Centrus Energy Corp.
Q3 2014 Earnings Call Transcript

Published: 14 Nov 2014

[Operator:]

Greetings and welcome to the Centrus Energy Corp. Quarterly Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder this conference is being recorded. I would now like to turn conference over to your host Steven Wingfield. Thank you. You may now begin.

[Steven Wingfield:]

Good morning. Thank you for joining us for our first conference call of Centrus Energy Corp. Today’s call will cover the third quarter of 2014 that ended September 30 and our emergence from Chapter 11. With me today are John Castellano, Interim President and Chief Executive Officer; John Barpoulis, Senior Vice President and Chief Financial Officer; Phil Sewell, Senior Vice President; Bob Van Namen, Senior Vice President; and Tracy Mey, Vice President and Chief Accounting Officer. Before turning the call over to John Castellano, 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 earlier today. That news release is available on many financial websites and our corporate website, centrusenergy.com. All of our news releases and SEC filings including our 10-K, 10-Qs and 8-Ks are available on our website. We expect to file our Quarterly Report on Form 10-Q later today. A replay of this call also will be available later this morning on the Centrus website. I’d like to remind everyone that certain of the information that we discuss on this call today may be considered forward-looking information that involves risk and uncertainty, including assumptions about the future performance of Centrus. 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 November 14, 2014. This call is the property of Centrus. Any redistribution, retransmission or rebroadcast of this call in any form without the expressed written consent of Centrus is strictly prohibited. Thank you for your participation. And now, I’d like to turn the call over to John Castellano.

[John Castellano:]

Thanks, Steve. Good morning and thank you for joining us today. Much has changed since our last call with the financial community. As you know, we commenced proceedings under Chapter 11 in March of this year and emergence September 30. Earlier today, we reported results for the third quarter that included significant adjustments to balance sheet items that also affected our income statement. John Barpoulis will cover our financial results in a few minutes; and Tracy Mey, our Chief Accounting Officer, will also provide a short primer on fresh start accounting. Later today, we expect to file our Quarterly Report on Form 10-Q with the SEC, and that document has significant additional detail on the accounting adjustments. I joined the Centrus management team last October as the Chief Restructuring Officer. The position I’ve held with other energy and infrastructure related companies that were engaged with AlixPartners. My firm has an extensive practice involving energy companies and I have been involved with a range of large, complex restructurings since I’ve joined the firm in 1998. Although, Centrus in unique in the United States as a publically traded supplier of nuclear fuel, many of the core issues involving capital structure, supply and demand, and appropriate development spending are not unique and fit within my professional experiences. I deeply appreciate the Board’s confidence in selecting me for this interim leadership role. Given that I spent the past year with this management team, we’ve been able to hit the ground running following emergence from Chapter 11. Today, Centrus is in a much better condition financially than where we were 12 months ago. With that said, we have many things on our plate; I would like to hit the highlights of what is ahead for the Centrus management team over the next several months. First, we are working with the top executive recruitment firm, Spencer Stuart, to help us identify and select our next Chief Executive Officer. We are considering both internal and external candidates. This is obviously a very important selection for Centrus and the Board of Directors is committed to spending the time and diligence necessary to find a vibrant and energetic leader, who will be able to successfully lead the company through this period of transition. We hope to complete the process in early 2015. In the meantime, our work is not on hold. In October, we completed the return of the Paducah plant to the Department of Energy, a project begun in June 2013. This is a significant task, as the Gaseous Diffusion Plant in Kentucky is among the largest industrial sites in the United States with approximately 150 acres of floor space. The task of preparing the Paducah plant for return to DOE required detailed plan and flawless execution. Our people relocated uranium inventory to other approved storage facilities and sold surplus equipment during a serious of auctions in recent months. This transition was completed in a cost-efficient and collaborative manner with DOE. We are very proud of the professional manner in which our employees safely completed the turnover of the Paducah plant to DOE. And although, nearly all of our remaining Paducah employees were terminated at the end of the process, many were hired by the DOE contractor that will complete the decontamination and decommissioning of the facility. Turning next to our common stock. In April 2013, our total market capitalization did not meet the continued listing standards of the New York Stock Exchange. We prepared a plant to regain compliance, and over the past several quarters, we executed that plan, which of course included the Chapter 11 process. Our new common stock, which trades under the ticker LEU is now back in compliance with the exchange’s continued listing standards, after trading above and average market capitalization of $50 million over a 30-day trading period. In addition, the stockholders equity on the Centrus balance sheet was $59 million at September 30, further strengthening our compliance with the exchange’s continued listing standards. Moving to the nuclear fuel market, last week Kagoshima became the first Japanese prefecture to give its consent for the restart of nuclear reactors following the terrible aftermath of the earthquake and tsunami that struck Japan in March of 2011. As part that process that involved many months of careful review and new industry safety regulations, the assembly and governor of Kagoshima provided the necessary local approvals for the restart of two reactors at the Sendai nuclear plant. There are few more steps to the process, but many observers believe the reactors at Sendai will restart in early 2015 and 18 more Japanese reactors are in the regulatory review queue. This is clearly a good a sign for our industry and the psychological effect on the market can already be seen in the price of natural uranium, which has moved back above $40 recently. Just as clearly, however, there is still a very long way to go in rebuilding confidence in the nuclear power industry in Japan. The restart of Japanese reactors will likely have a positive impact on the nuclear fuel market. A recovery of the nuclear fuel industry is essential to our long-term plan to build a commercial plant using the American Centrifuge technology. We are continuing to perform work and demonstrate the technology through the America Centrifuge Technology Demonstration and Operation Agreement, which we refer to as ACTDO agreement. Under this agreement, we are working closely with the Oak Ridge National Laboratory, to continue operations of the Centrifuge cascade and perform additional development while preserving the option of commercial deployment. The laboratory has exercised its first option to extend the program in March 31, 2015 and has the option to extend the program further to the end of September 2015. We believe there is a strong recognition that the United States needs a domestic source of uranium enrichment for both national security and energy security, and that the American Centrifuge is the only enrichment technology when you step into that role. I’d also like to add, having worked with Centrus for over 12 months, I’ve had the opportunity to understand and appreciate the enormous task this company and its employees underwent to develop and demonstrate the American Centrifuge. Our employees are among the worlds leading experts in centrifuge technology and are completely dedicated to the continued development and deployment of this technology. As investors, you should feel very confident that you have the best in the business working at Centrus. The other major item on our front burner is to continue our core business of selling low enriched uranium. Until a new commercial plant is deployed, we will make sales from our inventory, LEU obtained from Russia and from other potential suppliers. The transition also involves streamlining our management processes and sizing our organization to better match our business model. In summary, it has been a very busy and productive 12 months. In the past year, we completed negotiations with the majority of our noteholders about restructuring the debt, which allowed us to go through a pre-arranged and consensual Chapter 11 process in seven months. We were gratified to see the overwhelming support we received from our investor for our plan of reorganization. We have significantly reduced our leverage and cash interest burden. We believe Centrus has emerged with a stronger financial base from which to move forward as a sponsor of the American Centrifuge Technology and a trusted supplier of LEU. We have returned the Paducah plant to DOE. We are actively engaged with the Oak Ridge National Laboratory to further demonstrate the American Centrifuge Technology’s ability to meet our nation’s energy and national security requirements. And we are, once again, in full compliance with the listing standards of the New York Stock Exchange. That’s a good start, but we recognize that we still have much to accomplish. Now, I’d like to turn the call over to John Barpoulis and Tracy Mey to provide a high level overview of third quarter results and the application of fresh start accounting. John?

[John Barpoulis:]

Thank you, John. Going to the bottom line upfront, Centrus reported net income for the third quarter of $418.9 million compared to a net loss of $44.3 million in the same quarter of 2013. For the nine month period ended September 30, 2014, we reported net income of $340.1 million compared to a net loss of $87.2 million in the same period last year. These results were primarily driven by net reorganization gains. Also affecting results were higher gross profit due to a decline in non-production expenses, higher average SWU prices, lower interest expense and lower sales volume. For the third quarter, reorganization items net were $440 million. We’ve reported an operating loss of $16.4 million that was primarily driven by lower sales volume and $17.5 million of non-production expenses related to preparing the Paducah plant for the return to DOE. As John mentioned earlier, the plant was returned to DOE on October 21. Going back to the top of the income statement, revenue for the third quarter was $120.7 million and $390.5 million for the nine month period of 2014. The volume of SWU sales declined 70% and 61% in the three month and nine month periods of 2014 respectively, which is in line with our guidance that sales volumes would decline in 2014. The average price billed to customers for sales of SWU increased 6% in the third quarter and 2% for the nine month period compared to the same periods in 2013. Cost of sales declined in both the three month and nine month periods of 2014 compared to the same periods in 2013 due to lower SWU sales volume and lower non-production expenses. Non-production expenses declined in 2014 compared to 2013 as transition activities wound down in Paducah, but still accounted for $17.5 million of cost from the third quarter and $66.7 million in the nine-month period. The non-production expense was the primary cause of the gross loss for the quarter and the nine-month periods of 2014, but the size of the gross loss and the profit margin improved compared to the same periods of 2013. In the nine-month period ended September 30, 2014, advanced technology costs were $56.6 million compared to $150 million in the nine-month period of 2013. Included in advanced technology expenses for 2014 were $12.3 million for certain demobilization and maintenance costs incurred as a result of the change in work scope. The reduction in the scope of work under the ACTDO Agreement as compared with the scope under our previous co-operative agreement resulted in a decrease in advanced technology expense. In addition, revenue and cost of sales for work that Centrus performs under the ACTDO Agreement is reported in our contract services segment. You’ll find additional detail on advanced technology costs in footnote six of the 10-Q. Selling, general and administrative expense declined 11% in the nine-month period compared to the same period of 2013. We’ve also incurred special charges and termination expenses related to workforce reduction at all Centrus locations. Turning next to cash, we reported a cash balance of $105.4 million at September 30, 2014. Cash flow used in operations in the nine-month period was $220.3 million, which reflects the net operating loss, payables for SWU purchased from Russia, and cash payments made for reorganizations items and interest payments. Partially offsetting these uses of cash was a $177 million monetization of inventory. As noted in earnings news release, we are not providing detailed financial guidance to investors at this time, but we do expect to end 2014 with a cash balance of more than $150 million. As we note in our liquidity analysis, we anticipate having adequate liquidity to support our business operations for at least the next 12 months. The results reported today were significantly affected by adjustments made by restructuring and fresh start accounting. I’d like to ask Tracy Mey to provide an overview about fresh start accounting. Tracy?

[J. Tracy Mey:]

Thank you, John. First, I’d like to point out that the 10-Q that we expect to issue later today has several footnotes and pages of details about fresh start accounting. That said, I’ll take a few minutes here to provide a high level explanation of the adjustments. Upon emergence from bankruptcy and if certain requirements are met, such as a change in control, fresh start accounting is required to be adopted by the company. The effective date of our plan of reorganization and emergence was September 30. In many ways, fresh start accounting is similar to purchase accounting. In fact, you will see in our 10-Q many references to predecessor company and successor company for accounting purposes. For example, we show both the results of operations and cash flows in the period ending September 30 related to the predecessor company and the fresh start balance sheet related to the successor company. The goal of fresh start accounting is to approximate the amount that a willing buyer would pay for the assets, immediately after restructuring and value the successor company accordingly. Most companies going through the Chapter 11 process have a court approved valuation, we did not. We developed the valuation of the company based on a discounted cash flow model using the assistance of a third-party valuation specialist to conduct the valuation. Fresh start accounting also requires all tangible assets such as our inventory to be fair valued and to identify and fair value intangible assets as well such as customer relationships and the sales contracts in our existing backlog. The fair value of our inventory of low enriched uranium was valued using a net realizable value method, which utilizes the expected selling prices to customers, as a basis for valuing finished goods. The inventory has a higher valuation at September 30 due to projected gross margins on future sales. I would point out that the higher inventory valuation at September 30 will have a negative effect on future gross margins in the LEU segment. In our footnotes, we also include a four-column walk of the balance sheet providing insight as to the effects of the reorganization adjustments and fresh start adjustments to the successors company’s fresh start balance sheet. The first-column that you will see is the closing balance sheet for the predecessor company USEC, just prior to emergence on September 30. The second column illustrates the plan effects of reorganization, which includes gain from debt extinguishment, cancelation of the old equity and the issuance of new securities. The third column has the fresh start adjustments, including fair value adjustments of our inventory, newly established intangible assets and excess reorganization value, sometimes referred to as good will, and elimination of the bulk of previously recorded deferred revenue and their associated costs, since cash had already been received and the actuarial re-measurement as a result of our emergence of our pension and post retirement benefits, in accordance with accounting standards. The pension and post-retirement benefits liability increased in large part due to lower discount rates than were used at the time when the Form 10-K was last prepared in February, as well as revised assumptions reflecting current views of mortality from the Society of Actuaries. The fourth column then provides the opening balance sheet for the successor company Centrus. Because the adjusted assets are greater than the adjusted liabilities, Centrus begins with positive stockholders’ equity. As I noted at the beginning of the short tutorial fresh start accounting, there are several pages of explanation along with tables which provides substantial detail on the adjustments to be filed later in our Form 10-Q. Now operator, we are ready for questions from our investors.

[Operator:]

Thank you. At this we will be conducting a question and answer session. [Operator Instructions] Our first question comes from the line of Richard Howard with Prospector Partners. Please proceed with your question.

[Richard Page Howard:]

Yeah, thank you. My question is, could you give us a little more color on the nuclear fuel market outlook? We have the Japanese restart, we have the Paducah shut down and I think there is a French plant that shut down. Where do you think we are on a supply-demand balance and where do you think we’re headed, over what time period?

[Philip Sewell:]

This is Phil Sewell. First we should indicate as John Castellano noted that the market is reacted positively to the Japanese government taking action that could result in the restart of two reactors early in 2015. It’s important to note that there is 18 more reactors in the regulatory queue and it’s likely that more reactors will start restart later in 2015. All of this has a positive impact on the market and in particular, since the beginning of the month we’re seeing a 15% increase in the uranium market. So that action alone is having a psychological impact on the entire nuclear industry and we would also expect to see an impact later on with respect to the SWU prices. There is less transparency in SWU pricing than in uranium prices for a number of reasons. One, there is a lot more participants in the uranium industry than in the SWU industry and second, there is a lot longer lead time in order to bring new supply into the market for uranium mines than enrichment capacity. So all of that shows you that the market is responding to, I’ll say changes. Japanese restarts are a step and a positive indication that the market is in the process of recovering. And the important item too is to note that there is about 70 reactors that are under construction in the world and that is also expected to have a significant impact with respect to absorbing the oversupply and excess capacity in the SWU market. It’s important to note, as new reactors come online, those new reactors need three times the amount of enrichment that reloads due for current operating reactors. So that additional demand from the 70 some reactors that are expected to come online between now and 2020 should go a long way toward absorbing oversupply, excess capacity and have positive impact on prices that we’re all seeing and in recovery in general for the nuclear fuel market.

[Richard Page Howard:]

Can I ask another question?

[John Castellano:]

Sure.

[Philip Sewell:]

Sure, Rich.

[Richard Page Howard:]

Where do you think we are on right sizing the company and what are we looking for in a new CEO?

[John Castellano:]

Yeah this is John Castellan, let me address the CEO question. As I had indicated, the executive search firm Spencer Stuart has been actively involved in the search for the next President and Chief Executive Officer of Centrus since early October. The Board is seeking an outstanding and visionary leader with the necessary credibility and professional experience required to grow and diversify revenues and increase shareholder value. Ideally, we are seeking someone with relevant experience in the nuclear industry, who has experience dealing with the U.S. government, so that they have proven credibility with key decision makers in the highest levels of government. We are also looking for a leader with proven track record of managing complex businesses and delivering financial results in a competitive market. As I said, we’re looking at both internal and external candidates and I believe that the Centrus Board will have an excellent pool from which to select our next Chief Executive. I’ll turn it over to John Barpoulis as it relates to the sizing of the organization.

[John Barpoulis:]

Thanks John. Rich, you may have noted in the earnings release and there is more on it in the 10-Q on the continuing trend of lower SG&A. So I’d say, we have over the past couple of years highlighted the need to be adjusting our corporate size and processes as the company has changed and as our businesses continue to change, we continue to undertake that. So as a result of the transition of Paducah, you will also see a significant reduction in total headcount across all sites and that again very much a result of the change in our business. As we take a look at our processes, we had many processes that were finally honed for operating a Gaseous Diffusion Plant at a corporate level. And, again, now that business is transitioning with the focus on American Centrifuge and our LEU broker business, we are adapting the corporate structure to adapt to those business circumstances as well.

[Richard Howard:]

Great. One more little question, which you may not want to answer. If I look at cash and working capital a year from now, do we have a feel that the current level is about right, and that it will be maintained in 2015, or is it too early to tell?

[John Castellano:]

Richard, I think the best way to answer that is we continue to be focused on cash. We noted both cash balance at the end of the third quarter and that we expect at the end of the year to have a cash balance in excess of $150 million. We also state confidently and clearly that we expect to have adequate liquidity for at least the next 12 months and will provide additional insight on that front as we get further into 2015.

[Richard Howard:]

Great. Thank you very much and I’m glad you got this started.

[John Castellano:]

Thanks, Rich.

[Operator:]

Thank you. Our next question comes from the line of Bob Clutterbuck of Clutterbuck Capital Management. Please proceed with your question.

[Robert T. Clutterbuck:]

Thanks for taking my call guys. As usual, Rich asked two of my three questions. So talk about my third one, the Russian supply agreement. Have we seen any interruption? And is there anything – it’s obviously activity picking up in the Ukraine, are there any signals that we are going to have any problems?

[Philip Sewell:]

This is Phil Sewell, again. First, I should indicate that the sanctions that were imposed earlier this year in the summer on Russia have not affected deliveries under that transitional supply agreement with TENEX, who is the marketing agent for Russia. We also understand that sanctions on nuclear fuel are currently not under consideration. And even though, we can’t speak for the U.S. government, there is an awareness that nuclear fuel supply by Russia is an important source of fuel for a clean electricity generation both in United Stated and other countries. At this time, we have sufficient inventory to meet customer needs even in the event of a temporary disruption. And what if there is an extended delay or termination of Russian deliveries? We believe there is a significant amount of excess inventory oversupply of nuclear fuel in the market due to the effects of the Fukushima incident, so that we could access that in order to fulfill our sales commitments. In the meantime, we’ve been at discussions with other potential supply sources that could be used to mitigate the impact of a potential disruption of supply. So that’s where we are and that’s the best picture that we can give you at this time.

[Robert T. Clutterbuck:]

All right. So we are thinking maybe no interruption, but if we do, potentially we have other sources, I guess, is what I’m getting from that. So following up, if I can have one follow-up question on Rich’s question earlier about rightsizing the organization, obviously, it’s extraordinarily important and I’d encourage much sooner than later, I don’t have the advantage of looking through the Q yet, but obviously we’ve incurred an awful lot of professional fees going through the bankruptcy, also part of the rightsizing the organization, I hope would be rightsizing outside professionals particularly at this point going forward, could you comment on that?

[John Barpoulis:]

Sure, Bob. It’s John Barpoulis. And first, I’d just like to thank you again for your support during the restructuring process. As you know, our business is very complex, involves unique issues related to classified technology, licensing of nuclear facilities, national security and more. The pre-arranged bankruptcy, which garnered significant large majority of creditors support and the smooth administration of the bankruptcy case that help preserve the company’s NYSE listing, required significant specialized professional services. The fees included not only paying for the advisors to the company, but also paying the expenses of advisors to the creditors under the various plan support agreements. So the significant professional fees and bankruptcy is while not uncommon, it’s also a very important reason why we worked so hard to complete the Chapter 11 process and emerge within the seven-month period. But all that said, we expect to see those professional fees diminish significantly going forward.

[Robert T. Clutterbuck:]

Terrific. That’s it. That’s all I have and keep up this good job guys.

[John Barpoulis:]

Okay. Thanks, Bob.

[Operator:]

Thank you. Our next question comes from the line of Albert Hicks with Bowery Investment Management. Please proceed with your question.

[Albert Hicks:]

Good morning, thank you for taking my question. I see the change in benefit liabilities on the balance sheet and I understand that, part of that is due to the change in rate following the bankruptcy. But I was curious to learn, if there were any legacy liabilities transferred along with the shutdown of Paducah and do you plan to provide any additional disclosure related to that?

[John Barpoulis:]

Albert, it’s John Barpoulis. The pension and postretirement The pension and postretirement health liabilities that we have currently are, say, related to our LEU business, our legacy business also at our Enrichment Corp subsidiary and at Centrus Energy Corp. there is significant disclosure around those liabilities in our 10-Q as you would expect and the change due to both a change in rates, also the adoption of new mortality tables that we expect to see, going forward, Tracy touched on that as something that came out from the Society of Actuaries.

[Albert Hicks:]

Great. Thank you for the help and I’ll look for that in the 10-Q. Thank you, thanks.

[John Barpoulis:]

Sure.

[Operator:]

Thank you. At this time this does concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.