Babcock & Wilcox Enterprises, Inc. - Quarter Report: 2015 June (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended June 30, 2015

OR

For the transition period from                      to                     

Commission File No. 001-36876

BABCOCK & WILCOX ENTERPRISES, INC.

(Exact name of registrant as specified in its charter)

Registrant’s Telephone Number, Including Area Code: (704) 625-4900

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ¨    No  x

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of shares of the registrant’s common stock outstanding at July 30, 2015 was 53,773,190.

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BABCOCK & WILCOX ENTERPRISES, INC.

INDEX - FORM 10-Q

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PART I

BABCOCK & WILCOX ENTERPRISES, INC.

FINANCIAL INFORMATION

Item 1. Condensed Consolidated and Combined Financial Statements

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BABCOCK & WILCOX ENTERPRISES, INC.

CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS

See accompanying notes to condensed consolidated and combined financial statements.

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BABCOCK & WILCOX ENTERPRISES, INC.

CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF COMPREHENSIVE INCOME

See accompanying notes to condensed consolidated and combined financial statements.

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BABCOCK & WILCOX ENTERPRISES, INC.

CONDENSED CONSOLIDATED AND COMBINED BALANCE SHEETS

ASSETS

See accompanying notes to condensed consolidated and combined financial statements.

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BABCOCK & WILCOX ENTERPRISES, INC.

CONDENSED CONSOLIDATED AND COMBINED BALANCE SHEETS

LIABILITIES AND STOCKHOLDERS’ EQUITY

See accompanying notes to condensed consolidated and combined financial statements.

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BABCOCK & WILCOX ENTERPRISES, INC.

CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF STOCKHOLDERS’ EQUITY

See accompanying notes to condensed consolidated and combined financial statements.

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BABCOCK & WILCOX ENTERPRISES, INC.

CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS

See accompanying notes to condensed consolidated and combined financial statements.

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BABCOCK & WILCOX ENTERPRISES, INC.

NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

JUNE 30, 2015

(UNAUDITED)

NOTE 1 – BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Babcock & Wilcox Enterprises, Inc. (“BW”, “we”, “us” or “our”) operates in three business segments as described below and was wholly owned by The Babcock & Wilcox Company (“BWC” or the “former Parent”) until June 30, 2015 when BWC distributed 100% of our outstanding common stock to the BWC shareholders through a tax-free spin-off transaction (the “spin-off”). BWC is now known as BWX Technologies, Inc. On and prior to June 30, 2015, our financial position, operating results and cash flows consisted of The Power Generation Operations of BWC (“BW PGG”), which represented a combined reporting entity comprised of the assets and liabilities in managing and operating the Power Generation segment of BWC, combined with related captive insurance operations that were contributed by BWC to BW. In addition, BW PGG also includes certain assets and liabilities of BWC’s Nuclear Energy (“NE”) segment that were transferred to BWC. We have treated the assets and liabilities and results of operations of NE as a discontinued operation in our condensed consolidated and combined financial statements. See Note 3 for further information.

Our condensed consolidated and combined balance sheet as of June 30, 2015 consists of the consolidated balances of BW, while our condensed consolidated and combined balance sheet as of December 31, 2014 consists of the combined results of BW PGG. Our condensed consolidated and combined statements of operations and our condensed consolidated and combined cash flows consist entirely of the combined results of BW PGG.

On June 8, 2015, BWC’s Board of Directors approved the spin-off of BW through the distribution of shares of BW common stock to holders of BWC common stock. The distribution of BW common stock was made on June 30, 2015 and consisted of one share of BW common stock for every two shares of BWC common stock to holders of BWC common stock as of 5:00 p.m. New York City time on the record date, June 18, 2015. Cash was paid in lieu of any fractional shares of BW common stock. On June 30, 2015, BW became a separate publicly-traded company, and BWC did not retain any ownership interest in BW. A registration statement on Form 10 describing the spin-off was filed by BW with the Securities and Exchange Commission and was declared effective on June 16, 2015 (as amended through the time of such effectiveness, the “Form 10”).

We have presented our condensed consolidated and combined financial statements in U.S. Dollars in accordance with the interim reporting requirements of Rule 10-01 of Regulation S-X and accounting principles generally accepted in the United States (“GAAP”). Certain financial information and disclosures normally included in our financial statements prepared annually have been condensed or omitted. Readers of these financial statements should, therefore, refer to the consolidated financial statements and notes in our Form 10. We have included all adjustments, in the opinion of management, consisting only of normal recurring adjustments, necessary for a fair presentation. We use the equity method to account for investments in entities that we do not control, but over which we have the ability to exercise significant influence. We generally refer to these entities as “joint ventures.” We have eliminated all intercompany transactions and accounts. We present the notes to our condensed consolidated and combined financial statements on the basis of continuing operations, unless otherwise stated.

Certain corporate and general and administrative expenses, including those related to executive management, tax, accounting, legal, information technology, treasury services, and certain employee benefits, have been allocated by BWC to us to reflect all costs of doing business related to these operations in the financial statements, including expenses incurred by related entities on our behalf. The majority of these allocations of management and support services costs are based on specific identification methods such as direct usage and level of effort. The remainder is allocated on the basis of a three-factor formula that considered proportional revenue generated, payroll and fixed assets. Management believes such allocations are reasonable. However, the associated expenses reflected in the accompanying condensed consolidated and combined statements of operations may not be indicative of the actual expenses that would have been incurred had we been operating as an independent public company for the periods presented. Following the separation and distribution from BWC, we have been performing these functions using internal resources or purchased services, certain of which may be provided by BWC during a transitional period pursuant to a transition services agreement. Refer to Note 13 for a detailed description of transactions with other affiliates of BWC.

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We have reclassified amounts previously reported to conform to the presentation as of and for the three and six month periods ended June 30, 2015 and 2014, attributable to the treatment of NE as a discontinued operation. We have also retrospectively adjusted amounts previously reported in the December 31, 2014 combined balance sheet related to the initial capitalization of our new, wholly-owned captive insurance subsidiary, which occurred in the second quarter of 2014. The retrospective adjustment reduced restricted cash, investments and other assets by $5.5 million, $0.5 million and $0.3 million, respectively.

Reporting Segments

We operate in three reportable segments: Global Power, Global Services and Industrial Environmental. Our reportable segments are further described as follows:

See Note 11 for further information regarding our segments.

Operating results for the three and six months ended June 30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015. For further information, refer to the combined financial statements and the related footnotes included in the Form 10.

Contracts and Revenue Recognition

We generally recognize contract revenues and related costs on a percentage-of-completion method for individual contracts or combinations of contracts based on work performed, man hours or a cost-to-cost method, as applicable to the product or activity involved. We recognize estimated contract revenue and resulting income based on the

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measurement of the extent of progress completion as a percentage of the total project. Certain costs may be excluded from the cost-to-cost method of measuring progress, such as significant costs for materials and major third-party subcontractors, if it appears that such exclusion would result in a more meaningful measurement of actual contract progress and resulting periodic allocation of income. We include revenues and related costs so recorded, plus accumulated contract costs that exceed amounts invoiced to customers under the terms of the contracts, in contracts in progress. We include in advance billings on contracts billings that exceed accumulated contract costs and revenues and costs recognized under the percentage-of-completion method. Most long-term contracts contain provisions for progress payments. Our unbilled receivables do not contain an allowance for credit losses as we expect to invoice customers and collect all amounts for unbilled revenues. We review contract price and cost estimates periodically as the work progresses and reflect adjustments proportionate to the percentage-of-completion in income in the period when those estimates are revised. For all contracts, if a current estimate of total contract cost indicates a loss on a contract, the projected loss is recognized in full when determined.

For contracts as to which we are unable to estimate the final profitability except to assure that no loss will ultimately be incurred, we recognize equal amounts of revenue and cost until the final results can be estimated more precisely. For these deferred profit recognition contracts, we recognize revenue and cost equally and only recognize gross margin when probable and reasonably estimable, which we generally determine to be when the contract is approximately 70% complete. We treat long-term construction contracts that contain such a level of risk and uncertainty that estimation of the final outcome is impractical, except to assure that no loss will be incurred, as deferred profit recognition contracts.

Our policy is to account for fixed-price contracts under the completed-contract method if we believe that we are unable to reasonably forecast cost to complete at start-up. Under the completed-contract method, income is recognized only when a contract is completed or substantially complete. For parts orders and certain aftermarket services activities, we recognize revenues as goods are delivered and work is performed.

Variations from estimated contract performance could result in material adjustments to operating results for any fiscal quarter or year. We include claims for extra work or changes in scope of work to the extent of costs incurred in contract revenues when we believe collection is probable. At June 30, 2015 and December 31, 2014, we recognized accrued claims totaling $10.1 million and $8.2 million, respectively.

In the three and six months ended June 30, 2014, we recorded a contract loss totaling approximately $4.0 million and $11.6 million, respectively, based on our estimated costs to complete our Global Power segment’s Berlin Station project. We previously asserted that substantial completion had been achieved on this project in early 2014 and that any further delays to complete this project were the result of the customer’s failure to supply fuel complying with the contract specifications. The customer certified that we achieved substantial completion on this project effective July 19, 2014, following which the customer has no further claims for liquidated damages associated with delays. See Note 7 for legal proceedings associated with this matter.

Comprehensive Income

The components of accumulated other comprehensive income included in stockholders’ equity are as follows:

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The amounts reclassified out of accumulated other comprehensive income by component and the affected condensed consolidated and combined statements of operations line items are as follows:

Inventories

The components of inventories are as follows:

Restricted Cash and Cash Equivalents

At June 30, 2015, we had restricted cash and cash equivalents totaling $35.5 million, $4.1 million of which was held in restricted foreign cash accounts and $31.4 million of which was held to meet reinsurance reserve requirements of our captive insurer in lieu of long-term investments.

Goodwill

The following summarizes the changes in the carrying amount of goodwill:

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Warranty Expense

We accrue estimated expense included in cost of operations on our condensed consolidated and combined statements of operations to satisfy contractual warranty requirements when we recognize the associated revenue on the related contracts. In addition, we record specific provisions or reductions where we expect the actual warranty costs to significantly differ from the accrued estimates. Such changes could have a material effect on our consolidated financial condition, results of operations and cash flows.

The following summarizes the changes in the carrying amount of our accrued warranty expense:

Research and Development

Our research and development activities are related to the development and improvement of new and existing products and equipment, as well as conceptual and engineering evaluation for translation into practical applications. We charge research and development costs unrelated to specific contracts as they are incurred. Research and development activities totaled $4.0 million and $4.3 million in the three months ended June 30, 2015 and 2014, respectively, and $8.5 million and $8.3 million in the six months ended June 30, 2015 and 2014, respectively.

In the three months ended June 30, 2015, we recognized a $9.0 million impairment charge primarily related to research and development facilities and equipment dedicated to a carbon capture process that was determined during the quarter ended June 30, 2015 to not be commercially viable. The impairment is included in losses on asset disposals and impairments, net.

Provision for Income Taxes

We are subject to U.S. federal income tax and income tax of multiple state and international jurisdictions. We provide for income taxes based on the enacted tax laws and rates in the jurisdictions in which we conduct our operations. These jurisdictions may have regimes of taxation that vary with respect to nominal rates and with respect to the basis on which these rates are applied. This variation, along with changes in our mix of income within these jurisdictions, can contribute to changes in our effective tax rate from period to period. We classify interest and penalties related to taxes (net of any applicable tax benefit) as a component of provision for income taxes on our condensed consolidated and combined statements of operations.

Our effective tax rate for the three months ended June 30, 2015 was approximately 18.2% as compared to 53.3% for the three months ended June 30, 2014. Our effective tax rate for the three months ended June 30, 2015 was lower than our statutory rate primarily due to the jurisdictional mix of our income. Our effective tax rate for the three months ended June 30, 2014 was higher than our statutory rate primarily due to the jurisdictional mix of income as well as the favorable impact of an increase in benefits for amended federal manufacturing deductions and certain amended state return filings, offset by an increase to a valuation allowance against certain state deferred tax assets.

Our effective tax rate for the six months ended June 30, 2015 was approximately 29.9% as compared to 8.6% for the six months ended June 30, 2014. Our effective tax rate for the six months ended June 30, 2015 was lower than our statutory rate primarily due to the jurisdictional mix of our income. Our effective tax rate for the six months ended June 30, 2014 was lower than our statutory rate primarily due to the receipt of a favorable ruling from the Internal Revenue Service that allowed us to amend prior year U.S. income tax returns to exclude distributions of certain of our foreign joint ventures from domestic taxable income.

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As of June 30, 2015, we have gross unrecognized tax benefits of $2.4 million, which, if recognized, would lower our effective tax rate from continuing operations.

New Accounting Standards

In April 2015, the FASB issued Accounting Standards Update (“ASU”) No. 2015-03, Simplifying the Presentation of Debt Issuance Costs. This ASU requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This revised guidance is effective retrospectively for annual reporting periods beginning after December 15, 2015, and related interim periods with early adoption permitted. We are currently evaluating the impact of this standard.

In April 2015, the FASB issued ASU 2015-05 – Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement. The objective of this ASU is to help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement by providing guidance as to whether an arrangement includes the sale or license of software. This update is effective prospectively for annual periods, including interim periods within those annual periods, beginning after December 15, 2015 with early adoption permitted. We are currently evaluating the impact of this standard.

In May 2015, the FASB issued ASU No. 2015-07, Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent). This ASU permits a reporting entity to measure the fair value of certain investments using the net asset value per share of the investment. This update is effective retrospectively for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. We are currently evaluating the impact of this standard.

NOTE 2 – ACQUISITIONS AND DISPOSITIONS

MEGTEC Acquisition

On June 20, 2014, we acquired the outstanding stock of industrial processes solutions provider MEGTEC for $142.8 million, net of cash acquired. MEGTEC designs, engineers, manufactures and services air pollution control systems and coating/drying equipment for a variety of industrial applications.

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The purchase price of the acquisition has been allocated among assets acquired and liabilities assumed at estimates of fair value with the excess purchase price recorded as goodwill. Our purchase price allocation, finalized in the second quarter of 2015, is as follows:

The intangible assets included above consist of the following (dollar amounts in thousands):

Our Industrial Environmental segment is comprised of MEGTEC, and its results of operations since acquisition can be found in Note 11. Additionally, the following unaudited pro forma financial information presents our results of operations for the three and six months ended June 30, 2014 had the acquisition of MEGTEC occurred on January 1, 2013. The unaudited pro forma financial information below is not intended to represent or be indicative of our actual consolidated results had we completed the acquisition at January 1, 2013. This information should not be taken as representative of our future consolidated results of operations.

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The unaudited pro forma results include the following pre-tax adjustments to the historical results presented above:

NOTE 3 – DISCONTINUED OPERATIONS

As discussed in Note 1, we distributed assets and liabilities totaling $47.8 million associated with our NE segment to BWC in conjunction with the spin-off. We received corporate allocations from the former Parent as described in Note 1, which included $1.3 million and $1.3 million for the three months ended June 30, 2015 and 2014, respectively, and $2.7 million and $2.7 million for the six months ended June 30, 2015 and 2014, respectively. Though these allocations relate to our discontinued NE segment, they are included as part of continuing operations because allocations are not eligible for inclusion in discontinued operations.

The following table presents selected financial information regarding the results of operations of our former NE segment:

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The following table presents the carrying values of the major accounts of discontinued operations that are included in our December 31, 2014 condensed consolidated and combined balance sheet:

NOTE 4 – CREDIT FACILITY

On June 30, 2015, the new credit agreement (“New Credit Agreement”) that we entered into on May 11, 2015 closed in connection with the spin-off. The New Credit Agreement provides for senior secured revolving credit facility in an aggregate amount of up to $600 million, which is scheduled to mature on June 30, 2020. The proceeds of loans under the New Credit Agreement are available for working capital needs and other general corporate purposes, and the full amount is available for the issuance of letters of credit.

The New Credit Agreement contains an accordion feature that allows us, subject to the satisfaction of certain conditions, including the receipt of increased commitments from existing lenders or new commitments from new lenders, to increase the amount of the commitments under the revolving credit facility in an aggregate amount not to exceed the sum of (i) $200 million plus (ii) an unlimited amount, so long as for any commitment increase under this subclause (ii) our senior secured leverage ratio (assuming the full amount of any commitment increase under this subclause (ii) is drawn) is equal to or less than 2.0 to 1.0 after giving pro forma effect thereto.

The New Credit Agreement and our obligations under certain hedging agreements and cash management agreements with our lenders and their affiliates are (i) guaranteed by substantially all of our wholly owned domestic subsidiaries, but excluding our captive insurance subsidiary, and (ii) secured by first-priority liens on certain assets owned by us and the guarantors. The New Credit Agreement requires interest payments on revolving loans on a periodic basis until maturity. We may prepay all loans at any time without premium or penalty (other than customary LIBOR breakage costs), subject to notice requirements. The New Credit Agreement requires us to make certain prepayments on any outstanding revolving loans after receipt of cash proceeds from certain asset sales or other events, subject to certain exceptions and a right to reinvest such proceeds in certain circumstances, but such prepayments will not require us to reduce the commitments under the New Credit Agreement.

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Loans outstanding under the New Credit Agreement bear interest at our option at either the LIBOR rate plus a margin ranging from 1.375% to 1.875% per year or the base rate (the highest of the Federal Funds rate plus 0.50%, the one month LIBOR rate plus 1.0%, or the administrative agent’s prime rate) plus a margin ranging from 0.375% to 0.875% per year. A commitment fee is charged on the unused portions of the revolving credit facility, and that fee varies between 0.250% and 0.350% per year. Additionally, a letter of credit fee of between 1.375% and 1.875% per year is charged with respect to the amount of each financial letter of credit issued, and a letter of credit fee of between 0.825% and 1.125% per year is charged with respect to the amount of each performance letter of credit issued. The applicable margin for loans, the commitment fee and the letter of credit fees set forth above vary quarterly based on our leverage ratio.

The New Credit Agreement includes financial covenants that are tested on a quarterly basis, based on the rolling four-quarter period that ends on the last day of each fiscal quarter. The maximum permitted leverage ratio is 3.00 to 1.00, which ratio may be increased to 3.25 to 1.00 for up to four consecutive fiscal quarters after a material acquisition. The minimum consolidated interest coverage ratio is 4.00 to 1.00. In addition, the New Credit Agreement contains various restrictive covenants, including with respect to debt, liens, investments, mergers, acquisitions, dividends, equity repurchases and asset sales. At June 30, 2015, we had no borrowings outstanding under the revolving credit facility, and after giving effect to the leverage ratio and $109.1 million of letters of credit issued under the New Credit Agreement, we had approximately $383.9 million available for borrowings or to meet letter of credit requirements.

The New Credit Agreement generally includes customary events of default for a secured credit facility. If an event of default relating to bankruptcy or other insolvency events with respect to us occurs under the New Credit Agreement, all obligations will immediately become due and payable. If any other event of default exists, the lenders will be permitted to accelerate the maturity of the obligations outstanding. If any event of default occurs, the lenders are permitted to terminate their commitments thereunder and exercise other rights and remedies, including the commencement of foreclosure or other actions against the collateral. Additionally, if we are unable to make any of the representations and warranties in the New Credit Agreement, we will be unable to borrow funds or have letters of credit issued. At June 30, 2015, we were in compliance with all of the covenants set forth in the New Credit Agreement.

NOTE 5 – SPECIAL CHARGES FOR RESTRUCTURING ACTIVITIES AND SPIN-OFF COSTS

Global Competitiveness Initiative

In the year ended December 31, 2013, we announced the Global Competitiveness Initiative (“GCI”) to enhance competitiveness, better position us for growth and improve profitability. In conjunction with GCI, during the six months ended June 30, 2014, we incurred $2.2 million of expenses related to facility consolidation.

Other Restructuring Actions

In the six months ended June 30, 2015, we incurred $6.5 million of accelerated depreciation and impairment charges related to facility consolidation, $1.1 million of consulting fees and other administrative costs and $0.1 million of expenses related to employee termination benefits in conjunction with the margin improvement program that BWC announced in 2014. In the six months ended June 30, 2014, we incurred $6.0 million of expenses related to employee termination benefits and $0.8 million of consulting and other administrative costs related to the margin improvement program.

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An analysis of our restructuring liabilities for the six months ended June 30, 2015 and 2014 follows:

At June 30, 2015, unpaid restructuring charges totaled $1.7 million for employee termination benefits and $0.5 million for consulting and administrative costs. At June 30, 2014, unpaid restructuring charges totaled $6.6 million for employee termination benefits.

Spin-off transaction costs

In the three and six months ended June 30, 2015, we incurred $0.9 million of costs directly related to the spin-off of BW from BWC, included in selling, general and administrative expenses.

NOTE 6 – PENSION PLANS AND POSTRETIREMENT BENEFITS

Components of net periodic benefit cost included in net income are as follows:

We made contributions to our pension and postretirement benefit plans totaling $4.5 million and $6.6 million during the three and six months ended June 30, 2015, respectively, as compared to $2.0 million and $4.1 million in the three and six months ended June 30, 2014, respectively.

NOTE 7 – COMMITMENTS AND CONTINGENCIES

Investigations and Litigation

Berlin Station

Our subsidiary, Babcock & Wilcox Construction Co., Inc. (“BWCC”), is currently in a dispute with a customer in connection with a 75MW biomass-energy power plant that BWCC designed and built in Berlin, New Hampshire. The dispute primarily concerns material claims by BWCC against its customer for contract changes relating to schedule delays, delay costs, extra work, withheld payments, improper draws on letters of credit, withheld contract-retention amounts, as well as fraud and misrepresentation. The customer has made nine partial draws totaling approximately $11.0 million under letters of credit that were outstanding in connection with the project. These draws correspond to a total of approximately $11.9 million in alleged liquidated damages for delay (“Delay LDs”) on the project.

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Following the customer’s denial of BWCC’s change order request relating to schedule delays, delay costs and extra work incurred up to that time, on January 16, 2014, BWCC filed suit against the customer in the Court of Common Pleas, Summit County, Ohio, Case No. 2014 01 0208, seeking damages in excess of $37 million (the “Ohio suit”). On or about January 30, 2014, BWCC’s customer filed suit against BWCC in the Superior Court of Coos County, New Hampshire, Case No. 214-2014-CV-14 alleging breach of contract and seeking unspecified amounts (the “New Hampshire suit”) which was subsequently transferred to the New Hampshire business/commercial court division. On June 26, 2014, the Ohio suit was dismissed on jurisdictional and forum non conveniens grounds. On August 29, 2014, BWCC filed its Answer, Affirmative Defenses and Counterclaim in the New Hampshire suit seeking recovery of damages. Damages claimed and incurred to date are at least $70 million in connection with all matters currently in dispute.

Given the customer’s prior wrongful acts, there is a risk that the customer will attempt to call all or part of the remaining $21.9 million of letters of credit during the pendency of this matter. We believe any such call would be wrongful and entitle us to a return of the funds drawn and other damages. We have made provisions in our financial statements as disclosed in Note 1 for Delay LDs called to date against the letters of credit and have not recorded offsetting claims revenue related to these calls in our financial statements.

We believe BWCC has sound legal and factual bases for its claims. BWCC intends to aggressively pursue recovery on its claims, including recovery of the wrongful calls against BWCC’s letters of credit. However, it is premature to predict the outcome of this matter. The litigation could be lengthy, and if BWCC’s customer were to prevail completely or substantially in this matter, the outcome could have a material adverse effect on our financial statements.

ARPA

On February 28, 2014, Arkansas River Power Authority (“ARPA”) filed suit against Babcock & Wilcox Power Generation Group, Inc. (“PGG OpCo”) in the United States District Court for the District of Colorado (Case No. 14-cv-00638-CMA-NYW) alleging breach of contract, negligence, fraud and other claims arising out of PGG OpCo’s delivery of a circulating fluidized bed (“CFB”) boiler and related equipment used in the Lamar Repowering Project pursuant to a 2005 contract.

In 2009, PGG OpCo informed ARPA that the boiler would require a selective non-catalytic reduction system in order to achieve contractual emissions guarantees, which PGG OpCo supplied in 2010. PGG OpCo recommended additional modifications in 2011 and 2012 to ensure the boiler would meet contractual emissions guarantees; however, ARPA has not installed all of the recommended modifications. ARPA has not confirmed whether it intends to complete and commission the Lamar plant.

On April 16, 2014, PGG OpCo filed an Answer asserting numerous defenses, including waiver, prevention of performance and failure to mitigate damages and Counterclaims alleging bad faith, breach of contract and unjust enrichment. ARPA filed an Answer to the Counterclaims on May 7, 2014. The District Court granted leave for ARPA to amend its Complaint, and ARPA’s First Amended Complaint was accepted on March 20, 2015. PGG OpCo filed its Answer to the First Amended Complaint on April 1, 2015. Discovery is ongoing and a trial date has not been set.

We believe that ARPA has asserted damages theories that are highly speculative and without legal or economic support as a litigation tactic. We also believe most of the alleged damages are expressly waived and/or capped in enforceable provisions of the 2005 contract. We cannot estimate the possible loss at this time. However, in addition to establishing other relevant sub-caps and including an explicit waiver of a broad range of damages, including consequential damages, the 2005 contract provides an overall cap of liability at the original contract price of approximately $20.5 million. ARPA has alleged various theories of possible liability and damages that would lead to vastly different measures of damages, making it impracticable to estimate a range of possible outcomes; however, ARPA’s damage claims total approximately $170 million. PGG OpCo does not believe it is probable that ARPA will be successful in any of its claims. PGG OpCo believes it has strong defenses and intends to aggressively defend this matter and pursue its counterclaims. However, if ARPA were to prevail on all or any significant portion of its claims in this matter, the outcome could have a material adverse effect on our financial condition.

Other Litigation and Settlements

On December 17, 2014, an unfavorable jury verdict was delivered against BWC, PGG OpCo, Babcock & Wilcox Nuclear Energy, Inc. (a subsidiary of BWC that is not part of BW), and Babcock & Wilcox Canada Ltd (a BWC subsidiary that is not part of BW) (collectively, the “BWC Parties”) in a case entitled AREVA NP, INC. f/k/a Framatome ANP, Inc. v. The Babcock & Wilcox Company, et. al.

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in the amount of approximately $16 million. The BWC Parties strongly disagree with the verdict and believe the plaintiff’s claims are without merit. The BWC Parties have filed a post-trial motion requesting that the verdict be set aside or a new trial granted. On March 5, 2015, the trial court denied a post-trial motion requesting that the verdict be set aside or a new trial granted. The BWC Parties have filed a notice of appeal with the Virginia Supreme Court. The case was filed August 26, 2011 in the Circuit Court for the City of Lynchburg, Commonwealth of Virginia and alleged that the BWC Parties to the suit owed royalties on certain commercial nuclear contracts performed by BWC and certain of its subsidiaries since 2004. Under the terms of the spin-off, the former Parent has agreed to indemnify BW in full from any losses in this matter.

NOTE 8 – DERIVATIVE FINANCIAL INSTRUMENTS

Our global operations give rise to exposure to market risks from changes in foreign currency exchange (“FX”) rates. We use derivative financial instruments, primarily FX forward contracts, to reduce the impact of changes in FX rates on our operating results. We use these instruments primarily to hedge our exposure associated with revenues or costs on our long-term contracts that are denominated in currencies other than our operating entities’ functional currencies. We do not hold or issue derivative financial instruments for trading or other speculative purposes.

We enter into derivative financial instruments primarily as hedges of certain firm purchase and sale commitments denominated in foreign currencies. We record these contracts at fair value on our condensed consolidated and combined balance sheets. Depending on the hedge designation at the inception of the contract, the related gains and losses on these contracts are either deferred in stockholders’ equity as a component of accumulated other comprehensive income until the hedged item is recognized in earnings, or offset against the change in fair value of the hedged firm commitment through earnings. Any ineffective portion of a derivative’s change in fair value and any portion excluded from the assessment of effectiveness are immediately recognized in other – net on our condensed consolidated and combined statements of operations. The gain or loss on a derivative instrument not designated as a hedging instrument is also immediately recognized in earnings as a component of other– net in our condensed consolidated and combined statements of operations.

We have designated all of our FX forward contracts that qualify for hedge accounting as cash flow hedges. The hedged risk is the risk of changes in functional-currency-equivalent cash flows attributable to changes in FX spot rates of forecasted transactions related to long-term contracts. We exclude from our assessment of effectiveness the portion of the fair value of the forward contracts attributable to the difference between FX spot rates and FX forward rates. At June 30, 2015, we had deferred approximately $0.3 million of net losses on these derivative financial instruments in accumulated other comprehensive income. Assuming market conditions continue, we expect to recognize substantially all of this amount in the next twelve months.

At June 30, 2015, our derivative financial instruments consisted of FX forward contracts. The notional value of our FX forward contracts totaled $114.3 million at June 30, 2015, with maturities extending to August 30, 2017. These instruments consist primarily of contracts to purchase or sell euros. We are exposed to credit-related losses in the event of nonperformance by counterparties to derivative financial instruments. We attempt to mitigate this risk by using major financial institutions with high credit ratings. The counterparties to all of our FX forward contracts are financial institutions included in our credit facility. Our hedge counterparties have the benefit of the same collateral arrangements and covenants as described under our credit facility. The effect of counterparty non-performance on the fair value of derivative financial instruments included in our financial statements is not material.

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The following tables summarize our derivative financial instruments at June 30, 2015 and December 31, 2014:

The effects of derivatives on our financial statements are outlined below:

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NOTE 9 – FAIR VALUE MEASUREMENTS