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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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FORM 10-Q

Commission file number 001-33830

EnergySolutions, Inc.
(Exact name of registrant as specified in its charter)

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 ý    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 ý    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):

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

        As of November 5, 2010, 88,621,825 shares of registrant's common stock were outstanding.

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ENERGYSOLUTIONS, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
For the Three and Nine Months Ended September 30, 2010

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PART I

Item 1.    Financial Statements

        

EnergySolutions, Inc.

Condensed Consolidated Balance Sheets

September 30, 2010 and December 31, 2009

(in thousands of dollars, except per share information)

See accompanying notes to condensed consolidated financial statements.

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EnergySolutions, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

Three and Nine Months Ended September 30, 2010 and 2009

(in thousands of dollars, except per share information)

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

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EnergySolutions, Inc.

Condensed Consolidated Statements of Cash Flows

Nine Months Ended September 30, 2010 and 2009

(in thousands of dollars)

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

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EnergySolutions, Inc.

Notes to Condensed Consolidated Financial Statements

(1) Description of Business

        EnergySolutions, Inc. ("we," "our," "EnergySolutions" or the "Company") is a leading provider of specialized, technology-based nuclear services to government and commercial customers. Our customers rely on our expertise to address their needs throughout the lifecycle of their nuclear operations. Our broad range of nuclear services includes engineering, operation of nuclear reactors, in-plant support services, spent nuclear fuel management, decontamination and decommissioning ("D&D"), logistics, transportation, processing and disposal. We derive almost 100% of our revenues from the provision of nuclear services.

        We provide our services through four segments: Federal Services; Commercial Services; Logistics, Processing and Disposal ("LP&D"); and International. Our Federal Services segment derives revenues 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 the U.S. Department of Defense ("DOD"). Our Commercial Services segment provides a broad range of on-site services, including D&D, to commercial customers. Our commercial customers include power and utility companies, pharmaceutical companies, research laboratories, universities, industrial facilities and other commercial entities with nuclear materials, as well as state agencies in the U.S. Our LP&D segment provides a broad range of logistics, transportation, processing and disposal services to government and commercial customers. This segment also operates our facilities for the safe processing and disposal of radioactive materials, including a facility in Clive, Utah, four facilities in Tennessee and two facilities in Barnwell, South Carolina. Our International segment derives revenues primarily through contracts with the Nuclear Decommissioning Authority ("NDA") in the United Kingdom ("U.K.") to operate, manage and decommission 10 Magnox sites with 22 nuclear reactors. In addition, our International segment provides turn-key services for the disposal of radioactive sources from non-nuclear power generating facilities such as hospitals, research facilities and other manufacturing and industrial facilities.

Exelon Transaction

        On December 11, 2007, we, through our subsidiary ZionSolutions, LLC ("ZionSolutions"), entered into certain agreements with Exelon Generation Company LLC ("Exelon"), ("the Exelon Agreements") to dismantle Exelon's Zion nuclear facility located in Zion, Illinois ("Zion Station"), which ceased operation in 1998. The transaction closed on September 1, 2010. Upon closing, Exelon transferred to ZionSolutions substantially all of the assets (other than land) associated with Zion Station, including assets held in nuclear decommissioning trusts. 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 spent nuclear fuel currently held in spent fuel pools at 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 ("License Transfer").

        To satisfy the conditions of the NRC order approving the License Transfer, we (i) secured a $200 million letter of credit facility, (ii) granted an irrevocable easement of disposal capacity of

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EnergySolutions, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(1) Description of Business (Continued)

7.5 million cubic feet at our Clive disposal facility and (iii) purchased the insurance required of a licensee under the NRC's regulations.

        Although we entered into this contract in December 2007, we postponed the closing of the transaction due to the financial crisis affecting the stock markets at the time, and as a result all costs associated with the execution of the planning phase were also deferred. During September 2010, after closing, we were able to recognize these costs and the related revenues in our consolidated statements of operations.

(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. We evaluated all subsequent events through the date we filed these financial statements in our Quarterly Report on Form 10-Q with the Securities and Exchange Commission ("SEC"). These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2009 filed with the SEC on March 1, 2010.

        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 revenues and expenses during the reporting period. Actual results could differ from these estimates. The results of operations for the three and nine months ended September 30, 2010 are not necessarily indicative of results that can be expected for the full year.

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

        Certain amounts for prior periods have been reclassified to conform to the current year presentation. Prior to the fourth quarter of 2009, we included equity in income of unconsolidated joint ventures in other income (expense), net. During the fourth quarter of 2009, we reclassified these amounts from other income (expense), net, to operating income in the accompanying consolidated statements of operations. Accordingly, for the three and nine months ended September 30, 2009, income from operations was increased by $2.8 million and $5.9 million, respectively, as a result of the reclassification. There was no impact on net income or net income attributable to EnergySolutions for the three or nine months ended September 30, 2009. Income from unconsolidated joint ventures is included in our Federal Services segment operations. In addition, we reclassified $36.8 million from accounts receivable, net of allowance for doubtful accounts, to costs and estimated earnings in excess of billings on uncompleted contracts as of December 31, 2009 to conform to the current year presentation which reflects a difference in the way our new accounting system, implemented effective January 1, 2010, records invoicing activities related to the current period, but generated in the subsequent period. This reclassification had no impact on total current assets, total assets, revenue or net income.

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EnergySolutions, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(2) Basis of Presentation (Continued)

Accounting for the Exelon Transaction

        The plant assets acquired under the Exelon Agreements are radioactively contaminated assets that are in a shut-down state and have no future use and will be processed as waste and disposed of as part of the D&D activities. Thus, the acquired assets have no fair value. The NRC license, transferred to ZionSolutions from Exelon, allows ZionSolutions to perform the D&D activities and manage the spent nuclear fuel that is still on site for the duration of the project. Similar to the tangible assets, we do not believe there is assignable value associated with the NRC license as we are unable to sell, assign or transfer the license to another party. Further, while the license covers activities such as operating the power plant, the plant is non-operable and shut-down.

        As the owner of the plant assets and NRC license, we have assumed an asset retirement obligation ("ARO") related to the decommissioning of the site and obtained a controlling interest in the trust fund which will be used solely to pay the costs of the D&D activities. Accordingly, we have recorded each of these items in our balance sheet. In addition, under the terms of the Exelon Agreements, we have an obligation to return any excess funds in the trust fund to Exelon. The excess is defined as any remaining balance in the trust fund after ZionSolutions has been reimbursed for all of its costs, including contractually agreed upon profit, for the D&D activities associated with Zion Station (the "Zion Station ARO"). Accordingly, as of September 30, 2010 we had an excess obligation of $120.6 million recorded as payable due to Exelon which is included in other noncurrent liabilities in the consolidated balance sheets. This payable will fluctuate based upon changes in value of the trust fund and the changes to the Zion Station ARO.

        We will account for the Zion Station ARO according to our current accounting policies related to asset retirement obligations, except for the presentation of the gain associated with the Zion Station ARO settlement as services are performed. This gain will be included in revenue. For further details see Note 9—Facility and Equipment Decontamination and Decommissioning.

        The decommissioning trust fund (further described in Note 4—Trust Fund Investments) is recorded at fair value as described in Note 5—Fair Value Measurements.

        We have made a formal submission to the SEC requesting pre-clearance of our proposed accounting treatment for the Zion Station ARO, as reflected above. There is no assurance the SEC will concur with our proposed accounting treatment. Therefore, we may be required to modify such accounting treatment and may also be required to file an amended Quarterly Report on Form 10-Q, for the quarter ended September 30, 2010, to reflect material changes in our financial statements resulting from an accounting treatment that is different from that proposed above.

(3) Recent Accounting Pronouncements

Accounting Pronouncements Issued But Not Yet Effective

        In October 2009, the Financial Accounting Standards Board ("FASB") issued an update to the authoritative guidance for multiple-deliverable arrangements to enable vendors to account for products or services (deliverables) separately rather than as a combined unit. This update is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010 and may be applied retrospectively for all periods presented or prospectively to arrangements entered into or materially modified after the adoption date. This guidance is effective for us on January 1, 2011. We are currently evaluating the potential impact of the adoption of this

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EnergySolutions, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(3) Recent Accounting Pronouncements (Continued)

guidance but we do not expect it to have a material impact on the Company's results of operations, financial position or cash flows.

        In January 2010, the FASB issued accounting guidance improving disclosures about fair value measurements, which requires reporting entities to make new disclosures about recurring or nonrecurring fair value measurements including significant transfers into and out of Level 1 and Level 2 fair value measurements and information on purchases, sales, issuances, and settlements on a gross basis in the reconciliation of Level 3 fair value measurements. This guidance is effective for annual reporting periods beginning after December 15, 2009, except for Level 3 reconciliation disclosures which are effective for annual periods beginning after December 15, 2010. The adoption of the Level 1 and Level 2 provisions as of January 1, 2010 did not have any impact on our consolidated financial statements. We do not expect the adoption of the Level 3 provisions to have a material impact on our consolidated financial statements.

(4) Trust Fund Investments

        We consolidate the nuclear decommissioning trust ("NDT") fund as a variable interest entity. We have a contractual interest in the NDT fund and such interest is a variable interest due to its exposure to the fluctuations caused by market risk. Also, 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. However, the only allowed purpose of the NDT is to pay for the decommissioning work at the Zion Station plant and if there are any funds remaining in the NDT fund at the conclusion of the Zion Station decommissioning work we are required to return those funds back to Exelon. We are the primary beneficiary of the NDT as we benefit from positive market returns and bear the risk of market losses.

        Our marketable securities consist of marketable debt and equity securities held in our NDT fund associated with the Exelon Agreements. They are classified as trading securities. As of September 30, 2010, investments held by the NDT fund, net, totaled $830.3 million and are included in other long-term assets in the accompanying balance sheets. Gains and losses resulting from adjustments to the fair value of the NDT fund investments resulted in net gains of $28.9 million for the three and nine months ended September 30, 2010, and are included in other income (expense), net, in the accompanying consolidated statements of operations and comprehensive income.

        Along with the transfer of the NDT fund, under the terms of the Exelon agreements, we have also assumed an obligation to return any excess funds in the NDT fund to Exelon. The excess is defined as any remaining balance in the NDT fund after ZionSolutions has been reimbursed for all of its costs, including profit, for the D&D activities associated with Zion. Due to these agreements with Exelon, any realized or unrealized gains or losses on NDT fund investments have the effect of increasing or decreasing the funds due back to Exelon. In order to correctly reflect the Due to Exelon balance we have reclassified $28.9 million from other income (expense) to the payable due to Exelon for the three and nine months ended September 30, 2010.

        Of the $28.9 million net gains recorded from adjustments to the fair value, $10.7 million are related to realized gains on investment securities recorded for the three and nine months ended September 30, 2010. Amortized cost, gross unrealized holding gains, gross unrealized holding losses and

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EnergySolutions, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(4) Trust Fund Investments (Continued)

fair value for our trading securities by major class as of September 30, 2010 were as follows (in thousands):

        The unrealized losses above are considered temporary. Losses are recorded in other income (expense) when a decline in fair value is determined to be other than temporary. The Company reviews several factors to determine whether a loss is other than temporary. These factors include but are not limited to: (i) the extent to which the fair value is less than cost and the cause for the fair value decline, (ii) the financial condition and near term prospects of the issuer or declines in credit risk, (iii) the length of time a security is in an unrealized loss position and (iv) whether it is more likely than not that the company will hold the securities for a period of time sufficient to allow for any anticipated recovery in fair value.

(5) Fair Value Measurements

        The Company has 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 generally accepted accounting principles, 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

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EnergySolutions, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(5) Fair Value Measurements (Continued)

included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability.

        This hierarchy requires the Company 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 the Company believes its 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 the fair value measurement.

        The Company holds investments in the NDT fund that was established to satisfy the decommissioning obligations assumed in connection with the execution of the Exelon Agreements. The NDT fund holds debt and equity securities directly and indirectly through commingled funds. Investments with maturities of three months or less when purchased, including certain short-term fixed income securities, are considered cash equivalents and included in the recurring fair value measurements hierarchy as Level 1.

        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 exchanges.

        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. 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.

        Commingled funds and units of participation, which are similar to mutual funds, are maintained by investment companies and hold certain investments in accordance with a stated set of 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. Commingled funds are categorized in Level 2 because the fair value of the funds are based on net asset values per fund share (the unit of account), primarily derived from the quoted prices in active markets on the underlying equity securities. Units of participation are categorized as Level 3 because the fair value of these securities is based partially on observable prices of the underlying securities as well as third party valuation models.

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EnergySolutions, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(5) Fair Value Measurements (Continued)

        The following table presents the fair value of the NDT fund investments as of September 30, 2010 (in thousands):

        The following table presents total realized and unrealized gains (losses) included in income for Level 3 assets and liabilities measured at fair value on a recurring basis during the three and nine months ended September 30, 2010:

        The carrying value of accounts receivable, costs and estimated earnings in excess of billings on uncompleted contracts, inventories, prepaid assets, accounts payable, accrued expenses and unearned revenues 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. The fair market value of our senior secured credit facility was approximately $523.4 million as of September 30, 2010, and $516.5 million as of December 31, 2009. The carrying value of our senior secured credit facility was $558.6 million as of September 30, 2010, and $519.1 million as of December 31, 2009. As of September 30, 2010, we also had outstanding senior

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EnergySolutions, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(5) Fair Value Measurements (Continued)

notes obligations with a carrying amount of $300.0 million and a fair market value of approximately $357.9 million.

        The fair value of our derivative instruments is determined using models that maximize the use of the observable market inputs including interest rate curves and both forward and spot prices for currencies. The carrying amount of our interest rate collar derivative approximates fair value. This instrument is included in accrued expenses in the accompanying balance sheets and is classified as Level 2 under the fair value hierarchy. The fair market value of our interest rate collar was $0.6 million as of September 30, 2010 and $1.7 million as of December 31, 2009.

(6) Goodwill

        As of September 30, 2010 and December 31, 2009, the Company had recorded approximately $483.4 million and $518.8 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 consolidated balance sheets. For the nine months ended September 30, 2010, we recorded $0.4 million in translation losses related to goodwill denominated in foreign currencies.

        In accordance with authoritative guidance, we evaluate goodwill for impairment annually and when an event occurs or circumstances change that indicates that the carrying value may not be recoverable. Our annual testing date is April 1. We test goodwill for impairment by first comparing the book value of net assets to the fair value of the reporting units. If the fair value is determined to be less than the book value, a second step is performed to compute the amount of impairment as the difference between the estimated fair value of goodwill and the carrying value. We estimate the fair value of the reporting units using discounted cash flows. Forecasts of future cash flow are based on our best estimate of future net revenues and operating expenses, based primarily on pricing, market segment share and general economic conditions. Changes in these forecasts could significantly change the amount of impairment recorded, if any.

        We performed our annual goodwill analysis during the second quarter of 2010 and concluded that the goodwill within our Federal Services reporting unit was impaired. As a result, we recorded a $35.0 million non-cash goodwill impairment charge during the nine months ended September 30, 2010. Factors culminating in the impairment included a decrease in future expected cash flows and lower forecasted growth rates than those projected in the prior year. There was no tax benefit associated with this impairment charge as the goodwill was not deductible for tax purposes. The impairment charge did not impact our cash position, operating cash flow or debt covenants.

(7) Other Intangible Assets

        Other intangible assets subject to amortization consist principally of amounts assigned to permits, customer relationships, non-compete agreements and technology. We do not have intangible assets that are not subject to amortization.

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EnergySolutions, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(7) Other Intangible Assets (Continued)

        Other intangible assets as of September 30, 2010 and December 31, 2009 consist of the following (in thousands):

        Amortization expense was $6.4 million and $19.2 million for the three and nine months ended September 30, 2010, respectively, as compared to $4.8 million and $18.7 million for the three and nine months ended September 30, 2009, respectively. In addition, for the nine months ended September 30, 2010, we recorded $0.6 million in translation losses related to intangible assets denominated in foreign currencies.

        In conjunction with the performance of our annual goodwill impairment analysis, it was determined that an indicator of impairment existed with regard to the technology intangible assets allocated to the Federal Services reporting unit. We completed our analysis of these intangible assets during the quarter ended September 30, 2010. We compared the carrying amount of the intangible assets to the estimated undiscounted future cash flows expected to be generated by the intangible assets. The undiscounted future cash flows exceeded the carrying value; therefore, no impairment charge was required to be recorded.

(8) Credit Facilities

Senior Secured Credit Facility

        On August 13, 2010, the Company entered into a senior secured credit facility with JPMorgan Chase Bank, N.A. (the administrative agent), consisting of a senior secured term loan (the "Term Loan") in an aggregate principal amount of $560.0 million at a discount of 2.5% and a senior secured revolving credit facility (the "Revolving Credit Facility") with availability of $105.0 million. The revolving portion of the senior secured credit facility includes a sublimit of $100.0 million for letters of credit, of which $9.6 million were issued as of September 30, 2010. The proceeds of the senior secured credit facility were used to: (a) repay outstanding indebtedness under the former credit agreements; (b) collateralize reimbursement obligations to the deposit issuing banks with respect to deposit letters of credit; (c) replace synthetic letters of credit issued under the former credit agreements; and (d) provide credit support for obligations acquired under the Exelon Agreements.

        Borrowings under the senior secured credit facility bear interest at a rate equal to:

•

Adjusted LIBOR plus 4.50%, or ABR plus 3.50%; in the case of the Term Loan,



•

Adjusted LIBOR plus 4.50%, or ABR plus 3.50%; in the case of the Revolving Credit Facility, and

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EnergySolutions, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(8) Credit Facilities (Continued)

•

a per annum fee equal to the spread over Adjusted LIBOR under the Revolving Credit Facility, along with a fronting fee and issuance and administration fees; in the case of revolving letters of credit.

        "Adjusted LIBOR" is defined as, the London interbank offered rate for such interest period, adjusted for any applicable statutory reserve requirements; provided that Adjusted LIBOR, when used in reference to the Term Loan, will at no time be less than 1.75% per annum.

        "ABR" is defined as the highest of (a) the administrative agent's Prime Rate, (b) the Federal Funds Effective Rate plus ¹/2 of 1.00% and (c) the Adjusted LIBOR from time to time for an interest period of one month, plus 1.00%; provided that ABR, when used in reference to the Term Loan, will at no time be less than 2.75% per annum.

        Borrowings under our senior secured credit facility and former credit facilities bear interest at variable rates. As of September 30, 2010 the interest rate on borrowings under our senior secured credit facility was 6.25%. As of December 31, 2009, the interest rate of borrowings under our former credit facilities was 4.01%.

        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.

        The Term Loan amortizes in equal quarterly installments of $1.4 million payable on the last day of each calendar quarter, which is equal to 0.25% of the original principal amount of the Term Loan, with the balance being payable on August 13, 2016. As of September 30, 2010, we have $5.6 million of scheduled payments due within the next 12 months.

        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 (ii) 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 Term Loans 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 Term Loans. 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 or, in the case of the fiscal year ending on December 31, 2010, as of and for the last day of the partial year commencing on October 1, 2010 and ending on December 31, 2010. Pre-payments 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.

        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), which are calculated quarterly. Failure to comply with these financial ratio covenants would result in an event of default under the senior secured

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EnergySolutions, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(8) Credit Facilities (Continued)

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 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 4.75 from the quarter ended September 30, 2010 through the quarter ending December 31, 2010, 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 September 30, 2010 through the quarter ended September 30, 2014 and 2.25 through the maturity date. As of September 30, 2010, our total leverage and cash interest coverage ratios were 3.61 and 4.25, 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 2010 and each year thereafter, plus for each year the lesser of (1) a one year carry-forward 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 nine months ended September 30, 2010 were $11.6 million. As of September 30, 2010, we were in compliance with all of the covenants under our senior secured credit facility.

        During the nine months ended September 30, 2010 and 2009, we made principal repayments totaling $1.4 million and $47.6 million, respectively. During the nine months ended September 30, 2010 and 2009, we made cash interest payments of $20.6 million and $18.5 million, respectively. In addition, during the nine months ended September 30, 2010 we paid fees of approximately $23.2 million to the lenders to obtain the new credit agreements, which are being amortized over the remaining term of the senior secured credit facility. Also, during the nine months ended September 30, 2010, we recorded a $19.1 million write-off of deferred financing fees as a result of retirement of our previous debt.

Senior Notes

        On August 13, 2010, we completed a private offering of $300 million 10.75% Senior Notes due 2018 (the "Notes") at a discount of 1.3%. The Notes are governed by an Indenture among EnergySolutions and Wells Fargo Bank, National Association, as trustee. Interest on the Notes is payable semiannually in arrears on February 15 and August 15 of each year beginning on February 15, 2011. The Notes rank in equal right of payment to all existing and future senior debt and to all future subordinated debt.

        At any time prior to August 15, 2014, we are entitled to redeem all or a portion of the Notes at a redemption price equal to 100% of the principal amount of the 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 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

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EnergySolutions, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(8) Credit Facilities (Continued)

August 15, 2014, we may redeem all or a portion of the 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.

        The Notes are guaranteed on a senior unsecured basis by all of our domestic restricted subsidiaries that guarantee the senior secured credit facility. The Notes and the 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 Notes will also be structurally subordinated to all liabilities of each of our subsidiaries that do not guarantee the 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 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 its restricted subsidiaries 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.

        In connection with the sale of the Notes, we entered into a registration rights agreement, dated August 13, 2010 (the "Registration Rights Agreement"), with the representative of the initial purchasers of the Notes. Under the Registration Rights Agreement, we agreed to use our commercially reasonable best efforts to file and cause to become effective a registration statement with respect to an exchange of the Notes. We also agreed to file, if obligated, a shelf registration statement relating to the resale of the Notes if the exchange offer is not consummated within the required time period stated in the Registration Rights Agreement.

(9) 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. The ARO related to the Zion Station D&D project continues to be refined and any adjustments made as a result of this process will be recorded in the fourth quarter of 2010 and these changes, if any, will also adjust the due to Exelon liability.

        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

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EnergySolutions, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(9) Facility and Equipment Decontamination and Decommissioning (Continued)

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 decontamination and decommissioning liabilities consist of the following (in thousands):

        The following is a reconciliation of our facility and equipment ARO as of September 30, 2010 (in thousands):

        For the majority of our D&D obligations, we are required to provide financial assurance in the form of a restricted cash account, a deposit in escrow, a trust fund or an insurance policy. Restricted cash and decontamination and decommissioning deposits consists 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. Accordingly, as of September 30, 2010, we have non-current restricted cash of $0.3 million related to our Clive facility and it is included in restricted cash and decontamination and decommissioning deposits in the accompanying balance sheets. We also have the NDT fund to fund the decommissioning obligation for the Zion Station. The NDT fund balance as of September 30, 2010 was $830.3 million and is included in NDT fund investments in the accompanying consolidated balance sheets.

        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 the funds included in non-current restricted cash in the accompanying consolidated balance sheets (see Note 8—Credit Facilities).

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EnergySolutions, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(9) Facility and Equipment Decontamination and Decommissioning (Continued)

        The ARO established in connection with the Zion transaction differs somewhat from our traditional AROs. The assets acquired in the Zion transaction have no fair value, no future useful life and are in a shut-down, non-operating state. As a result, the ARO established in connection with the Zion transaction is not accompanied by a related asset. Changes to the ARO liability due to accretion expense and changes in cost estimates are recorded in operating expense in our consolidated statements of operations and comprehensive income (loss). Both of these changes to the ARO liability have the effect of changing the amount payable to Exelon to the extent such a payable is available. As such, we expect any gain or loss that results from a change in the payable to Exelon to be recorded to the same line as the changes in the ARO liability.

        Also, as we will perform most of the work internally related to the Zion Station ARO, a gain will be recognized for the difference between our actual costs incurred and the recorded ARO, which includes an element of profit. Due to the nature of this contract and the purpose of the license stewardship initiative, we have presented this gain in the revenue section of the income statement, rather than as a credit to operating expense, as we would with our other AROs. For the three and nine months ended September 30, 2010, the revenue associated with the Zion Station ARO was $0.4 million. For the three and nine months ended September 30, 2010, we did not recognize any gain associated with the settlement of our other AROs.

(10) Derivative Financial Instruments

        We have entered into derivative contracts to help offset our exposure to movements in interest rates in relation to our variable rate debt. These contracts are not designated as accounting hedges. On December 18, 2008, we entered into an interest rate collar agreement with a notional amount of $200.0 million. As of September 30, 2010 and December 31, 2009, the fair value liability of the interest rate collar contract was $0.6 million and $1.7 million, respectively. Unrealized gains and losses resulting from adjustments to the fair value of the contracts are included in other income (expense), net, and resulted in net gains of $0.2 million and net losses of $0.5 million for the three months ended September 30, 2010 and 2009, respectively, and net gains of $1.1 million for the nine months ended September 30, 2010, and net losses of $1.7 million for the nine months ended September 30, 2009. We do not use interest rate derivatives for trading or speculative purposes.

        We have foreign currency exposure related to our operations in the U.K. as well as other foreign locations. Foreign currency gains and losses are included in other income (expenses), net, in the accompanying condensed consolidated statements of operations and comprehensive income. During the three and nine months ended September 30, 2010, we recognized gains of $0.5 million and $0.1 million, respectively. During the three and nine months ended September 30, 2009, we recognized gains of $0.7 million and $5.1 million, respectively.

        In the past, we have entered into derivative contracts to help offset our exposure to movements in foreign currency rates in relation to our U.S. dollar denominated intercompany loan with our U.K. subsidiary. These foreign currency derivative contracts were not designated as accounting hedges. The most recent contract was terminated on December 23, 2009. Unrealized gains and losses resulting from adjustments to the fair value of the contracts were included in other income (expenses), net and resulted in a net gain of $0.4 million and a loss of $5.2 million for the three and nine months ended September 30, 2009. We had no foreign currency derivative contracts for the nine months ended September 30, 2010.

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EnergySolutions, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(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:

(12) Equity-Based Compensation

Stock Options and Restricted 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 recorded non-cash compensation expense related to our stock option and restricted stock grants of $3.0 million and $8.0 million for the three and nine months ended September 30, 2010, respectively, as compared to $3.2 million and $8.4 million for the three and nine months ended September 30, 2009, respectively. For the nine months ended September 30, 2009, we also had $0.3 million of compensation expense related to other equity awards. As of September 30, 2010, we had $13.9 million of unrecognized compensation expense related to outstanding stock options, which will be recognized over a weighted-average period of 1.7 years. As of September 30, 2010, there was $3.6 million of unrecognized compensation expense related to non-vested restricted stock which is expected to be recognized over a weighted-average period of 2.2 years.

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EnergySolutions, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(13) Pension Plans

        Net periodic benefit costs for the three and nine months ended September 30, 2010 and 2009 consisted of the following (in thousands):

        The preceding information relates only to the Magnox Plan and does not include amounts related to benefit plans applicable to employees associated with certain contracts with the U.S. Department of Energy because we are not responsible for the current or future funded status of these plans.

(14) Income Taxes

        We recognized income tax expense of $8.3 million for the three months ended September 30, 2010, and $12.4 million for the nine months ended September 30, 2010, based on an effective tax rate on our consolidated operations of negative 40.2%. Our negative effective tax rate is the combined result of a pretax book loss for the nine months ended September 30, 2010, and tax expense for the same period resulting primarily from the realization of income and tax expense in certain foreign subsidiaries and losses in certain other foreign subsidiaries for which we could not record a tax benefit, the goodwill impairment charge that is not deductible for tax, and the recording of tax expense related to an increase of $8.6 million in the valuation allowance for certain existing domestic and foreign deferred tax assets.

        During the three and nine months ended September 30, 2010, we also recorded a benefit for prior year domestic and foreign research and development credits. Our expected annual effective tax rate of approximately 37% is higher than the U.S. statutory rate of 35% due primarily to the tax expense items listed above, excluding the impact of the goodwill impairment charge which is not deductible for tax, and state income taxes, net of federal taxes, partially offset by lower tax on earnings in certain foreign jurisdictions. We recognized income tax expense of $1.7 million for the three months ended September 30, 2009 and $8.4 million for the nine months ended September 30, 2009, based on an effective tax rate on our consolidated operations of 22.8% which is lower than the U.S. statutory rate of 35% due primarily to lower tax on income in foreign jurisdictions and the tax benefit of domestic and foreign research and development credits. During the nine months ended September 30, 2010 and 2009, we made income tax payments of $8.9 million and $7.8 million, respectively.

        As of September 30, 2010 and December 31, 2009, we had $2.7 million and $2.0 million, respectively, of gross unrecognized tax benefits, which may impact our annual effective tax rate in future years. These tax benefits were accounted for under guidance for accounting for uncertainties in income taxes. The Company and its U.S. subsidiaries are subject to U.S. federal and state income tax. The Company is currently in various stages of multiple year examinations by federal and state taxing authorities. The Company does not anticipate a significant impact to the unrecognized tax benefits

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EnergySolutions, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(14) Income Taxes (Continued)

balance with respect to current tax examinations in the next 12 months, although the timing of the resolution and/or the changes that may be required by the audits are highly uncertain.

(15) Segment Reporting and Business Concentrations

        We provide our services through four segments: Federal Services ("FS"), Commercial Services ("CS"), Logistics, Processing and Disposal ("LP&D"), and International. The following table presents segment information as of and for the three and nine months ended September 30, 2010 and 2009 (in thousands):

 

 

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EnergySolutions, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(15) Segment Reporting and Business Concentrations (Continued)