7/3/13
The following interview with Babcock & Wilcox President and CEO Jim Ferland was conducted by ExchangeMonitor Publications CEO Martin Schneider, Editor Todd Jacobson and Reporter Tamar Hallerman.
You’ve been on the job as the President and CEO of B&W for about a year now. What is your vision for the company, and where would you like to see B&W in the next five years?
If you look across the board at our four businesses, you’ll find good, solid, well-run groups that produce solid margins. And that is where a portion of our growth is going to come from in the future. Our leaders are focused on growing the business and creating shareholder value. Our number one priority is to operate the businesses that we have well, execute our work, bring in new work, and see if we can eliminate some cost. We have a cost-reduction program underway in the company that is doing just that. The second priority is deciding how to smartly use the cash that is derived from our existing businesses, and we have a couple of choices on that front.
We very recently instituted a dividend at B&W for the first time and we initiated a stock buyback program. Additionally, we announced that B&W is looking for a strategic acquisition. It’s a little bit of a tradeoff for us. We are generating a lot of cash, we can return it to the shareholders via dividend or stock buyback, or we can find a smart acquisition. We’re trying to balance those.
If we make an acquisition, it will be in line with our precision manufacturing/high-tech/energy sector core competencies. A lot of our businesses, we’re also involved in some way, shape or form working with or for the U.S. government, and we could target growth in that direction. B&W is a strong company with well-performing business units, so we have an opportunity to grow. But we don’t feel this huge urge to do something just to do something. We can be patient, and we can be smart.
As currently organized, B&W is a relatively flat organization with all of the group presidents directly reporting to you. What advantages do you see that offering, and is that going to continue to be a hallmark of how the company is organized going forward?
In the short- to medium-term, the expectation is to keep the organization just as you described: relatively flat, with the presidents reporting directly to me. It allows me to be more involved in the day-to-day decision-making, project execution and project bidding of each of the business units. And as a relatively new CEO, this structure provides value to me and to the corporation.
B&W is a $3 billion revenue company. We’re of a size where five business unit presidents reporting to me is manageable. If B&W grew significantly in the next couple of years, I’d have to rethink that organizational structure. In the short run, I’m learning a lot and it gets me involved in the day-to-day execution of important projects for our customers and that’s a good thing.
With a lot of B&W’s business areas, the government is essential to profits. How much does recent fiscal austerity and sequestration change your strategy going forward in government contracting or markets that are heavily impacted by government regulation?
The primary focus for us on work we do for the government, primarily the Nuclear Operations Group and the Technical Services Group, is to perform on the contracts that we have, whether it’s delivering propulsion systems to the Navy or doing a great job operating the various government sites we’re at. If you don’t do that, you’re going to have trouble even maintaining the business you have.
Part of the reality of doing a significant amount of work for the U.S. government is that it does not equate to a growth platform for the company. They’re great businesses that we’re going to keep, but the reality is there’s probably not a lot of natural growth. Even in TSG, the contracts ebb and flow.
We can’t build a growth story for the larger B&W around those two government businesses. They’re great businesses and we’re not going to lose focus on them, but there’s not an inherent growth story. It’s more about maintaining what you have, and doing a great job, while looking for growth outside that market.
Looking at B&W’s experience with small modular reactors and mPower, with USEC on the American Centrifuge Project and with FutureGen, you’ve got three of probably the highest profile government-industry cost share programs. With government being so important to what you do, what’s your perspective going forward and what have you learned on these high profile, big, swing-for-the-fences government-industry partnerships?
I think there is a role for government to provide support in certain instances, for example, when we’re trying to keep the U.S. on the cutting edge of a technology or developing a technology that we think is going to be cutting edge 10 years from now, like SMRs. With USEC, there’s clearly a role for the government. The government has an interest in promoting that technology. It so happens that B&W can help facilitate that innovation due to our expertise in the marketplace.
FutureGen I view much the same way. The U.S. government, and I think the public as well, would like to have technology to address CO2 capture and storage in place five or 10 years from now. The market by itself today will not support an individual, publicly traded company investing significant money in carbon capture and storage because we don’t know what the upside t is going to look like in five or 10 years. CCS is a good example of where it makes sense for the government to make an investment to foster that technology development so that that option is available in the future.
Are these the kind of things that B&W is going to continue to pursue as a company and have you learned any lessons from the current experience?
I don’t have a fourth project to add to the list right now. But would we continue to look for opportunities like that? I think we would. What we’re trying to do is leverage the technology and leverage the talent we have across the company, look into the future and make smart investments so we’re well-positioned to grow the company as we go forward. We’ll continue to look for opportunities like that.
In lessons learned, there is one that stands out, and we try to live to it: under-promise and over-deliver. It’s easy as you’re pursuing funding to over-promise to get the funding and then back-pedal two or three years later when you under-deliver. That is not a recipe for sustained credibility. We have multiple projects and we need to deliver on our promises. That’s a lesson we push consistently across the business units, whether it be FutureGen and power generation, or the USEC venture, or even with mPower, which is more of a startup. We need to back up what we say.
Do you see B&W’s future primarily as an operations company or a technology company?
I see us as a combination of the two. Part of our skill set is the ability to blend technology, precision manufacturing and operations together to create competitive advantage in the marketplace. We often market B&W as more of a clean energy company because that is al lot of what we do.
Our Power Generation Group is a good example. Since in the U.S. we’re not building any new coal plants, our entire business is built around servicing the existing fleet and cleaning up the coal plants that are operating in the U.S. We have a cadre of technologies. Whatever the customer’s issue with a coal plant, whatever environmental regulation comes out, we have the technology to solve that problem. We do the upfront design, we manufacture the components themselves and then we do the installation on-site. We provide a full suite of solutions to our customers. That gives us an advantage in the marketplace. We leverage our technology, operations and manufacturing and put those together to create value for the shareholders and to our customers.
What would you say is your largest human capital or workforce challenge? What are you doing on the leadership development and workforce front?
B&W has some advantages in the marketplace today. We have a great name and reputation, we have great technology and we have great people. One of the concerns I had coming in to B&W was around the potential for an uneven distribution of employee experience. I thought for sure B&W would have an experienced workforce and a gap in new talent, but that’s not the case. B&W, over the last 10 or 15 years, has done a great job of consistently bringing in talent. We have a pretty flat workforce curve with some experienced people starting to think about retirement, and new hires that are coming in and getting up to speed. And we don’t have a gap in the middle. We’ve continued to maintain a hiring process throughout the last couple of decades, and we have a depth of talent across the board. That’s one thing I think we can leverage going forward. We do a good job of passing down information from one generation to the next and there’s a competitive advantage in that for us.
B&W has been a partner in the FutureGen 2.0 project for years now. But recently the project has faced some delays, cost estimate increases and political challenges. What has made B&W want to stay involved in the project when we’ve seen other partners like Ameren pull away in recent years?
One of the advantages we have in the marketplace is our cutting-edge technology. We believe that someday the market will have a place for viable carbon capture and storage technology. I’m not smart enough to tell you when “someday” is, but we believe that there will be a market for it.
Over the last two or three years, we’ve backed off our R&D spending on carbon capture and storage as cap-and-trade’s prospects diminished in Washington. But FutureGen is one place where it did make sense for us to put our money. We continue to see promise in the technology and we think there’s some government funding that can match up with our money, so it makes sense to continue making those investments.
You mentioned pulling back on R&D funding since Congress failed to set a price on carbon. Tell us more about your reasoning behind that move.
We’re very careful in how we invest our money, and there has to be a business case in order for us to make significant investment in a technology. Four, five years ago there was a business case for making an investment in carbon capture because it looked like there was going to be a market for it. Today there’s no business case to be made in the U.S. and a relatively weak business case in Europe. We’ve maintained some money flow for CCS just to keep us in the game and maintain some of our expertise so it’s still here for us. But there’s not enough of a business case to move a lot of money into CCS.
While we’re not likely to see this Congress place a price on carbon, the closest thing to a business case we may see this year is from the White House. The Administration is currently moving forward on carbon standards for new power plants. In the past, EPA has said those regulations could incentivize CCS deployment. Do you agree? Have you been talking to your customers about them?
For that particular new coal plant policy, I don’t think it will do much to support an investment in carbon capture and storage. Ultimately it depends on how these regulations are put in place. If a new plant rule says every coal plant can only emit CO2 at a level equivalent to a gas plant, the question is not going to be how available is CCS technology. The question is going to be whether to build a coal plant or not. Looking at the current proposal, that answer is likely ‘no.’ If no coal plants are built, that doesn’t do much to encourage CCS investment.
Today, without specific rules and regulations that allow for a marginal price on carbon, it’s difficult to create a sustainable CCS market. It takes significant money to develop carbon capture and storage technology. The only way to justify that investment is if you have a product that can sell repeatedly in the marketplace as opposed to a one-off venture. Until there is clarity on new and existing coal plant regulations in regard to carbon pricing, we are unlikely to see an increased focus on CCS development.
Do you think such a carbon standard, then, would instead lead to a “dash for gas” in the utility sector? If so, how is B&W viewing this recent natural gas boom?
We’re looking at it in the short run and in the long run. In the short run, certainly we see a trend toward natural gas. If I was considering an investment today in a new power plant in the U.S., I’d probably build a gas plant even though that’s not necessarily B&W’s business. In the long run we think it’s a question of diversification. It doesn’t make sense for any country or company to put all their eggs in one fuel basket. Diversity of supply makes an awful lot of sense.
We’ve proven that over the last few decades. We think it’s our place in the market to have high-end environmental cleanup technologies available on the coal side. We think an investment in small modular reactors is a good strategy because the nuclear option in five or 10 years will be needed as folks look for diversity of fuel supply.
Has B&W looked at CCS on gas as a potential technology for your portfolio?
At some point, whether it be in the U.S. or internationally, public opinion is going to influence discussion around the fact that gas does emit CO2 and that we need to do something about it. I don’t see a business case today that would prompt us to make an investment in CCS on gas, but at some point in the future, I think that could be the case.
There have been arguments made that a business case for CCS can come from enhanced oil recovery. Do you buy into that?
We’ve taken a look at the EOR opportunity. There is something to it, but that by itself is not enough to sustain an investment in carbon capture technology for a couple of reasons. One, the EOR market is of finite size. Two, if you’re looking to provide CO2 to inject into the ground, is carbon capture on a coal plant really the most economic way to get that CO2, or are you better off with another, more economic method. EOR is an interesting opportunity, but that by itself is not going to drive carbon capture.
Why is B&W pulling back on carbon capture technology given that there are some states and Canadian provinces interested in investing in the technology?
Individual governments or states can fund a specific project to generate the result they want. But in the end, for any business to be sustainable, there has to be a fundamental, broad-based economic driver. You can put incentives on a specific project to provide a boost and you can maybe get a specific project built, but when we look at the coal industry, there has to be a fundamental, long-term business case to justify continued investment in coal CCS.
Without specific rules and regulations that put a long-term price on carbon, it’s difficult to create a sustainable CO2 market. It takes significant money to develop carbon capture and storage technology. You’re only going to make that investment if you think you have a product that will sell repeatedly. I think that’s why you’re seeing the R&D spending back off on CCS.
This is the second of two interviews with B&W executives about the company’s outlook for technologies like CCS. Read GHG Monitor’s previous interview with B&W Power Generation Group President Randy Data here.
