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Published: April 9, 2010
As the United States wrestles with the
future of nuclear power, it faces a more prosaic concern: What
to do with all of the existing nuclear power plants, many of
which were built more than 30 years ago and have already
exceeded their originally planned life spans. The choice is
twofold: regulators can provide an extension if the power
company replaces aging critical components, or they can shut
them down and disassemble them. Either way, little-known
Energy Solutions (NYSE: ES) stands to benefit. The $630
million Salt Lake City, Utah, company provides a range of
de-commissioning, waste processing and
logistics services to the nuclear power industry, primarily
in the United States and United Kingdom.
In the United States alone, there are 104 operating nuclear
reactors, and 13 more that have been shut down but not yet
disassembled. Of the 104 in operation, 54 have already received
life extensions, 20 have applied for extensions, and 24 more are
expected to apply, meaning the remaining six will be shut down
during the next three to four years. That figure is likely to
build in subsequent years as many facilities will not be able to
indefinitely extend their lives. Reactors that receive
extensions need to replace critical components such as turbines,
reactor heads and pressurizers, which is another high-margin
service offered by Energy Solutions.
To be sure, this industry has been tricky for investors, as the
United States has continually dithered on what it wants to do
with nuclear waste, existing plants and new plant construction.
Recent quarterly results for Energy Solutions have not reflected
the growth that management had hoped, as projects were delayed
and funds were slow to be disbursed.
But that appears set to change.
For starters, the massive U.S. stimulus package, which earmarked
$6 billion to the Department of Energy for nuclear cleanup, was
slow to get started but is now firmly underway. That should aid
results in coming quarters and especially in 2011. Second, a
long-term $7 billion deal to clean up the Hanford power plants
should start to generate around $300 million in annual revenues
for the company.
In addition, Energy Solutions is close to signing a deal with
Exelon (NYSE: EXC) to assume stewardship of an aging nuclear
site in Illinois. The eight to 10 year $900 million pact, which
is expected to generate more than $200 million in operating
profits for Energy Solutions, only awaits back-stop financing
for insurance. The company hopes to pursue similar deals with
other utilities in a program known as license stewardship. Each
of those projects would generate $300 million to $600 million in
funding, with profit margins of the same 20% magnitude as
management expects from the Exelon deal.
Energy Solutions is also bidding on large
plant remediation projects in Paducah, Ky., Portsmouth, N.H.,
and elsewhere, though analysts have not incorporated any
potential wins into their earnings models.
Offsetting the bright longer-term prospects is a nearer-term
drag: Energy Solutions derives more than half of its sales in
the United Kingdom on a low-margin project that may expire by
2013. That would hurt the top-line, but the contract generates
such weak cash flow that Energy Solutions’ profit margins would
get a substantial boost. It’s too soon to handicap the long-term
outcome of that U.K. contract.
Shares of Energy Solutions took a sharp hit in February, when
Chairman and CEO Steve Creamer unexpectedly resigned. Investors
quickly assumed that the exit signaled trouble at the company,
but the departure appears now to be a function of differing
visions for growth between Creamer and the board of directors.
Shares have started to rebound in recent weeks, but remain well
below levels seen late in 2009.
Investors had always expressed concern with the company’s high
debt load. After an acquisition spree, Net debt to total capital
stood at 83% by the end of 2006. That metric fell to 45% at the
end of 2009, and is expected to fall below 40% this year as the
company plans to earmark cash flow toward debt pay-downs.
The falling debt load and expected stream of new contract wins
should eventually help the stock shed its lowly earnings
multiple. Right now, the stock trades for roughly 10 times
projected 2011 profits, and less than seven times projected 2011
EBITDA (earnings before
interest,
tax, depreciation and amortization), on an
enterprise value basis. As the new projects announcements
roll in over the next few quarters, and visibility increases for
the prospect of steadily improving results in 2011 and 2012,
shares should start to trade back toward historical levels of
around 10 to 11 times EBITDA, or some 40% to 50% above current
levels.
-- David Sterman
Contributor
StreetAuthority |
