Perma-Fix Environmental Services, Inc. (PESI) provides nuclear, engineering, and industrial waste management and consulting services. The company engages in the treatment, storage, and processing of nuclear and low-level radioactive waste mate­rial. PESI’s unique asset portfolio includes sites in or adjacent to major Department of Energy (DoE) facilities as well as the only commercial facility in the United States permitted to treat radioactive Polychlorinated Biphenyls (PCBs). PESI also owns another exclusive permit as its Northwest facility (at Hanford) is the only commercial facility in the U.S. permitted to accept transuranic waste. PESI is poised to benefit from secular envi­ronmental cleanup trends, including the cleanup of contami­nated sites and the treatment of radioactive materials, and from the large amount of stimulus funds allocated towards projects which fall under PESI’s area of expertise.

PESI, long-recognized as a leader in the treatment space, ex­panded into on-site work in the fourth quarter of 2008 when it became a sub-contractor to CH2M Hill on a contract to com­plete on-site work at the DoE’s Hanford site. The contract lasts for five years and has a five-year renewal option that we expect will get exercised; the contract should generate about $35 mil­lion in annual revenues for PESI. While on-site work is lower margin work than treatment work, PESI can leverage its pres­ence at a site to drive incremental waste to its facilities for treat­ment. The Hanford contract enables PESI to display its capabili­ties and build its resume so that it can win more on-site work in the future. PESI’s continued expansion into on-site work should further enable the company to simultaneously grow its treat­ment revenues. The Hanford contract essentially provides the company with a source of recurring cash flows which it can use as a foundation to grow the company.

PESI’s unique permits provide the company with some ad­ditional attractive opportunities. The permit to treat radioactive PCBs provides the company with the exclusive opportunity to serve a market that, while extremely difficult to quantify, could provide a $100--$300 million revenue opportunity in the future. We also believe that the transuranic waste market could eventu­ally provide up to a $100 million revenue opportunity as well.

PESI continues to upgrade its facilities and expand its ca­pabilities. The company is currently working on installing a railroad at its Hanford facility. This will reduce transportation costs for the DoE and other customers and make it easier for the company to accept shipments of higher activity waste streams that cannot easily be transported on the road.

PESI stands to experience significant margin expansion over the next several years. In addition to maintaining a largely fixed operating cost structure, PESI has recently focused on treating more complex, higher activity waste streams which produce better margins. In May of 2010 the company successfully dem­onstrated its ability to treat tritium, a high activity waste stream that is prevalent at the DOE’s Savannah River site. The DoE shipped seven drums of tritium to PESI’s Oak Ridge, Tennessee facility towards the end of 2009. In the second quarter of 2010, PESI finished treating the initial seven drums and, while the timing of DoE shipments remains nearly impossible to predict, over 30 additional drums of tritium remain at Savannah River and PESI has positioned itself to benefit from this.

PESI's Oak Ridge, Tennessee facility.

PESI continues to execute and grow its cash flows. We be­lieve that the stock is extremely attractive at current levels. However, PESI is a long-term name that requires patience from investors; it is impossible to predict when the company will re­ceive shipments of waste from DoE sites. We believe that as this trend continues to play out over the long-term that PESI will be a big winner. We also think that the company is an attractive ac­quisition target for another player in the environmental services space. PESI has significantly improved its balance sheet over the last year and has positioned itself for what we believe will be an extremely bright future.

Joel Hainsfurther, Securities Analyst,
Wanger Investment Management, Inc.