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EnergySolutions, Inc. (NYSE:ES)

Q2 2008 Earnings Call Transcript

August 11, 2008 12:00 pm ET

Executives

Tim Barney – EVP, IR

Steve Creamer – Chairman and CEO

Philip Strawbridge – EVP and CFO

Analysts

Jamie Cook – Credit Suisse

Scott Levine – JP Morgan

Sanjay Shrestha – Lazard Capital Markets

Charles Fishman – Piper Jaffray

Al Kaschalk – Wedbush Morgan

Alex Rygiel – FBR

John Rogers – D.A. Davidson

Rudy Tolentino – Morgan Stanley

Brandon Davis [ph] – Orex [ph]

Operator

Good day, ladies and gentlemen, and welcome to the second quarter 2008 EnergySolutions, Inc. earnings conference call. My name is Melanie and I'll be your coordinator today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session at the end of this conference. (Operator instructions) As a reminder, today's call is being recorded for replay purposes.

I would now like to turn the call over to Mr. Tim Barney, Executive Vice President of Investor Relations. Please proceed.

Tim Barney

Thank you, and good morning, everyone, and welcome to EnergySolutions, Inc.'s Second Quarter Fiscal 2008 Conference Call. With us today are EnergySolutions Chairman and Chief Executive Officer, Steve Creamer, and EnergySolutions 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 management's remarks may contain forward-looking statements within the meaning of 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 EnergySolutions 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-K for the year ended December 31st 2007 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 expressed in any forward-looking statements made.

Any projections as to the company's future financial performance represent management's estimates as of today, August 11th 2008, and EnergySolutions assumes no obligation 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 EnergySolutions Chairman and Chief Executive Officer, Steve Creamer.

Steve Creamer

Thanks, Tim. Our good start to the year has continued into the second quarter. I am pleased with the performance of each of our business segments in both results of the second quarter as well as the progress each has made toward executing our long-term strategic plan. In particular, this quarter, I'm proud of our international operations, which has exceeded our performance targets on the Magnox contracts in the United Kingdom.

Making a few highlights for the quarter. In our Federal Services business, the Hanford contracts were awarded in late May. We said we will win one of the two and we did. We are a 40% partner along with URS, and Areva, in a consortium that won a contract valued at $7.1 billion over ten years.

We will be managing $53 million gallons of radioactive and chemical waste stored in a 177 tanks on the Hanford reservation. We will be safely maintaining these ageing tanks while beginning the retrieval and transfer the waste and eventual tank closure. We are in the middle of the transition period of this project now and we expect to take over full management on October 1st.

In our Commercial Services segment, license stewardship generally and Zion in particular, continued to excite us. Zion is still on schedule for license transfer in late Q3. Two tasks have needed to be completed. The clarification of the tax status of the transfer of the trust fund without tax consequence, and the amendments to our banking facilities to allow letters of credits to be issued for this project are both in place. A second project, while not as far along as Zion has an internal target date for Zion in Q1 of 2009. And a third project is behind that.

In our Logistics, Processing and Disposal or LPD business, we were awarded two five-year projects totaling $54 million by the Tennessee Valley Authority to provide processing waste management and disposal services to three of their nuclear power plants. We will manage liquid radioactive waste, and incinerate reduce and can pack solid waste for transporting disposal.

As we have said before, the TVA is the only multiple reactor operator in the U.S. that did not have a life of plan agreement with us. This is because I said as a quasi governmental and they could not sign up for 30 year to 40 year contracts. This demonstrates our unique capabilities have been able to offer coordinated segment offerings, commercial services and LP&D, and vertical integration through the back end of the fuel cycle.

In addition, we received a $25 million five-year contract from the DOD and have extended our DOE contract for five years. This will continue to provide continued business for LP&D division. This is the ongoing stuff is goes on day after, day after day. It is a further endorsement of our reliability and safety records. This contract requires waste to be shipped across the country by truck and rail and we have the reputation and a track record that allowed us to be awarded this responsibility.

In our international business, as Philip will describe in more detail, our U.K. business accelerated earnings into this quarter in the third and fourth quarters, and our budgeting process at the end of last year, we planned to pursue and win some opportunities outside Magnox that would generate revenues in the third and fourth quarters.

While these opportunities still exists, and have been worked on every day, they have not happened as quickly as we had planned. However, as you have seen in this quarter, we have been able to replace that earning streams at better performance of our existing Magnox contracts. We were able to exceed performance milestone that resulted in higher efficiency fees, and we've recognized in this quarter.

Two more general updates review. We were out on the road talking to inventors during this quarter. I am pleased that about 80 institutional investors, some new to EnergySolutions on this call, purchased 40 million shares sold by ENV Holdings, our (inaudible) entity.

It's anticipated that the remaining portion of the ENV Holdings will be dissolved and distributed before the end of the year. There are now almost 75 million freely tradable EnergySolutions shares in the market and trading volumes look to be increasing as a result, thus improving liquidity for all of our investors.

We also amended our debt facilities to allow our letter of credit issuance capacity. We needed to support our Zion project. This process also went well and met with the acceptance by the banks. Overall, it's been a very good quarter for business. We have received the endorsement from customers who awarded these new projects from the capital markets which accepted our debt and our common shares.

And a final note, from two other prestigious sources, we are ranked #1 All-Environment Firm by Engineering News Record. And we were in the top ten of 200 firms and ranked for nuclear waste cleanup contracts awarded, firms in construction/remediation and environmental firms working abroad.

As I mentioned on our last call, our UK subsidiary won the Engineering Construction Safety Award given by the Royal Society for the Prevention of Accidents. Last week, here in the U.S. we celebrated 3 million workovers which equates to over four years of safe time at our five facilities without loss time accident.

I would like to acknowledge all our team, both in the UK and here in the US for this performance, as this company are number one priority is and always will be safety. As usual, our success and accolades during the quarter we're doing entirely to the efforts of our 5,000 strong EnergySolutions team and I want to thank for their dedication.

I will now turn the time over to our CFO, Philip Strawbridge to review our financial results and detail. Philip?

Philip Strawbridge

Thanks, Steve. Good morning, everyone. The numbers I'm going to discuss are GAAP numbers for Q2 for both this year and last. As a reminder, given the acquisition last June of RSMC the number is not strictly comparable, particularly in the international segment. I'll also talk about EBITDA and EPS before non-cash intangible amortization which are both non-GAAP numbers. We provided a reconciliation to these measures to GAAP net income in our earnings release.

Revenues for the second quarter ended June 30, 2008 were $460 million compared to $162 million a year ago. The increase in revenues as I mentioned before, it's primarily result of from the inclusion of RSMC's results, following its acquisition in June 2007. And the consolidation of certain JV interests previously accounted for under the equity method.

Gross profit was $61.1 million compared to $45.7 million for the second quarter last year. Gross margin for the quarter was 13.3% compared with 28.3% a year ago, largely because of the addition of RSMC which carries lower gross margins because of the substantial amount of pass through costs and revenues that we get from the reimbursement from the British government.

SG&A expense was $29.9 million compared to $23 million in Q2 last year. The increase was primarily due to the amortization of intangible and our RSMC and the additional expenses to operate as a public company such as professional fees for SOX compliance, (inaudible) insurance and investor relations.

Included in SG&A this quarter is about $0.5 million out of a total $1.6 million incurred to complete the company secondary offering of 40.25 million shares that Steve's already mentioned. The remaining approximate 1.1 million will be expensed in Q3.

Operating income for the second quarter increased to $31.2 million from $22.7 million in the same period of 2007. During the quarter, we paid down $10 million of debt following on from the 20 million we paid in the first quarter, and adding to the repayments that we made with our IPO proceeds. As a result, interest expense declined to $11.2 million from the quarter, down from $15.3 million in the same quarter last year.

For the second quarter of 2008, net income was $12.6 million or $0.14 per diluted share compared to $6 million in Q2 last year. EBITDA for the quarter was $41.9 million, up from $32.3 million in Q2 last year. And net income before the impact of non-cash amortization of intangible assets was $17.2 million or $0.19 per diluted share based on $88.3 million fully diluted shares outstanding.

Cash flows from operations this quarter was $20.8 million, some of which is I mentioned was used to pay down $10 million of long-term debt. As a result, our total long-term debt continues to decrease. It was $877 million prior to the IPO on September 30th of 2007 and has been reduced to $577 million as of June 30th 2008.

Now I'll talk a little bit about each of our segments. First of all, Federal Services. Revenues in the second quarter were $73.1 million, up from $37.2 million, a year ago. Segment income from operations was $6.3 compared to $7.6 million in the same quarter 2007. Operating margin was 8.6% compared to 20.4% the prior year.

During the fourth quarter 2007 and the first quarter of 2008 at the request of our customer, the Department of Energy, we assume voting control over two joint ventures. As a result the joint ventures were consolidated this year which added approximately $36 million to revenue in recognition of the pass through of our partner share of the revenue which result in lower reported margins.

Commercial services. Commercial services revenues were $26.2 million compared to $38.6 million in the same quarter of the prior year. Revenues were lower following the substantial completion of two projects last quarter that we talked about before. Income from operations was $6.2 million, up from $5.6 in the second quarter last year.

And operating margins were 23.8%, up from 14.4 a year ago. The segment's improved performance resulted from higher margins and has been fuel contracts and decreased revenue from our lower margin engineering projects compared to Q2 last year.

Now on to Logistics, Processing and Disposal or LP&D. Revenues were $63 million compared to $69.3 million in the same quarter 2007. Income from operations was $22.7 million, compared to 26 million in the same quarter last year.

Operating margin was 36%, down from 37.5% in the second quarter of fiscal year 2007. The decrease is in revenues and income from operations are primarily due to lower volumes of waste disposed by our federal customers that are facility in play.

And moving on to our international operations. International operations generated revenue of $298 million, up from 16.7a year ago. Of course the substantial increase stem from the acquisition of RSMC in June of 2007.

Segment income from operations was $13.8 million, up from an operating loss of 2 million a year ago. While operating margin for the second quarter of 2008 proved 4.6 from a negative 11.7 in the second quarter of 2007.

Increase in operating margin for the quarter was the result of additional efficiency fees as Steve's already mentioned before from our UK Magnox contract. We recognized $8.5 million of efficiency fees related to the contract herein to March 31st, 2008 during the quarter due to better performance than estimated during the first quarter of 2008.

As Steve previously said, when we are going through our budgeting process last year we had expected earnings from some non-Magnox related opportunities to come in, the third and fourth quarter of this year. These opportunities still exist, but they just haven't materialized as quickly as we had planned. Earnings from these opportunities have made up in this quarter by the additional efficiency fees from Magnox contract that we have earned by exceeding our performance target.

Now turning to our balance sheet. As of June 30th, 2008 we had cash balance of $42.2 million and debt including the current portion of $577 million. This compares with cash on hand of $40.4 million, an outstanding long-term debt of 607 million on December 31st, 2007. Shareholders equity was $438.4 million at the end of the second quarter, up from $405.3 million on December 31st 2007.

Now I'm going to talk a little bit about our outlook as Steve has already alluded to before. The results of second quarter, as Steve and I have both discussed, benefited from strong earnings in our international operations. In this along with the revenues and earnings that we reported in the first quarter in our commercial group have served a level out of earnings for the year. We now expect our earnings in the second half of the year to be similar to the first half with the fourth quarter being stronger than the third.

For the year, we still expect full year revenues in the range of $1.8 billion to $1.9 billion. Earnings per share in the range of $0.69 to $0.74. Earnings per share before non-cash impact of amortization of intangible assets which is calculated as earnings per share plus the per share of non-cash impact of the amortization expense of intangible assets, net of the related income tax expense is in the range of $0.89 and $0.94. EPS assumes a weighted average fully diluted share count for the year of 89 million shares. EBITDA for the year is expected to be between $195 million and $205 million.

Non-cash amortization expense of the intangible assets net of the related income tax expense is expected to be $17.8 million. Compensation expense related to stock option grant is expected to be $9.1 million for 2008. All the above numbers as I stated before does not include the impact of approximately 1.6 million of expenses related to the secondary offering.

CapEx for the year is expected to be approximately $37 million which is above what we consider to be our maintenance CapEx level of about $20 million a year, primarily related to the one-time purchase of equipment at our Atlas mill tailing contracts that we talked about before of Moab.

Results for the year and for the remaining two quarters will still be significantly affected by a number of key items. First, Zion. Following the second quarter decision on tax treatment, visibility of Zion has considerably improved and we are confident of an October 1st start day. We now wait NRC approval of license transfer in the late third quarter.

In order for us to issue $200 million letter of credit in connection with Zion we had to amend our credit facilities with our banks to accommodate the increased exposure of near part. As a result of this amendment and the cost of obtaining letter of credit, we expect interest expense in the second half for these costs to increase by about $3.5 million.

Second, we still expect revenue from the movement of major components from one of the other large projects at our commercial services segment in the last quarter. Our best current view of the business overall together with these specific items leads us to confirm our existing guidance for the year and to note that third and fourth quarters will be negatively impacted by significant amounts of earnings, having been exhilarated into the first and second quarters. This will affect the third quarter much more than the fourth.

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

Steve Creamer

Thanks, Philip. In conclusion, we have turned in a solid first half of the year. As I said last quarter, it's always nice to have a few more points on the board early in the game. It hasn't affected our view of the most probable final score for 2009. Thanks for listening and we're happy to take any questions you might have.

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from the line of Jamie Cook with Credit Suisse. Go ahead.

Jamie Cook – Credit Suisse

Hi, good morning and congratulations. I guess just my first question can you just give a little more color on the slowdown in the awards overseas I guess. What the size of those projects were? How much you expected them to impact your 2008 results, your full year results?

Steve Creamer

We had – as you first talk about before we had several different types of opportunities in the international that we focused on early at the beginning of the year we anticipated in our budget. Those were related to projects that that we have been in Spain, in Italy, Czech Republic. And what we had done just from a budget perspective it's really kind of put those on a probability weighting. And as was mentioned they haven't materialize as fast as possible. There is still a lot of those opportunities out there. And so, we can't move those out of our forecast for the year.

Jamie Cook – Credit Suisse

Any way to quantify the amount though? I just try to get a feel for – I mean (inaudible) in the first half of year about $0.12 (inaudible).

Steve Creamer

That's what we have done is that's one we kind of emphasize, Jamie, the quantification of that's very close to increased efficiency fees in the international. And that’s why we focused on that.

Jamie Cook – Credit Suisse

And then you also mentioned that you had mix from the spent fuel operations that also helped the quarter I guess if you quantify how much helped the quarter and how we should think about that mix of business going forward that continue to help out margins?

Steve Creamer

Yes. I mean, part of that is, is – the first of all from a bottom-line perspective not a huge impact. There are a large portion of that's really related to a lot of our customers rushing, you heard us talk about Barnville [ph] closing, Barnville closed to most of the nation, for being sea waste at the end of June. In other words, after July 1st. What we saw was in our spent fuel area, a large acceleration of those projects trying to, as people around the country, we're trying to get into Barnville, and that just kind of help moved us up, those are better margins in that division. And we kind of delayed other stuff.

Jamie Cook – Credit Suisse

All right. Thanks. I will get back in queue.

Steve Creamer

Thank you

Operator

Our next question comes from the line of Scott Levine with JP Morgan. Go ahead.

Scott Levine – JP Morgan

Good morning. With regard to the NRC's view on component removal and your perspectives on it now versus six months ago – nine months ago, what level of conviction you have with regard to their views being in line with yours in terms of funding and these types of projects, and if you can think maybe like a bare case versus a bulk case, in terms of the timing on that, that would be helpful?

Unidentified Speaker

There is just a letter that came out over the weekend may have been Friday with Chairman claim formally requesting the rule making on the – to go both situation. I feel comfortable that it's going to get done, I think, everyone out there does not want 104 (inaudible) junk yards around the country I think things should be taken care of and every indication we have is the strong outlay. I think there are issues with individual plans, individual fundings on some of the decommissioning plants we're hearing rumblings back to the staff up, I still feel – I mean, bullish wise I think we would have something we hear something in – toward the end of third quarter, bearish lives were probably could be out as far as Q1 or Q2 of next year. I still feel confident that we're going to get it – that we'll get done, because we've had lot of conversations at all levels in the NRC and we feel bullish that this is something it's important that the utilities, NEI is strongly supporting and I actually sent another letter to the NRC last week. We think there is a lot of support out there all the way through to get it done. The question is this regulatory and you just – it's hard to tell exactly when it's going to actually come. We would hope we better earlier than this, but it's obviously going to a lot of review and there's lot of things going on in the NRC and new plans and everything else, can delay things.

Scott Levine – JP Morgan

But in terms of your conviction around – that leads to a timing issue in terms of your level of conviction there is no real change there?

Steve Creamer

No. I feel very comfortable we will get the real change.

Scott Levine – JP Morgan

Got it. And so with regard to any associated work that's in the budget or in your forecast for 2008, if there were to be any slippage there, would that be incremental to '09 or would that affect push the entire business opportunity, if you will, backwards?

Steve Creamer

It pushes backwards. It will push it backwards into '09. So we did have some slippage in Q4, as you know, we had some major components in Q4 budget, we have some slippage there. It was just little bit into later period in '09.

Scott Levine – JP Morgan

Into '09. And then with regard to license stewardship, you're saying I believe beginning in Q4s and you will be looking to begin the work, can you talk a little bit about the time table for Zion specifically and the point in which we might be able to expect maybe the LP&D revenue associated with that business opportunity begin to kick in? And then – and I know it will be my last one. Is – with that be indicative of a typical license stewardship contract for you when – because the margins on the LP&D versus the commercial services business are clearly higher?

Steve Creamer

Yes. It would be a typical – it will change a little bit, because some of the plants that are fuel, our Zion actually has a fuel in, and so that will actually slow the LP&D a little bit coming out. We will start seeing some LP&D in Q3, Q4 of '09. We will pick up significantly better in '10 and '11 probably be the biggest year for LP&D, but it will start towards the end of next year or in the second half next year. Obviously, it's very important to us we are doing planning and strategizing every data to move the LP&D part up, because once you said it's absolutely true that is where the higher margin work is. And on the – once you don't have fuel you could actually see disposal going actually quicker on those. Some of the plants that we will be looking at under this scenario already have the fuel out of them and those plants actually the LP&D will actually start sooner. Because we would have to take care of the fuel before we get started actually in some of the major decommissioning, so. Kind of varies a little bit, but it's going to be pretty difficult to what to see in the future. Number two has a fuel out. And so it would actually see some LP&D quicker I think.

Scott Levine – JP Morgan

Thanks. Nice quarter.

Philip Strawbridge

Thank you.

Steve Creamer

Thanks, Scott

Operator

Our next question comes from the line of Sanjay Shrestha with Lazard Capital Markets. Go ahead.

Sanjay Shrestha – Lazard Capital Markets

Great. Thank you. Good morning, guys. Again a great first half. Couple of quick questions. Can you talk a little bit more about the timing on the potential award for some of the DOE projects here that lots of bid as well as the international opportunity that's talked a little bit about potentially going more into early '09 seems like. Can you go into some more detail as much as you can, just to when we might start to see some of these contract wins see you guys?

Steve Creamer

You know, there is going to be – there is a huge small wins out right now. Smaller ones where we have, smaller physicians, Jocamound [ph] for example. We had the oral interviews on that, about two weeks ago, within last two weeks, that one should be awarded, they are saying by the end of this year, I think it will slide into '09, but they are saying the end of this year, slide into their. Another big one that will be coming out they had they kind of industry they on, were they taking comments on what the proposals are as the Portsmith in which is one very, very interested in. And towards most to see the final RFP on that in September which would mean that we would be looking at an early Q3 award in 2009. But there is – we have another ones like truwaste in Oak Ridge we have smaller projects that are $2 million, $3 million, $4 million year of EBITDA that continue to come out continuously that we don't even have on the bigger list. And we work on those every day. We have had the oral interviews on that truwaste in Oak Ridge which is a – it would be a couple million dollars of EBITDA coming through there. So it continue to come, but the big ones, Jocamound – the first one will be Jocamound that would be coming and then, one after that would be Portsmith, and then (inaudible) will be coming also probably Q2 of next year and an award on that one.

Sanjay Shrestha – Lazard Capital Markets

Terrific. So then when we think about all this do you guys have a business being pushed to some of these bigger contracts into '09. So should we think about '09 being a year where you can potentially do even more than 15% which is sort of like organic goal, right. And not is about but increasing the disposal business as well. Then margins get better. So from an earnings standpoint because we start to see that much higher earnings growth in '09 than with higher margin business even for the kicking in, even a bigger earnings to jump in 2010, is that how we should see your P&L sort of progress over the course of next few years?

Philip Strawbridge

Obviously. You're exactly right, Sanjay. When you say 2009, but we really see – as we have said before, Steve already kind of alluded to with LP&D and license stewardship you are going to see 2010 is even – should be even better than 2009 from a growth perspective.

Steve Creamer

I think one thing we will keep a little bit of damp for our 2009, Sanjay, is that continuing resolution. And assuming that Congress comes back in after the election, and gets right after budget, I mean, they've announced for sure, that they're not going to have a – whatever they call it, be continue resolution, but they are not going to come back in session between the election and January – 1st of January and so, assuming that they come in, they got a budget house, we actually have the budget to work through in the second half of '09 it would be incredibly positive for the business, but that continued resolution – the thing we find is that they end up watching things rather than doing things. And so it does slow the LP&D division that has the last – it's had a damper on the last year and half. Because of the continuing resolutions going on. And we perceive that at least the first half of '09. We'd like to offset for sure by Q4 of '09, we would see some of that change, and hopefully even in – you know, they will get a budget done for the second half of their fiscal year which would start in March, which would be very nice way that the government actually function rather than just watch things.

Sanjay Shrestha – Lazard Capital Markets

Fair enough. Thanks a lot, guys.

Steve Creamer

Thank you.

Operator

Our next question comes from the line of Charles Fishman with Piper Jaffray. Go ahead.

Charles Fishman – Piper Jaffray

Steve, quick update on the Italian (inaudible).

Steve Creamer

We are filing a request for summary judgment right now. We think that everything has been heard and said. It's hard to tell when courts rule. We think that the court will take a look at this and schedule fairly quickly. We are hoping that would be the case. And that we would be able to – we are still hoping for resolution like this year, early next year. But we still feel very comfortable with our position on it. And we think it's important thing and we plan to keep pushing head on.

Charles Fishman – Piper Jaffray

You said in your prepared comments ENV Holdings anticipate them reducing their position or eliminating their position before the end of the year. Can I assume that based on comments you said before that you will retain your position, you remain –

Steve Creamer

I'm with all of you as long as you are there. As long as I am here I am planning to stay right where I am at. So that's our gain. The last few days I thought I should be buying. So I probably would be doing that in the future, but I am not. You know, right now, I am not planning to sell any stock in the future.

Philip Strawbridge

The comment was really about dissolving ENV Holdings. That's what Steve mentioned in his comments.

Charles Fishman – Piper Jaffray

Probably quite. So that wasn't necessarily for them selling their shares and an additional follow on.

Philip Strawbridge

What we're saying is that, that eliminates that drag on, if you will. So eliminates the ENV Holdings.

Steve Creamer

I and my family have about couple million shares left in the company.

Charles Fishman – Piper Jaffray

Thank you for clearing that up.

Steve Creamer

Yes.

Operator

Our next question comes from the line of Al Kaschalk with Wedbush Morgan. Go ahead.

Al Kaschalk – Wedbush Morgan

Thanks, guys. I wanted to try and focus on the Federal business if I may. With a lot of push and takes here on the revenue flow, are we had a level which we call it fair run rate excluding the Hanford project win which starts in the fourth quarter? And if you could add a little color on that as it relates to margin as well, because it clearly below historical levels, but my guess is you get a little bit on fair punishment in the court on that?

Philip Strawbridge

Yes. I mean, we are probably at a low level, Al, I mean, we don't have tank – as you already mentioned we only have tank, tank farm cranking up yet and that won't really start until Q4 as we've always mentioned. You got – our Hanford M&I contract really that was the one that was awarded that's really kind of PRC, if you will. And so that's kind of ended, that was very good margins by the way. That some of the best margins that we have. So you got that mix change that is occurring. But when you get tank farm back in there then you are going to see some – again, some pretty positive stuff. Coming to (inaudible) question here is what Steve has already alluded to. What’s going to happen to the funding with the continuing resolution. So we got a – continue to focus on that.

Al Kaschalk – Wedbush Morgan

I mean you had the Atlas mill project or contract last year, in the last year have the acquisition, and then you get the JV consolidation, that's now fair is. 70 – without trying to get to a point as to (inaudible) is there a ballpark of this type of run rate before the Hanford project which could come in on?

Steve Creamer

Run rate you earn from a bottom line perspective?

Al Kaschalk – Wedbush Morgan

Revenue.

Unidentified Speaker

Revenue, as you already mentioned, since we consolidate as a JV what does is it just really recognizes our partner share of those revenues which has the perception of lowering our margin obviously. So, yet revenue was probably at the right level, but couple of those JVs come off. So we may – may be coming down in the next year if you will. (inaudible) perspective. Bottom line will have much impact.

Al Kaschalk – Wedbush Morgan

And then on CapEx, should we expect the project or the Atlas contract, is it that more even across a second half of '08 or is it CapEx really going to be obvious in Q3?

Unidentified Speaker

We're looking at CapEx going to be combination of Q3 and Q4. It's probably going to be more – I haven't seen all those the different requisitions on it, but I think a lot of its going to be in Q4.

Al Kaschalk – Wedbush Morgan

Thank you.

Unidentified Speaker

Thank you.

Operator

Our next question comes from the line of Alex Rygiel with FBR. Go ahead.

Alex Rygiel – FBR

Thank you. Good morning to all. Steve, how are you?

Steve Creamer

Hi, Rygiel, how are you?

Alex Rygiel – FBR

Very good. As relates to Zion, you mentioned you're planning in that Zion starts to run October 1st. What kind of cost you're carrying just in case that gets delayed a month or two?

Steve Creamer

We actually have people in there working right now. I mean we have signed – we took a lot of the buy out of this buy, actually signed a contract, a service contract with Exelon. So we actually have 40 people or 50 people working there right now on the plan under service agreement with Exelon until the license was done in order to get planning stuff so we could move ahead even quicker on getting the thing done. So, I don't perceive there being we've – NRC is committed to us assure that we will have it buy December 19 and I wouldn't see there will be any major issues in Q4. If we get it hopefully we will push a little bit more, but based on where we're at right now I don't see it have any effect on Q4 if it delay a month or so longer.

Alex Rygiel – FBR

You mentioned some about interest expense with $3.5 million. Could you go up that again please?

Steve Creamer

Yes, was that's related to is for that last quarter we're going to have is the interest and the costs associated with the 200 million letter of credit for Zion. Essentially for that last quarter it's going to bump up about 3.5 million.

Alex Rygiel – FBR

Great. Lastly, on Hanford. Can you review your accounting methodology you will be using on that can for tank?

Steve Creamer

Right now. We are looking at it. We are trying to determine it's going to be like a JVI. In other words, it comes in through other income or do we incorporate that in our Federal services segment, but it looks like its probably going to – we are going to probably characterize that as JVI.

Alex Rygiel – FBR

Great. Thank you.

Operator

Our next question comes from the line of John Rogers with D.A. Davidson. Go ahead.

John Rogers – D.A. Davidson

Hi good morning. Can you hear me?

Steve Creamer

Yes, we hear you, John. How are you?

John Rogers – D.A. Davidson

Good. Thanks. I just wanted to – on your second dismantling project that you are working on, do you think you have to wait for an NRC approval the first one before you will be able to sign the second?

Steve Creamer

No.

John Rogers – D.A. Davidson

That will be independent?

Steve Creamer

It's totally independent.

John Rogers – D.A. Davidson

And then secondly, in terms of the flow of commercial waste in the (inaudible), anything coming up there in terms of projects that we should be thinking about?

Steve Creamer

We have continuous ones going on all the time. For example we have – we're working on the couple of projects, in Texas, the project, the New Jersey project, and Missouri, these are all pretty significant commercial projects, they would be in revenue range from $10 million to $20 million and we just have a continuous slow those types of projects right now that will be coming in, in Q3, Q4 and Q1, some in California. We have a pretty continuous slow those type of projects that go on continuously.

Philip Strawbridge

And as we said, we said a long, our growth really from that in LP&D is going to be driven by major components and license stewardship.

John Rogers – D.A. Davidson

Right. If in between there over the next six months nothing that – this towards one quarter from the other, markedly?

Philip Strawbridge

Yes.

John Rogers – D.A. Davidson

Great. Thank you.

Operator

Our next question comes from the line of Rudy Tolentino with Morgan Stanley. Go ahead.

Rudy Tolentino – Morgan Stanley

Hi. What's the TOE planning to, that have been filed the Jocamound application with the NRC. Do you expect to benefit from that, given your oil based expertise?

Steve Creamer

(inaudible) bid on that project right now. It's out for bid, they are saying there will be a word before the end of the year. We are not on the incumbent team. But we are on a very strong team. We think we have a good shot at it. But it's one hard detail. We still have some major questions about Jocamound and especially with the sales picking up, you know mostly the Whitehouse seems to be safe, pretty close but there is not too many people we don't believe, the senate isn't going to become almost lead approved in the democratic standpoint. So, high probability, Senator Reid [ph] will be just about (inaudible) in my opinion. So, I look at that as being a fairly short-term project to shows down rather than keep going, but we will wait and see.

Rudy Tolentino – Morgan Stanley

Which would be an opportunity.

Steve Creamer

Opportunity for us. Because that's it's there, but it's…

Unidentified Speaker

The opportunity would be of course is the if they do this do more and more towards recycling.

Steve Creamer

Which is as far as we are concerned one of our major goal there is in future, it's recycling, so, if they do move away from storey to one time at a mountain, going to reusing recycling which is what we believe makes sense. That's actually very, very positive for us.

Rudy Tolentino – Morgan Stanley

The Jocamound project that you were talking, just mentioned that's the same thing is what you disclosed previously. Is that correct or is that something different?

Steve Creamer

Same what.

Rudy Tolentino – Morgan Stanley

And then I think I reached my question quota. So I will get back in queue.

Steve Creamer

Thanks.

Operator

(Operator instructions) And our next question comes from the line of Brandon Davis [ph] with Orex [ph] Go ahead.

Brandon Davis – Orex

Good morning. Could you talk about the year-over-year performance that RSMC?

Unidentified Speaker

Year-over-year performance has actually improved. Because of what we talked a little bit about – the efficiency gains in our Q2 which is really there Q1 if you will. So there will be – as we said there will be a bottom-line improvement.

Brandon Davis – Orex

But I guess on the six month basis, income there will be up on a pro forma basis?

Steve Creamer

Good question. Don't know that. When we look back at 2007 before we did the acquisition?

Brandon Davis – Orex

Yes. Correct.

Steve Creamer

We will go back and look, because when you look at you said on a six month basis, I know the Q1 of 2007 was actually lower because of reduced funding which we anticipated in the acquisition. So, it would probably be slightly lower.

Brandon Davis – Orex

Thank you.

Operator

And I see there are no further questions at this time. I'd like to turn the call back over to Mr. Barney for any closing remarks.

Steve Creamer

This is Steve is for Tim, but I want to thank you very much. It really is a great opportunity to work with you guys, with all of you as partners and we are very focused on delivering what we told you that we would do and we appreciate your support and we look forward to working with you. We think the nuclear renaissance is real, we think everything is really moving along very well in our industry and we are excited about the future. Thank you very much for your time this morning.

Philip Strawbridge

Thank you.

Operator

Ladies and gentlemen thank you for your participation in today's conference. That does conclude the presentation. You may disconnect. Have a wonderful day.

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Source: EnergySolutions, Inc. Q2 2008 Earnings Call Transcript
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