USEC Inc. (identified in the request as Centrus Energy Corp.) — 2010 Q3 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2010; filed November 3, 2010. The filing names the registrant as USEC Inc.
Business context and financial results
USEC supplied low-enriched uranium (LEU) to nuclear utilities, performed U.S. Department of Energy (DOE) contract work, and was developing the American Centrifuge Plant (ACP). Its LEU supply came principally from the Paducah gaseous diffusion plant and Russian contract deliveries.
| Metric ($ millions, except per-share data) | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Revenue | 564.6 | 549.3 | 1,369.0 | 1,569.2 |
| Gross profit | 38.0 | 39.2 | 108.8 | 158.8 |
| Operating income (loss) | 7.8 | (9.0) | 17.5 | 17.4 |
| Net income (loss) | 1.0 | (6.2) | (1.5) | 9.0 |
| Basic earnings (loss) per share | $0.01 | $(0.06) | $(0.01) | $0.08 |
| Gross margin | 6.7% | 7.1% | 7.9% | 10.1% |
- Q3 revenue rose 3%, as higher uranium and government-contract revenue more than offset lower SWU revenue. Nine-month revenue fell 13%, principally because SWU revenue declined 21%.
- Nine-month gross profit decreased 31%; management cited lower uranium prices and higher unit costs. Q3 SWU sales volume fell 17%, while the average billed SWU price rose 4%.
- Nine-month operating cash flow was $30.0 million, down from $319.4 million. Investing used $74.9 million, versus $401.4 million in 2009; financing provided $59.7 million. Cash increased $14.8 million to $146.1 million.
- At September 30, current assets were $2,135.9 million and current liabilities $1,204.2 million; inventories were $1,472.8 million gross, including $587.1 million owed to customers and suppliers. Inventory therefore represents a substantial portion of reported current assets.
- Long-term debt was $575.0 million, consisting of 3.0% convertible notes due 2014. The $75.8 million Series B-1 preferred stock liability included accrued dividends. The credit facility showed $207.4 million available at September 30, subject to borrowing-base and covenant limits.
Material changes and unusual items
- Toshiba and Babcock & Wilcox completed the first $75 million phase of a planned $200 million investment on September 2. The remaining $125 million depends on significant closing conditions, including DOE loan-guarantee progress. The first phase included 12.75% convertible preferred stock and warrants for 6.25 million shares at $7.50 per share.
- DOE cost-sharing support generated $32.4 million of other income in the first nine months, including $12.4 million in Q3. The arrangement provides up to $45 million of DOE support for qualifying ACP activities.
- The nine-month tax provision included a $6.5 million charge from a change in Medicare Part D tax treatment. Preferred-stock issuance costs of $4.8 million were expensed in Q3.
- On October 8, after quarter-end, USEC amended its credit agreement and funded an $85 million term loan. The facility totaled $310 million, including a $225 million revolving commitment; maturity remained May 31, 2012.
- On September 30, USEC returned three major Portsmouth plant buildings and other facilities to DOE, reducing estimated lease-turnover costs. Management reported a $2.2 million cost-of-sales reduction for the nine-month period from the related estimate change, net of associated costs.
Outlook, commentary, and risks
- Management forecast 2010 revenue of approximately $2.0 billion, including about $1.5 billion of SWU sales, $200 million of uranium sales, and $275 million from U.S. government contracts. Full-year gross margin was expected to be about 7%, with net income approximately breakeven.
- Management expected full-year operating cash flow between breakeven and $20 million used, and approximately $100 million of ACP capital expenditures. It said cash, operating cash generation, the funded term loan, and available revolver borrowings were expected to cover needs for at least 12 months, subject to risks and assumptions.
- USEC estimated approximately $2.8 billion to complete the ACP from financing close. The estimate excluded prior investment, pre-financing spending, contingency, financing costs, and financial assurance. Management said initial commercial operations could begin 18–24 months after financing, with 30–36 months more to complete the plant.
- DOE had largely completed its initial technical review of the loan-guarantee application and provided a draft term sheet, but due diligence, negotiations, final documentation, and funding conditions remained. USEC said additional capital beyond the requested $2 billion guarantee and the Toshiba/B&W investment would be needed; neither the guarantee nor other financing was assured.
- The ACP had been substantially demobilized since 2009. Failure to secure financing, meet DOE milestones, or satisfy technical and funding conditions could lead to further spending reductions or project termination, impairment of capitalized costs, and significant harm to the business.
- DOE’s Portsmouth cold-shutdown contract was extended to January 16, 2011, but the extension was not yet definitized. USEC expected government-services revenue to fall significantly beginning in Q1 2011 as work transitioned to a new decontamination contractor; subcontract work, workforce costs, and collection of DOE receivables were uncertain.
- Other key exposures included electricity-price volatility and expiration of the TVA power agreement in May 2012; reliance on Russian SWU deliveries through 2013; restricted ACP spending under credit covenants; and potential dilution from preferred-stock conversion or warrant exercise. DOJ had asserted possible contract overcharges, revised to at least $14.6 million; USEC disputed the allegations and had accrued no loss.
Important facts for investors to verify
- Whether DOE issues an acceptable conditional commitment and ultimately funds the loan guarantee, and whether USEC secures the additional financing needed for the ACP.
- Whether the remaining Toshiba/B&W investment phases close and what dilution, governance, or redemption consequences may follow if they do not.
- Whether USEC meets or renegotiates DOE-USEC milestones, and the effect of any DOE remedies on the ACP and Russian supply access.
- Actual ACP completion cost, contingency, financing and financial-assurance requirements, schedule, and recoverability of capitalized project costs.
- The transition of Portsmouth work after January 2011, including contract definitization, subcontract awards, employee-related costs, and collection of $31.2 million in unbilled and $6.5 million in past-due DOE-related receivables.
- Whether the 2010 revenue, margin, earnings, and cash-flow outlook is achieved, particularly given customer-order timing, uranium revenue recognition, power costs, and inventory build.