Centrus Energy Corp (LEU) 2013 Q3 法說會逐字稿

Greetings and welcome to the USEC third-quarter conference call with investors. At this time all participants are in a listen-only mode. A question-and-answer session will follow the prepared remarks. (Operator Instructions). As a reminder this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Steven Wingfield, Director of Investor Relations for USEC. Thank you, Mr. Wingfield, you may begin.

Thank you for joining us for USEC's conference call regarding the third quarter of 2013. With me today are John Welch, President and Chief Executive Officer; John Barpoulis, Senior Vice President and Chief Financial Officer; Bob Van Namen, Senior Vice President; Phil Sewell, Senior Vice President; and Tracy Mey, Vice President and Chief Accounting Officer.

Before turning the call over to John Welch, I would like to welcome all of our callers as well as those listening to our webcast. This conference call follows our earnings news release issued yesterday afternoon. That news release is available on many financial websites and our corporate website, usec.com. All of our news releases and SEC filings are also available on our website. A replay of this call will be available on the USEC website.

I would like to remind everyone that certain of the information that we may discuss on this call today may be considered forward-looking information that involves risks and uncertainties including assumptions about future performance of USEC. Our actual results may differ materially from those in our forward-looking statements. Additional information concerning factors that could cause actual results to materially differ from those in our forward-looking statements is contained in our filings with the SEC, including our Annual Report on Form 10-K and Quarterly Reports on Form 10-Q.

Finally, the forward-looking information provided today is time sensitive and is accurate only as of today, November 5, 2013. This call is the property of USEC and any redistribution, retransmission or rebroadcast of this call in any form without the express written consent of USEC is strictly prohibited.

Thank you for your participation. Now I would like to turn the call over to John Welch.

Good morning and thank you for joining us today. This morning we will be discussing our third-quarter results, our progress in demonstrating a commercial cascade of the American Centrifuge technology and the headway we are making in transitioning the Paducah Gaseous Distribution Plant back to DOE.

Bottom line upfront. We reported a net loss for the third quarter of $44.3 million compared to net income of $4.5 million in the same quarter last year. For the year to date we reported a net loss of $87.2 million compared to a net loss of $116.3 million in the nine-month period of 2012. The net losses for the 2013 periods are due in part to lower SWU deliveries year over year. The more significant fact, however, was the recognition of nonproduction expenses related to the cessation of enrichment at the Paducah Plant in June.

The steps we are taking to prepare the Paducah GDP for return to DOE resulted in substantial nonproduction expenses that are charged directly to cost of sales and are playing a significant role in our financial results in 2013. Without these nonproduction expenses, we would have reported a gross profit for the quarter and year to date.

In the weeks since the decision was made in late May to cease enrichment at the plant, we have taken steps to prepare facilities for eventual return to DOE. We notified all of our employees of potential layoffs and we are presently in our second round of workforce reductions. The current round will continue into January and involves approximately 90 employees.

We anticipate that additional layoffs will occur in stages through 2014, depending on our business needs, regulatory requirements and the timing of plans to transition the site back to DOE in a safe and orderly manner.

I want to be clear that we expect to continue operations at the Paducah site into 2014 in order to manage inventory and to meet customer orders. John Barpoulis will provide a more complete report on our financial results.

I will turn next to our American Centrifuge Research Development and Demonstration program. I am pleased to report that the RD&D program remains on schedule and the equipment is operating very well. I go to Piketon frequently and I was there in October, and I can tell you that the ACP team is doing an excellent job. We have met all of the program milestones on or ahead of schedule, and we remain confident of meeting the remaining three milestones by the end of the year.

As background, earlier this year we completed testing of new redundant plant support systems and installed the 120 AC 100 machines that make up the commercial demonstration cascade. We completed integrated systems testing and then conditioned the centrifuge machines for the uranium gas. In early October, we officially began the demonstration of full cascade operations, which is the centerpiece of the RD&D program.

We are meeting the objectives of the program through the construction and operation of a commercially configured cascade. We have sustained the domestic centrifuge technical and industrial base for national security purposes and potential commercialization of the American Centrifuge technology.

Under the cooperative agreement, there are nine technical milestones. We have completed and DOE has certified six of the technical milestones. The remaining three milestones are targeted for completion by the conclusion of the RD&D program this year. And while we have documented the progress of the RD&D program in great detail with DOE, we have also recently updated a video that documents the program's progress. You can find the video on our website, usec.com, in the Media section. This short video really captures the scope and importance of the American Centrifuge technology and the RD&D program.

As you are aware, the funding for the RD&D program has been incremental and based on an 80/20 cost share with DOE. In July, DOE authorized additional funding that kept the program going through the end of the fiscal year, September 30. Thanks to the careful financial management of our American Centrifuge team, we had enough funds to keep the program operating during the government shutdown.

A continuing resolution passed by Congress and signed by the President in October provided additional funds for DOE to use through mid-January. Last week, we entered into an amendment to our cooperative [repayment] that provides an additional $17 million for the program. Although that won't be sufficient to fund the program through December 31, the amendment states that there is an expectation that DOE will provide additional funds. The amount of the additional funding has yet to be determined, but we are in discussions with the DOE about obtaining the funds needed to complete the technical milestones and the remaining program's scope.

So from a technical standpoint, we are making excellent progress in demonstrating American Centrifuge technology. Unfortunately, as we have reported throughout 2013, market dynamics for our nuclear fuel product are presenting a significant challenge for commercialization of the American Centrifuge project. The price of our product separative work units or SWU has fallen since the earthquake and tsunami in Japan in March 2011.

Before that national disaster struck, there were 55 reactors operating in Japan. Today, none are operating due to inspections and a new regulatory protocol. Reactors have also been shut down in Germany and retired prematurely in the United States.

This supply and demand imbalance has put severe pressure on SWU prices, which are at the lowest point in a decade. At current market prices, we do not believe that our plans for ACP commercialization are economically viable without additional government support.

In addition, the timing of our project construction beyond the conclusion of the RD&D program at the end of the year could leave us with a gap between the RD&D program and any potential future commercialization of American Centrifuge technology. In light of our liquidity, we do not have the ability to continue to fund ACP at its current levels beyond the end of 2013 without additional government support. Even with this support, our ability to provide funding in 2014 will be limited.

Therefore, we continue to evaluate our options concerning the project and could make a decision to demobilize or terminate the project in the near term. Such actions could have significant adverse impacts on the Company, including our ability to deploy the American Centrifuge technology, our liquidity and on the long-term viability of our enrichment business.

We are in ongoing discussions with the government regarding this dilemma. We have a robust technology that is proven and ready for deployment, but the enrichment market that would support that deployment is oversupplied in the short term. The reason DOE is providing significant support for the RD&D program is the desire to maintain enrichment capability for national security purposes. Our foreign owned competitors can't provide that national security assurance.

We are in the final weeks of the highly successful Megatons to Megawatts program. The employees of USEC are understandably proud of the role our Company has played in affecting this nonproliferation effort. Working with our Russian counterpart highly enriched uranium sufficient to arm 20,000 nuclear warheads was converted into peaceful use as reactor fuel. Over the past decade, this material has helped to generate about 10% of US electricity.

In the weeks ahead, American and Russian officials will be recognizing the completion of the 20-year treaty at ceremonies in St. Petersburg and Washington.

The conclusion of this treaty does not end our business relationship with Russia. We have begun taking deliveries of low enriched uranium under the follow-on commercial contract with Russia that will provide USEC with SWU through 2022. This supply is an important element of our transition plan and we look forward to continuing our business relationship with Russia.

Our Board of Directors met at the end of October and we are pleased to have two additional Directors join the Board. Michael Diament and Mikel Williams are successful businessman who have extensive experience in corporate governance. Their selection was made in consultation with certain noteholders and I expect their experience in restructuring will prove valuable to the Board.

In summary, although we reported a significant loss for the quarter, the loss was largely due to nonproduction expenses related to ceasing enrichment at the Paducah Plant. We are preparing a facility for return to DOE and are in discussions with DOE regarding timing of this transition.

The RD&D program is positioned to meet the remaining three milestones by the end of the year, but significant challenges remain for continued funding for the project and for developing a business plan to support the commercialization of the American Centrifuge technology going forward.

Now I would like to turn the call over to John Barpoulis for a more detailed report on our financial results. John?

Thanks, John. Good morning, everyone.

We reported revenue of $304 million for the third quarter, a decrease of $259 million compared to the same quarter of 2012. For the nine-month period, revenue is $909 million, a decrease of $550 million. The average invoiced SWU price year-to-date in 2013 was 3% higher compared to the year before, but SWU sales volume is 43% lower in the first nine months of 2013 compared to the same period last year.

As we have noted in recent quarters, the Contract Services segment has become a small revenue contributor following completion of services to DOE at the former Portsmouth, Ohio plant and the sale of our NAC subsidiary in March 2013.

In prior periods when we reviewed our cost of sales, our two largest cost components have historically been electric power and the price we pay Russia to purchase SWU. With the cessation of enrichment at Paducah, the cost of power is no longer relevant, but non-production expenses are being charged directly to cost of sales.

Non-production expenses totaled $48 million and $123 million in the three- and nine-month periods of 2013. These include immediate asset retirement charges for property formerly used in the enrichment process at the Paducah GDP, inventory valuation adjustments, site expenses including lease turnover activities, power contract losses and accelerated depreciation.

Additionally, we recorded special charges related to workforce reductions and advisory costs.

Overall, cost of sales in the third quarter was $334 million, a decrease of $193 million compared to the same quarter last year. For the nine-month period, the cost of sales was $973 million, a decrease of $403 million compared to the same period of 2012. The decrease, especially after consideration of non-production expenses, was due primarily to lower SWU sales volume.

We are taking deliveries of LEU from Russia as we conclude the Megatons to Megawatts program in 2013 and we have begun to take deliveries under the commercial 10-year supply contract with Russia. Purchased costs for the SWU component of LEU from Russia increased $79 million in the nine months ended September 30, compared to the corresponding period in 2012 due in part to a 6% increase in the purchase cost per SWU under the Megatons to Megawatts program.

Deliveries from Russia under the new Supply Contract also added to our purchase costs compared to the same period last year. Gross profit for the third quarter was a loss of $30 million, a decrease of $67 million compared to the same quarter in 2012. Looking at the nine-month period the loss on the gross profit line was $64 million, a decrease of $147 million from the same period in 2012. The loss reflects non-production costs in the LEU segments of $48 million and $123 million in the quarter and nine-month periods, respectively, and lower SWU sales volumes.

Below the gross profit line, we had several significant expenses as well as partially offsetting other income from DOE's pro rata share of the RD&D program. Selling, general and administrative expense was $36 million for the nine-month period, a decrease of $2 million or 6% compared to the prior year. In addition, year-to-date, we recorded special charges for advisors, supporting the effort to restructure our balance sheet of $7 million and one-time severance expense for employees laid off from the Paducah GDP of $3.6 million.

Advanced Technology costs in the nine-month period were $150 million, a decrease of approximately $17 million compared to the same period in 2012. The comparison is a decrease because, during the second quarter of 2012, there was a $45 million expense related to the title transfer of previously capitalized American Centrifuge machinery and equipment to DOE as provided for in our cooperative agreement that set up the RD&D program.

DOE and USEC are sharing the cost of this program and DOE's pro rata share of 80% of allowable costs during the nine-month period of 2013 was $124 million. That compares to $45 million in the corresponding period of 2012, which included four months of the RD&D program.

The net loss in the third quarter was $44.3 million compared to net income of $4.5 million in the same quarter last year. The net loss for the nine-month period was $87.2 million, an improvement of $29.1 million over the same period in 2012 when the net loss was $116.3 million. We ended the quarter with a cash balance of $128 million.

One outcome of our transition away from production at Paducah and the conclusion of the Megatons to Megawatts program is a change in our working capital requirements. Our payments to Russia will be significantly smaller and we no longer have electric bills of hundreds of millions of dollars. We maintained a credit facility that was rarely drawn upon, but the provided letters of credit primarily related to our power purchases. The credit facility matured on September 30 and was not renewed or replaced.

We have limited our financial guidance for investors in 2013. Clearly, USEC is in a period of transition and uncertainty. There are far too many variables to provide meaningful guidance for financial results and operating metrics.

We expect SWU revenue to come in at approximately $1.25 billion, based on a 35% reduction in SWU volumes delivered compared to 2012 and at 2% higher average SWU price invoiced to customers. The significant non-production expenses related to the cessation of enrichment at Paducah that both John and I addressed this morning is expected to result in a net loss for 2013.

We do, however, expect to end the year with more than $250 million in cash from positive cash flow generated by operations. We expect to have significant payables to Russia in the first quarter of 2014 that will be a draw on that cash balance. I would remind investors that our limited guidance includes important factors that could affect our actual results.

That concludes our prepared remarks and with that, operator, we are ready to take questions from our callers.

(Operator Instructions). Vladimir Jelisavcic of Bowery Investment.

Good morning, everyone. Question regarding the new Russian contract. What type of fiscal infrastructure does USEC need to be able to service and operate under that contract?

This is Phil Sewell. We have been operating under the Megatons to Megawatts contract for 20 years now and we have developed the infrastructure necessary to support deliveries from Russia and then transfer it to our customers. That same infrastructure will be applied as we move to the new contract with Russia from 2013 to 2022.

So we have nothing new to prepare or to build in terms of infrastructure and we intend to implement that contract on the same basis and using the same procedures as we did in the Megatons to Megawatts contract.

Okay. Does that infrastructure include Paducah assets or are there other assets outside of Paducah?

That infrastructure includes, I will say, assets throughout the country. It could be at Paducah, it could be other locations within the United States including locations at fuel fabricators with respect to where the material was delivered, and then provided either to fuel fabricators in the United States or fuel fabricators outside the United States. That logistical framework has been in place for quite some time and we just used a multitude of I will say locations dependent upon the customers' needs.

Understood. Is it possible to monetize or assign that contract because it appears as though it is not really core, not directly related to your initiatives under the ACP project?

I think strategically that one of the -- I would like to address the second item first is that is absolutely essential to the transition to American Centrifuge. Because without production out of the Gaseous Diffusion Plant in Paducah and American Centrifuge taking a period of time to build and deploy that transitional supply, which is good through 2022, is really what we are restructuring towards as the interim to get to American Centrifuge.

Right, but the business itself is --. So, you are saying it is a necessary source of cash going forward, but the business itself appears to be unrelated?

Well, one of the big things it does is it maintains a position for us in the market and it maintains relationships with our customers, which is absolutely critical.

And since privatization, we have maintained at least two sources of enrichment with our Paducah production and, historically, the Megatons to Megawatts program. Again, strategically, we see this Russian supply as being very important and a very important complement for, again, the work that we are doing toward ACP deployment.

Understood. Regarding your statements about restructuring your balance sheet, what options do you have available to mitigating control, various legacy and employee benefits, related liabilities at Paducah?

I guess I will answer that in a couple of ways. One is from a -- restructuring takes many forms and so I won't get into the broad swap that that can include. We will note that we do have the October 2014 maturity of our convertible notes we have out there but with respect to our Paducah transition I would say we are stepping back to evaluate all of our benefits and how we proceed along those lines as, frankly, it seems that many companies are across the country given the change in evolution and benefits across the board.

Recall that we did -- for our salaried workers, we did freeze our pension in the third quarter as well. Late second quarter.

Understood. Thank you.

(Operator Instructions).

Well, if there's no more questions, operator, I think we will conclude today's call.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time and thank you for your participation.