Energy Solutions Inc.Q3 3008 Earnings Call Transcript

| About: EnergySolutions, Inc. (ES-OLD)

Energy Solutions Inc. (NYSE:ES-OLD)

Q3 2008 Earnings Call

November 12, 2008 10:00 am ET


Steve Creamer – Chairman, CEO

Philip Strawbridge – Executive Vice President, CFO


Scott Levine – J.P. Morgan

Jamie Cook – Credit Suisse

Sarah Martin – Lazard Capital Markets

Preetesh Munshi – Piper Jaffray

Alex Rygiel – Freedman, Billings, Ramsey

John Rogers – D. A. Davidson

Al Kaschalk – Wedbush Morgan


Welcome to the third quarter 2008 Energy Solutions earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today's call, Mr. John Rasmussen of Energy Solutions Investor Relations.

John Rasmussen

Welcome to Energy Solutions Inc. third quarter fiscal 2008 conference call. I'm John Rasmussen. I am in Investor Relations at Energy Solutions. I've taken over from Tim Barney and I look forward to working with all of you. With me today are Energy Solutions' Chairman and Chief Executive Officer, R. Steve Creamer and Energy Solutions Executive Vice President and Chief Financial Officer, Philip Strawbridge. Also joining us and available for the question and answer session will be Mark McBride, Senior Vice President and Chief Accounting Officer.

Before I turn the call over to Steve, I would like to remind listeners that during today's call, managements remarks may contain forward-looking statements within the meaning of the Federal Securities law, including statements concerning plans, objectives, goals, strategies, projections of future events or performance and underlying assumptions many of which are based in turn on further assumptions.

Also, forward-looking statements involve risks and uncertainties. Although Energy Solutions believes that its plans, intentions and expectations are reasonable, it may not achieve those plans, intentions or expectations. There are important risks and uncertainties that could cause actual results to differ materially from the forward-looking statements made in this conference call.

Such risks and uncertainties are discussed in the company's Form 10-Q for the quarter ended June 30, 2008 and in other documents filed by the company with the Securities and Exchange Commission. These and other risks could cause actual results to differ materially from those express in any forward-looking statements made.

Any projections as to the company's future financial performance represent management's estimates as of today, November 12, 2008 and Energy Solutions assumes no obligations to update these projections in the future due to changing market conditions or otherwise.

It is now my pleasure to turn the call over to Energy Solutions' Chairman and Chief Executive Officer, Steve Creamer.

Steve Creamer

Just as a brief side note this morning, Tim Barney is also with us today. He's handing over his responsibilities to John, and I just want to personally thank Tim as I'm sure many of you who have met Tim for his great ability to be able to explain the company and what the company does. We're going to miss Tim. He's decided to change his life a little bit. He's going to become a teacher and entrepreneur on his own and he's been a great asset to me personally since we started the company four years ago, and has played any role we've asked him to play in a great way. So Tim, thank you very much and we'll go on with the call.

I'd like to start today by expressing my appreciation to our shareholders that joined us first at the IPO and then at the secondary offering. We value your loyalty and continued faith in us. You purchased a company with a strong cash flow producing base business and a good growth strategy that is focused on several identified growth opportunities.

Unfortunately, because of the financial crisis, our entire sector has been negatively impacted. In addition, the market affect only caused a delay in two of our key growth strategies. Today, I want to update you in some detail on our performance and our prospects and explain why the company still has a very strong base that produces significant positive cash flows, long term growth prospects and has an excellent competitive position.

First, let's talk about the two growth strategies that have to be delayed due to external market forces. In our opinion, license stewardship is still alive and well. Exelon and Energy Solutions are both committed to closing the Zion transaction as soon as the market recovers to a level where we can be assured that the project can be completed at the planned margins. The companies have until the end of 2009 to close the transaction without any contract modification.

We likewise do not believe that there has been any significant change in the long term demand scenario for the disposal of large components. We have been told by members of the Nuclear Regulatory Commission that while they turned down the large component rule making because of near term concerns, they agree that storing these large waste components on site is not the best practice.

We believe they are going to work with the Nuclear Energy Institute, the utilities and Energy Solutions to either grant individual exemptions or find alternative funding options. We will continue to work with individual utilities, the NRC and the State Public Service Commission to determine individual funding scenarios and will pursue other alternatives for large component disposal funding from the commissioning funds.

While we and the rest of the country have been struggling with the overall financial crisis, we have continued to execute well through the third quarter in terms of the completion of existing projects and the development of new ones. A few highlights.

In our Federal Services business, working with URS, we have completed the transition of the Hanford tank operating contract and we began full operations on October 1. The group has also completed the construction of the DUS6 conversion facility in Portsmouth, Ohio and is ahead of schedule on the completion of the Paducah, Kentucky facility.

We also won a $29 million task order with our small business partner from the U.S. Army Core of Engineers to retrieve spent fuel from Holland and Chile. Just to be clear, none of the material is destined for any of our disposal facilities and will remain the liability of the U.S. Government.

In our Commercial Services segment, we have completed all regulatory requirements necessary for the license transfer of our first license stewardship project in Zion, Illinois. We are now waiting for the NRC final approval of the license transfer which is expected in the next several months.

We have successfully idled the project to a minimal spending level until the overall de-commissioning funds recover from the recent market down turn. We are also continuing to work on due diligence of the second license stewardship opportunity. This division has also signed a $20 million contract with the ZARCO for the cleanup of the Federated side in Houston, Texas.

In our logistics process and disposal, our LP&D division, we have been able to reduce operating costs through a slow year. We have completed cell construction during slow receipt times using Energy Solution staff and equipment which reduces both capital costs and operating costs.

Our international unit has continued to perform extremely well. On the Magnox contract performance based incentive fee milestones to date are all on target or ahead of schedule. We're also progressing well on extending the lives of operating reactors at Obray and Wilma which will potentially provide the NDA with hundreds of millions of pounds of revenue from the continued sale of electricity. It will also allow us to continue generating long term fees from this generation.

With our teaming partner, a U.K. Laboratory and Defense company, we have pre-qualified on a U.K. government competition to operate the U.K. National Nuclear Laboratory. Only one other team pre-qualified for this $80 million pound per year contract.

We have also achieves the Institute of Environmental Management Assessment, or IEMA accreditation. IEMA is a U.K. based body with a world wide reputation and membership. This is the first accreditation awarded to a multi site organization in the U.K.

To touch on the effectiveness of our operation, safety is the number one priority in the nuclear industry. It's also the number priority in Energy Solutions. The contracts we win and the work we do is always predicated on our safety record. Not only that, I regard safety metrics as an indicator of the general excellence of our overall operational practices.

Here are some of the accomplishments in Q3 that we are very, very proud of. As I mentioned last quarter, Clive Utah Disposal facility achieved a major milestone on Thursday, August 7, 2008 when they completed 3 million worker hours without an OCEA lost time accident. Just to show you how that exciting that is, in 2007 only 18 companies in the United States achieved a 3 million hour goal without an OCEA lost time incident, so it's incredibly good work.

Our [Bad Creek] commercial processing facility was accepted into the Tennessee OCEA voluntary star program, or VPP. Only 27 companies in Tennessee have earned this very prestigious award in its 26 year history of the award. In addition, of the 26 companies, one of those companies is also ours, so we actually have two of these, our subsidiary Manufacturing Science Corporation also has a VPP status since the year 2000. A really unique accomplishment, our Commercial Services division continues a perfect two year safety record with all zeros.

Before I hand over to Philip, I'd like to take a few minutes to comment about my general feelings about our business. First of all, I would like to say that I am extremely proud to lead a great group of people who have chosen to work and build our company. I am personally very dedicated to the company and have a great dedication to continue to work hard to deliver shareholder value and insure that our people have a great place to work.

As you know, I purchased 300,000 shares of our common stock at approximately $15.00 a share in mid September because I believed and still believe that's an incredibly good value. I have been counting the days for the quite period to end so I can buy more shares at what I consider a very, very cheap price and I will buy.

My family and I now own over 2.3 million shares of our common stock and continue to have the same alignment as our shareholders. You do not need to worry about my personal incentive to grow the company.

We have a very great company; a company that is well positioned to be stable through a recession or a flat economy and is ready to blossom with the next economic rebound. I will now turn the time over to Philip to review our financial results.

Philip Strawbridge

I'm going to discuss our GAAP numbers for Q3 for both this year and last, but I also talk about EIBTDA and EPS before non cash amortization of intangible assets which are both non-GAAP numbers. We provided a reconciliation of these measures to GAAP net income in our earnings release.

Revenue for the third quarter ended September 30, 2008 were $419 million compared to $389 million a year ago. The increase in revenues of $30 million is primarily a result of three items. One, the consolidation of two joint ventures, UDS and Isotech which we've talked about previously; also, increased revenues from our clean up at the Atlas Mill Tailings near Moab and a partially offsetting decrease in revenues from our Commercial Services segment.

Gross profit was $56 million for Q3 this year compared to $56.1 for Q3 last year. Gross margin for the quarter was 13.3% compared to 14.4% in the third quarter a year ago, largely because of the consolidation of the ventures which we talked about which have a lower margin than our average overall business although there were other mix factors in play as well which I will discuss these when I get into the divisional numbers, primarily a decrease in activity in our Commercial Services segment and an increase in activity in profitability from our LP&D segment.

SG&A expenses for the third quarter 2008 were $30.8 million compared to $29.1 million in Q3 of last year. This increase was primarily due to the additional expenses to operate as a public company. Included in the SG&A expenses this quarter were the remaining $1.3 million of a total of $1.8 million in expenses to complete our secondary offering. The rest was expensed in Q2.

Because the increase in revenues from Federal Services from the joint venture consolidations had no corresponding increase in SG&A expenses, SG&A expenses as a percentage of revenues were slightly down compared to last year's third quarter, 7.3% versus 7.5% for last year.

Operating income for the third quarter was $25.2 million compared to $27 million in the same period in 2007. This is primarily due to the slightly lower gross profit and the secondary offering expenses.

In the first and second quarter of 2008, we repaid $30 million of our long term debt with free cash flow, adding to the repayments that we made with our IPO proceeds. As a result of lower debt outstanding compared to last year, and a lower interest rate on that debt, interest expense declined to $9.2 million in Q3 2008, down from $21.1 million in the same quarter of last year.

For the third quarter 2008 net income was $10.9 million or $0.12 per diluted share compared to just above breakeven in the third quarter last year. EBITDA for the quarter was $36.2 million, down from $38.3 in Q3 of last year.

The net income before the impact of non cash amortization of intangible assets was $15.6 million or $0.18 per diluted share.

Cash flow from operations for the third quarter 2008 was approximately $35.2 million. Capital expenditures were about $4.1 million and we paid dividends of $2.2 million. Our cash balance increased by $17.7 million from $42.2 million last quarter to $59.9 million at the end of Q3 2008.

Given these markets, I'll talk a little bit about our debt position. As I mentioned, as of September 30, we had long term debt including the current portion of $577 million. We also had $60 million of cash and cash equivalents. We used some of that cash to repay $10 million of debt just last Friday. We had no debt payments due until September 2009, so we are currently well within the covenants of our loans.

Energy Solutions business generally produces a healthy cash flow as Steve mentioned before. Our intra quarter cash flow is likewise pretty healthy. We've only tapped our revolving loan facility twice in the last 15 months and drawn a portion of that $75 million facility which we do use for a letter of credit, is approximately $58 million.

Now, I'm going to talk a little bit about each of our segments. This will provide you with some color of why revenues rose by $30.6 million and operating income fell by $1.8 million. First of all, I'll talk about Federal Services. Revenues in the third quarter were $84.3 million, up from $39.2 million a year ago. Segment income from operations was $10.9 million unchanged from the same quarter of 2007. Operating margin was 12.9% compared to 27.9% the prior year.

Revenues increased $45.1 million over the same quarter last year. This was in part again, due to an increase in $9.6 million in revenues from our contract to clean up the Mill Tailings at Atlas site in Moab. This work had a slightly higher margin than average for the segment in the quarter.

As I mentioned earlier, during the fourth quarter of 2007 and the first quarter of 2008, at the request of our customer, the Department of Energy, we assumed voting control over two joint ventures. As a result, the joint ventures were consolidated this year which added approximately $36.1 million to revenues and very little gross profit which resulted in a lower gross margin.

Now I'm going to turn to Commercial Services. Revenues were $19.2 million compared to $336 million for the same quarter in the prior year. Revenues have trended down from Q3 last year because at the time we had greater revenues from both utility services and engineering technology projects, some of which are now completed.

For example, in Q3 2007 we had significant revenues from a large Canadian contract that has now been successfully completed. Also remember that we accelerated two projects earlier in the year which had the affect of moving forecasted revenue from Q3 into the first half, and we addressed that in our Q1 and Q2 calls.

Income from operation was $4.7 million, down from $5.8 million in the third quarter last year, and the operating margins were 24.4% up from 17.1% a year ago.

The segments improved performance from a margin perspective resulted from higher margins our fuel pool contracts and decreased revenue from our lower margin engineering projects compared to last year, and we also had lower business development costs compared to Q3 last year.

Now, on the logistic processing and disposal, or LP&D segment. Revenues were $66.2 million compared to $64 million in the same quarter of 2007. An increase in revenues from the acquisition of [Monserca] and an increase in shipment of waste storage containers were partially offset by lower volumes at our Bear Creek, Clive and Barnwell disposal facilities.

Income from operations was $25 million compared to $22.7 million in the same quarter last year and operating margin was up 37.8% from 35.4% in the third quarter of fiscal year 2007. The margin improvement was somewhat offset by an increase in SG&A from higher business development costs. The Clive facility has performed well on the cost side of this quarter as Steve mentioned, hence the improved margin.

Lastly, our international operation; we generated revenue of $249.8 million, down from $252.1 million a year ago. Revenues increased $16.3 million primarily due to the acceleration of decommissioning project in our RSNC operations or Magnox operations. However, this increase was offset by a decrease in revenue of $18.6 million due to the decline in exchange rate of the pound sterling.

Segment income from operations was $3.3 million at a margin of 1.3% compared to $5.1 and a margin of 2% last year. This year, we had some additional business development expenses and other administrative expenses compared to last year.

Now, I'm going to talk a little bit about our outlook. Steve has already given you kind of a market context in which we are forecasting. The market uncertainties have caused us to be conservative and assume both for the rest of 2008 and preliminarily for 2009, and those assumptions are that first of all, federally funded projects are locked into their current spending levels and cannot grow much due to the government's continued resolution and their budget status even though there is some possibility of an improved budget under the new administration.

Particularly with the Democrats coming in, I'll tell you that Democrats have always spent more on the Department of Energy and Environmental Management program than the Republicans.

We also expect that large component work will produce a couple of new pieces of business for us during the year, even without the blanket approval to use the decommissioning trust funds from the NRC. As Steve said, we plan to pursue this market on a site by site basis, assisting the utilities with their optimal choice of funding.

Because of the financial crises we talked about, we have assumed that licensed stewardship projects will not produce any revenues until fiscal 2010. Our other assumption is that the pound sterling is significantly reduced in value to the dollar and that will impact our earnings in our international segment next year as compared to the previous year.

Consistent with our announcement a month ago, for the full year of 2008, we now expect revenues of approximately $1.8 billion. Earnings per share before the non cash impact of amortization of intangible assets which is calculated as earnings per share plus the per share non cash impact of amortization expense of intangible assets, net of the related income tax expense, in the range of $0.70 to $0.80 or EPS in the range of $0.50 to $0.60 on a GAAP basis.

EPS assumes a weighted average fully diluted share count for the year of 88.3 million shares. EBITDA for the year is expected to be between $165 million and $180 million. Non cash amortization expense of the intangible assets net of the related income tax expense is expected to be $18 million.

None of these include the impact of approximately $1.8 million of expenses related to the secondary offering, nor do they include any impact of any one times special items.

CapEx for the year is expected to be between $24 million to $30 million, down from our earlier estimate of $37 million really due to management's effort to reduce purchases of equipment.

We've provided an early look at 2009 by saying our result will be similar to 2008. Well this follows from the assumptions of only a small number of large components and no license stewardship revenue. It's really an early look at this stage. As Steve said, we'll give you more detailed thoughts on our '09 in the first call of next year.

With that, I'm going to turn it back over to Steve for any concluding remarks.

Steve Creamer

I think we're ready to move ahead with questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Scott Levine – J.P. Morgan.

Scott Levine – J.P. Morgan

With regard to Zion decommissioning in general, how should we think about how you plan to proceed with regard to that project, specifically how much time you have? And also, in thinking about additional projects you may be working on, how much would you caution against extrapolating your position with regard to Zion to other types of projects you have in the pipeline kind of recognizing differences in decommissioning funds among projects?

Philip Strawbridge

I think as we said, what we'd expect from Zion is a couple of things. We still anticipate as an example, the license from the NRC. That was one of the conditions to close. We've been in close discussions with Exelon. They're still really excited about getting this thing closed so both of our goals is to get this done before the end of next year. So that's something that we think that's possible.

That said, certainly we need the financial markets to help us in terms of moving up that fund balance so that we're very comfortable with the significant margins that we're going to get out of the project.

In terms of extrapolation, what I say is that the funds are impacted differently as we've talked about before. Our number two project as an example actually still receiving funds or contributions, so you've got not only contributions but then you've got the market impact which will hopefully help it. We're in the process of analyzing the impact on that second one, but I'll say that our Commercial Services groups had a variety of discussions with that particular utility, and they too, are still interested in moving ahead.

I think it's a matter of time. I think you're right, we need to be careful from just extrapolating a, b, c, d, are going to happen. But I think the key thing, and this is something that Steve mentioned, was that licensed stewardship is still something that everybody wants to happen, including the NRC, the utilities and certainly us.

Scott Levine – J.P. Morgan

Turning to the international side, can you give us an update, I think it's sometime before the U.K. government looks to move towards finalizing the budget for next fiscal year, but give us an update with regard to the rebid process potentially for Magnox and some early thoughts with regard to how the U.K. government is viewing their decommission issues.

Philip Strawbridge

As we said before, we really think that the process is going to occur, that they're evaluating right now. Do they combine sites? What order do they do those sites? We would anticipate that they're going to announce sometime probably in December what their plan is. I'm talking about the NDA, the Nuclear Decommissioning Authority; the earliest that they would come out for a bid for both Magnox north and south in January, and our assumption is that they'll combine them.

We've actually been pushing for that because we think strategically that's the best thing for us. If that occurs, they've got if you just look back on their cell fuel process which I think was very visible and I think a lot of people followed it, it takes approximately 24 months for them to go through that process. So we would expect over that period of time to be doing it.

Again, none of this has been finalized. It could be delayed which would be fine from our perspective as well. But we think that strategically we're prepared and we could move ahead.

On the funding issue from the NDA, as I've mentioned before, the U.K. looks at a three year funding cycle and right now, everything still looks fairly good for next year. That said, I'll say one of the things that can impact us is that I've alluded to, is not necessarily the funding from the NDA, but just the foreign exchange rates are down significantly. I think people recognize that.

We don't anticipate much change from a funding perspective next year with NDA, and we think that their process for re-competing would start early next year.

Steve Creamer

Just last week we were asked what we would do if they gave us an extra $50 million pounds for next year and then $18 million pounds additional for the two years following that, basically because just like our goal is looking right now and one of the reasons why we feel pretty positive about our Federal Services business right now is that there is going to be a lot of money put back into restarting the economy back up, and that will come through spend through government and certainly these are projects that those affect and especially our projects in the U.K. are in areas that need this type of stimulus.

So we believe that will help the Magnox contract over there going forward in the future. We're pretty positive about it, especially with the recent occurrences of last week.

Philip Strawbridge

The other thing is that the U.K. is in my mind, further ahead in new build than we are. If you look at what they've said is that they're only going to do new build on the existing sites. Well those are all the sites that we're located on, so we think long term wise that they'll come up more funding not less.


Your next question comes from Jamie Cook – Credit Suisse.

Jamie Cook – Credit Suisse

With respect to, and I know you haven't sewed up your finalized '09 guidance but is there any way you can kind of handicap of the amount of large components that's in your forecast? Is there any way you can help us with quantifying that?

Philip Strawbridge

One of the things that we're doing obviously is that we're trying to give out the best information. We don't want to jump ahead of the game and provide some mis-information. As I said, we actually still left a couple of the major components in our forecast simply because those were some that we've been working with utilities, that the NRC is aware of, and one especially doesn't even require NIC approval.

So we feel comfortable with those. Both of those are in decent size opportunities and as I said, really what we'll be doing is providing more clarification and detail on that later. What we're trying to do is look at not only what's the size of them, but what's the timing of them before we provide that data.

Jamie Cook – Credit Suisse

Have you seen any material shifts in timing for your expectations on Portsmouth or tier two work on cell fuels, any of your up to date thoughts on that would be helpful.

Steve Creamer

I think from that standpoint Portsmouth is delayed a little bit but Paducah has actually moved up a little bit so we think we'll see bids coming on both Portsmouth and Paducah in '09. At the conference down in Florida in mid October, that's what the deal the procurement people were saying, that we would see both of those in '09.

We think they're right on schedule moving that way.

Philip Strawbridge

As far tier two goes, we're in conversations with them right now. They're just taking over the contract on November 24, and we've talked with them, and of course they can't do anything until the 24th, but we're working with them right now.


Your next question comes from Sarah Martin – Lazard Capital Markets.

Sarah Martin – Lazard Capital Markets

How do you see the opportunity unfolding for Energy Solutions under the Obama presidency?

Steve Creamer

As we've said in the past, both candidates had different things that would be positive. On the commercial side and new build side, probably McCain may have been stronger but President Obama, we believe the Democrats will actually strengthen the EM program. It's been taken down some by the Bush Administration.

Some of the major, for example, Patty Murray is the Chairman of the Senate Appropriate Committee from the State of Washington which certainly will bode well for the Hanford site. We believe that we will see more money, that there could be an increase in funding the EM programs.

As far as over all nuclear goes, I think President Elect Obama is from the state that has the most nuclear power plants as far as Illinois goes. He's been to those plants. I think he's comfortable. I know our biggest customer Escalon is very positive about his feelings about nuclear, and we believe that he believes that nuclear has to be part of the solution and there will be some changes in the NRC and some changes of course in the Department of Energy and we're hoping that he puts really good people in there because we believe that America needs a strong energy policy maybe worse now than we ever did and we hope that the low price of oil doesn't take our eyeball off it once again.


Your next question comes from Preetesh Munshi – Piper Jaffray

Preetesh Munshi - Piper Jaffray

Following up on the Obama comment, we were recently talking to a very influential person who worked on his Clean campaign and she indicated that President Elect Obama, one of his main concerns was nuclear waste. You would imagine that would be positive for a company as yourself. Assuming that, are you looking at '09 especially with the Hanford project, do you expect now to get the $710 million level of funding which was roughly around $250 million rate. Is that kind of baked into the guidance or what are you thinking internally?

Steve Creamer

Because of the continuing resolution that even if they jump in and go to work immediately, it would be March or April, so their fiscal year would be almost over. We do believe that they may just leave the resolution running and go to work on fiscal '10 which would start in October of '09 budget, and that's what we hoping for.

We're thinking that we will some increase coming in the 2010 budget, but we have not baked anything in for any increase in the '09 budget right now until we have better vision in that.

Philip Strawbridge

Just to be clear, our assumption from a DOE perspective in our Federal Services arena is that the continuing resolution will continue through the year. Do we think that's the case? Well, we're very hopeful as already mentioned that there will be additional funding not only from an Obama perspective but as Steve mentioned, Senator Patty Murray's sitting right there in the State of Washington, so her desire is certainly to increase it.

Preetesh Munshi - Piper Jaffray

Going back to the Zion design project, at the end of Q2 you indicated the value of the trust fund was about $840 million or $860 million. Do we know what that level is right now and where does it need to be to jump start these projects?

Philip Strawbridge

Right now it's about $750 million, is what our latest information is from Exelon. Remember, Exelon still manages that fund but we certainly get information from them. In terms of what's the appropriate level, as a company we've got to look at where the market is going to go, where the fund is going to go. We've agreed with Exelon to continue to monitor that.

I'm not sure there's any magic number but it needs to be above $800 million and something for us to move ahead based on where it's at. You've heard me and Steve talk about one of the other alternatives may be that we look accepting the project but taking a longer schedule and that's not been fully discussed with Exelon other than to say that's an alternative, and they agree that's something we can look at.

Preetesh Munshi - Piper Jaffray

A lot of the conversations we've had with investors, people are just trying to guess at that number and people have assumed that it's been cut into half and what have you, but it's good to know that it hasn't deteriorated that much. So hopefully the market stabilizes and we can see that getting jump started.


Your next question comes from Alex Rygiel – Freedman, Billings, Ramsey.

Alex Rygiel – Freedman, Billings, Ramsey

As it relates to your bid expense for DOE and U.K. NDA opportunities, I suspect it's been fairly high over the last year given the number of opportunities. How do you see you bid expense trailing over the next 12 to 24 months?

Philip Strawbridge

One of the things that we see is that the bid expense will go up and the reason, a couple of reasons. We've had a couple of bids but really the bids that are upcoming, we're going to be the prime, and we'll take a major position. As an example, Magnox, we will definitely take the major position there.

Also as Steve talked about when you look at Portsmouth and Paducah, both of those are extremely attractive for us to be the prime because a; we have the experience but b; neither one of those have on site disposal, so we want to be in a position to try to manage that.

If you were to sit here next year as an example, we would anticipate quite a bit higher business development expenses, and we've kind of put that in terms of our planning and our guidance.


Your next question comes from John Rogers – D. A. Davidson.

John Rogers – D. A. Davidson

Back to the trust funds for a second, just so I'm clear. Once you begin work on the license transfer agreements would Exelon retail control over those funds or at that point do you take control over those funds and who has the market risk at that point?

Philip Strawbridge

We take control of the funds, so we're responsible for those. In terms of the market risk, we certainly take some market risk, but as I've mentioned before, there's actually a feature in the contract and that feature doesn't kick in until you sign up; in other words, until it's transferred over.

That protects us because what it does is that it takes a one year snap shot that says how did the market do? And if the market is down or essentially flat, then you get a one to two year vacation, so that we could relax our costs. I think that's one of the critical features of this that protects us in market down turns, is it gives us schedule relaxation which means that we can time our costs to be managed within those funds.

John Rogers – D. A. Davidson

In terms of the other projects that you're looking at and that are out there potentially for licensed stewardship, is there a big gap now between the funding and what's required to actually make these projects go? Because the Exelon or the Zion project the gap is not enormous.

Steve Creamer

I think you see that in all of them because the investment, there's some pretty strict investment requirements on these funds by the NRC and so from what we've looked at on the second one we're working on, I think they're all in similar type situations. Some of them are actually still receiving, on the second one for example, still has three or four more years of money to collect.

There's actually another way to bring funds into that fund in order to bring it up to the amount. The thing has been fairly conservatively invested so I'm guessing it's in a similar type spread that Zion is going to be for shareholders.

John Rogers – D. A. Davidson

In terms of the contracts, you mentioned Magnox, Portsmouth, Paducah, what are the other projects that we should be watching particularly in 2009?

Steve Creamer

[Inaudible] Waste up in Idaho will be coming out. It's actually out to bid right now. We're actually teamed, we have a keen position of that one. That's one is a minority position, but we're bidding on that one.

In the federal business, the Portsmouth, Paducah ones are going to be the bigger ones. We'll be finished up with a lot of good contracts there and actually taking the UF6 into a start up mode and operations which will give us a little bit of upside there.

Philip Strawbridge

We're still waiting on Savannah River Liquids.

John Rogers – D. A. Davidson

When do you expect to hear on that?

Philip Strawbridge

The rumors have been that we would probably hear very, very soon. What we've heard is that they anticipate certainly before the end of the year.

Steve Creamer

On the commercial side we still have a rolling group of projects and so far we haven't seen too much change in the pipe line on those types of projects which Commercial Services works on. They generally are funded by existing trust funds and things like that so we've been watching that pretty carefully, but we haven't really seen a slowdown in that pipe line.


Your final question comes from Al Kaschalk – Wedbush Morgan.

Al Kaschalk – Wedbush Morgan

On the currency impact, is that something that's just this period or is there exposure as you move out, and is it just in the international segment?

Philip Strawbridge

It's just in the international segment. Just to explain that exposure, you remember in the U.K. we actually pay in pounds and get paid in pounds. So the exposure is really only whenever we transfer the profits back to the U.S. So it's not like some companies where you've got a mix of currencies and you've got an exposure. We really don't have that over there.

But just to put it in perspective, last year at this time, I think the pound was at about $1.98 per pound and what we've done from a budgeting perspective in the future, it's more like $1.60 per pound. Of course I think people recognize it's been bouncing anywhere from $1.58 to $1.65 and that type of range.

So it's only in our international segment and as I said, it's really only the profits from our Magnox operations.

Al Kaschalk – Wedbush Morgan

On the CapEx I believe you said it was for '08, $24 million to $34 million? What's the big expenditure coming through here in the fourth quarter because I think to date it's around $10 million.

Philip Strawbridge

The big expenditure is what we've talked about before, is really associated with our project in Moab which requires us to put money up in terms of some of the capital assets down there. We get reimbursed from the government, but still it's CapEx. So that's the biggest single piece.

And we're also doing some stuff at ATG facility down in Oakridge which would help to improve that facility.

Steve Creamer

Actually that brings on a new business line for us in that building which we're hoping will add to our LP&D division which we feel comfortable we will add to our LP&D division.

Al Kaschalk – Wedbush Morgan

Can you share what type of business that is?

Steve Creamer

It's a new way of handling resins that come from nuclear power plants to enhance the volume of resins that we can take and bring out to clients.

Al Kaschalk – Wedbush Morgan

On the balance sheet in the working capital area, it looks like receivables were down substantially if I read that right as well as payables. Could you talk about timing there, what's happened?

Philip Strawbridge

It's all just a matter of the timing. You take a snap shot whenever you close obviously. It's all timing associated with Magnox in the U.K.

Al Kaschalk – Wedbush Morgan

In terms of the outlook and what we should be monitoring, it seems like the revenues or guidance was flat or is expected to be flat. Could you talk about the movements within some of the segments, federal seems to be going up, commercial down even down substantially may be the right term. Could you just talk about some of the dynamics or trends that you're seeing on the revenue growth or even on the operating side.

Philip Strawbridge

I'll give you a couple of examples. On federal you say going up, actually from a profitability or bottom line perspective we had two projects coming off, and that's our Savannah River job where we're prime as well as on the prime team for the year, and talking about year over year comparison, and also our Hanford project where we were teamed with Fleur and both of those are kind of ending, or ended I should say.

The pick up there was anticipated to be the Tank Farm contract which as we've said was the best one to win because if you look at the DOE base line, that project is going to go on for 100 years and they actually anticipate spending about $100 billion on that clean up. That said, the project is one of those that's supposed to grow significantly by the DOE's own numbers that's a $7.1 billion contract But they're caught into continuing resolution so you can't spend under a continuing resolution any more than you spent the previous year. What we're in on federal is actually, it will come down because of those dynamics.

Moving over and looking at Commercial Services, we actually see Commercial Services will still continue at about the same level. Its major growth initiatives were around licensed stewardship as well as major components. But that said, even at those being delayed, we anticipate commercial will still have a good year next year.

In international, you'll see a couple of things that are impacting. One, we're going to have higher bidding costs as our share with Magnox, and then you're going to have the exchange rate issue that I just mentioned before. But we also anticipate being able to look at new projects there, so we see a lot of bidding activity towards the end of the year on cell field and on mainland Europe. So we think that some of those while they'll be cost in the year, it will be impacted on a year over year perspective, are certainly setting us up very well in the future from all those opportunities.

So those are just a few examples of color to tell you there is a mix change in a couple of different things going on, but we think that really when you look out, I think '09 is going to be a year where we're going to really have to focus on pushing ahead on licensed stewardship and major components because those are still initiatives that are alive and well as Steve said.

But also, a year where we're going to be bidding on opportunities from a tier one perspective of the U.K. and the U.S., and I think setting us up extremely well for growth in 2010 and beyond.

Al Kaschalk – Wedbush Morgan

On the federal side it's the two larger ones that are coming off contract. The tank is still J.V. Accounting?

Philip Strawbridge

That would seem to imply that federal would be at best flat year over year on the top line. Nothing granular on the segments but just trying to understand the trends here.

Philip Strawbridge

On the top line it probably is going to fairly close to flat to maybe a little bit down simply because of the consolidation of the joint ventures. That's what's driving the revenue side of federal more than anything else.

It's the bottom line though that we're talking about that will be impacted because of those two large projects. So it will go down year over year is what we're saying.


There are no further questions. I'd like to turn the call back over to Mr. Steve Creamer, CEO for closing remarks.

Steve Creamer

Thank you very much all of you for joining us this morning. It's been a tough year for everyone with the financial crisis out there, but we really do feel like we've got a very strong basis where as a management team we're very focused on moving the company forward, but also very focused on making sure that we watch all of the costs and that we run the company in the most efficient way we can through this trying time in the history of our country.

We're very excited about our prospects. We feel like we're very solid and we've got things well in hand, and we look forward working with all of you going on in the future. Thank you very much.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to All other use is prohibited.


If you have any additional questions about our online transcripts, please contact us at: Thank you!