Get Started for Free Contexxia identifies hard-to-find pieces of information in SEC filings. No more highlighters, no more redlining, no more poring over huge documents. CENTRUS ENERGY CORP (1065059) 10-Q published on Aug 05, 2020 at 5:58 pm
Reporting Period: Jun 29, 2020
Our order book of sales under contract in the LEU segment extends to 2030. As of June 30, 2020, the order book was $1.0 billion. The order book represents the estimated aggregate dollar amount of revenue for future SWU and uranium deliveries under contract and includes $0.3 billion of Deferred Revenue and Advances from Customers. Due to the nature of the long term contracts and our order book, we have visibility of a significant portion of our anticipated revenue for 2021 and 2022 in the LEU segment. However, these long term contracts are subject to significant risks and uncertainties, including potential import laws and restrictions. In particular, the portion of our order book that we may fulfill with LEU received under our Russian Supply Agreement (“RSA”) is subject to uncertainties related to the administrative review and possible extension of the RSA. For further discussion of these risks and uncertainties, refer to Part II, Item 1A, Risk Factors - Restrictions on imports or sales of SWU or uranium that we buy from our Russian supplier could adversely affect profitability and the viability of our business, including new restrictions as a result of the expiration of the RSA or amendments to the RSA on terms unfavorable to us, as well as - Duties or restrictions on imports or sales of SWU or uranium that we buy from foreign suppliers, or sanctions applicable to those suppliers or their affiliates, could adversely affect profitability and the viability of our business, and Part I, Item 1A, Risk Factors - The dollar amount of the sales order book, as stated at any given time, is not necessarily indicative of future sales revenues and is subject to uncertainty in our Annual Report on Form 10-K for the year ended December 31, 2019.
The negotiations between the DOC and Rosatom are ongoing, and the parties have not yet reached agreement. The most significant issue to the Company in the ongoing negotiations is the treatment of the Russian Supply Agreement on a going-forward basis in the context of the cap on imports of Russian LEU that would apply under an extended RSA. In June 2020, the DOC indicated in a publicly-available letter to certain U.S. Senators (the “June Letter”) that, as part of its negotiating position on the extension of the RSA, the DOC is seeking to respect the commercial interests of U.S. parties who, by the time negotiations of the RSA extension began in February 2019, had already entered into contracts to purchase uranium products from Russia in the post-2020 time period. We have asked the DOC that the Russian Supply Agreement (signed in 2011) be included among those contracts and have proposed to the DOC an amount of quota to satisfy our anticipated operational needs. Although the negotiations are ongoing, our current expectation is that, if an agreement were to be reached that included quota in the amounts we have proposed, we would be substantially protected from import restrictions and could continue to meet our obligations under the Russian Supply Contract, taking into account foreign sales that we could make that would not require quota for delivery of Russian LEU. However, the DOC also stated in the June Letter that significant gaps on key issues have persisted in the negotiations with Rosatom and, accordingly, the ongoing negotiations are subject to significant uncertainty. Therefore, there can be no assurance that the DOC will reach agreement with Rosatom or that any agreement will ultimately protect the amount of LEU we currently expect to take under the Russian Supply Agreement.
On October 31, 2019, we signed the cost-share HALEU Contract with DOE to deploy a cascade of centrifuges to demonstrate production of HALEU for advanced reactors. The three-year program has been under way since May 31, 2019, when the Company and DOE signed an interim HALEU letter agreement that allowed work to begin while the full contract was being finalized. We continue to invest in advanced technology because of the potential for future growth into new areas of business for the Company, while also preserving our unique workforce at our Technology and Manufacturing Center in Oak Ridge, Tennessee. The Company entered into this cost-share contract with DOE as a critical first step on the road back to the commercial production of enriched uranium, which the Company had terminated in 2013 with the closure of the Paducah Gaseous Diffusion Facility. The HALEU Contract, once fully implemented, will result in the Company having demonstrated the capability to enrich uranium to the 19.75 percent concentration in the uranium -235 isotope that is required by many of the advanced reactor concepts now under development. Moreover, by 2022 the Company expects to have secured an NRC license for production on 19.75 percent HALEU, opening the door to the possibility of significant sales of HALEU to both commercial and government customers. In the latter category, the Company is closely following the implementation of Project Pele, which is supporting the development of micro-nuclear power plants, which in time could provide a significant source of demand for HALEU-based nuclear fuel.
It is likely that such restrictions will be imposed prior to the end of 2020. The RSA is subject to periodic review by the DOC and, as described in Part I, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations - Market Uncertainties, on June 17, 2020, the DOC preliminarily found in the Second Administrative Review of the RSA that the RSA does not meet the applicable statutory requirements. A final determination in the Second Administrative Review is due to be issued by the DOC on October 5, 2020. If the DOC determines that (i) there is evidence of non-compliance with the RSA, and/or (ii) the RSA does meet the statutory requirements, the DOC could terminate the RSA, restart the antidumping investigation that the RSA suspended, and begin collecting cash deposits to cover applicable tariffs in excess of 115% of the value of imports of Russian uranium products, including the LEU that the Company imports into the United States under the Russian Supply Agreement. Further, these cash deposits could be applied retroactively to periods before the final determination, requiring Centrus to deposit cash equal to 115% of the value of Russian LEU imported under the Russian Supply Agreement during such periods. The requirement to post cash deposits and the potential duties due upon the conclusion of the antidumping investigation would make the LEU containing the SWU that we purchase under the Russian Supply Agreement too expensive to place into the U.S. market, and our ability to place Russian LEU outside of the U.S. is limited. Similarly, if cash deposits were to apply retroactively, the Company would not be able to mitigate these losses through purchases from alternative supplies. Because (i) the majority of the LEU we place into existing and future contracts with customers is sourced from Russia under the Russian Supply Agreement and (ii) a significant portion of our revenues result from the sale of the SWU contained in the Russian LEU we place in these contracts, the imposition of cash deposits and duties following a determination by the DOC to restart the antidumping investigation would result in significant financial losses to the Company and potentially result in our business no longer being viable.
In February 2019, the DOC formally opened negotiations with Rosatom with respect to a possible extension of the term of the RSA. In connection with these negotiations, the DOC is seeking a significant extension of the RSA. We are working with industry stakeholders and others to ensure that the extension will include sufficient quota to allow the Russian Supply Agreement to be fully implemented, but it is possible that the terms of the extension will not expressly protect our ability to import LEU under the Russian Supply Agreement or will not require that sufficient or any available quota be allocated to those imports. Because the Russian Supply Agreement does not stipulate what would happen if quotas or other restrictions are imposed post-2020, there is no assurance that the Company will be permitted to use any future quotas to import LEU under the Russian Supply Agreement post-2020. Further, even if TENEX were willing to grant the Company the right to use all or a portion of any new quotas, there is no assurance that the new quotas would be sufficient to cover all the LEU that the Company is required to order under the Russian Supply Agreement after 2020. And while the Company has asked the DOC to provide sufficient quota to cover our obligations under the Russian Supply Agreement, there is no assurance that the final terms of an extended RSA will include sufficient quota for the Russian Supply Agreement. Even if sufficient quota is granted to TENEX to cover the Russian Supply Agreement, TENEX may ultimately elect not to use that quota for the LEU under the Russian Supply Agreement.