CENTRUS ENERGY CORP annual report, FY2011

Business context and reporting period

USEC Inc.’s Form 10-K covers the fiscal year ended December 31, 2011, with quarterly data including the fourth quarter; it was filed March 14, 2012. The company supplied low-enriched uranium (LEU), enriched uranium at the Paducah gaseous diffusion plant, purchased material from Russia, and provided nuclear services through NAC. The filing identifies the registrant as USEC Inc.; the request metadata names Centrus Energy Corp.

Key financial metrics

Fourth-quarter 2011 revenue was $462.4 million and net loss was $496.0 million, compared with $666.4 million revenue and $9.0 million net income in fourth-quarter 2010. The 2011 net loss included a $369.1 million valuation allowance against deferred tax assets and $146.6 million of previously capitalized American Centrifuge costs expensed. The filing reports no conventional EBITDA figure.

Material changes versus the prior comparable period

• Revenue fell 18%; LEU segment revenue decreased 17%, while contract services revenue fell 25%. Gross profit declined 47% and gross margin contracted 2.8 percentage points.
• SWU revenue declined 13% and uranium revenue declined 44%. SWU sales volume fell 15%; average billed SWU price rose 3%. Uranium sales volume fell 53%, while average price rose 20%.
• LEU cost of sales fell 14%, mainly on lower volumes, but cost per SWU rose 6%. Electricity represented about 70% of Paducah production costs; TVA power-price adjustments averaged 12% above base prices in 2011.
• Cash decreased $113.4 million. Operating cash generation was more than offset by investing outflows, including $152.8 million of capital expenditures. Inventory increased $75.2 million in cash-flow terms, while lower receivables provided $146.6 million.
• Contract services shifted materially after Portsmouth work transferred to a DOE decommissioning contractor in September 2011. Future segment revenue was expected to rely primarily on NAC.
• The American Centrifuge project’s financing was delayed; the company reduced project spending and ceased capitalizing new project costs beginning in fourth-quarter 2011.

Outlook, risks, contingencies, and unusual items

• 2012 outlook: Management projected SWU revenue of $1.45–$1.50 billion, approximately $100–$150 million above 2011. It gave limited guidance because Paducah operations and American Centrifuge funding remained uncertain. Uranium and contract-services revenue were not given a clear numerical forecast.
• Paducah: The TVA power contract expired May 31, 2012. Management expected to decide by May whether to continue enrichment, but said it did not believe market demand was sufficient to support an extension, even with potential DOE tails re-enrichment. The filing anticipated commercial enrichment could cease within 18 months.
• American Centrifuge: DOE’s proposed two-year RD&D cost-share program was capped at $300 million, but government funding and a final agreement were not secured in the filing. A March 13, 2012 DOE arrangement released $44 million of encumbered funds to support activities through March; the related LEU would not be returned and costs would not be reimbursed if the program did not proceed. Without further funding, demobilization was expected.
• Up to $1.1 billion of previously capitalized centrifuge costs could be expensed if commercial deployment were no longer probable. Full demobilization estimates included about $15 million in employee severance, $38 million in contractual commitments (including $17 million in termination penalties), and up to $55 million in execution costs, before potential asset recoveries.
• Liquidity and capital structure: Management said available cash, operating cash flow, and revolving credit were expected to meet needs for at least 12 months, while warning liquidity would be challenging and that restructuring discussions or bankruptcy could become necessary. A March 2012 amendment extended the credit facility to May 31, 2013, reducing its size from $310 million to $235 million and imposing tighter spending limits, cash-control provisions, and other covenants.
• Pension and other exposures: Defined benefit pension plans were underfunded by approximately $260 million on a GAAP basis. PBGC preliminarily estimated potential Portsmouth-related ERISA liability could exceed $100 million; USEC disputed both the trigger and estimate. The company also estimated approximately $35 million of Portsmouth contract-closeout costs billable to DOE, subject to significant uncertainty and recovery.
• DOE receivables were $37.8 million, including $19.0 million unbilled; past-due DOE receivables rose to $20.1 million. The company filed claims for $11.2 million and $9.0 million under the Contract Disputes Act; recovery was uncertain.
• Other significant risks include post-Fukushima LEU oversupply and weaker prices, customer concentration (top 10 LEU customers represented 55% of total revenue), reliance on Russian supply for about half of LEU supply, and uncertainty over import quotas under the new Russian supply agreement. A former-employee severance class action was unaccrued; potential severance exposure was estimated at $14 million if all approximately 400 salaried Portsmouth transferees qualified, with DOE potentially responsible for about $9 million.
• The company reported effective disclosure controls and internal control over financial reporting; its auditor issued unqualified opinions on the financial statements and internal controls.

Most important facts for investors to verify

• Whether the registrant and filing are correctly attributed: this report is for USEC Inc., despite the Centrus Energy Corp. metadata.
• Actual post-filing outcomes for Paducah enrichment, power supply, DOE tails arrangements, and any continuing facility use.
• Whether DOE and Congress funded and finalized the RD&D program, whether the $44 million interim arrangement was repaid in LEU or reimbursed, and the project’s current deployment and impairment status.
• Current liquidity, borrowing availability, facility covenant compliance, debt maturities, and any restructuring or going-concern developments.
• Final PBGC determination, pension funding requirements, DOE receivable collections and closeout recovery, and the outcome of the severance litigation.
• Whether backlog, customer delivery schedules, LEU market prices, and Russian supply/import constraints support the stated 2012 revenue outlook.