Centrus Energy Corp (LEU) 2004 Q2 法說會逐字稿

Good day, and welcome everyone, to the USEC, Inc. second quarter 2004 earnings conference call. This call is being recorded. With us today from the Company is Mr. William H. Timbers, the President and Chief Executive Officer; and Mr. Steven Wingfield, the Director of Investor Relations. At this time I would like to turn the call over to Steve Wingfield. Please go ahead, sir.

Good morning, and thank you for joining us for USEC's conference call regarding the second quarter that ended June 30, 2004. This is Steve Wingfield, Director of Investor Relations for USEC. With me today today to discuss our financial results are: Nick Timbers, President and Chief Executive Officer, Lisa Gordon-Hagerty, Executive Vice President and Chief Operating Officer; and Ellen Wolf, Senior Vice President and Chief Financial Officer.

Before turning the call over to Nick I want to first welcome our callers as well as those listening to our webcast via the internet. This conference call follows our earnings news release issued yesterday after markets closed. That news release is available on many financial websites, as well as our corporate website USEC.com.

Second, I want to inform all of our listeners that our news releases and SEC filings, including our most recent 10-K, 10-Qs and 8-Ks are available on our website. A replay of this call will also be available later this morning on the USEC website. I'd like to remind everyone that certain of the information that we discuss on the call today may be considered forward-looking information that involves risk and uncertainty, including assumptions about 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 forward-looking information provided today is time sensitive and is accurate only as of today, August 4, 2004. This call is the property of USEC.

Any redistribution, retransmission or rebroadcast of this call in any form, without the expressed written consent of USEC, is strictly prohibited. Thank you for your participation.

And now I'd like to turn the call over to Nick.

Well, thanks Steve, and good morning to everyone, and thank you for joining us for our conference call. Yesterday we issued USEC's results for the second quarter.

Ellen will provide a detailed report on those results in a few minutes, but first let me give you a few thoughts on our activities for the quarter. From an operational view point the quarter was routine. The Paducah plant operated well. Customer orders were delivered on time and on specification.

The shipments of the megatons to megawatts material from Russia were right on schedule. While that may sound bland, that's the sound of a business quietly working as it should. Looking briefly at our financial results in the second quarter, net income was $11.7 million or 14 cents per share. That brings our earnings for the first half of the year slightly better than break even. Revenue in the quarter was $318.6 million.

This year, as we previously disclosed, about half of the year's total revenue is expected to be earned in the fourth quarter. If you look back several years, generally our revenue is higher in the second and fourth quarters. In this respect our financial results regularly reflect our customers' refueling schedule for their nuclear power plants. Refueling is generally done in the spring or fall when utilities take their plants offline because power demand is usually low then.

This refueling pattern, plus the advance notice for deliveries that we receive from our customers, provides good revenue visibility on an annual basis. As a reminder, we believe USEC's financial results are more appropriately viewed over the longer term.

That's because our customers generally place orders under long-term contracts that are tied to their reactor refuelings that occur within a 12-24 month cycle. Therefore, as we report in each quarterly earnings release, short-term comparisons of USEC's financials are not necessarily indicative of the Company's longer term results.

In other USEC business developments, last week we announced that we purchased NAC International from the Arizona utility holding company Pinnacle West. With NAC we will offer an expanded portfolio of products and services to our utility customers. These will include transportation and storage systems for spent nuclear fuel that are essential to nuclear power plant operators as well as nuclear consulting services to nuclear customers worldwide.

In the United States, USEC will be able to assist utilities as they await the opening of the U.S. Department of Energy's long-term nuclear waste repository at Yucca Mountain, Nevada. NAC anticipates selling a next generation technology that can provide for safe storage of spent fuel at nuclear power plants. This is of significant interest to reactor operators who are running out of capacity in their on-site spent fuel ponds. A license application for this new canister is expected to be submitted to the Nuclear Regulatory Commission later this year.

NAC has the largest fleet of spent nuclear fuel and high level waste transportation casks in the United States. Transportation services now moves spent fuel between 103 operating nuclear power plants and Yucca Mountain is another business opportunity that we can pursue. NAC's consulting division also includes a special role for tracking nuclear materials conducted on behalf of the United States government.

We see this as an opportunity to align the strategic interest of USEC and DOE. NAC has long been a leading provider of consulting services for the nuclear industry. Let me assure you that we understand the necessity of establishing a careful separation between USEC's marketing efforts and NAC's consulting businesses. That means constructing a high Chinese wall to ensure separation and confidentiality of information.

While this is a relatively small transaction at $16 million, we like the strategic fit it has with our business and advances our goal of transforming USEC to a growth and astute diversification. We believe in our industry and think it is poised for expansion and growth. This acquisition will help us tap into that growth potential.

We plan to retain key members of NAC's senior management team based in Atlanta Georgia.Leading that team is CEO Peter Walier who will report to Lisa Gordon-Hagerty, USEC's Chief Operating Officer. Because this transaction will close in the latter half of the year, we do not expect it to have any material impact on 2004 earnings.

Looking forward, NAC should add about $30 million to our annual revenue, be accretive by about a penny per share to annual earnings and generate positive cash flow. Spent fuel management is at the end of the nuclear fuel cycle. This investment in NAC complements the investment we are making in the front end of the fuel cycle--the American Centrifuge.

We expect the American Centrifuge to provide the world's most efficient enrichment technology, creating the fuel going into nuclear power reactors around the world. With this investment in NAC we can help both existing and new customers with managing spent fuel after it has finished generating billions of kilowatt hours of electricity. Through NAC these new products and services offerings will strengthen our business relationship with the nuclear industry.

Regarding the American Centrifuge, in June we announced the selection of Fluor Enterprises, a subsidiary of the Fluor Corporation to provide engineering, procurement, construction management services for the American Centrifuge plant in Piketon, Ohio. Fluor's responsibilities over the next two years will include design and detailed engineering work covering all aspects of plant construction, apart from the centrifuge machines. We expect to announce a manufacturing contract for the centrifuge machines in the near future.

Fluor is one of the world's leading engineering and construction firms, and they are very familiar with our project, having played a major role in the original design of the DOE's centrifuge plant at the same site in Piketon. As you know, we'll be using that large facility which has the equivalent of some 20 football fields underroof for the American Centrifuge plant.

USEC employees are currently refurbishing the building to prepare for the demonstration of the American Centrifuge. They are removing DOE era centrifuge machines that have been idle there since the program was halted in 1985. We are conducting this refurbishment project under contract with the Department of Energy.

We expect our state of the art centrifuge machines will be demonstrated in the same space beginning next year. The operation of these initial centrifuge machines will provide important cost, schedule, and performance data that is necessary before we begin construction of the commercial plant. As we work to demonstrate the American Centrifuge technology we are also evaluating various funding options for the commercial plant.

We are confident that the demonstration will prove the efficiency of our centrifuge technology and that the financial markets and other potential partners will find this to be an attractive investment. The American Centrifuge is an investment in this Company's future and accordingly, our reported earnings and cash flow reports today, and in the future, reflect this vital investment.

Turning next to our operations in Paducah.

We have been operating under lower electric power usage for the summer. As you will recall, electricity represents 60% of our production costs, so we operate at a lower production level during the summer when power costs are higher. We are using about 900 megawatts this summer compared to the 1600-1700 megawatts used during the other nine months.

This level allows us to maintain a high number of production cells online that will facilitate a rapid return to full production in September. The higher cell count also improves the efficient use of electric power as we underfeed the plant. This underfeeding mode results in USEC having less uranium in the enrichment process. Having additional uranium to sell meets the needs of our customers in the current volatile uranium market, and improves USEC's profitability.

I would now like to turn the call over Ellen, who has additional information about our efforts to optimize the economic value of our operational flexibility at Paducah as well as wrap up the quarter financial results. Ellen?

Thank you, Nick, and good morning, everyone. As Nick mentioned earlier, for the quarter ended June 30, 2004, our net income was $11.7 million. Revenue for the quarter was $318.6 million, or $44 million less than the same quarter in 2003. The key reason for our lower revenue was a 27% decrease in SWU volume from second quarter 2003 to second quarter 2004.

The factors behind this decline were first, lower customer commitments as a result of the aggressive pricing that we saw in the late 1990s. Second, the timing of reactor refuelings, which occur in cycles of 12-24 months depending upon the reactor design. And third, the postponed refuelings by a major Japanese customer whose 17 reactors were shut down for special inspections beginning in late 2002.

These postponed sales were anticipated in USEC's earnings guidance. The Japanese government has now authorized 14 of the 17 shutdown reactors to restart, and the utility is prepared to seek permission to restart the remaining 3 reactors. 10 of these reactors were USEC customers and 7 of them have been returned to service.

The shutdowns have affected SWU volume for 2004 and looking forward to 2005 will continue to impact our SWU sales volume but to a lesser extent than in 2004. The price per SWU bill to customers was nearly flat in the second quarter of 2004 compared to the second quarter of '03. For the six month period SWU prices billed to customers were 4% lower than the same period in '03 as SWU deliveries in the first quarter were made under the lower price contracts that we had signed in the late 1990s.

We expect average prices billed to our customers for the rest of the year to be higher than in the first half of the year. Our forecast reflects that improvement with average prices for the full year in 2004 that are little changed from 2003. The improvement in average invoiced prices reflects higher pricing in our more recent contracts and the continued rolloff of older lower priced contracts for uranium.

Uranium sales for the 3 and 6 month periods ended June 30th improved over the same periods in 2003. The $18.8 million improvement in the first half of '04 was due entirely to higher average prices billed to customers. As many of you know, the market price for natural uranium has improved significantly in the past year. Much of our inventory of natural uranium is presold, but additional uranium was made available for sale as a result of underfeeding operations at Paducah.

Let me give you a short explanation of underfeeding. USEC has the flexibility to operate the Paducah production facility in a manner that uses less uranium in the enrichment process, but does require more processing or more separative work units known as SWU, which in turn requires the use of more electric power. The uranium not required to meet the customers’ order is added too our inventory and available to be sold. We utilize the flexibility of underfeeding when the value of the uranium exceeds the cost of the additional power.

Conversely, if the economics of uranium and electricity change, we can overfeed, where we use more uranium and less power to meet the customers' order. If you would like any further explanation of the production processes please feel free to contact Steve Wingfield. Essentially, we are optimizing the economic value of the two major inputs for enriched uranium, natural uranium and electricity, for the benefit of our shareholders. We are also responding to requests from customers to bring additional natural uranium to the market because of the unusually tight supplies available today.

The one key thought that I want to leave you with is that we are not accelerating the drawdown of our natural uranium inventory. Additional uranium sales at this point in time make economic sense through the underfeeding process at our operations in Paducah.

Finally, on the revenue side, government contract work continues to be in line with our guidance that it will be virtually unchanged from 2004 compared to 2003.

For the quarter, revenue from U.S. government contracts was $41.4 million, about $1 million more than in the second quarter of 2003. Turning now to cost of sales. The decrease in SWU volumes resulted in a corresponding decrease in cost of sales, with cost of sales decreasing 18% from the second quarter of 2003 to the second quarter of 2004. In addition to lower volumes, cost of sales was also lower between the two periods due to lower inventory unit costs. Previous initiatives that had reduced production costs and the lower purchase costs related to the megatons to megawatts program, contributed to the lower inventory costs.

USEC uses the average inventory cost method under which an increase or decrease in production costs or purchase costs will have an effect on cost of sales in future periods. For the six month period ended 2004, our unit production costs increased by 3% from the first half of 2003. This reflects an increase in labor and employee benefit costs, which were abnormally low during the same period in '03 because of the strike at the Paducah plant.

The purchase cost per SWU increased 3% under our market-based formula with Tenex, the Russian government's executive agent, which reflects higher SWU market prices since 2001. Gross margin for the quarter was 17.4% compared to 11.5% the year before. This increase was due to improved margin on natural uranium sales. For the six-month period, the gross margin was 14.2% compared to the 11.1% in the same period of 2003. For the full year of 2004, the mix of products will bring the margin down a little, as we expect gross margin to be about 13%, or a little over 1% better than 2003.

Recorded below the gross profit line on the income statement are the expenses for the American Centrifuge project and selling, general, and administrative expenses. First, expenses related to the American Centrifuge for the six month period were about the same as last year and had the impact of reducing net income by approximately $7 million for the quarter and $12 million for the six month period.

In addition to these expenses, in 2004 we have begun to capitalize the American Centrifuge costs that are related to the commercial uranium enrichment plant. These costs are accumulated on the balance sheet as construction work in progress under property, plant and equipment.

So far, in 2004, we have capitalized $4.5 million in centrifuge costs. USEC is a company clearly committed to the American Centrifuge demonstration. As we said on prior conference calls, in 2004 we expect to spend approximately $70 million on the American Centrifuge with about $20 million of that being capitalized. The remaining $50 million in demonstration costs will be charged to expense, and will have the effect of reducing after-tax net income for 2004 by about $30 million.

As you evaluate the earnings power of USEC, please keep in mind the limited time frame over which we will be incurring these costs of investing in our future. Selling, general and administrative expenses, or SG&A, were up $1.1 million compared to the second quarter of '03. Contributing to the increase were higher compensation and employee benefit costs, higher insurance costs, and additional legal and consulting fees.

Turning next to cash. Our cash flow from operating activities in the six months ended June 30, was negative by $190.6 million compared to a positive $23.1 million in the same period last year. The primary difference in cash flow between the two periods was the cost of a higher SWU inventory without the corresponding sales.

SWU inventory at the end of the second quarter of 2004 was 20% higher than at the end of the second quarter of 2003. This enriched uranium will be available for the unusually high SWU sales that we anticipate in the fourth quarter of 2004. Other differences in cash flow between the two periods included a $33 million payment in 2004 related to the termination of a power contract in 2003 and, as just mentioned, the reduction in SWU sales.

We also had an income tax payment on our 2003 results paid in 2004 compared to a tax credit for our 2002 results. As of June 30, we had a cash balance of $32.4 million and no short-term debt. Beginning in the third quarter, however, we expect to temporarily draw down on our bank facility. This is a result of our sales being back-end loaded into the fourth quarter.

We will spend more than $200 million building inventory during the year for those sales that we anticipate in the fourth quarter. Therefore, the declining cash is mainly due to timing. We expect to repay this short-term debt before December 31, 2004. As previously reported, our guidance of cash flow from operations for the year is in the range of negative $95 to $105 million.

In addition, capital expenditures, including those related to American Centrifuge, will be approximately $35 million. We anticipate a cash balance at December 31 in a range of $55 million to $70 million. That cash balance is after the cost of purchasing NAC International, and is about $15 million better than the guidance we provided earlier this year. We continue to expect to return to positive cash flow from operations in 2005.

Last month we updated our 2004 earnings guidance for the year. In our earnings news release yesterday, we confirmed our annual guidance of net income for 2004 in the range of $14 million to $16 million, or 17 to 19 cents per share. That's clearly an improvement over the $6 to $8 million guidance given earlier this year, and is due to the additional uranium sales we discussed a few minutes ago.

SWU revenue is expected to be a little lower than our initial guidance due to the movement of a few sales in the 4th quarter of 2004 into early 2005. These are not lost sales, merely the movement of the timing of these sales that we see nearly every quarter. In conclusion, we had a stronger than anticipated quarter due in large part to higher natural uranium prices. Looking forward, we continue to seek opportunities to lower our cost, improve our margins, and maximize the process of underfeeding at the Paducah plant, where it makes economic sense.

That concludes my comments, and I'd like to turn the call back over to Nick. Thank you.

Okay, thanks, Ellen. Six years ago in July of 1988 - 1998 USEC became an investor-owned Company. We spent the first several years fixing the business by lowering our costs and building relationships with our customers as a private business rather than a government entity. Regaining reasonable pricing for our products and rationalizing our production capacity. We restructured the business from top to bottom. Last year with most of our business issues resolved, we said that we were shifting our focus to growing the business as we enlarged our vision for USEC's future.

Last week with the acquisition of NAC, we took the first step toward expanding and diversifying our business through acquisitions in the energy industry. We will continue to look for opportunities. Opportunities that leverage our core competencies and customer relationship--opportunities that are - create earnings and generate positive cash flow, and opportunities that generate returns in excess of our cost of capital.

We are very optimistic about the nuclear power industry. In recent months, three nuclear utilities filed applications with the Nuclear Regulatory Commission for early site licenses that could lead to reactor construction at existing plant sites. In addition, three consortia are examining potential for building three different advanced reactor designs in the United States.

We are part of one of these three consortiums, led by the Tennessee Valley Authority, investigating an advanced boiling water reactor design, or ABWR, that could be built at Brown's Ferry in Alabama. We think these are exciting developments. USEC is a key player in the nuclear fuel industry. We have a vision of growth for our industry and will continue to seek opportunities to grow and diversify our business when it meets the objectives that I've laid out. I can assure you that we will be careful and smart about diversification. Thank you again for taking part of your day to hear this conference call today. And now, operator, we're ready to take questions.

Thank you. Today's question and answer session will be conducted electronically. If you would like to ask a question, please press the star key followed by the digit one on your touchtone telephone. Once again, if you would like to ask a question, please press star one at this time. And we'll take our first question from David Schanzer with Janney Montgomery Scott.

Good morning, everybody.

Hi, Dave.

Good morning.

A couple of questions. First of all, the NAC acquisition - you mentioned that it's accretive by about a penny in the first full year. I guess that is what you were referring to?

That's right.

Okay. My question is, how long does it take to get up to about a nickel in contributions from that part of the business? Admittedly, it's - as you pointed out, it's rather small, but from the time that you spent on it, it sounded like you're relying on it a little bit for some other things. How long will it take you to get to, say, five cents, and after that, how quickly do you think that business will grow percentage wise?

Well, that is an interesting question. But, Dave, as you know, in these calls we don't give, you know, forward-looking information of that regard. We think it's an attractive investment. We think that there are additional business opportunities that can help grow that business. And I don't think - it's a little premature. We haven't even closed on the deal yet - to predict about any additions to EPS in the future. But this is one where we think there is essential value to it, and that we can build and have additional revenue growth and earnings growth coming from it in the future.

Question about the centrifuge, and the Fluor partnership or - the Fluor operation. You had indicated that at one point in time you were searching for participative partner in the ownership if I remember correctly. Is that something that is still being pursued?

In all respects, yes.

Okay. Could you give us a sense if there is - on the drawing board any change in your dividend policy at this point?

I would be disappointed, Dave, if someone didn't ask me that question on the call. Right now as you know, we've just declared our - the Board has just declared the dividend for September. The cash flow guidance that we have given you for the fourth quarter - for the year assumes a continued dividend payment for the year. But as you know, it is always at the prerogative of the Board. And we feel we do have sufficient cash flow to meet the dividend at the moment.

Okay. You also indicated that the supply of uranium has been tight in the market. Is there any sense, without getting into specific numbers, what the trend will be over the next 12 months in terms of availability of uranium? Do you see a new supply coming into the market over that period?

In a strategic standpoint. Basically, the uranium market has some perturbations that it has gone through in the last year. First of all, oh, I'd say in the last 17-18 years worldwide consumption of uranium has exceeded production. Let me say that again.

Worldwide consumption has exceeded production, and therefore meeting the full consumption requirements in the last 17-18 years has been drawdown through both inventories of utilities and also by the Russian HEU deal of the natural uranium that came out of that. We've really gotten to a point of where the draw down of those inventories has been exhausted and that there is a tighter supply/demand mix in the uranium marketplace.

You also saw some, I guess, what I would call disruption or perturbation by Russian Tenex, not fulfilling the - or cancelling its commitment to fulfill the GNSS contracts. You also saw a shutdown of the ConverDyn--a conversion plant in Metropolis for about four months or so while they worked out some difficulties there, so, the flows were interrupted. You saw, therefore, the price of uranium increasing significantly both in natural uranium U308 up to about $17-$18 per pound right now, and you saw uranium hexafluoride increase up to, I think, the last time I saw it quoted at $56.10 per KGU.

In that environment, we find it attractive because of the high cost of uranium, to buy more electricity and to underfeed and then therefore, we essentially are creating more uranium in the marketplace. There are limitations from our production capabilities as to how much of that uranium we can just produce through underfeeding, but the question - I know it's a long answer, but I think it's - important to understand the dynamics of this uranium market. It is a question as to whether these high prices for the natural uranium U3O8 and the high price for UF6 will bring new levels of supply from new mines around the world into the marketplace.

It is not certain yet whether that will occur. But all of us in this industry will be watching this uranium market carefully. But, Dave, there just - you know, there's a limited amount that we can do in terms of underfeeding and putting new uranium into the marketplace.

Okay. Last question having to do with - markets for SWU. We get a lot of information with regard to the nuclear market here in the U.S., and you've provided us with kind of a detail of events going on in Asia. One of the things that we don't hear very much about is what's going on in Europe. And my question I guess is, is what's your perception of the future demand for SWU in Europe, and whether or not, given all of the other competitors over there that you're focusing on that market at all?

Well that's, I actually find that a very interesting question, because there's a great deal of uncertainty in the enrichment market and uranium market in Europe. There is a clear trend here in the United States, there is a clear trend in Asia. There is more of an uncertain market in Europe. It is the mixed bag, let me put it that way.

We have - you really look at it country by country because it is very, very different. There is still very strong support in France. They have 50 some reactors producing about 80% of the market in France. They are going through a review process about the steps necessary to put in place a new generation of an advanced reactor in France. I mean, so it looks good there.

Germany is committed to shut down its nuclear operations. There is a new reactor being built in Finland to add to their fleet. They went through - the largest RFP process we've seen in years, which was won by, I guess, by Framatome. We see a mixed bag in Sweden where they voted to shut down the nuclear industry several years ago, but there is second thoughts going on right now.

They are in - in the United Kingdom there is a white paper that was put out that did not have nuclear energy as a significant future source of electricity, but Tony Blair came out a couple of weeks ago saying that he wanted very strong personally, to protect the nuclear option for Great Britain and the United Kingdom. Spain is very strong. So, you see, that as I'm going around the continent it varies from place to place. In the enrichment marketplace, I would point out is that we only have in any given year from 5-7% of that market.

It the dominated by the indigenous enrichment companies in France and Urenco. There also is a strong presence of the Russians in the market and the low cost basis. There also are, you know, basic understandings within the European community that a significant amount of enrichment capability will be reserved for those indigenous producers, so. It is a difficult market from our standpoint and it also is an uncertain one. We watch it carefully, there are opportunities that we strategically take advantage of, but we also recognize that the strength of this Company USEC, is here in the United States and in Asia.

Great, thanks.

We'll take our next question from [Stephen Pineault] with Imperium Capital.

Good morning. Congratulations on the quarter.

It is a solid quarter and as I said, you know, sometimes bland news is good news.

Two questions. The first of which deals with your earnings guidance. And it was only, I think, July 19th when you thought your EPS was going to be, I believe it was 6-8 cents for the quarter, and it since moved up to, I mean, you've nailed it you hit 14 in the quarter, but yet you didn't change your annual guidance. And my question is, is that because you haven't included option used to further underfeed in your last six months or is there something else going on there?

Steve, let me make sure I understand the question, being related to the second quarter results being different from what we had issued in our forecast?

Right.

And that was really due to the recognition of the timing of a sale. We had anticipated a sale and the recording of that revenue related to the sale to occur in the third quarter, and that's what was included in our forecasts and projections. When we relooked at that and relooked at the accounting principles working with our auditors, decided it was more appropriately recognized as revenue in the second quarter. So it really is just a timing issue. A moving issue.

Okay, so in terms of your annual guidance, we should stick with it and build off of that for next year?

That's correct. The annual guidance still holds, this did not impact that guidance, it was an issue of timing, of recognition of revenue.

Actually, that's it for now. Thank you very much, and congratulations on the quarter.

Thank you.

We will go next to Brett Levy with Jeffries & Company.

Hey, guys. Two questions. First off, regarding these three new projects, one of which you guys are a partner on, will those compete with the centrifuge project in the future? Can you talk a little bit more about that technology, and where you hope that brings you, and what it means for your existing and planned operations.

Actually, these three consortium that have been formed are to explore the construction of a new nuclear power plant in the United States. So rather than competition, it actually is the source of new business. That's why we participate in one of these. There is a very strong, strong belief that - growing - that nuclear power needs to be part of a going-forward portfolio mix of energy resources for this nation, and that growing belief really has helped the internal industry develop plans to put forth new nuclear technologies.

There are three of them that are being put forward. One is advanced boiling water reactor, which is really a GE, Toshiba technology that has been - that has built several of these in Japan. We are part of that looking to build this advanced boiling reactor, ABWR, in Alabama. The second is a pressurized water reactor or PWR. This is called an AP1000. It's a Westing House technology. That's being pursued by another group.

And then there's a CANDU reactor being pursued as well, I think led by Dominion Resources. I think all of these are very, very important for the industry, because there is beginning to have a significant internal investment to bring these online. These are advanced technologies they're off the shelf, the [inaudible] design, they're safer. This is something that's important for the United States to show leadership. I travel around a lot.

It is interesting when I'm in Japan and the nuclear executives in Japan keep on asking about when the United States is going build a new plant because they are looking again to the U.S. to show leadership in this arena. So, we think this is a very, very significant development for the industry, and that's why we seek to help participate and also, to be frank with you, to show leadership in this industry in developing a new road for nuclear power.

So, as opposed to competition, this is really a very important road to future business for the Company.

Okay. That's excellent news. Can you guys talk about, you know, vis-a-vis the Fluor contract and any internal requirements? Can you talk about when the financing starts to be, you know, needs to be in place in terms of your timeline or any of your contractors' timelines to build the full-scale plant?

I'm going to divide this into two questions. One about the Fluor, I'll mention that briefly, then I'll ask Ellen to address the financial side. The Fluor contract is with Fluor Enterprises, a subsidiary of Fluor Corporation in California. This is what we call EPCM, or engineering, procurement, construction, and management. Basically, this is a contract to build the balance of the plant, all the infrastructure, all the systems of the plant except the actual centrifuges. The tall cylindrical things that are 40 feet tall. Those will be built by somebody else. But this is a first step to design the plant to ensure that all of the systems are in place, and it's an attractive contract where we, I think, will be a strong partner over the years in developing this project. In terms of the funding and the financing, Ellen.

Let me divide. The project is divided into two pieces, as we had said. The demonstration phase--which would take up to $150 million, and then the manufacturing the building of the manufacturing plant, which is another $1.5 billion - up to $1.5 billion. We anticipate funding for the demonstration phase and a little bit into the manufacturing phase through internal funding.

But we have already begun the process of looking at the long-term financing for this project. We have had meetings with bankers. We have had bankers approach us. We've approached bankers. We put together a long-term gaming plan--including discussing other forms of financing, and as was mentioned earlier, perhaps partnering. So we believe we are well on the way to finding the long-term financing for this project.

The timing of it is such that we would like to bring with us the proof, which we believe will occur shortly, that this is a project that works. That we will have with us the statistics that show how it works. The efficiency of the working, and the cost savings of going to this methodology. And with that in hand, we believe it will be beneficial to our shareholders and produce lower cost financing for the project.

Alright. Thanks very much. Good quarter.

Thanks.

And we will go next to Richard Greenberg, Donald Smith and Company.

Good morning, guys.

Good morning.

I'm trying to understand these, you know, I'm assuming next year your SWU volume will be up for the reasons you've already stated. If that is the situation, and if natural uranium prices remain at these high levels, do you have the production capability to meet both the SWU contracts and to maintain this high level of underfeeding, and high level of natural uranium sales?

The answer to that is, yes. We have additional capacity within the plants and, you know, we are producing, I guess, what, Lisa? About 5500 SWU. That plant has significantly more capacity and it's really driven by the cost of electricity. As long as electricity is available we can produce this stuff.

Remember also, we purchased half of our production capability from Russia. So that gives us the additional capacity at the Paducah plant. I want to clarify one thing, Rich, is that this underfeeding issue does not reduce production capability. It just is a different mix of the cost of production. The drivers in the cost of production are electricity, labor, and uranium, and you know, labor is fixed and if we can dial up or down uranium and electricity, it changes how we produce. It doesn't change the production capability. But that is - I guess a little involved answer, but the answer is just a simple yes, we do have the capacity both through production and also through purchasing to meet additional customer requirements.

Okay.

Then can I make one additional point about this?

Sure.

Just wanted to - one of the good things about the centrifuge that we are working on, is that when this comes in to commercial deployment and at full production capability at the end of this decade, and there are additional, and I do believe that there will be additional - demands on nuclear energy going through the beginning of the following decade--that the centrifuge capability that we're building is modular so that we can add as new demand comes along.

We right now have installed a huge capacity at the Paducah plant, but it will be a much more efficient production capacity at the centrifuge as we add additional incremental capacity as demand requires. So, in that respect, it's a great question about the future of the industry, and how we're prepared to address it.

The other question I want - the other issue I wanted to understand a little bit better on the natural uranium is if - given that prices are so high now, I believe that a lot of your sales were made - on natural uranium were made under long-term contracts which have limited ability to increase prices. Some ability, but, you know, you can't get the full benefit. I guess it's a two-part question.

How much of the natural uranium sales you're making today can actually be done at these very high spot prices? And then next year on the assumption that prices remain high, how much more flow-through can you get into your earnings at the same volume level, say this year, just from the fact that these long-term contracts must have higher - you know, you're allowed to raise prices again next year?

Well, tell you what Rich, let's see if Ellen and I might do a tag team on this. Let me start by saying that you are right in the uranium contracts we do, we have engaged - we primarily sell uranium when it's associated with our enrichment SWU. We're not out there speculating as a third party, or an independent broker. So that, we're selling this as it is associated with enrichment, and what that is, we sell an enriched uranium product or EUP as opposed to just the SWU. Now, you're right.

We do sell this uranium and have sold this uranium over the years, since privatization, it has increased of late where we have entered into long-term contracts, but it's a little bit like dollar cost averaging, you know, from the financial standpoint. You don't want to bet all your bananas on the market on any given day, but you want a dollar cost average into a stock. You're going to buy over time, and protect the downside as well as the upside. And that's largely what we do. There is a significant amount that's under contract. There also is an amount that is coming - that we placeinto the market.

But I want to reemphasize one thing that Ellen said in her remarks, and that is the additional amount of uranium that we're selling is not a draw down of our existing inventory or our balance sheet, but rather it's produced through the underfeeding - and so it is immediately available. And so that's really where, in that underfeeding uranium that we are producing today, it does go into our inventory, but it still is one that is available to capture this marketplace. But in the same respect, I'm glad that we can, you know, see, you know, the good financial results from a $56.10 U.S. fixed marketplace, but, you know, markets go up and down, and I want to be sure that we're protected on the downside as well. So, that's my first part. Ellen, do you want to add on to that?

Let me add a couple of things. As you mentioned, a majority of our inventory, uranium inventory, is pre-sold and it is pre-sold in connection with our SWU sales--as a package. There are in those contracts often a market clause which allows us to raise the price within certain caps to meet the market.

However, the incremental sales that we're seeing, again, are combined with SWU sales but they're SWU sales that we've gotten this year, and we were able to provide the additional uranium out of the underfeeding process and able to capture that upside this year. As I said earlier, we'll continue to look at the underfeeding next year as well, but it will be a value proposition that will look at costs of the power needed to produce that additional, or to do the underfeeding versus where the market is on uranium at the time.

If market prices stay at this level and your volume, your natural uranium volume is the same, would your - can we say that your profits from this business from that selling natural uranium, would be higher next year because of what we said regarding, you know, higher price adjustments, and, you know, the higher flow-through of spot prices being higher for next year possibly than this year? Is that a fair statement?

While I appreciate the question and the statement, Rich, we generally do not comment on the future or give guidance for next year at this time, and that will come out later in the year as it has historically.

Just one last question. I know you don't give guidance for next year, but tell me if any of these assumptions that I'm making are wrong regarding next year's results. It seems that next year you should have higher SWU volume, your average price is going to be higher, your costs with your system I'm not sure where - your costs I imagine will be higher, but I still think your margins should be higher next year.

You should have lower American Centrifuge cost expense, $50 million this year, and I believe $40 million next year. Tell me if I'm wrong in that, and I'm hoping that your SG&A which has been high, we've talked about that in the past, will at most be the same next year as this year, and hopefully lower. Am I clearly wrong in any one of those assumptions?

On your assumptions I feel like I'm completing the computer model now. Let me talk about them generically. I think overall the comments that you made are not incorrect. However, there could be variations among all of the comments.

Centrifuge as we've said, will be expensed about the 150 million over the time frame, so we need to look at what we spent historically versus what we will spend next year. On the costs of SWU, higher SWU, again, we will have some of our older contracts rolling off, but they will impact '05 and so we need to keep that in mind as well.

And I could not concur with you any stronger on controlling our costs and our SG&A and our production costs. Our goal is to continue to control those and keep them as flat as possible.

Thanks a lot, guys.

We'll go next to [Terence Osrtslan] with TSO and Associates.

Thanks. Ellen, just to complete this American Centrifuge. How much has been capitalized and expensed so far, please?

We capitalized about $4.5 million. And expensed, we expensed this year as I said, we will expense about $50 million this year. And have expensed about 45 last year.

So there is about 95 - there is another 55 left to go on that one.

Yeah, and a little bit had been expensed in the prior years as well.

So the capitalized module might change into the future?

I'm sorry, could you say that.

The capitalized amount of the process will not change, well, you mean the $4.5 million?

That number will go up and that amount really relates to the manufacturing, the commercial plants, which under accounting principles will be capitalized. And as we said we expect about 20 million to be capitalized in '04.

Okay. Okay. Just come back to the uranium markets. Is there a point of resistance by reactors to consider whereby, yes, uranium's a very small proportion of the overall cost of producing power, but at what point in time do you see that it could be an impediment for people's decision making process for future reactors?

That's an interesting question, and probably is a very complex answer, mostly because uranium - is a relatively small part of the total cost of a nuclear power plant. The capital cost is really the most difficult part of the equation for nuclear - from an operating standpoint, nuclear is the lowest operating fuel source of any generating, it's lower than coal, lower than oil, lower than natural gas and certainly lower than wind solar and hydrogen.

From an operating standpoint, nuclear has it all over every other fuel source. But it is the capital course - the capital cost that has to be brought town and that is what these consortium are working so hard to do. Once you hit a capital cost that is - in the same what we call the area code of coal or natural gas, you're going to find a very, very attractive energy source. So the answer so this is not just looking at uranium as a separate isolated element but it is in the broader context of the overall cost of nuclear and then it is an even broader context of all the other competing sources of both their costs and their availability.

Please recognize as I was coming in to work this morning I think I heard on the radio that oil had closed at about $45 last night. Natural gas is about $7.50. I think when we look back over the last couple of years we can certainly that see that OPEC was looking for a stable range of oil between $18 and $23 a barrel. They're struggle at $45 right now. Natural gas was the future of all energy production in the United States at $2.50. It's now at $7.50. The economics have changed.

And so that these are long lead items as to when you build new nuclear - you know capacity or really energy capacity, and I think that it takes some significant leadership in this nation to look before thinking about how to have a portfolio of energy sources, and that is what I constantly promote in many different venues--both in the government and in commercial settings--that nuclear power is not going to be the sole source of energy in the future, but by gosh it needs to be part of a portfolio of diversity of energy sources that this country and others in the world can rely on. I feel quite strong about that and I think it provides quite an optimistic scenario for nuclear power in the future.

I think you have a lot of company in that thought process]. Looking at the history of this industry going back to the '70s and '80s and long-term contracts were an integral part of the industry, and not the hand to mouth feeding of their requirements if everyone comes back to the market, I mean, the uranium price will not stay where it is, just the natural reaction of supply and demand, that will cause the whole price structure difference. The security of supply will be more like an issue as time goes on.

I think what you find is the various uranium out there in the ground. Because the market has been flat over the last 15 years or so, there's no economic incentive to bring new mines on. New mines are capital intensive, they take several years to develop and unless there is a clear view that there is going to be a demand for it, you're not going have new mines developed.

I think if you start building, you know, a 5-10%, you know, compounded increase in nuclear power plants around the world from the basically 1% increase right now, you're going to have supply and demand, the demand is going to be met by increased supply. We'll go out and buy some uranium mines if it's economic if that's the case. I think what you'll find - I don't think you have to worry about the supply if the demand is going to be there.

Fair enough.

The problem is the demand has not been there over the last - over that time period that you just described.

Fair enough. Last question. You indicated that next year you will be - cash flow positive, is what I heard, sorry, in the assumptions?

That's correct.

And the reason for that being just - generically?

We anticipate, as we said, '04 was a unique year, particularly as it relates to SWU sales, and we anticipate returning to normal levels in 2005.

Fair enough, thanks very much for your time.

Thank you.

Thank you.

We'll go next to Tony Cilluffo, Cilluffo Associates.

Good morning, Nick, good morning, Lisa, good morning, Ellen. Congratulations on an excellent quarter. But, I just wanted to ask one quick little question. We had expected the cash balance to be $40 million to $60 million prior to the acquisition, I assume of, now expect to be 55-70. That means that - that looks like a $30 million improvement. Isn't that what it means?

That's correct. And then that - that's correct. The number we have given as our new forecast is after the acquisition of NAC, NAC which is for $16 million.

I heard a few questions asked about the portfolio of energy sources, et cetera. Maybe someone should tell how much cheaper nuclear power is vis-a-vis any of the other sources, because it's not cheap by little bit. It is cheaper by a lot.

From an operating standpoint that is very true. It is higher capital costs, is the thing that these three consortia are working on. The capital costs are higher but the operating costs are considerably lower.

Thank you very much, again, congratulations.

Thank you, Tony for your support.

Thank you.

Thank you, Tony.

Thank you.

And we'll go next to Ashwin Krishman, Morgan Stanley.

Hi. I had a quick question just regarding the 2006 bond.

Ashwin, can you speak louder or into the phone? We can't hear you.

Sorry about that. Regarding the announcement of the financing for American Centrifuge, do you also plan to announce a plan for the 2006 bonds at the same time? Or when can we expect that do you think?

We are working on that right now as well, and we'll probably--in terms of timing--be addressing that first, and then as I said, as we get more data and as the demonstration project proves out the data on the centrifuge project, we'll be announcing then the financing for that.

Okay, thanks very much.

Thank you.

And there are no further questions at this time. I would like to turn the call back over to Mr. Timbers for any additional or closing remarks.

Well, I just want to thank everybody for joining the call today. I found the questions quite interesting. I think you might also see from our standpoint that we are committed to this business. We are enthusiastic about this business, and maybe even in my voice sometimes you realize that I'm passionate about this business. We think that the future of USEC is very strong.

We spent the last couple of years fixing the business, but we're in a position where we wanted to be all along, now where we can see a vision about how we can grow and develop this business into a very strong Company with all your support both from shareholders, bond holders, and other interested parties. Thank you very much and see you next quarter.