Delays in the imposition of a new U.S. Environmental Protection Agency rule may actually benefit The Babcock & Wilcox Co. (NYSE:BWC), a supplier of environmental control technologies and services to coal-fired power generators.
Brandon Bethards, B&W’s President and CEO, made that point during the company’s March 1 earnings call. On Dec. 30, 2011, a federal appeals court issued a stay on the Cross-State Air Pollution Rule (CSAPR), which was due to take effect Jan. 1 and control SO2 and NOx emissions in a number of eastern states.
“We understand that arguments are scheduled be heard by the court in April with a decision in late summer or fall of this year,” Bethards noted. “While we do not know what the outcome of this litigation will be the impact of deferring the timing of CSAPR regulation will be to push some [selective catalytic reduction] and scrubber work to later in the cycle, potentially extending the cycle from four to five years to five to seven years. In my opinion, this adjusted timeframe increases the likelihood that B&W may capture a larger portion of the opportunity that may have been otherwise unavailable to us with the prior schedule.”
Also in December 2011, EPA issued the final Mercury and Air Toxic Standards (MATS). The most significant change in the final rules from the draft version was a change in the standard for measuring particulate matter, Bethards noted. The finalization of the rule goes a long way towards reducing regulatory uncertainty in the market and providing more information for utilities so they can make decisions on their compliance strategy and capital spending requirements, he added.
The B&W environmental capture team has been assessingestimated addressable market opportunity based on the MATS rules as finalized, Bethards told analysts. Because of the change to the previous draft in measuring particulate matter, B&W believes that in some situations, if a power generation unit is already equipped with an SCR, electrostatic precipitator and a scrubber, it may not need to convert to new mercury removal systems. “Rather the existing equipment as installed or with some engineered upgrades may be able to achieve the modified MATS emissions requirements,” he said. “Net-net this will likely reduce the required capital outlay by the utilities, but the technical requirements match very well to the core capabilities of B&W products and services offerings.”
Accordingly, B&W’s revised estimated addressable opportunity based on the current technical details of the regulations as finalized, will be somewhat lower than under the previous draft. Also, since B&W first identified an addressable market range, there has been a year’s worth of work awarded in the industry. After deducting the 2011 awards and adjusting for the new rules, the company’s latest review suggests a remaining addressable market opportunity, net of awarded work, of approximately $12bn to $18bn.
Environmental award activity in the industry was robust in 2011, particularly in the fourth quarter in which the company booked $278m of environmental awards and for the full-year 2011 it booked over $500m for new environmental projects. “We were working with several large utilities throughout the second half of 2011 to assist them in planning for the new environmental requirements,” said Bethards. “These early movers are acting. However, we expect that the award activity will slow somewhat over the first half of 2012 as those utilities that have not acted evaluate the potential outcome of CSAPR.”
Bethards answered an analyst question about the impacts on B&W of extensive coal-to-gas switching right now as generators in the U.S. back down coal capacity so they can fire cheaper natural gas.
Bethards pointed out that power generators, like during the recent recession, back down their coal plant retrofit and parts replacement schedules during down times. But eventually it catches up with them and they then have to spend more heavily to get back to their normal maintenance schedules, which is a current factor in the market.
Bethards added: “The other thing that you have to consider is the ratio of fuel competition, in other words the cost per Btu of natural gas to that of coal. In most of the middle-aged coal plants, you have a cost advantage for coal as long as that differential is in the 1.5 to 2.0 range. In the eastern part of the country, where you have all units relying principally on Appalachian based coal supplies, you have a higher delivered cost per Btu for coal and a lot of that power is being displaced by natural gas at the current pricing levels. However, those are the units that are most likely targeted for shutdown as a result of the new environmental regulations and they have been on sort of a life support program for a number of years now…. So, net-net, when you consider that, and the fact that there are still certain parts of the country where gas is simply not available to serve the regional markets, we think we are going to continue to see a pretty strong parts and services business going forward for the foreseeable future.”
Bethards also expanded in response to an analyst question on the point of how a more extended CSAPR timeline can help B&W. “[W]e have a very good portfolio of technologies that really gives us what we believe to be a competitive edge in working with our customers to help bring the maximum value solution to their environmental compliance needs,” he said. “Now, if you had a real steep peaked market with a short time span, you are probably going to forgo some of that opportunity just due to a lack of capacity, okay. So the other opportunity is, we like an environment where we have a reasoned and informed customer that has the appropriate amount of time to make a solid and informed decision, and that is really the benefit of the expanded time….”