Centrus Energy Corp.
Q3 2020 Earnings Call Transcript

Published: 16 Nov 2020

[Operator:]

Greetings, and welcome to the Centrus Energy Third Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. . As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Dan Leistikow, Vice President, Corporate Communications for Centrus Energy. Thank you. You may begin.

[Dan Leistikow:]

Good morning. Thank you for joining us. Today's call will cover the results for the third quarter of 2020 ended September 30. Here today are, Dan Poneman, President and Chief Executive Officer; Philip Strawbridge, Senior Vice President, Chief Financial Officer, Chief Administrative Officer and Treasurer; and John Dorrian, Controller and Chief Accounting Officer.

[Daniel Poneman:]

Thank you, Dan, and thank you to everyone on the call today. As we have discussed in previous calls, the health and welfare of our employees and their families is our paramount concern. The pandemic has certainly forced us to change the way we do our work in order to protect our people. Fortunately, it has not taken away our ability to deliver on our customer orders and we expect to continue making those deliveries as planned in the months and years ahead. Indeed, Centrus is fortunate in that the COVID-19 pandemic does not affect our revenue in the way that it does for direct to consumer businesses. Nearly all of our revenue comes from stable, long-term contracts with utilities and the U.S. government. This was another exciting quarter for Centrus. We launched a public offering, raising about $25 million before expenses. We also announced a cash tender offer to purchase up to $60 million in Series B senior preferred stock. I can't go into much detail on that because the tender offer is still open, but we are optimistic about what the future holds.

[Philip Strawbridge:]

Thank you, Dan, and good morning, everyone. As Dan mentioned, for the third quarter 2020, we had total revenue of 33.6 million. Revenue from the LEU segment declined 69.1 million for the third quarter compared to the same quarter last year. This decline was because we had no SWU deliveries in the quarter, but we did have some uranium sales. The variability from quarter-to-quarter rises because our customers in the LEU segment generally have multiyear contracts with purchase obligations that are annual, not quarterly. So the customer decides what month to take their annual purchase commitment. Some quarters look worse because we have fewer deliveries, while others look better because we have more deliveries. Another source of variation is the fact that some contracts were signed when prices were higher than they are today, and others were signed when prices are lower. So a quarter can look better or worse depending upon the price points of particular contracts that we're delivering on during that quarter. We anticipate that the revenue in the fourth quarter of this year for the LEU segment will be the highest of any quarter for 2020, assuming there are no interruptions to our planned customer deliveries based on changes in the market or COVID-19. Cost of sales for the LEU segment decreased 34.8 million in the third quarter 2020 compared to the same period in 2019, again due to no deliveries being made in that quarter. Our technical solutions segment revenue and cost of sales decreased by $2 million and was flat, respectively, compared to the same quarter in 2019. This reflects the mix of technical solutions work performed in each of the periods, including work performed under the HALEU contract that Dan talked about before.

[Daniel Poneman:]

Thank you, Philip. Before we close, I would like to add just a few thoughts on the future of advanced nuclear reactors. As I mentioned earlier, the U.S. Department of Energy recently announced the two major demonstration awards for the Advanced Reactor Demonstration Program, which will fund the deployment of two first of a kind advanced reactors in the next five to seven years, laying the groundwork for the potential commercialization of those reactor designs. This program reflects the strong commitment of the U.S. Department of Energy and a bipartisan coalition in Congress to the future of the advanced nuclear industry and the belief that America can and should lead the transition to the next generation of reactors. Many of these new designs will require HALEU, including both winners of the ARDP demonstration awards, and Centrus is proud to be on the vanguard of that effort. In addition, there are now two separate efforts underway at the U.S. Department of Defense to explore the potential of micro-reactors to support our national security requirements at home and abroad. One of those efforts known as Project Pele aims to field the prototype HALEU-fueled micro-reactor within three years. There is also an effort underway led by the Air Force to explore using micro-reactors, which are reactors of like 1 to 10 megawatts instead of a larger size to provide an assured source of power to military bases. If either or both of these efforts go forward, the requirement for domestically-produced HALEU could be significant and we will be ready to meet that need. This is a pivotal moment for America's nuclear future. Our energy security, national security and climate objectives can all be powerfully advanced by the successful deployment of advanced generation nuclear reactors. All of us at Centrus are excited to be part of this moment and to this great venture that holds so much promise for our generation and for those that follow.

[Operator:]

Thank you. At this time, we’ll be conducting a question-and-answer session. . Our first question comes from the line of Rob Brown with Lake Street Capital Markets. Please proceed with your question.

[Rob Brown:]

Good morning, Dan. Good morning, Philip.

[Daniel Poneman:]

Good morning, Rob.

[Philip Strawbridge:]

Good morning.

[Rob Brown:]

First question is on the advanced reactor projects that you mentioned. Could you just give us a sense of how much – I think you said how much HALEU capacity you'd have as those ramp and how you'd sort of envision those coming online and then you having fueling capacity to supply them, maybe a sense of how that kind of plays out?

[Daniel Poneman:]

Sure. Yes, certainly. So the reactor designs and they're all proprietary, of course, Rob, vary a lot. And some of them require quite modest amounts of HALEU and some of them require quite substantial amounts. If we went beyond the demonstration cascade to building, say, a full cascade of 120 machines, that would give us about 5 or 6 metric tons per year of HALEU. And if we just had just the 16 machines, it's about 900 kg or nearly 1 MTU per year. And how far that would go? Again, just depends on the particular designs. We could – with even the demonstration cascade, we could supply two or three of the smaller versions. But for the larger versions, we would want to build that additional capacity. The good news about the way the thing is set up, Rob, is that it's faster to build an enrichment cascade than it is to build a reactor. So we're going to have plenty of runway to see if we get the fidelity and the demand signal, and it turns out that some of the larger reactors that need more HALEU are going to be built. We have plenty of time to build the machines and time to satisfy whatever demand develops. Again, one of the nice things about our current business model compared to the – for those who were paying attention years ago to the American Centrifuge project, which was anticipating a massive 3 million SWU facility in one move. Now we're looking not at a massive plant with all the feed and withdrawal consolidated and so forth, but one in which we can meter in the investment and meter the production of our machines to match the demand signal as it emerges.

[Operator:]

Thank you. . Our next question comes from the line of Richard Howard with Boiling Point Resources.

[Unidentified Analyst:]

Good morning. Heading back to the base businesses that exist now, Dan, do you have a feeling that the underfeeding of centrifuges worldwide is gradually ending with the current price situation or do you think that is continuing?

[Daniel Poneman:]

Good to hear you, Rich. Thanks for the question. So among the things that people hold close in this industry is exactly how much underfeeding they're doing, but the way – I think the way to think about it is that gradually, and it is a gradual process, the overhang of excess capacity in the market is gradually easing. And therefore – basically for those who don't follow it closely, underfeeding is what happens when there's a lot more supply of enrichment capability than there is demand for separative work. And so since people like to keep those machines running for economic efficiency and operational reasons, they turn from enriching fresh uranium to basically re-enriching tails and creating effectively a new uranium mine. And so when the depleted tails are then restored to 0.7% concentration of U-235, they've effectively created a bunch more natural uranium, which has a weighting effect and depresses the market. So I don't know because, again, the producers – we are not operating, as you would know, Rich, now. So we aren't doing that now in the operational sense. And we don't have confidential information on what our competitors are doing. But the natural tendency would be for that underfeeding to ease over time, but I think it's quite a gradual process. And my hunch it will be some period of time before that's worked through.

[Operator:]

Thank you. . Ladies and gentlemen, this concludes our question-and-answer session. I'll turn the floor back to Mr. Leistikow for any final comments.

[Dan Leistikow:]

Thank you, operator. This will conclude Centrus' third quarter 2020 investor call. I want to thank all of our listeners online and those who called in. We look forward to speaking with you again next quarter.

[Operator:]

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