Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 

(Mark One)

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2013

 

Or

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from               to               

 

Commission file number 001-33830

 

EnergySolutions, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware
(State or Other Jurisdiction of
Incorporation or Organization)

 

51-0653027
(I.R.S. Employer
Identification Number)

 

 

 

423 West 300 South, Suite 200
Salt Lake City, Utah

(Address of principal executive offices)

 

84101
(Zip Code)

 

Registrant’s telephone number, including area code: (801) 649-2000

 

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

 

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

 

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

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o
(Do not check if a smaller reporting company)

 

Smaller reporting company o

 

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

 

As of May 7, 2013, 90,579,979 shares of the registrant’s common stock were outstanding.

 

 

 



Table of Contents

 

ENERGYSOLUTIONS, INC.

INDEX TO QUARTERLY REPORT ON FORM 10-Q

For the Three Month Period Ended March 31, 2013

 

 

 

Page

 

PART I. FINANCIAL INFORMATION

 

Item 1.

Financial Statements

2

 

Condensed Consolidated Balance Sheets

2

 

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

3

 

Condensed Consolidated Statement of Changes in Stockholders’ Equity

4

 

Condensed Consolidated Statements of Cash Flow

5

 

Notes to Condensed Consolidated Financial Statements

6

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

24

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

34

Item 4.

Controls and Procedures

34

 

PART II. OTHER INFORMATION

 

Item 1.

Legal Proceedings

35

Item 1A.

Risk Factors

36

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

36

Item 6.

Exhibits

36

Signatures

 

37

 



Table of Contents

 

PART I

 

Item 1.  Financial Statements

 

EnergySolutions, Inc.

 

Condensed Consolidated Balance Sheets

 

March 31, 2013 and December 31, 2012

 

(in thousands of dollars, except per share information)

 

 

 

March 31,
2013

 

December 31,
2012

 

 

 

(unaudited)

 

 

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

90,425

 

$

134,191

 

Accounts receivable, net of allowance for doubtful accounts

 

349,124

 

259,913

 

Costs and estimated earnings in excess of billings on uncompleted contracts

 

93,350

 

98,978

 

Income tax receivable

 

619

 

6,427

 

Prepaid expenses

 

10,129

 

11,022

 

Nuclear decommissioning trust fund investments, current portion

 

142,682

 

152,507

 

Deferred costs, current portion

 

119,793

 

127,573

 

Other current assets

 

3,357

 

3,924

 

Total current assets

 

809,479

 

794,535

 

Property, plant and equipment, net

 

116,487

 

117,744

 

Goodwill

 

305,432

 

308,608

 

Other intangible assets, net

 

230,197

 

239,551

 

Nuclear decommissioning trust fund investments

 

421,741

 

445,989

 

Restricted cash and decontamination and decommissioning deposits

 

315,968

 

316,754

 

Deferred costs

 

337,728

 

360,185

 

Other noncurrent assets

 

80,484

 

72,096

 

Total assets

 

$

2,617,516

 

$

2,655,462

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Current portion of long-term debt

 

$

 

$

16,592

 

Accounts payable

 

138,489

 

144,649

 

Accrued expenses and other current liabilities

 

256,256

 

193,546

 

Deferred income taxes

 

1,090

 

1,101

 

Facility and equipment decontamination and decommissioning liabilities, current portion

 

130,282

 

138,757

 

Unearned revenue, current portion

 

144,443

 

150,135

 

Total current liabilities

 

670,560

 

644,780

 

Long-term debt, less current portion

 

799,425

 

798,577

 

Pension liability

 

36,768

 

31,043

 

Facility and equipment decontamination and decommissioning liabilities

 

459,199

 

485,447

 

Deferred income taxes

 

19,331

 

20,507

 

Unearned revenue, less current portion

 

342,653

 

366,710

 

Other noncurrent liabilities

 

6,797

 

7,479

 

Total liabilities

 

2,334,733

 

2,354,543

 

Commitments and contingencies

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Preferred stock, $0.01 par value, 100,000,000 shares authorized; no shares issued and outstanding

 

 

 

Common stock, $0.01 par value, 1,000,000,000 shares authorized; 90,579,517 and 90,253,242 shares issued and outstanding as of March 31, 2013 and December 31, 2012, respectively

 

906

 

903

 

Additional paid-in capital

 

510,727

 

511,503

 

Accumulated other comprehensive loss

 

(31,121

)

(21,956

)

Capital deficiency

 

(198,231

)

(190,031

)

Total EnergySolutions stockholders’ equity

 

282,281

 

300,419

 

Noncontrolling interests

 

502

 

500

 

Total stockholders’ equity

 

282,783

 

300,919

 

Total liabilities and stockholders’ equity

 

$

2,617,516

 

$

2,655,462

 

 

See accompanying notes to condensed consolidated financial statements.

 

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Table of Contents

 

EnergySolutions, Inc.

 

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

 

Three Month Periods Ended March 31, 2013 and 2012

 

(in thousands of dollars, except per share information)

 

(unaudited)

 

 

 

Three Month Period Ended
March 31,

 

 

 

2013

 

2012

 

Revenue

 

$

526,208

 

$

490,692

 

Cost of revenue

 

(479,788

)

(459,012

)

Gross profit

 

46,420

 

31,680

 

Selling, general and administrative expenses

 

(32,221

)

(33,662

)

Equity in income of unconsolidated joint ventures

 

676

 

730

 

Income (loss) from operations

 

14,875

 

(1,252

)

Interest expense

 

(18,645

)

(17,691

)

Other income, net

 

2,111

 

18,282

 

Loss before income taxes and noncontrolling interests

 

(1,659

)

(661

)

Income tax expense

 

(6,539

)

(4

)

Net loss

 

(8,198

)

(665

)

Less: Net income attributable to noncontrolling interests

 

(2

)

(4

)

Net loss attributable to EnergySolutions

 

$

(8,200

)

$

(669

)

Net loss per common share of EnergySolutions:

 

 

 

 

 

Basic

 

$

(0.09

)

$

(0.01

)

Diluted

 

$

(0.09

)

$

(0.01

)

Weighted average common shares outstanding:

 

 

 

 

 

Basic

 

90,359,873

 

89,065,585

 

Diluted

 

90,359,873

 

89,065,585

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

Net loss

 

$

(8,198

)

$

(665

)

Foreign currency translation adjustments, net of taxes

 

(8,687

)

5,844

 

Change in unrecognized actuarial (loss) gain

 

(478

)

153

 

Other comprehensive income (loss), net of taxes

 

(17,363

)

5,332

 

Less: net income attributable to noncontrolling interests

 

(2

)

(4

)

Comprehensive income (loss) attributable to EnergySolutions

 

$

(17,365

)

$

5,328

 

 

See accompanying notes to condensed consolidated financial statements.

 

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Table of Contents

 

EnergySolutions, Inc.

 

Condensed Consolidated Statement of Changes in Stockholders’ Equity

 

Three Month Period Ended March 31, 2013

 

(in thousands of dollars, except per share information)

 

(unaudited)

 

 

 

Common Stock

 

Additional
Paid-in

 

Accumulated
Other
Comprehensive

 

Capital

 

Noncontrolling

 

Total
Stockholders’

 

 

 

Shares

 

Amount

 

Capital

 

Loss

 

Deficiency

 

Interests

 

Equity

 

Balance at December 31, 2012

 

90,253,242

 

$

903

 

$

511,503

 

$

(21,956

)

$

(190,031

)

$

500

 

$

300,919

 

Net loss

 

 

 

 

 

(8,200

)

2

 

(8,198

)

Equity-based compensation

 

 

 

(342

)

 

 

 

(342

)

Vesting of restricted stock

 

441,127

 

4

 

(4

)

 

 

 

 

Minimum tax withholdings on restricted stock awards

 

(114,850

)

(1

)

(430

)

 

 

 

(431

)

Change in unrecognized actuarial loss

 

 

 

 

(478

)

 

 

(478

)

Foreign currency translation

 

 

 

 

(8,687

)

 

 

(8,687

)

Balance at March 31, 2013

 

90,579,517

 

$

906

 

$

510,727

 

$

(31,121

)

$

(198,231

)

$

502

 

$

282,783

 

 

See accompanying notes to condensed consolidated financial statements.

 

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Table of Contents

 

EnergySolutions, Inc.

 

Condensed Consolidated Statements of Cash Flows

 

Three Month Periods Ended March 31, 2013 and 2012

 

(in thousands of dollars)

 

(unaudited)

 

 

 

Three Month Period Ended
March 31,

 

 

 

2013

 

2012

 

Cash flows from operating activities

 

 

 

 

 

Net loss

 

$

(8,198

)

$

(665

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

Depreciation, amortization and accretion

 

17,400

 

19,017

 

Equity-based compensation expense

 

(342

)

665

 

Deferred income taxes

 

(1,187

)

203

 

Amortization of debt financing fees and debt discount

 

1,801

 

1,256

 

Gain on disposal of property, plant and equipment

 

 

(66

)

Realized and unrealized gain on nuclear decommissioning trust fund investments

 

(5,354

)

(19,514

)

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(102,815

)

(12,759

)

Costs and estimated earnings in excess of billings on uncompleted contracts

 

3,704

 

16,180

 

Prepaid expenses and other current assets

 

6,543

 

(1,512

)

Accounts payable

 

761

 

(23,471

)

Accrued expenses and other current liabilities

 

69,911

 

(21,044

)

Unearned revenue

 

(29,708

)

(19,866

)

Facility and equipment decontamination and decommissioning liabilities

 

(41,384

)

(34,623

)

Restricted cash and decontamination and decommissioning deposits

 

791

 

109

 

Nuclear decommissioning trust fund

 

38,289

 

41,086

 

Deferred costs

 

30,237

 

28,354

 

Other noncurrent assets

 

(8,033

)

(14,172

)

Other noncurrent liabilities

 

7,258

 

13,985

 

Net cash used in by operating activities

 

(20,326

)

(26,837

)

Cash flows from investing activities

 

 

 

 

 

Purchase of investments in nuclear decommissioning trust fund

 

(188,286

)

(195,996

)

Proceeds from sales of nuclear decommissioning trust fund investments

 

189,367

 

197,096

 

Purchases of property, plant and equipment

 

(3,171

)

(5,999

)

Purchases of intangible assets

 

89

 

 

Proceeds from disposition of property, plant and equipment

 

 

89

 

Net cash used in investing activities

 

(2,001

)

(4,810

)

Cash flows from financing activities

 

 

 

 

 

Repayments of long-term debt

 

(16,592

)

 

Minimum tax withholding on restricted stock awards

 

(431

)

(84

)

Repayments of capital lease obligations

 

(211

)

(74

)

Debt financing fess

 

(3,160

)

 

Net cash used in financing activities

 

(20,394

)

(158

)

Effect of exchange rate on cash

 

(1,045

)

1,478

 

Net decrease in cash and cash equivalents

 

(43,766

)

(30,327

)

Cash and cash equivalents, beginning of period

 

134,191

 

77,213

 

Cash and cash equivalents, end of period

 

$

90,425

 

$

46,886

 

 

See accompanying notes to condensed consolidated financial statements.

 

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Table of Contents

 

EnergySolutions, Inc.

 

Notes to Condensed Consolidated Financial Statements

 

(1) Description of Business

 

References herein to “EnergySolutions,” the “Company,” “we,” “us” or “our” refer to EnergySolutions, Inc. and its consolidated subsidiaries unless the context otherwise requires.

 

Envirocare of Utah, Inc. (predecessor) was formed in 1988 to operate a disposal facility for mixed waste, uranium mill tailings and Class A low-level radioactive waste (“LLRW”) in Clive, Utah. In January 2005, the predecessor converted to a limited liability company, Envirocare of Utah, LLC (“Envirocare”). Immediately thereafter, the sole member of Envirocare sold all of its member interest to ENV Holdings LLC (“ENV Holdings”). In 2006, we changed our name from Envirocare of Utah, LLC to EnergySolutions, LLC (“we,” “our,” “EnergySolutions” or the “Company”). Since 2005, we have expanded and diversified our operations through a series of strategic acquisitions, including the decontamination and decommissioning (“D&D”) division of Scientech, LLC (“Scientech”) in October 2005, BNG America, LLC (“BNGA”) in February 2006, Duratek, Inc. (“Duratek”) in June 2006, Safeguard International Solutions, Ltd. (renamed ESEU Services Limited (“ESEU”)) in December 2006, Parallax, Inc. (renamed EnergySolutions Performance Strategies) in January 2007, Reactor Sites Management Company Limited (“RSMC”) in June 2007, NUKEM Corporation (renamed EnergySolutions Diversified Services, Inc.) in July 2007, and Monserco Limited (“Monserco”) in December 2007.

 

On November 20, 2007, the date of the completion of our initial public offering, we completed our conversion to a corporate structure whereby EnergySolutions, LLC became a wholly owned subsidiary of EnergySolutions, Inc. As a result, the member of EnergySolutions, LLC contributed its membership equity interest for 75.2 million shares of $0.01 par value common stock of EnergySolutions, Inc. EnergySolutions, Inc., is organized and existing under the General Corporation Law of the state of Delaware.

 

On July 30, 2008, we completed a secondary public offering of 35 million shares of common stock offered by ENV Holdings, as selling stockholder. The underwriters of the offering subsequently exercised their over-allotment option and purchased 5.25 million additional shares of our common stock from ENV Holdings. Following completion of these transactions, ENV Holdings owned approximately 16.7% of our outstanding shares of common stock. We did not receive any proceeds from the sale of shares by ENV Holdings and recognized expenses of $1.8 million for the year ended December 31, 2008. On February 13, 2009, ENV Holdings completed a distribution of all of our shares to its members on a pro rata basis for no consideration. As a result, ENV Holdings is no longer the beneficial owner, directly or indirectly, of any shares of our common stock.

 

On January 7, 2013, we entered into an Agreement and Plan of Merger (as amended, the “Merger Agreement”) with Rockwell Holdco, Inc., a Delaware corporation (“Parent”), and Rockwell Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of Parent (“Merger Sub”). Parent and Merger Sub are affiliates of Energy Capital Partners II, LP and its parallel funds (together with its affiliates, “Energy Capital Partners” or “ECP”), a leading private equity firm focused on investing in North America’s energy infrastructure. On April 5, 2013, EnergySolutions, Parent and Merger Sub entered into the First Amendment to the Agreement and Plan of Merger. Pursuant to the Merger Agreement, the Merger Sub will merge with and into the Company (the “Merger”) and we will become a wholly owned subsidiary of Parent. The Merger will only be able to be consummated following the satisfaction or waiver of a number of conditions set forth in the Merger Agreement. Upon completion of the Merger, each outstanding share of the Company’s common stock other than shares of common stock held in the treasury of the Company or owned by Parent, any affiliates of Parent, Merger Sub, a subsidiary of the Company or by stockholders who have validly exercised their appraisal rights under Delaware law, will be converted into the right to receive cash in an amount equal to $4.15, without interest and subject to any required withholding of taxes.

 

On April 26, 2013, the Company held a Special Meeting of Stockholders at which the Company’s stockholders approved the proposal to adopt and approve the Merger Agreement.

 

In January of 2013, EnergySolutions notified the U.S. Nuclear Regulatory Commission (the “NRC”) about the Merger and requested the NRC’s consent to the proposed indirect transfer of control of the Company’s NRC radioactive material licenses and permits pursuant to the Merger. On May 9, 2013, the NRC consented to the indirect transfer of control of the Company’s NRC licenses and permits pursuant to the Merger.

 

The Company has now received the required regulatory approvals related to the Merger from the states of Ohio, South Carolina, Tennessee and Utah and from the NRC. No further regulatory approvals related to the Merger are required.

 

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Table of Contents

 

The obligation of Parent and Merger Sub to consummate the Merger remains subject to the satisfaction or waiver of a number of conditions set forth in the Merger Agreement, including (i) the absence of any law or order preventing the consummation of the Merger, (ii) subject to certain exceptions, the accuracy of the Company’s representations and warranties, (iii) the Company’s compliance in all material respects with its obligations under the Merger Agreement, and (iv) the absence of a material adverse effect on the Company.

 

The obligation of the Company to consummate the Merger remains subject to the satisfaction or waiver of a number of conditions set forth in the Merger Agreement, including (i) the absence of any law or order preventing the consummation of the Merger, (ii) that Parent’s and Merger Sub’s representations and warranties are accurate subject to certain exceptions and (iii) that Parent and Merger Sub have complied in all material respects with their obligations under the Merger Agreement.

 

The Company expects to consummate the Merger on or about May 24, 2013, at which time the Company’s common stock will be delisted from the New York Stock Exchange.

 

We report our results through two major operating groups: the Government Group and the Global Commercial Group. The Government Group derives its revenue from United States (“U.S.”) government customers for the management and operation or clean-up of facilities with radioactive materials. Our U.S. government customers are primarily individual offices, departments and administrations within the U.S. Department of Energy (“DOE”) and U.S. Department of Defense (“DOD”). The Global Commercial Group reports its results under three separate operating business divisions: Commercial Services (“CS”), Logistics, Processing and Disposal (“LP&D”) and International. The Global Commercial Group provides a broad range of services both nationally and internationally, including (i) on-site D&D services to commercial customers such as power and utility companies, pharmaceutical companies, research laboratories, universities, industrial facilities, state agencies and other commercial entities that are involved with nuclear materials; (ii) logistics, transportation, processing and disposal services to both government and commercial customers at our facility in Clive, Utah, our four facilities in Tennessee, or our two facilities in Barnwell, South Carolina; and (iii) comprehensive long-term stewardship D&D work for shut-down nuclear power plants and similar operations. Our international operations derive revenue primarily through contracts with the Nuclear Decommissioning Authority (“NDA”) in the United Kingdom (“U.K.”) to operate, manage and decommission ten Magnox sites with 22 nuclear reactors. In addition, our International operations also provide turn-key services and sub-contract services for the treatment, processing, storage and disposal of radioactive waste from nuclear sites and non-nuclear facilities such as hospitals, research facilities and other manufacturing and industrial facilities.

 

(2) Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring activities, considered necessary for a fair presentation have been included. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto contained in our 2012 Annual Report.

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates. The results of operations for the three month period ended March 31, 2013 are not necessarily indicative of results that can be expected for the full year.

 

We have majority voting rights for one of our minority-owned joint ventures. Accordingly, we have consolidated its operations in our consolidated financial statements and therefore, we recorded the noncontrolling interests, which reflect the portion of the earnings of operations which are applicable to other noncontrolling partners.

 

Reclassifications

 

Certain reclassifications have been made to our prior period consolidated financial information in order to conform to the current year presentation. Approximately $1.5 million was reclassified from property, plant and equipment to other intangible assets, both included under noncurrent assets in our consolidated balance sheet as of December 31, 2012, due to a misclassification of certain cask licensing costs.

 

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Table of Contents

 

Accounting for the Exelon Transaction

 

In December 2007, we entered into certain agreements with Exelon Corporation (“Exelon”) to dismantle the Zion Station nuclear power plant located in Zion, Illinois (the “Zion Station”). On the date of the closing of the asset sale agreement with Exelon, the nuclear decommissioning trust (the “NDT”) fund investments previously held by Exelon for the purpose of decommissioning the Zion Station were transferred to us and the use of those funds, and any investment returns arising therefrom, remain restricted solely for that purpose. The investments are classified as trading securities and as such, the realized and unrealized investment gains and losses are recorded in the condensed consolidated statements of operations and comprehensive income (loss) as other income (expense), net. As part of this transaction, we have assumed Exelon’s cost basis in the investments for tax purposes. To the extent that the trust fund assets exceed the total costs to perform the D&D work, we have a contractual obligation to return any excess funds to Exelon. Throughout the period over which we will perform the D&D work, we will assess whether such a contingent liability exists using the measurement thresholds under ASC 450-20.

 

As the trust fund assets transferred to us represented a prepayment of fees to perform the D&D work, we also recorded deferred revenue initially totaling $772.2 million. Revenue recognition throughout the life of the project is based on the proportional performance method using a cost-to-cost approach.

 

In conjunction with the acquisition of the shut down nuclear power plant, we also became responsible for and assumed the asset retirement obligation (“ARO”) for the plant, and we have established an ARO measured in accordance with ASC 410-20. Subsequent measurement of the ARO follows ASC 410-20 accounting guidance, including the recognition of accretion expense, reassessment of the remaining liability using our estimated costs to complete the D&D work, plus a profit margin, and recognition of the ARO gain as the obligation is settled. ARO gain results from the requirement to record costs plus an estimate of third-party profits in determining the ARO. When we perform the D&D work using internal resources to reduce the ARO for work performed, we recognize a gain if actual costs are less than estimated costs plus the third-party profits. Accretion expense and ARO gain are recorded within cost of revenue because we are providing D&D services to a customer. Any change to the ARO as a result of cost estimate changes is recorded in cost of revenue within the condensed consolidated statements of operations and comprehensive income (loss). We also recorded deferred costs to reflect the costs incurred to acquire the future revenue stream. The deferred cost balance was initially recorded at $767.1 million, which is the same value as the initial ARO, and will be amortized to cost of revenue in the same manner as deferred revenue is amortized, using the proportional performance method.

 

(3) Recent Accounting Pronouncements

 

Accounting Pronouncements Issued

 

There have been no developments to recently issued accounting pronouncements, including the expected dates of adoption and estimated effects on the Company’s consolidated financial statements from that disclosed in the Company’s 2012 Annual Report.

 

(4) Trust Fund Investments

 

The NDT fund was established solely to satisfy obligations related to the D&D of the Zion Station. The NDT fund holds investments in marketable debt and equity securities directly and indirectly through commingled funds. Investments in the NDT fund are carried at fair value and are classified as trading securities. As of March 31, 2013, investments held by the NDT fund, net, totaled $563.5 million, and are included in current and other long-term assets in the accompanying condensed consolidated balance sheets, depending on the expected timing of usage of funds.

 

We consolidate the NDT fund as a VIE. We have a contractual interest in the NDT fund and this interest is a variable interest due to its exposure to the fluctuations caused by market risk. We are able to control the NDT fund by appointing the trustee and, subject to certain restrictions, we are able to direct the investment policies of the fund. We are the primary beneficiary of the NDT fund as we benefit from positive market returns and bear the risk of market losses.

 

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Table of Contents

 

NDT fund investments consisted of the following (in thousands):

 

 

 

As of March 31, 2013

 

As of December 31, 2012

 

 

 

Amortized
cost

 

Gross
unrealized
gains

 

Gross
unrealized
losses

 

Estimated
fair value

 

Amortized
cost

 

Gross
unrealized
gains

 

Gross
unrealized
losses

 

Estimated
fair value

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Receivables for securities sold

 

$

12,551

 

$

 

$

 

$

12,551

 

$

7,422

 

$

 

$

 

$

7,422

 

Investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

209,989

 

16,214

 

(506

)

225,697

 

223,662

 

17,940

 

(575

)

241,027

 

Equity securities

 

400

 

39

 

 

439

 

10,117

 

4,249

 

(61

)

14,305

 

Direct lending securities

 

110,441

 

8,354

 

(937

)

117,858

 

98,138

 

6,026

 

(1,721

)

102,443

 

Debt securities issued by states of the U.S.

 

24,863

 

3,375

 

 

28,238

 

31,306

 

3,806

 

 

35,112

 

Cash and cash equivalents

 

23,161

 

 

 

23,161

 

23,686

 

 

 

23,686

 

Commingled funds

 

 

 

 

 

4,017

 

527

 

 

4,544

 

Debt securities issued by the U.S. Treasury and other U.S. government corporations and agencies

 

157,639

 

1,996

 

(1,299

)

158,336

 

166,925

 

3,912

 

(880

)

169,957

 

Total investments

 

526,493

 

29,978

 

(2,742

)

553,729

 

557,851

 

36,460

 

(3,237

)

591,074

 

Total assets

 

539,044

 

29,978

 

(2,742

)

566,280

 

565,273

 

36,460

 

(3,237

)

598,496

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payable for securities purchased

 

(1,857

)

 

 

(1,857

)

 

 

 

 

Total liabilities

 

(1,857

)

 

 

(1,857

)

 

 

 

 

Net assets held by the NDT fund

 

$

537,187

 

$

29,978

 

$

(2,742

)

564,423

 

$

565,273

 

$

36,460

 

$

(3,237

)

598,496

 

Less: current portion

 

 

 

 

 

 

 

(142,682

)

 

 

 

 

 

 

(152,507

)

Long-term investments

 

 

 

 

 

 

 

$

421,741

 

 

 

 

 

 

 

$

445,989

 

 

Investments held by the NDT fund are included in current and other long-term assets in the accompanying condensed consolidated balance sheets, depending on the expected timing of usage of funds. We have withdrawn from the NDT fund approximately $38.3 million and $158.3 million, for the three month period ended March 31, 2013 and for the year ended December 31, 2012, respectively, to pay for Zion Station D&D project expenses, estimated trust income taxes and trust management fees.

 

For the three month periods ended March 31, 2013 and 2012, we recorded $6.0 million of unrealized losses and $5.9 million of unrealized gains, respectively, resulting from adjustments to the fair value of the NDT fund investments. Realized gains related to sales of investments, dividends and interest payments received from investments held by the NDT fund were $11.3 million and $13.6 million for the three month periods ended March 31, 2013 and 2012, respectively. Both, unrealized and realized gains and losses on the NDT fund investments are included in other income (expense), net, in the condensed consolidated statements of operations and comprehensive income (loss).

 

(5) Fair Value Measurements

 

We have implemented the accounting requirements for financial assets, financial liabilities, non-financial assets and non-financial liabilities reported or disclosed at fair value. The requirements define fair value, establish a three level hierarchy for measuring fair value in GAAP, and expand disclosures about fair value measurements. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that a company has the ability to access at the measurement date. Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the assets or liabilities.

 

This hierarchy requires us to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while we believe our valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date. Assets are classified in their entirety based on the lowest level of input that is significant to their fair value measurement.

 

The carrying value of accounts receivable, costs, and estimated earnings in excess of billings on uncompleted contracts, prepaid assets, accounts payable, and accrued expenses approximate their fair value principally because of the short-term nature of these assets and liabilities.

 

The fair market value of our debt is based on quoted market prices from the over-the-counter restricted market and is categorized as Level 1. The fair market value of our senior secured credit facility was approximately $516.1 million as of March 31, 2013 and $508.6 million as of December 31, 2012. The carrying value of our senior secured credit facility was $510.4 million as of March 31, 2013 and $527.0 million as of December 31, 2012. We also had outstanding senior notes obligations with a carrying amount of $300.0 million as of March 31, 2013 and December 31, 2012, with a fair market value of approximately $313.5 million as of March 31, 2013 and $283.5 million as of December 31, 2012.

 

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Table of Contents

 

The following table presents the NDT fund investments measured at fair value (in thousands):

 

 

 

As of March 31, 2013

 

As of December 31, 2012

 

 

 

Total
Investments
at Fair
Value

 

Quoted Prices
in Active
Markets for
Identical
Assets
Level 1

 

Significant
Other
Observable
Inputs
Level 2

 

Significant
Unobservable
Inputs
Level 3

 

Total
Investments
at Fair
Value

 

Quoted Prices
in Active
Markets for
Identical
Assets
Level 1

 

Significant
Other
Observable
Inputs
Level 2

 

Significant
Unobservable
Inputs
Level 3
(revised)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Receivables for securities sold

 

$

12,551

 

$

12,551

 

$

 

$

 

$

7,422

 

$

7,422

 

$

 

$

 

Investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

23,161

 

23,161

 

 

 

23,686

 

23,686

 

 

 

Fixed income securities(1)

 

412,271

 

129,863

 

282,408

 

 

446,096

 

125,605

 

320,491

 

 

Equity securities(2)

 

439

 

439

 

 

 

14,305

 

14,305

 

 

 

Direct lending securities(3)

 

117,858

 

 

 

117,858

 

102,443

 

 

 

102,443

 

Units of participation(4)

 

 

 

 

 

4,544

 

 

4,544

 

 

Total investments

 

553,729

 

153,463

 

282,408

 

117,858

 

591,074

 

163,596

 

325,035

 

102,443

 

Total assets

 

566,280

 

166,014

 

282,408

 

117,858

 

598,496

 

171,018

 

325,035

 

102,443

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payable for securities purchased

 

(1,857

)

(1,857

)

 

 

 

 

 

 

Total liabilities

 

(1,857

)

(1,857

)

 

 

 

 

 

 

Net assets held by the NDT fund

 

$

564,423

 

$

164,157

 

$

282,408

 

$

117,858

 

$

598,496

 

$

171,018

 

$

325,035

 

$

102,443

 

 


(1)             For fixed income securities, multiple prices from pricing services are obtained from pricing vendors whenever possible, which enables cross- provider validations in addition to checks for unusual daily movements. A primary price source is identified based on asset type, class or issue for each security. The trustee monitors prices supplied by pricing services and may use a supplemental price source or change the primary price source of a given security if the portfolio managers challenge an assigned price and the trustee determines that another price source is considered to be preferable. U.S. Treasury securities are categorized as Level 1 because they trade in a highly liquid and transparent market. Investments with maturities of three months or less when purchased, including certain short-term fixed income securities, are considered cash equivalents and are also categorized as Level 1. The fair values of fixed income securities, excluding U.S. Treasury securities, are based on evaluated prices that reflect observable market information, such as actual trade information or similar securities, adjusted for observable differences and are categorized in Level 2.

 

(2)             With respect to individually held equity securities, the trustee obtains prices from pricing services, whose prices are obtained from direct feeds from market exchanges. The fair values of equity securities held directly by the trust fund are based on quoted prices in active markets and are categorized in Level 1. Equity securities held individually are primarily traded on the New York Stock Exchange and NASDAQ Global Select Market, which contain only actively traded securities due to the volume trading requirements imposed by these national securities exchanges.

 

(3)             Direct lending securities are investments in managed funds that invest in private companies for long-term capital appreciation. The fair value of these securities is determined using either an enterprise value model or a bond valuation model. The enterprise value model develops valuation estimates based on valuations of comparable public companies, recent sales of private and public companies, discounting the forecasted cash flows of the portfolio company, estimating the liquidation or collateral value of the portfolio company or its assets, considering offers from third parties to buy the portfolio company, its historical and projected financial results, as well as other factors that may impact value. Significant judgment is required in the applications of discounts or premiums applied to the prices of comparable companies for factors such as size, marketability and relative performance. Under the bond valuation model, expected future cash flows are discounted using a discount rate. The discount rate is composed of a market based rate for similar credits in the public market and an internal credit rate based on the underlying risk of the credit. Investments in direct lending funds are categorized as Level 3 because the fair value of these securities is based largely on inputs that are unobservable and also utilize complex valuation models. Investments in direct lending securities typically cannot be redeemed until maturity of the term loan.

 

Because we rely on a third party for valuation of Level 3 investments, we have concluded that quantitative information about significant unobservable inputs used in valuing these investments is not reasonably available. This includes information regarding the sensitivity of the fair values to changes in the unobservable inputs. We obtain annual valuations from the fund managers and gain an understanding of the inputs and assumptions used in preparing the valuations. We also conclude on the reasonableness of the fair value of these investments. We obtain quarterly reports from the fund managers and review for consistency and reasonableness with regards to the valuations of these investments that were analyzed at the most recent year-end.

 

(4)             Units of participation, which are similar to mutual funds, are maintained by investment companies and hold certain investments in accordance with stated fund objectives. The fair values of short-term commingled funds held within the trust funds, which generally hold short-term fixed income securities and are not subject to restrictions regarding the purchase or sale of shares, are derived from observable prices. Units of participation are categorized as Level 2 because the fair value of these securities is based primarily on observable prices of the underlying securities.

 

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Table of Contents

 

The following table presents the rollforward for Level 3 assets and liabilities measured at fair value on a recurring basis (in thousands):

 

Direct Lending Securities

 

March 31,
2013

 

December 31,
2012

 

Beginning balance

 

$

102,443

 

$

61,998

 

Purchases and issuances

 

17,351

 

82,285

 

Sales, dispositions and settlements

 

(5,094

)

(39,706

)

Realized gains and losses

 

46

 

(2,940

)

Change in unrealized gains and losses

 

3,112

 

806

 

Ending balance

 

$

117,858

 

$

102,443

 

 

(6) Joint Ventures

 

We use the equity method of accounting for our unconsolidated joint ventures. Under the equity method, we recognize our proportionate share of the net earnings of these joint ventures as a single line item under “Equity in income of unconsolidated joint ventures” in our condensed consolidated statements of operations and comprehensive income (loss). In accordance with authoritative guidance, we analyzed all of our joint ventures and classified them into two groups: (a) joint ventures that must be consolidated because we hold the majority voting interest, or because they are VIEs of which we are the primary beneficiary; and (b) joint ventures that do not need to be consolidated because we hold only a minority voting or other ownership interest, or because they are VIEs of which we are not the primary beneficiary. During the three month period ended March 31, 2013, we performed an assessment of our joint ventures and concluded that no unconsolidated joint ventures should be consolidated and that no consolidated joint ventures should be deconsolidated.

 

The table below presents unaudited financial information, derived from the most recent financial statements provided to us, in aggregate, for our unconsolidated joint ventures (in thousands):

 

 

 

As of
March 31,
2013

 

As of
December 31,
2012

 

Current assets

 

$

44,605

 

$

49,979

 

Current liabilities

 

24,006

 

25,127

 

 

 

 

For The Three Month
Period Ended
March 31,

 

 

 

2013

 

2012

 

Revenue

 

$

26,506

 

$

32,667

 

Gross profit

 

2,566

 

2,011

 

Net income

 

2,275

 

1,909

 

Net income attributable to EnergySolutions

 

676

 

730

 

 

Our percentage of ownership of unconsolidated joint ventures as of March 31, 2013 was:

 

 

 

Percentage of
Ownership

 

Global Threat Reduction Solutions, LLC

 

49.0

%

LATA/Parallax Portsmouth, LLC

 

49.0

%

SempraSafe, LLC

 

49.0

%

TPMC EnergySolutions Environmental Services, LLC

 

49.0

%

Washington River Protection Solutions, LLC

 

40.0

%

Weskem, LLC

 

27.6

%

Idaho Treatment Group, LLC

 

15.0

%

West Valley Environmental Services LLC

 

10.0

%

 

We did not receive any dividend distributions from our unconsolidated joint ventures during the three month periods ended March 31, 2013 or 2012.

 

Noncontrolling interest

 

We have majority voting rights for one of our minority owned joint ventures. Accordingly, we have reported its operations in our consolidated financial statements. Assets from our consolidated joint venture can only be used to settle its own obligations. Additionally, our assets cannot be used to settle the joint ventures’ obligations because this minority owned joint venture does not have recourse to our general credit. We record noncontrolling interest income which reflects the portion of the earnings of operations which are applicable to other minority interest partners. Cash payments, representing the distributions of the investors’ share of cash generated by operations, are recorded as a reduction in noncontrolling interests. Noncontrolling interest income for the three month periods ended March 31, 2013 and 2012 was $0. No distributions were made for the three month periods ended March 31, 2013 or 2012.

 

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Table of Contents

 

(7) Goodwill

 

As of March 31, 2013 and December 31, 2012, we had recorded $305.4 million and $308.6 million, respectively, of goodwill related to domestic and foreign acquisitions. Goodwill related to the acquisitions of foreign entities is translated into U.S. dollars at the exchange rate in effect at the balance sheet date. The related translation gains and losses are included as a separate component of stockholders’ equity in accumulated other comprehensive income (loss) in the condensed consolidated balance sheets. For the three month periods ended March 31, 2013 and 2012, we recorded translation losses of $2.8 million and translation gains of $1.7 million, respectively, related to goodwill denominated in foreign currencies.

 

In accordance with authoritative guidance for accounting for Goodwill and Other Intangible Assets, we perform an impairment test on our goodwill annually, as of April 1, or more often when events occur or circumstances change that would, more likely than not, reduce the fair value of a reporting unit below its carrying value. We estimate the fair value of the reporting units using a combined income and market approach. The income approach is calculated based on management’s best estimates of future cash flows. Changes in these forecasts could significantly change the calculated fair value of a reporting unit. The market approach is calculated based on market multiples for comparable companies as applied to our company-specific metrics. As of March 31, 2013, and December 31, 2012, there were no events or circumstances that indicated that impairment exists in any of our reporting units.

 

(8) Other Intangible Assets

 

Other intangible assets subject to amortization consist principally of amounts assigned to permits, customer relationships and technology.  All of our intangibles are subject to amortization.

 

Other intangible assets consisted of the following (in thousands):

 

 

 

As of March 31, 2013

 

As of December 31, 2012

 

 

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Weighted
Average
Remaining
Useful Life

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Weighted
Average
Remaining
Useful Life

 

Permits

 

$

243,036

 

$

(78,871

)

16.4 years

 

$

243,130

 

$

(76,406

)

16.9 years

 

Customer relationships

 

154,851

 

(93,349

)

5.3 years

 

161,429

 

(93,552

)

5.6 years

 

Technology and other

 

15,490

 

(10,960

)

2.8 years

 

15,490

 

(10,540

)

3.1 years

 

Total amortizable intangibles

 

$

413,377

 

$

(183,180

)

13.2 years

 

$

420,049

 

$

(180,498

)

13.4 years

 

 

We recorded $2.8 million and $3.5 million of translation losses related to intangible assets denominated in foreign currencies for the three month periods ended March 31, 2013 and 2012, respectively. Amortization expense was $6.4 million and $6.5 million for the three month periods ended March 31, 2013 and 2012, respectively.

 

(9) Senior Credit Facilities and Senior Notes

 

Our outstanding long-term debt consists of the following (in thousands):

 

 

 

March 31,
2013

 

December 31,
2012

 

Term loan facilities due through 2016(1)

 

$

510,407

 

$

527,000

 

Term loan unamortized discount

 

(8,026

)

(8,741

)

Senior notes, 10.75% due through 2018

 

300,000

 

300,000

 

Senior notes unamortized discount

 

(2,990

)

(3,090

)

Revolving credit facility

 

 

 

Total debt

 

799,425

 

815,169

 

Less: current portion

 

 

(16,592

)

Total long-term debt

 

$

799,425

 

$

798,577

 

 


(1)         The variable interest rate on borrowings under our senior secured credit facility was 6.25% as of March 31, 2013 and December 31, 2012.

 

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Table of Contents

 

On August 13, 2010, the Company entered into a senior secured credit facility with JPMorgan Chase Bank, N.A., as the administrative agent and collateral agent, consisting of a senior secured term loan in an aggregate principal amount of $560 million at a discount rate of 2.5% and a senior secured revolving credit facility with availability of $105.0 million, of which $69.2 million was used to fund letters of credit issued as of March 31, 2013. Borrowings under the senior secured credit facility bear interest at a rate equal to: (a) Adjusted LIBOR plus 4.50% (subject to a LIBOR floor of 1.75%), or ABR plus 3.50% in the case of the senior secured term loan; (b) Adjusted LIBOR plus 4.50% (subject to a LIBOR floor of 1.75%), or ABR plus 3.50% in the case of the senior secured revolving credit facility, and (c) a per annum fee equal to the spread over Adjusted LIBOR under the senior secured revolving credit facility, along with a fronting fee and issuance and administration fees in the case of revolving letters of credit. As of March 31, 2013 and December 31, 2012, borrowings of $310.5 million and $310.6 million, respectively, under the senior secured term loan were held in a restricted cash account as collateral for the Company’s reimbursement obligations with respect to deposit letters of credit.

 

The senior secured term loan amortizes in equal quarterly installments of $1.3 million payable on the last day of each calendar quarter with the balance being payable on August 13, 2016. In addition to the scheduled repayments, we are required to prepay borrowings under the senior secured credit facility with (1) 100% of the net cash proceeds received from non-ordinary course asset sales or other dispositions, or as a result of a casualty or condemnation, subject to reinvestment provisions and other customary adjustments, (2) 100% of the net proceeds received from the issuance of debt obligations other than certain permitted debt obligations, (3) 50% of excess cash flow (as defined in the senior secured credit facility), if the leverage ratio is equal to or greater than 3.0 to 1.0, or 25% of excess cash flow if the leverage ratio is less than 3.0 to 1.0 but greater than 1.0 to 1.0, reduced by the aggregate amount of optional prepayments of senior secured term loan made during the applicable fiscal year. If the leverage ratio is equal to or less than 1.0 to 1.0, we are not required to prepay the senior secured term loan. The excess cash flow calculations (as defined in the senior secured credit facility), are prepared annually as of the last day of each fiscal year. Prepayments of debt resulting from the excess cash flow calculations are due annually five days after the date that the Annual Report on Form 10-K for such fiscal year is filed with the SEC. As of March 31, 2013, no scheduled quarterly repayments were due within the next 12 months. Each optional and mandatory prepayment is applied first, in direct order of maturities, to the next four scheduled principal repayment installments of the senior secured term loan and second, to the other principal repayment installments of senior secured term loans on a pro rata basis.

 

During the three month period ended March 31, 2013, we made principal debt payments totaling $16.6 million. We also paid $5.7 million of debt financing fees to our lenders to obtain amendments to the senior secured credit facility of which $3.2 million were capitalized and are included in other noncurrent assets within the condensed consolidated balance sheet as of March 31, 2013.

 

The senior secured credit facility requires the Company to maintain a leverage ratio (based upon the ratio of indebtedness for money borrowed to consolidated adjusted EBITDA, as defined in the senior secured credit facility) and an interest coverage ratio (based upon the ratio of consolidated adjusted EBITDA to consolidated cash interest expense), both of which are calculated quarterly. Failure to comply with these financial ratio covenants would result in an event of default under the senior secured credit facility and, absent a waiver or an amendment from the lenders, preclude us from making further borrowings under the senior secured credit facility and permit the lenders to accelerate repayment of all outstanding borrowings under the senior secured credit facility. Based on the formulas set forth in the senior secured credit facility, we are required to maintain a maximum total leverage ratio of 4.0 for the quarter ending March 31, 2013, which is reduced by 0.25 on an annual basis through the maturity date. We are required to maintain a minimum cash interest coverage ratio of 2.00 from the quarter ended March 31, 2013 through the quarter ended September 30, 2014 and 2.25 through the maturity date. As of March 31, 2013, our total leverage and cash interest coverage ratios were 2.96 and 2.55 respectively.

 

The senior secured credit facility also contains a number of affirmative and restrictive covenants including limitations on mergers, consolidations and dissolutions, sales of assets, investments and acquisitions, indebtedness, liens, affiliate transactions, and dividends and restricted payments. Under the senior secured credit facility, we are permitted maximum annual capital expenditures of $40.0 million for 2013 and each year thereafter, plus for each year the lesser of (1) a one year carryforward of the unused amount from the previous fiscal year and (2) 50% of the amount permitted for capital expenditures in the previous fiscal year. The senior secured credit facility contains events of default for non-payment of principal and interest when due, a cross-default provision with respect to other indebtedness having an aggregate principal amount of at least $5.0 million and an event of default that would be triggered by a change of control, as defined in the senior secured credit facility. Capital expenditures for the three month period ended March 31, 2013 were $3.1 million. As of March 31, 2013, we were in compliance with all of the covenants under our senior secured credit facility.

 

The obligations under the senior secured credit facility are secured by a lien on substantially all of the assets of the Company and each of the Company’s domestic subsidiary guarantors, including a pledge of equity interests with the exception of the equity interests in our ZionSolutions subsidiary and other special purpose subsidiaries, whose organizational documentation prohibits or limits such pledge.

 

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Table of Contents

 

In connection with our senior secured credit facility, on February 15, 2013, we entered into Amendment No. 2 to the Credit Agreement and Consent and Waiver (the “Loan Amendment”), with the lenders party thereto and JP Morgan Chase Bank, N.A., as the administrative and collateral agent. The Loan Amendment contains the following terms and conditions:

 

1)                                     that the lenders and the administrative agent consent to i) the consummation of the Merger; ii) a waiver of the change of control provisions and certain other covenants and provisions under the senior secured credit facility, iii) a consent to any repayment of our 10.75% Senior Notes due 2018, provided that any payments are funded from equity contributions made to us by ECP or its affiliates; iv) an extension to the maturity date of our senior secured revolving credit facility, subject to certain conditions and acceptance by the extending revolving lenders; and v) 1% prepayment premium if any senior secured term loans are refinanced prior to the date that is one year following the execution date of the Loan Amendment;

 

2)                                     that the definition of change of control and reporting requirements under the senior secured credit facility be amended;

 

3)                                     that upon the closing of the Merger, that the applicable margin for our senior secured term loan made pursuant to the senior secured credit facility be increased by 0.5%;

 

4)                                     that we will pay a consent fee to each lender that has entered into the Loan Amendment equal to (i) 0.5% of the sum of the outstanding term loans and revolving commitments of such lender on the execution date of the Loan Amendment and (ii) 0.5% of the sum of the outstanding term loans and revolving commitments of such lender on the closing date of the merger;

 

5)                                     that we reimburse the administrative agent for fees, charges and disbursements of counsel in connection with preparation of the Loan Amendment;

 

6)                                     that no later than 150 days after the closing of the Merger, that we reduce our debt with respect to our senior secured term loans under the amended senior secured credit facility and our 10.75% Senior Notes due 2018, after giving effect to the Merger, to $675.0 million or less; and

 

7)                                     that the Loan Amendment would take effect upon the consummation of the Merger.

 

If the Merger Agreement is terminated, then pursuant to the Reimbursement Agreement we entered into with Parent and Merger Sub on February 15, 2013 in connection with the Loan Amendment, Parent will reimburse the Company for (i) certain fees, costs, expenses or disbursements, if and to the extent paid by or on behalf of the Company, payable in connection with the Loan Amendment and (ii) certain fees, costs, expenses or disbursements, if and to the extent paid by or on behalf of the Company, that would otherwise be payable by Parent under the Fee Letter dated January 7, 2013, by and between Morgan Stanley Senior Funding, Inc. and Parent, subject to offset in certain circumstances.

 

On August 13, 2010, we also completed a private offering of $300.0 million 10.75% senior notes at a discount rate of 1.3%. The senior notes are governed by an Indenture among EnergySolutions and Wells Fargo Bank, National Association, as trustee. Interest on the senior notes is payable semiannually in arrears on February 15 and August 15 of each year beginning on February 15, 2011. The senior notes rank in equal right of payment to all existing and future senior debt and senior in right of payment to all future subordinated debt. In May 2011, we filed a registration statement under the Securities Act, pursuant to a registration rights agreement entered into in connection with the senior notes offering. The SEC declared the registration statement relating to the exchange offer effective on May 27, 2011, and the exchange of the registered senior notes for the unregistered senior notes was consummated on May 31, 2011. We did not receive any proceeds from the exchange offer transaction.

 

At any time prior to August 15, 2014, we are entitled to redeem all or a portion of the senior notes at a redemption price equal to 100% of the principal amount of the senior notes plus an applicable make-whole premium, as of, and accrued and unpaid interest to, the redemption date. In addition, prior to August 15, 2013, we may redeem up to 35% of the aggregate principal amount of the senior notes with the net cash proceeds from certain public equity offerings at a redemption price of 110.75% of the principal amount, plus accrued and unpaid interest to the date of redemption. In addition, on or after August 15, 2014, we may redeem all or a portion of the senior notes at the following redemption prices during the 12-month period commencing on August 15 of the years set forth below, plus accrued and unpaid interest to the redemption date.

 

Period

 

Redemption
Price

 

2014

 

105.375

%

2015

 

102.688

%

2016 and thereafter

 

100.000

%

 

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Table of Contents

 

The senior notes are guaranteed on a senior unsecured basis by all of our domestic restricted subsidiaries that guarantee the senior secured credit facility. The senior notes and related guarantees are effectively subordinated to our secured obligations, including the senior secured credit facility and related guarantees, to the extent of the value of assets securing such debt. The senior notes are structurally subordinated to all liabilities of each of our subsidiaries that do not guarantee the senior notes. If a change of control of the Company occurs, each holder will have the right to require that we purchase all or a portion of such holder’s senior notes at a purchase price of 101% of the principal amount, plus accrued and unpaid interest to the date of the purchase. The Indenture contains, among other things, certain covenants limiting our ability and the ability of one restricted subsidiary to incur or guarantee additional indebtedness, pay dividends or make other restricted payments, make certain investments, create or incur liens, sell assets and subsidiary stock, transfer all or substantially all of our assets, or enter into a merger or consolidation transactions, and enter into transactions with affiliates.

 

Each subsidiary co-issuer and guarantor of our senior notes is exempt from reporting under the Securities Exchange Act of 1934 , as amended (the “Exchange Act”), pursuant to Rule 12h-5 under the Exchange Act, as the subsidiary co-issuer and each of the subsidiary guarantors is wholly owned by us, and the obligations of the co-issuer and the guarantees of our subsidiary guarantors are full and unconditional and joint and several. There are no significant restrictions on our ability or any subsidiary guarantor to obtain funds from its subsidiaries.

 

During the three month period ended March 31, 2013, we made cash interest payments totaling $25.2 million related to our outstanding debt obligations as of that date. During the three month period ended March 31, 2012, we made cash interest payments totaling $25.0 million, related to our outstanding debt obligations as of that date.

 

(10) Facility and Equipment Decontamination and Decommissioning

 

We recognize AROs when we have a legal obligation to perform D&D and removal activities upon retirement of an asset. The fair value of an ARO liability is recognized in the period in which it is incurred, if a reasonable estimate of fair value can be made, and is added to the carrying amount of the associated asset, which is then depreciated over the remaining useful life of the asset, in the case of all our AROs except the Zion Station ARO, as described below.

 

Our ARO is based on a cost estimate for a third party to perform the D&D work. This estimate is inflated, using an inflation rate, to the expected time at which the D&D activity will occur, and then discounted back, using our credit adjusted risk free rate, to the present value. Subsequent to the initial measurement, the ARO is adjusted at the end of each period to reflect the passage of time and changes in the estimated future cash flows underlying the obligations.

 

Our facility and equipment D&D liabilities consist of the following (in thousands):

 

 

 

March 31,
2013

 

December 31,
2012

 

Facilities and equipment ARO—Zion Station

 

$

519,252

 

$

553,302

 

Facilities and equipment ARO—Clive, UT

 

29,588

 

29,300

 

Facilities and equipment ARO—other

 

35,562

 

35,757

 

Total facilities and equipment ARO

 

584,402

 

618,359

 

Barnwell Closure

 

5,079

 

5,845

 

 

 

589,481

 

624,204

 

Less: current portion

 

(130,282

)

(138,757

)

 

 

$

459,199

 

$

485,447

 

 

Subsequent to the initial measurement of the ARO, the ARO is adjusted at the end of each period to reflect the passage of time and changes in the estimated future cash flows underlying the obligations. The following is a rollforward of our facilities and equipment ARO (in thousands):

 

 

 

March 31,
2013

 

December 31,
2012

 

Beginning Balance as of January 1

 

$

618,359

 

$

750,649

 

Liabilities incurred

 

64

 

187

 

Liabilities settled

 

(40,600

)

(159,776

)

Accretion expense

 

6,579

 

30,017

 

ARO estimate adjustments

 

 

(2,718

)

Ending liability

 

$

584,402

 

$

618,359

 

 

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Table of Contents

 

For certain of our D&D obligations, we are required to deposit cash relating to our D&D obligation in the form of a restricted cash account, a deposit in escrow, or in a trust fund. D&D deposits consist principally of: (i) funds held in trust for completion of various site clean-up projects and (ii) funds deposited in connection with landfill closure, post-closure and remediation obligations. Although we are required to provide assurance to satisfy some of our D&D obligations in the form of insurance policies, restricted cash accounts, escrows or trust funds, these assurance mechanisms do not extinguish our D&D liabilities. D&D deposits and restricted cash are included in non-current assets in the accompanying condensed consolidated balance sheets.

 

The following table presents a summary of the D&D cash deposits available exclusively to fund closure and post-closure obligations related to our AROs (in thousands):

 

 

 

March 31,
2013

 

December 31,
 2012

 

Zion Station plant—restricted cash(1)

 

$

200,000

 

$

200,000

 

Clive, Utah facility—restricted cash

 

85,618

 

85,606

 

Tennessee facilities—escrow account(2)

 

13,363

 

13,363

 

Barnwell, South Carolina facility—trust fund

 

5,079

 

5,845

 

Others—restricted cash

 

662

 

662

 

 


(1)         In connection with the execution of the Exelon Agreements, and in fulfillment of NRC regulations, we secured a $200.0 million letter of credit facility to further support the D&D activities at Zion Station. This letter of credit is cash-collateralized with proceeds obtained from our senior secured credit facility.

 

(2)         To fund our obligation to clean and remediate our Tennessee facilities and equipment, we have also purchased insurance policies.

 

(11) Net Income (Loss) Per Share

 

Basic net income (loss) per share is computed by dividing net income (loss) attributable to EnergySolutions by the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing net income (loss) attributable to EnergySolutions by the weighted-average number of common shares outstanding during the period and potentially dilutive common stock equivalents. Potential common stock equivalents that have been issued by us relate to outstanding stock options and non-vested restricted stock awards and are determined using the treasury stock method.

 

The following table sets forth the computation of the common shares outstanding in determining basic and diluted net income (loss) per share:

 

 

 

For the Three Month
Period ended March 31,

 

 

 

2013

 

2012

 

Weighted average common shares—basic

 

90,359,873

 

89,065,585

 

Dilutive effect of restricted stock and stock options

 

 

 

Weighted average common shares—diluted

 

90,359,873

 

89,065,585

 

Anti-dilutive securities not included above

 

3,498,933

 

7,814,192

 

 

(12) Equity-Based Compensation

 

Stock Options, Restricted Stock and Phantom Stock

 

In November 2007, we adopted the EnergySolutions, Inc. 2007 Equity Incentive Plan (the “Plan”). The Plan authorizes our Board of Directors to grant equity awards to directors, officers, employees and consultants. The aggregate number of shares of common stock that may be issued pursuant to awards granted under the Plan is 10,440,000.  We also have a phantom stock plan that provides cash or stock award based on the value of a number of shares to be paid out at the end of a specified period of time at the Company’s closing stock price on the vesting date.

 

For the three month period ended March 31, 2013 we recorded stock based compensation expense related to our stock option, restricted stock grants and phantom stock grants of $0.5 million. During the first quarter of 2013, the Company determined that it had recorded stock based compensation expense related to grants to certain employees that had been previously terminated with such grants being forfeited. As such, the Company recorded $0.8 million to reduce stock based compensation expense for the three months ended March 31, 2013, related to periods prior to 2013. For the three month period ended March 31, 2012 we recorded stock based compensation expense related to our stock option and restricted stock grants of $0.7 million. Amortization of equity based stock compensation is included in selling, general and administrative expenses in the condensed consolidated statements of operations and other comprehensive income (loss).

 

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Table of Contents

 

As of March 31, 2013, we had $0.9 million of unrecognized compensation expense related to outstanding stock options, which will be recognized over a weighted-average period of 1.6 years. As of March 31, 2013, there was $2.7 million of unrecognized compensation expense related to non-vested restricted stock which is expected to be recognized over a weighted-average period of 1.4 years. As of March 31, 2013, we had $11.8 million of unrecognized compensation expense related to phantom stock awards, which will be recognized over a weighted-average period of 3.8 years.

 

As of March 31, 2013 and December 31, 2012, we had recorded liabilities of $2.5 million and $2.5 million, respectively, related to phantom stock awards to be settled in cash, which are included in accrued expenses and other current liabilities in the condensed consolidated balance sheets. For the three month periods ended March 31, 2013 and 2012, we recorded $1.6 million and $0.6 million, respectively, of compensation expense related to these awards.

 

(13) Income Taxes

 

We recognized income tax expense of $6.5 million and $4,000 for the three month periods ended March 31, 2013 and 2012, respectively, for year-to-date effective rates of negative 393.6% and 0.7%, respectively, based on an estimated annual effective tax rate method. The negative rate resulted from the combination of income tax expense and pretax book losses. Income tax expense arises from income in certain jurisdictions in the U.K. and for the Zion NDT fund. No benefits from losses in the U.S. and other jurisdictions in the U.K. are available to offset tax expense due to their respective full valuation allowance positions. The effective rate varies from the U.S. statutory rate of 35% primarily as a result of the amount of income tax expense relative to pretax book income, lower tax on income in foreign jurisdictions and the NDT fund and the tax benefit of foreign research and development credits.

 

During the three month period ended March 31, 2013, an extension of the research and development credit in the U.S. was signed into law. While the Company fully intends to take advantage of the research and development credit for the 2012 and 2013 tax years, no benefit has been recorded in the financial statements due to the full valuation allowance position in the U.S.

 

During the three month periods ended March 31, 2013 and 2012, we made income tax payments of $0.9 million and $4.3 million, respectively.

 

As of March 31, 2013 and December 31, 2012, we had $0.1 million and $0.1 million, respectively, of gross unrecognized tax benefits. These tax benefits were accounted for under guidance for accounting for uncertainties in income taxes.  During the three month period ended March 31, 2012, the Company recognized an income tax benefit of $1.1 million, due to the expiration of the statute of limitations to examine and challenge our tax positions by the taxing authorities in the jurisdictions in which we operate.

 

(14) Segment Reporting and Business Concentrations

 

The Company has two major operating groups to serve our customers: the Government Group and the Global Commercial Group. The Government Group serves its government customers and pursues new opportunities within the government market. The Global Commercial Group focuses on increasing its customer base both nationally and internationally, and consolidates the operations of our Commercial Services, LP&D and International divisions. However, we continue to report separately each of our four operating business divisions to more fully present the results of our operations.

 

Certain reclassifications have been made to the segment information reported for the prior year period, to conform to current year presentation.

 

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Table of Contents

 

The following table presents segment information as (in thousands):

 

 

 

As of and for the Three Month Period ended March 31, 2013

 

 

 

Government

 

Global Commercial Group

 

Corporate
Unallocated

 

 

 

 

 

Group

 

CS

 

LP&D

 

International

 

Items

 

Consolidated

 

Revenue from external customers(1)(5)

 

$

43,547

 

$

40,912

 

$

43,414

 

$

398,335

 

$

 

$

526,208

 

Income (loss) from operations(2)(5)

 

4,411

 

2,163

 

6,972

 

20,788

 

(19,459

)

14,875

 

Depreciation, amortization and accretion expense

 

31

 

6,577

 

5,523

 

1,986

 

3,284

 

17,400

 

Goodwill

 

73,594

 

90,129

 

89,548

 

52,161

 

 

305,432

 

Other long-lived assets(3)

 

14,246

 

18,317

 

261,039

 

46,221

 

6,861

 

346,684

 

Purchases of property, plant and equipment

 

 

1,542

 

1,363

 

5

 

261

 

3,171

 

Total assets(4)

 

166,432

 

1,356,721

 

511,502

 

508,078

 

74,783

 

2,617,516

 

 

 

 

As of and for the Three Month Period ended March 31, 2012

 

 

 

Government

 

Global Commercial Group

 

Corporate
Unallocated

 

 

 

 

 

Group

 

CS

 

LP&D

 

International

 

Items

 

Consolidated

 

Revenue from external customers(1)(5)

 

$

43,674

 

$

39,494

 

$

44,389

 

$

363,135

 

$

 

$

490,692

 

Income (loss) from operations(2)(5)

 

(4,031

)

(1,666

)

3,238

 

20,508

 

(19,300

)

(1,252

)

Depreciation, amortization and accretion expense

 

407

 

7,552

 

5,653

 

1,902

 

3,503

 

19,017

 

Goodwill

 

73,594

 

90,129

 

89,548

 

54,818

 

 

308,089

 

Other long-lived assets(3)

 

25,021

 

25,865

 

267,779

 

54,940

 

16,053

 

389,658

 

Purchases of property, plant and equipment

 

 

1,655

 

3,562

 

473

 

309

 

5,999

 

Total assets(4)

 

167,996

 

1,579,567

 

555,386

 

574,091

 

84,809

 

2,961,849

 

 


(1)         We eliminate intersegment revenue in consolidation. Intersegment revenue for the three month periods ended March 31, 2013 and 2012 were $5.5 million and $7.4 million, respectively. Revenue by segment represent revenue earned based on third-party billings to customers.

 

(2)         For the three month period ended March 31, 2013, we recorded $0.7 million of income from our unconsolidated joint ventures of which $0.2 million loss is attributable to LP&D and $0.9 million income is attributable to the Government Group. For the three month period ended March 31, 2012, we recorded $0.7 million of income from our unconsolidated joint ventures of which $17,280 loss is attributable to LP&D and $0.7 million income is attributable to the Government Group.

 

(3)         Other long-lived assets include property, plant and equipment and other intangible assets.

 

(4)         Corporate unallocated assets relate primarily to income tax receivables, deferred tax assets, deferred financing costs, prepaid expenses, and property, plant and equipment that benefit the entire Company and cash.

 

(5)         Results of our operations for services provided by our Global Commercial Group to our customers in Canada, Asia and Europe are included in our International operations.

 

(15) Pension Plans

 

Net periodic benefit costs related to the Magnox pension plan consisted of the following (in thousands):

 

 

 

For the Three Month
Period ended March 31,

 

 

 

2013

 

2012

 

Service cost

 

$

14,216

 

$

13,943

 

Interest cost

 

38,726

 

39,471

 

Expected return on plan assets

 

(45,290

)

(42,613

)

Net actuarial loss

 

78

 

117

 

 

 

$

7,730

 

$

10,918

 

 

(16) Restructuring

 

In September 2012, we initiated a restructuring plan (the “Restructuring Plan”) to reduce operating costs and improve profitability within our operations in the U.S. Under the Restructuring Plan, we reduced our facility footprint and implemented a reduction of force across multiple business segments and functions. For the three month period ended March 31, 2013 we recognized $1.8 million in restructuring charges associated with lease and contract terminations, which is included in the condensed consolidated statements of operations and comprehensive income (loss) under cost of revenue. The corresponding liability as of March 31, 2013 and December 31, 2012 was $4.9 million and $7.8 million, respectively, and is included in accrued expenses and other current liabilities and other noncurrent liabilities in the condensed consolidated balance sheets. In February 2013, we announced that we had substantially completed the Restructuring Plan. The remaining unpaid termination benefits are expected to be paid within the next 9 years.

 

                                                In 2009, we started an initial organizational review of our Magnox sites and identified an opportunity to reduce the existing workforce, primarily at three sites at which decommissioning was relatively close to completion with only a few projects remaining. The termination plan was presented in two phases and was approved by the NDA. As a result of overstaffing at the Magnox sites, approximately 300 employees left us on a voluntary basis. For the three month period ended March 31, 2013 we recognized an additional $55.6 million of expected employee termination benefits related to the termination of approximately 200 employees at the Bradwell site, which is rapidly moving into the early care and maintenance phase. Additionally, we also accrued employee termination benefits for the Chapelcross site, which is decreasing in size following completion of defueling activities and is preparing for further decommissioning, as well as the Dungeness, Oldbury, Trawsfynnyd sites, which are getting ready to re-shape the workforce following cessation of power generation in 2014 . No termination benefits were recognized for the three month period ended March 31, 2012. These benefits are included in cost of revenue in the accompanying condensed consolidated statements of operations and comprehensive income (loss) related to our International operations. In addition, we have recognized revenue and a receivable from the NDA for the reimbursement of the employee termination benefits. The corresponding liability as of March 31, 2013 and December 31, 2012 was $56.7 million and $5.7 million, respectively, and is included in accrued expenses and other current liabilities in the condensed consolidated balance sheets. The remaining liability is expected to be paid over approximately the next 12 months.

 

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Table of Contents

 

The following is a reconciliation of the beginning and ending liability balances related to the Magnox employee termination benefits (in thousands):

 

 

 

 

March 31,
2013

 

December 31,
2012

 

Beginning liability

 

$

5,695

 

$

32,659

 

Additions

 

55,555

 

 

Payments

 

(3,097

)

(27,888

)

Effect of exchange rate

 

(1,445

)

924

 

Ending liability

 

$

56,708

 

$

5,695

 

 

The termination plan and employee benefits paid for the termination of these employees are in accordance with the existing employee and the trade union agreements and were pre-approved by the NDA. All employee termination benefits are treated as part of the normal Magnox cost base and are reimbursed by the NDA.

 

Magnox Limited continues to transition as sites move to a new state within their lifecycle. The Magnox Optimized Decommissioning Program (“MODP”) includes approximately ten further changes of organization across the ten Magnox sites in the next 5 years. As a result of these changes and the drive to reduce support and overhead costs, there will be manpower reductions of approximately 600 employees through year 2015 followed by a further reduction of approximately 1,000 employees in the period from 2016 to 2020. The MODP has been approved by the NDA and forms part of the NDA funding settlement which in turn is part of the U.K. government’s current comprehensive spending review.

 

(17) Commitments and Contingencies

 

We may become subject to various claims and legal proceedings covering matters that may arise in the ordinary course of our business activities. As of March 31, 2013, we were not involved in any legal proceedings that we believe would have a material adverse effect on our consolidated financial position, operating results or cash flows.

 

(18) Guarantor and Non-Guarantor Financial Information

 

The 2018 senior notes were issued by EnergySolutions, Inc., the parent company, and EnergySolutions, LLC (together with EnergySolutions, Inc., the “Issuers”). The senior notes are jointly and severally guaranteed on a full and unconditional basis by each of the EnergySolutions, Inc.’scurrent and future domestic wholly owned subsidiaries that are guarantors under the senior secured credit facility, other than ZionSolutions LLC, which was established for the purpose of the Company’s license stewardship initiative, as well as up to five other special purpose subsidiaries that may be established for similar license stewardship projects, and certain other non-operating or immaterial subsidiaries.

 

Presented below is the condensed consolidating financial information of the issuers, our subsidiaries that are guarantors (the “Guarantor Subsidiaries”), and our subsidiaries that are not guarantors (the “Non-Guarantor Subsidiaries”). The condensed consolidating financial information reflects the investments of EnergySolutions, Inc. in the Guarantor Subsidiaries and the Non-Guarantor Subsidiaries using the equity method of accounting.

 

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Table of Contents

 

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

For The Three Month Period ended March 31, 2013

(in thousands)

 

 

 

Energy
Solutions,
Inc.

 

Energy
Solutions,
LLC

 

Guarantor
Subsidiaries

 

Non-
Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

Revenue

 

$

 

$

11,275

 

$

96,895

 

$

431,052

 

$

(13,014

)

$

526,208

 

Cost of revenue

 

 

(7,195

)

(80,077

)

(405,530

)

13,014

 

(479,788

)

Gross profit

 

 

4,080

 

16,818

 

25,522

 

 

46,420

 

Selling, general and administrative expenses

 

 

(17,492

)

(9,975

)

(4,754

)

 

(32,221

)

Equity in income of unconsolidated joint ventures

 

 

 

676

 

 

 

676

 

Operating income (loss)

 

 

(13,412

)

7,519

 

20,768

 

 

14,875

 

Interest expense

 

 

(15,190

)

 

(3,455

)

 

 

(18,645

)

Income (loss) from subsidiaries

 

(6,236

)

24,772

 

 

 

(18,536

)

 

Other, net

 

 

(2,406

)

163

 

4,354

 

 

2,111

 

Income (loss) before income taxes

 

(6,236

)

(6,236

)

7,682

 

21,667

 

(18,536

)

(1,659

)

Provision for income taxes

 

(1,964

)

 

 

(4,575

)

 

(6,539

)

Net income (loss)

 

(8,200

)

(6,236

)

7,682

 

17,092

 

(18,536

)

(8,198

)

Less: net income attributable to noncontrolling interests

 

 

 

 

(2

)

 

(2

)

Net income (loss) attributable to EnergySolutions

 

$

(8,200

)

$

(6,236

)

$

7,682

 

$

17,090

 

$

(18,536

)

$

(8,200

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

(8,200

)

(6,236

)

7,682

 

17,092

 

(18,536

)

(8,198

)

Foreign currency translation adjustments, net of taxes

 

 

 

 

(8,687

)

 

(8,687

)

Change in unrecognized actuarial loss

 

 

 

 

(478

)

 

(478

)

Other comprehensive income (loss)

 

(8,200

)

(6,236

)

7,682

 

7,927

 

(18,536

)

(17,363

)

Less: net income attributable to noncontrolling interests

 

 

 

 

(2

)

 

(2

)

Comprehensive income (loss) attributable to EnergySolutions

 

$

(8,200

)

$

(6,236

)

$

7,682

 

$

7,925

 

$

(18,536

)

$

(17,365

)

 

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

For The Three Month Period ended March 31, 2012

(in thousands)

 

 

 

Energy
Solutions,
Inc.

 

Energy
Solutions,
LLC

 

Guarantor
Subsidiaries

 

Non-
Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

Revenue

 

$

 

$

11,555

 

$

95,796

 

$

398,092

 

$

(14,751

)

$

490,692

 

Cost of revenue

 

 

(8,871

)

(89,973

)

(374,919

)

14,751

 

(459,012

)

Gross profit

 

 

2,684

 

5,823

 

23,173

 

 

31,680

 

Selling, general and administrative expenses

 

 

(22,005

)

(7,219

)

(4,438

)

 

(33,662

)

Equity in income of unconsolidated joint ventures

 

 

 

730

 

 

 

730

 

Operating income (loss)

 

 

(19,321

)

(666

)

18,735

 

 

(1,252

)

Interest expense

 

 

(14,253

)

 

(3,438

)

 

 

(17,691

)

Income (loss) from subsidiaries

 

(5,369

)

28,115

 

 

 

(22,746

)

 

Other, net

 

 

90

 

(11

)

18,203

 

 

18,282

 

Income (loss) before income taxes

 

(5,369

)

(5,369

)

(677

)

33,500

 

(22,746

)

(661

)

Benefit from (provision for) income taxes

 

4,700

 

 

 

(4,704

)

 

(4

)

Net income (loss)

 

(669

)

(5,369

)

(677

)

28,796

 

(22,746

)

(665

)

Less: net income attributable to noncontrolling interests

 

 

 

 

(4

)

 

(4

)

Net income (loss) attributable to EnergySolutions

 

$

(669

)

$

(5,369

)

$

(677

)

$

28,792

 

$

(22,746

)

$

(669

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

(669

)

(5,369

)

(677

)

28,796

 

(22,746

)

(665

)

Foreign currency translation adjustments, net of taxes

 

 

 

 

5,844

 

 

5,844

 

Change in unrecognized actuarial gain

 

 

 

 

153

 

 

153

 

Other comprehensive income (loss)

 

(669

)

(5,369

)

(677

)

34,793

 

(22,746

)

(5,332

)

Less: net income attributable to noncontrolling interests

 

 

 

 

(4

)

 

(4

)

Comprehensive income (loss) attributable to EnergySolutions

 

$

(669

)

$

(5,369

)

$

(677

)

$

34,789

 

$

(22,746

)

$

(5,328

)

 

20



Table of Contents

 

CONDENSED CONSOLIDATING BALANCE SHEET

As of March 31, 2013

(in thousands)

 

 

 

Energy
Solutions,
Inc.

 

Energy
Solutions,
LLC

 

Guarantor
Subsidiaries

 

Non-
Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Total current assets

 

$

618

 

$

72,912

 

$

107,943

 

$

630,521

 

$

(2,515

)

$

809,479

 

Property, plant and equipment, net

 

 

57,731

 

56,249

 

2,507

 

 

116,487

 

Goodwill

 

 

29,765

 

223,506

 

52,161

 

 

305,432

 

Intangibles, net

 

 

157,345

 

29,285

 

43,567

 

 

230,197

 

Restricted cash

 

 

110,463

 

5,101

 

200,404

 

 

315,968

 

Nuclear decommissioning trust fund

 

 

 

 

421,741

 

 

421,741

 

Long-term deferred costs less current portion

 

 

 

 

337,728

 

 

337,728

 

Investment in subsidiaries

 

(24,954

)

631,490

 

 

 

(606,536

)

 

Intercompany receivable

 

308,048

 

 

102,804

 

283

 

(411,135

)

 

Other long term assets

 

 

13,225

 

17,550

 

49,709

 

 

80,484

 

TOTAL ASSETS

 

$

283,712

 

$

1,072,931

 

$

542,438

 

$

1,738,621

 

$

(1,020,186

)

$

2,617,516

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

Intercompany loan payable

 

$

 

$

397,089

 

$

 

$

 

$

(397,089

)

$

 

Intercompany payable

 

 

 

2,452

 

14,046

 

(16,498

)

 

Total current liabilities

 

 

63,669

 

46,757

 

560,197

 

(63

)

670,560

 

Long-term debt, less current portion

 

 

602,484

 

 

196,941

 

 

799,425

 

Facility and equipment decontamination and decommissioning liabilities, current portion

 

 

31,423

 

38,788

 

388,988

 

 

459,199

 

Unearned revenue, less current portion

 

 

 

 

 

342,653

 

 

342,653

 

Other liabilities, net

 

1,431

 

3,220

 

1,051

 

57,194

 

 

62,896

 

Stockholders’ equity

 

282,281

 

(24,954

)

453,390

 

178,100

 

(606,536

)

282,281

 

Net income attributable to noncontrolling interests

 

 

 

 

502

 

 

502

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 

$

283,712

 

$

1,072,931

 

$

542,438

 

$

1,738,621

 

$

(1,020,186

)

$

2,617,516

 

 

21



Table of Contents

 

CONDENSED CONSOLIDATING BALANCE SHEET

As of December 31, 2012

(in thousands)

 

 

 

Energy
Solutions,
Inc.

 

Energy
Solutions,
LLC

 

Guarantor
Subsidiaries

 

Non-
Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Total current assets

 

$

6,423

 

$

128,479

 

$

115,603

 

$

545,483

 

$

(1,453

)

$

794,535

 

Property, plant and equipment, net

 

 

60,657

 

54,112

 

2,975

 

 

117,744

 

Goodwill

 

 

29,765

 

223,506

 

55,337

 

 

308,608

 

Intangibles, net

 

 

160,198

 

31,186

 

48,167

 

 

239,551

 

Restricted cash

 

 

110,471

 

5,867

 

200,416

 

 

316,754

 

Nuclear decommissioning trust fund

 

 

 

 

445,989

 

 

445,989

 

Long-term deferred costs less current portion

 

 

 

 

360,185

 

 

360,185

 

Investment in subsidiaries

 

(9,554

)

616,038

 

 

 

(606,484

)

 

Intercompany receivable

 

303,550

 

 

108,032

 

1,302

 

(412,884

)

 

Other long term assets

 

 

10,884

 

16,450

 

44,762

 

 

72,096

 

TOTAL ASSETS

 

$

300,419

 

$

1,116,492

 

$

554,756

 

$

1,704,616

 

$

(1,020,821

)

$

2,655,462

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

Intercompany loan payable

 

$

 

$

401,015

 

$

 

$

 

$

(401,015

)

$

 

Intercompany payable

 

 

 

1,441

 

11,869

 

(13,310

)

 

Total current liabilities

 

 

88,815

 

67,198

 

488,779

 

(12

)

644,780

 

Long-term debt, less current portion

 

 

601,836

 

 

196,741

 

 

798,577

 

Facility and equipment decontamination and decommissioning liabilities, current portion

 

 

31,206

 

39,358

 

414,883

 

 

485,447

 

Unearned revenue, less current portion

 

 

 

 

 

366,710

 

 

366,710

 

Other liabilities, net

 

 

3,174

 

1,051

 

54,804

 

 

59,029

 

Stockholders’ equity

 

300,419

 

(9,554

)

445,708

 

170,330

 

(606,484

)

300,419

 

Net income attributable to noncontrolling interests

 

 

 

 

500

 

 

500

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 

$

300,419

 

$

1,116,492

 

$

554,756

 

$

1,704,616

 

$

(1,020,821

)

$

2,655,462

 

 

22



Table of Contents

 

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW

For The Three Month Period ended March 31, 2013

(in thousands)

 

 

 

Energy
Solutions,
Inc.

 

Energy
Solutions,
LLC

 

Guarantor
Subsidiaries

 

Non-
Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

Cash flow from operating activities

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by (used in) operating activities

 

$

(10,470

)

$

(9,127

)

$

(2,201

)

$

3,701

 

$

(2,229

)

$

(20,326

)

Cash flow from investing activities

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

 

(942

)

(2,220

)

(9

)

 

(3,171

)

Purchase of investments in nuclear decommissioning trust fund

 

 

 

 

(188,286

)

 

(188,286

)

Proceeds from sales of nuclear decommissioning trust fund investments

 

 

 

 

189,367

 

 

189,367

 

Purchases of intangible assets

 

 

 

89

 

 

 

89

 

Net cash provided by (used in) investing activities

 

 

(942

)

(2,131

)

1,072

 

 

(2,001

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

 

 

 

 

 

Intercompany loan receivable

 

(4,499

)

 

6,249

 

 

(1,750

)

 

Intercompany loan payable

 

 

(2,413

)

(1,514

)

 

3,927

 

 

Investment in subsidiary

 

15,400

 

(15,452

)

 

 

52

 

 

Repayments of long term debt

 

 

(16,592

)

 

 

 

(16,592

)

Debt financing fess

 

 

(1,960

)

 

(1,200

)

 

(3,160

)

Minimum tax withholding on restricted stock awards

 

(431

)

 

 

 

 

(431

)

Repayments of capital lease obligations

 

 

(211

)

 

 

 

(211

)

Net cash provided by (used in) financing activities

 

10,470

 

(36,628

)

4,735

 

(1,200

)

2,229

 

(20,394

)

Effect of exchange rate on cash

 

 

 

(23

)

(1,022

)

 

(1,045

)

Net increase in cash and cash equivalents

 

 

(46,696

)

380

 

2,550

 

 

(43,766

)

Cash and cash equivalents, beginning of period

 

 

93,080

 

3,371

 

37,740

 

 

134,191

 

Cash and cash equivalents, end of period

 

$

 

$

46,384

 

$

3,751

 

$

40,290

 

$

 

$

90,425

 

 

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW

For The Three Month Period ended March 31, 2012

(in thousands)

 

 

 

Energy
Solutions,
Inc.

 

Energy
Solutions,
LLC

 

Guarantor
Subsidiaries

 

Non-
Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

Cash flow from operating activities

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by (used in) operating activities

 

$

(12,352

)

$

(9,232

)

$

7,230

 

$

(22,680

)

$

10,197

 

$

(26,837

)

Cash flow from investing activities

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

 

(1,400

)

(2,644

)

(1,955

)

 

(5,999

)

Purchase of investments in nuclear decommissioning trust fund

 

 

 

 

(195,996

)

 

(195,996

)

Proceeds from sales of nuclear decommissioning trust fund investments

 

 

 

 

197,096

 

 

197,096

 

Proceeds from disposition of property, plant and equipment

 

 

 

89

 

 

 

89

 

Net cash provided by (used in) investing activities

 

 

(1,400

)

(2,555

)

(855

)

 

(4,810

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

 

 

 

 

 

Intercompany loan receivable

 

3,832

 

27,351

 

(4,675

)

 

(26,508

)

 

Intercompany loan payable

 

 

(3,832

)

 

 

3,832

 

 

Investment in subsidiary

 

2,608

 

(26,739

)

 

 

24,131

 

 

Minimum tax withholding on restricted stock awards

 

(84

)

 

 

 

 

(84

)

Repayments of capital lease obligations

 

 

(74

)

 

 

 

(74

)

Net cash provided by (used in) financing activities

 

6,356

 

(3,294

)

(4,675

)

 

1,455

 

(158

)

Effect of exchange rate on cash

 

5,996

 

5,996

 

 

1,138

 

(11,652

)

1,478

 

Net increase in cash and cash equivalents

 

 

(7,930

)

 

(22,397

)

 

(30,327

)

Cash and cash equivalents, beginning of period

 

 

695

 

 

76,518

 

 

77,213

 

Cash and cash equivalents, end of period

 

$

 

$

(7,235

)

$

 

$

54,121

 

$

 

$

46,886

 

 

23



Table of Contents

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The following discussion and analysis of the financial condition and results of operations should be read together with the condensed consolidated financial statements and the related notes of EnergySolutions included elsewhere in this Quarterly Report on Form 10-Q, and with our audited consolidated financial statements and the related notes included in our Annual Report on Form 10-K for the year ended December 31, 2012, as amended (the “2012 Annual Report”).

 

Cautionary Statement Regarding Forward-Looking Statements

 

This Quarterly Report on Form 10-Q contains statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements are based on the current expectations and beliefs of EnergySolutions and are subject to a number of risks, uncertainties and assumptions that could cause actual results to differ materially from those described in the forward-looking statements. Any statements that are not statements of historical fact (such as statements containing the words “believes,” “plans,” “anticipates,” “expects,” “estimates” and similar expressions) should be considered forward-looking statements. Among others, the following risks, uncertainties and other factors could cause actual results to differ from those set forth in the forward-looking statements: (i) the risk that the proposed acquisition of EnergySolutions pursuant to that certain Agreement and Plan of Merger, dated January 7, 2013 (the “Merger Agreement”), by and among Rockwell Holdco, Inc., a Delaware corporation, which is an affiliate of Energy Capital Partners II, LLC, Rockwell Acquisition Corp. and the Company, pursuant to which, subject to certain conditions, Rockwell Acquisition Corp will merge with and into the Company (the “Merger”), may not be consummated in a timely manner, if at all; (ii) the risk that the Merger Agreement may be terminated in circumstances that require us to pay Energy Capital Partners Management II, LP or its designee a termination fee of up to $13,600,000, including the inability to complete the Merger due to the failure to satisfy certain conditions for completion of the Merger; (iii) risks related to the diversion of management’s attention from our ongoing business operations; (iv) risks regarding the failure of Energy Capital Partners to obtain the necessary financing to complete the Merger; (v) the effect of the announcement of the acquisition on our business relationships (including, without limitation, partners and customers), operating results and business generally as well as the potential difficulties in employee retention as a result of the Merger; (vi) risks related to obtaining the requisite consents to the acquisition; (vii) risks related to the outcome of any legal proceedings that have been, or will be, instituted against us related to the Merger Agreement; and (viii) risks related to the effects of local and national economic, credit and capital market conditions on the economy in general. Additional risk factors that may affect future results are contained in the subsection entitled “Risk Factors” under Part I, Item 1A of the 2012 Annual Report. Because forward-looking statements involve risks and uncertainties, actual results and events may differ materially from results and events currently expected by us. We expressly disclaim any obligation or undertaking to update or revise any forward-looking statements contained herein to reflect any change of expectations with regard thereto or to reflect any change in events, conditions or circumstances.

 

Overview

 

We are a leading provider of a broad range of nuclear services to government and commercial customers who rely on our expertise to address their needs throughout the lifecycle of their nuclear operations. Our broad range of nuclear services includes engineering, in-plant support services, spent nuclear fuel management, decontamination and decommissioning (“D&D”) services, operation of nuclear reactors, logistics, transportation, processing, and low-level radioactive waste disposal. We also own and operate strategic processing and disposal facilities that complement our services and uniquely position us to provide a single-source solution to our customers. We derive almost 100% of our revenue from the provision of nuclear services.

 

We provide our services through two customer groups: the Government Group and the Global Commercial Group. Our Government Group provides services to U.S. government customers for the management and operation, and/or clean-up of facilities with radioactive materials. The Global Commercial Group, reports its results under three operating business divisions: Commercial Services, Logistics, Processing and Disposal (“LP&D”), and International. Our Government Group customers are individual offices, departments and administrations within the U.S. Department of Energy (“DOE”) and the U.S. Department of Defense. Our Commercial Services operations provide a broad range of on-site services, including D&D services and comprehensive long-term stewardship D&D work for shut-down nuclear power plants and similar operations, to commercial customers. Our commercial customers include power and utility companies, pharmaceutical companies, research laboratories, universities, industrial facilities, state agencies and other commercial entities that are involved with nuclear materials as well as state agencies in the U.S. Our LP&D operations provide a broad range of logistics, transportation, processing and disposal services to both government and commercial customers. Our LP&D division also operates our facilities for the processing and disposal of radioactive materials, including our facility in Clive, Utah, four facilities in Tennessee, and two facilities in Barnwell, South Carolina. Our International division derives revenue primarily through contracts with the Nuclear Decommissioning Authority (“NDA”) in the United Kingdom (“U.K.”) to operate, manage and decommission ten Magnox sites with twenty-two nuclear reactors. In addition, our International division also provides turn-key services and sub-contract services for the treatment, processing, storage and disposal of radioactive waste from nuclear sites and non-nuclear facilities such as hospitals, research facilities and other manufacturing and industrial facilities.

 

24



Table of Contents

 

Notwithstanding the decline in our Government Group operations, our Global Commercial Group operations remain strong.  We continue to extend our business development efforts into Europe, Asia and Canada, and have won new contracts in Japan, Korea, Canada, Germany, and elsewhere.  Most notably we have been selected by Toshiba Corporation as the technology provider for the clean-up of a large volume of radioactively contaminated water at the damaged Fukushima Dai-ichi Nuclear Power Plant.

 

We continue our work on the Magnox contracts.  The Magnox contracts have been extended and are scheduled to expire on June 30, 2014.  As expected, the NDA published a notice advising of its intention to launch the contract rebid process that is expected to be completed in late 2013.  We are competing for the rebid of the Magnox contracts by teaming with one other partner.

 

On January 7, 2013, we entered into the Merger Agreement with Rockwell Holdco, Inc., a Delaware corporation (“Parent”), and Rockwell Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of Parent (“Merger Sub”). Parent and Merger Sub are affiliates of Energy Capital Partners II, LP and its parallel funds (together with its affiliates, “Energy Capital Partners” or “ECP”), a leading private equity firm focused on investing in North America’s energy infrastructure. On April 5, 2013, EnergySolutions, Parent and Merger Sub entered the First Amendment to the Agreement and Plan of Merger. Pursuant to the Merger Agreement, the Merger Sub will merge with and into the Company and we will become a wholly owned subsidiary of Parent. The Merger will only be able to be consummated following the satisfaction or waiver of a number of conditions set forth in the Merger Agreement. Upon completion of the Merger, each outstanding share of the Company’s common stock other than shares of common stock held in the treasury of the Company or owned by Parent, any affiliates of Parent, Merger Sub, a subsidiary of the Company or by stockholders who have validly exercised their appraisal rights under Delaware law, will be converted into the right to receive cash in an amount equal to $4.15, without interest and subject to any required withholding of taxes.

 

On April 26, 2013, the Company held a Special Meeting of Stockholders at which the Company’s stockholders approved the proposal to adopt and approve the Merger Agreement.

 

In January of 2013, EnergySolutions notified the U.S. Nuclear Regulatory Commission (the “NRC”) about the Merger and requested the NRC’s consent to the proposed indirect transfer of control of the Company’s NRC radioactive material licenses and permits pursuant to the Merger. On May 9, 2013, the NRC consented to the indirect transfer of control of the Company’s NRC licenses and permits pursuant to the Merger.

 

The Company has now received the required regulatory approvals related to the Merger from the states of Ohio, South Carolina, Tennessee and Utah and from the NRC. No further regulatory approvals related to the Merger are required.

 

The obligation of the Company to consummate the Merger remains subject to the satisfaction or waiver of a number of conditions set forth in the Merger Agreement, including (i) the absence of any law or order preventing the consummation of the Merger, (ii) that Parent’s and Merger Sub’s representations and warranties are accurate subject to certain exceptions and (iii) that Parent and Merger Sub have complied in all material respects with their obligations under the Merger Agreement.

 

The obligation of the Company to consummate the Merger remains subject to the satisfaction or waiver of a number of conditions set forth in the Merger Agreement, including the requirement that (i) Parent’s and Merger Sub’s representations and warranties are accurate subject to certain exceptions and (ii) Parent and Merger Sub have complied in all material respects with their obligations under the Merger Agreement.

 

The Company expects to consummate the Merger on or about May 24, 2013, at which time the Company’s common stock will be delisted from the New York Stock Exchange.

 

25



Table of Contents

 

Results of Operations

 

The following is a summary of our results of operations (in thousands):

 

 

 

Three Month Period
Ended March 31,

 

 

 

2013

 

2012

 

Revenue:

 

 

 

 

 

Government Group

 

$

43,547

 

$

43,674

 

Global Commercial Group

 

 

 

 

 

Commercial Services

 

40,912

 

39,494

 

LP&D

 

43,414

 

44,389

 

International

 

398,335

 

363,135

 

Total revenue

 

526,208

 

490,692

 

Cost of revenue:

 

 

 

 

 

Government Group

 

(37,654

)

(44,621

)

Global Commercial Group

 

 

 

 

 

Commercial Services

 

(36,709

)

(38,335

)

LP&D

 

(33,602

)

(39,430

)

International

 

(371,823

)

(336,626

)

Total cost of revenue

 

(479,788

)

(459,012

)

Gross profit (loss):

 

 

 

 

 

Government Group

 

5,893

 

(947

)

Global Commercial Group

 

 

 

 

 

Commercial Services

 

4,203

 

1,159

 

LP&D

 

9,812

 

4,959

 

International

 

26,512

 

26,509

 

Total gross profit

 

46,420

 

31,680

 

Segment selling, general and administrative expenses:

 

 

 

 

 

Government Group

 

(2,356

)

(3,814

)

Global Commercial Group

 

(10,406

)

(10,548

)

Total segment selling, general and administrative expenses (1)

 

(12,762

)

(14,362

)

Segment operating income:

 

 

 

 

 

Government Group

 

3,537

 

(4,761

)

Global Commercial Group

 

30,121

 

22,079

 

Total segment operating income

 

33,658

 

17,318

 

Corporate selling, general and administrative expenses (1)

 

(19,459

)

(19,300

)

Equity in income of unconsolidated joint ventures (2)

 

676

 

730

 

Total income (loss) from operations

 

14,875

 

(1,252

)

Interest expense

 

(18,645

)

(17,691

)

Other income, net

 

2,111

 

18,282

 

Loss before income taxes and noncontrolling interests

 

(1,659

)

(661

)

Income tax expense

 

(6,539

)

(4

)

Net loss

 

(8,198

)

(665

)

Less: Net income attributable to noncontrolling interests

 

(2

)

(4

)

Net loss attributable to EnergySolutions

 

$

(8,200

)

$

(669

)

 


(1)         Together, group and corporate selling, general and administrative expenses represent our total segment, general and administrative expenses as reported in the accompanying condensed consolidated statements of operations and comprehensive income (loss). As such, both amounts are needed to compute total consolidated income from operations for the three month periods ended March 31, 2013 and 2012.

 

(2)         For the three month period ended March 31, 2013, we recorded $0.7 million of income from our unconsolidated joint ventures of which $0.2 million loss is attributable to LP&D and $0.9 million income is attributable to the Government Group.

 

Three Month Period Ended March 31, 2013 Compared to the Three Month Period Ended March 31, 2012

 

Government Group

 

Revenue from our Government Group decreased $0.1 million to $43.5 million for the three month period ended March 31, 2013 compared to the three month period ended March 31, 2012, due primarily to the completion of major projects during 2012 as well as a decrease in government funding. The decreases were offset by an increase in revenue from our Salt Waste processing facility contract with the DOE due to a $6.4 million fee reduction incurred during the first quarter of 2012. Gross profit increased by $6.8 million and gross margin increased to 13.5% for the three month period ended March 31, 2013 from a negative 2.2% for the three month period ended March 31, 2012. The increase in gross margin was due primarily to increased revenue from our Salt Waste processing facility contract which included a $6.4 million fee reduction in the first quarter of 2012. The overall reduction of federal government spending is expected to continue to negatively impact the financial results of our Government Group for the remainder of the year.

 

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Revenue from our Salt Waste processing facility contract increased $6.1 million for the three month period ended March 31, 2013 compared to the three month period ended March 31, 2012, due primarily to a fee adjustment recorded during the first quarter of 2012 resulting from expected costs to complete the contract exceeding the original total budgeted costs. In contrast, cost of revenue decreased $0.3 million due to less activity on the project. As a result, gross profit increased $6.4 million during the three month period ended March 31, 2013 compared to the same period in 2012.

 

Revenue and cost of revenue from our Southwest division increased $3.3 million and $2.3 million, respectively, for the three month period ended March 31, 2013 compared to the three month period ended March 31, 2012 due primarily to increased activity on our waste characterization and disposal project at the Los Alamos National Laboratory.  As a result, gross profit increased $1.0 million for the three month period ended March 31, 2013 compared to the same period in 2012.

 

Revenue and cost of revenue related to engineering and technology projects division within the Government Group increased $2.2 million and $2.1 million, respectively, for the three month period ended March 31, 2013 compared to the three month period ended March 31, 2012 due primarily to increased construction and testing activities on our large scale mixing projects.  As a result, gross profit increased $0.1 million for the three month period ended March 31, 2013 compared to the same period in 2012.

 

Revenue and cost of revenue generated by our contract with the DOE to clean up the Atlas mill tailings site near Moab, Utah decreased $7.8 million and $7.3 million, respectively, for the three month period ended March 31, 2013 compared to the three month period ended March 31, 2012, due primarily to the completion of the contract during the first quarter of 2012. As a result, gross profit decreased $0.5 million for the three month period ended March 31, 2013 compared to the same period in 2012.

 

Revenue and cost of revenue related to our liquids and gases staff augmentation project in Oakridge, Tennessee, decreased $0.8 million and $1.0 million, respectively, for the three month period ended March 31, 2013 compared to the three month period ended March 31, 2012, due primarily to the completion of the contract during the second quarter of 2012. As a result, gross profit increased $0.2 million for the three month period ended March 31, 2013 compared to the same period in 2012.

 

Global Commercial Group

 

Commercial Services Operations

 

Revenue from our Commercial Services operations increased $1.4 million to $40.9 million for the three month period ended March 31, 2013 compared to the three month period ended March 31, 2012, due primarily to increased scheduled procurement activities at Zion Station, offset in part by decreased revenues from our technology products commercial projects groups. Gross profit increased $3.0 million and gross margin increased to 10.3% for the three month period ended March 31, 2013 from 2.9% for the three month period ended March 31, 2012.

 

Revenue and cost of revenue related to the decommissioning of the Zion Station increased $4.5 million and $2.0 million, respectively, for the three month period ended March 31, 2013, compared to the three month period ended March 31, 2012, due primarily to increased procurement activities related to the independent spent fuel storage installation and to a decrease in accretion costs when compared to 2012. As a result, gross profit increased $2.5 million for the three month period ended March 31, 2013 compared to the same period in 2012.

 

Revenue and cost of revenue from our project services division decreased $1.7 million and $2.3 million, respectively, for the three month period ended March 31, 2013 compared to the three month period ended March 31, 2012 due primarily to the substantial completion of various large component projects in 2012 and to lower transportation and overhead costs in 2013. As a result, gross profit decreased $0.6 million for the three month period ended March 31, 2013 compared to the same period in 2012.

 

Revenue and cost of revenue from our technology products group decreased $1.4 million and $1.3 million, respectively, for the three month period ended March 31, 2013 compared to the three month period ended March 31, 2012, due primarily to a decrease in demand for liners and storage containers partially offset by increased liquid waste processing activities. As a result, gross profit decreased $0.1 million for the three month period ended March 31, 2013 compared to the same period in 2012.

 

LP&D Operations

 

Revenue from our LP&D operations decreased $1.0 million to $43.4 million for the three month period ended March 31, 2013 compared to the three month period ended March 31, 2012, due primarily to lower waste disposal volumes processed at our Clive, Utah facility driven primarily by decreased government stimulus funding. In contrast, gross profit increased $4.9 million and gross margin increased to 22.6% for the three month period ended March 31, 2013 from 11.2% for the three month period ended March 31, 2012 due to cost savings initiatives implemented during the second half of 2012.

 

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Revenue and cost of revenue related to our disposal facilities decreased $2.1 million and $4.2 million, respectively, for the three month period ended March 31, 2013 compared to the three month period ended March 31, 2012, due primarily to lower volumes of waste receipts on DOE projects due in part to a decrease in ARRA funding offset by decreases in costs due to cost saving initiatives implemented during the second half of 2012. As a result, gross profit increased $2.1 million for the three month period ended March 31, 2013 compared to the same period in 2012.

 

Revenue and cost of revenue from our processing facilities increased $2.4 million and $2.0 million, respectively, for the three month period ended March 31, 2013 compared to the three month period ended March 31, 2012, due primarily to increased incineration activities resulting from equipment outages for scheduled maintenance during 2012. As a result, gross profit increased $0.4 million for the three month period ended March 31, 2013 compared to the same period in 2012.

 

Revenue and cost of revenue from our logistics operations decreased $1.2 million and $0.4 million, respectively, for the three month period ended March 31, 2013 compared to the three month period ended March 31, 2012, due primarily to decreased shipping activity on major contracts. As a result, gross profit decreased $0.8 million for the three month period ended March 31, 2013 compared to the same period in 2012.

 

International Operations

 

Revenue from our International operations increased $35.2 million to $398.3 million for the three month period ended March 31, 2013 compared to the three month period ended March 31, 2012, due primarily to higher reimbursable cost base from our operations in the U.K., continued progress of fabrication activities in China and Japan and increased waste processing activities in Canada. Gross profit was unchanged while gross margin decreased to 6.7% for the three month period ended March 31, 2013 from 7.3% for the three month period ended March 31, 2012.

 

Revenue and cost of revenue from our operations at the Magnox sites in the U.K. increased $29.7 million and $29.9 million, respectively, for the three month period ended March 31, 2013 compared to the three month period ended March 31, 2012, due primarily to higher reimbursable cost base during the first quarter of 2013 which included approximately $55.6 million of employee termination benefits related to the termination of approximately 200 employees at the Bradwell site, which is rapidly moving into the early care and maintenance phase. Revenue and cost of revenue were also negatively impacted by $3.9 million and $3.6 million, respectively, as a result of fluctuations in pound sterling exchange rates period over period. Gross profit decreased $0.2 million for the three month period ended March 31, 2013 compared to the same period in 2012.

 

Revenue and cost of revenue from our operations in Asia increased $4.7 million and $4.8 million, respectively, for the three month period ended March 31, 2013 compared to the three month period ended March 31, 2012, due primarily to increased design and fabrication activities at the Yangjiang and Haiyang, China nuclear reactor sites and to the completion of construction activities in Japan. As a result, gross profit decreased $0.1 million for the three month period ended March 31, 2013 compared to the same period in 2012.

 

Revenue and cost of revenue from our operations in Canada increased $0.8 million and $0.5 million, respectively, for the three month period ended March 31, 2013 compared to the three month period ended March 31, 2012, due to increased shipments of waste for processing and higher demand for waste storage services. As a result, gross profit increased $0.3 million for the three month period ended March 31, 2013 compared to the same period in 2012.

 

Group selling, general and administrative expenses

 

Group selling, general and administrative (“SG&A”) expenses include expenses that are not directly associated with performing services for our customers. These expenses consist primarily of compensation and related benefits for management and administrative personnel, preparing contract bids, office expenses, advisory fees, professional fees, strategic growth initiatives such as research and development, and administrative overhead. Group SG&A expenses decreased $1.6 million, or 11.1%, to $12.8 million for the three month period ended March 31, 2013 compared to $14.4 million for the three month period ended March 31, 2012, due primarily to the impact of cost saving initiatives implemented during the second half of 2012. Group SG&A expenses, as a percentage of revenue, decreased 0.5% for the three month period ended March 31, 2013 compared to the same period in 2012.

 

Corporate selling, general and administrative expenses

 

Corporate SG&A expenses reflect costs associated with supporting our entire company including executive management and administrative functions such as accounting, treasury, legal, human resources, and information technology, as well as other costs required to support our company. Corporate SG&A expenses increased $0.2 million, or 0.8%, to $19.5 million, for the three month period ended March 31, 2013, from $19.3 million for the three month period ended March 31, 2012 due primarily to increased professional fees and executive relocation costs, offset by decreased administrative function costs. Corporate SG&A expenses, as a percentage of revenue, remained unchanged for the three month period ended March 31, 2013 compared to the same period in 2012.

 

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Equity in income of unconsolidated joint ventures

 

Income from unconsolidated joint ventures was unchanged at $0.7 million for the three month periods ended March 31, 2013, and March, 31, 2012 with the majority of the income coming from our Washington River Protection Solutions LLC joint venture at the Hanford site during both periods.

 

Interest expense

 

Interest expense increased $0.9 million to $18.6 million for the three month period ended March 31, 2013 from $17.7 million for the three month period ended March 31, 2012, due primarily to the acceleration of amortization of debt financing fees resulting from the debt principal repayment of $16.6 million during the first quarter of 2013. During the three month period ended March 31, 2013, we also made interest payments totaling $25.2 million of which $16.1 million relates to the semi-annual payment of interest on the senior notes and $9.1 million relates to interest on the term loan and related senior secured revolving facility. For the three month periods ended March 31, 2013 and 2012, the variable interest rate on our term loan was 6.25%, while our senior notes bear interest at a fixed annual rate of 10.75%.

 

Other income, net

 

Other income, net, decreased $16.2 million to $1.2 million for the three month period ended March 31, 2013 from $18.3 million for the three month period ended March 31, 2012, due primarily to lower investment income earned on our nuclear decommissioning trust (“NDT”) fund during the first quarter of 2013. For the three month period ended March 31, 2013, we also recorded $2.6 million of arranger fees associated with the modification of our senior secured credit facility.

 

Income taxes

 

We recognized income tax expense of $6.5 million and $4,000 for the three month periods ended March 31, 2013 and 2012, respectively, for quarterly effective rates of negative 393.6% and 0.7%, respectively, based on an estimated annual effective tax rate method. The negative rate resulted from the combination of income tax expense and pretax book losses. Income tax expense arises from income in certain jurisdictions in the U.K. and for the NDT fund. No benefits from losses in the U.S. and other jurisdictions in the U.K. are available to offset tax expense due to their respective full valuation allowance positions. The effective rate varies from the U.S. statutory rate of 35% primarily as a result of the amount of income tax expense relative to pretax book income, lower tax on income in foreign jurisdictions and the NDT fund and the tax benefit of foreign research and development credits.

 

During the three month period ended March 31, 2012, we finalized certain multiple year examinations by U.S. federal taxing authorities. The results of these examinations included a reduction to certain net operating loss carry-forward deferred tax assets. As a result of the finalization of these examinations, we recorded tax benefits of approximately $2.4 million related to the reversal of certain tax reserves.

 

Liquidity and Capital Resources

 

We finance our operations primarily through cash provided by operations. Our cash flow from operations are primarily impacted by fluctuations in working capital caused by the timing of our billings to customers, collection terms of our contracts, stages of completion of our projects, execution of projects within their planned budgets, the timing of payments to vendors and subcontractors, the timing of payment of dividends from our unconsolidated joint ventures, the changes in income tax assets and liabilities and unforeseen events. Additionally, certain projects receive advance payments from customers. A normal trend for these projects is to have higher cash balances during the initial phases of execution which then level out toward the end of the construction phase. As a result, our cash position is reduced as work is performed against customer advances, unless they are replaced by advances on other projects.

 

Our cash and cash equivalents and cash flow from operations for the three month period ended March 31, 2013, were sufficient to cover our operating expenses without the need to draw on our senior secured revolving credit facility to cover any shortfalls in the timing of receipts and payments. We are actively engaged in managing our working capital to generate cash that will allow us to accelerate our plans to reduce debt and to fund the growth of our business. Our primary use of cash was to fund our working capital and capital expenditures, to service our debt and to pay taxes. As of March 31, 2013 and December 31, 2012, approximately $310.5 million and $310.6 million, respectively, of the borrowings under the senior secured credit facility were held in a restricted cash account as collateral for the Company’s reimbursement obligations with respect to deposit letters of credit.

 

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For the three month period ended March 31, 2013, our principal sources of liquidity consisted of $90.4 million in existing cash and cash equivalents, of which $29.8 million was held in foreign jurisdictions and $35.8 million of availability under the $105.0 million revolving portion of our senior secured credit facility, which is net of $69.2 million of outstanding letters of credit issued against it. Due to U.S. tax laws and foreign regulations, our ability to use our cash held in foreign jurisdictions to fund U.S. operations is limited. We also had $349.1 million in accounts receivable and $93.4 million in costs and estimated earnings in excess of billings on uncompleted contracts to fund our operations. We review the collectability of these balances on a regular basis and determine if allowances for doubtful accounts are needed. As of March 31, 2013 our allowance for doubtful accounts represented 0.5% of the combined total of these accounts. We also monitor our Days Sales Outstanding (“DSO”) periodically and use it as a metric of performance of our credit and collection function. We use DSO to monitor the average time, in days, that it takes us to convert our accounts receivable into cash. We calculate DSO by dividing the average accounts receivable for the year into the amount of revenue recognized during the year and multiplying the result of that calculation by the number of days in that year. Our average DSO decreased from 57 days as of December 31, 2012 to 52 days as of March 31, 2013.

 

Certain trends or uncertainties could have a material impact on our liquidity. For example, if interest rates increase substantially, that could dramatically increase our cash interest expense; if we are required to increase our bonding requirements on current or future projects it could materially impact our available liquidity under the senior secured revolving credit facility; if the economy suddenly weakens or governments materially reduce future funding for nuclear remediation or D&D projects, these events could have a negative effect on our liquidity. Under certain terms and conditions we have the ability, absent an event of default, to increase our senior secured credit facility by up to $150.0 million. We do not anticipate the need to access this incremental commitment in our senior secured credit facility. Furthermore, we have the ability to hedge interest rate and foreign currency fluctuations and we actively monitor these markets in order to mitigate our exposure to these risks. Our principal needs for liquidity have been, and will continue to be, for working capital, to pay down debt, and for capital expenditures.

 

We had accumulated benefit obligations related to pension plans of $3.8 billion as of December 31, 2012. See Note 19 to our audited consolidated financial statements included elsewhere in our 2012 Annual Report for a more detailed discussion. Approximately 98% of that obligation relates to the Magnox pension plan. The Magnox pension plan is funded by contributions from employees and the Nuclear Decommissioning Authority (“NDA”) in the United Kingdom pursuant to a contractual arrangement. As a result, we are reimbursed for contributions made to the Magnox pension plan under the terms of these contracts. Thus, we have no potential net funding requirements relative to the accumulated benefit obligation of the Magnox pension plan. Our liquidity is not affected by these contributions as they are only made when we have received the funds from the NDA. We are required to fund the pension plan for our employees of EnergySolutions EU Limited, a wholly owned subsidiary of EnergySolutions, Inc. The plan is currently funded by contributions from us and the employees.

 

We believe we have sufficient resources to fund our operating and capital expenditures requirements, to pay our income taxes and to service our debt for at least the next twelve months.

 

Effect of Exchange Rate Changes on Cash

 

Unrealized translation gains and losses resulting from changes in functional currency exchange rates are reflected in the cumulative translation component of accumulated other comprehensive loss. During the three month period ended March 31, 2013, most major foreign currencies weakened against the U.S. dollar. As a result, the Company had unrealized translation losses of $1.1 million in 2013 related to cash held by foreign subsidiaries. During the three month period ended March 31, 2012, most major foreign currencies strengthened against the U.S. dollar resulting in unrealized translation gains of $1.5 million related to cash held by foreign subsidiaries. The cash held in foreign currencies will primarily be used for project-related expenditures in those currencies, and therefore the Company’s exposure to realized exchange gains and losses is generally mitigated.

 

Senior Secured Credit Facility and Senior Notes

 

On August 13, 2010, the Company entered into a senior secured credit facility with JPMorgan Chase Bank, N.A., as the administrative agent and collateral agent, consisting of a senior secured term loan in an aggregate principal amount of $560 million at a discount rate of 2.5% and a senior secured revolving credit facility with availability of $105.0 million, of which $69.2 million was used to fund letters of credit issued as of March 31, 2013. Borrowings under the senior secured credit facility bear interest at a rate equal to: (a) Adjusted LIBOR plus 4.50% (subject to a LIBOR floor of 1.75%), or ABR plus 3.50% in the case of the senior secured term loan; (b) Adjusted LIBOR plus 4.50% (subject to a LIBOR floor of 1.75%), or ABR plus 3.50% in the case of the senior secured revolving credit facility, and (c) a per annum fee equal to the spread over Adjusted LIBOR under the senior secured revolving credit facility, along with a fronting fee and issuance and administration fees in the case of revolving letters of credit. As of March 31, 2013 and December 31, 2012, borrowings of $310.5 million and $310.6 million, respectively, under the senior secured term loan were held in a restricted cash account as collateral for the Company’s reimbursement obligations with respect to deposit letters of credit.

 

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The senior secured term loan amortizes in equal quarterly installments of $1.3 million payable on the last day of each calendar quarter with the balance being payable on August 13, 2016. In addition to the scheduled repayments, we are required to prepay borrowings under the senior secured credit facility with (1) 100% of the net cash proceeds received from non-ordinary course asset sales or other dispositions, or as a result of a casualty or condemnation, subject to reinvestment provisions and other customary adjustments, (2) 100% of the net proceeds received from the issuance of debt obligations other than certain permitted debt obligations, (3) 50% of excess cash flow (as defined in the senior secured credit facility), if the leverage ratio is equal to or greater than 3.0 to 1.0, or 25% of excess cash flow if the leverage ratio is less than 3.0 to 1.0 but greater than 1.0 to 1.0, reduced by the aggregate amount of optional prepayments of senior secured term loan made during the applicable fiscal year. If the leverage ratio is equal to or less than 1.0 to 1.0, we are not required to prepay the senior secured term loan. The excess cash flow calculations (as defined in the senior secured credit facility), are prepared annually as of the last day of each fiscal year. Prepayments of debt resulting from the excess cash flow calculations are due annually five days after the date that the Annual Report on Form 10-K as amended for such fiscal year is filed with the SEC. As of March 31, 2013, no scheduled quarterly repayments were due within the next 12 months. Each optional prepayment is applied first, in direct order of maturities, to the next four scheduled principal repayment installments of the senior secured term loan and second, to the other principal repayment installments of senior secured term loans on a pro rata basis.

 

During the three month period ended March 31, 2013, we made principal debt payments totaling $16.6 million. We also paid $5.7 million of debt financing fees to our lenders to obtain amendments to the senior secured credit facility of which $3.2 million were capitalized and are included in other noncurrent assets within the condensed consolidated balance sheet as of March 31, 2013.

 

The senior secured credit facility requires the Company to maintain a leverage ratio (based upon the ratio of indebtedness for money borrowed to consolidated adjusted EBITDA, as defined in the senior secured credit facility) and an interest coverage ratio (based upon the ratio of consolidated adjusted EBITDA to consolidated cash interest expense), both of which are calculated quarterly. Failure to comply with these financial ratio covenants would result in an event of default under the senior secured credit facility and, absent a waiver or an amendment from the lenders, preclude us from making further borrowings under the senior secured credit facility and permit the lenders to accelerate repayment of all outstanding borrowings under the senior secured credit facility. Based on the formulas set forth in the senior secured credit facility, we are required to maintain a maximum total leverage ratio of 4.0 for the quarter ending March 31, 2013, which is reduced by 0.25 on an annual basis through the maturity date. We are required to maintain a minimum cash interest coverage ratio of 2.0 from the quarter ended March 31, 2013 through the quarter ended September 30, 2014 and 2.25 through the maturity date. As of March 31, 2013, our total leverage and cash interest coverage ratios were 2.96 and 2.55 respectively.

 

The senior secured credit facility also contains a number of affirmative and restrictive covenants including limitations on mergers, consolidations and dissolutions, sales of assets, investments and acquisitions, indebtedness, liens, affiliate transactions, and dividends and restricted payments. Under the senior secured credit facility, we are permitted maximum annual capital expenditures of $40.0 million for 2013 and each year thereafter, plus for each year the lesser of (1) a one year carryforward of the unused amount from the previous fiscal year and (2) 50% of the amount permitted for capital expenditures in the previous fiscal year. The senior secured credit facility contains events of default for non-payment of principal and interest when due, a cross default provision with respect to other indebtedness having an aggregate principal amount of at least $5.0 million and an event of default that would be triggered by a change of control, as defined in the senior secured credit facility. Capital expenditures for the three month period ended March 31, 2013 were $3.1 million. As of March 31, 2013, we were in compliance with all of the covenants under our senior secured credit facility.

 

The obligations under the senior secured credit facility are secured by a lien on substantially all of the assets of the Company and each of the Company’s domestic subsidiary guarantors, including a pledge of equity interests with the exception of the equity interests in our ZionSolutions subsidiary and other special purpose subsidiaries, whose organizational documentation prohibits or limits such pledge.

 

In connection with our senior secured credit facility, on February 15, 2013, we entered into Amendment No. 2 to the Credit Agreement and Consent and Waiver (the “Loan Amendment”), with the lenders party thereto and JP Morgan Chase Bank, N.A., as the administrative and collateral agent. The Loan Amendment contains the following terms and conditions:

 

1)                                     that the lenders and the administrative agent consent to i) the consummation of the Merger; ii) a waiver of the change of control provisions and certain other covenants and provisions under the senior secured credit facility, iii) a consent to any repayment of our 10.75% Senior Notes due 2018, provided that any payments are funded from equity contributions made to us by ECP or its affiliates; iv) an extension to the maturity date of our senior secured revolving credit facility, subject to certain conditions and acceptance by the extending revolving lenders; and v) 1% prepayment premium if any senior secured term loans are refinanced prior to the date that is one year following the execution date of the Loan Amendment;

 

2)                                     that the definition of change of control and reporting requirements under the senior secured credit facility be amended;

 

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3)                                     that upon the closing of the Merger, that the applicable margin for our senior secured term loan made pursuant to the senior secured credit facility be increased by 0.5%;

 

4)                                     that we will pay a consent fee to each lender that has entered into the Loan Amendment equal to (i) 0.5% of the sum of the outstanding term loans and revolving commitments of such lender on the execution date of the Loan Amendment and (ii) 0.5% of the sum of the outstanding term loans and revolving commitments of such lender on the closing date of the merger;

 

5)                                     that we reimburse the administrative agent for fees, charges and disbursements of counsel in connection with preparation of the Loan Amendment;

 

6)                                     that no later than 150 days after the closing of the Merger, that we reduce our debt with respect to our senior secured term loans under the amended senior secured credit facility and our 10.75% Senior Notes due 2018, after giving effect to the Merger, to $675 million or less; and

 

7)                                     that the Loan Amendment would take effect upon the consummation of the Merger.

 

If the Merger Agreement is terminated, then pursuant to the Reimbursement Agreement we entered into with Parent and Merger Sub on February 15, 2013 in connection with the Loan Amendment, Parent will reimburse the Company for (i) certain fees, costs, expenses or disbursements, if and to the extent paid by or on behalf of the Company, payable in connection with the Loan Amendment and (ii) certain fees, costs, expenses or disbursements, if and to the extent paid by or on behalf of the Company, that would otherwise be payable by Parent under the Fee Letter dated January 7, 2013, by and between Morgan Stanley Senior Funding, Inc. and Parent, subject to offset in certain circumstances.

 

On August 13, 2010, we also completed a private offering of $300.0 million 10.75% senior notes at a discount rate of 1.3%. The senior notes are governed by an Indenture among EnergySolutions and Wells Fargo Bank, National Association, as trustee. Interest on the senior notes is payable semiannually in arrears on February 15 and August 15 of each year beginning on February 15, 2011. The senior notes rank in equal right of payment to all existing and future senior debt and senior in right of payment to all future subordinated debt. In May 2011, we filed a registration statement under the Securities Act, pursuant to a registration rights agreement entered into in connection with the senior notes offering. The SEC declared the registration statement relating to the exchange offer effective on May 27, 2011, and the exchange of the registered senior notes for the unregistered senior notes was consummated on May 31, 2011. We did not receive any proceeds from the exchange offer transaction.

 

At any time prior to August 15, 2014, we are entitled to redeem all or a portion of the senior notes at a redemption price equal to 100% of the principal amount of the senior notes plus an applicable make-whole premium, as of, and accrued and unpaid interest to, the redemption date. In addition, prior to August 15, 2013, we may redeem up to 35% of the aggregate principal amount of the senior notes with the net cash proceeds from certain public equity offerings at a redemption price of 110.75% of the principal amount, plus accrued and unpaid interest to the date of redemption. In addition, on or after August 15, 2014, we may redeem all or a portion of the senior notes at the following redemption prices during the 12-month period commencing on August 15 of the years set forth below, plus accrued and unpaid interest to the redemption date.

 

Period

 

Redemption
Price

 

2014

 

105.375

%

2015

 

102.688

%

2016 and thereafter

 

100.000

%

 

The senior notes are guaranteed on a senior unsecured basis by all of our domestic restricted subsidiaries that guarantee the senior secured credit facility. The senior notes and related guarantees are effectively subordinated to our secured obligations, including the senior secured credit facility and related guarantees, to the extent of the value of assets securing such debt. The senior notes are structurally subordinated to all liabilities of each of our subsidiaries that do not guarantee the senior notes. If a change of control of the Company occurs, each holder will have the right to require that we purchase all or a portion of such holder’s senior notes at a purchase price of 101% of the principal amount, plus accrued and unpaid interest to the date of the purchase. The Indenture contains, among other things, certain covenants limiting our ability and the ability of one restricted subsidiary to incur or guarantee additional indebtedness, pay dividends or make other restricted payments, make certain investments, create or incur liens, sell assets and subsidiary stock, transfer all or substantially all of our assets, or enter into a merger or consolidation transactions, and enter into transactions with affiliates.

 

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Each subsidiary co-issuer and guarantor of our senior notes is exempt from reporting under the Securities Exchange Act of 1934 , as amended (the “Exchange Act”), pursuant to Rule 12h-5 under the Exchange Act, as the subsidiary co-issuer and each of the subsidiary guarantors is wholly owned by us, and the obligations of the co-issuer and the guarantees of our subsidiary guarantors are full and unconditional and joint and several. There are no significant restrictions on our ability or any subsidiary guarantor to obtain funds from its subsidiaries.

 

During the three month period ended March 31, 2013, we made cash interest payments totaling $25.2 million related to our outstanding debt obligations as of that date. During the three month period ended March 31, 2012, we made cash interest payments totaling $25.0 million, related to our outstanding debt obligations as of that date.

 

Exelon Agreement

 

In September 2010, we entered into an arrangement, through our subsidiary ZionSolutions, LLC, with Exelon to dismantle the Zion Station nuclear power plant which ceased operation in 1998. Upon closing, Exelon transferred to ZionSolutions substantially all of the assets (other than land) associated with the Zion Station, including all assets held in its NDT. In consideration for Exelon’s transfer of those assets, ZionSolutions agreed to assume decommissioning and other liabilities associated with Zion Station. ZionSolutions also took possession and control of the land associated with Zion Station pursuant to a lease agreement executed at the closing. ZionSolutions is under contract to complete the required decommissioning work according to an established schedule, and to construct a dry cask storage facility on the land for the spent nuclear fuel currently held in spent fuel pools at the Zion Station. Exelon retains ownership of the land and the spent nuclear fuel and associated operational responsibilities following completion of the Zion Station D&D project. The Nuclear Regulatory Commission (“NRC”) approved the transfer of the facility operating licenses and conforming license amendments from Exelon to ZionSolutions.

 

To satisfy the conditions of the arrangement between ZionSolutions and Exelon, and to fulfill the requirements of the NRC to approve the license transfer, we (i) secured a $200 million letter of credit facility, (ii) granted an irrevocable easement of disposal capacity of 7.5 million cubic feet at our Clive disposal facility and (iii) purchased the insurance coverages required of a licensee under the NRC’s regulations.

 

We provided a guarantee as primary obligor to the full and prompt payment and performance by ZionSolutions of all its obligations under the various agreements with Exelon. As such, we pledged 100% of our interests in ZionSolutions to Exelon. In addition, we were required to obtain a $200 million letter of credit facility to further support the D&D activities at the Zion Station, which is held by ZionSolutions. If we exhaust our resources and ability to complete the D&D activities, and in the event of a material default (as defined within the Credit Support Agreement), Exelon may exercise its rights to take possession of ZionSolutions. At that point, through their ownership of ZionSolutions, Exelon (not the Company) is then entitled to draw on the funds associated with the letter of credit. Under the terms of our financing arrangements, we obtained restricted cash and took on the liability for the letter of credit facility.

 

Off Balance Sheet Arrangements

 

As of March 31, 2013, we had routine operating leases, primarily related to real estate and rail equipment, and investments in joint ventures.

 

As of March 31, 2013, we had an outstanding variable rate term loan of $510.4 million. Under our senior secured credit facility, we are required to maintain one or more hedge agreements bearing interest at a fixed rate in the aggregate notional amount of no less than 50% of the outstanding principal amounts of our long term debt net of restricted cash.  We were not required to enter into new hedge agreements because the outstanding balances under our senior notes bear interest at a fixed rate of 10.75% and totaled $300.0 million as of March 31, 2013, which is 60.0% of our outstanding debt, net of $310.5 million in restricted cash collateralizing deposit letters of credit.

 

From time to time, we are required to post standby letters of credit and surety bonds to support certain contractual obligations to our customers, self-insurance programs, closure and post-closure financial assurance, as well as other obligations. As of March 31, 2013, we had $307.1 million in letters of credit issued under our senior secured credit facility and $69.2 million of letters of credit issued against our revolving credit facility. As of March 31, 2013, we had $25.0 million in surety bonds outstanding. With respect to the surety bonds, we have entered into certain indemnification agreements with the providers of the surety bonds, which would require funding by us only if we fail to perform under the contracts being insured and the surety bond issuer was obligated to make payment to the insured parties.

 

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Our processing and disposal facilities operate under licenses and permits that require financial assurance for closure and post-closure costs. We provide for these requirements through a combination of restricted cash, cash deposits, letters of credit, and insurance policies. As of March 31, 2013, the closure and post-closure requirements for our facilities were $150.7 million.

 

Critical Accounting Policies

 

This management’s discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and assumptions about matters that are uncertain. These estimates and assumptions are often based on judgments that we believe to be reasonable under the circumstances, but all such estimates and assumptions are inherently uncertain and unpredictable. Actual results may differ from those estimates and assumptions, and it is possible that other professionals, applying their own judgment to the same facts and circumstances, could develop and support alternative estimates and assumptions that would result in material changes to our operating results and financial condition. For a further discussion of our critical accounting policies, see our 2012 Annual Report.

 

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

 

We believe there has been no material change in our exposure to market risk from that discussed in our 2012 Annual Report.

 

Item 4.  Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

Our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) of the Exchange Act) are effective as of March 31, 2013, based upon their evaluation of those controls and procedures required by paragraph (b) of Rule 13a-15 or Rule 15d-15 of the Exchange Act.

 

Changes in Internal Control Over Financial Reporting

 

There were no changes to our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during our first fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II

 

Item 1.  Legal Proceedings.

 

Except as set forth below, there have been no material developments to the legal proceedings disclosed under Part I, Item 3. “Legal Proceedings” in our 2012 Annual Report.

 

City of Roseville Employees’ Retirement System v. EnergySolutions, Inc., et al. and Shareholder Derivative Actions

 

On April 17, 2013, the United States District Court of the Southern District of New York issued a final order approving the settlement agreement between the Company and the plaintiffs in the proceeding concerning the disclosures made in connection with our November 2007 initial public offering and July 2008 secondary offering, which proceeding has been previously disclosed and discussed by us in our 2012 Annual Report.  As a result, this matter has been dismissed.

 

Contemporaneous with the final order referenced above, the United States District Court of the Southern District of New York entered a final order approving the settlement agreement and dismissing the shareholder derivative actions which were based on substantially the same underlying facts concerning our initial and secondary public offerings described above and which actions were previously disclosed and discussed by us in our 2012 Annual Report.

 

Litigation Relating to the Merger with Energy Capital Partners

 

Following the Company’s January 7, 2013 announcement that it had entered into a Merger Agreement providing for the acquisition of the Company by Parent, an entity formed by Energy Capital Partners, ten purported class action lawsuits were brought against us, the members of our board of directors, Energy Capital Partners II, LLC, Parent and Merger Sub. Six lawsuits were filed in the Delaware Court of Chancery, captioned Printz v. Rogel, et al., C.A. No. 8302-VCG (Jan. 10, 2013); Bushansky v. EnergySolutions, Inc., et al., C.A. No. 8210 (Jan. 11, 2013); Danahare v. EnergySolutions, Inc., et al., C.A. No. 8219 (Jan. 15, 2013); Graham v. EnergySolutions, Inc., et al. (Jan. 15, 2013), and Lebron v. EnergySolutions, Inc., et al., C.A. No. 8223 (Jan. 15, 2013); Louisiana Municipal Police Employees’ Retirement System v. EnergySolutions, Inc., et al., C.A. No. 8350 (Feb. 22, 2013), (the “Delaware actions”). On January 19, 2013, the Court of Chancery entered an order consolidating the Delaware actions as In re EnergySolutions, Inc. Shareholder Litigation, Consolidated C.A. No. 8203-VCG. On January 28, 2013, the Court of Chancery entered an Order of Class Certification and Case Management which, among other things, certified a non opt-out class of EnergySolutions stockholders consisting of all persons who held shares of stock of EnergySolutions (excluding defendants named in the Delaware actions and their immediate family members, any entity controlled by any of the defendants, and any successors in interest thereto) at any time during the period from and including January 7, 2013, through the date of consummation or termination of the Merger.

 

On March 15, 2013, without admitting any wrongdoing and to avoid the burden, expense and disruption of continued litigation, EnergySolutions, Inc., the members of our board of directors, Energy Capital Partners II, LLC, Parent and Merger Sub entered into a memorandum of understanding with the plaintiffs in the Delaware actions providing for the settlement in principle of the claims brought by the plaintiffs in the Delaware actions. Pursuant to the memorandum of understanding, we included additional disclosures in our proxy statement requested by the plaintiffs in the Delaware actions. The parties to the Delaware actions are in the process of documenting the settlement and will present the settlement to the Delaware Court of Chancery for approval when that documentation is complete. In approving the settlement, the Delaware Court of Chancery may also require the Company to pay plaintiffs’ attorney fees, the amount of which have not been determined.

 

The other four lawsuits were filed in the Utah State District Court, Third Judicial District, Salt Lake County, and are titled Mohammed v. EnergySolutions, Inc., et al., No. 130400388 (Jan. 10, 2013); Luck v. EnergySolutions, Inc., et al. No. 130900256 (Jan. 11, 2013); Braiker v. EnergySolutions, Inc., et al., No. 130900573 (Jan. 25, 2013); and Temmler v. EnergySolutions, Inc., et al., No. 130900684 (Jan 31, 2013), (the “Utah actions”). On February 1, 2013, the Company and certain defendants filed a Motion to Dismiss or Stay, or in the Alternative for Extension of Time to Respond to Complaint in the Luck action, seeking to dismiss or stay the action in deference to the Delaware actions.

 

On April 9, 2013, without admitting any wrongdoing and to avoid the burden, expense and disruption of continued litigation, EnergySolutions, Inc., the members of our board of directors, Energy Capital Partners II, LLC, Parent and Merger Sub entered into a memorandum of understanding with the plaintiffs in the Utah actions, providing for the settlement in principle of the claims brought by the plaintiffs in the Utah actions. Pursuant to the memorandum of understanding, we included additional disclosures in this proxy statement supplement requested by the plaintiffs in the Utah actions. The parties to the Utah actions are in the process of documenting the settlement and will present the settlement to the Utah State District Court, Third Judicial District, Salt Lake County for approval when that documentation is complete.

 

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Collectively, the Delaware actions and Utah actions generally allege that the individual defendants breached their fiduciary duties in connection with the Merger because the merger consideration is unfair, that certain other terms in the Merger Agreement are unfair, and that certain individual defendants are financially interested in the Merger. Some of the actions further allege that Energy Capital Partners, Parent and Merger Sub aided and abetted these alleged breaches of fiduciary duty. Among other remedies, the lawsuits seek to enjoin the Merger, or in the event that an injunction is not awarded, unspecified money damages, costs and attorneys’ fees. We believe that each of the Delaware actions and Utah actions is without merit, and we intend to vigorously defend against all claims asserted to the extent not yet resolved.

 

We believe the legal claims alleged against the Company in the complaints described above are without merit and we intend to vigorously defend these actions to the extent not yet resolved.

 

Item 1A.  Risk Factors.

 

There have been no material changes to the risk factors disclosed under Part I, Item 1A. “Risk Factors” in our 2012 Annual Report.

 

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

 

The following table provides information with respect to shares of restricted stock granted under the EnergySolutions, Inc. 2007 Equity Incentive Plan that we withheld upon vesting to satisfy our tax withholding obligations during the three month period ended March 31, 2013.

 

Period

 

Total Number
of Shares
Purchased (1)

 

Average
Price Paid
per Share

 

Total Number
of Shares
Purchased as
Part of Publicly
Announced
Plans or
Programs

 

Maximum
Number of
Shares that May
Yet Be Purchased
Under the Plans or
Program

 

 

 

 

 

 

 

 

 

 

 

January 1, 2013 — January 31, 2013

 

 

$

 

 

 

February 1, 2013 — February 28, 2013

 

85,224

 

$

3.76

 

 

 

March 1, 2013 — March 31, 2013

 

29,626

 

$

3.75

 

 

 

 


(1)         Shares cancelled as payment for minimum statutory withholding taxes upon the vesting of restricted stock issued pursuant to the EnergySolutions, Inc. 2007 Equity Incentive Plan.

 

Item 6.  Exhibits.

 

Exhibit No.

 

Exhibit Description

31.1

 

Certification of Chief Executive Officer Pursuant to Rule 13a-14(a).

31.2

 

Certification of Chief Financial Officer Pursuant to Rule 13a-14(a).

32.1

 

Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS *

 

XBRL Instance Document.

101.SCH *

 

XBRL Taxonomy Extension Schema.

101.CAL *

 

XBRL Taxonomy Extension Calculation Linkbase.

101.DEF *

 

XBRL Taxonomy Extension Definition Linkbase.

101.LAB *

 

XBRL Taxonomy Extension Label Linkbase.

101.PRE *

 

XBRL Taxonomy Extension Presentation Linkbase.

 


*                 XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933 is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, and is otherwise not subject to liability under these sections.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, this 10th day of May, 2013.

 

 

ENERGYSOLUTIONS, INC.

 

 

 

 

 

By:

/s/ GREGORY S. WOOD

 

 

Gregory S. Wood

 

 

Executive Vice President and

 

 

Chief Financial Officer

 

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EXHIBIT INDEX

 

Exhibit No.

 

Exhibit Description

31.1

 

Certification of Chief Executive Officer Pursuant to Rule 13a-14(a).

31.2

 

Certification of Chief Financial Officer Pursuant to Rule 13a-14(a).

32.1

 

Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS *

 

XBRL Instance Document.

101.SCH *

 

XBRL Taxonomy Extension Schema.

101.CAL *

 

XBRL Taxonomy Extension Calculation Linkbase.

101.DEF *

 

XBRL Taxonomy Extension Definition Linkbase.

101.LAB *

 

XBRL Taxonomy Extension Label Linkbase.

101.PRE *

 

XBRL Taxonomy Extension Presentation Linkbase.

 


*                       XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, and is otherwise not subject to liability under these sections.

 

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