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USEC Inc. (NYSE:USU)

Q1 2013 Earnings Call

May 7, 2013 8:30 am ET

Executives

Steven Wingfield – Director-Investor Relations

John K. Welch – President and Chief Executive Officer

John C. Barpoulis – Senior Vice President and Chief Financial Officer

Analysts

Evan Babazadeh – Bowery Investment Management

Amer Tiwana – CRT Capital Group

Operator

Greetings, and welcome to the USEC Inc. First Quarter 2013 Conference Call. 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, Steven Wingfield, Director of Investor Relations for USEC Inc. Thank you, Mr. Wingfield, you may begin.

Steven Wingfield

Good morning, and thank you for joining us for USEC’s conference call regarding the first 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’d 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. We expect to file our quarterly report on Form 10-Q soon. A replay of this call will be available later today on the USEC website.

I’d 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 risk and uncertainty, including assumptions about the 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, May 7, 2013. This call is the property of USEC. 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.

And now, I’d like to turn the call over to John Welch.

John K. Welch

Good morning and thank you for joining us today to discuss our first quarter results. Operationally, we had a good quarter as we executed our contract to re-enrich depleted uranium at the Paducah plant continued to solidly hit program milestones for the American Centrifuge demonstration, and concluded our sale of NAC International. Financially, we earned a gross profit of $13.3 million in our low enriched uranium segment. We reported a net loss of $2 million for the quarter compared to a net loss of $29 million in the first quarter of 2012.

During this morning’s call, I will provide an update on the status of our effort to reach an agreement for a short-term extension of enrichment at Paducah. I will also give an update on our continued effort to commercialize the American Centrifuge technology. Then, John Barpoulis will provide a more complete report on our financial results.

First, I’ll start with the status of depleted uranium tails re-enrichment contract at the Paducah Gaseous Diffusion Plant. Under our multi-party agreement, USEC is feeding depleted uranium into the Paducah plant rather than using natural uranium as the feedstock. This tails material is from DOE enrichment operations prior to 1993. The government considered this depleted uranium to be a liability to be disposed off sometime in the future.

The final product is the same high-quality low-enriched uranium that Paducah has been delivering on time and inspect to customers for decades. This is an environmentally positive arrangement as we are taking a waste stream and producing valuable nuclear fuel.

Much of this nuclear fuel will go into Tennessee Valley Authority reactors under a special program that provides DOE with tritium, a radioactive isotope essential to our nation’s national security defense programs. Thus this agreement also has national security benefits.

We are in discussions with interested parties regarding the potential for a short-term extension of enrichment at Paducah beyond the May 31 expiration of the current arrangement. But even as we pursue a short-term extension of enrichment at Paducah, we are continuing to prepare to return these leased facilities back to DOE. Given the current SWU market conditions, a longer-term extension is unlikely, and we are planning for the transition of Paducah.

Once we cease enrichment at the Paducah Gaseous Diffusion Plant, we will still need to lease for a limited period of time certain areas used for ongoing operations such as shipping and handling, inventory management and site services. An important topic in these discussions with DOE is the timing of the de-lease of the site, but we expect to return it to DOE in 2014.

Turning next to the American Centrifuge research, development and demonstration program, I am pleased to report that it remains on schedule and on budget. During the first quarter, we completed the construction phase where legacy equipment in the plant was removed and new redundant plant systems installed.

We also installed 120 AC100 machines that will make up the commercial demonstration cascade. We are now in a period of testing the plant support systems in preparation for formal integrated systems testing. This will allow us to demonstrate redundancy of the primary cascade support systems. Looking ahead, we will condition the centrifuge machines with the uranium gas and begin demonstration cascade operations later in 2013.

As you will recall, the 120 centrifuge cascade is the basic building block for commercial operations, and we plan to incorporate this 120-machine cascade into the full commercial plant, which will consist of 96 identical cascades.

There are nine technical milestones and five additional performance indicators for the RD&D program. Last week, DOE certified the most recent two milestones we achieved. To date, we have achieved four of the milestones and five remain. We have also met three out of five performance indicators.

We are pleased to see continued support for the RD&D program. During the first quarter, Congress passed and the President signed the continuing resolution that included funding for the program. As you know, the funding for the program has been incremental and this additional funding should keep the program going through the end of the federal fiscal year September 30.

The President’s 2014 budget includes a request for transfer authority for DOE to fund the remainder of the program. Our managers have adjusted spending on the RD&D program to accommodate changes to the timing and amount of federal funding. We will continue to work with Congress and the administration to fund the program through December 2013 and achieve the remaining program milestones.

We’re also updating a commercialization plan for the American Centrifuge project following the completion of the RD&D program. This includes working to improve our balance sheet to position USEC financially in order to move forward as a stronger sponsor of the American Centrifuge project. We expect to update our pending application for a loan guarantee from DOE later this year. Achieving these milestones and acquiring reams of data from our test during the RD&D program reflecting more than a million machine hours of runtime should provide a significant fact-based update to our application.

DOE and Oak Ridge national laboratory experts continued to be integrally involved in the specifics of a robust and comprehensive test program. These experts will also be certifying the completion of the RD&D milestones, thus further strengthening our loan guarantee application. While we've been given no assurances by DOE regarding our loan guarantee, we believe that all of the actions we're taking on both the technical and financial fronts will strength our application. However, a significant amount of capital will be needed to deploy the American Centrifuge plant.

USEC remains committed to commercializing the American Centrifuge Technology. We firmly believe that this is the path to USEC's long-term competitiveness in the uranium enrichment business and that it is the best way to maximize value for all our stakeholders, including meeting the government's national security requirements.

In recent months, our common stock has been trading below $1 which puts it below the New York Stock Exchange's continued listing criteria. As we have previously discussed, we will be seeking shareholder approval of a reverse stock split at our Annual Meeting scheduled for June 27. If our shareholders approve the reverse stock split, the condition will be cured if the closing share price remains above $1 for at least the following 30 trading days.

Last week, we were also notified that we are below the NYSE's standard related to minimum $50 million market capitalization in combination with $50 million of the stockholders' equity. We have notified the New York Stock Exchange that we will submit a plan to return to compliance. We have maintained frequent communications with the exchange and our shares continue to trade on the NYSE. We continue to work to remain a listed company.

In summary, we've had successful operations in the quarter as we executed on both the research development and demonstration program for the American Centrifuge and on the depleted uranium tails enrichment contract. So let me close with three points, our employees at Paducah have done an outstanding job of executing the tails re-enrichment contract getting every ounce of productivity out of the 60-year-old plant. And while we continue to presume a short-term extension of enrichment at the Paducah plant, we are also continuing with preparations to return the plant to DOE in 2014. And third, we remain sharply focused on meeting the objectives of the RD&D program. We remain committed to the commercialization of the American Centrifuge Technology and believe successful completion of the RD&D program is the best path for reaching that goal.

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

John C. Barpoulis

Thanks, John, and good morning everyone. We reported revenue of $320 million for the first quarter, a decrease of $222 million compared to the same quarter of 2012. The average invoiced SWU price in the first quarter of 2013 was 5% higher compared to the year before, but SWU sales volume was about half of the volume delivered in the first quarter of 2012.

Over the past year, we've talked about the transition of USEC's business. One area where the transition has already occurred is in contract services and with the sale of our subsidiary NAC; we expect to see revenue in the contract services segment decline further. The LEU segment accounted for 99% of our revenue in the first quarter of 2013 and that segment is dominated by SWU sales.

Looking at the cost side of the ledger, our two largest cost components are electric power and the price we pay Russia to purchase SWU. Cost of sales for the first quarter was $307 million, a decrease of 39% compared to the year before. The decrease was due to lower SWU sales volume, partially offset by uranium sales and higher per unit SWU costs in 2013.

The cost of power is about 70% of our cost of production. During the first quarter of 2013, the average cost per megawatt of electricity declined 3% compared to the prior year, reflecting lower costs under a revised contract with the Tennessee Valley Authority. SWU production declined 14% year-over-year and unit production cost declined 3%, reflecting the economics of the depleted uranium enrichment program that began in June 2012.

In addition, due to the shorter expected service life of the Paducah plant, we have accelerated depreciation that increased cost of sales in the quarter. In the corresponding quarter of 2012, we had a couple of items that reduced cost of sales. We provide additional information about these items in our news release and upcoming 10-Q. As has been the practice in recent years, there were no purchases from Russia under the Megatons to Megawatts program of the SWU component of LEU during the first quarter. Shipments for 2013, the final year of this historic program, have begun.

Gross profit for the first quarter was $13.3 million, a decrease of $23.4 million compared to 2012. Our gross profit margin in the first quarter was 4.2% compared to 6.8% in the same quarter of 2012. The lower gross profit was due to the lower SWU sales volume and lower unit profit margins.

Below the gross profit line, we had several significant expenses as well as offsetting other income from DOE's pro rata share of the RD&D program. Selling, general and administrative expense was $12.9 million in the first quarter, a slight decrease compared to the prior year. In addition, we expensed $2.4 million for advisors that are supporting the effort to restructure our balance sheet. Advanced technology costs were $59 million, an increase of approximately $23 million that reflects the increased development and demonstration work of the RD&D program. DOE and USEC are sharing the cost of this program and DOE's pro rata share of 80% was $48 million.

As you are aware, we sold our subsidiary NAC on March 15. We reported the results of NAC operations as discontinued operations and classified the previous year's first quarter NAC activities as well to provide a comparison. Net income from discontinued operations in the quarter ended March 31, 2013 of $21.7 million includes USEC's gain on the sale of $35.6 million. In the corresponding quarter of 2012, net income attributable to NAC was $0.5 million. The net loss in the first quarter from continuing operations is $23.7 million, an increase of $5.6 million compared to the same quarter last year.

At the bottom line, we reported a net loss of $2 million for the first quarter compared to a net loss of $28.8 million in the prior year. We ended the quarter with a cash balance of $72 million, the same cash balance we had on March 31, 2012. We recognized that the cash balance declined during the quarter from the year end balance, but that was due to the payoff of our term loan related to our previous credit facility, as well as the payment to the Russians of a $210 million payable from deliveries in the fourth quarter of 2012.

As John noted a few minutes ago, we are in discussions with potential interested parties that could lead to a short-term extension of enrichment at the Paducah plant beyond May 31. However, these discussions are fluid and we have no assurance that we will reach an agreement or on what terms.

We are clearly in a period of transition. Given this uncertainty, we are limiting our guidance for financial results in 2013 and we are not updating the guidance we provided on March 18 in our news release and Form 10-K. I would remind investors that the limited guidance includes important factors that could affect our actual results.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question is from the line of Evan Babazadeh with Bowery Investment Management. Please proceed with your question.

Evan Babazadeh – Bowery Investment Management

Good morning everyone.

John K. Welch

Good morning.

Evan Babazadeh – Bowery Investment Management

Regarding the ACP, does the company have an updated estimate of the construction cost for the project?

John K. Welch

Evan that's one of the things that we are actively working, there's an update to that. We have a series of activities to update that cost and clearly it's all in preparations for the update to a loan guarantee that would occur later this year. So that is one of the elements that we're working. We have no update to provide at this time. When we have one, as we head into that process, we'll provide it.

Evan Babazadeh – Bowery Investment Management

Okay. For the time being, can we rely on the previous $4 billion estimate as a ballpark?

John K. Welch

I mean, clearly that previous estimate was at a different point in time than we are today. I mean there are time differences that clearly put some pressure on that estimate and yet we're also building machines through the RD&D program and so that becomes a benefit to that estimate. But we're really in no position to provide an update at this point.

John C. Barpoulis

Okay. Thank you, Evan.

Operator

Thank you. Our next question comes from the line of Amer Tiwana with CRT Capital Group. Please proceed with your question.

Amer Tiwana – CRT Capital Group

Hi. My question is in regards to your discussions on the balance sheet restructure, are those discussions still ongoing or have they ended up at this point in time?

John C. Barpoulis

Amer, it's John Barpoulis. As we stated in our prepared comments and in our earnings release, we continue to work with advisors and stakeholders on alternatives for restructuring elements in the balance sheet. But at this point, it would not be appropriate to speculate on what that is and where that may take us. Thank you.

Amer Tiwana – CRT Capital Group

Just a follow-up question on the working capital issue, your press release states that you expect cash inflow for the rest of the year, I mean, is there – can you give us some sense of the magnitude of what that could be?

John C. Barpoulis

That is very much a function of the potential for an extension of Paducah operations as well as our related transition costs. So extended Paducah operations, if that occurs, may utilize working capital as part of that operation, on the other hand that may produce additional cash from operations. But on the whole, we do have a significant inventory position and that is something that as we work through our transition, we would expect to monetize. So, I think as part of one of John's quotes in their earnings release, we do expect to see cash generated by operations over the next several quarters.

John K. Welch

Yeah, Amer, I would, just to summarize, we expect to have adequate liquidity to meet obligations for at least the next 12 months and that assumes a renewal replacement of the credit facility in September, but we're very confident that we have adequate cash over that period of time.

Amer Tiwana – CRT Capital Group

Thank you very much.

John C. Barpoulis

Thank you.

Operator

Thank you. Mr. Welch, there are no further questions at this time; I would like to turn the call back over to you for closing comments.

John K. Welch

Thank you. Thank you for your continued interest in USEC. If and when we reach an agreement on the extension of Paducah enrichment, we will put out a timely announcement. We look forward to seeing our shareholders at the Annual Meeting on June 27 and speaking with you again in August when we announce our second quarter results. Thank you again and good day.

Operator

Thank you. This concludes today's teleconference. We thank you for your participation. You may disconnect your lines at this time.

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