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The Babcock & Wilcox Company (BWC)

September 15, 2011 9:30 am ET

Executives

Michael P. Dickerson - Vice President and Investor Relations Officer

Christofer M. Mowry - President of Babcock & Wilcox Nuclear Energy Inc

Brandon C. Bethards - Chief Executive Officer, President and Director

Richard L. Killion - President of Babcock & Wilcox Power Generation Group Inc and Chief Operating Officer of Babcock & Wilcox Power Generation Group Inc

Peyton S. Baker - President of Babcock & Wilcox Nuclear Operations Group, Inc.

Michael S. Taff - Chief Financial Officer and Senior Vice President

S. Robert Cochran - President of Babcock & Wilcox Technical Services Group Inc

Mary Pat Salomone - Chief Operating Officer and Senior Vice President

Analysts

Jamie L. Cook - Crédit Suisse AG, Research Division

Joseph Ritchie - Goldman Sachs Group Inc., Research Division

Scott J Levine - JP Morgan Chase & Co, Research Division

Steven Fisher - UBS Investment Bank, Research Division

Andy Kaplowitz - Barclays Capital, Research Division

Unknown Analyst -

Robert F. Norfleet - BB&T Capital Markets, Research Division

Tahira Afzal - KeyBanc Capital Markets Inc., Research Division

Michael P. Dickerson

Good morning, everyone. We're going to go ahead and get started here this morning. Welcome to the 2011 Babcock & Wilcox Investor and Analyst Day. My name is Mike Dickerson; I'm the Vice President and Investor Relations Officer.

This event is being webcast, and a copy of the presentation and a link to the webcast are available on babcock.com. [Operator Instructions]

The Babcock & Wilcox Company cautions that statements in this presentation that are forward-looking and provide other than historical information involve risks and uncertainties that may impact actual results in any future performance suggested in the forward-looking statements. The forward-looking statements in this presentation speak to conditions as of the date of this presentation including, without limitation, statements relating to backlog, to the extent backlog may be viewed as an indicator of future revenues, future expectations from our Operational Excellence program, market growth, drivers and expectations of our segments, expected timing of key environmental regulations for the utility industry, forecast for environmental equipment orders, business strategies and plans, B&W mPower market opportunities and lead plant schedule and federal government agency budgets.

These forward-looking statements are based on current management expectations and involve a number of risks and uncertainties including, among other things, adverse changes in the industries in which we operate and delays and other difficulties executing on contracts and backlog and adverse changes in federal appropriations to government programs in which we are involved.

If one or more of these risks materialize, actual results may vary materially from those expected.

For a more complete discussion of these and other risk factors, please see B&W's filings with the Securities and Exchange Commission, including its annual report on Form 10-K for the year ended December 31, 2010, as supplemented by quarterly reports on Form 10-Q. B&W cautions not to place undue reliance on these forward-looking statements, which speak only as of the date hereof, and undertake no obligation to update or revise any forward-looking statements except to the extent required by applicable law.

One last item I'd point out, when we start taking Q&A, which we'll do periodically throughout the day, [Operator Instructions].

We that out of the way, it's my pleasure to introduce Brandon Bethards, B&W's President and Chief Executive Officer.

Brandon C. Bethards

Thank you, Mike. I'd suggest Mike, grab your water, or someone will be drinking it. Good morning, everyone. I'd like to second Mike's comments in welcoming you all to our first annual investor conference. We put a lot of time and effort in there and brought a larger body of our management team to the program, which I think is unique. Not everybody does that, so I want to give you a chance to meet the people that are out there earning money everyday for the shareholders. And let me start by saying that our goal is pretty simple with regard to this meeting. It's to provide you all with a comprehensive overview of each of the business segments and their associated products and the services, and let you hear that directly from the people that manage those operations.

And also, there will be comments both by myself and the others on the program with regard to our long-term strategies for the company and our core businesses.

With that, for those on the webcast, if you will turn to Page 5 in the deck that's on the link, I'd like to mention a few words about our vision, mission and core values. Typically, we don't have time to do this in the one-on-ones or at the other general investor conferences we attend, where we we're usually restricted to 45 minutes or an hour maximum on the presentation. But I think it's important to share with you, it gives you a little bit of insight into the culture and the drivers that we utilize everyday in our businesses. And first of all, our vision. Our vision is to basically establish the B&W brand as the preferred global leader excelling in the delivery of advanced energy and operational solutions. Now that's not a tagline, it is truly a vision and there's madness behind that vision in the sense that if we, on an unaided recall basis can position ourselves in front of our customers domestically and worldwide so that when they have needs for advanced energy solutions or operational solutions, that the first name that pops into their mind is Babcock & Wilcox. And we get ourselves there through our marketing, our branding and our performance. That basically positions us, too, in a favorable light relative to competitive forces for enhanced bookings opportunities and enhanced margins opportunities.

Also our mission statement here is not quite as smooth and glitzy as you might see from others, but I think it is much more pragmatic. We basically carve it into 3 territories or into 3 statements, focusing on both our customers, our shareholders and our employees. And our mission day in and day out is simply that our customer group can count on us to deliver innovative technologies and solutions to fulfill their needs. Saying it another way, our business is making them successful. If we can help them become successful in their businesses, we will have a good business model platform that will have a good continuing posture.

With regard to our employees, our goal is to provide them a challenging, rewarding and safe environment. We have one of the lowest turnover rates in the industry. Our voluntary turnover rate is less than 3% usually and if you recognize the costs associated with recruiting, training and deploying new talent, there's money to be made in being able to maintain that type of working environment. The third point here is, our mission is to generate ever-increasing value for our shareholders on a day-to-day basis. In your book on Page 7, our core values are centered around people, safety, excellence, technology and stewardship. It's written in plain language. I'll leave it to you to read that, but I will confer to you that we actually do live and abide by those core values.

On the next page, we have the basic profile. For those of you that may not be aware, we are incorporated in the state of Delaware. Our headquarters are located in Charlotte, North Carolina. I have served as the CEO of the company, pre-spin and post-spin, starting pre-spin in 2008. We have about 12,000 employees worldwide that are full-time employees of the company, and about another 10,000 through our proportioned share of our global joint ventures. We trade on the NYSE and our trading symbol is BWC.

Moving to Page 7 in the deck. I would like to say just a few words here about our core business strategy. There's a large body of work behind this. We're just going through a refresh of that. We do it every year. It involves the top 170 managers in the company worldwide. But let me say that relative to the investor community, it's a straightforward business strategy. We want to expand our global presence primarily in the fossil, environmental and power businesses, as well as the nuclear OEM and services business into the European and Asian platform. We want to diversify our business portfolios by leveraging our existing businesses into adjacent space in those industries where we have good performance and reputation, particularly listed here is just a few of them: The nuclear field services, particularly in the United States; the launch of B&W mPower; the continued development and deployment of our carbon capture technology for our fossil technologies business; a diligent placement of our company relative to the pending Ohio class replacement program; and other selected target government services opportunities.

We also are focused on maintaining a balance to our heavily weighted portfolio of businesses that are focused on services and solutions. The reason we do that is that we have good visibility, there's good repeatability in that business and often it lends itself to higher margins and more balanced terms of execution.

The fourth thing that is -- it may sound simple, but it often doesn't exist in technology companies such as ours, that is to build a strong growth culture. We are primarily a company of PhDs, engineers, manufacturing managers and the like, and part of our job as management is to get that group of very sophisticated individuals focused not only on the conduct of their business, but the shareholder interest in that business. And they are the best set of eyes and ears with regard to these adjacent opportunities that I talked about above.

And then the other cornerstone of our business is the ever-diligent posture you have to take relative to your competitiveness. We have a very sophisticated and well-developed Operational Excellence. It's a Lean Six Sigma program that was first developed in our government businesses and we are translating that into our commercial businesses and you will hear a little bit more about that this morning.

Next, my last task before I come back for Q&A at the end of the session is I'd like to introduce the B&W management team. On Page 9, that's our CEO, 15 pounds ago. But on our left, I'd like to introduce you to Mary Pat Salomone. Ms. Salomone has served as our Senior Vice President and Chief Operating Officer of B&W Corp. since January 2010. She has over 28 years of experience within B&W, including her time at Marine Mechanical Corporation, where she served as the President and CEO. As some of you may know, B&W acquired Marine Mechanical in 2007. It was a strategic acquisition inside our Naval Reactors business. Ms. Salomone also serves on the Board of the Naval Submarine League.

Next to Mary Pat is Mike Taff. Mike joined B&W in July 2010, that is post-spin as the -- and continues to serve as our Chief Financial Officer. Prior to that, many of you know Mike through his position at McDermott International, Inc., where he served as the Chief Financial Officer and was a key member of the leadership team that was committed to the successful span of B&W from that enterprise.

Next, I would like to introduce you to Bob Cochran. Bob's right over here. Mr. Cochran is President of B&W Technical Services Group. Bob has more than 20 years of experience in the EPC business, along with government management and operations, environmental management and high-consequence nuclear operations.

Sitting on the end of the row there is Rich Killion. Mr. Killion is President of the B&W Power Generation Group. He joined B&W in 1970 and directs the worldwide operations of the company's OEM and aftermarket border businesses, environmental products and services, global joint ventures and licensing. Just think of Rich's responsibility as all things worldwide in environmental and power that are nonnuclear. That's the simplest way to think of that.

Next in the book on Page 14 is Mr. Baker, who is President of the B&W Nuclear Operations Group. Sandy has been responsible for several important programs throughout his career, including key Naval Reactor programs, contracts and general administration, as well as overseeing B&W's project execution relative to the Advanced Carrier Program. Mr. Baker is a U.S. Naval Academy grad and has a Bachelor of Science in Mathematics and a Masters in Business Administration.

On the front end row here is Mr. Mowry, who is President of the B&W Nuclear Energy Group. Chris is responsible for all of our commercial and nuclear power products and services worldwide, including the development and deployment of the B&W mPower program. Chris holds a Bachelor of Science in Engineering, a Bachelor of Arts in Astronomy and a Masters of Science in Mechanical Engineering.

Not on the agenda, but here to participate in helping put this together today are some other members of the team I'd like to introduce. Let me start with Mr. Dudich. George rejoined the company in August 2010 to serve as our Senior Vice President of Business Development and Strategic Planning. In this position, George is responsible for advancing and advising the Board, myself and senior management on strategic direction and growth opportunities for all aspects of our business. He's also responsible for our government's relations program and our communications department that stages these type of events.

Next, you all met Mike earlier. Let me simply say that Mike Dickerson joined us in June 2010 as V.P. and as our Investor Relations Officer. Mike has over 20 years of senior financial management experience. He's a native of Cleveland, Ohio. We didn't hold that against him, and he's earned a Bachelor's Degree in Business Administration and Accounting and is a CPA.

David Black, over here on my left, is Senior Vice President and Chief Accounting Officer for B&W Corp. David joined the company in 1991 as General Accounting Manager for the Nuclear Environmental Services Division, has held a number of positions of increasing responsibility through his career, and assumes his current position post-spin in Charlotte of last year.

And last on the introduction list is Ms. Apker, who joined B&W in 2010 as our Vice President and Treasurer. Jenny has served as Vice President and Treasurer of Dex One Corporation before joining the company, and we're really pleased to have her as part of the team.

Now I'd like to turn the program over to Mary Pat, and we'll get into the meat of the agenda.

Mary Pat Salomone

Thank you, Brandon. Good morning, everyone. I'm going to start on Slide 22 for those on the webcast. I'm going to cover 2 topics this morning: First, the summary review of our company operations; and then I'm going to get into a discussion of 2 of our common support platforms, Safety and Operational Excellence.

B&W's history goes back to 1867, 140 years plus. We have an install base of more than 300,000 megawatts of power generation systems and equipment, and we've manufactured more than 300 nuclear steam generators. B&W is a global company. You can see from the map here on Slide 23 that we have facilities that are located across the world, including 13 major manufacturing facilities, each equipped with advanced state-of-the-art equipment and they're all capable of performing complex manufacturing operations.

Brandon mentioned that we are a leader in clean energy technology and services, so it shouldn't be surprising to anyone that we employ an awful lot of engineers, scientists and technicians. Many of those work in Nuclear Operations and many of those hold government security clearances.

Two of our facilities are the only 2 privately held NRC Category 1 licenses that allows them to work with and to store highly enriched uranium. Five of our manufacturing facilities have the required certifications from ASME to -- for nuclear manufacturing. I should say that -- note that B&W is one of the only companies, manufacturers in North America who has continuously manufactured heavy-walled nuclear vessels over the last 50 years. There's a lot of people that talk about the fact that we need to regain that competency in the United States. We never lost it.

Moving to Slide 24. As I'm sure most of you know, today we operate in 4 different business segments that are distinct, but yet complementary to one another: Our Power Generation and our Nuclear Energy Group primarily serve the commercial utility market, while our Nuclear Operations and our Technical Services Group primarily serve the U.S. government.

Power Generation Group, Brandon mentioned it, focused on coal-fired power generation, environmental systems that support these coal-fired plants and renewables.

Nuclear Energy, on the other hand, is focused on nuclear power generation. The Nuclear Operations Group, also focused on nuclear as you might guess from their name, primarily provides nuclear components to the U.S. Navy. And our Technical Services Group, which like Nuclear Energy and Nuclear Operations is a nuclear-centric, provides a variety of services for -- to the government, including management and operation of highly complex government-owned facilities, as well as decontamination and decommissioning projects across the Department of Energy complex.

Our capabilities include design, project management, manufacturing, procurement, construction, services and operation of these products and systems. And you're going to hear a lot more about the segments from each of the presidents here shortly.

Moving to Slide 25. All 4 of our segments are supported by common global platform of support services. This platform consists of Safety,

Operational Excellence, which is B&W's continuous improvement initiative; human resources; information technology; and central procurement. This morning I'm going to tell you a little bit more about safety and about operational excellence, and I'm going to start with safety.

B&W's safety culture starts with a personal commitment to safety by each one of us. Our vision, which is to finish each and every day injury and incident-free, is reinforced by the active engagement of all of our employees. It starts with the Executive Steering Committee that's led by B&W's senior leadership, most of whom are here today with us and is part of the incentive compensation for almost all of B&W's employees.

This chart here on Slide 27 shows you how we're doing. And from this, you can see that B&W has a tremendous track record of improved safety performance. It compares B&W's total recordable incident rate, or TRIR, which is the blue line on this -- let's see, yes, the blue line here on this chart against the TRIR of comparable companies, which is the green line on the chart. TRIR can be thought of as the number of incidents per 100 workers in the company. Last year, we worked over 45 million man-hours and we had a TRIR of 1.17. TRIR is a common performance indicator track throughout the industry. It's also used by our customers as a qualifier for many proposals. And in many cases, it's actually, could -- can come down to be the determining factor [indiscernible] awarded a contract or not, and that applies across all parts of our business.

Not only is safety a good thing for our employees, it's a good thing for our shareholders, because safety and productivity really go together. A safe workforce is a productive workforce.

B&W's safety performance is routinely recognized by multiple organizations, including the Department of Energy, OSHA and our customers. Our safety performance is among the best in class in many different sectors. In addition to recognition by these organizations, our excellent safety performance has a positive impact on our bottom line. And one way that, that is seen through our Worker's Compensation insurance premium. They are 43% lower than the industry average, and that is really directly attributable to our safety record.

Now starting with Slide 29, I'm going turn to operational excellence and talk about that for little bit. Operational excellence, as I mentioned earlier, is B&W's continuous improvement initiative. It was formally launched in 2008 but again, as Brandon mentioned, this has been going on for many years in a less formal structure. It's a data-driven approach. It combines the use of Six Sigma, which is aimed at reducing variability and defects. Lean, which is -- works to reduce waste and speed up processes. And then finally performance metrics, which ensures that we have alignment of strategy and that we're actually measuring results. All these techniques are proven best practices.

In 2010, the operational excellence project contributed approximately $20 million to B&W's bottom line toward our operating income. Our customers also greatly benefit from these improvement initiatives. We estimate in 2010 that benefits generated by these projects saved our customers around $150 million. Most of these savings occur at the sites that we managed for the Department of Energy, and the balance of the savings is primarily returned to our customers through our cost share contract.

We have more than 650 managers trained as Project Champions, approximately 200 employees trained as Black Belts or Green Belts and we have almost 2,800 employees trained as Team Members.

The continuous improvement culture at B&W does continue to mature, and our demand for Operational Excellence talent is very high. We don't actually train Black Belts with the idea that they're going to be a Black Belt forever. It's a rotational assignment. So what happens is, is that they come in, they learn to be a Black Belt, and then they get transferred back into their business unit. And when they transfer back into their business unit, or a different business unit, they help to reinforce the data-driven decision making that they learned as a part of their Black Belt training, and that further integrates the culture of continuous improvement into their business unit. Just as the executive staff is highly engaged in Safety, which I talked about a minute ago, they're also highly engaged in Operational Excellence programs. That includes setting strategy for their group's activities, regular recording of results and almost every quarter we have a Black Belt who has recently completed a project come in and present the results of that project to the executive staff.

We're continuing to expand our Operational Excellence program from the more traditional areas of manufacturing into more areas that accompany with movement into our functional support areas. And improvements in these areas are continuing to allow us to drive our cost down come to generate higher margins and to increase our competitiveness.

So in conclusion, Slide 32, the things that I would like to leave you with today. B&W has a long history of innovation. In fact, we've been creating solutions to technical issues since 1867. Our government related segments, the Nuclear Operations and the Technical Services Group provide a strong and stable base for the company, and we have exciting opportunities for growth within all 4 of the business units and you're going to hear about those directly here momentarily. We serve our different market segments with common platforms and a safety conscious, continuous improvement culture. And the culture really makes good business sense. It creates a financial advantage to B&W and it creates higher reliability, which is good for our customers and for our shareholders.

With that, I'm going to turn it over to Bob Cochran, who's the President of B&W's Technical Services Group.

S. Robert Cochran

Thank you, Mary Pat. It's always good to be in New York, no doubt about that. I'm going to talk about the Technical Service business. And I think I'm on Slide 33 in the deck.

First of all, let me get a handle on this. What I want to cover today are the core business units that we have to give you a little understanding of what kind of business we're in, give you a little profile on our operational footprint, how much we operate, where we operate and then talk in a snapshot about the market landscape that we see with respect to this particular business.

We have within TSG 3 core operating platforms. Two of these operating platforms are very mature and have been in place for quite a while. The other 2 are platforms that we look at for growth potential outside of our organization. Within the National Nuclear Security Administration, we're the primary provider of the production enterprise with respect to nuclear weapons in this country. So we operate within that group, most of the production enterprise related to the assembly, disassembly in the nuclear security within our country. We also were involved heavily within that group in securing nuclear materials through our nonproliferation efforts.

Second, we have an operating group that's geared towards environmental management. Really, this is the rest of the Department of Energy business stage, as we look at it. The science, the Nuclear Energy research and development and the deactivation and decommissioning of nuclear facilities that are left over from the Cold War era and the Manhattan Project. Two other operating groups that we have within TSG are the specialty and classified manufacturing operations, and I'll speak a bit about that, which has to do with manufacturing high tolerance components and parts for centrifuges and leveraging technology that we've developed within B&W to address Medical Isotope issues around the world.

The other aspect, which is a growth platform within our group, is the Federal -- other Federal and other country opportunities that we're currently looking at. In other words, translating our capabilities with respect to what we do for our National Nuclear Security Administration into the Department of Defense and other federal agencies within the United States and other countries.

So what does this mean relative to TSG? Well, we have a little different operating model than the rest of the company. We have an addressable market of about $27 billion as we look at it. We tend to look at long-term contract positions. We put very little capital, if any, into these long-term contract positions and drive a lot of free cash flow into the Corporation. And last but not least, we attempt to leverage every aspect of the other operating groups within TSG as we deliver these services and products.

So what's our footprint? What's this yield? This is Slide 36, I believe, in the deck. TSG operates and manages about $3 billion of the federal government's budget through our minority and majority contract positions in our LLC. About 5 years ago, we've had 14 operations around the country, it's grown to 28. So we've been able to grow our footprint in an enormous way around the country within the NNSA and other federal agencies. We've developed a very highly trained workforce that deals with high consequence operations and is able to manage huge infrastructure elements. For example, we have about 5,000 buildings that we manage, about 5,000 vehicles that we maintain, we operate about a $400 million per year maintenance and operation budget, we maintain approximately 18 water and wastewater treatment plants, we run reactors at Idaho National Lab. So we have a fairly large reach into infrastructure as well.

All of our projects are built around a full recovery model. In other words, we embed our key talent into these operations, get full recovery and work on a very incentive-based oriented contract position that has 5 to 10 years attached to the contract position.

So over the past decade, we've been able to deliver about $0.5 billion in operating income to the company, and we've maintained a growth rate of about a 13% CAGR with respect to our operation. We do that with very little capital expense. Most of our expense is related to our bid and proposal process to win this contract. In that process, we have a fairly well defined and mature approach that's yielded about a 50% award percentage where we go after contracts. We're very focused. We bid maybe 5 to 8 contracts per year on the maximum. We take a very close look at the core competencies required. We look at sophisticated teaming arrangements in order to develop the best approach to deliver value to the customer and then we establish very good contract terms and long-term positions, which yields fairly good incentive fee positions for the corporation.

Now I'd like to talk a little bit about our operations and what we do with respect to some of our major operations. I'm sure you've all heard of Y-12 and Pantex. At least in our group, that's probably the marquee element of our business. Pantex and Y-12 are the key elements of the nuclear weapons production enterprise. At Y-12, we develop and manufacture what's referred to as the secondary. We also do a lot of nonproliferation work at Y-12. We do surveillance work on weapons, which is to look at them and make sure that they're actually meeting standards and aging correctly. We operate about a 600-acre facility with about 4,000 employees there.

At Pantex, we assemble nuclear weapons and we maintain the primary side. We also manufacture high explosives at Pantex, conduct surveillance work and it's only about a 25 square mile reservation with about 3,000 employees. Combined, our operations produce, refurbish, dismantle nuclear weapons. We safely store uranium and plutonium. We are the feedstock that Sandy will talk about later within the NOG Group core Naval Reactors activity, and we provide technical development for nuclear security and nonproliferation issues.

We're on Slide 40 of the deck at this moment in time. We're also heavily involved in the physics laboratories, which are responsible for both advanced physics, research and development and the weapons design and certification activity within the country. We have a very specific role in a partnership with the University of California and Bechtel. In the Los Alamos National Lab, we're responsible for an area called TA-55. That is where the plutonium is actually manufactured for a nuclear weapon. It's our job to maintain TA-55, and we do a very good job at that. We also are responsible for the safety and security aspect of the laboratory. So the security operations are our responsibility at Los Alamos National Lab.

At Lawrence Livermore National Lab, we're responsible for the inventory of an area called Superblock, where they did advanced physics work. We're taking special nuclear materials out of that building, shipping them to secure locations around the United States.

At Idaho National Lab, which is a nuclear energy research and development lab, we run the security operations and we also operate the special manufacturing facility which manufactures Class 5 components for the Department of Defense using depleted uranium. We're involved as well to operate the Advanced Test Reactor, of which Sandy's group supplies us the fuel. So we operate the Reactor, we get the fuel from Sandy's operation, another integrating aspect of our business.

I mentioned earlier that we're involved in the American Centrifuge Program, which is an advanced centrifuge technology for the enrichment of uranium that U.S. Enrichment Corporation is deploying and taking to market. Our job with respect to this is to manufacture the centrifuge and integrate the rest of the manufacturing supply chain, a $1.6 billion program that involves a number of major corporations that manufacture specialty components and parts.

The plant that you see here is in Oak Ridge, Tennessee. The high bay gives you an idea of how large the centrifuges really are, as well as this shot. And this high bay is what we use to balance the centrifuges after we've assembled them. It's a very technical process to get them balanced and on line just correctly. We are in the process now of standing up the manufacturing operation and have begun the process of manufacturing centrifuges for delivery to their pipe end facility in Portsmouth, Ohio.

We're also involved in taking the technology that actually came out of the NOG group to market, and it's to address a very important issue with respect to the supply of Medical Isotope here in the United States and globally. Two aspects drive this technology: One is nonproliferation, which is a low-enriched approach to generating molybdenum-99, which creates Technetium that's used for cardiovascular investigation and cancer identification within patients.

We have a partnership with Covidien. We're in the early stages of developing the technology. It's low enriched. It skips a step in the process, which means that you don't digest, you simply use the aqueous phase of the reactor, put that through a process to separate the moly [molybdenum], put it back into the reactor and reuse it as fuel. So it's a very efficient way of developing and generating molybdenum for the use in Medical Isotope.

Now let's talk a little bit about the market landscape. If you go to deck, Slide 44, I believe. As I mentioned, we're heavily involved in the National Nuclear Security Administration. Recently, there was a passage in the Senate of a new START Treaty, which changed our nuclear posture in this country, which dictates that we reduce the number of nuclear weapons. It also would indicate that we have a lot of work to do in order to do that. With a smaller stockpile, you want to make sure maturity of that stockpile is in place. As a result of the new START Treaty and the Nuclear Posture Review, the Department of Defense and the Department of Energy, NNSA, have actually increased the budget for this activity over the next 5 years. The Department of Defense, through a memorandum, has decided to invest approximately $5 billion more into the program over the course of the next 5 years. Obviously, this is all subject to what's happening in Washington today with regard to budgets. And if anybody can predict that, they're a lot better than me in that regard. I will tell you last year, with respect to this budget it was an anomaly, as they refer to it. In other words, this aspect of the DOE budget and the DoD budget was not touched. And we believe at this point in time that there's considerable effort to make sure we have an anomaly in FY '10. It's very important that this result in modernization of the production in laboratory enterprise for the future. Because as a result of this, we have to do Life Extension Programs on nuclear weapons in order to make sure that they're in the stockpile and that the triad, the nuclear weapon triad, is maintained. So we see a fairly strong position with respect to this business on a budget basis, and believe that our performance maintains us in a very good posture for the future.

The other aspect of our business that's very important is the Department of Energy's Environmental business, as well as their Science and NE, Nuclear Energy, research and development. And so we're involved in many of those facilities, as you could tell from the slide that I presented with our locations.

We believe that the environmental management budget within the Department of Energy will probably maintain or slightly decline over the next few years. However, our position within that market space has been strategically and practically placed so that we can take advantage of the areas we think they'll be funding at a fairly good level. For example, the decommission and deactivation of nuclear facilities, the process of special nuclear materials for ultimate disposition and that's been the focus of our efforts. And in fact, we've had a fairly good success rate in terms of winning those contracts and partnerships with other companies.

The other aspect of the Department of Energy budget is under a bit of pressure, which is a declining budget with respect to Nuclear Energy research and development, which happens to be central to the Idaho National Lab. However, we believe that there'll be continued efforts with regard to advanced decommissioning and deactivation. The results of the Blue Ribbon Commission with regard to spent nuclear fuel indicate that this country will start to invest in alternatives relative to how it manages its spent nuclear fuel. For example, dry cast storage and those types of technologies and reuse of nuclear materials will be developed at the Idaho National Lab, and ultimately funded through the government budget process. And we're well positioned for that particular activity in the future.

We're on Slide Deck 46 right now. This is the DoD side of the business. I'm sure all of you are tracking what's happening with the Department of Defense budget, and we're watching it very closely with this. Redeployment back from Iraq and further consolidation with respect to how the Department of Defense does business. So our efforts are focused purely on certain things: High consequence operations; manufacturing of components and parts that replenish the stockpile within the Department of Defense, in other words ammunition plants; and the view of what will happen with consolidating facilities and their management operation. Those are our targets for the future, particularly as they relate to our Navy pedigree. So we are looking at that very closely in terms of how we want to view our investment in this particular market space. We do believe the expertise that we have within the National Nuclear Security Administration gives us an advantage against many of the competitors that we see in this particular market space.

Specialty manufacturing and our work in that particular area. There are really 3 areas that we've focused. I've mentioned the Medical Isotope business. As we develop that not only do we want to be a supplier for the domestic isotope, but we're looking at a partnership and arrangements that will take us, as we develop this technology, assure its successful deployment to take it to other parts of the world. That's quite a ways out into the future, but it is a view that we have.

Second, the manufacturing of centrifuge machines. Currently, U.S. Enrichment Corp. plans on building one plant. That would be an 11,000 machine plant, about 3 million SWU per year. They're intended purpose is to build 2 more plants, 2 more phases over the next 10 years, which would probably put them at about a 9,000 SWU plant. We want to be there to manufacture all of those machines for them and in fact, have a relationship that will enable that should they get the loan guarantee and move forward with the program.

And then last but not least, as the modernization occurs within the National Nuclear Security Administration, there'll be a need for specialized tooling that goes into the production enterprise. We want to be there to manufacture that specialized tooling for the future and we see that as a vital market as we go forward.

So the key takeaways. So we have a little different business model. Most of our model is driven by National Nuclear and National Security imperatives, so we feel fairly comfortable in the stability of our market. Most of our business model is built around a long-term recurring revenue stream. In other words, contract positions that are 5 years or greater as we look at them.

We have a real strong cash flow model. I'd like to give Brandon and Mary Pat a lot of cash at the end of the year. If I do that, I think they'd like it as well, so we invest further in this particular business. And then we're a leading service provider within NNSA. We believe we can take that platform elsewhere and that we have a unique position. Not many companies in our market space have the same position. We're able to manufacture, we're able to take technology to the market space, we're able to run projects and we're able to run major infrastructure jobs involving an awful lot of the support related to the manufacturing operations.

Thank you very much.

Michael P. Dickerson

Thanks a lot. If you don't mind, we've got plenty of time for a few questions if anybody out there...

Question-and-Answer Session

Andy Kaplowitz - Barclays Capital, Research Division

Bob, Andy Kaplowitz, Barclays Capital. You mentioned that you were starting to build the centrifuges for the USEC project, and it's obviously very much in the news around the loan guarantee. We see what's happening with the administration and Cylindra. [ph] Can you update us on the time line of this? And I wasn't aware that you were already building the centrifuges, so what kind of certainty do you have around the project going forward?

S. Robert Cochran

Right. Well, first of all, we've been building the centrifuges now for the better part of a -- on a particular design, for the better part of a year. Second, predicting the loan guarantee process is sort of like witches' brew. And I think for me to predict the time line would be difficult. I would tell you that the activity associated with the loan guarantee process is very, very high on the OMV and DOE side of the equation. They're looking at ways in order to get the loan guarantee accomplished and they're working a pretty tight schedule. I would defer to USEC to give you advice on how far they've gotten with respect to that. As far as the Cylindra [ph] issue, that's a different loan guarantee pool. There's the renewable energy pool, there's the nuclear reactor loan guarantee program and then there is the nuclear technology loan guarantee program. Of course, Areva French company recently was in receipt of a conditional commitment in the nuclear technology arena, and USEC is the other company that's really pressing hard for a loan guarantee.

Steven Fisher - UBS Investment Bank, Research Division

Steve Fisher, UBS. Bob, if I heard correctly, you said you went from 14 projects up to 28 over the last 5 years, I think it was, which I assume has been a key contributor to driving that growth, the steady growth in that business. I guess I'm just curious, how do you look out over the next 5 years? I know there's some budget uncertainty, but where do you see those numbers going over the next 5 years?

S. Robert Cochran

Well, I would tell you that in our current position within the Department of Energy and NNSA, we have a very specific strategy to make sure that we retain our Y-12/Pantex position. The second part of that strategy is to look at other aspects of the NNSA that we're currently not involved in. And so we've got targets over the horizon with respect to those operations. With respect to the environmental management and science operations, we have fairly early contract positions, so we're in a good position. In other words, our contracts have just recently been awarded and have a long run rate. Our real growth potential is taking this expertise, which we think is a step above with respect to safety, security and quality that is delivered in the Department of Defense to that market space and other allied federal businesses, as well as friendly -- I always say friendly countries where we're capable of providing similar services.

Michael P. Dickerson

Steve, it's Mike. Also I'll cover this some in my slides, too. But Bob's right, I mean, we've got incredible growth in that business over that 5-year period. I think last year we've made about $46 million for the income on their LLC and we're about $49 million. For the year, what I've been telling folks on the conference calls and the meeting, we're on a run rate of probably in mid-50 range. And then when we look out over the next several years, I think that number could grow by 10% just on what the jobs, some of the jobs Bob won recently. One of the large wins was the job we won before in Portsmouth, and we just took a piece of the operation April 1, right Bob?

S. Robert Cochran

That's right.

Michael P. Dickerson

And more hit, we really won't hit our full steam on that until mid-next year. So just with what we have in-house, I see nice growth over the few next years, and there's certainly other potential out there, jobs that we're looking at, jobs that we'll be bidding over the next 12 to 24 months.

Anybody else?

Tahira Afzal - KeyBanc Capital Markets Inc., Research Division

This is Tahira from KeyBanc. Couple of questions: number one, earlier on, you talked when you laid out the strategy in platform, you talked about established platform as nuclear weapons manufacturing. And then on the growth side, you talked about fuel enrichment technology. Could you talk about the overlap and expertise over there, and how you differentiate the 2? And then, number 2, looking at the labs and the R&D over there, could you talk a bit about some of the advanced nuclear reactor technologies coming out of that, especially on the nuke front side? That could be helpful.

S. Robert Cochran

Yes, I will. So the work that we do with the National Nuclear Security Administration puts us at the very, I would say, at the very highest levels of how we manage nuclear materials, special nuclear materials and processed nuclear materials. It's advanced technology. We're involved with our national labs. How that relates back to what we do in the process of other nuclear materials within enrichment and things of that nature, it gives us a core technical and management competency. One of the biggest issues that we deal with in our industry is safety, and Mary Pat talked a lot about that. In fact, if you look at Pantex, our safety record is by far the best in the entire nuclear enterprise. Look at security, and then technology application. So we're able to take the skill sets, the people, that are involved in many of the activities that we have in NNSA into the areas that we want to see growth in with regard to either enrichment or processing of nuclear materials, as well as being able to reach back into Sandy's operation and vice versa. Because he's involved in similar activities and he'll be explaining that. Your second question with respect to advanced nuclear power technology, I believe, is that what you were asking about? Well, I would say Chris Mowry has advanced nuclear power technology with respect to our mPower approach, which is a very important aspect of our business going forward. But at Idaho National Lab and at Los Alamos National Lab, they are constantly involved in taking a look at the next generation. They refer to it as Gen 4, Gen 4-plus technology, which is higher temperature nuclear power plants, different types of coolants and fuel with respect to nuclear power. And we're involved in a lot of the materials research and the basic research with our partners Bechtel and the University of California. We're the practical side of that. We bring the implementation and practicality to the equation. They're the theoretical and the advanced science side of that equation. That's why we have such a good partnership with those entities. I hope that answers your question.

Unknown Analyst -

Al Silver, DMI Capital [ph]. As an outgrowth of what happened in the nuclear sector in Japan and the German government's actions to phase out the nuclear plants, does that represent a business opportunity to you or the adverse possibility of phasing out some of the older nuclear plants in this country? Generally, are you seeing any increased demand to your services by nuclear plant operators because of what's been happening in the last year?

S. Robert Cochran

Right. So just to give you some background when Fukushima occurred back on March 11, I actually was on the ground within a week. We have a strong partnership with Toshiba. And Toshiba, ourselves, Westinghouse and Shaw Group put together a team to respond to the Fukushima incident with Toshiba and in help of Pepco and the Japanese government. As a result of that, we're still involved in the project. In fact, we're involved in planning activities and also looking at spent nuclear fuel activities. I was also in the EEOC with respect to the NRC the day after the event, looking at it from an industry perspective. I would tell you that the implications of Fukushima are, for our business in my mind, very positive, not that a negative event like that is something you want to see. The future of spent fuel and how it's managed at nuclear reactors presents a very good opportunity. I believe we'll see the movement from wet storage to dry cast storage on a faster pace, which is a more secure way of looking at spent nuclear fuel storage and interim storage. I think the Blue Ribbon Commission laid out a very good plan to take a look at the long-term management of spent or used nuclear materials with regard to commercial reactor technology. I'll yield to Mike, he'll be talking about this and the implication, but I believe it has a positive impact on the [indiscernible] technology and the safety environment in my opinion, but Mike will probably speak, or Chris will speak more about that as he discusses things. And so the downside in some respects, because I'm a glass-half-full type guy, presents a real opportunity for B&W's technology and its capability.

Maybe one other, if there's anybody interested?

Unknown Analyst -

Sure. [indiscernible] of Capital Alpha. Can you just talk a little bit more about the army ammunition plant push and what are the opportunities you see there? And talk a bit about the competitive landscape? What you do different than Alliant Techsystems, BAE or some of the other companies that are there?

S. Robert Cochran

Well actually we're teamed with Alliant Techsystems on the Radford plant. So what we bring is a different view of modernization than the Alliant Techs and the BAE Systems that are currently bidding these jobs. If you take a look at what we've done with some of our nuclear facility, we think the types of approaches to modernization, safety operations, lend themselves well. In fact at Pantex, often when they have incidents or accidents, we deploy our people to do the root cause analysis and extent of conditions. So we have a technology advantage in my opinion. And we have a relationship that allows us to leverage into that business. It does have a future. They have to replenish. We've been spending a lot of ammunition over the years. We'll always keep our stockpiles full.

Michael P. Dickerson

We're running a couple of minutes ahead, so I think we're going to go ahead and get started. I'd like to introduce Rich Killion, the President of our Power Generation Group, who will run through his business for us.

Richard L. Killion

Good morning ladies and gentlemen. How's the sound back there? Okay? I'm very pleased to be here this morning and to have this opportunity to explain to you the business unit that I represent and run for B&W, which is the Power Generation Group.

For those on the webcast, I'll introduce the sections that I want to cover this morning. First, we'll give you a business overview of the PGG business. And then we'll spend some time on the environmental regulations, some of the drivers that I know are very interesting to you as we look at what the EPA is doing and some of the real impacts that we're seeing already in our business. And then I'll conclude with some takeaway points. First of all, my business is based in Ohio. That's where my office is, in Barberton, Ohio. We've been there for many years. Worldwide, I have a group that's over 8,000 employees, most centered in Ohio, but we also have a very large group working throughout the U.S., servicing our customers and constructing our services and then the other center of large employee numbers is in China, with our joint venture and a wholly owned subsidiary that's there. Several of you will recognize what's on the right side here. Our business is reported in 3 product lines that we go through with the MD&A, and then we explain this in our quarter presentations. First is the new-build environmental systems, which we'll talk about later. Second is the new-build steam generation business, which is a very large worldwide business and third is the global aftermarket business.

Next, I'd like to explain to you our technology base. For the webcast, we're on Slide 55. It all starts with technology. If you think about technology as I do, you'd probably start off and think about hardware, then you think about software. Certainly, B&W has both. From the hardware standpoint, we have plenty of BlackBerrys, laptops. In the operations standpoint and software, we have some very modern, sophisticated and proprietary software models that we use to design our products and also run our projects for project controls. But what I wanted to tell you here is one of the differentiations is our people. One of the best ways to probably explain that is this book. You probably didn't expect me to be presenting a book on this slide, but this is a Steam book that B&W has been continuously publishing since 1875. The key point here is we write it ourselves and it's recognized as one of the great industry "bibles", so to speak, for other customers and some of our associated companies that use throughout the world. We write it ourselves. It's very extensive. We're in the 41st edition and moving towards the 42nd edition. This is all about the people that give us some differentiation and very good customer service.

So what's that take us to? Environmental technology. We have all the environmental products and solutions that our customers require today to meet the regulated emissions requirements the EPA has, as well as those that we see coming down the pipe very soon. For all the NOx, SOx reductions, particulate control and the other means that you see here. We've got all that.

Next is ultra-supercritical technology. This is the most efficient way to burn coal and generate steam for electric production. B&W built our first supercritical unit in 1957. We've built the largest supercritical units in the world. We've supplied over 90 gigawatts in this supercritical technology. Today, as you know, it's not a large market for new build in the U.S. with coal fired but it is in China, continues to be. And that's one of the stable technologies for our joint venture there, as well as the new technology for the introduction of our Indian JV.

Next is renewable technology. B&W has all the know-how to combust a wide variety of biomass fuels and generate electricity and also waste-to-energy. Earlier this year, we announced a major new contract that we won in West Palm Beach. That's what's shown on the left side. The first view there is of the unit that we built for West Palm Beach over 20 years ago, have been operating it since. That processes up to 2,000 ton per day. The new facility which is now in engineering and early procurement will process 3,000, in 3 lines -- 3,000 ton per day.

On the right side, you see a view of the concentrated solar receiver that's supplied by B&W. This is in the solar technology. That's a proprietary design that we developed that receives the solar rays and generates steam for electric production and has been successfully introduced in California.

Next on Slide 59 is the CO2 capture technology. There's really 2 technologies here that we've developed with extensive investments in our R&D facilities in Ohio and also with the technology that we've developed. One uses oxygen rather than air to burn coal and generate a CO2 stream for sequestration. Another technology uses a solvent. We've been developing a proprietary solvent to be energy efficient in capturing the CO2 downstream of fossil combustion, also to be sequestered. We're continuing on a reasonable investment path so that when the legislation worldwide or U.S. moves towards carbon control, B&W will have the technology.

On this view, next Slide 60, you see a 3D cut of our products. On the left is the steam generating island. For some of you that haven't been to power plants, you may not appreciate the scale of some of what we produce. On the left is the ultra-supercritical type of design. A structure like this would be over 250 feet tall. If you were to deliver it on flatbed semi trailers, it would take about 2,000 -- about 2,000 loads. We have pressure parts here that run at around 4,000 pounds per square inch. Some of the flue gases reach temperatures of 3,000 degrees Fahrenheit. Materials and steam generation over 1,100 degrees Fahrenheit. So it's a product of scale and one that I'm sure you'll understand that it does take several years to design and build.

In the back end there is 2 typical trains for environmental compliance. The one that's on the upper side is for dry FGD or scrubbers with a baghouse accompanying that. The alternative way is to use a direct -- wet scrubbers along with electrostatic precipitators. This equipment is also equal in scale and many times occupies a larger footprint than even the existing current boilers.

Now so we have the technology. We've developed an impressive array of products, what's the market demand and what's the pull? On this pie chart on the right, you can see that the total addressable market is over $30 billion for our business. It's global. And we have positions, certainly very strong positions in the U.S. where it's almost $7 billion, and strong positions in China where it's almost the same at $6 billion. The point here is we do have some opportunity with our technology and our very, very well recognized brand to continue to grow; we have an aggressive international plan to do so.

This might be one of the more interesting charts that I'm showing you today, because it gives you the breakdown of the business mix. These figures are from 2010, included there in revenue base of $1.4 billion. On the left, you can see that the North American utility industry is still one of our primary customer segments but also equally impressive, I believe, is what we have offshore, particularly in industrial, which is the waste-to-energy business, primarily in Europe and then other industrial business in North America.

On the right, this is where we are today. One of the areas that you may not understand as well as some of the others in my business is the global aftermarket business and the large share that we run on a sustainable basis in the U.S. Right now, at this revenue level, it's about 50%, 50% of what we have. New build environmental, which as you understand we're running off of the wave that we just went through and preparing for the next wave driven by the new regulations is below 20% currently. And then the steam generation business is about 30%. Clearly, we expect the new build environmental share to begin to grow, which will also raise the revenue from the $1.4 billion upwards and provide some very good leveraging with our base business model.

This is a somewhat busy slide but for your reference, it's a write-up of our base business models. If we follow down just the left column, just the left column, you'll see that we have 5 different ways of earning value for our shareholders. The first one is really the new build major projects which do take several years to finish, including both the environmental as well as steam generation. The second part is the aftermarket worldwide. B&W has an intrinsic value here because we have enjoyed a very large market share for several years or decades. Last year, the B&W boilers in the U.S. generated, out of the total electricity, about 16%. If you take this coal, this coal is about 36%. So we have a large share of the fleet that gives a good opportunity and good capture rates for the service that we have. Products in this range can be something that can be delivered in a small truck to projects that can extend up to $100 million and take a couple of years to build. The third row here is equity income, and this is a model that we use frequently in Asia, where we believe it's best to have a partner. We don't consolidate the revenue, but we do report our equity income. Using our technology and using good partnerships there. The fourth line is royalties and fees that we earn from technology licenses. It's another model that we use where we make a decision that it's advantageous to work with a local licensee rather than invest equity. And the last business model is operation and maintenance, where we actually operate and maintain complete power plants in biomass, coal, gas-fired units.

Michael P. Dickerson

Thanks, Rich. I think it's 10:45. We're going to take a 15-minute break there.

Richard L. Killion

Okay.

Michael P. Dickerson

We'll then gather back, and Rich will go through the environmental piece of his business.

[Break]

Richard L. Killion

Ready to resume? Next we'll go through the environmental regulations. And this is also -- our plan at B&W and PGG to go forward and maximize return to our shareholders and as Brandon was saying earlier, really make our customers successful as they go through a period of uncertainty. What do you do when you're running a business and there's a significant amount of uncertainty? What do you do, particularly if you can't control all the uncertainty, which we see from a regulated business? Now as there's a number of different regs that has either been proposed by EPA or in effect, that are overlapping and then cause our customers some real challenge to make the decisions on very large capital investments. Well one way is to make sure that we have everything they might need, whether it's going left, right, up or down, or controlling SOx, particulates, whatever and have a good relationship with those customers so we can go out, sit down and talk to them on an advisory or consulting basis and then be able to respond to them quickly with budgetary prices, with the cost benefit of some of the technologies, with the operational differences that they have. That's where we are today. We've been in this phase for the past 3 to 6 months. Now it's really moving from talking about it to doing it, with a number of utilities and that varies depending upon where they're located, what they have under some of these new regs, what their local regulatory bodies are saying for them. So what we have right here is 16 technologies that I'm showing you. We're on the Slide 65, for those on the webcast, 16 technologies. Each one of these can generate a significant order and solve a lot of problems for the customer. This ranges from the wet scrubbers that we had, which were really the strong point of the last wave of buildout to meet the CAIR, Clean Air Interstate Rule. There'll be some of those going forward, and there are other technologies in here to give a variety of solutions depending upon what fuel is required, and what the emissions may be that our customers require. Noteworthy on here is some of our aftermarket service that's in environmental. This is a growing opportunity for PGG because obviously, there's more to work on and more to service as the utilities buildout more into service. It's also very important for B&W when we have a large market share. This is how we did in the last wave of buildout, the next slide, Slide 66. We were either in #1 rank or #2 for the variety of products. Now I know -- what you see are the products that were delivered by B&W in that period of time and also the gigawatts that we supplied. PJFF is baghouse, that's pulse jet fabric filter, those are the baghouses for particulate capture. SCR for NOx, I think you know about the top 2, which is flue gas desulfurization for SO2 capture. Now this next slide, Slide 67, I'm putting in here really for effect. I don't know if any of you have seen this before, this is put out by EEI, Edison Electric Institute, usually called the "train wreck". We refer to it as the "train wreck" because it's so difficult to interpret. But across the top are the various regulatory requirements and emissions that the utilities need to meet. It goes from left to right, chronologically. Part of the issue here is there's overlapping timing on when rules will be implemented and compliance is required. So it's quite complicated. Today, we'll talk about 2 of the regulations that are in the news very much today. One is clean air -- clean state air pollution regulation, CSAPR, and then also U-MACT or Utility MACT. First is Utility MACT. This is the Mercury and Air Toxics Rule that was proposed in March of this year and by the court ruling or consent degree from 2008, it's to be put as the final rule in November. Many are watching the November 16 date to see what comes out. That's a real date. It is a requirement for EPA to do this. Now as many of you know, there's a comment period that EPA opens up and that's been there and it's now closed. There were over 7,000 letters submitted to EPA; over 6,000 pages of comments on this rule -- over 6,000 pages of comments on the rule. B&W took it very seriously ourselves, because the way the rules are set up is based upon actual test data for some of the controlled units to show that the technology is available to achieve lower levels of emissions on these toxics. So there's science around it, there's questions around it. There's a -- from the utility's standpoint, not so much. And also for our standpoint, not so much on do we have the technology to meet the emission levels, but the schedule, the timing for compliance. And from what we are hearing and seeing, most of the utility customers have issues with the schedule, because of the full timing to put one of these projects together, to get the full approval of their utility commissions and then go forward, plus the bidding. It is driving some of the projects we have right now. If the rule comes out in November as required, then there'll be a 3-year period for compliance. That could be extended one year by the permitting bodies. But if not, we're looking at compliance by the beginning of 2015. The second rule is the Cross-State Air Pollution Rule or CSAPR. This replaced the transport rule which had been put out as a proposal, and replaced the CAIR, Clean Air Interstate Rule. This is now in effect as of July 7 this year. This applies -- unlike U-MACT, U-MACT applies nationwide. This one applies to Eastern states, 28 states in the east that now have requirements for standards starting in 2012 and 2014, '12 and '14 in January. So it's now in effect to reduce sulfur dioxide and NOx. The states that have the largest reduction requirements are shown in the lower right-hand corner, Ohio being the leader and then Pennsylvania, a number of states where we have good relations with our customers and where we're in dialogue today. There is a -- for some of you who may not know about it, there is -- within the CSAPR program, 2 groups of states which are allowed to trade within those regions. So there can be trading within the regions on the allowances. Now to simplify it and just to recap what I just went through, the Cross-State Air Pollution Rule on the top of Slide 70, the draft issue is out. The final issue in July, and then the Phase 1 and Phase 2 compliance dates in January next year, as well as 2014. Some of the work we have right now is to initially upgrade or treat on a very fast paced turnaround some of the existing equipment so that they can meet compliance in 2012. The lower bar is what I just went through on U-MACT. U-MACT, I think you know, it does stand -- I'll just refresh you, is Utility Maximum Achievable Control Technology. So that's where it comes from, the test data that's out there MACT. And that's a -- as I said, is anticipated for November, with compliance that starts in November of 2015. The next slide shows the expected range of power plant retirements. This has gotten a lot of attention and much of the attention because such a wide range of the retirements forecasted. What I've shown here is several different sources which have made public their range of expected retirements. So it's all the way from 10 gigawatts to almost 70 gigawatts, out of the current 300-plus gigawatts of fleet that we have in the U.S. Our own figures, we're more in the range of about 25 gigawatts to maybe up to 50 gigawatts that we think may be retired. Well these are older units, coal-fired units, lower efficiency, built in '50s, '60s that are generally below 200 megawatts or 250 megawatts that are in the coal fleet. There's some impact here. One impact that I think has been a concern is what does this do to a really good, sustainable B&W services business. It's less of an impact than you might otherwise think. Because as these units, whichever ones are removed from service, we also have some very large newer units in the fleet that will be reaching points in their lifetime when more of the service work that we have been performing would be expected. So we actually see a good possibility for the overall service market to be -- to continue to be a growth opportunity for B&W. We're also working with our customers very closely to offer them technology support on the operating coal fleet. As you can see, we have a good portfolio on the environmental challenges. We also have a portfolio to assist them in changing the mode of operation for their boiler islands. Where there's challenges to have them be more load flexible, rapid response and things like that so that they can conserve their operating cost on the existing fleet that will not be retired.

On our earnings call, we have given you a range of our expectation in the environmental buildout of $12 billion to $25 billion, and we continue to believe that that's the range. The top here is some of the industry sources on a low to high by the various products that we expect to be required in the environmental buildout. So that generates about a $12 billion to $25 billion range of total capital investment over the next period, running out to at least 2016. If it stays on schedule, we would see revenue going probably to the '18, 2019 time period as those projects that are ordered are finished and built out. We've done our own point-by-point, bottoms-up level of forecast; plant-by-plant, customer-by-customer. And it does bring us in this range.

So what I want to do is conclude with some takeaway points for you. These are written on Slide 74, where we are. First is "technology travels". This is what I was saying earlier, that we do have deep technology. We also have an excellent B&W brand from the long time that we've been in this industry, essentially over 140 years. So going into new markets, particularly those foreign markets where we have the technology and where those markets are following behind the U.S., particularly for environmental compliance, we have some good opportunity on long-term upside there for growth. A respected brand and technology travels into there because we really have the same challenges. Once they get to the regulatory requirements similar to what we have in the U.S., and then of course GNP growth for some efficient steam generation from burning coal. Second point here is we have made the investment in our product development, both in environmental and the ultra-supercritical. So we're well positioned on that going forward. We have the technology that we need. The third is the demand is obviously built -- driven by environmental regulatory actions by the U.S. government and then GNP growth in Asia. And finally, as I said earlier, we have the advantage of a very high percentage of the operating fleet in the U.S. and good technologies for service. So it's a sustainable business that fits in with the other parts of what we have going forward. We believe that will serve us well in PGG. So I'm confident with these key attributes that we have in our business that we have a good future going forward.

Thank you for your attention and I think Mike will coordinate a few Q&As.

Michael P. Dickerson

Thanks, Rich.

Jamie L. Cook - Crédit Suisse AG, Research Division

Two questions. One, on the second quarter conference call, I think you guys talked about on the emissions retrofit you were bidding on, about $1.6 billion in the first half and another $1 billion in the second half. Can you talk about whether or not that's materialized into any awards to date? And then my second question is sort of longer-term. Given the emissions retrofit opportunities that you see ahead of you how, as investors, should we think about normalized revenue growth rates, say over the next 5 years versus what power gen has seen historically?

Richard L. Killion

Okay. On the first question, we did report that we had about $1.6 billion of new business, and it's environmentally in-house that we're working on. Actually right now we have 10 very active proposals in various stages of preparation or negotiation. And we also reported $1 billion in future business that we saw that would be in the pipeline for activity by year end, and that's holding. We don't have any new orders to report as of today, but it is progressing as you would expect. Although there's some uncertainty on the customer's side, just as they watch other things and look at their opportunities or alternatives on how they're going to comply, it wouldn't be a surprise to see a few of those go into stage releases. Where the winner of those awards, if they have an engineering award, to go forward with some of that and then a later step up for full capability. So it's there. It's real. When we talk to the customers, we can see what's driving their side. Now your second question was on the environmental growth or...

Michael S. Taff

She was looking for longer-term growth rates over the next the next 5 years, normalized sort of revenue growth...

Richard L. Killion

Just on the environmental or...

Jamie L. Cook - Crédit Suisse AG, Research Division

[indiscernible]

Richard L. Killion

For us, we see ranges in the growth overall in what we have in the Power Generation Group in the high single digits to 10%. Some of the areas may be low double-digits, 12%. So we're in that range of 8% to 9%, up to 12%. We see most likely opportunistic growth in service that may be based upon some key strategic acquisitions that we have in the longer-term plan, where we can move into some of the adjacent space as Brandon has talked about earlier. We'll either do that organically or we may find some key acquisitions where we see a good return on what we would do. Internationally, we have the opportunity to grow there. As you saw, the addressable market is over $30 billion. So we do have opportunities to go forward with that growth.

Michael S. Taff

Jamie, and I'm going to cover that on my slide as well. But I mean I see that -- for the company in the short term, probably our greatest ability to grow the top line, which in turn will grow operating income. I mean, look at Rich's business today at about $1.4 billion, and you look back at some of the slides I'm going to show you. What the -- kind of what I call, the system is capable of doing, it's well capable within our footprint of doing over $2 billion a year. And that's really kind of where we see this next line of environmental spending taking us back to those '07, '08 periods and all. And I'll show you some history and then really what we're capable of doing and have this capacity to do.

Brandon C. Bethards

Mike, I would add to that just for clarification, there's really just 2 fundamental drivers that are moving in that direction, not only the environmental markets that is in the windshield, but is also a historical trend of recovery from a certain amount of under spend on capital projects that's been going on over the last 4 years during this recession, that as you get back -- as you get electrical production back up to or greater than where it was at the end of '07 and '08, the utilities typically combine that with some of these outages that they take for the environmental tie up. So there actually are 2 drivers moving it in the direction that Mike and Rich talked about.

Scott J Levine - JP Morgan Chase & Co, Research Division

Scott Levine, JPMorgan. You guys have traditionally provided margin guidance roughly in the 7% to 10% range. I was wondering if you can provide some color with regards to the margins you typically see on the system sales versus the services that you provide. And then as a follow-on, maybe -- you gave the pie chart on Page 62, the breakout of the business and I'm wondering if you care to take a stab of what that pie chart might look like 3 to 5 years from now. It's the pie chart on the right, where you break it out by aftermarket, new-builds, and environmental.

Richard L. Killion

Yes, certainly, 2 questions. They're good questions. First of all, on the expectation of margins. There's some overlapping in what's going on and has been going on recently. We still -- as we entered the recession, we had certain parts of our business that went down just because of lower capital spending. Some of what Brandon had talked about that happened recently. At the same time, we were concluding some of the higher-margin and large environmental project from the last wave. So that overlapped and we had -- we've been reporting, I think, the margins that are, certainly, very respectable in the upper end of the range of that we talked to you about. Now as we move forward, in the early phase of the environmental buildout, we'll have to see what the margins are now that goes forward, whether there will be some readjustment in that. But I still expect it to be in our range in the early part of the wave as we go forward. And we are -- as we've, I think, we reported to you, are completing some of the projects that had good harvesting and contingencies and cost savings. Certainly, we expect that to going forward. Our business model of what we're doing. For environmental buildout, that includes all forms of delivery model. We can sell it straight out material, engineer it, procure it, ship it. We'll do it where we will install it and we'll also do with where we will take on EPC, total service for our customers. So that does impact the top line that we see going forward. We do generally see higher margins on our service business. It's all consolidated within what we report to you, but we'll generally see higher margins on the service business. It depends on what the area it is. Some can be very, very competitive, with several competitors out there. Other places, there's good value added from our technology if the margins are, as expected, higher.

Michael S. Taff

The other thing I'd add to that and what we saw again back in '06, '07, '08, really gets to be that fixed cost absorption rate or utilization is what I keep referring to. As Rich's businesses ramp up and we get that revenue, that top line up closer to $2 billion, $1.8 billion and to $2 billion, $2.2 billion range, you'll see we basically will be fully absorbing our fixed cost. And so even though we made the margin on the jobs that we did early on may be the same margin as we did later in the cycle, those jobs later in the cycle will produce higher net margins just due to that full absorption rate. So I think that's the thing to look at. Early on, I think you'll see margins being pretty consistent with where they were historically. But as we're able to get total revenues in that $2 billion, $2.2 billion, $2.3 billion, $2.4 billion range, you'll see the margin incrementally increasing due to the full cost absorption. I expect that.

Brandon C. Bethards

Now Mike, and I would add to that. I think it's important to understand why that happens and there's sort of a unique feature here in Rich's business that gives us an advantage. He operates that Barberton complex you saw earlier with a number of employees. It's on a campus type facility where our construction company, our aftermarket, large or small projects in the global OEM businesses all operate from the campus, along with that research and development center. So while some of our competitors have to reach across interstate lines and different parts of the country to leverage up their business, it's quite easy for us to redeploy our technical resources, our procurement, our project management resources to optimize the return. So what happens, you certainly -- you can ramp, you can leverage this business that he has into a much higher revenue regime without seeing anything close to that same translation in fixed cost. So that gives us a little bit of competitive advantage and supports what Mike and Rich were talking about.

Richard L. Killion

The other question is the pie chart which is the one that shows the next in 2010 our revenue between global aftermarket was just 51%, new-build environmental 19% and steam generation 30%. No surprise that it's a new-build environment, our business continues to grow as we expect, so that percentage will come up. What I would expect is the overall revenues on the raise, which is what Mike's talked about. That'll rise more in the new build environmental business, certainly. And there'll also be some increase in the steam generating business as our international plan kicks in. There will be some periods where it's going to be probably evenly balanced. As we see it moving up, it could be areas where it'll be a 1/3, 1/3, 1/3. It's all going to depend on some of the lumpiness of the business and the timing and how that goes out. So we do have that regulatory driver that's going to pull that percentage up as the overall business grows and we leverage it up.

Joseph Ritchie - Goldman Sachs Group Inc., Research Division

Joe Ritchie, Goldman Sachs. So on Page 66, there's a chart that shows your market share of install capacity last cycle across your suite of products. And the market share is somewhere roughly between 25% to 50%. I guess my question is, has anything changed either from a competitive landscape or from your customer requirements that would lead you to believe that you wouldn't have the same type of share this cycle? And I guess where I'm really going with this is if your addressable market share, your addressable market is $12 billion to $24 billion and you're expecting to see spending over the next 4 years, you're really looking at potential bookings of $1 billion at the low end and $2 billion at the high end over the next 4 years.

Richard L. Killion

Okay, great question. One of the things I'd like to explain to you, and I think it makes sense is you know that we are a very prudent company that looks at our project and our project risk. The total market is comprised of all the steps that would be provided on the projects. As I said earlier, we have different delivery models. We can do it material. We can do it delivered and installed or we may take it EPC. We can do all those. First of all -- and some adjustment from what it would be if you just get the previous market shares and multiplied that out by this $12 billion to $25 billion, is -- we're not going to go after everyone of those and a full show of EPC side. We think that there's some other players out there, major players, who think they can use our resources by having a strategic combination of the delivery models that we use. So that will bring it down some. Market share-wise and what we've seen in previous markets compared to what we have going forward, first of all, you saw a very impressive product portfolio where we have 16 different solutions and technologies. We have more than anybody else. There is one other supplier out there that gets close us, but they don't have the construction features that Brandon just talked about. The rest of them are generally are into 2 or 3 or fewer deliveries. So we feel that what we've done to shore up and really extend the product portfolio compared to maybe some other market dynamics would offset any new competitive threats. We're planning on being a major supplier, no doubt about it. We're prepared for that, but thanks for your question.

Robert F. Norfleet - BB&T Capital Markets, Research Division

Rob Norfleet with BB&T. A quick question. If the customer chooses the B&W technology, what's the typical win rate if they're choosing B&W to do the EPC construction portion? And I guess secondly, in terms of overall market environment, would you expect to see as these awards are starting to ramp, what kind of pricing discipline should we expect to see in terms of other smaller competitors potentially discounting product in order to fill their backlogs and how do you ultimately react to that?

Richard L. Killion

First of all I think you asked about -- to rate our success rate on EPC?

Robert F. Norfleet - BB&T Capital Markets, Research Division

[indiscernible]

Richard L. Killion

Very high. And it depends on the customers' procurement style. Some of them ask for the bids together, all right. Or we would do what we call a delivered of the procurement and material and installation and pull it together. Others, separate those, but generally we've been over 50% on that, but we install our own equipment. As I said in environmental, that is one of our differentiating features as the other suppliers out there who can compete with us on technology don't have their own construction, which we have a very, very large construction company. We employ generally #1 or #2 in the number of boilermakers in the country. So we've had an excellent, very well received construction for this, that's one of the advantages that we have going forward.

Brandon C. Bethards

Rob, that's something we've always said of the jobs where we supply the equipment, as you said, we generally win the construction side about 50%, 55% of the time. On items where we don't win the award for the equipment, but we bid on the construction side, our success rate is much less. You just bring a lot of other competitors into that arena versus the equipment side. And then on that basis it's probably in the 10% to 20% range or so.

Michael P. Dickerson

Rich, we're going to take just one last question.

Richard L. Killion

Okay, any other question?

Unknown Analyst -

Rich, I just wanted to get some color on a couple of comments made by 2 large gold utilities recently. Number one, American Electric Power just recently printed out a detailed assessment of its retrofits going forward, based on the proposed macro, et cetera. And they're indicating 7 gigawatts plus and scrubbers that they need to retrofit or upgrade over the next 3, 4 years. So I would love to know how that compares to your 25 to 45-gigawatt assumption. Number 2, within that 7 gigawatts, 2.5 gigawatts is really upgrades, because a lot of the ones in the 1980s seem like they need to be upgraded. I would like to know what your assumptions are within that 25, 45 for upgrade? And number 2, Southern Company has recently indicated to us that even if the EPA rules, if they are defined this year, by the end of the year, they'll still have to give out contracts by the first or second quarter of next year. I would love to get a sense of what utilities are telling you as you speak to them.

Richard L. Killion

Okay, great questions about 2 very large utilities and customers that we have. And I'm sure you can expect any inside information that we have on what AEP's plans are or Southern Company's plans, it's difficult for me to share externally. However, we are in discussion with both companies, as I said earlier, on how we will assist them as they look at what they have going forward. AEP is a very, very large generator and their position on what they see going forward is probably one of their scenarios. We've worked with them and will continue to work with them to follow whatever final decisions they have, as well as Southern Company. The drivers, I can speak more generically on the drivers. On this, there are possible fuel changes. There are possible different selections of technology. CSAPR does have a trading provision, as you know. And so certainly, many of AEP's units will be in that one group where they would be able to trade some allowances. I have no information on what their strategy is involving that. I'm just saying that, these are some of the examples that as you look at different utilities and what their final plans are that need to be taken into consideration.

Michael P. Dickerson

Thank you, Rich, I think that's going to be it. We're going to move on. I'd like to introduce Sandy Baker, the President of our Nuclear Operations Group.

Peyton S. Baker

Good morning. Thank you, Mike for the introduction. I'm going to talk to you today about the Nuclear Operations Group. You've heard from TSG. You've heard from PGG. Now we're going to talk about NOG. I'm excited to be here because I don't get the chance often to talk about this business in this kind of forum. And I have to say upfront, I'll have to be a little bit cautious in my remarks because of the nature of the business, but you'll understand that as we move along. Mary Pat mentioned that we supply components to the U.S. Navy, the U.S. Nuclear Navy. That is in fact correct. Our primary business is manufacturing. We manufacture for the Naval Nuclear Propulsion Program, which is in support of the U.S. nuclear fleet. We have 5 facilities around the country that do that work for us. In Erwin, Tennessee and Lynchburg, Virginia; Euclid, Ohio; Barberton, Ohio and Mount Vernon, Indiana, are where the 5 factories are located. The first 4 bullets here represent those products that we manufacture for the Nuclear Propulsion Program and I'll go through those briefly with you. On the fuel side, manufactured at our Erwin, Tennessee plant, that's Nuclear Fuel Services. That's high-enriched uranium product, The starting material as Mr. Cochran mentioned earlier comes from his facility. That's the feedstock material that allows us to make the high-enriched uranium. That product is packaged and shipped to our Lynchburg campus, Lynchburg, Virginia, where it and about tens of thousands of other components that are manufactured in Lynchburg or assembled into a full up reactor core and delivered to the Navy. In our Euclid, Ohio plant, we build what's professionally referred to as electromechanical devices. In essence, it's control rod drive mechanisms that manage the movement of control rods inside of a reactor. There's some pictures of those at the top here from left to right that's a set of bearings, that's a lee [ph] screw, a drive motor. That's some of the thousands of components that go in to make up the control rod drive mechanism. Those things are assembled in Euclid -- manufactured and assembled in Euclid and tested in a simulated operational environment before being delivered to our customer. Heavy components are manufactured in our Barberton, Ohio and Mount Vernon, Indiana plants. These are things like core barrels, reactor vessels, closure heads, steam generators, pressurizers. And for good reason they're called heavy components; they weigh anywhere from 150 to 250 tons apiece, so they're not things you move around easily or -- and you're very careful when you move them around. Got some pictures at the bottom that give you an idea of the types of components that come out of those 2 facilities. So those are the components we supply to the Naval Nuclear Propulsion Program. We have some businesses in adjacent markets. Fuel assembly is for the research test reactor business. Bob Cochran mentioned his advanced test reactor in Idaho that he runs. We supply the fuel for that. We supply the fuel for the high flux reactor at Oak Ridge National Labs. That's it. Also the National Bureau of Standards and a number of universities like MIT and Missouri also house nuclear reactors and serve in the research and test market, and we supply the fuel for those as well. Nuclear nonproliferation, again, the TSG works in that field as well. We do a process called down blending at our NFS facility in Tennessee, where we take high-enriched uranium that's excess, the government has declared excess, leftover or whatever. We down blend that to low enriched uranium for use in the commercial reactor market. We just completed the contract at NFS, where we down blended 28 metric tons of high-enriched uranium that yielded 312 metric tons of low-enriched uranium. To put that in perspective for you, that's enough fuel for TVA to supply power to its 9 million customers for 3 years. So not only is it a nuclear nonproliferation effort, it's also supplying the needs of our energy market for the future. We also build spent fuel containers for the Navy. These are large, heavy containers that they use when they defuel cores for the carrier program. They can put the entire core in the spent fuel container and ship it and store it at its final destination, wherever that might be. So you probably figured out our customer here is the U.S. government. That's our primary customer. We contract directly with them for some of our products. We contract with some of their prime contractor and manufacture plant machinery for others. Funding comes from the DOE side, Department of Energy, as well as the Department of Defense. We're not just cutting ships for the government. We provide a full range of services starting with design. Right up front, we have a group of design engineers located in Barberton and in Euclid, Ohio. They design the steam generator and pressurizer, and CRDMs, control rod drive mechanisms for the government and we're contracted separately to do that. It's a highly engineered product. We have a staff of 500 engineers in our facilities that manage the process and project manage the manufacture of these components. Those are degreed engineers, mechanical, civil, electrical, chemical, nuclear degrees. All the material we use to manufacture the stuff you've seen so far is procured by us. So we have a large procurement staff that manage a global international supplier base to obtain that material. The fabrication consists of machining, welding, heat treating and a lot of specialty processes that the government requires that you probably wouldn't find anywhere else in the world are done in our facility. So we assemble and test those hardware in our shops. We package it. We ship it to the customer. All that's in our venue. Recovery, that's a process we use in our fuel facilities, both in Erwin and in Lynchburg, where fuel that's left over in the process or components bearing fuel that are not used in the process, scrapped for whatever reason, we can recover that fuel for the government. They can reuse it as they see fit, or they can down blend to low-enriched uranium. One thing that's not mentioned here is R&D. You'll note later in the program when Mr. Taff show you some slides that -- NOG spends very few corporate dollars on research and development. And the reason for that is we do it with government funding to the tune of $10 million to $15 million a year. And all of our factories, we do R&D separately contracted through general development programs with the government. So we're developing product lines and materials for use by the Navy in the next decade. We mentioned -- I mentioned that the products we make are highly engineered. Not only that, they're high precision. Even though they're big and round, they're high precision components and they're high-consequence. Highly tolerant, the operating environment they have to work in has a stringent test -- stringent performance characteristics associated with it. We're not making doughnuts here. It's not an assembly line. It takes anywhere from 5 to 9 years to make, with the exception of fuel. The rest of the components have a manufacturing span of 5 to 9 years. They're all custom-made. It's not an assembly line process. They're all different when they come out the back door. So from that standpoint they're custom-engineered and custom-manufactured. We have to operate for 30-plus years and you can imagine the environment we have to operate in. We have to operate flawlessly; failure's not an option. The lives of our sailors on these ships are dependent on the flawless operation of our components, so that's very important to us. Because of the nature of that, there's a lot of support processes that have to be in place. Our fuel facilities in Lynchburg and Erwin have to be licensed by the Nuclear Regulatory Commission. All of their processes and all of our plants associated with the Navy's products have to be certified by the government. All of our people have to be qualified as operators by the government. They have to obtain and sustain a security clearance from the government to operate in our plants. And there's a rigorous drug testing associated with that. So that's a great deal of rigor in the support processes, as well as the manufacturing processes in this product line. This schematic will probably give you the best representation of what we make. The box on the left is -- depicts a reactor compartment aboard a submarine or an aircraft carrier. The fuel, the gray and white striped area is manufactured in our Erwin plant. The reactor itself is manufactured in our Lynchburg plant. The core barrel, the reactor vessel, the closure head, the pressurizer and steam generator are manufactured in our Barberton and Mount Vernon facilities. And the item in red up here, the control rod drive mechanisms, are manufactured in our Euclid plant. So we'd like to say we own the reactor compartment, everything other than pumps, piping and primary shielding, we manufacture for the Navy.

Long history. Most of our operations have been supporting this business since Admiral Rickover created the nuclear Navy. These are some of the classes we've supported over time. Today we support the Nimitz class carrier program and the Ohio class submarine program with refuels and replacement parts. We support the Virginia class program submarine and the Ford class carrier program with new build ship construction components. We are way down the road in developing and designing the components for the Ohio class replacement submarine. Those components will be delivered later in this decade. This is a little bit on the 5 factories I mentioned earlier, just some data I will give you. Just a couple of key highlights here. It's about 2.5 million square feet of manufacturing space, about 4,000 employees working for us. I mentioned that 2 of our facilities are licensed by the NRC as Cat 1 facilities. Simply that means they are certified to handle, process and store high-enriched uranium. In fact, they are the only 2 privately held facilities in the U.S. that have that license and I don't think there'll ever be another one.

Our other 3 factories have obtained the N-Stamp from the ASME, which means they can make pressure boundary parts in the commercial nuclear environment as that business resurrects itself. At Mount Vernon facility, I want to point that one, it sits on the Ohio River in Indiana. It has 1,000 ton lift capacity on the river, so most of the products we manufacture there are shipped by barge. But we also use that capability to load and unload barges to others. High-margin work; not a lot of volume, but high margins.

The next 4 slides I want to show you are -- depict the type of -- I put them in here to give you an idea on the type of equipment and the size of equipment that it takes to manufacture this hardware. So again, shows you good pictures of the hardware itself. This is a 20-column machining center. I'm not going to get into the details of that, but you can get the scale here, if you just look at the people's size in relation to the equipment. This next one's a machining center as well, I think it's fairly evident how large that is. The next 2 sides are numerically controlled robotic welding systems that we have in place. And then you can get a sense of the size there.

I put those in here to show you that, but also we have about 135 pieces of large equipment in that factory just like this. And we have about 150 pieces of smaller equipment, 35 heat treatment furnaces in our factories to support this particular program. So it's not inconsequential. We spent about $270 million over the last 20 years to facilitize the factories, and they're fully facilitized today. So if I pause for a moment and ask you to think about the licensing, the certification, the qualification efforts, the support systems that are needed and the facilitization that's required to manufacture this product, I hope you readily realize there's a huge barrier at the entry in this market. And therefore, that's why I included these pictures.

So what does it look like as we move forward at NOG? From our perspective, on the government side, with the government test to procure, I see the Virginia class procurements continuing into a year. I don't think that will change. I don't see that changing. I think the Ford-Class carriers will continue to be procured. The question is what the frequency will be. A lot of swirl in Washington. It's on 5-year centers now. Will it be 6-year centers, or 7-year centers? In my dialogue with my customer, I think worst case it'll be a 6-year center. The Ohio class replacement, an important leg in the triad of nuclear deterrent is that weapon system. I don't see that changing. I think that's going to move forward. A lot of old subs in the fleet today and they've got to replace those. Everything I hear and see right now says Ohio class is going to be there, and we'll be manufacturing those throughout this decade and beyond.

We also have 8 refuels left to do for the Navy. Six of those are under contract now. We have 2 more to contract for, both of those carrier refuels. So I see that business continuing into the early 2020's. On the commercial nuclear side, the facilitization that you've seen we have, I think positions us well. And both the qualifications that we have position us well in the commercial nuclear market should that renaissance ever occur. But particularly, we're positioned in planning for and getting ready for the manufacture of components to support our mPower product line that Mr. Mowry will tell you about after lunch.

Looking at other adjacent markets. We've made missile tubes in the past. We are proceeding down the path if you're going to make missile tubes for the Ohio Class Replacement submarines, as well as other hardware that we manufacture today.

Motors. We're using high-temperature environments. We have a couple of customers who are talking to us today regarding us building motors for them in the Euclid facility, where they have to have strengthened operating requirements.

We do some work for NASA at our Mount Vernon facility. Heat treats of components for some of their rockets. We see a logical extension of that into the manufacturing of those components. They fit our core competencies very well. And then an extension of our stem fuel containers that we make for the Navy is to get into the cask manufacturing for dry cask storage on the commercial side.

The government is going to continue buying nuclear fuel, there’s no question about it. They have to have that to make products that we make, see that continuing. One logical progression of that could be the manufacture of fuel on the commercial side. I don't know that that's going to happen quickly, I think that's probably more a decade away. But we are positioned in our NFS facility to support mPower fuel needs, if it's so required.

Then on the nuclear nonproliferation front, down blending will continue. We just don't know how much excess uranium the government will declare, but we know there are tons out there left to be down blended and we intend to be selective for that work.

So what I want you to remember about NOG. It's a key and strategic partner and supplier to the Naval nuclear proportions program in the manufacture components and hardware. It's a long-term business, it's a recurring business, it has high margins, it has high cash flows, has great visibility. You can see clearly out the windshield what's coming down the pike within the government. This is not the first time we've had the swirl in Washington that we have today, so we're kind of used to that. The facilitization, the qualification, the certification that it takes to support this business is a clear barrier to entry in the marketplace. Those same attributes though position us well for commercial nuclear manufacture, particularly our mPower product line Mr. Mowry will talk to you about. And lastly, because we're fully facilitized, our capital demands on the corporation are low, mostly to maintain the infrastructure and their factors. So that's kind of an overview of NOG. Any questions?

Michael P. Dickerson

Thanks, Sandy.

Unknown Analyst -

Sandy, this has been a nice growth business for you over the last couple of years, as you've added the Virginia-class sub into the year. I haven't looked over the next couple of years. Is it still a growth business as you wait for the Ohio class? And then just a follow-up to that is what would be the impact on the business if you moved the Ford carriers from 5 to 6 years, in terms of build?

Peyton S. Baker

Okay. Both good questions; expected to hear those. The business -- we have about a $2.7 billion backlog at this point. So our forecast for the shop loads in all of our factories are pretty much at their limit for the next 3 years. And that's about as far out as we can see at this point given the backlog we have. If the Ford class slides to the right, I was talking to the Naval Reactors program last week with the Board on that subject. The expectation is it will probably end up on 6-year centers. And with the advanced funding we get, I seen very little impact to our business if that's what happens. They can move the advanced funding around and they told me that's what they intend to do, so.

Brandon C. Bethards

And Andy, just to clarify a little bit. I mean as we look, I mean, obviously, Sandy's business has had just remarkable growth over this 5-year period, double digit, compound annual growth to top line. I think what we see internally is we do see some growth, but certainly not at that 12%, 15%, 20% level. Over the next 2 years or so, we could see a growth in his top line depending what we're doing for the Navy, as well as some of the operations in NFS that are incorporated in that business unit in that 6% to 8% range or so, or 5% to 8% range. Thanks. Yes, sir?

Unknown Analyst -

Two questions. Just following up. Can you comment about the Virginia class sub, if that gets stretched out? Someone had the comment that you made on the aircraft carriers. And secondly, you talked about the components. I didn't catch if it was all 5 plants are used to make the engine or is it the reactor, or if it's just for the pot? But why is that and over time, if you buildout the mPower business, would you expect different locations to make more components? Is this something from history or is it just something that you have strategically have placed around in multiple locations?

Peyton S. Baker

Okay. If I can remember your questions, all 5 of our plants manufacture hardware or material for the naval nuclear propulsion program, starting with the fuel in Erwin, cores in Lynchburg, heavy equipment in Barberton and Mount Vernon and control rod valve mechanisms in our Euclid, Ohio plants. So all 5 plants support that business. The research test reactor business is conducted in Lynchburg. The down blending business is conducted in Erwin, Tennessee in NFS. The stem fuel canisters, containers are manufactured in Barberton and Mount Vernon. And so... Yes?

Unknown Analyst -

[indiscernible]

Peyton S. Baker

Do they have to be -- yes and no. Is there an opportunity to consolidate? Probably at the right time. Perhaps consolidate the Barberton works and the Euclid works in some fashion. But we don't have any plans to do that. Right now, they're pretty much at their max load. On the mPower side, we plan -- and based on the forecast that we see coming out of Chris Mowry's organization, we plan to be manufacturing parts for that in -- certainly in Mount Vernon, probably in Barberton, in Lynchburg, Virginia and in Euclid, Ohio. Down the road, if the fuel business materializes and it makes sense, we might be in the fuel business at Erwin for mPower.

Michael P. Dickerson

And really the key to this whole operation as we get into -- more talking about mPower and Chris talks about that, is some available capacity that we have in some of our shops. And that's why we feel we have a very unique skill set, as well as an asset base that will allow us to do the manufacturing of commercial nuclear at some of these existing facilities that are facilitized with our human capital there.

Peyton S. Baker

And that's late this decade and next decade.

Michael P. Dickerson

Absolutely.

Brandon C. Bethards

Mike, I'd also add that when you talk about that, bear in mind that with regards to commercial nuclear, we have a substantial facility with some unique characteristics in Cambridge, Ontario, where we have traditionally built our steam generator replacement components for that operation. And you mentioned -- you talked about consolidation, but I would like to add a couple of comments to that. Each one of those facilities that Sandy talked about, and including the clean room capabilities for commercial applications in Cambridge are unique and the economics for consolidation are not what you would typically think. They're not building similar components or similar activity. So there really isn't a very good case -- there's no economic case for consolidation. Also, it allows you some risk management, if you will, with regard to diversity of the labor force. And the maintenance of those facilities or being in those facilities, which were originally used back in the 60's and the early 70's in the big shaft commercial business that we ran at that time, have the footprint and the infrastructure to be scaled up significantly with very modest capital investment. And they were -- are well qualified to take us through Phase 1 of the mPower program. When we get into Phase 2, you'll actually start to reach the capacity of that. Depending on where that market is and how much of it is international, it would be well out in the future before we would have to add any manufacturing capability for nuclear commercial components.

Unknown Analyst -

[indiscernible]

Peyton S. Baker

Getting stressed. I don't see those getting stressed. And in fact, the dialogue I'm having with the government today indicates that the one year this decade that if they plan to buy one plant, they are going to buy 2. So I think we'll continue at 2 a year, based on the mileage I have inside the government. There are plans in the 2021 time frame and beyond is to go to one a year. But I see nothing that's going to change that or slide it to the right.

Unknown Analyst -

[indiscernible]

Peyton S. Baker

Depends on what they are. I can't comment on...

Unknown Analyst -

[indiscernible]

Michael P. Dickerson

It's really hard to say because the way we procured, we have openers in our contract and the way our contracts are structured, we basically get negotiated multiyear procurements on a cost-reimbursable target price incentive contract. So if they change that and that changes our volume, then we open those existing contracts. So short term, there's probably -- there's a benefit to us longer term, probably not so much. But I think those scenarios, and it's depending on what it is, is hard to estimate. I think the logical progression is that as we continue with our current procurement over the next several years, then the question gets to once you layer in Ohio-Class Replacement in that, what ultimately has to happen. Capacity wise, we have plenty of capacity, continue doing what we're doing, as well as layering the Ohio-Class replacement. But as we get into this decade and the first part of next decade, you could see some lengthening of the Virginia class program going to 1.5 per year or so, as they layer in the Ohio class. One thing we don't know yet, Sandy, is what that procurement rate of the Ohio Class would be. As Sandy indicated, we've done a lot of research. They've spent a lot of R&D dollars for us determining the size of the reactor of that ship and things like that, working on the different fuel aspects of that reactor. But from a capacity standpoint, we're well positioned for that.

Brandon C. Bethards

Mike, let me add something, because I think this is a question we get often and there's -- understand that we work really hard with our customer to deliver value to them. So we, Sandy and his group and those that work on this for management before him work really hard at optimizing value for the NR program. And recognize that the components that he showed you are the long lead time components relative to a ship build, if you would. So if there is some change or stretch out to like a 1.5, that customer has a number of derivative decisions that he will make. And if you'd de-optimize the work for reasons that Mike talked about and from loading efficiencies, stretching things out doesn't necessarily save them any money. What they will do is redeploy other components with regard to the ship build that shows up later and they can take receipt, and often want receipt of our delivery in advance of those other components. So it's a complex dynamic but what I'm trying to convey to you, even in an adverse situation like that, the priority with which they will spend for the program scheduled to pay and been given to work with still sets up well for us.

Michael P. Dickerson

So 2 key points there. One you named, Brandon, but one is the programmers work very hard on the Virginia class submarine to get advanced $2 billion a copy, from where it started in the procurement cycle. Changing that procurement style in any way is going to have an adverse impact on that and if the Navy can avoid it, if the DOE can avoid it, I don't see that that changing. So that's Sandy Baker's opinion. Brandon's exactly right. What's happened in the past when they've made changes to a forecast that they've already provided us, is they do some extraordinary things to make up for that imbalance in the shops, like the refuels that are scheduled to be done in 2017 or '18 get moved into 2014 and '15. So there are other dynamics that play into the procurement scheme, should either the 4 class or the Virginia class procurement cycle change.

Martin W. Malloy

Martin Malloy, Johnson Rice. Could you talk about the timetable for when you expect to be awarded early sign work on the Ohio class and when you expect to ramp up manufacturing component? Is there a difference in the relative size or the relative value of the amount of equipment that you sell for the Ohio class versus the Virginia class?

Peyton S. Baker

I hope I heard that right, because it didn't sound like the microphone was on. We are already doing preliminary design on the Ohio class, so there's some early work being done. We expect the final design phase contract to be placed in 2012, next government fiscal year. And they're on target to do that as we are quoting that process right now to them. The relative value, since the design is not final yet and there are some decisions to be made, it's kind of hard to answer. There are no significant differences in what we see coming down the pike for Ohio class and the other submarine classes we have. In fact, there's some dialogue about they may use the Virginia platform for that. But that's still up in the air at this point. So it's probably pretty much the same.

Michael P. Dickerson

Thank you, Sandy. We're running just a couple of minutes over. We're going to take about a 15-minute break. There's a buffet-style lunch set up in the library just behind us here. If you can grab yourself a plate, bring it back in. Chris Mowry's going to run through the nuclear business energy for us.

[Break]

All right, thanks, everybody. We're going to go ahead and get started. I'd like to introduce Chris Mowry, the President of our Nuclear Energy Group.

Christofer M. Mowry

Thanks, Mike. Is this on? Yes, all right. Good afternoon. It's a pleasure to be here, and I hope you all are enjoying your lunch. We come to work every day thinking about our 2 core missions. The first is servicing the existing fleet of operating nuclear plants here in the United States, up at Canada and around the world. And our focus here is on plant maintenance; replace the nuclear components and reactor modifications. Our other mission is building the next generation of new nuclear plants. And of course, our primary focus there is on the B&W mPower small modular reactor, and I'll talk about that quite a bit later on. But we also supply nuclear components, advanced nuclear fuels and other manufacturing services for all the other technologies that are being deployed out there. So we are a leading nuclear supplier with a very special value proposition.

In today's global economic environment, we're very fortunate to have such a positive market outlook. In spite of the tragedy in Japan that Bob Cochran talked about earlier, Fukushima is good for our business in the areas of spent nuclear fuel management, plant upgrades that we see coming down the road and of course a few small modular reactors.

China and their nuclear visions continue to grow strongly, and we're actively engaged in a number of areas with that market. And the situation in Canada continues to evolve in a way that's very favorable for B&W with the sale of AECL and the turmoil that that's created for their OEM customers, as well as the prospect for new nuclear new builds in the province of Ontario. And of course, the B&W mPower brand continues to open doors for us around the world not only for nuclear new builds, but also for our Services business.

We estimate that the Global Services market opportunity for B&W is almost $20 billion. Today we serve about $2.5 billion, so there's plenty of room for us to grow in the future.

We also remain excited about the global new build opportunity, and see somewhere between $400 billion and $500 billion of investment through 2030 in that segment.

As I mentioned, we serve this exciting market opportunity with a really, truly unique value proposition. Out of our North American facilities, we offer nuclear engineering for the most advanced reactor designs. And this is not only for our B&W mPower SMR, but it's also for improving the performance of plant systems and components in existing reactor fleets. We provide comprehensive, heavy reactor manufacturing across the span of all technologies that are currently deployed, including the Canadian CANDU fleet, the global pressurized water reactor markets and of course again for our mPower SMR. And we deliver plant services to lower the cost, schedule in radiation dose associated with plant maintenance activities that are needed by our global customers. Viewed this way, B&W is the only comprehensive North American nuclear supplier.

I'd like to dive into our product lines and start with Nuclear Fuel Services. Our Fuel Services business is all about levering our "Best In Class" tooling technology, conduct of operations and work management processes to deliver steam generator inspections, balance of plant repairs and safety-related equipment maintenance for all the Canadian utilities, 50 of the reactors that are operating here in the United States and selected global customers.

Let me share a few examples with you. Last year, Bruce Power, we were selected to do very technically challenging maintenance right up on the reactor phase in an inaccessible work environment and a very high radiation area. Using our proprietary tooling and technology, we were able to complete the work 10x faster and with 90% less radiation dose than the previous vendor. And because of that, we're back again this year with the same kind of project with an even bigger scope of work. A similar story is happening with us with Duke Energy. This past spring, we did steam generator inspections for their feet. And as you can see, we did it in less time with less radiation dose and less people than the previous vendor. And that's what's driving a really a long-term relationship that we have with them. So when you think about B&W Nuclear Fuel Services, you should think about technology enhancing our project execution and driving that consistent long-term revenue stream from our core customers.

Complementing our fuel services is our Nuclear Equipment business. And this business truly does have a special heritage and capability. We are the primary supplier for CANDU Technology, for steam generators and other heavy equipment. And in fact, as Mary Pat mentioned earlier, we delivered over 300 nuclear steam generators worldwide for all technologies. This experience phase powered our business going forward. We have the TVA Bellefonte Unit 1 new build that was recently announced. We have the steam generators under contract for that. We're manufacturing reactor components for international customers like Embalse in Argentina. And we continue to supply replacement steam generators to the operating fleet, like FirstEnergy's Davis-Besse plant, which we're currently working on.

We're also getting back into the nuclear plant modification business. Unlike fuel services, this is all about providing design built capabilities to our customers who are modifying or upgrading their plants. This is a robust market across North America driven by some very powerful cost cutting dynamics. Major equipment replacements are being pursued by many customers to support their life extension programs.

Post-Fukushima plant upgrades are being mandated by the U.S. Nuclear Regulatory Commission. And ongoing Canadian CANDU reactor refurbishments are being pursued and continue at a rate of about $500 million per reactor.

As mentioned earlier by Rich and others, B&W has strong capabilities in this area to support this opportunity. We have this 100-year history of successful power plant construction. We're the second largest -- or first largest employer of boilermakers in North America. And as I previously mentioned, we have the engineering, project management and contracts of operations expertise necessary to do this work. While we've had some growing pains, B&W is excited about this growth opportunity that really focuses in on our core competencies.

Now I'd like to shift my discussion to our B&W mPower SMR business. We think we have a very real opportunity here to reshape the energy industry as it relates to nuclear power. And we're going to do this by deploying our innovative B&W mPower small modular reactor by 2020, and demonstrate its ability to offer in changing certainty in plant construction schedules, certainty in client overnight costs and the ability to provide much more, and much more viable project financing.

Well ultimately, what dominates market adoption of power generation technologies is the relative levelized cost of electricity performance for the technology. And by focusing on a very tight set of program requirements, we think we can deliver a product that is not only more competitive than the large integral class reactor designs that are out there, but it can also compete with natural gas over the utility planning horizon. We can do this space on mPower's projected levelized cost of electricity between $80 and $92 a megawatt hour. So at the highest, most strategic level, this is the B&W mPower value proposition.

Well, mPower is all about creating a truly practical alternative to natural gas within the electric utility industry's power generation portfolios. And we do this by offering some very specific value propositions. Most importantly, we're breaking the historical cost-scale paradigm that's driven utility customers to ever larger, less-affordable projects. mPower also offers flexibility, the ability to more closely match capacity additions to retirements, and the ability to size our reactor plants to local constraints, like transmission rig requirement and the availability of water. To provide truly North American manufacturing supply chain and technology that allows utilities to repower old plants that are being retired with a clean tower solution. And that's something that Rich shared with you in the previous -- one of the previous presentations. And if you work at a range of 25 to 50 gigawatts of retirement of power plants that are built in the 50s or 60s, this represents a huge market opportunity for us and a market opportunity that many of our customers have asked us to look at.

B&W mPower is economical, it's safe and it's flexible. This value proposition plays in an accelerated global market to new nuclear generation. The opportunity is not only here in North America, but exists on an even greater scale worldwide. And we have great market dynamics for mPower. B&W has been and remains the clear leader in the emerging small modular reactor market. If anything, we see that the new entrants like Westinghouse and Holetech just validating the size and the opportunity of this market. Fukushima has rebalanced the industry's focus on safety as well as economics for nuclear new builds.

The good news here is that the B&W mPower exceed as extremely robust against the extreme events, such as what happened in Japan. And we continue to enjoy very strong stakeholder support here in the United States, including our utility customer base, the Department of Energy, the Nuclear Regulatory Commission and Congress.

I'd like to share some more specifics about our mPower technology. This is an illustration of a 2-unit mPower plant generating 320 megawatts of electricity, similar to what we tried to build at Clinch River. It's a nuclear plant, but it doesn't look like a nuclear plant, with the reactors inside the low white one-story building that you see in the image. But this is just where our innovation starts. The reactor system is a single integrated module, so we can rail shift from our factories across the United States and Canada. The reactor and the stem fuel are entirely underground, well protected against external threats.

These types of innovations deliver breakthrough performance. A plant that is 100x safer than the latest large gigawatt plants designed. A plant that can operate up to 4 years continuously between refueling outages, compared to the 2 years for existing plants. This is disruptive technology.

But the innovation of mPower does not stop with the technology itself. We've also reinvented how the technology will be delivered with our Generation mPower joint venture with Bechtel. This is a permanent and truly integrated team that brings together B&W's more than 50 years of nuclear technology and manufacturing expertise, with Bechtel's 60 years of construction leadership in the industry. It's the JV of substance, with a clear mission to manage the design and licensing program of mPower, to lead project development and contracting with a single phase with our customer base and to provide overall project management on construction management for the delivery of our contracts. We believe that this platform will create lasting value for B&W and enhance our brand around the world.

We made a lot of progress in the marketplace since the program was formally launched almost 2 years ago. The upper box is composed of our mPower consortium members. And this customer base has "skin in the game", with funding commitments to support programmatic aspects of mPower, including policy matters and delivery requirements. The lower box constitutes the broader base of global utilities that have expressed interest in our technology. And you should recognize not only Tier 1 utilities in this mix, but also utilities that are large and small, utilities that are regulated and deregulated, nuclear utilities and nonnuclear utilities and U.S. utilities and international utilities. In fact, it expands the entire desired market space for mPower.

Not only is TVA, our launch customer on this list, but we would expect that customers 2 and 3 will probably come off this page as well.

At the core of our customer universe is TVA. This is our launch customer for mPower at the Clinch River sight in Tennessee. This really is an ideal lead plant location. Not only does TVA have significant new build expertise and credibility, but there's strong community support for this program. Earlier this summer, 5 local mayors showed up in one of our meetings to express and voice their support and desire to see this project move forward. As many of you know, our letter of intent for the project was signed this past May with TVA's CEO, Bryan [ph], we now have a path forward through to construction.

TVA's commitment to mPower is not only a reflection of the alignment of our value proposition with their needs, but it's also a clear expression of their confidence in our technology. So far, this is unique. mPower and B&W are the only SMR vendor with a launch customer and a lead plant site.

Further details of our mPower lead plant schedule. As you can see, it lays out the design and testing elements, which are in blue, and those are currently underway. The licensing activities, which are in orange, and we just started those earlier this year in earnest. And finally, manufacturing and construction, and this is in purple. And these are the phases which are going to generate significant revenues for the B&W company. The schedule was developed jointly with our customer TVA, over a year ago. The details are evolving. They have evolved and now I would expect them to continue to evolve. However, we still are looking at a target date of 2020 for commercial operations for these first lead plant units. The key milestones in this journey are located in the bottom of the chart, including the submittal and approval of the Construction Permit in 2013 and 2015, respectively.

There's also a larger market universe that presents a long-term growth opportunity for mPower outside the core market power generation space. These include the downstream oil and gas and petrochem sector which not only needs power, but more importantly needs a clean and more efficient source of process heat. And we think mPower technology is well positioned to serve this emerging opportunity.

Desalination, with accelerating infrastructure in many regions around the world. And this activity needs lots of power, and we've seen early and strong interest from this market segment as well. And finally, there's other energy intensive industries who will come forward inquiring about our technology. These include mining, especially tar sands up in Alberta, as well as the refining sector including energy intensive areas like aluminum. These are often located in remote areas and represents strong potential growth opportunities for the mPower technology.

When you think about B&W Nuclear Energy, you should view it through the lens of a large and growing global market. We're capturing this opportunity with our proprietary services technology, a truly unique North American engineering and manufacturing platform and our disruptive B&W mPower small modular reactor, when it's already gained traction with our customers. Thank you. We'll take some questions.

Unknown Analyst -

Just 2 quick questions. You didn't address in the presentation just how we should think about R&D on a longer-term basis, just because it continued to surprise on the upside. And then my second question is just more strategic or how you're thinking about -- this is, as an industry expert. Shaw Group recently announced that they're getting out of the Westinghouse agreement, so I would just be curious to hear your thoughts on that. Do you think that -- does that suggest they're less on nuclear because they were the biggest [indiscernible], or you could put it another way and say well, maybe they don't think the traditional nuclear power gens the way to go and maybe modular's more the way that we should be. So just curious on your thoughts on that.

Christofer M. Mowry

Yes, could you just restate the first question?

Unknown Analyst -

Just R&D, longer term. Just trying to figure out how much of a headwind that could be. Could it go up from these levels?

Michael S. Taff

I'm going to address that in my presentation. But I think the best way to think about that for Chris' group is, as we indicated for '11, we're on a run rate to probably spending at $70 million to $80 million range. We think '12 is probably a similar spend. And then once we get into '13 through '15 time frame, we'll see that spend rate starting to decline and by the time you get to '15, '16, quite dramatically.

Christofer M. Mowry

And you can line that up and correlate that to the milestones on the schedule there where we're looking to submit the Construction Permit application in early 2013, for example. So that lines up with what Mike's talking about. With regard to Shaw and the Westinghouse, this would just be pure speculation, but we do know that there's been some challenges there in terms of cost estimates, that there's some prudency reviews going on. And so I think what we see from our side with regard to what's happening with plant global is the kind of challenges that you find when you try to build extremely large projects in the field [indiscernible]. And that uncertainty that you have in schedule and the overnight cost is why we think that small modular reactor market is so strong. Because the shift from fuel built to factory built is what can drive that certainty in construction schedule and cost and that's what customers are looking for. They're looking for certainty in these new build projects.

Unknown Analyst -

With regard to the 160-megawatt module, excluding AC/DC, what kind of cost per megawatt are you talking about for construction?

Christofer M. Mowry

If you go back to slide -- let me find the right one here. For those of you on the webcast, we're on Slide 94. So there's a number of constraints that are listed there on that slide and one of them is the target to have an overnight cost of less than $6,000 a kilowatt for a 320-megawatt plant. And again if you look back in history, you say, "Hey, that's pretty challenging." But that's where the innovation of our integral reactor comes in, and the ability to have that not only made in the factory, but drive simplification in the overall design and architecture of the plant. So this isn't just a big nuclear plant [indiscernible]. It's a totally different way of working on how you design commercial nuclear power.

Unknown Analyst -

Chris, I'm curious, you mentioned that you might have opportunities for one or 2 additional clients coming out of this list. And then based on your expectations, I know it's hard to figure out when clients might step up, but do you expect them to wait until the first plant is proven or operating? What's the potential time frame there?

Christofer M. Mowry

Well, a couple of things. One is we are in discussions with a number of potential customers who could be #2 and #3. And the drivers are there in terms of renewable energy portfolios. If you look at small customers, customers that are traditionally nonnuclear for the co-ops, and those types of utilities around the country, they're kind of filled up with renewable, which doesn't provide dispatchable power. And they're looking for other sources of clean energy and that demand is here now. And then you look at the other side of the equation and some of these large facilities like AEP, like FirstEnergy, like ADUC [ph], which are facing retirement of their smaller, older generating assets, and that's something that in the 2015 to 2020 time frame, they're going to need to do something about. And you just can't replace those existing small units with a new big unit somewhere else because of grid reliability and stability issues. Utility is one option. And you can't put a big nuclear plant on a small 250-megawatt old-generating station that's sitting in a very constrained location. The only thing that can go there is a small modular reactor, and that's another reason why a lot of these discussions are continuing. So we see the market drivers here in the U.S. as being very strong, and continue to be strong in spite of what's happening with the economy. And to supplement that, we continue to get strong interest globally, including places like China, the Middle East and India.

Unknown Analyst -

[indiscernible]

Christofer M. Mowry

Yes, yes, we think that there's enough confidence in our technology. I think you heard today that B&W in many ways is the premier technology supplier for new reactors. And certainly, we've been building small reactors for 50 years. And if you look at the confidence TVA had in us earlier this year, it's based upon the credibility of this entire business. Not just my nuclear energy business, or Sandy's NOG, and then manufacturing platform. Because one of the things about SMR is if you think about the winners and losers here, it's different than a big plant. And to be a good supplier for SMRs, you not only need to know how to make things out in the field, you got to be able to manufacture this stuff, very high quality, high precision and high consequence. You're making the entire reactor in a factory. How many other vendors have factories in North America that can make a total reactor? Not too many. None.

Unknown Analyst -

Can you just speak a little bit about the competitive landscape? For SMRs, it sounds like you certainly believe mPower is the leader, but if you could just give some more color on the other SMRs out there. Is it a 2-horse race, 3-horse race? How do you see this developing over the next several years?

Christofer M. Mowry

How do I see what?

Unknown Analyst -

Competition for SMRs.

Christofer M. Mowry

Well, we think there is going to be competition because we believe this is a rapidly accelerating market opportunity. And we also that again, as I mentioned earlier, validating our decision to get in early and be in front. So right now, there are a lot of other players who want to be in the game, but we're way out in front right now. We're the one who is the furthest along in design and development. We're going to be rolling out and commissioning our new testing facility later this month up in Virginia. And with regard to licensing, we're the furthest along in the licensing process. So we expect that there are going to be other competitors out there. Westinghouse got in the game earlier this year. And again, we can only speculate as to why. But obviously, they have a premier large reactor product that they just rolled out, the AP1000. You got to think that them going after a small reactor is going to take away from the big reactor markets. So they must, as well as us, see that there is a strong value proposition in what SMRs offer. And it's all driven by economics. Fukushima, kind of clears the floor of safety requirement. But this is an economic discussion. Levelized cost of electricity and risk management have taken the risk out of the project by creating certainty in overnight cost, as you build it in a factory. You're taking certainty or taking risk out of the construction schedule by doing 70% of it away from the site. And those are the things, inability to finance these jobs. If your project is 10% of the price and 10% of the cost, there's a lot more options to finance that than a $15 billion or $20 billion job.

Brandon C. Bethards

Let me add a couple of comments to that, Chris. I think more specific to your question is we would expect the most viable competition to emerge out of the other PWR, the light water reactor crowd that has credibility. It's not going to -- in our opinion, going to be the radical change that has to get through the licensing process, a high and rich core, or some kind of other cooling mechanism. The commercial nuclear power business moves in evolutionary steps. And that's one of the good things about our SMR approach is that we're not showing the regulatory that is a lot of significant new code. There's nothing over the edge here that's radical that requires a conversion and belief, if you will. So if you think about those types of parameters and getting it to market, getting through approval in the market, the competition is likely to come from those that are in the business. And as Chris said, they've got some tough decisions to make because in the process, you're going to be cannibalizing their existing business in their existing market.

Unknown Analyst -

Two questions. Number one, if you go back to slides at Page 101, when do we -- it's basically the schedule for mPower. My first question was in regards to that. When do you start to see the bulk of the bookings flow through? How do you book that in regard to this particular schedule? And number two, the second question is in regard to your international opportunities. Given how key manufacturing facilities in essence are and in terms of the mPower's proposition, what kind of exposure licenses are you going to require if you're following an international opportunity. And number two, in regard to competition, could you comment on the federal-based reactor and whether that has an edge over your modular reactor in China?

Christofer M. Mowry

Okay, so first of all, relative to revenues and bookings for mPower going forward. What I would say is you got to look here at the manufacturing and the construction elements of the schedule, because those windows on this chart indicate when those activities are going to occur. And that's when we're going to have the bookings and the revenues coming out associated with those specific processes. And as said, things are moving around a little bit, but we're still targeting 2020 for commercial operations date. So you can pick that stuff off of this chart. With regard to top of that reactor, I guess I'll just echo and then summarize what Brandon said. The difference is mPower is not a science project, okay? And to cover a broad reactor, how many covers that nuclear fuel suppliers are there around the world? Can't think of too many. And so if you think about a utility, or wants to go make a bet on a new project, on a new technology, it's all about risk management. And that's what Brandon was talking about evolutionary. And if you look at the attributes back on this earlier slide, I think it was 94, our focus is use proven technology wherever possible to enable the overall innovation. This is an engineering effort, not a science project. And that is the fundamental difference between all the GEN 4 technologies, including double bed. I mean, this is about risk management and utilities don't want to take these big risks, especially when the incremental value that they would get out of it is questionable. mPower has very slow economics, it's got a long operating cycle. So it's got a lot of the benefits that we've always exposed to some of these GEN 4 technologies, relative to the international customer base. Again, one of the benefits of having a small modular reactor is you can actually ship with it. You could make it entirely in your factory in one piece, and put it on a rail car or on a boat and send it to wherever you want to go. Of course, the entire process has to sit within the nuclear liability framework, and that's something that we're going to be thinking about carefully as we look at possible international customers. So there's a lot of requirements with regard to proliferation and the nuclear liability. And those represent tollgates that in the business we're going to go through it in a very careful and thoughtful way.

Michael P. Dickerson

Chris, I'll also ask about export requirements. Obviously, you have to go through the Part A10 [ph] process. But again, I'll take you back to the fact that this is a light water pressurized water reactor technology. So there is nothing classified with regard to this particular design, and it should make it feasible to follow in the wave of these other Part A10 [ph] processes that have occurred in front of it.

Unknown Analyst -

Lead plant schedule you show integral systems as extending into 2014. And you have preparation of the construction permits nearly ending in 2012. Does integral system testing have to be completed to really come up with a definitive cost estimate and making it possible to prepare construction permit application? And secondly, will this reactor system be eligible for the energy legislation set by the last administration that would get in the way of objections and lawsuits and things that could also delay this project?

Christofer M. Mowry

Could you just add some more details on the last part of the question? What specific legislation?

Unknown Analyst -

Well supposedly, the Bush administration's past legislation that would hurry up the granting of operating license inside the Nuclear Regulatory Commission. You couldn't get in the way of these projects for years by having -- legislation, or people filing lawsuits who are going for the court.

Christofer M. Mowry

That's 2 very, very good questions. With regard to the IST, the purpose of the IST is to validate the software programs and the codes that we use to do the design work, okay? And so the design is being done, again, as you can imagine with 3D simulations, ESC codes in these types of things, and that would be the basis for what is submitted to the Nuclear Regulatory Commission for approval. What we have to do in the window between submittal of the application and approval is we have to submit supplemental documentation coming out of the systems testing to confirm that the codes accurately project how this system will work. And that's the purpose of the IST. We'll then get some of it done before we submit the application, but it doesn't all need to be done before the application is submitted, just before final permit is granted. And as I mentioned earlier, our IST will be dedicated later this month and really represents a full fidelity scaled version of mPower, which is the only full fidelity scaled test facility in the world for an SMR. Relative to the legislation, I think you're talking about what's called [indiscernible] Part 52 [ph] licensing. And the idea there was that they will combine what used to be a 2-step process, which is the old Part 50 process, they would combine that into a single operating license. So what will happen is the NRC will pre-certify your design before the customers started construction, and part of that precertification then would include a list of testing requirements you have to do at the end of the construction process to ensure that what you built was what you got certified. And this process here actually uses the old 2-part approach. But we view that, and TVA more importantly views that as good risk management, because it's a lead plant. Once you get that certified design, you can't make any more changes without going back to the NRC and relicensing. So if you think there's any chance that you may make a couple of adjustments along the way, Part 52 actually hamstrings you in a way that the old Part 52 process won't. The other part of this is, as I mentioned, very strong local community support for mPower at Clinch River. And the risk with the old process where there was interveners and this type of thing at the end of the game. We see Clinch River in its proximity to Oak Ridge as really being the ideal location for a lead plant. Now what we are doing, because we do want a standard certified design coming out of our entire program, is we're going to have a coordinated program between the Part 50 process and the Part 52 process. We're actually going to be doing in parallel a Part 52 licensing. And so somewhere in this -- it's not shown on the schedule, we're going to be submitting at the end of 2013 an application for design certification and the process of going through Clinch River will inform that process. So as can think about it, at the end of the day, the Clinch River plant will be the reference design that is built and used for design certification. So we would expect customers 2 and 3 to use that new one-step process, basically piggybacking off this leadplant project. But again, the whole focus here is risk management and how do I try to ensure that I don't inject licensing risk into the program. And I think TVA's been very smart about how they've gone and done this. We spent a lot of time socializing this with the Nuclear Regulatory Commission. And about a year ago, I'd say that they asked a lot of questions, but they're fully on-board now and they recognize we're the first of a kind lead plant. It's probably a smarter way to go.

Unknown Analyst -

Chris, can you talk about how the NRC post-Fukushima requirement would affect the Bellefonte Unit 1? Is there any risk that it would ship your schedule out to the right? And/or would it create any other opportunities for you on that specific project?

Christofer M. Mowry

I think that's a bit of a 2-part question. Excellent question. I mean, what, bottom line, I think the lessons learned out of Fukushima that are going to be embodied in new requirements for the NRC to really come around power. Okay? If you lose power, especially for plants that require power to drive safety systems, you got a problem. So I think you're going to see older designs like non-passively safe designs, which will include Bellefonte 1 having to have an upgraded power system. And if you look at the changes that are going to be embodied in the Bellefonte 1 plant versus the original design of it, it's all about adding more certainty to their power source. It may be more diesel, making the diesel robust and secure. So that's going to shift that program a little bit because of the licensing changes that are going to be required. But again, mPower, if you look at what happened in Fukushima and you look at mPower, we're in pretty good shape. I mean, it's a design that's inherently safe, uses gravity to power our systems. We've got a huge number of defense in that system. And it is really, at this point, no concerns out of the NRC relative to our design in the way we've taken it over the last 6 months for what's going on with Fukushima. So we don't see any push into our schedule, both for design licensing and also the plant construction being driven by Fukushima.

Unknown Analyst -

Could you try to size for us the opportunity set in the steam generators like Davis-Besse and maybe even also reactor components like the one in Argentina over the next several years?

Christofer M. Mowry

Well, we're currently working on the Davis-Besse, so that's in backlog. That's in our backlog. I think one of your charts there might show the $400-some million of backlog, and that would be included in there. It's also the Argentina work that we're doing, and there's more opportunity for us down there as well. That's also in our backlog. So the specific dollar value is not something that we're in a position to share though.

Michael P. Dickerson

And we're just going to take one more question, Chris.

Unknown Analyst -

Shifting to your internal base case assumptions, when would you estimate that mPower begins producing free cash flow?

Christofer M. Mowry

Well again, if you look at the schedule here and you start to see where this lead plant starts generating revenues under the manufacturing and construction elements, I mean, that starts in the '14, '15 time range. So if you start to get later in that process, again, this is just the lead plant we talked about, getting customer 2 and 3. And again, that's something that we're focused on in the next 12 to 18 months, and that will be layered in behind us. So I would say somewhere in the midrange there from when you're looking at the construction and manufacturing elements of this program is when you'd kind of hit cash flow neutral on the design that you've made up for your development investment. Mike, I don't know if you want to...

Michael S. Taff

Yes, I agree with that. I mean, I think it's in that '15, '16 time frame once we get that signed contract from TVA and we start ordering the long lead materials, that will generate some revenues, as well some associated cash flows with as well ramping down of the R&D spend once we get in that space and we get past the middle for the design, something to that nature.

Michael P. Dickerson

All right. Thanks, Chris. Next, we're going to have Mike Taff, our Chief Financial Officer.

Brandon C. Bethards

Mike, before we go to that, and the nature of the questioning here is the way it always is when we talk about nuclear power, commercial nuclear power, so Mike, I just want to reemphasize that the near-term growth opportunities for Chris's business was reflected back on Chart 91 where he talked about nuclear services. We've dominated that position in Canada for many years and we are just starting to build off of that reputation, our unique tooling capabilities and the expertise of the people that have advanced that in B&W Canada into the U.S. market. So we don't have to wait in this particular business arena for the first plant, first in power plant, embedded in the long-term strategy. Of course, this is a game-changing technology, as Chris likes call it a disruptive technology. But we have plenty of room to run with regard to providing products and service, particularly as you continue to see a move toward power upgrades in the existing 104 reactor fleet here in the U.S. And you can continue to see relicensing and license extensions. Those plants are well along and they have to run for many decades before there's anything in the ground to basically replace that generation. So we're quite optimistic with the North American PWR, and the worldwide CANDU reactor service market, and it's an area of special emphasis for the company going forward.

Michael S. Taff

Good afternoon, everyone, and I certainly appreciate everyone hanging in there. It's been a long day. But I think hopefully, you all agree this conference and analyst day for B&W were timely. We've been public now for a little over a year, about 13 months. And it's certainly great to hear and for you guys to see some new faces, cause mine's pretty worn out. I've been on the road about 35 times with Mike Dickerson this last year, so I know you're tired of hearing from me. So thanks to Mary Pat and the 4 division presidents for being here.

Hopefully, the information you receive today is certainly informative. I will say you guys have been pretty nice to Chris and no one asked about the B&W project. So thanks for that. But I did want to just add some color on that since you guys were nice not to grill him. So he got grilled really pretty good by the senior management and the Board, as well as we had a number of questions on the conference call. We did reach mechanical completion back in full on that earlier this month, the first week of this month, right, Chris?

We are demobilizing from that site. I think the customer is happy at the end of the day. It was a long road. I think we've learned a lot of things. We have a lot of lessons learned as we continue to enter that business in other ways. We're down from the high of mid-400 folks to less than 25 or so at the site today. And so there's just a number of cleanup items that those 20 folks are doing at the site. And we're having active dialogue, as you can imagine, with the customer on a voluminous amount of claims associated with that site that we feel we're entitled to.

It's hard for me to give you a time frame of when that will be -- when that will settle and how it will settle. We're hoping that it's near term, but it could be longer-term and all. But at the end of day, we're done. I don't expect a material charge in the third quarter associated with that. So certainly, congrats to Chris and his team. It was a hard-fought battle out there. But at the end of the day, I think we proved our reputation is intact, and we did deliver a quality product to the customer, and that was our goal, ultimately.

So we're winding the day down. So thanks for hanging in there. I've got a few slides I'm going to share with you. And then we've got another 20, 25 minutes of general questions phase that is available for you. And then Brandon has got some closing remarks. So again, thanks for hanging in there with us.

I'm going to cover 4 primary topics. I'm going to go over our consolidated financial statements for the last several years. Then we'll get into kind of the details of some segments. Data for a couple of years will show consolidated where we weren't breaking it out. And in the last couple of years, we've got details on the 4 segments from each of the presidents you've heard today. I'll talk briefly about our pension status in funding and underfunded position and then also close with how we view it, risk management and that's really project management versus going out and buying insurance.

So as we move into Slide 106. Basically, this schedule on the slide shows you just some historical perspectives of our financial statement. I think the key points here that I wanted to point out was, as discussed earlier, we don't have '07 on this slide. But '07 and '08 were certainly the high watermarks of B&W's operations over the last 4, 5 years. In '08, we had generated revenues close to $3.4 billion on a consolidated basis, with operating income of $444 million. You'll see here that's a 13% margin. Great margin, really industry-leading margins when you think of anyone else in the ENC [ph] business.

But the other thing I wanted to point out is, as the recession started in the '09, '10 and in our last 12 months you see on this slide, you'll see a pretty dramatic fall-off in the top line of 18% compared to '08. So what you see in the operating income line is still very good margins, 9.5%, 9%, 9.8% in '10 and LTM, when you factor in some of these onetime items, 9.8%. So close to 9.5%, 10% margins over the last 3 years or so with a significant downfall. Two ways we got there. One was cost management. We implemented an across-the-board cost reduction program in '09 as we saw the recession happening and revenues declining. And the other was execution. You take away the B&W issue. I've always said that I think not '07 and '08 were the best years for B&W but from an operation standpoint, it's really been '09 and '10. There's not very many folks out there that could take a 20% decline in revenues and still maintain close to 10% margins. So our operations were flawless in those years. I look back at '10 for example and over the 30, 40, 50 projects that we were executing very few, if any, had negative gross margins. And so that just goes to not only the operational expertise that we have in keeping our eye on the ball on the cost side, but also our risk management procedures that we continue to implement today.

Next slide shows you our cash flows. Bob talked about his cash flow business and certainly the amount of cash flow we get out of both our NOG and TSG segments. This certainly shows and as you see in '09, we generated $253 million. The big difference between '08 and '09 was some cash flows. So you could average those if you want to. But you'll see even on the average, we're generating $175 million to $200 million average over that 3-year period of cash flow.

And then you look at capital, this is not a high-capital business. Our maintenance capital on an annual basis is about $40 million to $50 million a year. Depreciation is running now at about $70 million a year, so pretty unusual that our maintenance capital is well below our depreciation run rate. So it is a business that year in, year out, will generate significant cash flows. And not only operating cash flow, but free cash flow.

Now we'll get into the segment detail a little bit more. We're on Slide 109 for those on the webcast. Here, just a couple of things to point out -- I wanted to point out. You'll see on the graph, the first 2 years, '07 and '08, as I said were kind of a high watermarks, $3.2 billion and $3.4 billion in revenues. That was when we were under the McDermott reporting metrics and we reported in 2 segments: Power Generation and Government. And then we have the last 3 bars under the new segments to give you a little more detail.

But one of the things I want to point out is if we look back at the old 10-Ks from those years, you would see Power Generation, which back then was basically Chris's group and the Power Generation, Rich's group, well north of $2 billion in revenues. And when someone asked earlier, what's the growth potential coming out of Rich's group, that's where you can have up to 25%, 30% growth potential in that business over the next several years, ramping up from this $1.4 billion range up to $2 billion and north of that when this environmental movement of all the components that Rich talked about.

And then on NOG we've seen nice growth, 9% growth from '09 to '10. And certainly, just in LTM, 4% growth. As I mentioned earlier, when -- I think it was either Steve [ph] or Randy [ph] who asked the question. I would expect growth for '11 and '12 in that NOG business to be in that 5% to 8% range. So again, a very strong business that Sandy has there.

Bob's revenue is -- it's not a revenue business, as you know. It's an income business. Most of all those activities that Bob showed you on all those slides we account for in equity method of accounting. So we have no revenues, although if we were to book revenues, it would be in the billions of dollars. But he is generating significant income that you'll see on the next slide. A lot of this revenue you see here is what he mentioned is manufacturing revenues coming out of the USEC operation for manufacturing of centrifuges. And just to clarify that point, Andy [ph], you asked that question.

The manufacturing we're doing is really for -- with that Lead Cascade. Basically, part of what USEC's mission and requirement was is to get that new technology up and running in a simulated plant environment. So we've manufactured a number of synergy just for them, and then they've got that in their Lead Cascade. And they had certain man-out requirements that the DOE wanted to see that technology proven in a plant-like environment. And so that's what we've been doing for them. It's not full scale because obviously, if we get a plant, we have to manufacture 13,000 centrifuges over a 3 or 4-year period, we would ramp up dramatically our headcount there in the Clinch River site where we do that manufacturing.

And then looking at the operating income here, it's really a great story from that standpoint. As I mentioned, 13% margins in '07. 10% margins or so -- or a little bit higher -- higher net in '08 when we ramped up to $444 million, and still have maintained very good margins there. The other thing that really points on this, if you really look at this, just from the 2 Government Operations segments, both the TSG and NOG, you add those 2 together, LTM, they're generating $221 million of operating income. EBITDA, almost $260 million. So you've heard about their businesses, the long-term nature of their business, the high barriers to entry and all where we stand there, limited competition. A great business that's generating significant EBITDA and more importantly, significant cash flows with a minimum amount of capital and all. So certainly see tremendous growth opportunities at Rich's business, the top line going from 120. And then what it could be, you see it generating $163 million of income in '09 and even more in '07 and '08 time frame.

So then in Chris's business, you can see energy LTM loss of $85 million. You'll see it as we switch to the next slide. A big piece of that is the R&D, as well as the loss we reported in the current period on the Energy Northwest project.

And then the last thing I'd point out there is unallocated corporate fees running at around $30 million a year. I think and we think that's kind of our base level run rate, and something you would expect kind of on an annual basis going forward would be in that $30 million range or so.

Here's a slide on R&D. And I think most of you are familiar with that. But you can see obviously the ramp-up over time in '07 at $35 million. And it has ramped up LTM to $76 million. As I indicated earlier, we're on a path for this year, '11, to be in about that $90 million to $100 million consolidated range of R&D, about $78 million of that coming at Chris's group, at mPower, and then the rest more on traditional.

The other thing you'll notice is that our traditional R&D spend has ramped down slightly, going from the mid-30s down to 26 last year. And we're probably on a similar rate for this year or so, and that may be a little bit less. That's the work that really goes into having the product portfolio that we have when -- Rich was a little bit modest when he talked about the number of components and technology that we have. They have been -- when I think of B&W, I think first of Rich's business being a technology company. They generate technology. They solve tomorrow's problems today with that research center that they have today and with that cost money. But that investment that we make in these new technologies certainly pay huge dividends for our shareholders, as occurred over the last 40, 50 years.

Backlog. I just wanted to speak a little bit, take a little time to talk about backlog. As this slide shows you, today we're at $4.6 billion. We ended the year at $5.2 billion. We're likely to be at the level of backlog we were. Our all-time high was back in '08, roughly $5.4 billion, rounded up. But you'll see that the buckets have changed. The backlog in Power Generation has declined as we were kind of ending that phase of environmental spending and the recession kicked in. But then certainly you see the buckets associated with Sandy's group in NOG had grown significantly with a record backlog at December 2010 of around $3.2 billion.

The other thing you'll notice in Sandy's business is that the procurement cycle is typically an annual procurement cycle. So us declining from $5.2 billion to $4.6 billion and that decline of about $500 million of Sandy from $3.125 billion to $2.694 billion is not unexpected or unusual. Typically we have large orders in the fourth quarter, and we would expect that again this quarter. I think Sandy, in the fourth quarter last year, booked about $900 million or so in backlog. And we'd expect something in that general range for this year, assuming Washington is operating on a normal procurement cycle, which is always suspect and questionable, but that's certainly our expectation.

So as someone mentioned earlier, when you look back at where Power Generation was back in that '07, '08 time frame, we had backlog exceeding $2 billion and certainly would expect -- assuming we win our fair share of these projects that are out, that backlog would certainly eclipse that $2 billion mark by the end of '12 and certainly even rise a little bit above that once we get in the '13, '14, '15 time frame. So tremendous growth there in that opportunity. And then Chris, you'll see Chris's business at the bottom.

So 2 of the things to point out about backlog, and I want to focus in on NOG and TSG. One you'll see no backlog, essentially, in the -- in Bob Cochran's business, in TSG. Again, that's because we account for unlikely method of accounting. But in that business, those are long term contracts; typically 5- to 10-year contracts. And certainly, we have dominated that space as it relates to nuclear handling and nuclear research. So we see no reasons why we wouldn't continue to win our fair share in that industry. And so you could put a backlog factor on there, and it would be quite significant when you consider that's a business generating $55 million to $65 million of operating income per year over the next several years.

The other story is NOG. In NOG, we take a pretty conservative approach of how we book backlog. For example in December, we were under contract, awarded about $2 billion worth of backlog. But we only booked $900 million. We only book what's been appropriated and not what's under contract. So certainly, even under contract, there are significant dollars out there. But then when you look out into the future, what programs we're working on, Virginia-Class program's a great example. It's public knowledge that's going to be a 40 ship set program and we're certainly in the first quartile of that program. So you could kind of do the math and say well, if they're ordering 2 a year and we're in the first quartile of a 40 ship set program, then you've got 10 or 12 years worth of work to do, assuming they continue to order Virginia-Class submarines and as Sandy said, the various entries of that program and all.

So I think that's one thing I have tried to certainly do a better job versus when I was CFO at McDermott is to educate the investment community of the repetitive nature of that business, but also the visibility of that business and what's the luxury that it gets us to on that recurring revenue stream of coming out of those 2 business components. So I wanted to share that with you again today and just make sure everyone understood the predictability, the recurring revenue base and earnings base, cash flow base we have coming at those 2 businesses.

Next slide, on Slide 113 for those on the webcast. It talks about capitalization. Obviously, the cornerstone and strength of the company, not only the operating heritage, is the strength of our balance sheet. Today we have, in the second quarter, $373 million of cash, essentially no debt, no funded debt. We have our liquidity available to us under our current revolver. We have a $700 million revolver facility that we use about roughly $200 million or less for LOCs. So we have an extra $500 million of availability in that. And certainly, equity position continues to grow north of $800 million. So from a capitalization standpoint, we feel very good about the business, about what it will allow us to do in the future to make strategic investments and certainly, to run the business on a certainly delevered base.

Next I want to visit briefly with you about pension and discuss -- share with you the pension expense. The second line here really should be more of our unfunded status versus funded status. So please make a note of that. And so from an expense standpoint, you see more modest expense that occurred back in the '07, '08 time frame. There was a slight problem in the equity markets in '08 that I'm sure most of you shared the pain as we did. I think our pension assets had a return of around negative 20% return -- right, Dave? -- or something like that, 21%. And although we led the pension community in having the best results, it also was very painful. As a result of that, that kicked in higher expense as we amortized those losses under the accounting policies going forward. You can see for 2011, expenses down slightly versus '10 on annualized basis, about $150 million of expense. And then our funded status has certainly went up at the end of '08 due to the equity markets. And as we've contributed cash into that, it's coming down slightly. Who knows what's going to happen this year from -- we are about 80% funded. We're using a discount rate of about 5.6%. We set that discount rate at the end of December of each year. So depending on what happens to interest rates, we certainly don't expect that rate to go up but it could come down anywhere, I'd say from 200 to 400 basis points. But again, we'll have to wait and see what the -- how the interest rate markets perform in the last quarter of the year.

The other thing I wanted to point out is from a cash funding standpoint, it's not on here. I've talked in the past about we're going to fund around $125 million a year. That number's actually going to go up a little bit in the fourth quarter and we'll probably have total cash funding for the year probably in that $150 million, $160 million range due to some current asset performance that's occurred over the last quarter and a half or so.

And lastly, I wanted to just share with you and reiterate some of the things we've talked about in the past, and that's really our risk management program. We have a very robust process of when we enter into new contracts, when we look at acquiring new businesses, enter new markets, new territories, new customers and things of that nature. We spend a lot of time as it relates to what we call first-of-a-kind elements. So when you see FOAK, that's what that means. It basically means a new product, a new customer, new heat rate that we are required to get the customer, new warranty requirements and things like that. That is something that certainly Brandon, Mary Pat and I really focus significantly on as we're going through that process.

And when we're looking at different projects, we focus on cash flows and the risk profile. Okay, specific process. Some of the things we focus on are going to be cash payment, the timing of those payments, the cash needs, the project type, whether it's the fixed cost or fixed price or cost plus project, the location, the workforce required, first-of-a-kind elements. And then we focus significantly with our legal staff on the contract terms and conditions, consequential damages, LDs, things of that nature. In this whole component, then we factor in all the items I just mentioned on those project metrics and we determine the level of contingencies required in the job.

Basically the way we do it, we basically go in and we'll fully cost out the project, labor, materials, project management, et cetera, and then layer on top of that what we call unknown contingencies. And we have contingency associated with execution. We have event contingencies. We can have monetary type of contingency as it relates to foreign currencies and things of that nature. Typically, that contingency is in that 3% to 6% range, depending on any particular job. On average today, it's within that 3% to 5% range accumulative for our total backlog. But that's the key component to managing that risk not only understanding it, but also having the appropriate level of contingency as protection.

So that's something we've had a long history of doing, both back when I was at McDermott, as well as the B&W team here. And that's a protocol that we follow. We have a written protocol that's required, and so it's -- we beat the business units up sometimes. I know Rich and his team and Chris get tired of this or that and so they may go through 3 or 4 different project reviews. But over time, it certainly -- I feel it pays dividends because it really gets back into that execution phase, how well we execute.

The other thing I wanted to point out is just more of our conservative nature of our accounting procedures and principles. We do follow percentage of completion method of accounting, as most of you are aware. As it relates to accounting for claims and change orders, we have a very conservative approach. One thing -- I won't say never, but generally you won't see us doing is you won't see us booking revenues associated with claim or change order and then de-booking it later once we couldn't get in final resolution with a customer. We typically -- and our policy is we don't book claims unless we have a written authorization and approval from the customer.

And on change orders, we typically follow that same procedure. If we do feel that we have a change order and it's valid and there's contractual support for that even though we don't have the customer's approval, we'll book revenues off the cost. We don't book any profit. But I'd say about 80% of the time, typically we're booking claims in chain orders under the same criteria. We want customer approval and basically endorsement before we do that.

We go through monthly and quarterly project reviews at the business levels, very thorough and robust process where we're looking at the execution of those projects. And then along with that, we also utilize what we call our PROM system, our project risk and opportunity management system. That's a proprietary system that we've been using now for probably close to 10 years. And really what we do in that process, that helps us identify the amount of contingency that goes into each project. And with that, it's line item by line. And then we'll assign a person to basically be responsible for that particular risk. And his or her job is mitigating that risk. And so by mitigating that risk, then we were -- then we're able to harvest that contingency that we talked about at the end of the job. So again, it's another way for us -- for that risk management process of management risk in that standpoint.

Last slide before we go into the Q&A is just backlog. Again as I mentioned earlier, at backlog conservative approach, we don't put backlog unless we have a signed contract from the customer. The other thing we do from a conservative standpoint, as Rich indicated and is very common in his business, we may get 3 or 4 releases, so Rich may win a $200 million job to do a scrubber. And we'll get what we call a limited notice to proceed to conduct the engineering for $25 million. And then at that point, we would book $25 million. And then we'll get another, say, call it $40 million release to order the materials. And then at that point, we'd book another $40 million in the backlog. And then after that, we'll get another notice to actually manufacture the components. And so each phase of that, the way the utility industry works, is those limited notes proceed and we put that into backlog.

Others would probably take a little bit more aggressive approach in that once you sign a contract to that scrubber, they're going to book $200 million. So that's why you see a lot of the -- some lumpiness and you don't see some big banks in terms of our backlog. We'll try -- we do our best to issue press releases when we're allowed to by the customers and to educate and share that with the investment community what we have won. We're not always allowed to do that, but we do that as much as we can. So I wanted to just share that with you from a backlog standpoint, because it is a pretty conservative approach that we have in booking backlog.

And so with that, we'll turn it over to just some general questions, and then Brandon will have some wrap-up.

Unknown Analyst -

Mike, if I remember correctly, I think you guys guided to 2x leverage target at the time of the split. I was just wondering, can you give us a time line as to when you think you'll get there and perhaps start creating some shareholder value given where the stock is today? And I guess my second question is really in terms of revenue guidance range for Nuclear Energy. Brandon talked earlier about the opportunity in services, but Chris also highlighted some significant opportunities in construction as well.

Michael S. Taff

Yes. I mean, I think one of the first projects that we did when Jenny came on board, we did a comprehensive look at our balance sheet and kind of optimum capital structure and things of that nature across the board, from rating agencies to cost of capital and certainly leverage position. I think with -- one of the things that I feel that's very unique about B&W compared to the other peers that I've become very familiar with over my 6 years of being in this industry is the recurring nature of our revenue stream. When I look -- step back and look at B&W, I really view that about 50% of our revenue is recurring and about 50% is project. So I really view Jenny's group as being recurring. It's a project business that's recurring due to the limited nature of competition and long-term contracts. I do the same for Bob's business. And then as we talk about maintenance, one of the things that Rich didn't go into detail but on an annual basis, he's booking about $400 million to $500 million a year on what I call book-and-burn call-in-type revenues where a recurring revenue stream for that 40% install base that he has. So with that, it does allow some leverage. And I think something -- a place that we can do so very comfortably up to that 2x EBITDA on a total basis from a leverage standpoint. And then I think from there, it's just optimizing that from an expense standpoint. Do we do that via some strategic acquisitions? Do we do that by more organic growth with joint ventures with others? Or do we, maybe as you're alluding to, give some value back to shareholders via share the repurchase program or something like that? I would say we continue to look at all of those. It's something that we, the senior management and the Board discuss very frequently. And so I think my answer to that is, essentially, we will continue to look at essentially on a day-in, day-out basis, certainly, where the markets are at the current price range. And then, yes, the Nuclear Energy. Yes, I think we will see some growth there. The margins in that business are probably pretty consistent with what we have seen in the Power Generation margin, in that 7% range, a little above that, depends on how much service we're doing and how much reconstruction we're doing. And this is all excluding mPower so -- and all. But I mean there's no reason why we can't grow that business. I'll say double-digit top line growth and all and certainly, I think something that I would expect and I think that Chris's team would expect in there.

Unknown Analyst -

On the pension expense, I think you just mentioned that based on where the industries are today, you might be reducing the discount by, I think you said 200 to 400, but maybe in that 20 to 40 basis points.

Michael S. Taff

Well, yes. I'm sorry. 20 to 40, yes. 20 to 40.

Unknown Analyst -

All right. Have you...

Michael S. Taff

200, 400, 20, 40, yes.

Unknown Analyst -

All right. How should we think about the estimated impact on the expense next year if that is, in fact, the case? And then actually, the question is twofold. How much of the pension expense is related to government offs and potentially reimbursable from the government?

Michael S. Taff

Good question. Probably the biggest driver for where pension expense will go is not necessarily the reduction discount rate. The discount rate is -- basically drives the underfunding liability position, but it's going to increase or decrease that liability. The bigger piece of the play on expense is going to be return on assets. So our projected return on asset this year -- David, 8.5? -- 8.5%. So you would have to compare that to where we end the year. Currently we're slightly north -- or slightly positive, maybe 1.5%, 2% range or something like that. The last report I got, on that 2%. David gave me a signal. So that -- really what drives that, because we would compare our expected return to the actual return that will create a gain or loss and you amortize that over about a 9- or 10-year period. And then that delta gets added to the existing expense side of that. So based on the current returns, I would expect an increase in expense compared to '11 or '12, but I wouldn't necessarily see it be extremely significant from that standpoint. I'm sorry, did you have a second question?

Unknown Analyst -

How much [indiscernible]?

Michael S. Taff

Yes, I think about 30%, 40% of the expenses related to our government operation. And then ultimately, that gets flowed through our rates, although timing is an issue because we can flow it through our rates based on cash allowable or government regulations, whereas we book expense based on a GAAP regulation. And then those 2 are not one and the same.

Unknown Analyst -

Brandon and Mike, so about 20 months ago when the government announced it was breaking up, both companies talked about more focus, more asset sort of channel into each business. So just a question about sort of the improvements you've seen at BWC over the last year that maybe you couldn't have had if you were still with McDermott. And then just one other separate question. Is there any scenario where you would pull back on mPower research spending, whether slowing it down or stopping it? Any economic scenario, natural gas at $4 forever, anything?

Brandon C. Bethards

Well, let me address that. First of all, with regard to the pre-spend and the post-spend scenario, some of the things that I put into the test category is as we went through that process, we maintained a focus on execution in '10. One of our big goals was basically at the senior level and the spend team was to isolate our operations from the distractions associated with that. That gave us good margins on that. And once we'd gotten through the process, it's been a pleasant experience to watch the focusing of the management team, and I talked earlier about the growth culture of being able to actually communicate the B&W story to the investment community, get the management of the team harmonized with the value proposition and the growth culture concept to try and drive shareholder value in this. I gave us high margins on that. The more technical or tangible result is splitting the 2 markets as we talked about pre-spend, allowing us to realign through Jenny's efforts and increase our bonding capacity because we got away from some of the volatility that was associated with the oil and gas ENC [ph] business where we didn't always get credit for the recurring nature of our business and the predictability and the line of sight that we have. So that's been a positive because we needed that capacity at work in the delivered and erected NEPC portion of our businesses. So we're pleased with that outcome. It's also allowed us to develop a better precision around our WAC and be able to use that with regard to put more emphasis on return on investment capital, matched up more with these business lines. I think that's going to add opportunity and bounding metrics, and it also allows us to tie more of that type of financial mechanisms back into the bonus plant and enhance shareholder value. So all of that, I think, is a very positive attribute. And the other part of your question was?

Unknown Analyst -

And mPower spending would be?

Brandon C. Bethards

MPower spending, would we -- I have a hard time making predictions about things forever. Okay? But certainly when we look at -- remember that when we look at -- and I think I communicated this in our earlier discussions. mPower's business proposition was really based on a global market. Certainly, we didn't see in the near term the Fukushima impact. I was really concerned about that for the first 3, 4 weeks after that as to how the world would react to it, but I thought the response was very adult and logical-like. We have not seen any hesitation for the rest of the world to move forward. And with regard to the gas issue, I would say beware of what they call vividness bias. You tend to see the whole world as it is immediately around you, and we tend to relate to things in terms of natural gas pricing as we see it in the U.S. But you have issues with regard to availability in different regions of the world. You have different security prospects. You have security issues around that. I think long term, while gas seems to be in the limelight these days as a bridge technology, I've been doing this for 4 decades and I was cautioned that as all of us and particularly the folks in this room recognize that on an economics basis, you can't be trading one commodity in one region in the world for $4, 1 million BTU, and have it trading someplace else in the world for $8 or $10, 1 million BTU and have that difference existing, because the technology with regard to liquefaction and re-gas and the development of a global LNG market short of antitrade type legislation that would prohibit the export of natural gas out of this country into Europe or Asia, you're likely to see those markets equalize over time. And if you're a producer of that gas, why would you sell it domestically for -- perhaps if I can go through the extensive liquefaction, transportation, re-gassing and net out 1.3x? I'm going to take the 1.3x every time. So I think you see some evidence of that. It doesn't get much press, but there's a little company that trades under the symbol LNG that basically has an application with the federal authorities to build a liquefaction plant. And also Dominion, one of the big players in the market, is pursuing a liquefaction plant. Why do you build a liquefaction plant? Because you're going to export the natural gas. So we have -- when we look at this in detail, which we are going to with our Board on Monday and Tuesday of next week, it's our annual strategic planning process, we take those gas pricing and scenario things and mark them up not just how they exist in the U.S., but how they exist around the world on various regional markets. So near term, it looks like it's different with competition in the U.S. market. You don't see that in the international market relative to mPower. That's probably more than you wanted to hear from me on that, but it's one of my favorite subjects. I could talk on it for a long time.

Unknown Analyst -

I might not be current on your -- on the mPower design, but I remember in previous presentations, you were using 125 megawatt and now you're at 160. Can you elaborate on what's behind that?

Michael S. Taff

Yes. As we went from the higher level conceptional design work that we had done into the process that Chris and his team have been managing, obviously one of the goals of that whole exercise with our generation and power partner on board was to look for opportunities for optimization. And that was an outcome of that. Actually, you've got multiple variables in that levelized cost of electricity, one of which is the overnight cost. With regard to a small increment in power production, you get leverage with regard to that -- driving down that levelized cost for electricity. And being able to do that within the basic parameters that we had in the initial conception, we were going to take all of that upside that we could get. And it's still well within that boundary of the deployable size that we were looking for.

Unknown Analyst -

Could you give an update on DOE's SMR program and when you might see some potential impact from funds you seek under that program?

Brandon C. Bethards

I actually might ask Chris to give you an update on that. He's testified in front of the commission up there, in front of the Congress and I'm more likely to misstate the facts than he is.

Christofer M. Mowry

Yes. Well, it's an evolving situation. The DOE, all the way up through the Secretary of Energy, Steve Chu, is fully committed to this program. And in fact, this is one of his top 3 initiatives for the whole department. So there's full support in the Department of Energy. If you look at Congress, I would say this is one of the few areas where there is actually broad bipartisan support for this initiative. It's viewed as something as they care about on The Hill, that's good for jobs. I mean, this is going to be technology that's designed here in the U.S. It's going to be technology that will be built here in the U.S. with U.S. manufacturing and supply chain. All of those things speak to both sides of the aisle. And for that reason, we continue to get very broad support. Obviously, there are issues with regard to the budget. And this program is supposed to be part of the fiscal year '12 new start, but it was agreed that there are continuing resolutions that could potentially push this thing out. What is a bellwether or a marker for support within the Beltway, I think nothing has changed there. There is very strong bipartisan support in Congress, Department of Energy and the NRC, and that's what really what's important because as people look to make decisions, they're really looking for which way the wind's blowing in Washington, and the winds are favorable for SMR today.

Brandon C. Bethards

The other thing I would add to that, Marty [ph] is, as you know, as economists and financial analysts and engineers that mostly make up this room, that process is anything but clean. There's a lot of different ways to fund projects, whether it goes through the stand-up route and sales all the way from administration and back and how it gets in and out of the committee or whether it gets reallocated within DOE from other areas or it gets fixed up as a rider on one of these provisional budgeting processes. I don't think you'll see upfront in the headlines/in day after day that this is moving, but it's working behind the scenes, I think, in a reasonable and less problematic fashion than you might think.

Michael P. Dickerson

We're going to take one last question. Anyone who's got one out there?

Unknown Analyst -

Y-12 and Pantex have been extended out for another year, so you get at least another year on those programs. But Mike, can you just remind us or quantify how big those programs are relative to that 59-plus run rate of TSG operating income?

Michael S. Taff

Yes. Yes, I mean, what I think what Steve's [ph] referring to -- maybe there's some recent news on that. And we're not trying to get ahead of the customer, but you've probably seen that. On that, we don't quantify that, but it is a significant piece of that; maybe up to 1/3 or so of that spend. So I think of it in that 10% or 20% to 30% range of that total income associated with those 2 sites.

Michael P. Dickerson

Mike, we have time for one more.

Unknown Analyst -

You seem to have significant ongoing positive cash flow. Any thought about a dividend?

Michael S. Taff

Good question. As I mentioned earlier, with the conversations with the Board, that is certainly a topic of that. A number of items that we've earmarked, some are free cash flow or kind of short-term initiatives as it relates to mPower spend, as it relates to potential investment in USEC, building out the Indian joint venture. As I look long-term, I see this as a company that certainly could be a very nice dividend story. So I'd say it's something that we continue to monitor. I think initially, once we spun out, we want to kind of get our legs underneath this. But as we have, and we see where we're going, I wouldn't be surprised to see that in the future with this company. But I mean, I think it's something that Brandon and the Board have to continue to monitor. And that would roll out. But that is a topic that comes up frequently with, not only our financial advisors, but also with the Board.

Michael P. Dickerson

Thanks, Mike. I think Brandon has got some final comments for us.

Brandon C. Bethards

I promise you they'll be very brief. I'd like to make a couple of comments that aren't in the book with regard to takeaways. One, if you take a look at the numbers that Mike had in his section and normalize those '07 and '10 that he was talking about for the increase in R&D, which is primarily driven by the mPower development program and the increase in pension expense, which is -- since the pension has been frozen back around the '05, '06 time frame, that winds up being what it is. You normalize that in '10, the operating group here, basically, if you put that pension expense, if you normalize that and adjust for the R&D, they operated at the teeth of this recession at a 12% ROI on the top line revenue. So we've been pretty demanding, but they were a capable group. And I'll assure that we'll keep the demands up, and they can continue to deliver on my performance.

With regard to takeaways, one, we'd like some feedback. So if you've got any suggestions about us doing this in the future, about content or form or shape of agenda, please feed them back to Mike Dickerson. We'd like your comments as to whether this was valuable to you and how it may be of more value.

But as you go away, I'd like for you to really think of B&W as a company that is leveraging our safety and operational excellence that was really borne in our high-consequence nuclear operation into all facets of our business to give us not only a competitive advantage long term, but to leverage margin opportunity in the short run.

Also, I'd like for you to think of us as a company that has a long-time history of developing complex and value-added technologies that often intersect our customer needs 10 years out front. It is always not evident when you look at that over such long programs we run. But we think that we do that as economically as you can feasibly do that, and that gives us really good leverage out of those investments that we make in research and development. We're also a company that has a pretty good phase of recurring revenues, particularly out of our government businesses, and then our services business and our commercial nuclear and fossil power. That basically gives us an operating model that provides us good -- gives our shareholders, and I'm certainly one of the group, gives us good downside protection in bad economic situations. And it also gives us the opportunity to leverage off of that phase in more favorable business cycles within our markets.

I think you heard today, and I'm not going to go back and read it -- repeat them, but a number of near-term growth initiatives and catalysts giving the swirl in Washington, the doom and gloom about global economic conditions, most of our near-term growth opportunities are significantly insulated from that. Not all, but significantly insulated from that because they're regulatory-driven and they're niche-driven based on deferred capital or catch-up spend on deferred capital maintenance from our customers.

We're a company that we basically -- as much as we get pressures, we do manage the company for the long term. We do try to make prudent investment decisions that recognize the near-term obligation and really provide long-term growth opportunities. We intend to maintain a strong balance sheet, and we focus very much on managing cash flows. It's embedded throughout our operation. It's a big part of the risk and management protocols that we follow that Mike talked about.

And we're a company with an experienced management team and we have all, through our careers, have the opportunity to appreciate the wisdom of good, solid risk management and the theme and aggravation that you can incur if you fail to follow that very rigorous discipline.

So with that, I thank you all for coming and I look forward to seeing you in some more of the roadshows planned for this fall. Thank you.

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