CENTRUS ENERGY CORP quarterly report, Q1 FY2011

Business context and reporting period

USEC Inc.’s unaudited Form 10-Q covers the quarter ended March 31, 2011. The filing describes a supplier of low-enriched uranium (LEU), with contract services and nuclear technology activities. It identifies the registrant as USEC Inc.; investors should verify its relationship to the company named in the request, Centrus Energy Corp.

Key financial results

SWU revenue increased 16% to $308.5 million, reflecting 9% higher sales volume and a 6% higher average selling price. Uranium revenue fell 10% to $14.0 million. Contract services revenue declined 7% to $58.0 million, and that segment moved from $11.7 million gross profit to a $1.4 million gross loss. LEU segment gross profit was nearly flat at $15.3 million. Overall gross profit fell as costs rose faster than revenue; SWU cost per unit was up 7% year over year.

Cash and cash equivalents were $149.8 million at quarter-end, versus $151.0 million at year-end 2010. Working capital was $940.9 million, down from $985.6 million. Current assets were $2,423.5 million and current liabilities $1,482.6 million. Long-term debt was $615.0 million: $530.0 million of 3.0% convertible notes due 2014 and an $85.0 million term loan due May 2012, bearing 9.5%. The $225 million revolving facility had $207.8 million available, including $17.2 million of letters of credit; borrowings were zero. The company reported compliance with its credit-facility covenants.

Material changes versus the prior period

• Total revenue rose $35.8 million, but gross profit declined $12.8 million and the net loss widened $6.9 million.
• Operating cash flow improved by $94.2 million, substantially reflecting working-capital movements, including inventory and receivables reductions and increased deferred revenue. This included a $201.2 million payment of Russian Contract payables.
• USEC exchanged $45 million principal amount of convertible notes for 6,952,500 common shares and accrued interest, recording a $3.1 million gain. Debt declined from $660.0 million at December 31, 2010.
• Portsmouth cold-shutdown services transferred to a new DOE contractor on March 28, 2011. USEC reported a $3.2 million pension curtailment charge; possible postretirement curtailment charges were estimated at up to $16.3 million. Estimated severance exposure was reduced to less than $2 million, with no severance accrual recorded.
• In March, USEC signed a 10-year TENEX supply contract for Russian LEU deliveries beginning in 2013, subject to governmental approvals and implementing arrangements. Estimated purchase commitments are approximately $2.8 billion, excluding volume options and subject to price changes.

Outlook, commentary and principal risks

Management reiterated 2011 guidance: revenue of approximately $1.7 billion, gross profit of $70–$80 million, gross margin of approximately 4%–5%, and SG&A of approximately $60 million. USEC expected a net loss for 2011 and provided no annual net income or cash flow guidance because American Centrifuge Plant (ACP) spending remained uncertain. Planned ACP spending through June 30 was approximately $110 million.

The ACP requires substantial financing. USEC had applied for a $2 billion DOE loan guarantee; in April 2011, the application advanced to review by DOE and other federal offices, but approval, terms, credit-subsidy cost and timing remained uncertain. A $50 million second phase of the Toshiba/B&W investment was needed in Q2 to maintain current project spending, with a June 30, 2011 outside date. USEC also sought $1 billion of Japanese export-credit financing and said additional capital beyond these sources would be required. Without timely financing, further demobilization or project termination was possible. The company estimated a further $2.8 billion to complete the project, excluding contingency, financing costs, financial assurance and some other amounts.

Other significant uncertainties include the March 2011 Japan nuclear disaster and potential effects on LEU demand and financing; the new TENEX contract’s approvals and Russian LEU import quotas; continued Paducah operations and replacement power arrangements after the TVA contract expires May 31, 2012; a November 2011 ACP financing milestone under the DOE agreement; and the substantial expected reduction in contract-services revenue following the Portsmouth transition. USEC noted that approximately 70% of Paducah production costs were electricity and that electricity prices and fuel adjustments were uncertain. The filing says ordinary-course legal matters were not expected to have a material adverse effect.

Most important facts for investors to verify

• Confirm the registrant’s identity and corporate continuity: this 2011 filing is for USEC Inc., while the request names Centrus Energy Corp.
• Check subsequent outcomes for the DOE loan guarantee, Toshiba/B&W investment closings, Japanese export-credit financing, and ACP spending or deployment.
• Verify approval and implementation of the TENEX supply contract, applicable import quotas, and actual purchase economics.
• Track liquidity, working-capital volatility, financing-facility availability and covenants, and the approaching May 2012 term-loan and TVA power-contract dates.
• Assess whether 2011 guidance was achieved and the effects of the Portsmouth transition, DOE contract closeout recoveries, pension and postretirement costs, and Japan-related changes in nuclear-fuel demand.