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EnergySolutions, Inc (NYSE:ES)

Q2 2012 Earnings Call

August 08, 2012 10:00 am ET

Executives

Richard Putnam

David J. Lockwood - Chief Executive Officer, President and Director

Gregory S. Wood - Chief Financial Officer and Executive Vice President

Analysts

Scott J. Levine - JP Morgan Chase & Co, Research Division

Albert Leo Kaschalk - Wedbush Securities Inc., Research Division

Yilma Abebe - JP Morgan Chase & Co, Research Division

Robert Perry - Kingsland Capital Management, LLC

George Walsh

Gentry Klein

Nathaniel Kirk

Operator

Good day, everyone, and welcome to EnergySolutions' Second Quarter 2012 Earnings Conference Call. This call is being recorded. [Operator Instructions] At this time, I would like to turn the call over to Richard Putnam, EnergySolutions Vice President of Investor Relations. Mr. Putnam, please go ahead.

Richard Putnam

Thank you, Karen. Good morning, everyone. Welcome to EnergySolutions Second Quarter 2012 Conference Call. With me today are Chief Executive Officer, David Lockwood; and our Chief Financial Officer, Greg Wood. Before I turn the call over to David, I would like to remind listeners that during today's calls, management's remarks will contain forward-looking statements within the meaning of the federal securities laws. These remarks may include statements concerning plans, estimates, objectives, goals, strategies and projections of future events or performance, many of which are based upon certain assumptions. Forward-looking statements involve risks and uncertainties and although EnergySolutions believe its plans, intentions and expectations are based upon reasonable assumptions, we may not achieve those plans, intentions or expectations. There are important risks and uncertainties that could cause actual results to differ materially from those expressed in any forward-looking statements made in this conference call. Such risks and uncertainties are discussed in our annual report on Form 10-K for the year ended December 31, 2011 and our just announced earnings release included in our current report on Form 8-K filed with the Securities and Exchange Commission this morning.

Any projections as to the company's future financial performance represents management's estimates as of today, August 8, 2012. EnergySolutions assumes no obligation to update these projections in the future due to changing conditions, developments or otherwise. We've also prepared a number of tables that will be referenced in our discussion this morning. These tables are part of the earnings release that was put out earlier this morning and can be accessed on the Investor Relations tab at www.energysolutions.com.

To be respectful of your time, we will try to hold this call to 1 hour. We know that you will have a number of questions and we'll try to answer as many as possible in the hour. We'll be happy to follow up with you individually after the conference call if you have additional questions. With that, I'll now turn the call over to David Lockwood, CEO of EnergySolutions

David J. Lockwood

Good morning. It has been 58 days since Greg and I joined the management team at EnergySolutions. We have been extremely pleased with the performance of our management team and our dedicated employees. We are fortunate to work with the best people in the business, over 5,000 engineers, scientists and professionals who make a difference in the communities in which we work and live. Over the past 58 days we've spent time talking with our customers, our employees, regulators, competitors, consultants, others about our company and its various products and services. We've also had the opportunity to review the data concerning the prospects for the markets we serve. We've had the opportunity to evaluate where we're strong and where we could do better.

Based on our analysis, we have reached 4 conclusions about our company. First, our company requires more focus. We are in too many businesses in too many places. We'll be more successful if we focus on fewer opportunities. In particular, we should focus our management and deploy our capital on businesses in which we have gained strategic competitive advantages and enjoy higher margins.

Second, our company requires a lower cost structure. Today, we have a cost structure that is more appropriate for a substantially larger firm. We'll be more successful if we're able to deliver our products and services at a lower level of SG&A.

Third, our company requires a stronger balance sheet. We will be more successful if we're financially stronger, both in terms of winning customer contracts and funding and growing our businesses.

And finally, our company requires more investment to grow. We have not adequately funded our businesses, and as a result, while margins are improving, revenues have fallen. We can grow our business, both organically and inorganically, but only if we are willing and able to provide capital to invest in those businesses.

Based on these conclusions, we have developed 4 strategic initiatives. We plan to implement these initiatives by the end of this year. One, sell assets. In order to focus our company, we will consider asset sales. We made an announcement last month concerning discussions related to our U.K. business that owns the Magnox contract, and we are also considering other potential asset sales. Two, lower SG&A. We will lower the amount of expenses related to SG&A at our company. Three, reduce debt. We plan to use a significant portion of the proceeds from asset sales and cash flow from our businesses to decrease our expanding debt obligations. Four, grow our business. Through focusing on fewer businesses, selling assets, reducing our costs, and strengthening our balance sheet, we are planning to deploy our capital more aggressively in order to achieve significant revenue growth.

Our priority for us as a management team going forward, once we have completed these 4 strategic initiatives this year, will be growth. In terms of growth, we've been working to identify and evaluate additional markets that offer substantial revenue and profit opportunities. This will be an ongoing process to identify these markets, and then build the teams and businesses to pursue these new growth opportunities. Our products and services have long sales cycles, so many of these new opportunities will not impact our top line this year or, in some cases, even next year. However, we have identified several key growth opportunities that we are actively pursuing today.

Let me first talk about decommissioning. As we discussed in our last call in June, nuclear decommissioning is a large and growing market. But as we also discussed in our last call, we needed to do more work to determine if it would be a profitable market for us, particularly given our experience with Zion, we had questions. Yes, Zion is a profitable project. It continues to be on track and on budget, and as we outlined in our last call, we expect 5% to 10% profit margins. However, the returns on that project, on a financial basis, we estimate are less than our cost of capital. Over the last 2 months we have studied the U.S. decommissioning market and evaluated over 2 year's work of data and experience from the Zion project. We've also spoken with a number of customers about new decommissioning opportunities. Our conclusions are that we have significant competitive advantages in this market and one significant competitive disadvantage.

Our competitive advantages in U.S. decommissioning are as follows: One, we own and operate the largest commercial low level nuclear disposal site in the U.S Clive; two, we own and operate the largest commercial rad waste processing facility in U.S., which is Bear Creek; three, we own and operate the largest nuclear logistics infrastructure in the U.S. for decommissioning, including rail, trucking, cast and containers; and four, we have the team and experience base that nobody else can match, including a proprietary database and what it really costs, item by item, to decommission a nuclear power plant.

Our competitive disadvantage is our cost of capital. Utilities require performance guarantees that tie up significant amounts of capital and that puts us at a disadvantage to stronger capitalized large E&C companies, and these are the same large E&C companies that we compete with for decommissioning projects. So we have decided, going forward, to partner rather than compete on new U.S. decommissioning opportunities. The model we have developed will be a partner or joint venture with a larger E&C company. That will provide our customers a broader range of skills, a deeper resource base and greater financial strength. That will provide for us the opportunity to work on multiple decommissioning opportunities at once.

Based on this new approach and new model, we believe U.S. decommissioning will be a profitable business for us that will more than compensate us for our cost of capital. Our role in new projects will likely be reduced compared to our work at Zion, but this new model will enable us undertake more decommissioning projects, which will generate more revenues over time rather than undertaking these projects sequentially. We are currently in discussions with several large E&C companies as we speak and are pursuing a number of decommissioning opportunities with them. We believe this partnering model will help us drive revenue, not only in the nuclear decommissioning market, but will also enable us to win larger scale waste management projects.

For example, we recently won work and partnership with a larger E&C company at Darlington in Canada. This a 10-year project to refurbish reactors with the total value of over $1 billion in which we play an important part. Without our partnership with the major Canadian E&C company, we would've been unlikely to be part of the winning team.

Decommissioning is a large and growing market. Funds set aside for decommissioning nuclear power plants are estimated to exceed $4 billion today and will continue to accumulate in years ahead. The low cost of natural gas and the continuing reverberations from Fukushima will increasingly drive the decommissioning of more nuclear power plants around the world. Our business model, partnering with larger E&C companies, allows us the opportunity to pursue this market and take on more projects, and therefore, generate more revenue growth.

Let me also talk briefly about another growth opportunity for us, and that is the water treatment technology we've deployed at Fukushima. We have built a dominant position in the treatment of liquid waste from nuclear power plants. These technologies and the knowledge and expertise of our people enabled us to win the work at the world's most challenging nuclear cleanup site, Fukushima. We're partnered with Toshiba and expect, by the time we're finished, to have earned over $100 million in revenues from this project. Our leadership at Fukushima and the lessons learned by nuclear operators around the world from this event, we believe, will drive growth in this market in the years ahead. The public wants to see better environmental standards for cleaning up discharges from nuclear power plants. Operators want to have a greater capability to react to emergencies. Hence, we see significant growth opportunities do deploy our Fukushima technology and expertise in new-build programs for nuclear power throughout the world, and particularly in China.

We have also identified growth opportunities in our Government business. U.S. Army Corps of Engineers has 3 environmental cleanup projects that will be awarded this year and next, totaling approximately $1.5 billion. There's a fourth project for the U.S. Army, which involves the cleanup of the Niagara Falls site, and is valued in excess of $0.5 billion. EnergySolutions is currently part of the feasibility study for this project and others. These projects require broad program support, waste management, logistics, processing and disposal services that EnergySolutions is ideally suited to provide. The net is we've been extremely encouraged by the growth opportunities we've been able to identify in our first 60 days and we'll continue to work in the months ahead to identify and pursue further growth opportunities.

Let me finish by talking about guidance for 2012. When we came into the business in June, we give our best estimate of adjusted EBITDA based on what we believe the balance of 2012 would look like. Given what we've learned over the past 2 months and where we are today, we are reaffirming our guidance of adjusted EBITDA in the range of $130 million to $140 million. This guidance range assumes the exclusion of restructuring charges but also assumes no benefit from the cost savings we talked about earlier, which we expect to flow into the P&L largely next year. So let me stop there, so we will have ample time for questions, and turn it over to Greg to discuss our second quarter numbers in greater detail.

Gregory S. Wood

Thank you, David, and good morning, everyone. Today, I'll be discussing our financial results for the second quarter of 2012, as set forth in the tables attached to our press release. Looking at our income statement on Table 1, you can see that revenue in the second quarter was $393 million, down slightly from $404 million in the second quarter of 2011, but there were some large swings in revenue within our segments. Government revenue was down $16 million while Global Commercial revenue was up $5 million. And within Global Commercial, our logistics processing and disposal business, or LP&D business, and our Commercial Services segments were both down while International revenues were up. I'll go into that in a little bit more detail in a few minutes.

Despite the lower revenues, gross profits increased by more than $3 million in Q2 compared to the prior year. Government gross profits increased by about $3 million and Global Commercial gross profits were relatively flat.

Selling, general and administrative expenses were $34 million in the second quarter, an increase of $6 million from the second quarter of 2011. In the most recent quarter, we incurred over $6 million of restructuring costs associated with the management change that took place in June. We also booked an income tax benefit of $3 million in the second quarter compared with the tax expense of $5 million last year.

In the second quarter we changed the assertion that our U.K. earnings are permanently reinvested, and as a result, in Q2 we provided U.S. tax on a portion of our U.K. earnings. However, the taxes were offset by certain tax credits and allowed us to reverse reserves against our deferred tax assets, which resulted in the tax benefit.

The resulting net income attributable to EnergySolutions for the second quarter was $5 million or $0.06 per share compared with net income of $500,000 or $0.01 per share in the quarter ended June 30, 2011.

If you flip over to the balance sheet at Table 2, you can see that cash rebounded back to near year end levels at $71 million. Some of the big movements in the balance sheet, we had reductions in accounts receivable and unbilled cost totaling $22 million, but those were more than offset by reductions in accounts payable and accrued liabilities of about $60 million. Approximately $30 million of the liability reduction was related to our Magnox business in the U.K. As you can see from our balance sheet, we have a lot of cash tied up in working capital, and that's a key point of emphasis for us going forward.

Related to our Zion decommissioning project, the NDT funds has decreased by $67 million so far to $631 million as we reduced the amount owed to us by the NDT funds. The decommissioning liability, under ARO accounting, decreased $55 million to $642 million. As David mentioned, the Zion project continues to be on track, and we expect to earn 5% to 10% profit over the life of the project.

We also had a reduction in our deferred tax liability of approximately $13 million as a result of changing our assertion on foreign earnings, which freed up some of the deferred tax assets that we've previously reserved.

And from a capital structure standpoint, we know we have a lot of debt, and we're committed to reducing it with asset sale proceeds, better working capital management and operating cash flow. I'd also like to add that we are in compliance with and have a good cushion against the financial covenants in our credit agreements.

If you turn over to Table 3, I won't spend a lot of time on the cash flow statement, as I've already talked through some of the working capital changes in the first half of 2012, but you can see that we used $2 million dollars cash in operating activities. In the first half of the year, we had about $11 million of capital expenditures and we sold assets associated with the Moab project, which generated about $5 million in proceeds.

Table 4 shows the reconciliation of our net income to adjusted EBITDA. Adjusted EBITDA for the second quarter was $32.5 million compared to $31.7 million in the second quarter of 2011. We have made one change to the reconciliation from prior quarter presentations. Given the materiality and nonrecurring nature of restructuring costs, we've added them back in calculating adjusted EBITDA and have made the same adjustment for prior period comparisons. As David mentioned, we believe the adjusted EBITDA will be in the $130 million to $140 million range for 2012.

Finally, Table 5 shows our segment detail for the second quarter and year-to-date. As I mentioned, the $11 million decrease in Q2 compared to 2011 was a result of government revenue being down $16 million, offset by our Global Commercial Group revenue, which was up $5 million. The Government reduction is largely due to the planned completion of our Moab contract that ended in March of this year.

Within Global Commercial, we've broken that down between Commercial Services, LP&D and International. The Commercial Services operation revenue decreased $8 million, primarily due to lower spending in Q2 compared to last year on the Zion project. In 2011, you may recall, we had higher projects spending for equipment purchases because we are ramping up the Zion project.

In our LP&D segment, we had significantly lower revenue this quarter versus Q2 last year, by $13 million, and this was the result of lower government waste disposal revenue at our Clive facility as stimulus funding dropped off. Revenue from our International operations increased by $26 million. Of that amount, the Magnox contract represented $21 million of the increase, our projects in Asia represented about $4 million of the increase and the rest of the growth came from our Canadian operations.

Our Government groups gross profit was $3 million -- sorry, up by $3 million. Much of that was attributable to a large-scale testing project, the Hanford Washington, that we got in the second half of 2011. The rollout of lower margin projects like Moab and the increase in the large-scale testing project has helped gross margins grow to 20% in the quarter compared to 7% last year.

Our Global Commercial group's gross profit was flat as we had higher gross profit from our International and Commercial Services Operations, but those were offset by the $6 million decline in our LP&D segment gross profit. The result is that our operating profit before corporate SG&A was $23 million in the quarter compared to $17 million in the same quarter of last year. So that takes you through the tables in the press release, and I'll turn it back to David.

David J. Lockwood

Thank you, Greg. We're extremely pleased with the performance of our management team and our dedicated employees. Greg and I come to work everyday excited about the future prospects for our company. We're fortunate to work with the best people in the business, the engineers, scientists and professionals who at our company make a difference in the communities in which we work and live. The opportunities for us to make a difference to clean up the environment have never been greater, and we look forward in the years to come on what we can achieve as one of the leading environmental cleanup companies. With that, let me open it up for questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Scott Levine from JPMorgan.

Scott J. Levine - JP Morgan Chase & Co, Research Division

So I guess my first question here, as you laid out a number of these initiatives and it seems like the decommissioning opportunity is kind of at the center, and I'm not surprised to hear that. But I guess I would ask, since we got the news on the call a couple of months ago with a change in management, that the economics and the profile, profit profile, return profile and the Zion isn't what you thought it would be, what gives you the confidence -- I mean, I understand the rationale behind partnering, but what gives you the confidence that utilities would look to proceed with projects on terms that would be acceptable to you and to the partners that you guys would look to get involved on these types of jobs going forward?

David J. Lockwood

That's a good question. So what we've done is we've done analysis of the balance in utility funds, some estimates of what it would cost to decommission these plants, and we've come away from that analysis very encouraged that there is sufficient money in a number of the funds to go forward. And I think from our customers perspective, and talking with them, that's the key for them. If the funds in the decommissioning funds are sufficient to go forward, they're happy. And as we look at it, and we now -- we have a lot of proprietary data, frankly, that nobody else has, and we've learned a lot. We paid our tuition with Zion. But we now know, in great detail, rendering almost 3 years in the Zion contract, we have a much better feel for what it costs to do one of these. And we're encouraged by the funds that are available, what we see the costs are and with this partnering model, we believe we can earn substantially higher returns in our cost of capital. And that's what we're pursuing today. So you're right. When Greg and I came in, I would say that was a question mark for us. We knew there was a large market and I think everyone would agree it's a large market. The question was, is it a profitable market? And based on work we've done in the last 2 months, we believe it is.

Scott J. Levine - JP Morgan Chase & Co, Research Division

Now that certainly -- that certainly makes sense. And I guess as a follow-on thought, with regard to partnering, have you given any sense whether this is going to be 1 or 2 entities where it have an exclusive type of arrangement? Are you going to be open-minded with respect to this? And we haven't seen a lot of announcements with regards to Commercial decommissioning out of the E&C, so just looking there for a sense of what types of relationships you'd like to strike there and what their level of interest would likely be.

David J. Lockwood

So far, the level of interest, I would, say is high. And so far, we would always consider an exclusive relationship. That's a discussion we'll have. But our current thinking is that we will partner with the appropriate person and the appropriate circumstances. So we're open. But I think our view is that we are much better as a company, doing these effectually in parallel rather than sequentially. In other words, partnering with a large E&C company to enable us to do many of these at once, because under our current structure, you can really only do one at the time. Also, by doing many at once in partnering, we diversify our risks on any one project. So we're pretty encouraged with this new model and this new approach. And as I said, I'm not saying that you're going to see revenues this year or even next year, because these projects have a long sales cycle. But if you look at the -- there's over a dozen plants that potentially could be decommissioned. And if you look at that market opportunity, that's $4 billion market opportunity. We're pretty encouraged by that.

Scott J. Levine - JP Morgan Chase & Co, Research Division

Understood. One last one then, David. On the asset sales side and the balance sheet side, so we saw the press release on the thoughts on the U.K. business. You went through a process, it sounded like, where you're looking to sell the company and didn't receive any acceptable offers. What are your thoughts with regard to whether there would be acceptable offers with regard to pieces of your business? And are there any specifics you can offer in terms of what could be up for sale beyond the U.K. or is it too early to really comment definitively there?

David J. Lockwood

Yes, I think as we said in our last call, we're not going to comment on strategic alternatives. What you'll see from us is when we decide to make an asset sale, you'll see an announcement about that. But before that, we're not going to comment on that strategic process.

Operator

Our next question comes from the line of Al Kaschalk from Wedbush Securities.

Albert Leo Kaschalk - Wedbush Securities Inc., Research Division

On this asset sale here, David, I was hoping you could maybe elaborate on what you see that I certainly don't see. You have 20 months left on this contract for Magnox, and I would find it hard to believe that someone could "buy" an asset and you generate sufficient proceeds to begin that pay-down process, because the contract renewal is started and it runs then for 15 years. So to what extent -- maybe you could add some color that you see that there's some value there that you could sell, because I would think the point would be that -- to go out and win that project for the next 15 years.

David J. Lockwood

Look, I think it's all a question of price. We could go out and decide to win that contract. But also, there's a price at which it makes more sense for us as company to do something else with that contract. The value in a contract has a couple of components. It has remaining fees for the next 2 years, plus it has significant value in terms of incumbency. So look, it's a process we're going through. We're approached by a third-party about doing something relative to our U.K. business, which includes, by the way, not just the Magnox contracts but other parts of our U.K. business. And so it's something the board is considering.

Albert Leo Kaschalk - Wedbush Securities Inc., Research Division

On Zion, could give us an update on where you're at on the movement of the fuel rods to dry shipment storage? Had those shipments -- have you started to move or you started to store? I think we were looking for something as early as the end of March or early April, on the previous calls.

David J. Lockwood

Yes, we're in a process of finishing the pad, and we estimate that sometime early next year, we'll begin moving.

Albert Leo Kaschalk - Wedbush Securities Inc., Research Division

So that's clearly a delay then from the overall risk perspective of the contract, is that fair?

David J. Lockwood

No. No, I don't believe that's a delay.

Albert Leo Kaschalk - Wedbush Securities Inc., Research Division

But you said you wouldn't commence shipment next year?

David J. Lockwood

Are you asking we start moving? We'd start moving early next year. At least -- again, I've only been here 60 days but that's always been my understanding.

Albert Leo Kaschalk - Wedbush Securities Inc., Research Division

Okay. Well maybe we can follow up offline because I think there was a -- if you look at the -- at least our understanding here was at a 9-, 10-year contract life, the peak risk in that contract was sort of the commence as those were being moved. It sounds like you haven't even entered that, which would suggest that the ability to reduce the debt or the line of credit, et cetera, is still some time away.

David J. Lockwood

Well, I think as we said in our last call, in our 5% to 10% profit margin for Zion, we have not included savings from the letter of credit. Right, so I think, at least, Greg and I have been consistent that we're not assuming savings in letter of credit.

Albert Leo Kaschalk - Wedbush Securities Inc., Research Division

I know but the risks to the balance sheet and to the project are still there, and that's what I'm trying to get at. Just a final comment, and I hear your strategy that you laid out. My question is, is historically E&C firms has never wanted to own assets? And are you suggesting that this partnering, partnership that you're going to go forward on is more for a scaled-down version of ES in these projects? In other words, business should be much smaller than we see it today even though there may be some large opportunities out there?

David J. Lockwood

So our view is that by doing these in parallel rather than sequentially, we will actually have more revenues, more profits and less risks. So if what you mean is will -- in the case of Zion, we're 100%. We're the whole thing. But are we going to be 100% in future projects? No. But we believe by doing more projects, we'll actually have greater revenues, greater profits and less risks. Your question about assets is -- I think, everyone would agree that we are going to continue to do the disposal and the processing and logistics of these various projects because that is one of our key competitive strengths. So you're absolutely right, I don't see a large E&C company getting in to the asset side of decommissioning. That's something that I believe we are uniquely positioned to do. Is that what you are asking relative to the asset intensive nature of these projects?

Albert Leo Kaschalk - Wedbush Securities Inc., Research Division

Yes. Clearly, like even if you look on the Government side but also on the decommissioning side, ES and the entities that they have acquired over time have been very good at logistics, disposal, et cetera. And the problem I see is that as you go and bid on these projects, this is not something that E&C firms like to share, even though they like to derisk their own project opportunities. And I don't -- I think this is a multi -- not that I'm saying this, but I think this is a multiyear effort to scale down the business, particularly on the DOE budget that continues to be decreased or these project opportunities and the decommissioning opportunities, which are, at best, 2 to 3 years from commencement. So again, it's just I'm trying to appreciate the benefit to shareholders down the road, and it may be multiple years, that if you're going to be selling assets, and hopefully, those asset sales are not the core business of what made this an excellent business to begin with.

David J. Lockwood

Well, I think you heard from my comments, we feel we have strong competitive strength in things like processing, disposal, logistics, other areas. And those, I think, to your point, are actually core to the company.

Operator

Our next question comes from the line of Yilma Abebe from JPMorgan.

Yilma Abebe - JP Morgan Chase & Co, Research Division

My first question is, I think you said one of the things you wanted to do is just focus the company. I want to flesh that out a little bit more. Is this focus as it relates to geography? Focus, as it relates to the type of work that you do? How do you envision this -- your work going forward?

David J. Lockwood

Yes, I think it's both. I think we're in too many businesses in too many places. And we need to invest more in our businesses to enable them to grow. Our margins are improving but the revenues have fallen. So once we complete these 4 strategic initiatives, our priority as a management team will be growth. And I think the way we achieve growth is by identifying those businesses, which have -- we have competitive advantages and which have higher margins, and then aggressively deploying capital into those businesses. And to do that, we really need to focus. We're not going to be able to fund all businesses in all places, but we're confident that with focus we can grow our company.

Yilma Abebe - JP Morgan Chase & Co, Research Division

And I guess implied in there is that asset sales are going to be related to, I guess, this more focused effort that they're going to be implementing. Is that fair?

David J. Lockwood

Yes, I think that's fair.

Yilma Abebe - JP Morgan Chase & Co, Research Division

Okay. I guess, moving onto the balance sheet, and I appreciate it may be difficult to give a lot of color there, but how do you envision the balance sheet risk evolving over time? And then maybe related to that, any updates on the LC release, I guess, negotiations, if any?

David J. Lockwood

Okay. So on the balance sheet, our goal is to significantly reduce debt over time. I think that's important to enable us to fund and grow our businesses. It's just -- us being financially stronger will enable us to be more successful. In terms of the LC, those are discussions that are ongoing, but we're not providing any guidance on when or -- when that will or won't happen. And also in our forecast for Zion, we are not assuming any letter of credit savings.

Yilma Abebe - JP Morgan Chase & Co, Research Division

Okay. And then my final question is, EBITDA first half, about $50 million, I think the midpoint of your guidance implies about $85 million in the second half. Any commentary to help us, I guess, bridge from this $50 million to $85 million in the second half, even if it's high level?

David J. Lockwood

Yes. I mean, I think as you know, our business is seasonal. It tends to be much stronger in the second half. So, for example, if you look at last year, last year if we strip out Magnox, because that contract can slump the numbers, but let's just look at the non-Magnox EBITDA. That was about 65% -- 65% of the non-Magnox EBITDA came in, in the second half of last year. And if you look at our numbers, we're saying this year, 70-some percent of our non- Magnox EBITDA will come in the second half. So it is a slightly stronger second half than we had last year. And there's really 3 things driving tha. The first is the Fukushima contract. The nature of the Fukushima contract is that more of the profits are coming in, in the second half than the first half, just the way the contract is structured. Secondly, we're going to have lower bid costs for Magnox than projected. And third, because our EBITDA is down, the level of bonuses this year will be -- just because of when the management objectives were set, the level of bonuses this year will be lower than level of bonuses last year. So that's was driving a slightly higher percentage of total EBITDA in the second half than the first half compared with last year, for example.

Yilma Abebe - JP Morgan Chase & Co, Research Division

I think that's helpful. I guess, implied in the guidance, is there any sort of expectations for new contract wins? Or is it really kind of the numbers and backlog in the bag to speak?

David J. Lockwood

Yes, it's the latter. We're just -- we're not assuming any significant new contract wins in the second half. Nor are we -- we're going to implement some cost saving measures. We're going to make some progress on our SG&A and, we're also not assuming any benefit from that. We're assuming that whatever those benefits are, you really won't see them flow-through until next year.

Operator

Our next question comes from the line of Robert Perry from Kingsland Capital.

Robert Perry - Kingsland Capital Management, LLC

I was just wondering if you could go back over any guidelines that the regulatory authority in the U.K. has put out there in terms of the upcoming contract renewal in the bid process? Assuming that you don't end up selling that business and that you end up bidding on the next go round, how specific have they been in terms of how dispersed they expect to spread that business around?

David J. Lockwood

So tell me -- let me understand your question a little bit better. Are you asking for -- because the NDA has put out publicly, and we probably shouldn't comment on that, but they have put out publicly what the sort of deadlines are and what the bidding process is. What specifically were you looking for?

Robert Perry - Kingsland Capital Management, LLC

Well, I'm under the impression that one of their objectives in this next go round is to spread the business around to multiple parties. And so I was wondering if they had given out any sort of guidelines in terms of what their thoughts are on that. And how we should think about the likelihood in the scenario where you keep the business, what percent of that business is likely to be retained vis-à-vis their objectives in this next go round of bidding?

David J. Lockwood

Yes, I don't think it's appropriate for us to talk about percentages as we go through this process. And I think, in terms of what the NDA would like or not like, I think -- I'll just point you to their public announcements. I don't think we want to speculate on what the NDA would prefer or not prefer, other than what they've said publicly.

Robert Perry - Kingsland Capital Management, LLC

So I am correct that in those public announcements, that's what they've alluded to, correct?

David J. Lockwood

Well, if what you're saying is do we -- look at it this way, do we expect that the best chance of winning is to be a consortium versus for one firm to own 100% of the contracts? I think the answer is yes. I think the strongest bid will be a consortium bid, not a single vendor bid.

Robert Perry - Kingsland Capital Management, LLC

And why do you believe that? Is that because of the current balance sheet issues that the company has or is that an objective of the NDA? I guess, that's what I'm trying to get at?

David J. Lockwood

Again, I don't want to speculate on what the NDA does or doesn't want. I would just say, my view is that first of all, no, it's not related to balance sheet because I think my own view is even if a bidder who had a pristine balance sheet were to show up as a sole vendor for that contract, I think that the best chance of winning is to have multiple bidders for that contract. I think, given the different -- it's not so much about balance sheet, it's more about capabilities, resources, not being dependent on one company. I think the strongest bid for that contract will be a consortium bid and I don't think balance sheet is really going to be the issue. I think the issue will be what are the resources and capabilities that the consortium could bring together? There's no one firm that, at least in my view, has it all. So the strongest bid is going to be a bid where you put together the best pieces from different firms and you make a joint consortium proposal. And certainly, if we decide to go that way, yes, you should expect that we would be bidding with a consortium. We would not be bidding solely on our own. If that's what you're getting to, then yes, I think the strongest bid, including the bid we would put in, would be as a consortium. It would not be on our own.

Operator

Our next question comes from the line of George Walsh from Gilford Securities.

George Walsh

Wondered if you could clarify it for me, in the decommissioning partnering model you want to use going forward, does that mean that you're not doing -- it wouldn't be the stewardship model going forward? Would you be partnering on a stewardship basis or you're in there as part of a joint venture and you're just performing your service and you get paid for it? Is it de-risking in terms of ownership or that you're out of the ownership business?

David J. Lockwood

It depends. I mean, I would anticipate that in most cases, it is the stewardship model. We will just have a partner for that model. So yes, it'll be lower risk because we'll have a partner and we'll each be providing different parts. And I think you should expect that a partner will be a strong financial partner and we'll have a strong and substantial balance sheet. So yes, I think it's still a stewardship model because the decommissioning funds are what they are. They're a fixed amount. But I think you'll see us -- we will have a substantially lower risk profile in that project. In this business, most projects, and we heard at the last question related to Magnox, most projects are actually consortium bids. And there's a reason for that. There's a reason why this business has been like that the last 20, 30, 40 years. And so I think what you're seeing us doing is coming more in line with the industry, where we partner with a number of firms, many of them larger firms, where we bring our strength, they bring their strength. And the net of it is though we believe that by partnering rather than competing with these larger firms, we'll be in a better place. We'll have more revenues, better margins, better profits and also less risk.

George Walsh

Okay. And anything on debt reduction you can quantify in terms of goals, numbers or time, a certain date you wanted to going forward?

David J. Lockwood

No. I mean, if I can tell you the things it'll be a function of, it'll be the function of asset sales, the amounts and timing. It'll be a function of improved cash flows from cost savings in SG&A. And I think one thing we have been encouraged about is there's significant opportunities here for cost savings. We have an SG&A structure that is appropriate for a much larger firm but not appropriate for us. So I believe there's significant opportunities to reengineer many parts of our business.

George Walsh

Okay. And on the other side, when you do talk about investments versus your cuts in SG&A, when you talk about investments, could you be a little bit more specific about what you're talking about? Is it, I mean, you're shrinking the company in one sense but is it about capacity in other areas? Is it, perhaps, buying certain types of companies or capabilities? What would be involved there?

David J. Lockwood

I think it's both. It's both organic growth and inorganic growth. I think we're going to focus on pure opportunities, but we're going to pursue those opportunities very aggressively. We're going to focus on businesses where we have achieved significant competitive advantages, where we're ahead of the game right now, and also businesses that have higher margins. And that will include both organic growth, funding the development of existing businesses and pursuing organically new business opportunities. And also involve inorganic growth where it makes sense to consolidate others in an industry where we feel we have a competitive strength.

Operator

Our next question comes from the line of Gentry Klein from Sedis Capital.

Gentry Klein

Can you explain, even at the high level, how the deficiency trigger would work at Zion? I see that the ARO versus the amount that's in the trust fund, I think when you released it in Q4 2010, it was a surplus of about $49 million, now that's sort of a negative $11 million. Is that considered a deficiency? Can you just walk us through exactly how that would work and when the deficiency would be triggered, if ever, and where you stand on it?

Gregory S. Wood

Sure. This Greg here. I mean, first off, that is not the test for deficiency under Exelon the contract. So the NDT fund that shows up on our balance sheet, those are the actual amounts invested as of today, the fair value today, that's sitting with our trustee that's investing those funds in order to have the funds to be able to decommission. The ARO liabilities and accounting convention, which includes all of the cost of decommissioning the projects and retiring the asset, and those costs include disposing of all the wastes, a fee to the decommissioning agent. So there are elements of profit for EnergySolutions that are built into the ARO liability. So that's not a good -- that's an accounting convention and that's not a good metric for what our actual cost on the project itself. We are required to report to Exelon on a quarterly basis our funds versus the estimated cost to complete and we've just done that recently. We have a significant cushion against -- between the NDT funds available and our expected cost to complete the contract.

Gentry Klein

And has that cushion -- how was that trended over time?

Gregory S. Wood

Well as you recall, at the beginning of the year, we did a cost reset on the -- we updated our cost on the Zion project and we had an increase in the cost. So that would have increase. We had increased cost to complete. So that would have narrowed the margin a little bit from the original estimates that we did. But we still have a healthy margin there. And as we've said on this call, we're still expecting a 5% to 10% profit margin on the contract.

David J. Lockwood

I mean, if you -- yes, and just to add, if your question is have the cost -- do we believe the cost have increased since we did that update earlier in the year? The answer is no. But as Greg said, there was an increase in cost when, earlier in the year, we did the estimate versus the original estimates we made.

Gentry Klein

And do you revise or look -- analyze the cost estimate quarterly or is that annual?

David J. Lockwood

Well it depends, if you mean regulatory reporting, or we have different reports we have to make, but we have systems that monitor it all the time. So we are continually updating the cost estimate. And this year, we continue to believe it's the same as we said, which is the 5% to 10% profit margin. That has not changed. That we're doing all the time.

Operator

Our next question comes from the line of Rehav Perry [ph] from Linden Advisors.

Unknown Analyst

My main question has been answered but you mentioned you were trying to cut costs. Will that cut costs for Zion at all? And another question regarding cost was that, we know that there's some sort -- people said there's shortage of qualified professional in your field. So will that have an effect on your ability to attract talent?

David J. Lockwood

No, I don't think it will have an effect on our ability to attract talent. And cost, we're looking at cost everywhere. I mentioned SG&A, there's also cost in our gross margin that we think there's significant opportunities on. So we're looking at all parts of the business.

Unknown Analyst

And just one follow-up on asset sales, I realize that you can't comment on the side of the asset sale like the dollar amount, but can you maybe list what other than the U.K. con -- U.K. business that you are referring when you said asset sales in general?

David J. Lockwood

No, we're not -- as I said, we will not talk about our strategic alternatives or process. We'll undertake that process, if they come to a conclusion, we'll be announcing asset sales when and if they occur.

Unknown Analyst

Understood. Last question, when you said that the new opportunities that you're considering will still be stewardship, who is going to make -- I mean, the other partner is going to be taking balance sheet risks like you did in Zion? And also my understanding is that nobody has -- like Zion was first of it's kind, so have you spoken to guys who are willing to do that?

David J. Lockwood

We're not going to comment on the discussions we're having with large E&C firms, but I think what you'll see in the model is shared risks, which shared risks and partnering with those with a stronger balance sheet. I also think that part of it is, as I mentioned last call, we kind of broke ground and paid our tuition. People haven't done this before. Well, now we've done it, and we're entering almost our third year. We and others have a lot more information and experience and data on how these things work. And now that we've done it, I think it's a lot more -- I'm a lot more optimistic now that we've done it and we have the experience about future projects. Because you're right, when we first did this, I think, there are a number of E&C firms that had concerns about how this will all work out. Well, now we have the data on how it works out, on how it works out in a project. I think that's enabling us to talk with others about future partnering opportunities and getting them comfortable that this is a profitable business. So we kind of had to do it, get the experience, get the data and I think we kind of proved the model. And now I think a number of these projects can go forward in the years ahead. As someone else asked, are we going to see significant revenues from decommissioning this year or potentially next year? Maybe not. I can't give specifics on timing. But what we do believe is it's a large market, it's a market that's going to grow over time, it's a market that has multibillion-dollar revenue opportunity, and we think significant profit opportunity for us. So we see it as significant growth area in the years ahead. We think we're uniquely-positioned because of our disposal, our processing, our logistics, our team and expertise. The fact that we've actually done one of these, have the data and team that's done one, that puts us in a really unique position to take advantage of these markets in the years ahead. And, as I said, this is a market, I think, between what's happened with natural gas, what's happened to Fukushima, you're going to see a number, in my opinion, a number of these plants get taken down. And we are really uniquely positioned to take advantage of that.

Operator

Our next question comes from the line of Nate Kirk from Third Avenue management.

Nathaniel Kirk

Do you mind offering a little bit more color on the change in the cost estimates that happened in the beginning of the year? And specifically, if you can just directionally focus on what has changed on the return of the trust versus operational cost estimates? Or maybe I'm misunderstanding, and I just wanted see if there's any more granularity there?

David J. Lockwood

Well I think -- let me comment on the costs said earlier in the year. It is true that the operational cost of the project, based on the cost estimate we did in early part of the year, there were operational costs that were higher than were originally expected when the project was undertaken in the summer of 2010. So yes, there were cost increases. I don't believe the company at that time specified what they were, but I'd just tell you directionally, there were operational cost increases. When we came in, in June, we made 2 additional assumptions that were not related to the operations of the company. One is we lowered the assumption on the returns in the funds. And secondly, we to took out the savings from the letter of credit. So those 3 components reduced the profitability of the project from the original projections to the 5% or 10% that we are projecting as of today.

Nathaniel Kirk

Okay, that helps a little bit. And then the last was just an operational question. Do you mind commenting on the volume and disposal outlook outside of, maybe just directionally or any anecdotes aside of just sort of EBITDA guidance over the next 12 months? Anything you can provide would be pretty helpful.

David J. Lockwood

Yes, I mean look, I think we've had a pretty -- we've had fall off in volumes at the Government business, which is a lumpy business. Several of the contracts in Government have rolled off. But we remain optimistic on volumes. But look, it's a lumpy business. You just -- I think you've got -- because of a couple of contracts we have to roll off this year, this year had particularly low volumes. But as we think about that business over a longer term, there will be more government contracts, and we've talked about some of them. The decommissioning market, we believe over time, will drive significant volumes to Clive. There is that sort of daily, what I'd call baseline, outflow of material that goes to Clive, which is just part of operating nuclear power plants and the Government's business, but if you think about -- it's basically paid by the cubic foot of Clive, if you think about taking down a nuclear plant, the volumes there are substantial. So one of the things that's going to drive volumes to Clive in the coming years will be the decommissioning opportunities. Because when you think about taking down an entire nuclear power plant and a couple of feet of dirt underneath it, those are significant volumes. And I think you'll also see, as the Zion volumes start to go to Clive, that will also start to impact the volumes for Clive. Because so far, that part of the project is not really hit yet, in a substantial amount. The real volumes to Clive from Zion are coming.

Nathaniel Kirk

Is that sort of -- I mean, frame it for us so that we understand it, please. Is that like a 2-year, a 5-year, what is the right time frame to understand that? Maybe just for Clive, specifically, as others may just be too far out on the comment to estimate.

David J. Lockwood

Yes, I think it's the next couple of years for Zion.

Operator

That concludes our question-and-answer session for today. I would like to turn the conference back to David Lockwood for any concluding remarks.

David J. Lockwood

Okay. Well thank you, everyone, for participating in our call today and we appreciate your continued interest in EnergySolutions.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may now disconnect. Everyone, have a good day.

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