The dismantling of the Zion nuclear plant was to be a model for how the process should be done, an unprecedented arrangement that allowed owner Exelon to turn the plant over to a third-party until the job was completed.



But even as the company doing the work, EnergySolutions, nears the riskiest phase of the project – moving the nuclear fuel into storage casks – the company is struggling financially, calling its future into question.



Last month EnergySolutions suddenly replaced its chief executive and chief financial officer for the second time in two years, causing the company's stock to plunge 55 percent and its credit ratings to fall two notches amid a weak earnings forecast. In March, EnergySolutions revealed that it underestimated by about $100 million the cost to dismantle Zion piece by piece, and ship the material to Utah for disposal.



EnergySolutions underbid the Zion project, gambling that publicity over it would help it snare similar work around the world, notably in Germany which vows to shutter its nuclear plants by 2022, the company's new chief executive and president David Lockwood told analysts last month.



"We undertook Zion for strategic, not financial reasons," Lockwood said.



What happens next has ramifications for Salt Lake City-based EnergySolutions Inc. but also the City of Zion and Chicago-based Exelon Corp. which shuttered the plant about 14 years ago.



Exelon was hoping to rid itself of the plant 10 years early, which would remove some risk for the company and earn it political goodwill.



If the project falters, EnergySolutions could cede control of the plant back to Exelon. If that occurs cost overruns would be covered by an EnergySolutions line of credit.



When EnergySolutions revealed that it grossly underestimated dismantling costs, investors took notice. That's because the amount is roughly one-eighth of the $800 million Exelon had set aside in a trust to fund the project.



Since then Energy Solutions has lowered profit projections from Zion from 10 to 15 percent in March to 5 to 10 percent in June, in part because it overestimated how much money the trust fund itself would earn.



The company says the decommissioning is ahead of schedule, which could translate to future cost savings. Last month, in downgrading the company's credit rating, Standard & Poor's cited concerns about the budget's dwindling cushion between the costs of decommissioning and the funds available in the trust fund.



If costs continue to escalate, EnergySolutions will be forced to dip in to its own finances or be forced to borrow to pay the costs. Currently, the company's cushion is just $6 million, compared with $121 million when Exelon handed over the keys in 2010, according to company budget updates.



Meanwhile, owners of more than two dozen other idled nuclear plants are watching what happens at Zion because, as the deal was structured, EnergySolutions took on the risk of cost overruns.



Just a few months ago EnergySolutions was upbeat about the prospects for more business as a result of Zion.



"The Zion project has become a key calling card in pursuing other domestic and international decommissioning opportunities because it showcases our unique capabilities, strengths and the very talented team we have assembed to successful undertake this complex work," Val John Christensen, then chief executive and president of EnergySolutions, told analysts in the first quarter of this year.



Christensen said utility owners were "watching our progress'' on Zion and had "reached out to us to discuss additional decommissioning opportunities in Germany, Japan, other European countries and here in the United States."



The Tsunami last year that caused a meltdown at the Fukushima Daiichi nuclear plant in Japan broadened the potential market for decommissioning nuclear reactors. Germany immediately shut down the country's 17 reactors and is phasing out nuclear energy altogether.



In the U.S., 29 reactors have been permanently shuttered and 13 of those are in the process of being decommissioned, according to the U.S. Nuclear Regulatory Commission. About 20 percent of U.S. electricity is generated by 104 nuclear reactors; Exelon operates the largest fleet of nuclear plants in the country.



The average age of U.S. reactors is 32 years, according to the U.S. Energy Information Administration and operating licenses run out at 40 years. Some reactors have received or applied for 20-year-extensions from the NRC. It's unclear how many are expected to be shuttered and decommissioned in the near future.



The NRC requires owners of nuclear power plants to set funds aside to cover the costs of dismantling or permanently encasing nuclear power plants.



The Government Accountability Office recently found that the NRC's formula may not reliably estimate adequate decommissioning costs. The formula was intended to estimate the "bulk" of the decommissioning funds needed, but the term "bulk" is undefined, making it unclear how NRC can determine if the formula is performing as intended.



In Zion's case, Commonwealth Edison ratepayers contributed to its trust fund while paying electricity bills over many years.



Exelon didn't think the fund was adequate and planned to let it grow, the company said. Its goal was to begin decommissioning Zion in 2014 and completed by 2030 – 32 years after the plant's permanent shut down. But EnergySolutions said it could do it sooner, faster and cheaper; so, Exelon hashed out a deal.



Adam Levin, director for decommissioning at Exelon, said the deal was attractive because it removed most if not all of the risk to Exelon that could come from cost overruns and pushed it onto EnergySolutions. If costs begin to run over, EnergySolutions is required to cover those costs and can no longer use the ratepayer-funded decommissioning trust fund until it is back on budget. In the past, Levin said, Exelon would have had to shoulder that risk.



If the project fails, a $200 million letter of credit automatically rolls over to Exelon. "From a standpoint of risk mitigation, we did a great job of protecting ourselves such that if EnergySolutions does have problems, we'll still be viable and be able to finish the decommissioning," Levin said.



EnergySolutions has said if Zion's costs run over there will be a "substantial impact" to its operations and financial condition.



From a financial standpoint, there wasn't much incentive for Exelon to decommission Zion. The money earned by the decommissioning fund more than covered the $10 million per year it cost to monitor the temperature of the fuel on site and to guard the area.



Also, the NRC gives plant operators 60 years from shut down to removing a nuclear facility and returning the land for reuse.



Levin said Exelon – which leased the 257-acre Zion site to EnergySolutions during the decommissioning – wants to see the property have a useful purpose.



So does the City of Zion.



"The people in Zion could get their lakefront back," said Zion Mayor Lane Harrison.



Every year the plant remains in place means a loss of potential tax revenue that could come from redeveloping a prime location on the shores of Lake Michigan.



Since the nuclear plant was deactivated, the city has been struggling to make ends meet because the plant's value dropped precipitously.



"The property tax?" said Harrison. "That's gone to just about zero. We used to get a substantial amount – millions of dollar a year."



The city is earning $600,000 per year over five years in demolition fees, Harrison said, but it doesn't begin to make up for the lost tax revenue.



Ultimately the land returns to Exelon after the decommissioning and the company hasn't said what its plans are for the site. "Some people have talked about condos on the lake," said Harrison. "But let's face it, there's a lot of places that want to do condos on the lake and there's so many things that need to come before you even get to that point."



When the plant is ultimately razed, part of the site will remain an electric switchyard and house 2.2 million pounds of spent fuel encased in concrete bunkers. Exelon will be responsible for guarding the fuel, while the country works on finding a permanent place to store the material.



That said, Harrison sees no reason for delays. "The decommissioning needs to be completed and everybody needs to step back and look at the possibilities of that property and that land for the future," he said.



When Exelon first hatched a plan to hand off Zion's decommissioning to EnergySolutions in 2007, EnergySolutions had just gone public in a 30-million share offering priced at $23 per share. Last Friday, the company's shares closed at $1.69 per share. The company is now being run by Lockwood, its third CEO (one was booted due to an improper use of company resources that was never explained), and a fourth CFO in as many years.



"The change caught everyone, including us, off-guard," said Al Kaschalk, an analyst with Wedbush Securities.



Kaschalk said Lockwood is a curious choice. A major shareholder and a director since 2010, Lockwood's background is in finance and law, not the nuclear industry. Lockwood, who has a record of turning around companies, characterized his appointment as a board decision meant to maximize shareholder value and bring financial accountability to the company.



"We wonder if the lack of transition period for a new CEO and the lack of nuclear industry experience versus financial discipline suggests that the board is looking someone to stabilize the business, cut costs and sell some or all of the company," Kaschalk said.



J.P. Morgan analyst Scott Levine said it appears -- from management comments -- that the company was on the block but that a buyer didn't emerge.



The company's finances have suffered as commercial companies have put off the planned cleanup of radioactive waste. At the same time, many contracts the company received from the Department of Energy were short-lived; they involved Recovery Act funds that have since dried up. The contracts represented about 15 percent of the company's revenue at the end of 2011.



Meanwhile a $1 billion per year contract EnergySolutions holds with U.K. nuclear operator Magnox is set for a re-bid in summer 2013. If EnergySolutions were to lose that bid, the company would see 60 percent of its revenue evaporate overnight. EnergySolutions is decommissioning 20 nuclear reactors for Magnox and operating two reactors at 10 locations.



According to YCharts, the company's debt-to-equity ratio the second highest among its peers in the waste management industry. A high debt to equity ratio indicates higher risk for shareholders.