Centrus Energy Corp (LEU) 2003 Q3 法說會逐字稿

Good day and welcome, everyone, to the USEC third quarter 2003 earnings conference call. This call is being recorded. With us today from the company is Mr. Hal Shelton, Senior Vice President and Chief Financial Officer and Mr. Steven Wingfield, the Director of Investor Relations. Mr. Shelton will make his opening marks which will be followed by a question and answer session. At this time I would like to turn the call over to Mr. Steven Wingfield. Please go ahead, sir.

Good morning. Thank you for joining us for USEC's conference call regarding his third quarter that ended September 30, 2003. This is Steven Wingfield, Director of Investor Relations. Before turning the call over to Hal Shelton, I would like to welcome our callers as well as those listening to our web cast via the internet. This conference call follows our earnings news release issued yesterday after the market closed. That news release is available on many financial web sites as well as our corporate web site www.usec.com.

Second, I want to alert all of our listeners that a full archive of our news releases and SEC filings including our latest 10K and 10Q's is available on our web site. A replay of this call will be available later this morning on the USEC web site.

I'd like to remind everyone that certain of the information that we may discuss on the call this morning may be considered forward-look information that involves risks and uncertainties, including assumptions about the future performance of USEC. Our actual results may differ materially depending on a variety of factors that we have referenced in our news releases and periodic filings with the SEC. Please refer to our SEC filings for a more complete discussion of these factors.

Finally, the information provided today is time sensitive and accurate only as of today, October 30, 2003. This call is a property of USEC. Any redistribution, retransmission or rebroadcast of this call in any form without the express written consent of USEC is strictly prohibited.

Thank you for your participation and now I will turn the call over to Hal.

Thanks, Steve. Good morning to everyone and thanks for joining us on our conference call. Also with me today are Phil Sewell, Senior Vice President and Ron Green, senior vice president.

We had a good third quarter making progress on many fronts. First, we finalized the coal standby contract with the Department of Energy and we recorded fees for services that we had been performing for the past two years. Second, we were successful in completing the first phase of uranium inventory clean up ahead of schedule and on budget. Third, we achieved another American Centrifuge milestone ahead of schedule when we manufactured a rotor tube that is the key component of the Centrifuge machine. Fourth, so far this year we have contracted for more than $1 billion in new sales with deliveries through 2011. And fifth and most important we had good operating results, gross margins have substantially improved. The result is quarterly net income of $3.4 million compared to $1.2 million in the same quarter last year.

With a nine month period, net income is $9.8 million compared to $12.6 million in 2002 when earnings benefited from a $4.2 million special credit from a change in cost estimate for consolidating plant operations.

In 2003, we recorded $9.5 million before tax in other income for coal stand by services we had performance for DOE and a pension cost adjustment. The gross margin was 10.2% during the quarter compared to 6.8% in the same period last year. Year to date our gross margin was 11.7% and for the full year we continue to expect gross margin of at least 10%.

Let me go through some of the highlights of the earnings release we issued yesterday. Revenue for the quarter was $293.6 million, a decline of 19% over the same period last year. Due mainly to a decrease in SWU volume and offset in part by higher natural uranium sales. SWU revenue decreased by $78 million, based on a 20% volume decline quarter over quarter and a 3% lower average fuel price billed to customers. Timing and movement of customer orders occur from quarter to quarter and cause shifts in revenue and we experienced lower commitments from some customers.

For the year to date, SWU volume is down 6% which is in line with our earlier guidance of 1.1 billion in SWU revenue for the full year. Purchase costs declined as new market base pricing terms with Russia went into effect on January 1. Also, lower unit production costs reflect cost control efforts over the past several years. Combined, these two cost control efforts lowered cost of sales per SWU by 5% in the quarter and 6% year to date.

While the average SWU price billed to customers was down 3% quarter over quarter, the lower cost of sales improved our gross profit margin. We expect the average SWU price billed to customers to decline by about 1.5% for the full 2003, a smallerdecline than in recent years. I anticipate the average SWU price billed to customers to begin improving by the end of next year as deliveries begin under contracts signed in the last few years.

Looking below the gross profit line on the income statement, the biggest difference between the first nine months of 2003 and the same period last year was spending on advance technology. Spending year to date totaled $31 million or about $18 million higher than in 2002. This spending has a direct impact on net income. Our decision to spend about $45 million this year will have an after tax effect of lowering net income by about $25 million because we expense these costs. This spending is an investment in USEC's future.

We are pleased to report that this spending has resulted in continued progress for the American Centrifuge. We achieved our fifth milestone of manufacturing a rotor tube, ahead of the November 30th target. Engineering, manufacturing and testing of major components continues in Oakridge, Tennessee.

We solicited proposals from the states of Kentucky and Ohio as part of our process for locating a commercial Centrifuge plant in one of these two states. We have received initial proposals and we are in further discussions. A decision on where to site the plans is expected this quarter.

During the quarter, USEC and DOE finalized a cold stand by contract for services the company has provided since July 2001 at the Portsmouth plant. The fees earned under this cost plus fixed fee contract since July 2001, and a pension cost adjustment, were $9.5 million which is included in the line item called other income expense net. With the signing of this contract we have changed the format of our income statement to separate government service activities from interest income instead of combining them as we had in the past.

DOE has extended the contract and we are negotiating the terms of the extension. We will continue to earn fees for cold stand by contract services but will be substantially lower because this quarter's fee included two years of work. The pension cost adjustment was a result of differences between the government's cost accounting standards, or CAS, and generally accepted accounting principals, or GAAP, which we follow.

Under the contract, DOE has been retaining a portion of our reimbursable costs and after the contract was signed we collected retainage of about $18 million in September. This is a cash transaction and had no impact on our income.

This year we have signed new sales contracts for more than $1 billion. Deliveries scheduled 2004 through 2011. We are pleased with the confidence these customers placed in us as a reliable long-term supplier of nuclear fuel. We also appreciate the support these and other customers are providing to Megatons to Megawatts program and the demonstration of the American Centrifuge.

During the quarter, we completed the 15 month initial phase project to clean up a portion of the 9,550 metric tons of contaminated uranium, that DOE transferred to the company prior to privatization. We exceeded the goal of cleaning 2,800 metric tons of material by the September 2003 target and, in fact, we processed 2,909 metric tons, all within the $21 million budget. This was a first of its kind operation and based on its success, DOE and USEC are discussing continuing the project. We are continuing to clean up operations during these discussions.

In September, the Court of International Trade issued a decision regarding a trade case that involves imports by our European competitors. The court affirmed the U.S. Department of Commerce's determinations on two of three general issues of the trade cases. The court affirmed that USEC constitutes the domestic enrichment industry and that countervailing duty law covers enrichment contracts. The court reversed Commerce’s decision that enrichment transactions are subject to anti-dumping law. The court's action is another step in an ongoing process of decision and appeal. We anticipate that the Court of International Trade's final decisions will be appealed to the U.S. Court of Appeals for the Federal Circuit. All duties on these imports remain in effect until the appeal process is completed.

For financial guidance, we affirm our range of 9 to $11 million for net income in 2003. While the gross margin is improving to at least 10% this year, the $45 million spending on American Centrifuge has the effect of reducing net income by about $25 million.

Turning next to the cash flow statement, cash flow used in operating activities during the nine month period was $52 million compared to positive cash flow of $135 million last year. The main difference in the two periods is the collection of trade receivables in early 2002 that resulted from record sales in the fourth quarter of 2001. Our guidance for cash flow from operating activities has been raised to a range of 80 to $95 million this year. This higher range is due to the timing of customer collections moving into the fourth quarter and payments to Russia moving into the fourth quarter of 2004. These movements will have the effect of reducing cash flow in 2004.

We ended the quarter with a cash balance of $66.5 million and in our release issued yesterday we provided guidance that we expect our year-end cash balance to be in the range of 180 to $200 million.

To wrap up, we had a solid quarter in operations. We resolved a couple of long pending issues that have removed uncertainty and we continue to move forward aggressively with our American Centrifuge demonstration. We covered a wide range of topics this morning. Phil Sewell, Ron Green and I are ready to take your questions. Operator, please prompt our audience for questions.

Thank you, sir. Today's question and answer session will be conducted electronically. If you would like to ask a question, please do so by pressing star 1 on your touchtone telephone. If you are using a speaker phone, please make sure your mute function is turned off to allow your signal to reach our equipment. We will pause for just one moment.

Our first question comes from David Schanzer from Janney Montgomery.

Good morning, everybody. First of all, on the balance sheet, could you give us an idea of what the current value is of your uranium stock, that portion of the stock that's not subject to remediation on the part of the government.

David, let me answer -- this is Hal. Let me answer that question this way, the uranium on our balance sheet in all categories is valued at approximately $25 a kilogram. The current market price, the current spot price, and it has been a run up substantially, today is about $36 to $37 a kilogram.

Okay. Is there any percentage -- general percentage we can apply as to what part of the stock is immediately usable?

We anticipate that we have enough uranium in the time periods that we needed to meet all our sales commitments.

All right. Let me move to another question. The comment that was made in the release about the reactors in Japan, the fact that it won't affect '03 revenue but perhaps '04 and '05, could you give us an idea of the magnitude of decline because of the situation over there.

David, that information along with sales targets, income targets, cash targets we will do as we normally do and in January, late January, when we have our earnings release and our guidance we will share all that information at that time. We are now putting our, together, our budgets and so we are still working through that information.

Uh-huh. Okay.

I can mention that in Japan it is only one company that's impacted. We have relationships with all 10 Japanese utilities.

Is there any other part of the far eastern market that's impacted as well or is it just Japan.

It is just that one company in Japan.

Okay. All right. Thanks.

Thanks, David.

Our next question comes from Brett Levy (ph) with Royal Bank of Canada.

I guess two questions. First off, with respect to the SWU in the third quarter and obviously was down pretty hard, was there a specific customer or order shift or something that'll be more evident in the fourth quarter to account for some of that? I know you sort of talked to it in general terms but can you put a little bit more color on that? And then the second one is as you guys ramp up your test plant and new technology, can you talk a little bit about some of the competitive start ups and the progress they're making and how that plays out in terms of, I guess, the competitive market that you guys will be entering assuming everything moves in the right direction.

Brett, I'll answer the first question and I'll ask Ron to answer the second one. In terms of our SWU sales as you know with an average SWU sales order of $12 million, just moving one order or two orders a day has a major impact in what gets recorded in a particular quarter. That's why we say in all of our releases that it is best to manage and view the business over the 12 to 18 month cycle. We are smack on the guidance that we've given from the beginning of the year that we would have SWU sales in the order magnitude of $1.1 billion for the year and that has not changed. Ron.

In terms of the progress we are making on the American Centrifuge program, our progress is excellent. We still are working well ahead of both the DOE-USEC agreement milestones and our own internal schedule so I am extremely pleased with how we're doing. Frankly, we don't spend a lot of time tracking the progress or lack thereof of competitors, we focus on our own program primarily. My best information, my best understanding is that our primariy competitor in centrifuge, which is a division of Urenco, in Europe is attempting to site a plant in New Mexico what did you but we really don't know how that's going. You are going to have to ask Urenco how that's going.

Assuming it comes on line somewhat around the same time as your plant, and I know that they're a bit behind, does that change the supply demand dynamics that you guys see as that plant comes on line?

My best answer is it does not change those dynamics. Our market for enriched material is already a globally competitive market and Urenco already enriches with centrifuge. So the fact a plant sits in New Mexico and our plant sits in Kentucky or Ohio does not really change the market dynamics.

Theirs will be considerably smaller than yours, right?

That’s yet to be determined. They have several sizes and I don't know which one they intend to build.

Thanks, guys.

Thank you.

Our next question comes from Peter Lieu with Lieu Capital Management.

Good morning. I guess there's some pleasant and not so pleasant surprises in the current report. I'm a little bit surprised that you collected so much money from the government and in trying to decipher what you’ll collect from the government next year it is materially less. That is also -- that's going to affect cash flow on top of the cash flow guidance that you're giving for this year which is bumped up and correspondingly lowered for next year. As you know, investors are very, very concerned about your ability to pay your $44 million dividend and I'd like you to comment how on, how secure this dividend might be given the dimunition of other income from the government as well as the lower cash flow for next year.

Peter, as you know and many of the other callers on the line today last week the board announced the 21st consecutive dividend to be paid on December 15. The board as we've talked before really takes this responsibility very seriously. They know that a dividend is important part of total shareholder return. They are very cognizant of our cash flows and our earnings level and through full discussions determined that this dividend is the right dividend to have. So it does continue.

Relative to collections from the Department of Energy, as you've gotten to know me you know I am a conservative CFO and we did not book things on a periodic basis but waited, basically, nine quarters in terms of booking the income until the contract was signed. And on the retainage, the Department of Energy has just held back 15% of the monies due. So we were getting 85% on an ongoing basis. So the amount of cash flow will be not that much different year-over-year.

Okay. Are you able to -- you indicated that 2004 cash flow would be less than previous and I'm trying to interpret whether that means it'll be less than 2003.

What I meant to say, Peter, was 2004 cash flow not relative to any benchmark and standard because we have not issued 2004 guidance yet but to the extent that we have monies moving across the December 31st time line that they came more into 2003 there would be a corresponding for those particular transactions in 2004.

Okay. You're managing the company long term so I accept the premises that is good to accelerate R&D but it does affect your cash flow and earnings. Is there a program to accelerate the R&D again next year?

We have -- when we made the announcement last summer, the last quarter, about our acceleration of the American Centrifuge and our ability through Ron's good efforts and his team to move this up by over a year, that the total expenditures we planned to spend for both the demonstration and Lead Cascade at $150 million and the commercial plant at 1 to $1.5 billion stays the same but the timing of them has been moved up. We are spending the same amount of money over a little shorter period of time.

It's very comforting to have you stay with USEC but I do want to know that how long we're going to enjoy your services.

Thank you, Peter. As you know, we've said before we have engaged a national search firm to help us identify candidates. We are taking this in a very thorough serious fashion. We have had many interviews. We are trying to find the right person and the right fit and when that time comes, we will make the announcement and, as you know, when we made the announcement of my pending retirement earlier this year, I said it was very important for me to have a smooth transition and we are working to that motto.

Thank you, Hal.

Just as a remainder, if you have a question press star 1. Next from Imperium Capital is Steven Pineault .

First of all, congratulations on your cost reductions. It looks like you've done a great job there. I had a question on your SG&A run rate which is down to a little bit over, I'm sorry, a little under $50 million a year. What sort of progression should we expect for next quarter and '04? I guess it looked quite a bit higher last quarter and the quarter before. Can you comment a little bit on that and what you expect in the future.

In terms -- this is Hal. In terms of the future, again, as I said to David and others, we will be giving the full income forecast in the end of January. Relative to run rates in comparison with previous years, we did discuss this in the first quarter of this year and recall that we had a change in fiscal year and so they're the quarter in which we had our merit increases change by six months so the quarter to quarter comparisons got out of kilter by six months. You are seeing some of that in the comparison.

Okay. Onto another topic and it was discussed earlier with regard to the 2004 cash flow. With the Russian payment coming in after the end of this year, is there any reason to think that next year's cash flow should not be better than this year.

We will all discuss that at the end of January

Lastly, perhaps on different topic, I was wondering what you were seeing in terms of your market shares. Are your customers enthused with your progress on American Centrifuge and is there an opportunity to, perhaps, enter into some longer term contracts and get some project financing on that project when it eventually does come three, four, five years down the road?

I'll start with that and if Ron wants to chime in he can. I was trying to signal through the comment I made twice about this year having signed new long term contracts with deliveries through 2011 of over $1 billion was a clear sign our customers are very supportive and are pleased to do business with us, see us as a long term viable supplier of fuel.

I would say -- this is Ron green. I would say that the customers, both domestic and international customers, with whom I have spoken are just about as excited about our progress on the American Centrifuge as we are. They are very supportive and very interested and very excited about it. I expect we will see that support manifest itself in excellent terms, excellent term and tenor of contracts.

Okay. Thank you very much, guys.

Our next question comes from Michael Christolus from Inwood Captial.

I understand that there may be a French company that's gotten an NRC contract to decommission some weapons grade plutonium and they may end up building a plant in the U.S. in South Carolina based on an article I read. I am a bit new to the names so I am not sure how this fits in the competitive landscape and if your exclusivity for enrichment does not include weapons grade materials.

This is Phil. That program is unrelated to uranium enrichment. Both Russia and United States have a program to dispose of 34 metric tons of plutonium, weapons grade plutonium, and a cooperative effort to do so, with a commensurate pace of schedule in that program in both the United States and Russia.

The United States program involves putting into some Duke reactors, MOX, mix-oxide fuel that includes the fabrication of fuel elements from weapons grade plutonium. A part of that project the Department of Energy is sending plutonium to France to manufacture as lead assemblies some MOX fuel, fabricated fuel to bring back and test in the reactors. That's merely a test program that the Department of Energy is going through and it is not a competitive threat with respect to uranium enrichment but is merely a cooperative and collaborative program between the United States and Russia of how each can dispose of weapons grade plutonium.

Would you anticipate anything in the plutonium realm could have an impact in the uranium SWU pricing in terms of competitive feed stock for nuclear reactors?

This is Ron green. I think the answer is no. The mixed oxide fuel program, which is a joint venture between Duke Energy, Cogema which is the French company you were referring to, and Stone and Webster is building us a plant in Savannah River in Aiken, South Carolina to create MOX fuel to be burned in a couple of Duke power PWR. The quantities and volumes are not enough to have a market impact.

Thank you, gentlemen.

Our next question comes from Chris Dechiario (ph) from ISI Capital.

Just I want to go back over if you don't mind, your answer to the question on the assumed or rumored New Mexico plant for the Urenco group. You said you didn’t think it would change the supply demand. Does that mean it'll replace existing production or by the time it gets on line the demand will be that much higher? I just want to get a sense for why you think it would not affect supply demand.

Well, I think there's two. This is Ron green again. There are two things in play. One is we're in an excellent nuclear environment. Plants are running better than ever. New plants are coming on line globally. Overall in the world there's a tendency to, over time, take diffusion enrichment out of play and replace it with centrifuge. So those two things taken together are the basis for my belief.

Okay. With respect to the U.S. Court of International Trade, I realize it is going to be an ongoing process and probably take a couple years, but, you know, if under -- if we try to look at a scenario under which you eventually lose the anti-dumping case why should we not expect SWU prices to go back to where they were before as opposed to the 105 to 108 where they are now.

This is Hal. Let me start and if Phil wants to chime in he can. I think your introduction to your comment summarizes it quite well. It'll be some time before this case gets to its final resolution and, you know, what we probably have and I think what we see now we have entirely different markets today as we had back in 1999 and 2000. And USEC, on a decision that we made, was probably the biggest cause of that by taking out one of our two enrichment plants and really reducing on the supply side and such that demand and supply are much closer in balance today than they’ve ever been before.

This is Phil. All trade actions provide discipline in the market with respect to on you competitors act in a fair trade environment. We will see that happen. We've seen that happen so far. Regardless of the length of time and outcome under this trade case, we are seeing more disciplined fair market actions by all competitors and all suppliers and we expect that to continue in the future.

With or without the anti-dumping law.

Yes.

In other words, if it didn't exist today, I guess how much lower do you think today's prices -- not guess but I assume prices would be lower today. I don't think it's a non-event or is it?

What you saw on the past is what the action -- what happened in the market as a result of the trade case and that's just a data point that you can use in terms of what has happened so far. It's impossible to speculate in the future what's going to happen. We are just seeing a more even, stable supply demand balance and disciplined approach more so today than we did in the past with respect to market activity.

Okay. With respect to the DOE providing additional 2100 metric tons of uranium, I assume you've been in continuous contact with them. Are they still -- is it your belief they are going to still meet that obligation just because you haven't heard that they haven't heard that they are not or actually have some affirmative correspondence that them saying yes we are going to do this?

We continue to believe and we are in constant conversation with the DOE that they will meet their responsibilities and supply the 2116 metric tons of KGU's of uranium.

Okay. And my last question is just I wanted to, you may have given this before, the 2003 full year guidance. I know you said $1.1 billion for the SWU's. What are you expecting for the uranium sales?

$160 million.

Right. That’s the same you said before.

Up and down. The income statement there has been no change in guidance and affirmation, reaffirmation of those numbers and we have increased the cash flow.

Right, right. Okay. Thank you.

Thank you.

Next from Target Capital Management is Steve Springer.

Yes. Good morning. First I would like to ask you if you have any data points from customers around the world. Reflecting their concern about the political environment in the oil producing regions of the world. The stability of supply from places like Nigeria, Venezuela, the Middle East, Indonesia, etc. It seems to be getting worse, not better. What are you hearing from your customers in terms of their view of nuclear power, expanding the use of nuclear power going forward?

Really two pieces. The first part I am not aware of any conversations or dialogue with our customers concerning oil, oil and gas, Middle East nations or whatever. On the other side, what we are hearing and what we are seeing on the action of number of utilities, both here in the United States and clearly overseas is what we would title a “renaissance in nuclear.”

You might have seen in some of the trade press three U.S. companies have filed with the NRC the preliminary documentation for building nuclear power plants in the United States and far east in particular there are expansions, the Finnish government has put out bids for a new nuclear reactor and selecting a contract. Also in the United States you might have seen in the press many, and I'm sure at one point it'll be all, U.S. utilities are going back to the NRC and getting 20 year extensions to their licenses. And so nuclear power is strong in the United States worldwide and we do see this renaissance occurring.

Uh-huh. Okay. Next I'd like to ask you the American Centrifuge program has a total development cost estimated, is the correct number at $1.5 billion?

The development cost is $150 million and the commercial plant and full implementation is in a range of between 1 and $1.5 billion.

Okay. Referring back to Peter Lieu's question regarding the dividend, I am wondering if you could give us some additional color on what you see -- what percentage of that you see yourselves generating internally and how you would finance it because clearly that affects the long term viability of the dividend which is a major component in any investor decision to buy this stock. So the viability of this dividend, while you characterized it as something that's important to the board and so on, it really doesn't get to the issue of looking forward you have this very substantial financing requirement. So what I am trying to do is I am trying to get an understanding of how you see the -- your financing alternatives and how that would affect the stability of this dividend.

What I am about to say we have said before that we expect to be able to provide the funds for the $150 million demonstration and Lead Cascade part of the American Centrifuge program and pay our dividend and pay our interest on our debt all through internal cash flow. We are not financing the dividend in any way.

All right.

We have a -- every company has a short term bank, a revolver and we haven’t touched that in over 2 and a half years.

When does this phase end?

The demonstration phase ends in about 2006. At that point in time we will be getting involved in the commercial plant. We will have to go to the markets or go to some other arrangements to raise the funds to build a commercial plant.

Okay. You clarified substantially there. So effectively what you are saying, I gather, is that between now and 2006 the conditions that currently exist will more or less continue to exist and at that point you then get into a point where you will need a substantial financing commitment which could be done in a variety of ways but obviously you can't discuss that in 2003.

That's absolutely correct.

My last question is could you discuss the, at the President's state of the union speech in January he initiated a program funding of $1 billion to develop hydrogen as an alternative energy source and it is my understanding from speaking with another person at your company that nuclear is the most desirable way to produce hydrogen. Could you expand on that a little bit.

Ron answer that question.

This is Ron Green. What you say is correct, there appears to be a commitment toward a, quote, hydrogen economy and every knowledgeable person knows that nuclear's the best way to produce the power to make the hydrogen.

Is there any -- is the nuclear industry receiving to your knowledge any of the funding, the $1 billion in funding that the Bush administration is talking about spending or has commenced spending?

That is not yet at all clear.

Do you think you would be in line for that? Is it something that you are looking for?

I just don't know.

Okay. Thank you.

Steve Roberts with NorthPointe Capital has our next question.

Sure. On the Russian contract, how long will it take to have a full impact on gross margins?

This is Steve. I would estimate that of the deliveries that we've had this year about 40% of the benefit has come through the income statement and about 60% is in inventory that will come out in future periods.

Okay. Thank you.

Our next question comes from Tony Cilluffo with Cilluffo Associates.

Congratulations on a good quarter. I just wanted because I worry about everything, Ron, you were in charge of the DOE's centrifuge project in the '80's, weren't you?

I was a part of the management team that did that work, yes, sir. I wasn't in charge of it. I was a very young man in those days.

Thank you very much.

Our next question comes from Richard Greenberg with Donald Smith.

I am wondering in a general sense if you could discuss the impact of the weaker dollar. It seems that it should help you but I'm not quite clear on that and maybe in that discussion talk about what the world SWU price is in contrast to the 105 or so in the U.S. What's the world price?

Rich, in terms of the dollar, one would think that, you know, way back when, when the dollar was strong or when it’s weak that it would have an impact relative to pricing, but the contracts are done over such a long period of time that it doesn't really appear to have much influence on any short term measurable period even within a year that you can see.

Even on the stock price?

Even on the stock price, the currency does not seem to be a factor.

Okay. And then world prices, what would you say world -- you know, prices outside the U.S. are.

We think they are about the same.

Okay. So there's somewhat close to that hundred dollar level as well.

Yes, sir.

Second question. I remember as part of the strike that you guys learned a lot and learned a lot about your staffing at Paducah and how that is could be reduced. And expecting another cost reduction announcement and work force reduction and I don't think we've seen that. Where do you stand on your efforts to further cut costs at Paducah?

At the end of last year, we announced a 200 person reduction in the Paducah area and as we were going through the strike and, as you said, learning about operations in the first half of the year of 2003 we increased that reduction by 20%. And all those reductions have occurred. We have made no announcements of any other reductions but as you indicate we have said time after time the attention to costs and cost control is a very important part of our business and we will continue to look for ways to have cost reductions. That statement is primarily related to our production operations at Paducah. Relative to Portsmouth we are not making any SWU and are basically in the government contracting business, the issue there on employment does the government has contracts to let? Have they funded them and are we the winning bidder?

Final question on gross profit margin. On a normalized basis, you have a lot of moving pieces and price bottoming out next year and you get annual increases, et cetera, hopefully but on a kind of normalized basis is there some target gross profit margin that you can point us to looking out a couple of years?

Rich, I'd rather wait on that question until we have our guidance for 2004 but I think you've seen, obviously, the progress we've made this year and really, you know, the kick in of the cost control efforts and manufacturing over the last couple of years kick in this year because they're an inventory and the impact of the new Russian contract with the market base pricing algorithm. So I think you can see for this to go forward..

Wouldn't it be fair to say since you are getting over half of your product from Russia that looking at what that market based price mechanism is and the discount you get, whatever that is and I don't think you've publicly said exactly what it is, but if I were to say, oh, you are getting a 13% discount, that that would kind of be a target normalized gross profit margin at least for the Russian SWUs or is that not the right way to look at it?

Obviously whatever that discount is that's what it is. And, you know, it's baked into the numbers.

Okay. Thanks a lot, guys.

Next we have a follow-up question from Michael Christolus with Inwood.

My question is just about contract lengths. You've mentioned how market SWU prices have increased a bit due to some of the trade actions and that you should be benefiting by late '04. And yet I also understand I think that your contracts are typically 12 to 24 months and yet some of the new business you’ve announced goes out to 2011. I was wondering if you could elaborate or reconcile the thought. Does it behoove the company to go out that far and lock in some higher prices and starting in 2006 soft commercialization partners you may be seeking for the centrifuge are also going to need to be working on their economic models to determine how to join you in funding that project. I am just trying to understand what kind of bench marks you may be trying to set for contract pricing in the latter years of this decade and how that might help you fund the centrifuge project.

In terms of the contract length and trying to clear that up for you, the average contract is somewhere between 3 and 7 years. In that contract, there's probably two to three deliveries and those deliveries tend to be 12, 18 months part. And those contracts are signed usually 18 months to two years before the first delivery so that's the reconciled of those two timing issues.

In our industry contracts are basically priced at time of contract signing plus an agreed to escalation clause and so they are not like someone asked earlier about oil and gas they are not like those kinds of industries where it is price at time of delivery. It is price at time of contract signing and escalation.

Can you give us some time of weighted average, maybe durational weighted measure of your average contract life? Are you consciously going now a lot further to 2011 just given the higher SWU pricing and could see you go more toward longer term contract as opposed to shorter term.

We have made the statement in the past we for the most part do not participate in a spot market. We believe it's good for both the supplier and the user to have longer term contracts and we have always been in this mode.

Thank you very much for clarifying.

And another follow up from Steven Pineault with Imperium.

Thank you. My question's been answered.

Our last question comes from Tim Hassara from Kennedy Capital.

What is the possibility,with respect to your natural raw uranium that you sell, that you can securitize those with a company that will give you the cash flow that inventory you have in your balance sheet based upon the future sales of those in the marketplace?

Tim, I guess it's always possible to securize those. We look at that obviously as an asset of the company. It is marketed to market or lower cost of market so it is fairly valued. And we look to be selling that over a period of time that probably will stretch to 2006 to 2007 and that's part of the cash flow generation of the company. We like to have our timings line up. As we indicated to a previous question, we have sufficient cash flow in the company to handle the $150 million centrifuge development activity in our dividend and interest so we don't need a slug of cash in today.

One more question. What is the talked about the price of uranium being approximately $35 right now. Is that still related to the Cameco mining issue right now? What is going on with the price of uranium.

This is Phil Sewell. I think you are seeing market being affected in terms of uranium by virtue of supply and demand and I say less extra supply or spot sales being made and being available and people looking at the future in terms of the supply and demand from a production standpoint coming more in balance than they were in the past and, therefore, looking at a way in which they want to secure their sales in the future and their procurements and the need to make sure they have the uranium they need to run the plants.

Tim, it is my understanding that much of the supply over the last couple years came from inventories as opposed to new production and a lot of those inventories have been worked down, the concern is in the industry is there going to be enough production and what kind of price needs to be in the market to encourage that production level.

Okay. Thank you.

That concludes today's question and answer session. I will now turn the call back to Mr. Shelton for closing arguments.

We have covered a wide range of toics this morning. I thank you for your participation in this morning's call. We value all opportunities to hear from our investors. We are excited about USEC's long term prospects and remain dedicated to delivering shareholder value. Have a good day.