On November 5, 2014, Babcock & Wilcox, the 147-year old power generation company announced that it would split into two separate publicly traded businesses. The announcement represented a culmination of a longer-term business transformation. Over the previous few decades, the company had diversified away from its core coal boiler manufacturing operations into adjacent product categories. The separation would allow the company to carve out its more stable nuclear operations and services business from the secularly declining coal boilers business, helping ease the strain on the company’s operating model and potentially unlocking value in the equity markets.
The changes in BWC’s operating model actually began as far back as the 1950s. For almost 100 years, the company had been a pure play pulverized coal boiler manufacturer. In this line of business, utility and power companies in need of coal-fired electric power generation hired Babcock & Wilcox to engineer and install large boilers into power plants and factories over the course of multiple months (i.e., longer-term project-based business with lumpy revenues). Once the plants were up and running, pulverized coal was burned in the boilers, and the thermal combustion produced the desired energy output. The long-term ramifications of continued coal burning are what eventually drove BWC to change its operating model and, ultimately, break up the entire company.
In 2014, coal was responsible for providing ~40% of the world’s electricity and ~39% of its CO2 emissions. Coal had historically flourished as an energy source due to its price – it is the cheapest available electrical energy-producing option. However, it is also the dirtiest source of energy, producing more CO2 per unit of energy than all fossil fuels. While these climate change-related negative externalities may not have been fully understood by BWC in the 1950s, there was a general sentiment across the U.S. that coal was dirty, especially following an incident in Donora, PA in 1948, in which a smog cloud made a high school football game unwatchable from the bleachers and twenty people in the town later died as a result.
In an attempt to hedge against a demand decline in coal-fired boilers, BWC began rapidly expanding its product offering in the 1950s. First, the company entered the nuclear space, working directly with the U.S. government to design and fabricate components for submarines. As the commercial nuclear industry evolved in the 1970s and 1980s, BWC was at the forefront of developing and manufacturing parts for new build plants and submarines. The company eventually entered the nuclear testing and certification space, marking a big shift from heavy industrial manufacturing to a service-based operating model. The testing and certification business lines are less capital-intensive, people-based businesses, with highly qualified nuclear scientists working on site at nuclear reactors to ensure adequate safety standards are met. Ultimately, the entry into these different product lines became part of a longer-term strategy of moving away from what is now a secularly declining business (coal-fired burners).
Instead of letting the core coal boiler business secularly decline to zero, B&W invested to innovate into more environmentally friendly boilers and into developing component parts that could be retrofitted to older coal-fired burners to reduce CO2 output. Some examples of new boiler technology include biomass-fired boilers and waste-to-energy boilers. In terms of retrofitted parts, BWC now designs, engineers and manufactures components and systems to treat nitrogen oxides, sulfur dioxide, fine particulate, mercury, acid gases and other hazardous air emissions.
When BWC was separated into two distinct companies, the nuclear operations and testing business was viewed as the more attractive public market stock because of the perceived unavoidable business decline expected in the coal boiler business. However, the legacy coal boiler business has been able (and continues) to innovate to a great degree to adapt to a world that cares deeply about climate change. For example, some of their more recent and cutting-edge products in the pipeline that relay on carbon neutral technologies could prove very lucrative in the future. Perhaps most interesting about Babcock & Wilcox, a company with almost 150 years of history, is that after playing such an integral role in the release of an immeasurable amount burned coal into the atmosphere, the firm has been forced to completely change its core business and operating models in an attempt to survive in a world that recognizes the serious negative externalities associated with burning fossil fuels.