Centrus Energy Corp (LEU) 2005 Q2 法說會逐字稿

Good day and welcome everyone to the USEC, Inc. 2nd Quarter 2005 Earnings Conference Call. This call is being recorded. With us today from the Company are Mr. James Mellor, the Chairman and CEO; and Mr. Steven Wingfield, the Director of Investor Relations. Mr. Mellor will make his opening remarks which will be followed a question and answer period. At this time, I would like to turn the call over to Steve Wingfield, please go ahead sir.

Good morning, thank you for joining us for USEC’s conference call regarding the 2nd quarter of 2005 that ended June 30th. With me to today to discuss our financial results are Jim Mellor, Chairman and CEO, and Ellen Wolf, Senior VP and CFO. Before turning the call over to Jim, I’d like to welcome all of 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 markets closed. That news release is available on many financial web sites as well as our corporate web site usec.com.

Second, I’d want to inform all of our listeners that our news releases and our SEC filings including our most recently amended 10-K, 10-Qs and 8-Ks are available on our web site. A replay of this call will also 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 this call today may be considered forward-looking information that involves risk and uncertainties, including assumptions about the future performance of USEC. Our actual results may differ materially from those in our forward-looking statements. Additional information concerning factors that could cause actual results to materially differ from those in our forward-looking statements is contained in our filings with the SEC, including our annual report on Form 10-K/A.

Finally, the forward-looking information provided today is time sensitive and is accurate only as of today, August 4, 2005. 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 Jim.

Thanks Steve and good morning to everyone, and thank you all for joining us for our conference call on USEC’s 2nd quarter operations and results. Before we begin going through USEC’s financial results, I’d like to take a moment to comment on the energy legislation which was passed last week by Congress.

The energy bill was a long time in the making, as you well know, but to my mind the wait was worth while. This is very pro-nuclear legislation and the impact on the nuclear power industry could be substantial. This country needs diverse sources of electricity generation and the energy bill really promotes that diversity. However, while wind turbines and solar energy are great they can’t provide reliable, low cost, base-load power generation that our economy and our lifestyle demands over the next 20 plus years. On the other hand, nuclear power can.

This new legislation financially supports building the first new reactors in a generation; carrying away some of the hurdles that have blocked new plant construction for too long. When I became Chairman of USEC in 1998, the question that analysts often asked was how many nuclear plants would be shut down early. Over the last several years, there’s been a distinct turn-around for our industry. Instead of early shut downs about three dozen nuclear plants have received 20 year extensions of their operating licenses, and many more are in the works. There are clear signs that the nuclear renaissance will bring construction of new, safe, environmentally friendly, and efficient nuclear plants to this country. This won’t happen over night, but certainly the tide has changed.

The new U.S. energy policy is a landmark development for the nuclear industry and clearly signals that we’re on the right track with our investment in the American Centrifuge program. This technology is expected to provide a reliable, competitive fuel source for the world’s nuclear power plants, while supporting U.S. energy security and national security interests.

We’ve had a string of successes with the American Centrifuge Demonstration meeting the first nine milestones that are included in the DOE-USEC Agreement. But as I said in the past, this is a large, complex project, and large projects rarely go exactly as planned from start to finish; at least I haven’t seen one in my experience. Over the last few months, we’ve encountered issues relating to quality of material, performance of some Centrifuge components, and insuring new processes are in place to comply with recently issued regulatory requirements. A tentacle of issues faced in any large, complex program. We’ve worked through some of these issues as the testing has progressed and I’m confident that our people will continue to work through all of the new issues as they arise. Our company, myself personally, continues to have high confidence in the American Centrifuge technology.

Just recently our Board of Directors sought the opinion of independent experts who affirmed that the technology is sound. And, we fully expect the American Centrifuge plant to provide our customers with nuclear fuel for decades to come. If the testing phase takes some extra time; we end up building a better Centrifuge program, machine. That’s time well spent in my mind.

Next, as many of you know, we’re engaged in negotiations with our power provider, Tennessee Valley Authority (TVA) regarding the cost of electricity we buy for our Paducah facility, beginning in June of 2006. USEC is a large and attractive customer for TVA, nonetheless, we’re not immune from market price pressures. Since we signed our last contract with TVA in the year 2000, the cost of fuel used by TVA to generate electricity has risen substantially. Forward market prices for electricity have also risen by about 45%. We’re still in the negotiations with TVA; our expectation, however, is that we’re going to pay more for electricity than we do today. An increase in power costs will translate into higher SWU production costs at our plant in Paducah. But we’re presently exploring ways to reduce production costs, improve operating efficiencies, and find incremental underfeeding opportunities to help offset future power cost increases. And we’ll keep you informed as to our success in that regard.

In the long run, however, the best thing that this Company can do is build and operate the American Centrifuge with its significantly lower power requirements, and that’s our primary focus.

Let me also bring you up to date on our search for a new CEO. The executive search firm, Korn Ferry has identified a number of attractive candidates for this critical position, and we’ve met with several excellent people. We’re pleased with our progress in the selection process, and we expect announce a new leader for USEC a little later this year. In the meantime, I continue to work closely with, what I consider to be a talented senior management team to implement our strategic plan.

Now with that, I’d like to ask Ellen to report on the financial results for the 1st quarter and I’ll be available later during the question and answer period, Ellen.

Thank you very much, Jim and good morning everyone. Before talking about our quarterly results as I have in the past, I’d again like to remind you that USEC’s financial results are most appropriately viewed over the long-term. Our customers generally place orders under long-term contracts that are tied to the reactor refueling which occur within a 12 to 24 month cycle. Therefore as we report quarterly earnings, we point out that short-term comparisons of USEC’s financials are not necessarily indicative of the Company’s longer term results.

Now, let me begin with revenue. For the quarter, revenue was approximately $277 million, down $25 million from the 2nd quarter of 2004, primarily due to a $31 million reduction in uranium sales. Revenue from SWU was virtually unchanged quarter over quarter at $193 million. U.S. government contract work which includes revenue from activity by NAC International was $9 million higher than the same period last year. We acquired NAC in November of 2004 and, therefore, USEC’s comparable revenue for the 2nd quarter of 2004 does not include NAC activity.

Looking at the six month period, revenue was just under $589 million, a $76 million improvement over the first half of 2004. SWU revenue was approximately $408 million, an increase of $59 million or 17% compared to the same period of 2004. Drilling down, that improvement includes a 13% increase in volume and a 3.5% increase in prices billed to customers. For the full year, however, average fuel prices billed to customers are expected to be only modestly higher than in 2004.

Uranium revenue was $79.5 million which was a decrease of $4.8 million over the six month period last year. Uranium revenue was down 14%--uranium volume was down 14%, but prices billed to customers rose 10%. Revenue from U.S. government contracts was $101.5 million, a $22 million improvement that includes the impact of $13 million in revenue from NAC.

Turning next to cost of sales over the six month period; the 13% rise in SWU volume in 2005 resulted in a corresponding 10% increase in cost of sales. The unit cost of sales increased by 1%, compared to the same period last year. USEC uses the average inventory cost method under which an increase or decrease in production costs or purchase costs has an affect on cost of sales in future periods. Therefore, the 1% increase in unit cost of sales in 2005, reflects increases and decreases in purchase and production costs that we reported in earlier periods. In the first half of ’05, the unit costs of purchases and production increased 3% over 2004. Our purchase costs of Russian material were slightly higher as determined by our market based pricing formula that reflects higher SWU market prices.

On the production side, our total cost of electricity, labor and benefits increased. However we produced 4% more SWU at Paducah during the six month period, compared to last year which offset some of the increase in unit production costs.

The gross profit in the six month period was $89.9 million, an increase of $23.6 million or 36% over the same period of 2004. The gross profit margin for the six month period was 15.3%, compared to 12.9% in the same period last year. Looking just at the 2nd quarter, the gross profit margin was 15.2%, down from the 16% margin seen in the 2nd quarter last year. As we noted in our revised guidance issued in the earnings release yesterday, we expect to see a gross profit margin in the range of 13% to 15% for the full year.

Below the gross profit line are the expenses for the American Centrifuge project and selling, general and administrative expenses for SG&A. USEC continues to make a substantial investment in the American Centrifuge technology. As expected, as we continue to move forward with the project our cash out-flow has ramped up. Total spending related to the American Centrifuge for the first half of 2005 was $53.7 million of which about $46 million was expensed and $8 million was capitalized. This investment in our future had the affect of reducing net income by approximately $28 million or 33 cents per share to our announced net loss of $2.1 million for the six month period.

In comparison, in the first half of 2004 advanced technology had the effect of reducing net income by about $12 million or 15 cents per share, and our net loss, at that time, was $2.4 million. A higher level of spending between the two periods reflect additional staff, increased spending on manufacturing Centrifuge components for the lead cascade, the cost of refurbishing systems that will support the lead cascade, and commercial plant design and licensing activities.

Our overall spending was somewhat higher than expected, and we had anticipated that more of this spending would be capitalized by mid-year. I’ll address this point in a moment, when I discuss our outlook for the remainder of 2005.

We continue to make progress in our effort to reduce SG&A expenses. For the quarter, SG&A was nearly $2 million or 12% lower than the 2nd quarter last year. For the year thus far, SG&A is down $2.7 million compared to last year. Consulting expenses for the year have declined $3.8 million, and compensation expenses are down $1.2 million. Those reductions are offset by $3 million of expenses by NAC which had not been acquired in the first half of 2004. Adjusting for NAC our SG&A would have been $5.7 million or 18% lower than the six month period compared to the same period in 2004.

Turning now to cash; our cash in-flow from operating activities for the six month period was approximately $39 million, compared to an out-flow of $156 million in the first half of 2004. The primary difference in cash flow between the two periods was a reduction of approximately $136 million in accounts receivable from customer collections in 2005, from sales that were made in the 4th quarter of 2004. We also had a smaller build-up of inventory in 2005.

In summary, the trends we are seeing in our ongoing operations had a positive impact. USEC’s gross profit margin of 15.3% for the six months is at the high end of our annual guidance. Our efforts to reduce SG&A are showing results. The average price billed to customers improved year over year, and our gross profit was 36% better in the first six months of 2005 than a year earlier. The benefit of these improved results to our bottom line is offset by higher spending on demonstrating American Centrifuge that was allocated to costs, to expense rather than to capital.

Looking forward to the remainder of 2005, we have updated our guidance for earnings, expenses related to the American Centrifuge project and cash flow. We expect to see improved prices billed to customers for both SWU and uranium which should generate a gross profit that is $30 million higher than in 2004. We will continue to reduce our SG&A expenses. Offsetting these improvements will be greater expensing of costs for American Centrifuge. The delay in beginning operation of lead cascade, that Jim had noted earlier, has resulted in more of the costs being accounted for as expense than in our earlier guidance. We expect our spending on this program will total $120 million for the year, $10 million more than we had previously announced. And while previously we believe that only $55 million of that total would be expensed and $55 million capitalized, we now believe that approximately $100 million will be expensed and $20 million capitalized, reducing net income by approximately $60 million. Given this higher level of cost allocated to expense, we have reduced our net income guidance to the range of $20 to $25 million or 23 to 29 cents per share. We will continue to assess the accounting allocation between expense and capital, and a higher allocation of the costs to expense would further reduce net income.

We expect a higher gross profit to improve cash generation from operations over our earlier guidance. Cash flow from operating activities is expected to generate $180 to $200 million or $30 million more than the previous guidance. Our capital expenditures are expected to total $33 million. We project a year-end cash balance in the range of $240 to $250 million which is about $50 million better than our previous guidance.

Looking out a little further, we will have a number of corporate financing requirements in the next several years. We are in the final stages of negotiating a new bank credit facility with a syndicate of banks that we believe will give us flexibility in meeting some of these capital requirements. We also have $325 million in senior notes due in January ’06, and we will have more details for you on our plan to deal with this maturity later in the year.

We are getting closer to the time when we will finalize a financing plan for the American Centrifuge. We’ve talked broadly about issuing new debt and equity, working with members of the American Centrifuge team to provide them their financing, working with the State of Ohio to issue industrial development bonds, and using internally generated cash. As we move forward, we’ll keep you informed about our plans. Our intent is to obtain the most attractive financing package that allows us to build the American Centrifuge plant at the lowest, long-term cost for our shareholders.

That concludes our report on USEC’s financial and operating results, and now operator we’re ready to answer questions.

[OPERATOR INSTRUCTION]

And we’ll go first to Paul Clegg at Natexis, please go ahead.

Yes, good morning. First you mentioned certain issues related to materials and components in the revised time table for ACP as well as new regulations, could we get into some more specifics on what types of things we’re talking about there?

Yeah, I’ll get as specific as I can; recognizing that some cases security is an issue, but first of all relative to the quality of material. From the time that the DOE design was done, a number of years ago, a lot of changes in the materials have come into play, to our advantage. These changes are expected to make the ultimate production Centrifuge program or machines more cost effective. However, in some cases it is taking a little longer than originally anticipated to achieve the desired specifications. We’ve got some very aggressive specifications, we haven’t achieved them all, they are all achievable, and you know if worst came to worst and it won’t, we can go back to the original materials. But, we’re really trying to have a—the most productive, the most efficient Centrifuge that we can, and everything is not going totally in line.

So is it availability of materials or is it more engineering type issues?

No, it’s engineering.

Ok, ok, and with respect to, you mentioned regulations as well?

Yeah, we’ve had to implement new processes, procedures in response to update a DOE-NRC classification of security requirements, 9/11 had an impact on these, there are more stringent requirements, and it’s just some initial delays in procurement, fabrication on certain materials reflecting that.

Ok, so is that a lot of that just paperwork, fees--?

Yeah, yes, exactly.

And, if I may, let’s see here, you mentioned potential cost cutting opportunities as well, could we talk about what specific areas you could see yourself targeting in the future?

As I mentioned, we’ll continue to look at reducing and have reduced SG&A. We will continue to look at production to see where we can be more efficient in, for example, more SWU produced, but at the same cost, do more underfeeding opportunities or get more out of our machines. The quality of our plant in Paducah is the best that it has been in many, many years, and—

Probably the best ever.

--best ever, yeah, becoming more efficient day by day. So, we’ll continue to look at production costs all the way through. We’ll continue to look at more underfeeding opportunities; we’ll continue to look at cutting SG&A.

As Ellen mentioned, even though it is the best it’s probably ever been, we’re continually looking for ways to improve on that and I think they’re there, and we’ll achieve them if they are there.

Ok, so could you—with respect to underfeeding, I think some of us were probably looking for more of the benefit from underfeeding in this quarter just given where UF6 prices are today, and can you just kind of talk about the discrepancy with that, because obviously uranium revenues on a year by year basis were lower? I know you don’t break out enough detail there for us to get really specific on how much of that is underfeeding and how much is contracted sales. But maybe, you could comment on that?

Sure, there are a couple things. Number one, most of our uranium sales are tied to our SWU sales, and our SWU sales are long-term contracts. So, while we’re doing the underfeeding you may not see the benefit from a cash and revenue perspective until such time as the SWU sale occurs and the SWU goes out the door.

Ok, so some of the benefits of underfeeding and they’re going into the contracted portion of the revenues?

Yes, that’s correct. Second, most of anything we would just sell if we were just selling what we’ve underfed; there is a time you enter into a contract and it’s not immediate sale, there’s usually some time element involved in that. So they may be contracting today for something in the 4th quarter or something in ’06.

Ok, and I swear this will be my last one. When do you expect to test run American Centrifuge using UF6, and is that the type of thing you would announce going forward? Would you give us a press release on that?

Yeah, generally don’t disclose that information, as you’ll see, it’s on the press release and you’ll see in our 10-Q, we have announced that we will be moving the lead cascade operation into ’06.

Ok, alright.

Hopefully, in the spring of ’06.

Spring of ’06 which I guess puts you sort of, you know, four months ahead of the DOE milestone?

Yeah, the DOE milestone is October of ’06.

DOE milestones are still good.

Right.

As we work towards, on own conservative milestones.

Ok.

Or aggressive.

Aggressive.

Ok, thanks very much.

Thank you.

And we’ll go next to Brett Levy with Jefferies & Company, please go ahead.

Yes, a couple of questions, just in terms of the guidance for the second half, can you tell us a little bit more about sort of the spacing between third and fourth quarters, and also in terms of the expenditures on American Centrifuge, total number for the second half, and space in between the 3rd and 4th quarters?

Sure, the guidance, as always, I’ve said although every quarter is lumpy we shouldn’t be looking at the Company necessarily on a quarter by quarter basis.

I understand.

The 4th quarter is traditionally our largest quarter for sales, and we would see that continuing in ’05, similar to what we saw in ’04. In terms of the Centrifuge expenditures, we have spent around $50 million to date, and we are expecting to spend $120 million cash; this is a cash answer. $120 million for the year and we would expect it to continue to slowly ramp-up between now and December.

And should I take the balance, you know the roughly $70 million and space that evenly between the 3rd and 4th quarters, roughly?

It’s a slow ramp-up with more expenditures coming as the year progresses.

So more in the fourth?

Yes, as we get closer to the lead cascade coming on-line.

Alright, and you guys, you guys had sort of talked about doing some refinancing and that sort of thing, you think that’s more of a 3rd or 4th quarter event in terms of addressing some of those issues?

As I mentioned, our revolving credit is due in September, and we’re in the middle of negotiating that at this point in time, and after we take care of that we’ll then address the refinancing.

Alright, thanks very much guys.

And we’ll go next to Tony Cilluffo with Cilluffo Associates, please go ahead.

In renegotiating the TVA contract, I assume that they’re also using, I understand we’re going—it’s going to be costing us more for the electricity, but I also assumed that TVA is using SWU, is some of the impact on that being borne by the higher sale of SWUs?

The TVA contract for power is a contract that we negotiate with them as it relates to power. SWU contract is a different contract negotiated with TVA and the two are treated as two separate and distinct events.

Thank you.

And we’ll go next to Joseph Whithohn with Janney Montgomery Scott, please go ahead.

Thank you very much guys, good morning. I’m just trying to see, because I don’t see it in the press release, I just looked for two updates, one of course is on the Russian contract and the second one would be an update on the litigation with Mr. Timbers, if possible?

The Russian contract, I guess there really is nothing to update. The contract continues to move smoothly, the deliveries are on time and on schedule, and we’ve had, there really is nothing new to update at this point in time.

I’ve got to say, I was over there about six weeks ago, relationships are great; they want to continue working with us as they have, and we’ll just have to see, this is a government to government issue, primarily.

Thank you.

Yeah, there is, as I said, we’ll be filing our Q tomorrow and you should be able to take out of that more information. There is very little to update on the Timbers arbitration other than it is in arbitration.

Well, that’s fair enough, thank you.

[OPERATOR INSTRUCTION]

And we’ll go now to David Rosen with Greenriver Management, please go ahead.

Hi, a couple comments and then I have four lines of questions. First, on you guidance I was actually very pleased, you know, we—I know you guys aren’t very prone to looking at proforma numbers, but if I look at ACF it looks like before you were at 74 to 80 cents, and now your at about 95 cents to $1.02. And, it looks like this is the most ETF on a proforma basis that you’ve done since 2000, so congratulations.

I also want to say that I’m very pleased with the SG&A reduction and I hope you guys continue that. I think that, it seems to me that based on a percentage of sales you have a long way to go.

I agree.

On your guidance, does it reflect the new down-blending contract you received with U.S. government? And I was wondering if you could talk a little bit about what kind of impact that will have in 2006 and beyond?

Yeah, it does reflect our new contract with the government, that is in the guidance, and anything beyond that, we don’t discuss our forecast beyond the current year. So, I apologize, but it is reflected in our ’05 numbers.

Ok, and also on a similar vein; in your initial 2005 guidance you had actually given a number on what your underfeeding revenues would be which was about $50 million. I was wondering what number you had in your current guidance.

Yes, first of it was underfeeding plus sales from third parties, and we’re not updating that guidance.

Ok, ok, the second thing is kind of related to your cash generation, and you mentioned that you had $180 to $200 million worth of operating income, I mean operating cash flow, included in that it looked like there was $30 million of cash that went from cash to short-term investments. When you give that number have you backed that back, have you, is that still in that 180 to 200?

Yes, it is.

So, in reality this is 210 to 230 or--?

The cash flow from operations is a net cash number from operations and does not assume, at this point in time, any short-term investments on the books.

Ok, I’m just looking in your first six months, you have $30 million decline from, that’s increase. So when you’re talking about that 180--?

Yeah.

--that, that does not account for that $30 million going away, so is this true--?

That is correct.

Ok, so now if I look at these numbers you have, Centrifuge, you’re generating, what it is, this year you’re generating about $250 million in cash; if I look out a couple years will you have fund this and just for arguments sake, if you continue to generate a similar amount cash, less your dividends, so say its about $200 million, that would give you at total at least in uranium sales about $400 million of cash for ’06 and ’07, and you said you’re going to have about $240 to $250 million of cash on your balance sheet, how much of that, let me ask quickly, do you actually need to run the operation? How much of that would you consider to be excess, assuming that you are—that you refinance—you still have $150 million revolver?

The—that’s a lot of questions and I’m not sure how to get to all of them David. But, and they’re very good questions, some of which I will avoid answering because they really do talk about our projections and our future cash flow figures. But, I think what you need to focus on is that we are projecting, from operations this year, a positive cash flow and those are our normal operations, and most of that cash flow is being used for—a good piece is being used for the Centrifuge project.

Right, and now I guess, how’s that $250 million of cash in balance sheet, how much of that did you consider to be excess? How much do you need to run your business, still assuming you have $150 million revolver?

I guess again, I would point you to the fact that as of the end of this year we are projecting a positive cash flow. We do have lumpy cash flows throughout the year, as you know, because our quarterly sales vary by quarter. But again, at the end of the year we do have positive cash flow from operations.

Ok, so that’s a great point, and this is why I’m asking the question. If you continue to generate a similar amount of cash and you’re still sitting on $250 million of cash that would imply to me that you should be ending, you know you could be ending 2007 with $650 million or so of cash on your balance sheet, and I was wondering how far would $650 million go to financing the Centrifuge. I would suspect that that would probably get you to your first million SWU, would that be a fair statement, based on the fact that the total cost is going to be $1.5 billion from here?

And truly I appreciate what you’re doing and the way you’re going about it, but that, those are forward looking numbers that that we really have not discussed publicly, but will be part eventually of our discussion when we talk about how we plan to finance Centrifuge.

Ok, I’ll end this, I have one more last question, but let me just ask it a slightly different way. Would it be conceivable, just conceivable, that you can finance the first million through without debt?

Well, that’s, that’s a novel way to ask me the same question.

But, it’s not forward looking, so—

I truly, truly appreciate the way you’ve done so. As I’ve said, in the prior calls, we’re comfortable saying that we have enough cash flow without borrowing for Centrifuge for the next year or two.

Ok.

Ok.

Alright, now, just talking about the Centrifuge a little bit, I’m actually eager to hear a little bit more of what the independent appraisers talked to the Board about the technology that I think is something important that several of us just wanted to hear? And the second thing is, and on a similar vein, Urenco in their 10-K, they generate about 60% EBITDA margins, and that’s basically assuming a similar price pursue that you guys are able to obtain, and their costs are in Euros, and I was wondering if those are still numbers that you feel comfortable that you can achieve with the ACF?

A couple things, first off, I think as Jim talked and mentioned as it relates to our outside consultants, they continue to believe that the technology is viable and anymore detail from that will run into security confidentiality issues. But, it is fair to say that we’ve had outside confirmations about the technology that we’re using.

Yeah, and these were very well qualified people, independent of the Company, they’re from outside, you would recognize their names immediately, and we wanted them to just get, get into all the ins and outs, not only look at the technology, look at the team on the program, and we’ve got a very favorable input. They’ve been down to Oak Ridge a couple times, they’ve been to Piketon and so forth. We were very pleased with the, I was very pleased with the input that I got.

Who are these outside advisors; can you give us their name?

I don’t think I, I don’t know.

Not without clearing it with them first.

Ok, alright and then final question, I apologize that there’s so many questions, but as you, you know uranium enrichment is a complicated story, so a lot of complicated questions to ask.

So we’ve noticed.

So, just on the market, so uranium prices now are at $31 a pound long-term, and I would suspect that you know and UF6 prices are close to $90, and I guess long-term probably $92. So, it seems to me that most, most of your customers would ultimately desire to bring down their tails from the .3 to .25, maybe possibly in the future a lot lower, and from what I understand and I know you won’t comment on this, it seems to me that the supply/demand balance, especially if you’re going to have new nukes built, is actually, is actually in good order right now. So, if people start bringing down their tails to .25 that would create a huge influx of demand for SWU, and I was wondering how do you think the market handles that? And I know you don’t want to comment on where SWU prices are going, but in theory wouldn’t that, wouldn’t you be expected to realize increases in your prices or at least significant increases in volumes?

There are several ways, as you know, text book, that the market responds to increased demand, there is increased price, but there is also development of and building of increased capacity. So, I think over time you may see both come into play. So building of new plants is a long time off and that does allow the market in the long-term to adjust to the capacity needs.

And the barrier to entry is so high on this enrichment arena that it’s really going to be, not only dollars, but time to achieve that.

Ok, well, we hope the substitution effect impacts you in a favorable manner over the course of the next couple years.

Thank you.

[OPERATOR INSTRUCTION]

And we’ll go next to Peter Lieu with Lieu Capital Management, please go ahead.

Good morning. I’ve been struggling with this flat yield curve which seems to quite an anomaly, and I’m sure you’re thinking about it all the time. And I’m just wondering if you think you can put your cementing requirements to bed before there’s any changed in the flat yield curve, which seems to be quite an aberration?

We will do our best, as I’ve said, to do the right financing at the right time. And, I mean what you bring up is a valid point that we hear and we look at constantly, but again we need to time our financing. There’s a trade off between doing your financing too early, and incurring costs that you do not need to incur because you don’t need the money. For instance, incurring it later at potentially maybe a higher price, if that’s where the market goes, but matching it more appropriately with your needs, and we do weigh that balance constantly.

Yeah, well, I think that, I remember looking at the huge change in interest costs going back to the early 80s where in a very short time interest costs went shooting up and the prime rate went up to 22%, and I think everybody got their, got caught with their pants down, and I would rather you pay more and have the assurances that the financing’s in place rather than try to squeeze a few extra basis points out of your financing. I just wanted to get your thoughts on that.

Sure, no, and we appreciate it, believe me, my first mortgage was at 16%, so I do well remember that time. But, it’s a different time with different safe guards and different views in the market and we will continue to watch and I do appreciate your views.

Ok, now in the past, we’ve had some troublesome foreign competition dumping, etc. and the energy bill I think is directed to help American companies. Do you have any special advantage because of this energy bill, and I’d like you to also comment about the activity of your competition in the context of rising demand, better prices for SWU?

The energy bill really is geared towards helping utilities move forward in developing and building nuclear power plants, and helping the energy situations here in the United States. And indirectly, as Jim was saying, it helps us because over the long-term it will increase demand for our product.

But it also helps your foreign competition because there’s no reason why they can’t sell into a richer environment.

All of us can sell into a richer environment, it is increasing the pie for all of the competitors, and that is a positive thing. We need to have surety of supply both here in the U.S. and abroad, and it again, it’s positive to increase here and the usage here in the U.S. And it’s not only here that we’ll be seeing that increase, we’ll be seeing it, China is building almost all nuclear power plants, India will be building nuclear power plants, and Japan continues to build nuclear power plants. So, really the U.S. is catching up to where the rest of the world is. And, again, it’s positive because the whole market is expanding of which we and our competitors will take a piece.

Can you give us the latest appraisal of your foreign versus domestic demand, because last year the Japanese were still having a lot of trouble with their plants?

Sure.

What has happened to foreign demand in the past say six months?

Yeah, and I’m not going give sort of that update you can look at our 10-K to see how the demand and our sales break out between domestic and foreign. But, I can tell you on the Japanese reactors, which had caused our sales to go down, that all of the reactors are now up and running, and of the ten that we, that we supply through two, the majority of those are now back in operations and the rest will be back in operations between now and through ’06.

Ok.

We could expect to see that demand start to increase.

Our backlog is looking extremely good, it’s going up, and although we can’t talk specifically about most of this, it’s very encouraging, the European sales, potentially sales that are coming on, that’s going up. We’ll be announcing these in the relatively near future.

When I think about your finances the absolute requirement for capital expenditures associated with the Centrifuge program, it looks like a huge hurdle a couple years out and you still have to take care of your current debt issues. Can you tell me or can you discuss a little more, what are some of the incentives that would attract partnerships to come in and invest with you on that Centrifuge program, because it looks like an almost insurmountable hurdle in terms of the amount of cash you have to raise a few years out?

Sure, one of the key drivers for our moving forward with Centrifuge is its impact on our power costs and we would expect that our power costs will go down by 90% to 95% on a per SWU basis of what we are incurring today. And, that is really just a huge benefit to us on a cash flow basis, and on an ability to manage our business, not being susceptible to that large of a cost we can’t control.

Ellen, if you could just translate that into today’s numbers. If your power costs were reduced by 90% what would your earnings be?

Sure, if you were to look in our prior 10-K, you would see that we’ve disclosed power costs in that particular year of around $300 million. And so, we would expect to see that number, I’ll take the lower end of the 90% to 95%, let’s take the 90%, the 90% reduction in that is around $270 million.

Well, that’s just a slight increase over your current earnings. Well, I hope this materializes. Thank you very much.

And it appears that there are no further questions at this time. Mr. Wingfield I’d like to turn the conference back over to you for any additional or closing remarks.

Ok, this is Jim Mellor again and we would like to thank all of you for participating in this morning’s call. As I said before, we value these calls as an opportunity to hear from you, our key investors, and let me just say we remain excited about the success of the Centrifuge program even with the hiccups that we’ve talked about. Those were to be expected to my mind, but the long-term prospects of the nuclear power industry are rolling, fueling today’s and tomorrow’s nuclear power plants looks good, and so again, thank you all for participating; we appreciate it.

And that does conclude today’s conference. You may disconnect.