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USEC Reports First Quarter 2011 Results
�
Net loss of $16.6 million on
revenue of $381 million
�
Progress continues on DOE loan
guarantee review
� Agreement with Russia provides long-term LEU
supply after Megatons to Megawatts concludes in 2013
BETHESDA, Md. - USEC
Inc. (NYSE:USU) today reported a net loss of $16.6 million or 14 cents per
share for the quarter ended March 31, 2011, compared to a net loss of $9.7
million or 9 cents per share for the first quarter of 2010. The loss in the
2010 quarter reflected a one-time charge of $6.5 million related to a change
in tax treatment of Medicare Part D reimbursements resulting from changes in
health care law.
The financial results
for the quarter ended March 31, 2011, reflect a 16 percent increase in separative work unit (SWU) revenue but a decline in
overall gross profit. Gross profit in the low enriched uranium (LEU) segment
increased slightly in the quarter compared to the same period last year due
to higher average selling prices, partially offset by higher unit costs.
Gross profit was reduced by a loss in the contract services segment as the
cold shutdown work at the Portsmouth
site for the Department of Energy (DOE) transitioned to a decontamination and
decommissioning (D&D) contractor at the end of the quarter.
"We've had
several important successes thus far in 2011 but we knew our financial
results would be reduced by higher costs," said John K. Welch, USEC
president and chief executive officer. "We expect gross profit margins
for 2011 will be compressed by higher production and purchase costs reflected
in our average SWU inventory cost.
"The largest cost
we face is for electricity, which makes up approximately 70 percent of our
production cost. That is why we are focused on building the American
Centrifuge Plant, or ACP, which will reduce the amount of electricity
required to enrich an equivalent amount of uranium by 95 percent," Welch
said. "In the near-term, we are also focused on negotiations with our
major power supplier and other utilities to obtain lower-cost power with less
volatility in pricing after our current contract expires in May 2012.
"The completion
of the due diligence and negotiation stage of the loan guarantee application
process with the DOE Loan Guarantee Program and progress towards final
approval of a conditional commitment of a $2 billion loan guarantee was
another important step along the path towards resuming construction of the
ACP.
"We also reached
agreement with Russia regarding a long-term supply arrangement that will
provide low enriched uranium for delivery to our customers after the end of
the Megatons to Megawatts program as we build out the ACP over the next
several years. And we worked with DOE, the unions that represent our
employees and the new D&D contractor to provide continuity for those
employees transitioning to the decontamination and decommissioning of the
Portsmouth site," he said.
Revenue
Revenue for the first
quarter was $380.5 million, an increase of 10 percent compared to the same
quarter of 2010. Revenue from the sale of SWU for the quarter was $308.5
million compared to $266.6 million in the same period last year. The volume
of SWU sales increased 9 percent in the quarter and the average price billed
to customers increased 6 percent, reflecting the specific contracts under
which SWU were sold during the periods as well as the general trend of higher
prices under contracts signed in recent years. We anticipate a decrease in
the volume of SWU sales of approximately 10 percent in the full year 2011 compared
with 2010.
Revenue from the sale
of uranium was $14..0 million, a decrease of $1.6 million from the same
quarter last year. The quarterly results reflect a decrease of 38 percent in
uranium volume sold but average prices were 44 percent higher than in the
2010 period due to the mix and timing of uranium contracts. Revenue from our
contract services segment was $58.0 million, a decrease of 7 percent compared
to first quarter last year.
In a number of sales
transactions, USEC transfers title and collects cash from customers but does
not recognize the revenue until low enriched uranium is physically
delivered.� At March 31, 2011, deferred
revenue totaled $248.8 million, an increase of $72.7 million from December
31, 2010. The gross profit associated with deferred revenue as of March 31,
2011, was $32.8 million.�
A majority of reactors
served by USEC are refueled on an 18-to-24-month cycle, and this can lead to
significant quarterly and annual swings in SWU sales volume that reflects the
mix of� refueling cycles.� Therefore, short-term comparisons of USEC's
financial results are not necessarily indicative of longer-term results.
Cost of Sales, Gross Profit Margin, Other Income and
Expenses
Cost
of sales for the quarter ended March 31, 2011, for SWU and uranium was $307.2
million, an increase of $40.0 million or 15 percent, compared to the
corresponding period in 2010 due to the associated increase in SWU sales
volume noted above and higher SWU unit costs. Cost of sales per SWU was 7
percent higher in the quarter compared to the first quarter of 2010. Cost of
sales for SWU and uranium reflects monthly moving average inventory costs
based on production and purchase costs.
Production
costs declined $12.2 million, or 5 percent, as production volume decreased 15
percent in the three months ended March 31, 2011, compared to the
corresponding period in 2010. The cost of electric power decreased by $13.8
million, or 8 percent, in the three months ended March 31, 2011, compared to
the corresponding period in 2010. We purchased less electricity under our
contract with Tennessee Valley Authority but the average cost per megawatt
hour increased 11 percent due to higher TVA fuel cost adjustments as well as
the fixed annual increase in the contract price. The unit production cost
increased 12 percent in the three-month period compared to the corresponding
period in 2010.
We
expect to purchase 5.5 million SWU under the Megatons to Megawatts program in
2011, but under our agreed upon shipping schedule there were no deliveries in
the first quarter.
Cost
of sales for contract services was $59.4 million in the first quarter, an
increase of $8.6 million or 17 percent over the same period last year,
reflecting a temporary increase in contract services work at the Portsmouth
site, as well as higher costs at our subsidiary NAC International. We
recorded a curtailment charge of $3.2 million for the defined benefit pension
plan in the current period in connection with the transition of USEC
employees to a new contractor following the expiration of the cold shutdown
contract on March 28, 2011.
The gross profit for the
first quarter was $13.9 million, a decrease of $12.8 million or 48 percent
over the same period in 2010. The gross profit margin for the 2011 period was
3.7 percent compared to 7.7 percent in the first quarter of 2010.� Gross profit for the LEU segment was $0.3
million higher due to higher average selling prices for SWU and uranium,
partially offset by higher unit costs. Gross profit for the contract services
segment declined $13.1 million in the three months compared to the
corresponding period in 2010, reflecting fee recognition on certain contracts
in the prior period as well as a $3.2 million pension curtailment charge
related to the transition of cold shutdown work at the Portsmouth
site.
Selling,
general and administrative expenses in the first quarter were $15.5 million,
an increase of $0.4 million over the same period in 2010, primarily due to
slightly higher salary and employee benefit costs.
Advanced
technology expense, primarily related to the demonstration of the American
Centrifuge technology, was $26.7 million in the quarter compared to $25.7
million in the first quarter of 2010. For the quarter, the $1 million
increase reflects a slight increase in development costs for the American
Centrifuge project. Advanced technology expense includes expenses by NAC to
develop its MAGNASTORT storage and transportation technology of $0.4 million
during the first quarter compared to $0.5 million in the same period of 2010.
In
January 2011, we executed an exchange with a noteholder
whereby USEC received convertible notes with a principal amount of $45
million in exchange for 6,952,500 shares of common stock and cash for accrued
but unpaid interest on the convertible notes. In connection with this exchange
USEC recognized a gain on debt extinguishment of $3.1 million in the first
quarter of 2011.
In
the 2010 period, the income tax provision of $5.4 million included a one-time
charge of $6.5 million related to the change in tax treatment of Medicare Part
D reimbursements as a result of the health care legislation.�
Cash Flow
At March 31, 2011, USEC had a cash balance of
$149.8 million compared to $151.0 million at December 31, 2010. Cash flow
provided by operations in the first quarter was $51.3 million, compared to
cash flow used in operations of $42.9 million in the previous year.� Payment of the Russian Contract payables
balance of $201.2 million was a significant use of cash flow in the three
months ended March 31, 2011.� More than
offsetting this use was positive cash flow provided by our LEU segment based
on the timing of customer orders and deliveries. Inventories declined $147.4
million in the three-month period, providing monetization of inventory produced
in the prior year; accounts receivable declined $63.8 million; and deferred
revenue, net of deferred costs, increased $62.3 million.� Capital expenditures, primarily related to
the ACP, totaled $50.7 million during the first quarter compared to $49.0
million in the same period of 2010.
American
Centrifuge Update
USEC
updated its application for a $2 billion DOE loan guarantee for the ACP in
July 2010. As part of its due diligence on the application, DOE conducted
independent financial, legal and engineering reviews of the project. USEC has
also been working with DOE since October 2010 on terms for a conditional
commitment for a $2 billion loan guarantee. In April 2011, the DOE Loan
Guarantee Program Office substantially completed the due diligence and
negotiation stage of the application process and advanced the ACP application
to the next phase. As part of this next phase, the credit package prepared by
the DOE Loan Guarantee Program Office, including the terms and conditions
that we have negotiated with that office, are being reviewed in parallel by
DOE's credit group and by the Office of Management and Budget (OMB), the
Department of the Treasury, and the National Economic Council. This review
will include the establishment of an estimated range of credit subsidy cost.
The next steps leading to a
conditional commitment involve approval by DOE's Credit Committee, then
approval by DOE's Credit Review Board. We have made it clear to DOE that
prompt action is essential. The terms of USEC's credit facility limit
spending on the American Centrifuge project without additional investment of
capital. The second phase of an investment by Toshiba Corporation and Babcock
& Wilcox Investment Company, which is conditioned upon receipt of a
conditional commitment, would provide an additional $50 million.. However, if
USEC does not close on the second phase of that investment by June
30, 2011, each of the investors has the right to terminate its
obligations under the investment agreement with the Company.
In
support of our application, we continue to operate a lead cascade test
program with production-ready AC100 machines at the Piketon, Ohio plant. By
increasing the number of operating machine hours, we provide additional
assurance of performance, reliability and plant availability. Our suppliers
continue to build components and assemble machines for the lead cascade
program, demonstrate machine manufacturing capability and sustain key
infrastructure for remobilization.
In
addition, we launched American Centrifuge Manufacturing, LLC (ACM), to
provide integrated manufacturing and assembly of uranium enrichment
centrifuges for the ACP. USEC established ACM, effective May 1, in concert
with The Babcock & Wilcox Company subsidiary Babcock & Wilcox
Technical Services Group, Inc. The company will be housed at USEC's American
Centrifuge Technology and Manufacturing Center in Oak Ridge, Tennessee. Once
the loan guarantee and other project funding needed to complete the American
Centrifuge Plant is secured and the project is remobilized, employment is
expected to grow to approximately 600 positions as ACM ramps up to its full
manufacturing rate. Approximately 11,500 centrifuges will be assembled and
installed in Piketon.
New Russian
Supply Agreement
USEC
is the U.S. government's exclusive executive agent in connection with a
government-to-government nonproliferation agreement between the United States
and the Russian Federation known as "Megatons to Megawatts". We
currently purchase about one-half of our SWU supply from Russia under this
program from a Russian government entity known as Techsnabexport (TENEX). The 20-year contract with
TENEX expires at the end of 2013.
On
March 23, 2011, USEC signed a new multi-year commercial contract with TENEX
for the 10-year supply of Russian LEU beginning in 2013. Under the terms of
the new contract, the supply of LEU to USEC will begin in 2013 and increase
until it reaches a level in 2015 that includes a quantity of SWU equal to
approximately one-half the level currently supplied by TENEX to USEC under
the Megatons to Megawatts program. TENEX and USEC also may mutually agree to
increase the purchase and sales of SWU by additional optional quantities of
SWU up to an amount beginning in 2015 equal to the amount USEC now purchases
each year under the Megatons to Megawatts program. Unlike the Megatons to
Megawatts program, the quantities supplied under the new contract will come
from Russia's commercial enrichment activities rather than from downblending excess Russian weapons material.
Deliveries
under the new contract are expected to continue through 2022. USEC will
purchase the SWU component of the LEU and deliver natural uranium to TENEX
for the LEU's uranium component. The pricing terms for SWU under the contract
are based on a mix of market-related price points and other factors. The
effectiveness of the new contract between TENEX and USEC is subject to
approval of the Russian State Corporation for Atomic Energy and completion of
administrative arrangements between the U.S. and Russian governments under
the agreement for cooperation in nuclear energy between the United States and
the Russian Federation (the Russia 123 Agreement) which, among other things,
provides the framework for the return to Russia of natural uranium delivered
by USEC to TENEX.
2011 Outlook
Reiterated
We
are reiterating our guidance for 2011. Specifically, in 2011 we expect
revenue of approximately $1.7 billion and gross profits in a range of $70 to
$80 million.. We expect our gross profit margin to be in a range of
approximately 4 percent to 5 percent. Below the gross profit line, we
anticipate our selling, general and administrative expense to be
approximately $60 million.
We
are not offering annual guidance for spending on the American Centrifuge
project at this time because the level of project spending continues to be
uncertain. Project spending will have a significant effect on net
income and cash flow, and therefore, USEC is not providing guidance on net
income or cash flow at this time. However, taking into account our
anticipated ACP spending during the first half of 2011 and our anticipated
gross profit margin, we continue to expect to report a net loss for 2011.
Spending
related to the American Centrifuge project is restricted under our credit
facility and will be dependent upon if and when additional capital becomes
available. We expect total spending on the American Centrifuge project, both
capitalized and expensed, to be approximately $110 million through June 30,
2011, which includes our plan to continue building a limited number of
additional AC100 machines. We also expect our current enrichment operations
will generate cash in 2011, but ACP spending will reduce our cash flow from
operations.
Our
financial guidance is subject to a number of assumptions and uncertainties
that could affect results either positively or negatively. Variations from
our expectations could cause substantial differences between our guidance and
ultimate results. Among the factors that could affect our results are:
- Changes
to the electric power fuel cost adjustment or changes to our power
purchases from our current projection;
- Closing out
contract services work at Portsmouth and recognition of estimated
contract closeout costs to be recovered from DOE as well as amounts
previously billed and owed;
- The
timing of recognition of previously deferred revenue, particularly
related to the sale of uranium;
- Movement
and timing of customer orders;��
- Changes
to SWU and uranium price indicators, and changes in inflation that can
affect the price of SWU billed to customers; and
- Additional uranium sales made possible by
underfeeding the production process at the Paducah GDP.
USEC Inc., a global energy
company, is a leading supplier of enriched uranium fuel for commercial
nuclear power plants.
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Forward
Looking Statements
This
news release contains "forward-looking statements" within the
meaning of Section 21E of the Securities Exchange Act of 1934 - that is,
statements related to future events. In this context, forward-looking
statements may address our expected future business and financial
performance, and often contain words such as "expects,"
"anticipates," "intends," "plans,"
"believes," "will" and other words of similar meaning.
Forward-looking statements by their nature address matters that are, to
different degrees, uncertain. For USEC, particular risks and uncertainties
that could cause our actual future results to differ materially from those
expressed in our forward-looking statements include, but are not limited to:
risks related to the deployment of the American Centrifuge technology,
including risks related to performance, cost, schedule and financing; our
success in obtaining a loan guarantee from DOE for the American Centrifuge
Plant, including our ability to address the technical and financial concerns
raised by DOE and the timing of any loan guarantee; our ability to reach
agreement with DOE on acceptable terms of a conditional commitment, including
the timing of any decision and the determination of credit subsidy cost, and
our ability to meet all required conditions to funding; our ability to obtain
additional financing beyond the $2 billion of DOE loan guarantee funding for
which we have applied, including our success in obtaining Japanese export
credit agency financing of $1 billion; the impact of the demobilization of
the American Centrifuge project and uncertainty regarding our ability to
remobilize the project and the potential for termination of the project; our
ability to meet the November 2011 financing milestone and other milestones
under the June 2002 DOE-USEC Agreement; restrictions in our credit facility
that may impact our operating and financial flexibility and spending on the
American Centrifuge project; risks related to the completion of the remaining
two phases of the three-phased strategic investment by Toshiba Corporation
("Toshiba") and Babcock & Wilcox Investment Company
("B&W"), including our ability to satisfy the significant
closing conditions in the securities purchase agreement governing the
transactions and our ability to close on the second phase of the transactions
prior to the outside date of June 30, 2011, and the impact of a failure to
consummate the transactions on our business and prospects; certain
restrictions that may be placed on our business as a result of the
transactions with Toshiba and B&W; our ability to achieve the benefits of
any strategic relationships with Toshiba and B&W; uncertainty regarding
the cost of electric power used at our gaseous diffusion plant; the economics
of extended Paducah plant operations, including our ability to negotiate an
acceptable power arrangement and our ability to obtain a contract to enrich
DOE's depleted uranium; our dependence on deliveries of LEU from Russia under
the Russian Contract and on a single production facility; risks related to
the approvals and implementing agreements needed for our new supply contract
with TENEX to become effective; limitations on our ability to import the
Russian LEU we buy under the new supply contract into the United States and
other countries; our inability under many existing long-term contracts to
directly pass on to customers increases in our costs; the decrease or
elimination of duties charged on imports of foreign-produced low enriched
uranium; pricing trends and demand in the uranium and enrichment markets and
their impact on our profitability; changes to, or termination of, our
contracts with the U.S. government including uncertainty regarding the
impacts on our business of the transition of government services performed by
us at the former Portsmouth gaseous diffusion plant to the new
decontamination and decommissioning contractor; limitations on our ability to
compete for potential contracts with the U.S. government; changes in U.S.
government priorities and the availability of government funding, including
loan guarantees; the impact of government regulation by DOE and the U.S..
Nuclear Regulatory Commission; the outcome of legal proceedings and other
contingencies (including lawsuits and government investigations or audits);
the competitive environment for our products and services; changes in the
nuclear energy industry; the impact of the recent natural disaster in Japan
on the nuclear industry and on our business, results of operations and
prospects; the impact of volatile financial market conditions on our
business, liquidity, prospects, pension assets and credit and insurance
facilities; and other risks and uncertainties discussed in our filings with
the Securities and Exchange Commission, including Item 1A entitled "Risk
Factors" and the other sections of our Annual Report on Form 10-K and
quarterly reports on Form 10-Q, which are available on our website at
www.usec.com. Revenue and operating results can fluctuate significantly from
quarter to quarter, and in some cases, year to year. We do not undertake to
update our forward-looking statements to reflect events or circumstances that
may arise after the date of this news release except as required by law.�
Contacts:
Investors: ������ Steven Wingfield (301) 564-3354
Media:��������� �� Paul Jacobson (301) 564-3399
The financial tables associated with this
news release are available for download at:
http://www.usec.com/NewsRoom/NewsReleases/USECInc/2011/USEC1Q2011Earnings.pdf
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