Power Systems

The financial results of our Power Systems division were as follows:

 

 

 

 

% Change

($ in millions)

2014

2013

2012

2014

2013

Orders

6,871

5,949

7,973

15%

(25)%

Order backlog at Dec. 31,

8,246

9,435

12,107

(13)%

(22)%

Revenues

7,020

8,375

7,852

(16)%

7%

Income from operations

(360)

171

7

n.a.

n.a.

Operational EBITDA

5

419

290

(99)%

44%

Orders

In 2014, orders increased 15 percent (20 percent in local currencies) compared with 2013, mainly due to a higher level of large orders in the Grid Systems business following the $800 million award in the United Kingdom for a HVDC subsea power connection in northern Scotland and a $400 million HVDC project in Canada to provide the first electricity link between the island of Newfoundland and the North American power grid. In addition, large orders in 2014 included a $110 million substation order in Saudi Arabia which will support grid interconnection and boost electricity transmission capacity. Initiatives to drive base order growth, combined with early signs of stabilization in the utility sector, contributed to modest growth in base orders. The overall market remains highly competitive, especially in certain higher-growth regions such as the Middle East. The Power Systems division continues to be selective, focusing on higher-margin projects and those with higher pull-through of other ABB products.

Order intake in 2013 was 25 percent lower (25 percent in local currencies), as customers postponed investments and delayed the award of large orders. In addition, we increased our project selectivity and focused on higher-margin business as part of the division’s strategic repositioning. Power infrastructure spending was restrained due to economic uncertainties in most regions, while transmission utilities continued to invest selectively, focusing on additional capacity in emerging markets while mature markets focused mainly on grid upgrades. Large orders in 2013 included a $110 million order for a HVDC converter station to facilitate the connection of the Lithuanian and Polish power grids, an $80 million order to power Canada’s largest solar photovoltaic plant, and substation orders of $160 million in Kuwait to help strengthen the country’s power grid and support its growing infrastructure. Price pressure, resulting from ongoing macroeconomic weakness in certain key geographical markets, also negatively impacted our order levels in 2013.

The geographic distribution of orders for our Power Systems division was as follows:

(in %)

2014

2013

2012

Europe

42

35

30

The Americas

25

25

31

Asia

17

17

18

Middle East and Africa

16

23

21

Total

100

100

100

In the Power Systems division, the change in the geographic share of orders often reflects changes in the geographical locations of large orders. In 2014, the share of orders from Europe increased due to the award of the HVDC project in Scotland. The share of orders in the Americas and Asia remained stable with growth in both large and base orders. Orders from MEA decreased, mainly due to the timing of large order awards, resulting in a reduction of order share relative to the other regions.

In 2013, orders declined across all regions compared to 2012. The order decrease in the Americas mainly resulted from the strong level of large orders in 2012. Regionally, the percentage of our orders from Europe was the highest, although both large and base orders were lower than in the previous year.

Order backlog

Order backlog at December 31, 2014, was $8,246 million, a decrease of 13 percent (4 percent in local currencies) compared with 2013. Although order backlog was supported by the large orders received in 2014, order backlog decreased in 2014 as the division continued to run off the remaining orders in businesses affected by the repositioning of the Power Systems division announced in 2012 and the businesses affected by the exiting of the solar EPC business announced in 2014.

Order backlog at December 31, 2013, was $9,435 million, a decrease of 22 percent (21 percent in local currencies) compared with 2012. Order backlog was impacted significantly by the lower level of large orders received in 2013, particularly the lack of very large project orders which typically have execution times stretching over several years.

Revenues

Revenues in 2014 decreased 16 percent (13 percent in local currencies), due mainly to the effects of weak order intake in 2013 and the resulting lower opening order backlog at the beginning of 2014. Revenues decreased in all businesses compared to 2013. In addition, revenues in 2014 were negatively impacted by execution delays in selected projects.

Revenues in 2013 increased 7 percent (8 percent in local currencies), with growth in all businesses. The increase was achieved primarily through the execution of projects from the 2012 order backlog. The strong order backlog level at the beginning of 2013 provided the division a strong base from which to generate revenues in 2013 and more than compensated for the lower level of orders received in 2013.

The geographic distribution of revenues for our Power Systems division was as follows:

(in %)

2014

2013

2012

Europe

38

36

40

The Americas

23

23

19

Asia

19

20

19

Middle East and Africa

20

21

22

Total

100

100

100

The regional distribution of revenues reflects the geographical end-user markets of the projects we are executing, and consequently varies over time. In 2014, revenues decreased in all regions compared to 2013. Europe remained our largest region in terms of revenues, followed again by the Americas. The largest revenue decrease was recorded in MEA, and partly related to lower revenues in Iraq and Saudi Arabia compared to 2013, following a lower opening order backlog.

In 2013, Europe was the largest region in terms of revenues, despite a decrease in share of revenues compared to previous year. The higher share of revenues from the Americas was due primarily to execution in 2013 of projects from the 2012 order backlog in the U.S. and Brazil.

Income from operations

In 2014, the Power Systems division realized a loss from operations of $360 million compared to an income from operations of $171 million in 2013, due primarily to lower revenues and project-related charges, mainly for offshore wind projects and solar EPC contracts. Income from operations also included a $115 million negative impact related to FX/commodity timing differences compared with a $40 million positive impact in 2013. Restructuring-related expenses in 2014 of $63 million were lower than the $101 million in 2013, and included charges to adjust the size and cost structure of certain operations in response to lower order backlog and an increased focus on white collar productivity. Cost savings from supply chain management and operational excellence activities helped mitigate higher research and development spending, and the impact of low margin projects executed from the order backlog.

In 2013, income from operations increased to $171 million, from $7 million in 2012, due partly to the impacts on 2012 from the repositioning of the Power Systems division. Income from operations in 2013 was also negatively impacted by operational charges in the fourth quarter of approximately $260 million, a significant portion of which related to certain offshore wind projects, where severe winter storms in the North Sea caused time delays and increased costs. The remaining operational charges in the fourth quarter related to project cost increases in certain projects in other businesses. Restructuring-related expenses in 2013 of $101 million were higher than the $52 million in 2012, and included charges to adjust the size of certain operations in response to lower order intake. However, income from operations benefitted from the contribution of higher revenues and lower research and development spending. Additionally, cost savings from supply chain management and operational excellence activities helped mitigate the impact of price pressures in projects executed from the order backlog.

Operational EBITDA

The reconciliation of income from operations to Operational EBITDA for the Power Systems division was as follows:

($ in millions)

2014

2013

2012

Income from operations

(360)

171

7

Depreciation and amortization

175

183

174

Restructuring and restructuring-related expenses

63

101

52

Gains and losses on sale of businesses, acquisition-related expenses and certain non-operational items

12

4

70

FX/commodity timing differences in income from operations

115

(40)

(13)

Operational EBITDA

5

419

290

In 2014, Operational EBITDA decreased compared to 2013, primarily due to the reasons described under “Income from operations”, excluding the explanations related to the reconciling items in the table above.

In 2013, Operational EBITDA increased 44 percent compared to 2012, primarily due to the reasons described under “Income from operations”, excluding the explanations related to the reconciling items in the table above.

Fiscal year 2015 outlook

Utilities are expected to continue to make selective investments in, for example, power infrastructure to add capacity in emerging markets, and upgrading aging infrastructure in mature markets. Integrating renewable energy sources into existing grids, improving overall grid efficiency and the development of more reliable, flexible and smarter grids will also support the business. The timing of these investments can vary significantly by region and customer and depends on both short-term macroeconomic conditions, long-term demand forecasts, and regulatory and policy developments, among other factors.