USEC's CEO Discusses Q2 2013 Results - Earnings Call Transcript

| About: Centrus Energy (LEU)

USEC Inc. (USU) Q2 2013 Earnings Call August 6, 2013 8:30 AM ET


Steven Wingfield – Director-Investor Relations

John Welch – President and CEO

John Barpoulis – SVP and CFO

Robert Van Namen - SVP and COO


Vladimir Jelisavcic - Bowery Investment

Jason Adler - GMP Securities

Amer Tiwana - CRT Capital Group


Greetings and welcome to the USEC Inc. second quarter 2013 conference call with investors. 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 second 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, All of our news releases and SEC filings are available on our website. We expect to file our quarterly report on Form 10-Q later today. A replay of this call will be available 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 uncertainties, 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 August the 6th, 2013. This call is the property of USEC. Any redistribution, retransmission or rebroadcast of this call in any form without the expressed 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 Welch

Good morning and thank you for joining us today to discuss our second quarter results. Operationally, it was an eventful quarter as we took actions to cease enrichment at the 60-year old Paducah plant at the conclusion of the one year agreement with Energy Northwest, Tennessee Valley Authority and the Department of Energy. We also continued to meet program milestones for the American Centrifuge, research, development and demonstration program also known as RD&D. All 120 centrifuges in the cascade are up and spinning at design speeds as we condition the machines with uranium gas in preparation for the cascade demonstration test this fall.

So we have the end of U.S. enrichment using the first generation of enrichment technology and another step towards demonstrating the technical readiness of the next generation of U.S. enrichment technology. We are in the final months of the highly successful Megatons to Megawatts program. And we’ve begun taking deliveries of low enriched uranium under the follow-on commercial contract with Russia that will provide USEC with SWU through 2022. This is an important element of our transition plan.

Financially, we incurred a number of non-production expenses related to the cessation of enrichment at the Paducah plant. We accelerated depreciation of equipment and leasehold improvements, made inventory adjustments related to residual uranium in certain cylinders, retired assets and recordable loss on a power contract as well as other actions. Together, these non-production expenses resulted in higher cost of sales and along with a special charge for workforce reductions were largely responsible for the loss in the quarter.

We reported a net loss of $40.9 million for the second quarter compared to a net loss of $92 million in the same quarter of 2012. For the six months period ended June 30, 2013, we reported a net loss of $42.9 million compared to a net loss of $120.8 million in the first half of 2012. John Barpoulis will provide a more complete report on our financial results.

I'll start this morning with a transition on the Paducah Gaseous Diffusion plant. As you will recall, for the past 12 months, we executed a multi-party agreement under which USEC had fed DOEs depleted uranium tails into the Paducah plant rather than using natural uranium as the feedstock. The final product was the same low-enriched uranium that Paducah delivered safely and inspected for decades. This arrangement ended May 31st, and by all measures was the most successful program.

We pursued possible opportunities for continuing enrichment at Paducah but ultimately the Department of Energy concluded that there were not sufficient benefits to the tax payers to extend enrichment beyond May 31st. During June and July, we took steps to cease enrichment of the plant and to prepare facilities for eventual return to DOE. We expect to continue operations at the site into 2014 in order to manage inventory, continue to meet customer orders and continue to meet the turnover requirements of our lease with DOE.

We notified all of our Paducah employees of potential layoffs and expect the first round of reductions involving approximately 160 employees to be concluded in mid-August. Additional layoffs may occur in stages later in 2013 and into 2014 depending on our business needs, regulatory requirements and the timing of plants to transition the site back to DOE in a safe and orderly manner.

Turning next to the American Centrifuge research development and demonstration program, I'm pleased to report that the RD&D program remains on schedule and on budget. During the second quarter, we completed testing of new redundant plant support systems and installed 120 AC100 machines that will make up the commercial demonstration cascade. We're in the process of conditioning of centrifuge machines with uranium gas and expect to begin demonstration cascade operations in the fourth quarter.

There are nine technical milestones and five additional performance indicators for the RD&D program. We have completed six of the technical milestones and expect DOE to certify the most recent milestone that we achieved in July. The remaining three milestones were targeted for completion by the conclusion of the RD&D program at the end of 2013. We have also met three out of five performance indicators and have submitted documentation to DOE on the fourth performance indicator.

As you are aware, the funding for the RD&D program has been incremental. At the end of July, DOE authorized another $30 million in spending on the program and this additional funding will keep the program going through the end of the federal fiscal year September 30th. We are pleased to see continued bipartisan support in Congress for the RD&D program. The President's 2014 budget includes a request for transfer authority for DOE to fund the remainder of the program through the end of calendar 2013. A similar level of funding for the program is included in an Energy and Water Appropriations Bill passed by the House of Representatives on July 10th and in the Senate version of the Bill reported to the Senate by the Appropriations Committee on June 27th. We believe this level of funding would be sufficient to finish the program. But until the bills are passed and signed into law, a risk to the funding remains.

From a technical standpoint, we are very pleased with the progress we are making to demonstrate the American Centrifuge technology. Unfortunately, the current enrichment market dynamics are presenting significant challenges to the economics of the American Centrifuge project for commercialization. We are in the process of developing an updated plan for financing and commercialization of the American Centrifuge project. Factors that can affect this plant and the economics of the project include project costs, schedule, market demand and prices for low-enriched uranium, financing costs and other financing terms.

The price of our products separative work units or SWU has fallen since the earthquake and tsunami in Japan in March 2011. Based on current market conditions, we see limited uncommitted demand for LEU relative to supply prior to the end of the decade which could continue to adversely affect market prices. Nonetheless, our customers tell us that U.S. owned domestic source enrichment supply is vital to energy security. In order to successfully raise the capital required to build the ACP, we need to develop and validate a viable business plan that support loan repayment and provides potential investors with an attractive return on investment, based on the projects risk profile. In light of these difficult market conditions, USEC is evaluating and pursuing the feasibility of alternatives necessary to proceed with the commercial deployment of American Centrifuge, including the availability of additional government support.

In addition, the timing for project construction beyond the conclusion of the RD&D program at the end of the year could leave us with a gap between the RD&D program and any commercialization of the American Centrifuge technology. This could lead to delays or further demobilization of the project or even termination. For the past year, our common stock traded below $1 which put us out of compliance with the New Stork Exchange continued listing criteria.

On June 27th, our shareholders voted by approximately 90% to approve a one-for-25 reverse stock split and the stock has been trading well above $1 since the split was implemented on July 1st. Under the exchange rules, the conditions will be considered cured if the closing share price remains above $1 for at least the following 30 trading days which will be in mid-August.

In April, we were also notified that we no longer met the New York Stock Exchange's standard related to a minimum $50 million market capitalization in combination with $50 million of stockholders’ equity. In June, we submitted a plan to return to compliance within 18 months and we have been notified that the plan of compliance has been accepted. I would point out that the market capitalization was above $50 million at yesterday's close. We communicate frequently with the exchange, our shares continue to trade on the New York Stock Exchange and we will endeavor to remain a listed company.

In summary, we reported a significant loss for the quarter but the loss was largely due to non-production expenses related to ceasing enrichment at the Paducah plant. The RD&D program to demonstrate the American Centrifuge technology is going very well but market conditions for nuclear fuel are challenging our business plans and economics for deploying the technology.

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

John Barpoulis

Thanks, John and good morning everyone. We reported revenue of $285 million for the second quarter, a decrease of $69 million compared to the same quarter of 2012. For the six month period, revenue was $605 million, a decrease of $291 million. The average invoiced SWU price in both periods of 2013 was 5% higher compared to the year before but SWU sales volume was 40% lower in the first half of 2013 compared to the same period of last year.

In recent periods, we have had an insignificant amount of revenue from the sale of natural uranium. In the first six months of 2013, however, our revenue included $41.5 million in uranium sales compared to $3.6 million in the first half of 2012. Such sales will remain variable and are often related to a specific SWU contract where the uranium is the feedstock for LEU delivery.

As we have noted in recent quarters, the contract services segment has become a small revenue contributor following the completion of services to DOE at the former Portsmouth, Ohio plant and the sale of our subsidiary NAC International.

Looking at the cost side of the ledger, our two largest cost components have historically been electric power and the price we pay Russia to purchase SWU. Clearly with a cessation of enrichment at Paducah, the components of cost of sales will change significantly in the quarters ahead. Cost of sales for the second quarter was significantly increased by the non-production expenses related to the cessation of enrichment at Paducah. We provide more details and makeup of non-production expenses in the Form 10-Q that we expect to issue later today.

In the second quarter of 2013, these non-production expenses totaled $70 million. These include immediate asset retirement charges for property formerly used in the enrichment process at Paducah GDP, inventory valuation adjustments, site expenses, including lease turnover activities, power contract losses and accelerated depreciation. Overall, cost of sales in the second quarter was $332 million, a decrease of $12 million compared to the year before. The decrease, especially after consideration of non-production expenses, was due primarily to lower SWU sales volume.

The cost of power has historically been 70% of our cost of production. During 2013, the average cost per megawatt of electricity declined 5% compared to the same six month period in the prior year, reflecting lower costs under our revised contract with the Tennessee Valley Authority.

SWU production declined 23% in the six month period year-over-year and unit production costs declined 5% reflecting the economics of the depleted uranium enrichment program that began in June 2012. We are taking deliveries of LEU from Russia as we conclude the Megatons to Megawatts program in 2013 and we have begun to take deliveries under the commercial 10-year supply contract with Russia.

The purchase cost for the SWU component of LEU from Russia increased $36 million in the six-month period ended June 30, 2013 compared to the corresponding period in 2012 due to a 3% increase in the purchase cost per SWU. As John noted earlier, we have begun taking deliveries from Russia under the new supply contract which added to our purchase costs compared to the same period last year.

Gross profit for the second quarter was a loss of $47 million, a decrease of $57 million compared to the same quarter in 2012. The loss reflected $70 million in non-production costs in the LEU segment. Looking at the six month period, the loss on the gross profit line was $34 million, a decrease of $81 million from the same period in 2012.

Below the gross profit line, we had several significant expenses as well as partially offsetting other income from DOE's pro-rata share of the RD&D program. Selling, general and administrative expense was $25 million for the six month period, a decrease of $2 million compared to the prior year. In addition, we expensed about $5 million in the six month period for advisors, including those advisors supporting the effort to restructure our balance sheet, which is $1 million less than the same period last year.

We also accrued for a $2 million charge related to the August workforce reduction at Paducah. Beginning Monday, accrued benefits for active employees who are not covered by a collective bargaining agreement have been frozen under the defined benefit pension plans. This is part of our effort to improve the balance sheet. Pension benefits will be fixed and will no longer increase based on service or earnings.

We are also in discussions with the leadership of the two local unions that represent approximately one half of the employees of the Paducah plant regarding the implementation of these changes for their members. Advanced technology costs in the six month period were $106 million, a decrease of approximately $17 million compared to the same period in 2012. The comparison is a decrease because during the second quarter of 2012, there was a $45 million expense related to the title transfer of previously capitalized American Centrifuge machinery and equipment to DOE as provided for in our cooperative agreement that set up the RD&D program.

DOE and USEC are sharing the cost of this program and DOE's pro-rata share of the 80% during the 2013 period was $88 million compared to $10 million in 2012 which included just one month of DOE's funding program. As you're likely aware, we sold our NAC subsidiary during the first quarter of 2013. We've reported the results of NAC operations in the six month period as discontinued operations and classified the previous year’s NAC results as well to provide a comparison.

For the remainder of 2013, we will report both continuing operations and discontinued operations as well as our bottom-line net income or loss. The net loss in the second quarter was $40.9 million, an improvement of $51.1 million compared to the same quarter last year. The net loss for the six month period was $42.9 million, an improvement of $77.9 million over the same period in 2012.

We ended the quarter with a cash balance of $195 million, an increase of $123 million from March 31, 2013. We have limited our financial guidance for investors in 2013. We are in a period of transition and uncertainty and there are just too many variables to provide meaningful guidance for financial results and operating metrics.

We provided a view on revenue, SWU volumes delivered and a 5% higher average SWU price billed to customers. I would remind investors that the limited guidance includes important factors that could affect our actual results. That concludes our prepared remarks and with that operator, we're ready to take questions from our callers.

Question-and-Answer Session


(Operator Instructions) Thank you. Our first question comes from the line of Vladimir Jelisavcic with Bowery Investment.

Vladimir Jelisavcic - Bowery Investment

Just had a couple of questions regarding cash and cash flow. Can you just give us a bridge for what sort of major positive and negative cash flow items you had to increase cash sequentially during the quarter by the $122 million? I’m looking at the cash flow section of the press release and I don't have enough figures to really bridge that.

John Barpoulis

Vlad, it's John Barpoulis. I think it was very much driven by our sales and deliveries to customers during that period. We did have -- what you'll see compared to the end of the year you will see a relatively little change in our payables to Russia, we did have a build-up of some of the Russian inventory during that quarter. And so we will be seeing based on the timing of Russian deliveries, payments to them going out in the third quarter.

Vladimir Jelisavcic - Bowery Investment

Understood. And what's the location of the cash, which corporate entity is the cash located in?

John Barpoulis

That's something that we do not disclose publicly.

Vladimir Jelisavcic - Bowery Investment

Understood. And you also mentioned that you began to operate under the 10 year contract that’s going to resume after the wind-down of the Megatons to Megawatts program, which USEC corporate entity owns that contract, and which operates it?

John Barpoulis

Again, we do not get into the legal entities that handle operations but for USEC, we have the subsidiary in United States Enrichment Corporation through which our businesses are primarily conducted but again everything is reported on a consolidated basis.

Vladimir Jelisavcic - Bowery Investment

Understood. And when do you anticipate the completion of the RD&D testing and validation process?

John Welch

The demonstration is scheduled for the fourth quarter, should be completed by the end of 2013.


Our next question comes from the line of Jason Adler with GMP Securities.

Jason Adler - GMP Securities

Hi. Thank you for taking the question. Just a few questions about shutting down operations at Paducah. The first is in the press release you had suggested that some of the efforts to shut down the facility would include transferring inventory. Can you talk a little bit about sort of what state the inventory is in now and what needs to be done with it to move it? And are there any different regulations for moving it within the U.S. versus internationally?

Robert Van Namen

Sure, Jason ,this is Bob Van Namen. Right now we have the both low-enriched uranium and natural uranium in a variety of cylinders. Some of which are suitable and some of which are not suitable for shipping both domestically and internationally. So we'll continue to use the Paducah shipping and transfer facilities to transfer both natural and low enriched uranium into cylinders where we can ship them. You have different regulations that apply for domestic versus international but we anticipate packaging the cylinders so that we can preposition it to meet customer orders in either situation, either domestic or international shipments.

Jason Adler - GMP Securities

And is that -- does it take a lot of time to do that? Is that a process that will take a year plus or is that a relatively easy thing to do?

Robert Van Namen

It is -- we have a volume of both natural and low enriched to work our way through. We've stated that we see these activities continuing into 2014 but then dovetailing nicely with our turnover to the Department of Energy under the DOE's plan.

Jason Adler - GMP Securities

My other question is GE through Global Laser has apparently expressed some interest in the Paducah facility. What parts of it are they trying to get involved in and how would that impact potential costs for USEC exiting the facility?

Robert Van Namen

You would really have to address your question to GE Silex on that, they are interested in establishing a laser enrichment facility at the Paducah site. We don't know what they're interested are on ,what facilities they might use, we don't speculate on it.

Jason Adler - GMP Securities

Could any level of interest have an impact on your costs to exit the facility or are they separate issues?

Robert Van Namen

We see them as separate issues.


Our next question comes from the line of Amer Tiwana with CRT Capital Group.

Amer Tiwana - CRT Capital Group

I was looking through your 10-K and you guys have provided a $1 billion of funding GAAP number in that release with respect to the completion of ACT. Have you guys updated that number and to follow-on, you were also in discussions with a number of parties with respect to getting that funding, where are we in that process?

John Barpoulis

Amer, it's John Barpoulis. To answer the question, we have not updated that information yet that $1 billion of capital number as -- to paraphrase John's comments earlier, we're in the process of developing our updated plan for the financing and commercialization of the project. Again very much being driven by several key variables, including project costs, schedule obviously market demand, market prices for LEU and our financing costs and financing terms. So we're looking at all those components now.

Amer Tiwana - CRT Capital Group

My next question is regarding the milestones that you have remaining. It seems like all three are supposed to be sort of completed by the end of this year. I mean, can you walk us through the process that you anticipate at year end? Will DOE be in a position to give you a verdict on the loan guarantee at that point in time or is there some other things that you would need to do to -- I mean do you have to file a new application at this point in time or your existing application is good, just walk us through what happens at year end?

Robert Van Namen

Yeah, this is Bob Van Namen. I'll address the first part of your question on the milestones. Again as John Welch said, we do anticipate cascade operations in the fourth quarter and meeting three milestones as you indicated that are scheduled to be completed by December 31st. We have constant interactions with the Department of Energy throughout the testing process and the demonstration process and per the forum that we've gone through with the other milestones, we would anticipate upon completion of these milestones that we would then submit documentation to the Department of Energy about how have accomplished it.

John Barpoulis

With respect to the capital side and specifically Amer, your question around the end of the year and DOE loan guarantee, again we have some additional information outlined in our 10-Q that we expect to file later today. But again we expect to need at least $4 billion of capital to complete the project. The two key debt components include the $2 billion loan guarantee from DOE and $1 billion of Japanese export credit agency funding are both critical elements of the current financing plan. And again to the first part of your question, we also expect to need at least a $1 billion of additional capital in addition to the debt. Again that additional capital includes cash generated by the project during start-up of potentially available cash flow generated by USEC operations and then third-party capital. I mean again it's dependent on a number of factors.

But as John outlined earlier, as part of our effort to commercialize the ACP technology, we expect to need additional investors in the project and to successfully raise that capital, we need to develop and validate a strong business plan that supports debt repayment and provides investors with an attractive return. I think so as we continue to evaluate our options for ACP and especially with respect to the timing of the update on our loan guarantee application that's something that we're currently evaluating. And so ultimately as we look at our paths those options may include --again continuing with the project following completion of the RD&D program, we're to take action to reduce funding for the project, further demobilize the project or delay to commercial deployment of the project or even potentially to terminate the project. So all of those things are under evaluation at the moment.


Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session and with that the conclusion of today's conference call. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to All other use is prohibited.


If you have any additional questions about our online transcripts, please contact us at: Thank you!