Business context and reporting period
USEC Inc. (the registrant named in this filing; not Centrus Energy Corp.) reported for the three months ended March 31, 2014. It supplied low-enriched uranium (LEU) to nuclear utilities and performed services for the U.S. Department of Energy (DOE). After ceasing enrichment at Paducah in May 2013 and completing the Megatons to Megawatts supply program in December 2013, USEC was transitioning to sales from inventory and reduced Russian supply. USEC Inc. filed pre-arranged Chapter 11 on March 5, 2014; its primary operating subsidiary was not a debtor.
Key financial results and position
| Metric | Q1 2014 | Q1 2013 or prior date |
|---|---|---|
| Revenue | $148.6 million | $320.4 million |
| Gross profit (loss) | $(20.9) million; margin (14.1%) | $13.3 million; margin 4.2% |
| Operating loss | $(39.2) million | $(13.7) million |
| Net loss | $(50.8) million; $(10.37) per share | $(2.0) million; $(0.41) per share |
| Operating cash flow | $(229.7) million | $(175.3) million |
| Cash and equivalents | $85.1 million | $314.2 million at Dec. 31, 2013 |
| Total assets / liabilities | $865.9 million / $1,374.4 million | $1,705.5 million / $2,163.7 million at Dec. 31, 2013 |
| Working capital | $(215.2) million | $(162.7) million at Dec. 31, 2013 |
Revenue fell 54%, principally as SWU sales volume declined 49%; SWU revenue was $145.6 million versus $290.2 million. No uranium revenue was recorded versus $27.6 million a year earlier. The LEU segment posted a $19.7 million gross loss. Paducah non-production expenses rose to $34.9 million from $5.8 million, including $27.0 million of site expenses and $6.6 million of inventory charges. Advanced technology costs decreased to $33.3 million from $59.3 million, while DOE cost-share income was included in other income. The 2013 quarter included $21.7 million of discontinued-operations income, including a $35.6 million gain on sale of NAC.
Cash declined $229.1 million during Q1. A $340.7 million payment of Russian Contract payables was a major use of cash; collections of receivables and inventory reductions partly offset outflows. There were no capital expenditures. The $530 million convertible notes due October 2014 were classified as liabilities subject to compromise following the filing; $653.6 million of consolidated liabilities were so classified at quarter-end. The company reported substantial doubt about its ability to continue as a going concern.
Material changes, plans and outlook
- USEC reached plan-support agreements with holders of about 65% of its convertible notes and with preferred investors. The proposed plan would exchange the $530 million notes for $200 million of new notes, cash for accrued interest and 79.04% of reorganized common stock; preferred investors would receive $40.38 million of new notes and 15.96% of new common stock in aggregate. Existing common shareholders were proposed to receive 5%, subject to dilution. Court confirmation and implementation were not assured.
- A $50 million debtor-in-possession (DIP) revolving facility from the operating subsidiary carried 10.5% interest and was secured by substantially all USEC Inc. assets. USEC borrowed and repaid $3 million in Q1. Funding, budget compliance, maturity and continued subsidiary support were significant dependencies.
- The DOE cooperative agreement expired April 30, 2014. A May 1, 2014 subcontract with UT-Battelle/ORNL provided approximately $33.7 million for May–September 2014 work, with two optional six-month extensions priced at about $41.7 million each. Funding was incremental; beyond initial funding for the first month, further funding and options were uncertain. Scope was reduced, and management estimated $10–$15 million of demobilization costs through year-end plus potential supplier termination exposure up to $25 million; actual costs could be higher.
- Management expected 2014 sales volume at about 30% of its 2008–2012 average of roughly 11 million SWU annually. Guidance was limited given bankruptcy, operational transition and uncertain federal funding. Management said current enrichment prices—at decade-plus lows—made prior commercialization plans for the American Centrifuge project uneconomic, while continuing to preserve deployment options.
- Paducah return timing remained unresolved with DOE: USEC anticipated readiness as early as July 2014, but said return appeared unlikely before October 2014 and no termination date before August 1, 2015 had been agreed. Q1 included 134 additional Paducah layoffs. Management estimated 2014 pension contributions of $28.7 million, of which $5.8 million had been made in Q1.
Risks, contingencies and unusual items
Key risks include failure to confirm or implement the Chapter 11 plan, limited liquidity and reliance on the operating subsidiary for funding; uncertainty about DOE appropriations and post-ORNL support; American Centrifuge demobilization, supplier termination and cost-overrun exposure; declining LEU prices, lower sales and possible customer contract cancellations; and Paducah transition costs or disputes with DOE. The PBGC had preliminarily estimated approximately $130 million of potential ERISA Section 4062(e) liability related to Portsmouth; USEC disputed the trigger and estimate. Paducah’s 20% employee-separation threshold was reached in April 2014, and potential related exposure was not quantified clearly in the filing. USEC also reported $99.7 million of gross DOE/contractor receivables, including $80.8 million in certified claims; $38.0 million of claims had been denied and appealed. DOE receivables for certain pension and postretirement costs carried a full valuation allowance.
Important facts for investors to verify
- Confirm the status and final terms of the Chapter 11 plan, court approval, emergence financing and treatment of common stock and noteholders.
- Verify cash runway, DIP/exit-facility availability, subsidiary funding commitments and near-term cash demands, including Russian supply payments and pension contributions.
- Track government funding, ORNL option exercise and any further American Centrifuge demobilization, supplier termination costs or changes in project scope.
- Assess actual Paducah de-lease timing, turnover costs and resolution of DOE disputes, including the recovery of receivables and claims.
- Monitor LEU market prices, deliveries, backlog renegotiations or cancellations, and execution of the reduced-supply business model.
- Check PBGC actions and any quantified ERISA exposure for Portsmouth, Paducah or American Centrifuge activities, as well as NYSE listing compliance.