Centrus Energy Corp: Form 10-Q for the period ended Sep 30, 2023

The following discussion should be read in conjunction with, and is qualified in its entirety by reference to, the unaudited Consolidated Financial Statements and related notes appearing elsewhere in this report.

This discussion contains forward-looking statements that involve risks and uncertainties. Actual results could differ significantly from the results discussed in the forward-looking statements particularly in light of the economic, social, and market uncertainty created by, among other things, the war in Ukraine. See “Forward-Looking Statements” at the beginning of this Quarterly Report on Form 10-Q.

Overview

Centrus Energy Corp., a Delaware corporation (“Centrus,” the “Company”, “we” or “us”), is a trusted supplier of nuclear fuel components and services for the nuclear power industry, which provides a reliable source of carbon free energy. References to “Centrus”, the “Company”, “our”, or “we” include Centrus Energy Corp. and its wholly owned subsidiaries as well as the predecessor to Centrus, unless the context indicates otherwise.

Centrus operates two business segments: (a) LEU, which supplies various components of nuclear fuel to commercial customers from our global network of suppliers, and (b) Technical Solutions, which provides advanced engineering, design, and manufacturing services to government and private sector customers and is deploying uranium enrichment and other capabilities necessary for production of advanced nuclear fuel to power existing and next-generation reactors around the world.

Our LEU segment currently provides most of the Company’s revenue and involves the sale of enriched uranium, the fissile component of nuclear fuel primarily to utilities that operate commercial nuclear power plants. The majority of these sales are for the enrichment component of LEU, which is measured in SWU. Centrus also sells natural uranium (the raw material needed to produce LEU) and occasionally sells uranium concentrates, uranium conversion or LEU with the natural uranium hexafluoride and SWU components combined into one sale.

LEU is a critical component in the production of nuclear fuel for reactors that produce electricity. We supply LEU and its components to both domestic and international utilities for use in nuclear reactors worldwide. We provide LEU from multiple sources, including our inventory, medium and long-term supply contracts, and spot purchases. As a long-term supplier of LEU to our customers, our objective is to provide value through the reliability and diversity of our supply sources.

Published spot price indicators for SWU reached historic highs in April 2009 at $163 per SWU. In the years following the 2011 Fukushima accident in Japan, spot prices declined more than 75%, bottoming out in August 2018 at $34 per SWU. This was followed by a slow and steady rise, reaching $56 per SWU by December 31, 2021. In 2022, spot prices increased substantially, reaching $110 per SWU by December 31, 2022. In 2023, spot prices continue to increase, reaching $138 on September 30, 2023. This represents an increase of 25% since the beginning of the year and 306% over the 2018 historic low. This surge in the SWU spot price beginning in 2022 has been driven by uncertainty created as a result of Russia’s invasion of Ukraine, coupled with growing interest in nuclear power as a source of reliable carbon-free energy.

When Russian supply is included, the uranium enrichment segment of the global nuclear fuel market is oversupplied. But without Russian supply, the global market for uranium enrichment would be undersupplied. Changes in the supply-demand balance and in the competitive landscape arising from the war in Ukraine may continue to affect pricing trends, change customer spending patterns, and create uncertainty in the uranium market. At the same time, there remains uncertainty about future demand for nuclear power generation. To address these changes and uncertainties, we will continue to evaluate opportunities to grow our business organically or through acquisitions and other strategic transactions.

Our Technical Solutions segment is dedicated to the restoration of America’s domestic uranium enrichment capability to play a critical role in meeting U.S. national security and energy security requirements and advancing America’s nonproliferation, energy, and climate objectives. Our Technical Solutions segment also is focused on repairing broken and vulnerable supply chains, providing clean energy jobs, and supporting the communities in which we operate. Our goal is to deliver major components of the next-generation nuclear fuels that will power the future of nuclear energy as it provides reliable carbon-free power around the world.

Under the HALEU Demonstration Contract, Centrus completed construction of a cascade of sixteen AC100M centrifuges in Piketon, Ohio, for the DOE to demonstrate HALEU production. The HALEU Demonstration Contract was originally set to expire on June 1, 2022. However, the DOE extended the HALEU Demonstration Contract to November 30, 2022 with closeout activities to be completed this year. Due to challenges the DOE experienced in providing withdrawal cylinders as government furnished equipment, the DOE elected to change the scope of the HALEU Demonstration Contract and moved the operational portion of the demonstration to a new, competitively awarded contract that provides for operations beyond the term of the HALEU Demonstration Contract. DOE incrementally funded the HALEU Demonstration Contract with total funding to date of $173.0 million.

On November 10, 2022, after a competitive solicitation, the DOE awarded the HALEU Operation Contract to the Company and work began on December 1, 2022. The base contract value is approximately $150 million in two phases through 2024. Phase 1 includes an approximately $30 million cost share contribution from Centrus matched by approximately $30 million from the DOE to complete construction of the cascade, begin operations and produce the initial 20 kilograms of HALEU UF6 by no later than December 31, 2023.

Phase 2 of the contract includes continued operations and maintenance, and production for a full year at an annual production rate of 900 kilograms of HALEU UF6. The DOE will own the HALEU produced from the demonstration cascade and Centrus will be compensated on a cost-plus-incentive-fee basis, with an expected Phase 2 contract value of approximately $90 million, subject to Congressional appropriations. The HALEU Operation Contract also gives DOE options to pay for up to nine additional years of production from the cascade beyond the base contract; those options are at the DOE’s sole discretion and subject to the availability of Congressional appropriations. Concurrently, pursuant to an amendment to our lease for the Piketon facility, the DOE assumed all D&D liabilities arising out of the HALEU Operation Contract.

Under the HALEU Operation Contract, DOE is obligated to provide the 5B cylinders necessary to collect the output of the cascade, but supply chain challenges have created difficulties for DOE in securing enough 5B cylinders for the entire year. Centrus’ delivery of the 900 kilograms is subject to the ability of DOE to provide the 5B cylinders on a timeline that allows for continuous production throughout the year. Centrus anticipates that any potential bottleneck in obtaining 5B cylinders will be temporary and that the supply chain for the 5B cylinders will ramp up over time now that HALEU production is under way.

To support the DOE in mitigating the risk of delayed delivery of 5B cylinders, the Company received technical direction from the DOE to procure compliant 5B cylinders and components while the contractual obligation to furnish compliant 5B cylinders under the HALEU Operation Contract continues to rest with the DOE. The Company is also performing additional work on infrastructure and facility repairs under DOE’s technical direction. On September 28, 2023, the DOE modified the HALEU Operation Contract to incorporate additional scope for infrastructure and facility repairs, and costs associated with 5B cylinder refurbishment, for an estimated additional contract value of $5.8 million. On October 19, 2023, the DOE provided additional funding of $5.5 million for the additional scope under the HALEU Operation Contract. DOE is funding the contract incrementally with total funding to date of $38.8 million. The Company’s goal is to ultimately scale up production of HALEU, to meet the needs of new and existing reactors as well as national security and other U.S. government requirements for enriched uranium, subject to funding and/or off-take commitments.

On February 9, 2023, the Company announced that construction and initial testing of the demonstration cascade and most of the support systems were complete. On June 12, 2023, following the completion of its operational readiness reviews, the NRC issued a letter authorizing the Company to introduce uranium hexafluoride into the HALEU cascade of centrifuges. This is a critical milestone in advancing toward the production of HALEU and the final NRC approval required before starting enrichment operations. During the third quarter of 2023, the Company completed construction of the remaining support systems, including a fissile materials storage area, for HALEU storage. On September 6, 2023, the Company announced that it was conducting final system tests and other preparations so that production of HALEU could begin. On September 21, 2023, the NRC granted final approval for the company to produce the quantity of HALEU required by Phase 1 of the contract. On October 11, 2023, the Company announced that it began enrichment operations in Piketon, Ohio. On November 7, 2023, the Company announced that it made its first delivery of HALEU to the DOE, completing Phase 1 by successfully demonstrating its HALEU production process.

The DOE is contemplating awarding additional contracts to ensure availability of HALEU for the ARDP and for the advanced reactor market in general, and received a $700 million congressional appropriation from the Inflation Reduction Act as a first step in establishing a domestic supply chain for HALEU. On June 5, 2023, the DOE issued two draft requests for proposals (“RFPs”) seeking public comment, the first focusing on production of HALEU and the second focusing on deconversion of HALEU into different forms used to fabricate fuels needed by various advanced reactor developers. Centrus submitted comments in response to the draft RFPs to ensure the RFP promotes deployment of HALEU capacity to meet U.S. commercial and government needs for HALEU produced with U.S. technology. The Company expects to submit a bid once a final RFP is issued, with the goal of expanding HALEU production capability at the Piketon facility, subject to availability of funding and/or off-take commitments. At the present, it is not clear whether DOE will adopt the Company’s RFP comments.

The war in Ukraine has contributed to a significant increase in market prices for enrichment and (along with proposals to limit imports of LEU from Russia) prompted calls for public and private investment in new, domestic uranium enrichment capacity not only for HALEU production but also for LEU production to support the existing fleet of reactors. As a result, Centrus is exploring the opportunity to deploy LEU enrichment alongside HALEU enrichment to meet a range of commercial and U.S. government requirements, which would bring cost synergies while increasing revenue opportunities. Our ability to deploy LEU and/or HALEU enrichment, and the timing, sequencing, and scale of those capabilities, is subject to the availability of funding and/or off-take commitments.

The Energy Act of 2020, which was signed into law in December 2020, requires the DOE to establish a program to support the availability of HALEU for civilian domestic research, development, demonstration, and commercial use. The Energy Act also reauthorized DOE nuclear energy research, development, demonstration, and commercial application activities, including advanced fuel, research and development for advanced reactors, used fuel technologies, and integration of nuclear energy systems for both existing plants and advanced nuclear concepts. It also authorized the funding of an ARDP which was launched by the DOE in May 2020. There are a number of advanced reactors under development that would use HALEU. Nine of the ten advanced reactor designs selected by the DOE for its ARDP will require HALEU. Various agencies of the U.S. government, including the U.S. Department of Defense, the Defense Advanced Research Projects Agency, and the DOE are building microreactors which demonstrates the focus on both the development of microreactors and HALEU. We believe our investments in advanced enrichment technology and our progress in demonstrating HALEU production will position the Company to meet the needs of government and commercial customers in the future as they deploy advanced reactors and next generation fuels and also offers potential cost synergies for a return to LEU production.

We are also actively considering and expect to consider potential strategic transactions from time to time, which could involve, without limitation, acquisitions and/or dispositions of businesses or assets, joint ventures or investments in businesses, products or technologies or changes to our capital structure. For further discussion, refer to Liquidity and Capital Resources in this Quarterly Report on Form 10-Q.

Market Conditions and Outlook

The global nuclear industry outlook has begun to improve after many years of decline or stagnation. The development of advanced small and large-scale reactors, innovative advanced fuel types, and the commitment of nations to begin deploying nuclear power or to increase the share of nuclear power in their nations has created optimism in the market. Part of the momentum has resulted from efforts to lower greenhouse gas emissions to combat climate change and improve health and safety.

According to the WNA, as of September 2023, there were 60 reactors under construction worldwide, about a third of which are in China. The United States, with over 90 operating reactors, remains the world’s largest market for nuclear fuel. The nuclear industry in the United States, Japan, and Europe faces headwinds as well as opportunities. In the United States, the industry has been under pressure from the expansion of subsidized renewable energy as well as relatively low-cost natural gas resources in recent years, although natural gas prices in the U.S. electricity sector tripled between 2020 and 2022 according to data from the EIA. Twelve U.S. reactors have prematurely shut down in the past ten years and others could shut down in the next few years. At the same time, one large reactor is currently under construction, and the DOE recently released a report outlining a pathway to deployment of approximately 200 gigawatts of additional capacity by 2050 which would triple the nuclear energy capacity in the United States.

The IEA projects that global nuclear energy generation will grow substantially in the next three decades. In the IEA’s 2023 World Energy Outlook, nuclear generation is forecasted to grow by 25 percent by 2030 and 45 percent by 2040 under the “Stated Policies” scenario. In the “Net Zero Emissions by 2050” scenario, nuclear generation would grow by 47 percent by 2030 and more than double by 2040.

As a consequence of the March 2011 earthquake and tsunami in Japan, over 60 reactors in Japan and Germany were taken offline, and other countries curtailed or slowed their construction of new reactors or accelerated the retirement of existing plants. Eleven reactors in Japan have restarted, additional reactors are expected to restart through 2024, and more of Japan’s reactors are expected to restart in subsequent years. Due to the war in Ukraine, the EU is encouraging its member countries to reconsider the planned early retirement of existing plants in order to reduce reliance on Russian gas imports.

In October 2020, the DOC reached an agreement with the Russian Federation on an extension of the RSA, a trade agreement that allows for Russian-origin nuclear fuel to be exported to the United States in limited quantities. The two parties agreed to extend the agreement through 2040 and to set aside a significant portion of the quota for Centrus’ shipments to the United States through 2028 to perform under our TENEX Supply Contract. This outcome allowed for sufficient quota for Centrus to continue serving its utility customers and support its investments in building new capacity. Use of this quota is subject to compliance with limitations under the RSA. These limitations include a requirement that we return natural uranium to TENEX for the LEU we receive under the TENEX Supply Contract at approximately the same time that we deliver the LEU to our customers. Our ability to meet this requirement depends on the capacity or willingness of the facilities where natural uranium is supplied to us by customers, to allow us to deliver this natural uranium to TENEX. We were recently notified by one facility that it will no longer receive natural uranium for TENEX. As a result, we will need to rely to a greater extent on deliveries at other processors or explore other options in order to comply with the RSA’s natural uranium delivery requirement.

On July 13, 2023, the Company and TerraPower, LLC (“TerraPower”) entered into a memorandum of understanding (“MOU”) to expand their collaboration aimed at establishing commercial-scale, domestic production capabilities for HALEU to fuel the Natrium TM reactor that TerraPower is building in Wyoming. Under this MOU, the Company and TerraPower will collaborate to ensure the Natrium demonstration reactor has access to HALEU at the milestones necessary to meet the project's 2030 operation date. Subject to a definitive agreement to be negotiated, Centrus will work toward scaling up production capacity with additional centrifuge cascades to meet TerraPower's fuel requirements.

On August 28, 2023, the Company and Oklo Inc. (“Oklo”) announced a new MOU to support the deployment of Oklo’s advanced fission powerhouses and advanced nuclear fuel production in Southern Ohio subject to a definitive agreement to be negotiated. Oklo and Centrus plan to enter into a broad range of collaboration programs supporting the development and operation of Oklo’s Aurora powerhouses, including supply of HALEU produced by Centrus at the Piketon, Ohio facility. Centrus also intends to buy clean, reliable, and affordable energy from Oklo’s planned Ohio plants to power its HALEU production facility.

The war in Ukraine has escalated tensions between Russia and the international community. As a result, the United States and other countries have imposed, and may continue imposing, additional sanctions and export controls against certain Russian products, services, organizations and/or individuals. While sanctions imposed to date do not preclude the import of Russian uranium products into the United States, it is possible that additional restrictions could be added in the future that would affect our ability to purchase and re-sell Russian uranium enrichment, or implement the TENEX Supply Contract, which could have a negative material impact on our business. Further, sanctions by the United States, Russia or other countries may impact our ability and cost to transport, export, import, take delivery, or make payments related to the LEU we purchase and may require us to increase purchases from non-Russian sources to the extent available. For example, due to restrictions imposed by Canada on the ability of Canadian persons and entities to provide ocean transportation services to Russia, a permit is required for our shipper, a Canadian company, to transport the LEU that we procure under the TENEX Supply Contract to the United States. A Canadian permit issued to our shipper was recently extended to July 2024, but for so long as the sanctions remain in place, the shipper will require further extensions for us to continue to use the shipper for imports of this LEU beyond July 2024.

In response to the war in Ukraine, there have been proposals in the U.S. Congress and elsewhere to ban imports of uranium products that could cut off or reduce our ability to import LEU in one or more years under the TENEX Supply Contract. None of these proposals have been adopted as of the date of this filing, but in a recent fact sheet on the need for the U.S. Congress to provide additional funding for domestic initiatives, including $2.2 billion for U.S. enrichment capacity, the White House stated that a long-term ban on enriched uranium imports from the Russian Federation into the United States is needed for this funding to be successful.

The proposals represent a significant risk to our business because the TENEX Supply Contract is the major source of supply that the Company relies upon today to meet its delivery obligations and to earn the revenues needed to fund our advanced technology work. We are following these proposals closely and taking steps where possible to request changes that would improve prospects of securing a waiver if sanctions are imposed. However, given that our ability to secure a timely waiver is not assured under any circumstances, we believe these proposals could pose a risk of significant harm to our business if enacted.

The expanding sanctions imposed by the United States and foreign governments on the mechanisms used to make payments to Russia and to obtain services including transportation have increased the risk that implementation of the TENEX Supply Contract may be disrupted in the future. Accordingly, we continue to monitor the situation closely and assess the potential impact of any new sanctions and how the impact on the Company might be mitigated.

For further discussion of these risks and uncertainties, refer to Part I, Item 1A, Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2022.

Operating Results

Our revenues, operating results, and cash flows can fluctuate significantly from quarter to quarter and year to year. Our Order Book in the LEU segment consists primarily of long-term, fixed commitment contracts, and we have visibility on a significant portion of our revenue for 2023-2027.

Given the current uncertainty and disruption in the market, due to, among other things, the war in Ukraine, we are no longer providing guidance on our results of operations for 2023. Please see Forward Looking Statements at the beginning of this Quarterly Report on Form 10-Q.

Our Order Book in the LEU segment extends to 2030. As of September 30, 2023 and December 31, 2022, our Order Book was approximately $1.0 billion. The Order Book is the estimated aggregate dollar amount of revenue for future SWU and uranium deliveries, and includes approximately $0.3 billion of deferred revenue and advances from customers as of September 30, 2023, whereby customers have made advance payments to be applied against future deliveries. No orders in our Order Book are considered at risk related to customer operations. However, these medium and long-term contracts are subject to significant risks and uncertainties, including existing import laws and restrictions such as the RSA, which limits imports of Russian uranium products into the United States and applies to our sales using material procured under the TENEX Supply Contract, as well as the potential for additional sanctions and other restrictions affecting the Company or its suppliers, in response to the evolving situation regarding the war in Ukraine.

Our future operating results are subject to uncertainties that could affect results either positively or negatively. Among the factors that could affect our results are the following:

• Armed conflicts, including the war in Ukraine, government actions and other events or third-party actions that disrupt supply chains, production, transportation, payments, and importation of nuclear materials or other critical supplies or services;
• The potential for sanctions and other measures affecting the importation, sales or purchases of SWU or uranium or goods or services required for the sale, purchase, transportation or delivery of such SWU or uranium;
• The availability and terms of additional purchases or sales of SWU and uranium;
• Conditions in the LEU and energy markets, including pricing, demand, operations, government restrictions on imports, exports or investments, and regulations of our business and activities and those of our customers, suppliers, contractors, and subcontractors;
• Timing of customer orders, related deliveries, and purchases of LEU or LEU components;
• Costs of and future funding and demand for HALEU;
• Financial market conditions and other factors that may affect pension and benefit liabilities and the value of related assets;
• The outcome of legal proceedings and other contingencies;
• Potential use of cash for strategic or financial initiatives;
• Actions taken by customers and suppliers, including actions that might affect existing contracts;
• The government’s inability to satisfy its obligations, including supplying government furnished equipment under its agreements with the Company or processing security clearances due to a shutdown or other reasons; and
• Market, international trade, and other conditions impacting Centrus’ customers and the industry.

For further discussion of these uncertainties, refer to Part I, Item 1A, Risk Factors, in our Annual Report on Form 10-K for the year ended December 31, 2022.

Revenue

We have two reportable segments: the LEU segment and the Technical Solutions segment.

Revenue from our LEU segment is derived primarily from the following:

• sales of the SWU component of LEU,
• sales of natural uranium hexafluoride, uranium concentrates or uranium conversion, and
• sales of enriched uranium product that include both the natural uranium hexafluoride and SWU components of LEU.

Our Technical Solutions segment reflects our technical, manufacturing, engineering, and operations services offered to public and private sector customers, including engineering and testing activities as well as technical and resource support currently being performed by the Company. This includes the HALEU Operation Contract and other contracts with public and private sector customers.

SWU and Uranium Sales

Revenue from our LEU segment accounted for approximately 79% and 86% of our total revenue for the three and nine months ended September 30, 2023, respectively. The majority of our customers are domestic and international utilities that operate nuclear power plants, with international sales constituting approximately 42% of revenue from our LEU segment since 2021. Our agreements with electric utilities are primarily medium and long-term fixed-commitment contracts under which our customers are obligated to purchase a specified quantity of the SWU component of LEU from us. Contracts where we sell both the SWU and natural uranium hexafluoride components of LEU to utilities or where we sell natural uranium hexafluoride to utilities and other nuclear fuel related companies are generally shorter-term, fixed-commitment contracts. Individual customer orders for the SWU component of LEU fulfilled in the nine months ended September 30, 2023 averaged approximately $6.4 million per order. As a result, a relatively small shift in the timing of customer orders for LEU may cause significant variability in our operating results year over year.

Utility customers, in general, have the option to make payment but defer receipt of SWU and uranium products purchased from Centrus beyond the contractual sale period, resulting in the deferral of costs and revenue recognition. Refer to Note 2, Revenue and Contracts with Customers, of the Consolidated Financial Statements for further details.

Our financial performance over time can be affected significantly by changes in prices for SWU and natural uranium hexafluoride. Market prices for SWU and uranium significantly declined from 2011 until mid-2018, when they began to trend upward. More recently, market uncertainty in the wake of the Russian invasion of Ukraine has driven SWU and uranium prices sharply higher. Since our sales Order Book includes contracts awarded to us in previous years, the average SWU price billed to customers typically lags published price indicators by several years. While some sales reflect the low prices prevalent in recent years, certain older contracts included in our sales Order Book have prices that are significantly above current market prices.

Recent proposals to severely limit or cut off supply of LEU from Russia have drawn attention to the potential for significant tightening of supplies in the market. Russian enrichment plants represent 46% of the world’s capacity, and Russian capacity significantly exceeds its domestic needs. According to data from the WNA, the annual enrichment requirements of reactors worldwide outside of Russia vastly exceeds the available supply of non-Russian enrichment, which potentially threatens the viability of some reactors, including those in the United States. While inventories and increased production at non-Russian plants may mitigate the shortfall, these options would not fully replace Russian supply. Deployment of new capacity ultimately could replace Russian enrichment but this capacity will take a number of years and significant funding from private and/or government sources to come online.

The following chart summarizes long-term and spot SWU price indicators, and a spot price indicator for UF6, as published by TradeTech, LLC in Nuclear Market Review:

SWU and Uranium Market Price Indicators*

* Source: Nuclear Market Review, a TradeTech publication, www.uranium.info (http://www.uranium.info)

Our contracts with customers are denominated primarily in U.S. dollars, and, although revenue has not been materially affected by changes in the foreign exchange rate of the U.S. dollar, we may have a competitive price advantage or disadvantage in obtaining new contracts in a competitive bidding process depending upon the weakness or strength of the U.S. dollar. Under a customer contract that commenced deliveries in 2023, payments are denominated in euros and may be subject to exchange rate risk. Costs of our primary competitors are denominated in other currencies. Our contracts with suppliers are primarily denominated in U.S. dollars. We have a SWU supply agreement, commencing in 2023, with prices payable in a combination of U.S. dollars and euros, but with a contract-defined exchange rate.

On occasion, we will accept payment for SWU in the form of natural uranium hexafluoride. Revenue from the sale of SWU under such contracts is recognized at the time LEU is delivered and is based on the fair value of the natural uranium hexafluoride at contract inception, or as the quantity of natural uranium hexafluoride is finalized, if variable.

Cost of sales for SWU and uranium is based on the amount of SWU and uranium sold and delivered during the period and unit inventory costs. Unit inventory costs are determined using the average cost method. Changes in purchase costs have an effect on inventory costs and cost of sales. Cost of sales includes costs for inventory management at off-site licensed locations and also includes certain legacy costs related to former employees of the Portsmouth GDP and Paducah GDP.

Technical Solutions

Our Technical Solutions segment reflects our technical, manufacturing, engineering, and operations services offered to public and private sector customers, including the American Centrifuge engineering, procurement, construction, manufacturing, and operations services being performed under the HALEU Operation Contract. With our government and private sector customers, we seek to leverage our domestic enrichment technology and experience, engineering know-how, and precision manufacturing facility to assist customers with a range of engineering, design, and advanced manufacturing projects, including the production of fuel for next-generation nuclear reactors and the development of related facilities. 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, and our production facility near Piketon, Ohio.

Results of Operations

Segment Information

The following tables present elements of the accompanying Consolidated Statements of Operations and Comprehensive Income that are categorized by segment (dollar amounts in millions):

Three Months Ended September 30, 2023 Compared with Three Months Ended September 30, 2022

Revenue

Revenue from the LEU segment was $40.5 million and $20.2 million for the three months ended September 30, 2023 and 2022, respectively, an increase of $20.3 million (or 100%). The increase was due to the $32.8 million increase in SWU revenue, partially offset by the $12.5 million decrease in uranium revenue for the three months ended September 30, 2023. The increase in SWU revenue was due to a 326% increase in the volume of SWU sold and a 25% increase in the average price of SWU sold.

Revenue from the Technical Solutions segment was $10.8 million and $13.0 million for the three months ended September 30, 2023 and 2022, respectively, a decrease of $2.2 million (or 17%). The decrease was primarily related to the transition from the HALEU Demonstration Contract to the HALEU Operation Contract in late 2022. For the three months ended September 30, 2023, the HALEU Operation Contract generated $8.9 million in revenue. The HALEU Demonstration Contract generated $1.3 million in revenue for the three months ended September 30, 2023, compared to $11.7 million in revenue for the same period in 2022.

Cost of Sales

Cost of sales for the LEU segment was $30.4 million and $18.9 million for the three months ended September 30, 2023 and 2022, respectively, an increase of $11.5 million (or 61%). The increase was due to a $23.9 million increase in SWU costs, partially offset by a $12.4 million decrease in uranium costs. The increase in SWU costs reflected a 326% increase in the volume of SWU sold and a 13% increase in the average unit cost of SWU sold. Cost of sales for the three months ended September 30, 2023 included $0.6 million for the revaluation of inventory loans.

Cost of sales for the Technical Solutions segment was $9.6 million and $12.0 million for the three months ended September 30, 2023 and 2022, respectively, a decrease of $2.4 million (or 20%). The decrease was related to a decrease of $10.8 million of costs associated with the HALEU Demonstration Contract and a decrease in costs of approximately $1.0 million associated with other contracts, partially offset by $9.4 million of costs incurred for the HALEU Operation Contract. For details on HALEU Demonstration Contract and HALEU Operation Contract accounting, refer to Technical Solutions Segment above.

Gross Profit

Gross profit for the LEU segment was $10.1 million and $1.3 million for the three months ended September 30, 2023 and 2022, respectively, an increase of $8.8 million (or 677%). The increase for the three months ended September 30, 2023 was due primarily to the specific contract and pricing mix of SWU contracts and the timing of their deliveries quarter over quarter. This was reflected by an increase in the volume of SWU sold and an increase in the average profit margin per SWU.

Gross profit for the Technical Solutions segment was $1.2 million and $1.0 million for the three months ended September 30, 2023 and 2022, respectively, an increase of $0.2 million (or 20%). The increase was attributable to the transition of work performed under the HALEU Demonstration Contract to the HALEU Operation Contract in late 2022.

Nine Months Ended September 30, 2023 Compared with Nine Months Ended September 30, 2022

Revenue

Revenue from the LEU segment was $186.9 million and $123.4 million for the nine months ended September 30, 2023 and 2022, respectively, an increase of $63.5 million (or 51%). The increase was due to a $41.4 million increase in SWU revenue and a $22.1 million increase in uranium revenue. The SWU revenue increase was primarily related to a 123% increase in the volume of SWU sold, partially offset by a 38% decrease in the average price of SWU sold.

Revenue from the Technical Solutions segment was $29.7 million and $44.2 million for the nine months ended September 30, 2023 and 2022, respectively, a decrease of $14.5 million (or 33%). The decrease was primarily related to the transition from the HALEU Demonstration Contract to the HALEU Operation Contract in late 2022. For the nine months ended September 30, 2023, the HALEU Operation Contract generated $27.0 million of revenue. The HALEU Demonstration Contract generated $1.6 million in revenue for the nine months ended September 30, 2023 compared to $35.7 million in revenue for the same period in 2022. The remaining decrease was attributable to a decrease in revenue generated by other contracts.

Cost of Sales

Cost of sales for the LEU segment was $126.1 million and $59.8 million for the nine months ended September 30, 2023 and 2022, respectively, an increase of $66.3 million (or 111%). The increase was due to a $47.6 million increase in SWU costs and a $18.7 million increase in uranium costs. The SWU cost increase was primarily related to a 123% increase in the volume of SWU sold, partially offset by a 6% decrease in the average unit cost of SWU. Cost of sales for the nine months ended September 30, 2023 and 2022, included $3.5 million and $5.5 million, respectively, for the revaluation of inventory loans.

Cost of sales for the Technical Solutions segment was $28.2 million and $38.3 million for the nine months ended September 30, 2023 and 2022, respectively, a decrease of $10.1 million (or 26%). The decrease was related to a reduction in costs of approximately $28.6 million associated with the HALEU Demonstration Contract and a reduction in costs of approximately $9.2 million related to other contracts, partially offset by $27.7 million of costs incurred for the HALEU Operation Contract. For details on HALEU Demonstration Contract and HALEU Operation Contract accounting, refer to “Technical Solutions Segment” above.

Gross Profit

Gross profit for the LEU segment was $60.8 million and $63.6 million for the nine months ended September 30, 2023 and 2022, respectively, a decrease of $2.8 million (or 4%). The decrease for the nine months ended September 30, 2023 was due primarily to the specific contract and pricing mix of SWU contracts and the timing of their deliveries quarter over the period. This was reflected by a decrease in the average profit margin per SWU, partially offset by an increase in the volume of SWU sold and an increase in uranium gross profit.

Gross profit for the Technical Solutions segment was $1.5 million and $5.9 million for the nine months ended September 30, 2023 and 2022, respectively, a decrease of $4.4 million (or 75%). The decrease was attributable to the transition of work performed under the HALEU Demonstration Contract to the HALEU Operation Contract in late 2022. In 2022, the HALEU Demonstration Contract transitioned to invoicing of all costs whereas most of the invoicing under the HALEU Operation Contract reflected a 50% cost-share.

Non-Segment Information

The following tables present elements of the accompanying Consolidated Statements of Operations and Comprehensive Income that are not categorized by segment (dollar amounts in millions):

Three Months Ended September 30, 2023 Compared with Three Months Ended September 30, 2022

43

Advanced Technology Costs

Advanced technology costs were $3.3 million and $5.4 million for the three months ended September 30, 2023 and 2022, respectively, a decrease of $2.1 million (or 39%). Advanced technology costs consist of American Centrifuge work and related expenses that are outside of our customer contracts in the Technical Solutions segment, including bid and proposal activities and work to improve our centrifuge technology.

Nonoperating Components of Net Periodic Benefit Income

Nonoperating components of net periodic benefit income was $0.6 million and $4.4 million for the three months ended September 30, 2023 and 2022, respectively, a decrease of $3.8 million (or 86%). Nonoperating components of net periodic benefit income consist primarily of the expected return on plan assets and the remeasurement related to lump sum payouts, partially offset by interest cost as the discounted present value of benefit obligations nears payment, as described in Note 8, Pension and Postretirement Health and Life Benefits of the Consolidated Financial Statements.

Investment Income

Investment income was $2.3 million and $0.6 million for the three months ended September 30, 2023 and 2022, respectively, an increase of $1.7 million (or 283%). The Company’s investment income represents interest earned on operating cash, which is primarily held in money market accounts. The increase was due primarily to an increase in interest rates.

Income Tax Benefit

Income tax benefit was $7.6 million and $1.8 million for the three months ended September 30, 2023 and 2022, respectively, an increase of $5.8 million (or 322%). Income tax benefit in all periods resulted from applying the annual effective tax rate to the quarterly income from continuing operations adjusted for discrete items. In addition, a decrease to the federal tax valuation allowance of $7.7 million was recorded during the three months ended September 30, 2023. For the three months ended September 30, 2022, there was no change to the tax valuation allowance. For more information about the valuation allowance, see Note 9, Income Taxes, of the Consolidated Financial Statements and Note 13, Income Taxes, in our Consolidated Financial Statements on Form 10-K for the year ended December 31, 2022.

Net Income (Loss) and Comprehensive Income (Loss)

Net income was $8.2 million compared to a net loss of $6.1 million for the three months ended September 30, 2023 and 2022, respectively, a change of $14.3 million (or 234%). The change of $14.3 million was primarily attributable to a $8.8 million increase in gross profit from the LEU segment, a $5.8 million increase in income tax benefit, and a $0.2 million increase in gross profit from the Technical Solutions segment, partially offset by a $3.8 million decrease in nonoperating components of net periodic benefit income.

Nine Months Ended September 30, 2023 Compared with Nine Months Ended September 30, 2022

Selling, General and Administrative

Selling, general and administrative costs were $27.4 million and $24.4 million for the nine months ended September 30, 2023 and 2022, respectively, an increase of $3.0 million (or 12%). This increase was due primarily to an increase in employee-related expenses, including equity related compensation.

Amortization of Intangible Assets

Amortization of intangible assets was $4.2 million and $6.2 million in the nine months ended September 30, 2023 and 2022, respectively, a decrease of $2.0 million (or 32%). Amortization expense for the intangible asset related to the September 2014 Order Book is a function of SWU sales volume under that Order Book, and amortization expense for the intangible asset related to customer relationships is amortized on a straight-line basis.

Nonoperating Components of Net Periodic Benefit Loss (Income)

Nonoperating components of net periodic benefit loss (income) netted to a loss of $0.1 million and income of ($11.1) million for the nine months ended September 30, 2023 and 2022, respectively, a change of $11.2 million (or 101%). Nonoperating components of net periodic benefit loss (income) consist primarily of the expected return on plan assets and the remeasurement related to lump sum payouts, partially offset by interest cost as the discounted present value of benefit obligations nears payment, as described in Note 8, Pension and Postretirement Health and Life Benefits, of the Consolidated Financial Statements.

Investment Income

Investment income was $6.4 million and $0.8 million in the nine months ended September 30, 2023 and 2022, respectively, an increase of $5.6 million (or 700%). The Company’s investment income represents interest earned on operating cash, which is primarily held in money market accounts. The increase was due primarily to an increase in interest rates.

Income Tax Expense (Benefit)

Income tax benefit was $1.9 million and income tax expense was $9.3 million in the nine months ended September 30, 2023 and 2022, respectively, a decrease to the income tax expense of $11.2 million (or 120%). Income tax benefit for the nine months ended September 30, 2023 resulted from applying the annual effective tax rate to year-to-date income from continuing operations adjusted for discrete items, and a decrease of $7.7 million to the federal tax valuation allowance. Income tax expense for the nine months ended September 30, 2022 resulted from applying the annual effective tax rate to year-to-date income from continuing operations adjusted for discrete items. There was no change to the tax valuation allowance during the nine months ended September 30, 2022. For more information about the valuation allowance, see Note 9, Income Taxes, of the Consolidated Financial Statements and Note 13, Income Taxes, in our Consolidated Financial Statements on Form 10-K for the year ended December 31, 2022.

Net Income and Comprehensive Income

Net income was $28.1 million and $30.9 million in the nine months ended September 30, 2023 and 2022, respectively, a decrease of $2.8 million (or 9%). The decrease was primarily attributable to a decrease in nonoperating components of net periodic benefit income of $11.2 million, a decrease in gross profit of $4.4 million in the Technical Solutions segment and $2.8 million in the LEU segment, partially offset by a $11.2 million increase in income tax benefit and a $5.6 million increase in investment income.

Liquidity and Capital Resources

As of September 30, 2023, the Company had a consolidated cash and cash equivalents balance of $183.3 million. In addition, there was $29.8 million of restricted cash related to three inventory loans, which required a cash deposit into an escrow fund. See Note 3*, Cash, Cash Equivalents, and Restricted Cash* of the Consolidated Financial Statements. The Company anticipates having adequate liquidity to support our business operations for at least the next 12 months from the date of this Quarterly Report. Our view of liquidity is dependent on, among other things, conditions affecting our operations, including market, international trade restrictions, sanctions and other conditions, the level of expenditures and government funding for our services contracts and the timing of customer payments. Liquidity requirements for our existing operations are affected primarily by the timing and amount of customer sales and our inventory purchases.

The Company believes its Order Book in our LEU segment is a source of stability for our liquidity position. Subject to market conditions, we see the potential for growing uncommitted demand for LEU during the next few years with accelerated open demand in 2025 and beyond.

Cash resources and net sales proceeds from our LEU segment fund technology costs that are outside of our customer contracts in the Technical Solutions segment and general corporate expenses, including cash interest payments on our debt. We believe our investment in advanced U.S. uranium enrichment technology will position the Company to meet the needs of our customers as they deploy advanced reactors and next generation fuels. We signed the three-year HALEU Demonstration Contract with DOE in October 2019. Under the HALEU Demonstration Contract, the Company contributed its required contribution through November 30, 2021. The program began May 31, 2019, when Centrus and DOE signed a preliminary letter agreement that allowed work to begin while the full contract was being finalized. Our cost-share HALEU Demonstration Contract period of performance ended in November 2022.

On November 10, 2022, the Company was awarded the HALEU Operation Contract. The HALEU Operation Contract provides for a 50/50 cost share contract for Phase 1 of the base contract to complete the cascade, begin operations and complete the initial, small quantity demonstration HALEU. Phase 2 includes continued operations and maintenance on a cost-plus-incentive-fee basis. Finally, the HALEU Operation Contract includes options for the government to unilaterally extend performance for up to an additional nine years comprised of three options of three years each, also on a cost-plus-incentive-fee basis. The Company’s goal is to modularly scale up the facility as demand for HALEU grows in the commercial and government sectors, subject to the availability of funding and/or contracts to purchase the output of the plant.

Although the Company believes demand for HALEU will emerge over the next several years, there are no guarantees about whether or when government or commercial demand for HALEU will materialize, and there are a number of technical, regulatory, and economic hurdles that must be overcome for these fuels and reactors that will use these fuels to come to the market. For further discussion, refer to Part I, Item 1A, Risk Factors, in our Annual Report on Form 10-K for the year ended December 31, 2022.

If funding by the U.S. Government of gas centrifuge technology is reduced or discontinued, or we are not awarded a future DOE contract to continue to operate the cascade, such actions may have a material adverse impact on our ability to deploy the American Centrifuge technology and on our liquidity.

Capital expenditures of approximately $1.0 million are anticipated over the next 12 months.

On October 12, 2023, the Company entered into an agreement with an insurer (“Insurer”) for one of its defined benefit plans to purchase a group annuity contract and transferred approximately $186.5 million of its pension plan obligations to the insurer. The purchase of the group annuity contract was funded directly by the assets of the pension plan of approximately $171.4 million. The purchase resulted in a transfer of benefit administrative responsibilities for approximately 1,400 beneficiaries effective December 1, 2023. The Company estimates that the income related to the pension settlement recognized in the fourth quarter will be approximately $15.1 million, dependent upon the final settlement and pricing of the annuity transaction. The settlement charge will be recognized in nonoperating components of net periodic benefit loss (income) in our consolidated statements of operations.

We are also actively considering and expect to consider potential strategic transactions from time to time, which at any given time may be in various stages of discussion, diligence, or negotiation. These could involve, without limitation, acquisitions and/or dispositions of businesses or assets, joint ventures or investments in businesses, products or technologies, or changes to our capital structure. In connection with any such transaction, we would seek to satisfy these needs through a combination of working capital, cash generated from operations, or additional debt or equity financing.

The change in cash, cash equivalents and restricted cash from our Consolidated Statements of Cash Flows are as follows on a summarized basis (in millions):

Operating Activities

For the nine months ended September 30, 2023, net cash used in operating activities was $8.8 million. The net decrease was primarily due to approximately $251.0 million of disbursements for operations, of which approximately $200.0 million relates to payments for LEU inventory deliveries and cash outflows for the Technical Solutions segment, with the remaining disbursements including corporate administration, benefits claims, and advanced technology costs. These cash outflows were partially offset by approximately $242.0 million in cash collected from customers, investment income, and reimbursements for postretirement health and life benefits paid by the Company.

In the nine months ended September 30, 2022, net cash used in operating activities was $35.1 million. The net decrease was due to an increase in payments made to suppliers of approximately $24.0 million as well as a decrease in cash collected from customers of approximately $24.0 million, which resulted from the timing of customer shipments and related contract terms. This remaining difference was primarily related to a reduction in disbursements from prior year for our Technical Solutions segment.

Investing Activities

Capital expenditures were $1.1 million and $0.6 million for the nine months ended September 30, 2023 and 2022, respectively.

Financing Activities

For the nine months ended September 30, 2023, cash of $23.2 million was provided from the net proceeds related to the issuance of 722,568 shares of Class A Common Stock under an ATM offering. For both the nine months ended September 30, 2023 and 2022, payments of $6.1 million of interest classified as debt are classified as a financing activity. Refer to Note 6*, Debt,* of the Consolidated Financial Statements regarding the accounting for the 8.25% Notes maturing in February 2027.

Working Capital

The following table summarizes the Company’s working capital (in millions):

We are managing our working capital to seek to improve the long-term value of our LEU and Technical Solutions businesses and are planning to continue funding the Company’s qualified pension plans because we believe these uses of working capital are in the best interest of all stakeholders. We expect that any other uses of working capital will be undertaken in light of these strategic priorities and will be based on the Company’s determination as to the relative strength of its operating performance and prospects, financial position, and expected liquidity requirements. In addition, we expect that any such other uses of working capital will be subject to compliance with contractual restrictions to which the Company and its subsidiaries are subject, including the terms and conditions of our 8.25% Notes. We continually evaluate alternatives to manage our capital structure, and may opportunistically repurchase, exchange, or redeem Company securities.

Common Stock Issuance

The Company sold an aggregate of 722,568 shares of its Class A Common Stock at the market price for a total of $24.4 million during the nine months ended September 30, 2023. After expenses and commissions paid to the agents, the Company’s proceeds totaled $23.4 million. Additionally, the Company recorded direct costs of $0.2 million related to the issuance. The shares of Class A Common Stock were issued pursuant to the Company’s shelf registration statement on Form S-3 (File No. 333-239242), which became effective on August 5, 2020, and two prospectus supplements dated December 31, 2020 and December 5, 2022, respectively. The Company has used and/or intends to use the net proceeds from this offering for working capital and general corporate purposes including, but not limited to, capital expenditures, investment in technology development and deployment, repayment of indebtedness, potential acquisitions and other business opportunities. There were no sales of Class A Common Stock through the ATM offering in the nine months ended September 30, 2022.

2023 Shelf Registration

The Company filed a shelf registration statement on Form S-3 (Registration Statement No. 333-272984) with the SEC on June 28, 2023, which became effective on July 10, 2023. Pursuant to this shelf registration statement, the Company may offer and sell up to $200 million in securities, in aggregate. The Company retains broad discretion over the use of the net proceeds from the sale of the securities offered. Unless otherwise specified in any prospectus supplement, we currently intend to use the net proceeds from the sale of our securities offered under this prospectus for working capital and general corporate purposes including, but not limited to, capital expenditures, working capital, repayment of indebtedness, potential acquisitions and other business opportunities. Pending any specific application, we may initially invest funds in short-term marketable securities or apply them to the reduction of indebtedness.

Rights Agreement

On June 20, 2023, the Company entered into a Fifth Amendment to the Rights Agreement, which amends the Rights Agreement, dated as of April 6, 2016, by and among the Company, and Computershare Trust Company, N.A. and Computershare Inc., as rights agent, as amended by (i) the First Amendment to the Rights Agreement dated as of February 14, 2017, (ii) the Second Amendment to the Rights Agreement dated as of April 3, 2019, (iii) the Third Amendment to the Rights Agreement dated as of April 13, 2020, and (iv) the Fourth Amendment to the Rights Agreement dated as of June 16, 2021.

The Fifth Amendment to the Rights Agreement (i) increases the purchase price for each one one-thousandth (1/1000th) of a share of the Company’s Series A Participating Cumulative Preferred Stock, par value $1.00 per share, from $18.00 to $160.38; and (ii) extends the Final Expiration Date (as defined in the Rights Agreement) from June 30, 2023 to June 30, 2026.

The Fifth Amendment was not adopted as a result of, or in response to, any effort to acquire control of the Company. The Fifth Amendment has been adopted in order to preserve for the Company’s stockholders the long-term value of the Company’s net operating loss carry-forwards for United States federal income tax purposes and other tax benefits.

Capital Structure and Financial Resources

Interest on the 8.25% Notes is payable semi-annually in arrears as of February 28 and August 31 based on a 360-day year consisting of twelve 30-day months. The 8.25% Notes are guaranteed on a subordinated and limited basis by, and secured by substantially all assets of, Enrichment Corp. The 8.25% Notes mature on February 28, 2027. Additional terms and conditions of the 8.25% Notes are described in Note 6*, Debt,* of the Consolidated Financial Statements and Note 8*, Debt,* of the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

Contractual Commitments

There have been no material changes to our contractual commitments from those discussed in our Annual Report on Form 10-K for the year ended December 31, 2022.

DOE Technology License

We have a non-exclusive license in DOE inventions that pertain to enriching uranium using gas centrifuge technology. The license agreement with DOE provides for annual royalty payments based on a varying percentage (1% up to 2%) of our annual revenues from sales of the SWU component of LEU produced by us using DOE centrifuge technology. There is a minimum annual royalty payment of $100,000 and the maximum cumulative royalty over the life of the license is $100 million. There is currently no commercial enrichment facility producing LEU using DOE centrifuge technology. We are continuing to advance our U.S. centrifuge technology that has evolved from DOE inventions at specialized facilities in Oak Ridge with a view to deploying a commercial enrichment facility over the long term once market conditions recover.

Off-Balance Sheet Arrangements

Other than our SWU purchase commitments and the license agreement with DOE relating to the American Centrifuge technology, there were no material off-balance sheet arrangements at September 30, 2023.

Critical Accounting Policies Estimates

There have been no significant changes to the critical accounting estimates disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2022.

There have been no material changes to our market risks from those discussed in our Annual Report on Form 10-K for the year ended December 31, 2022.

Evaluation of Disclosure Controls and Procedures

Centrus maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed by Centrus in reports it files or submits under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) is recorded, processed, summarized and reported in the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate to allow for timely decisions regarding required disclosures.

As of September 30, 2023, the end of the period covered by this Quarterly Report, our management performed an evaluation, under the supervision and with the participation of the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based on this evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended September 30, 2023, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

There have been no material changes to the Risk Factors described in Part I, Item 1A, Risk Factors, in our Annual Report on Form 10-K for the year ended December 31, 2022.