USEC Reports
Financial Results for the Fourth Quarter and Full Year 2011
- Net
loss of $540.7 million reflects expenses of American Centrifuge program, a
$369.1 million non-cash tax-related valuation allowance and lower profit
margin
- Cash
flow from operations of $56.3 million
- 2012
guidance limited pending decisions regarding Paducah plant
BETHESDA, Md. - USEC Inc. (NYSE:USU) today reported a net loss for the year
ended December 31, 2011 of $540.7 million or $4.48 per basic and diluted share,
primarily reflecting the impact of write-offs associated with the American
Centrifuge project, tax-related valuation allowances and lower profit margin.
This compares to a net income of $7.5 million or 5 cents per diluted share (7
cents per basic share) for 2010.
The tax-related valuation allowance and charge
for the previously capitalized centrifuge machines were taken in the fourth
quarter ended December 31, 2011. USEC reported a net loss of $496.0 million or
$4.09 per basic and diluted share in the fourth quarter of 2011 compared to net
income of $9.0 million or 5 cents per diluted share (8 cents per basic share)
for the same quarter of 2010. The charge and the valuation allowance did
not affect the company's cash flow from operations.
The significant loss for 2011
reflects the confluence of several factors. Expense for advanced technology,
primarily related to the American Centrifuge project, totaled $273.2 million,
including $127.1 million of previously capitalized work in progress related to
earlier centrifuge machines that were determined to no longer be compatible
with the commercial plant design. In the second quarter of 2011, USEC also
expensed $9.6 million of previously capitalized construction work in progress
costs for machines that were damaged during lead cascade operations. Beginning
in the fourth quarter of 2011, all American Centrifuge related project costs
incurred have been expensed, including interest expense that previously would
have been capitalized. Advanced technology expense in the fourth quarter was $187.0
million.
The Company also recorded a
full valuation allowance for the net deferred tax assets of $369.1 million due
to cumulative losses incurred in recent years and due to the substantial
uncertainty of generating future taxable income that would lead to realization
of the net deferred tax assets. Gross profit declined $74.2 million in 2011
compared to 2010, reflecting lower sales volume and higher costs for separative
work units (SWU) and uranium sold and the effect of pension plan and postretirement
benefit plan curtailment charges related to the conclusion of contract services
work at the former Portsmouth Gaseous Diffusion Plant (GDP).
"Throughout 2011, USEC
worked diligently to overcome a number of significant challenges facing the
Company," said John K. Welch, USEC president and chief executive officer.
"Despite the lack of a conditional commitment for a loan guarantee, DOE's
proposal to share costs in a two-year research, development and demonstration
program reflects the importance the U.S. government places on having a source
of domestic uranium enrichment."
Welch said, "This year
will present additional challenges as we continue operating under significant
competitive and cost pressures, and we make important decisions regarding the
future of the Paducah plant. Nonetheless, we expect to sell more than 10
million SWU in 2012.. These sales will come from our substantial inventory,
from Paducah commercial production through at least midyear, and from our
supply contract with Russia.
"Notwithstanding these
challenges, we are focused on using our strengths as we transition our business
and operations. We have a decades-long reputation with our customers around the
world for delivering their nuclear fuel requirements in-spec and on time. We
have a proven record of obtaining increased efficiency from our enrichment
operations and working with our regulators to achieve a strong track record of
compliance," Welch said.
"Looking ahead, we have a
highly efficient commercial centrifuge machine that has the potential to
substantially reduce our power requirements and is an opportunity to position
us as a low-cost producer in the long term. We are focused on a path to remain
a leading supplier of enrichment to our customers and a contributor to U.S.
national security," he said.
Revenue
Revenue for the fourth quarter was $462.4
million, a decrease of 31 percent compared to the same quarter of 2010. Revenue
from the sale of SWU for the quarter was $394.2 million compared to $519.6
million in the same period of the prior year. Revenue from the sale of uranium
was $28.7 million, a decrease of $42.9 million from the same quarter last year.
Revenue from our contract services segment was $39.5 million compared to $75.2
million in the fourth quarter last year.
For the full year, revenue was $1.67 billion, a
decrease of $363.6 million from 2010. SWU volume declined 15 percent year over
year reflecting the variability in timing of utility customer orders. The
average SWU prices billed to customers increased 3 percent compared to 2010,
reflecting the general trend of higher prices under contracts signed in recent
years. The volume of uranium sold declined 53 percent and the average price
billed to customers increased 20 percent. Revenue from the contract
services segment was $209..1 million, a 25 percent decrease year over year due
primarily to the completion of clean-up activities at the former Portsmouth GDP
in September 2011..
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 December 31, 2011, deferred revenue totaled $181.5 million, compared to $176.1
million at December 31, 2010. The gross profit associated with deferred revenue
as of December 31, 2011, was $6.0 million.
A majority of reactors served by USEC are refueled on a 12-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, Expenses and Other Income
Cost of sales for 2011 for SWU
and uranium was $1.39 billion, a decrease of $232.1 million compared to 2010.
The 14 percent change is a result of the decline in SWU and uranium sold,
partially offset by higher unit costs. Cost of sales for SWU and uranium reflects
monthly moving average inventory costs based on production and purchase costs.
Cost of sales per SWU in 2011 was negatively impacted by higher purchase costs
under the Russian Contract, higher per SWU production costs and the
carry-forward effect of high costs in prior periods.
Production costs declined $57.1 million or 7
percent in 2011 compared to 2010. This was primarily a result of a 10 percent
reduction in overall production volume partially offset by a 4 percent increase
in unit production costs. USEC purchased 11 percent fewer megawatt hours with
the average cost per megawatt hour increasing 3 percent, reflecting higher fuel
cost adjustments by the Tennessee Valley Authority (TVA) as well as the fixed,
annual increase in the TVA contract price. The higher costs under the
TVA contract were partially offset by supplemental power purchases in the
summer months at lower market-based prices than the prior year. Purchase costs
for the SWU component of LEU under the Russian Contract increased $20.5 million
in 2011 compared to 2010 due to a 3 percent increase in the purchase cost per
SWU. Purchase prices paid under the Russian Contract are set by a pricing
formula that includes market-based price points.
In the contract services
segment, cost of sales was $196.5 million in 2011, a decrease of $57.3 million
or 23 percent. The net decrease was due primarily to the substantial completion
of contract work at the former Portsmouth plant at September 30, 2011.
The gross profit for 2011 was $84.2 million, a
decrease of $74.2 million or 47 percent over the previous year. The gross
profit margin for the year was 5.0 percent compared to 7.8 percent in 2010. The
lower gross profit margin primarily reflects lower margins in the LEU segment. In
addition, the profitability of the contract services segment declined $11.5
million, primarily due to additional cold shutdown services performed at the
Portsmouth site and contract fee recognition on certain contracts in 2010 as
well as $5.1 million in pension plan and postretirement benefit plan
curtailment charges in 2011. Gross profit from NAC was $8.8 million in 2011, an
increase of $3.3 million year over year.
Advanced technology expenses,
primarily related to the demonstration of the American Centrifuge technology,
were $273.2 million for the full year of 2011, an increase of $163.0 million
compared to 2010. As previously disclosed, USEC expensed $136.7 million of
capitalized work-in-progress cost related to damaged centrifuge machines as
well as earlier machines that were determined to no longer be compatible with
the commercial plant design. In addition, $9.9 million was expensed in the
fourth quarter of 2011 for previously capitalized amounts related to
prepayments made to a supplier for the American Centrifuge Plant (ACP). The
Company's contract with this supplier could not be extended and this amount
represents the remaining balance for prepayments for materials that USEC will
not purchase under the contract.
Beginning with the start of the
fourth quarter of 2011, all ACP-related project costs incurred have been
expensed, including interest expense that previously would have been
capitalized. Spending at the reduced levels relates primarily to development
and maintenance activities rather than capital asset creation. USEC also
expects to expense costs under the research, development and demonstration
(RD&D) program as incurred. Capitalization of expenditures related to ACP
has ceased until commercial plant deployment resumes.
Advanced technology costs
include expenses in 2011 of $1..6 million compared to $2.4 million in 2010 by
NAC to develop and expand its MAGNASTOR� technology and its transportation
counterpart, MAGNATRAN.
Selling, general and administrative expenses in
2011 were $62.1 million, an increase of $3.2 million compared to 2010. The
higher expense reflects an increase of $1.8 million in consulting costs and an
increase of $0.3 million in director compensation related to two additional
directors in 2011.
In January 2011, USEC executed
an exchange with a noteholder whereby the Company 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, a gain on debt extinguishment of $3.1
million was recognized in the first quarter of 2011.
During 2010, USEC worked under
a cooperative agreement entered into with DOE to provide for pro-rata cost
sharing support for continued funding of American Centrifuge activities with a
total cost of $90 million. In 2010, USEC made qualifying American Centrifuge
expenditures of $88.8 million, and DOE's pro-rata share of 50 percent, or $44.4
million, was recognized as other income in 2010. The program was completed in
January 2011 when USEC made the remaining expenditures and recognized the
income in the first quarter of 2011.
Future tax consequences of
temporary differences between carrying amounts for financial reporting purposes
and USEC's estimate of the tax bases of its assets and liabilities result in
deferred tax assets and liabilities. In 2011, the net increase of $369.1
million in the valuation allowance reduced the net deferred tax assets to their
realizable value as of the end of the year. A full valuation allowance against
net deferred taxes was recorded in 2011 due to cumulative losses incurred in
recent years and due to substantial uncertainty to generate future taxable
income that would lead to realization of the net deferred tax assets. The
ultimate realization of the net deferred tax assets is dependent upon
generating sufficient taxable income in future years when deferred tax assets
are recoverable or are expected to reverse.
Cash Flow
At December 31, 2011, USEC had a cash balance
of $37.6 million compared to $151.0 million at December 31, 2010. Cash
flow from operations in 2011 was $56.3 million compared to cash flow from
operations of $22.5 million in the previous year. Positive cash flow resulted
from the decline in accounts receivable of $146.6 million. Net inventories
increased $75.2 million representing higher unit costs. Capital expenditures,
primarily related to construction of the ACP, totaled $152.8 million during
2011 compared to $162.2 million in 2010. As noted above, USEC ceased
capitalizing spending on the ACP as of September 30, 2011.
On March 13, 2012, USEC extended its credit
facility with a group of lenders. JPMorgan Chase Bank serves as
administrative and collateral agent for the facility that expires on May 31,
2013. The amended facility of up to $235.0 million includes a revolving credit
facility of up to $150 million (including up to $75 million in letters of
credit) and a term loan of $85 million. This replaces the credit facility that
included a term loan of $85 million that expires May 31, 2012. Additional
details regarding the credit facility can be found in the Form 8-K Current
Report filed March 13, 2012.
Transition of Contract Services Segment
Historically, the majority of revenues from the
contract services segment resulted from work performed under contract with DOE
to maintain and prepare the former Portsmouth GDP for decontamination and
decommissioning (D&D). On September 30, 2011, contracts for maintaining the
Portsmouth facilities and performing services for DOE expired, and USEC completed
the transition of facilities to a new DOE contractor responsible for the
D&D of the Portsmouth site. Consequently, USEC ceased providing
government contract services at Portsmouth on September 30, 2011. The Company
will continue to provide limited services to DOE and its contractors at the
Paducah site and at the Portsmouth site related to facilities we continue to
lease for the ACP. Revenue from the contract services segment, however, will
decrease compared to prior periods and will be comprised primarily of revenue
generated by NAC.
NAC provides nuclear energy
services and technologies, specializing in design, fabrication and
implementation of spent nuclear fuel technologies, including the high capacity
MAGNASTOR system. NAC also provides consulting services and nuclear materials
transportation.
2012 Outlook
USEC will make a number of
decisions during 2012 regarding its business that will significantly affect
financial results for the year, and future years. For example, the decision
regarding when to cease enrichment at the Paducah plant will affect cost of
production and ultimately cost of sales. We are also working with DOE and
Congress regarding funding for the RD&D program. USEC has entered into an
agreement with DOE that enables us to spend up to $44 million under the
RD&D program, which is expected to fund program activities through March
31, 2012. As a consequence, the amount of advanced technology expense beyond
the first quarter is uncertain. Given this uncertainty in two significant areas
of business, USEC is providing limited guidance for 2012 at this time.
Regardless of the decision on
continued operation of Paducah, USEC has significant sales of SWU in our
backlog for delivery in 2012. Revenue from the sale of SWU is expected to be in
a range of $1.45 and $1.50 billion, or roughly $100 to $150 million more than
2011. Uranium revenue will be dependent on the level of Paducah production in
2012 because uranium available for sale is a function of underfeeding the
enrichment process. We anticipate buying 5.5 million SWU from Russia under the
Megatons to Megawatts program during 2012. Under the pricing formula, the price
paid to Russia will increase 2 percent compared to deliveries in 2011.
In prior years, contract work
at the former Portsmouth GDP for DOE represented approximately three-quarters
of revenue for the contract services segment. USEC's contract services work at
Portsmouth was largely completed in September 2011 and revenue for that segment
is expected to decline significantly in 2012. Contract services segment revenue
will also be affected by any decision regarding continued production at
Paducah, and our subsidiary NAC will represent a growing percentage of revenue
for the segment.
The Company expects to make a
decision regarding operation of the Paducah plant by May 2012, although WARN
Act notices to affected employees could be sent out well before that date. USEC
is engaged in a multi-faceted review regarding the facility that involves
customers, DOE and power supplier TVA. USEC has significant inventory of LEU
and expects to continue to purchase LEU from Russia. However, based on our
current view of the market, USEC does not see sufficient demand to support
production of low enriched uranium for utility customers after our power
contract with TVA expires. A decision to cease commercial enrichment would
affect financial results for 2012. For example, expensing certain assets at
Paducah, such as previously capitalized leasehold improvements, machinery and
equipment located there could be accelerated. USEC could also incur significant
costs related to severance costs and curtailment charges related to our
postretirement benefit plans. Such costs would likely result in a significant
net loss for the year. Alternatively, in lieu of a decision to cease full
Paducah commercial operations, the company could pursue reduced operations or
take actions to reduce fixed costs at the plant that could have negative
consequences on results of operations and financial condition.
USEC Inc., a global energy company, is a
leading supplier of enriched uranium fuel for commercial nuclear power plants.
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