Centrus Energy Corp (LEU) 2005 Q3 法說會逐字稿

Good morning everyone. Welcome to the USEC Inc. third quarter 2005 earnings conference call. This call is being recorded. With us today from the Company is Mr. James Mellor, USEC Chairman, and Mr. Steven Wingfield, the Director of Investor Relations. Management will make opening remarks, which will be followed by a question and answer period.

At this time I would like to turn the call over to Steve Wingfield. Please go ahead, sir.

[technical difficulty] -- starting this third quarter of 2005, ending September 30.

With me today to discuss our financial results are Jim Mellor, Chairman, John Welch, President and Chief Executive Officer, and Ellen Wolf, Senior Vice President and Chief Financial Officer.

Before turning the call over to Jim, I want to welcome all of our callers, as well as those listening to our webcast via the internet. This conference call follows our earnings news release issued yesterday after the market’s close. USEC is making reference to non-GAAP financial information, in both our earnings news release and on this conference call.

A reconciliation of these non-GAAP financial measures to the comparable GAAP financial measures is contained in the earnings news release. 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 our SEC filings, including our amended 10-K, our 10-Qs and 8-Ks, are available on our website. A replay of this call also will be available later this morning on the USEC website.

I would like to remind everyone that certain of the information that we may discuss on the call today, may be considered forward-looking information, that involves risk and uncertainty, including assumptions about the future performance of USEC. Our actual results may differ materially from those forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those of 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 accurate only as of today November 3, 2005. This call is the property of USEC. Any redistribution, retransmission or rebroadcast of this call in any form, without the express written consent of USEC is strictly prohibited.

Thank you for your participation, and now I would like to turn the call over to Jim.

Thank you, Steve and good morning to all of you, and welcome to USEC's conference call for the third quarter of 2005. As most of you know, about 11 months ago the Board of Directors asked me to assume the responsibilities of Chief Executive Officer. In addition to those as Chairman of the Board. As I took responsibility for directing the day-to-day operations of the Company, I identified several major results that I wanted to achieve.

First and probably foremost, build momentum for demonstrating the American Centrifuge technology. I wanted to ensure we were focusing the right level of resources on this important investment in USEC's future. Second, restructure the headquarters organization. Here I had a couple of key missions in mind. Achieve our strategic goals of demonstrating and deploying the American Centrifuge, and maintain reliable and efficient enrichment operations at our plant at Paducah, Kentucky.

The third major result I wanted to achieve, was to reduce USEC's abnormal reliance on consultants. Outside advice can be very useful, but USEC executives must make these decisions and implement our plans. And we can't give them any excuses.

Fourth, improve our communications and relations with the outside world, which quite frankly were in disarray. This included Congress, the Executive Branch of the Government, Wall Street, and so forth. I think we have now established a level of trust with these folks, that unfortunately didn't exist before.

Also very importantly we re-established trust and confidence from our Board of Directors. And last, help select USEC's next Chief Executive Officer. With the assistance of an executive search firm, a special Committee of the Board evaluated many outstanding business leaders. We quite frankly had an exceptional pool of candidates, from which to consider and select.

John Welch rose to the top of our list with a strong record of achievement. He is the right person to lead USEC at this time. He has a strong nuclear background. An absolute essential for this job. He has built a track record of deploying multi-billion dollar projects on-time and under budget. John has experience in improving corporate processes to enable more efficient operations. John is noted for building strong working relationships, and I have seen that first hand in his first month on the job, as he met with customers, legislative leaders in Washington, and employees, at both headquarters and at our operations.

I knew John well at General Dynamics, where he served as Executive Vice President for the Marine Systems Group. Before that, he was given progressively more responsibility at Electric Boat, where he served as President. Electric Boat, as you know, built many of our nation's nuclear submarines, and as a former Naval submarine officer himself, John knows nuclear energy.

I'm pleased to report that USEC achieved the goals I set out nearly a year ago. I feel we are sharply focused on the right things, in particular moving ahead with demonstrating and deploying the American Centrifuge technology, and running our current operations at top efficiency. Our use of consultants has been dramatically reduced, and our corporate restructuring has more closely aligned our headquarter staff with our core enrichment operations, and demonstrating our advanced uranium enrichment process.

These two actions will also have a direct impact on our bottom line, as they combine to reduce our SG&A expense, which had gotten out of hand. Relative to our communications and relationships with our many constituencies, as I said, we've come a long way. We’re not there yet, but we have a solid base to build on. The Board has selected an outstanding person to lead USEC as we move forward.

With that, I would like to turn the call over to John for some comments. John.

Thank you, Jim. And good morning to all of you on the call. It's been a real pleasure to be at USEC, and I must say that the excitement and challenge that drew me here, has not diminished during my first month. It's been an interesting and busy time, as I have come up to speed on the Company and the business. I have been working closely with the management team, as we develop a detailed operating plan for 2006, and as we continue to refine the strategic plan for the longer term.

I'm very pleased with the energy and cohesiveness of the team, and their ability to drive the business forward with the American Centrifuge, while maintaining a strong operational focus on our core business. Our future is surely dependent on the quality and dedication of our employees. One of my first priorities was to visit our facilities.

I wanted to talk to our employees at the field, at the plants, and on the advanced technology team, the people doing the work, day by day. The people at Paducah have that plant in its best shape in many years. And that's saying a great deal when you consider it's a 50-year-old plant. Our employees at Piketon are conducting important tasks, that keep that plant in a standby mode, as well as other functions under contract with the Department of Energy. I had the opportunity to talk first hand with the managers, engineers, and scientists leading the American Centrifuge demonstration.

I'm very excited about the potential of this next-generation uranium enrichment technology. We are fortunate to have a team that includes the Department of Energy, our partner suppliers, and the scientists at Oak Ridge National Laboratory. Based on what I’ve seen so far, I had a lot of confidence in the project. We have a world-class facility in Piketon that's in great shape, and getting better as we continue the refurbishment, our test and manufacturing facilities in Oak Ridge are top notch.

We have a very motivated staff at both Oak Ridge and Piketon that is excited about bringing the American Centrifuge plant to completion over the next several years. Clearly we have a number of things going in the right direction. The engineer in me wants me to be conservative in setting schedules and evaluating performance data, but I have seen no show stoppers in our technology. As was explained last quarter, the current phase of testing individual machines is taking a little longer than we first planned, but it is important to remember that we are building the American Centrifuge plant for decades of service. This extra time can make an important difference in enhancing the performance of the machines, extending their lives, and lowering cost. I think it will be time well spent.

One of the questions that our investors, employees, and others have been asking is, why did I take this opportunity? Why am I at USEC? It's really a combination of things. First, I believe in the nuclear power industry. I have been in nuclear energy in one form or another since I entered the Navy submarine service 30 years ago.

I believe nuclear power is an essential energy resource for the United States, and will play a major role in meeting the growing demand for electric power generation around the world. It is emission-free and plays an important role in creating this country's energy independence. Having sufficient supplies of economic environmentally-friendly electricity is both a strategic and national security issue.

Which brings me to my second answer for, why USEC. The commercial nuclear power industry is at a decisive point. Several of our U.S. customers have said they are strongly considering building new nuclear power plants. They have stated their intent to submit combined construction permit and operating license applications.

We are at a jumping off point for renewal and growth in the industry. Having a reliable nuclear fuel supply is the key to this growth, and the American Centrifuge is the key to an adequate cost-effective domestic supply. USEC's uranium enrichment is a vital step in the nuclear fuel cycle, that today generates electricity for one in five American homes and businesses.

While new plant construction in the United States is an important development, I want to point out the growth oversees, particularly in Asia has been going on for several years, and is showing signs of accelerating in China. We have been a leading supplier of low-enriched uranium to Japan, Taiwan, and South Korea for many years, and we are positioning ourselves to be a player in the expanding China market.

That is a brief summary of why I joined USEC. I strongly believe in nuclear power, and I believe USEC is a public company, uniquely positioned to be a key player in the nuclear renaissance. I have found a management team and employees who are dedicated to superior performance, and a Board of Directors deeply committed to the deployment of the American Centrifuge, and USEC's role in fueling the future of nuclear power around the world. I look forward to meeting many of you over the next few months, and sharing my enthusiasm for this business.

Now I would like to turn the call over to Ellen Wolf, our Chief Financial Officer, to report on USEC's strong core business results.

Thank you very much, John. And good morning, everyone. Before addressing the details of our financial results, I would like to give you an overview of the results for our quarter and the first nine months of 2005.

Starting with the top line, revenue was 65% higher for the quarter compared to last year, and 31% higher for the nine month period. Our gross profit was 22% higher in the nine month period. This improved financial performance was mainly driven by higher sales volumes of SWU and natural uranium.

Due to timing of delivery and mix of customers, the average invoiced SWU price was down in the quarter, but is still over 1% higher than a year ago. The net loss for the nine months was $7.3 million, or $2.6 million more than a year earlier, but to put that in perspective, the loss comes after expensing approximately $29 million more than the same period last year on American Centrifuge, and in this year we have also incurred a $4.5 million special charge.

Now turning to the details. Total revenue in the quarter was $421 million, an increase of $165 million from the third quarter of 2004. Revenue from SWU sales increased $112 million, or 57%. Revenue from uranium nearly tripled quarter-over-quarter to $60 million, with most sales coming from our inventory under lower-priced long-term contracts. And to a lesser extent, spot sales coming from new supplies generated by underfeeding.

From the nine month period, revenue totaled just over $1 billion, an increase of $241 million. Both SWU and uranium revenue were up just over 30%, compared to the same period in 2004, due to higher sales volumes.

Under our revenue recognition policy, USEC transfers title and collects cash from customers for uranium sales, but does not recognize the revenue until the uranium leaves USEC's property. And it needs to leave that property in the form of low enriched uranium.

In 2005, as USEC continues to underfeed the enrichment process and capture the benefit of higher uranium prices, there has been a substantial increase in deferred revenue on the balance sheet related to uranium sales. At September 30, $133 million in revenue with an expected gross profit of $64 million has been deferred until subsequent quarters. At the same point in 2004, this amount was $40 million in deferred revenue, with a gross profit of $8 million. The timing of recognition of this revenue cannot be determined, as it is often dependent upon the sale of that uranium by a broker to a utility, and the utility SWU requirements.

Our other business segment, U.S. government contract work, also includes revenue from activities by NAC International. Revenues from U.S. government contracts was $14 million higher than the same quarter last year, and $35 million higher in the comparable nine month period.

We acquired NAC in November of 2004, and therefore USEC's comparable revenue for the third quarter of 2004 does not include any NAC activities. Revenue from NAC was approximately $8 million, and $21 million, in the quarter and the nine month period in 2005 respectively.

Switching to the cost side of the business. As you would expect, the strong growth in sales revenue brought a corresponding increase in the cost of sales for SWU and uranium. The average unit cost of sales per SWU for the nine month period was 3% higher than in the same period last year. The increase was due to higher production costs and higher purchase price in prior periods paid to Russia under the megatons to megawatts program.

Prices paid are set by a market based pricing formula that reflects increasing global SWU prices in recent years. The gross profit in the nine month period was approximately $126 million, an increase of $23 million, or 22% over the same period of 2004. The gross profit margin for the nine month period was 12.5%, compared to a 13.5% margin in the same period last year.

The gross profit margin declined some from our second quarter report, as the profit margin was lower in the third quarter, due to lower average prices billed to the customers under older contracts with prices below the current market indicators. I will address our outlook for the rest of 2005 in a moment. But we still expect average SWU prices billed to customers to be higher in 2005 compared to 2004. We also anticipate that the gross profit margins will be approximately 14%.

Below the gross profit line, are the expenses for selling general and administrative expenses or SG&A and the American Centrifuge project. As Jim mentioned, we continue to make progress in our effort to reduce SG&A. In September, we implemented a restructuring of our headquarters organization, that will permanently reduce our ongoing SG&A costs.

For the quarter, SG&A was $3 million, or 20% lower than the third quarter last year. For the first nine months, SG&A is down almost $6 million. Reductions in SG&A have actually been greater than this. Included in the 2005 SG&A is $4.5 million of expense by NAC in the nine month period. As mentioned earlier, NAC was not acquired until November 2004, and therefore its costs are not included in the same period for 2004. Adjusting for NAC our SG&A would have been about $10 million, or 22% lower in the nine month period compared to the same period in 2004.

USEC continues to make a substantial investment in the American Centrifuge technology. As expected, as we continue to move forward with the project, our spending has ramped up. Total spending related to the American Centrifuge for the first nine months of 2005 was approximately $78 million, of which about $66 million was expensed, and $12 million was capitalized.

In comparison, spending in the same period of 2004 was approximately $41 million, with $36 million being expensed, and $5 million being capitalized. The higher level of spending in 2005 reflects additional staff, increased spending on manufacturing centrifuge components for the Lead Cascade, and the cost to refurbish and upgrade systems that would support the Lead Cascade.

This investment in our future had the effect of reducing net income by approximately $41 million, or $0.47 per share, in the nine month period of 2005. To help investors evaluate the impact of this adjustment to current financial results, we reported pro forma net income before American Centrifuge expenses, which is a non-GAAP financial measure.

USEC reported pro forma net income before American Centrifuge expenses of $7.2 million in the third quarter, and $33.4 million for the 2005 nine month period. That compares to pro forma net income of $7.9 million in the third quarter of 2004, and $17.9 million in the nine month period last year. An almost doubling of the pro forma net income in the nine month period.

On a GAAP basis, we reported a net loss of $5.2 million for the third quarter, and a net loss of $7.3 million for the nine month period this year. These results include a one-time after tax charge of $2.8 million for the restructuring of USEC's corporate headquarters. In comparison, we reported losses of $2.3 million and $4.7 million last year, for the quarter and nine month periods respectively. I would like to refer you to our earnings release for a detailed schedule reconciling pro forma net income to net income.

Turning next to cash, our cash inflow from operating activities for the nine month period was approximately $20 million, compared to an outflow of $162 million in the same period 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 fourth quarter of 2004. We also benefited from cash received on uranium sales that are deferred for revenue recognition purposes. During the quarter, we replaced our expiring $150 million 3-year bank credit facility with a $400 million 5-year facility. This credit facility provides substantial flexibility, and is available to finance working capital needs, and to refinance debt.

We do have $325 million in senior notes that are due on January 20, 2006, and we expect to use a combination of cash on hand and borrowing under the facility, to pay off the maturing bonds. In the first half of 2006, we expect to file a shelf registration with the Securities and Exchange Commission to enable USEC to sell various securities, including debt and equity, to repay borrowings under the bank facility, and other corporate uses.

Our earnings guidance for the remainder of 2005 is the same as our guidance given in September, with net income in the range of 18 to $23 million, or $0.21 to $0.27 per share, from expected total revenue in 2005 of $1.5 billion. We are also narrowing our gross profit margin guidance to approximately 14% for all business lines combined.

As noted earlier, USEC has recorded $133 million in deferred revenue for uranium sales that have not yet been recognized. This deferred revenue represents an expected gross profit of $64 million. As noted earlier, this revenue is not recognized until the uranium leaves USEC’s property, and is low enriched uranium, and therefore we cannot forecast with any certainty when that recognition will occur.

I also want to point out that this guidance includes the headquarters restructuring charge taken in the third quarter, and an additional anticipated charge in the fourth quarter in the fourth quarter in the range of 2 to $3 million, for restructuring at our field operations involving up to 200 employees, that we began earlier this week. The continuation of our restructuring in the field, is expected to lower production costs by up to $10 million annually.

Cash flow from operations is expected to be in the range of 135 to $140 million. This range has declined since our August conference call, due to the timing of Federal tax payments, and to certain customer orders moving into December, and therefore the cash will not be received until early 2006. We anticipate a December 31 cash balance in the range of 230 to $240 million.

In summary, our core business fundamentals are strong. Revenue increased $241 million in the first nine months compared to the same period in 2004. Gross profit improved by about $23 million year-over-year. SG&A expenses are down by almost $6 million, even with the addition of $4.5 million in expenses related to NAC. And cash flow from operating activities improved by $182 million in the nine month period year-over-year. That concludes our report on USEC's financial and operating results.

And with that, I would like to turn it back to the operator take any questions.

Thank you. [OPERATOR INSTRUCTIONS] We will go first to Paul Clegg with Natexis.

Seems like you’re doing a brisk business in underfeeding, and using some of those volumes to satisfy contracted uranium demand. In the past you have inferred that uranium inventories would run out by the end of '07. Is it time for us to revisit that idea, are we still likely to see uranium revenues depleted by the end of '07?

We will continue to do underfeeding as long as it's economical, and we would hope to continue beyond '07, but again it's related to our customer's needs, and the timing of those needs.

What was the comparable figure to $133 million that you deferred this year? What was the comparable 2004 figure?

It was approximately $40 million with an $8 million gross profit.

Okay, thanks. If I may just a couple of quick follow-ups. There is obviously a lot of talk about LES and their facility getting financing backed by contracts, I know you can't comment on that. From USEC's perspective how are you going to be able to assure customers enough, to bring in those bankable-type contracts? Can you use your SWU inventory? Can that come into play as a source of collateral, or to back stop long-term contracts? What are your thoughts there?

There are a couple of strategies that we can use, and will continue to evaluate. One is our inventory as you mentioned, and at what point do we begin to build inventory to provide that comfort level.

The second is again as we move forward with Centrifuge, and begin to demonstrate its capabilities through the demonstration process, that also would give our customers the comfort that they need.

Third, we do continue to have other means, the Russian contract, et cetera, to providing SWU, and comfort to our customers.

So the plan is then that at some point you would probably give your customers greater access to information regarding American Centrifuge?

Yes. As we progress more, and also disclose that information to the public, they will be able to see the proof of the technology that we know works.

Okay. And I will just do one quick other one and let somebody else ask questions. Regarding the redemption of the '06 notes, will there be an attempt made to refinance some portion of those notes first, or will you just take them on initially with the revolver and wait to address the issue, along with American Centrifuge financing?

We will continue to look at refinancing ahead of when they come due in January. But again the market is very un-- has ups and down days, and we want to do it with the right timing. Our plan right now is to file a shelf registration in the first half of '06.

Kind of indicating that time to market would be more sort of late '06, early '07.

Time to market will be most likely in the first half of '06.

Okay. Great. Thanks.

Thank you.

Our next question comes from Brett Levy with Jefferies & Company.

In terms of the fourth quarter numbers, can you give a little bit of additional guidance aimed at maybe getting us towards an EBITDA range?

I hear the question, but I'm not quite sure what other guidance we can give at this point. You have our gross margin, which we expect to be around 14%. I would ask that you wait and look at our Q filing. And again the range will be anywhere from 18 to, as we said before, 23. And I would ask that the information that we have given is there. As a general reminder, this is not a Company that we look at quarter-by-quarter, because of our long-term nature of our contracts.

And then can you talk about -- I mean I would think in the long run the electricity advantage of the American Centrifuge technology, would be more compelling at this point. Can you guys talk about the per MMBTU annual requirements of the Company now, and kind of what the potential savings would be? I believe that the number was, as you would shift something in the zip code of $250 million for the new technology. But can you talk about consumption of both electricity and natural gas by the company now, and as you see it in the future?

What we have said and to re-iterate some of what we have said publicly before, the 2004 amount that we spent on electricity was in the 300 million range. When you look at the use that we believe will be of electricity coming through, or power for the American Centrifuge on a per SWU basis, we would expect it to be about 95% less, than what we are using today.

I guess I'm thinking in the context of somewhat higher power costs, whether those numbers might change a little bit.

Well, the savings will still be 95% on a per SWU basis, but it may be 95% of a higher number, given where power is going.

And you guys are not comfortable talking about sort of the number of megawatts that you guys use per year, anything along those lines?

Yes, we use approximately 1.3 megawatts --

1330.

1330. Sorry. I was rounding. 1330 megawatts as an average.

Got it. Thanks very much.

Thank you.

Thank you.

We will go next to [Erik Wald, ADA Capital].

My question relates to your SWU business. I'm looking at the gross margins, and I guess I was surprised how much pressure the gross margins came under in the quarter. Can you, I guess give us a sense, I know in the past you haven't broken out gross margins by segment, but was the SWU business, at least on a gross profit basis, was it profitable in the quarter?

The answer to that is yes.

Yes?

As we said in the third quarter, we had some of the lower price contracts that we talked about in the past. We saw more of them in the third quarter, than we had seen in the first two quarters of the year, or anticipate seeing in the fourth quarter.

Okay. And looking out to '06 with 60% of your operating costs from SWU being energy, and I believe 60% coming from TVA ,which you are going to renegotiate in May, would you expect the SWU business to continue to be profitable in the second half of '06, as your power costs, which are a substantial portion of your costs going higher?

The way we look at the SWU business is again on a blended rate with the Russian contract, the megatons to megawatts contract. And we don't comment on any breakdown other than that. We believe to look at it, as one business.

Okay. Great. Thank you so much.

We will go now to David Rosen with Green River Management.

Hi. A few questions. First I wanted to try and talk about you provided pro forma numbers for this quarter and the first nine months, but you didn't provide pro forma numbers for the full year. I want to talk about the components of that, so how I could evaluate as an investor what your pro forma results are going to look like for the full year. So maybe to start, you gave a guidance range of 18 to 23 million. If I look to the midpoint of that, I'm roughly at 20 to $21 million of net income.

And then the other items would be what, that I should add to that to get to, a way that you would evaluate the on-going business of operating Paducah and the Russian contract, and your government business?

As we said, one of the key items to note in our earnings, and really is our investment in American Centrifuge, that is a unique item for us, that normally we look at as an investment in the future, and therefore in our guidance, in any guidance you look at, as well as what we reported for the first three quarters, we have treated Centrifuge as something unique and different. So therefore if you look at the reconciliation that we have provided in our press release, we have added back in the expense after tax for Centrifuge.

What was the number again?

The number in the press release, or what we have said for the year?

What you have said for the year, I guess.

We said we anticipate approximately 120 million in total expenses for Centrifuge, with about 10 million of that capitalized, and 110 million of that probably expensed.

So if I take out 110 million, and I take 62% of that which would be a fully taxed number, that's $68 million. And then you also made mention of $2.8 million, is that right, for severance charges?

There are two types of severance charges. There is approximately $2.8 million, which we have incurred and recorded as part of the third quarter, and there will be an additional pre-tax 2 to $3 million in restructure charges, related to the Paducah and Piketon plant operations.

So that would be another about $1.5 million thereabouts. So their pro forma adjustments, if I wanted to go and look at what your earnings stream is this year, if I had to go say up about $73 million and I take the 21, the mid-point of your range, would be $93.5 million. How many shares do you guys --?

Approximately 86.

So (indiscernible) the 86 -- so that is pro forma earnings of about $1.09. That doesn't include the vast majority of your underfeeding revenues, is that correct?

The amounts that we have deferred on the balance sheet at this point in time, are not included in our forecast, because of the uncertainty around when we would be able to recognize them.

So is that incorporated in your guidance for the year, if you are able to actually record those sales in the first quarter.

Only to the extent we feel we could record some of them or recognize them, through the shipment of low enriched uranium, which at this point, we just have no certainty around that.

Okay. So arguably the vast majority of that will come in in '06 and '07, which should help you at least partially defray the prospective increase in electricity costs?

I should note that we have received the cash for those sales.

Yes.

In '05.

And I would suspect that you would to the extent that the market would allow, you to continue to underfeed, and continue to generate additional deferred revenues.

That is correct. As long as the economics continue to prove themselves out, we will continue to underfeed.

In terms of the numbers that you provided for cost cutting in '06, this quarter you did $12 million worth of SG&A. And that was before your cost cutting. So -- and I remember in your press release when you announced that, you made mention of a $2 million reduction in the costs per quarter. So would it be fair to look at your SG&A cost, on a pro forma basis, as about $10 million a quarter?

Yes. What we have said is, that we would expect versus 2004, because we do have some unique items in '05, that we would expect our run rate to be approximately $19 million less a year starting in '06.

This quarter you did $12 million in SG&A. And you said that didn't incorporate your most recent restructuring.

That's correct.

So would it be a fair statement to say that your run rate is less than the $12 million that you recorded this quarter?

That is correct.

So would a $2 million decline in that sequentially be an appropriate number to look at?

Yes. We would expect -- some of that would not all be in the fourth quarter, because as we said the restructuring, and people leaving the payroll, is over some in September, and some flowing into the fourth quarter.

But on a run rate basis we should probably see in '06 an SG&A number that's closer to $40 million, versus the 62 that you did last year.

Yes. Again, that is not taking into account the incremental expenses related with NAC that were not in our '04 numbers.

Wouldn’t those numbers be in your third quarter of $12 million?

Yes, they are.

So if I pro forma that to $10 million a quarter, it should be incorporated in that, right?

Okay.

The other thing is, you made mention of $10 million of cost cutting at the plant level. You are not going to realize I guess any of that until '06, is that correct?

That's correct, and that will come through on our cost of sales. It goes into our production costs.

Are there any other avenues that you are exploring current to further reduce costs?

We continuously look for avenues to reduce costs. At the moment, we don't have any other restructure plans on the table. But as I said, we will continuously look for means of reducing costs, engrained into our thought process.

One thing that I have spent a good deal of time trying to understand, is the relationship between SWU and uranium. And as you are well aware and as your deferred revenue line attests to, uranium prices have increased considerably, and there is clearly a sizable market for people willing to purchase the uranium that you do underfeed. The WNA has indicated in various, in their most recent study, that the expectation is that the sales levels of your customers are going to decline, which in theory increases the demand for SWU.

We’ve also heard empirical evidence that some of your chief competitors, Urenco, is an example, and I'm probably not using this phrase properly is overfeeding their plant, and then they are buying uranium in the spot market, because the centrifuges they have, don't allow them to underfeed, and they are fully contracted out, so they have no more excess to sell to their customers who are requiring it. In that kind of environment, wouldn’t SWU prices, there are some evidence that UXC has indicated that SWU prices are starting to go up. With that kind of demand backdrop for your product, how enthusiastic are you, about the prospect of additional SWU sales, or price increases in the next couple of years?

That’s a lot of question there, David, with a lot of facts. I think as John mentioned, we are incredibly enthusiastic about the market in total with the new builds coming on. With the growth in nuclear, we are extremely optimistic about the market, and where it will go. Just as we have done the analysis about underfeeding versus power costs, et cetera, and the price of uranium, I'm sure that our customers have done the same, and we'll find the right balance between the two.

We believe demand will continue. It will continue to grow, but the extent to which it will continue to grow, is really dependent upon those economics that our customer will do, in weighing all of the things that we also weigh.

Well, the one thing I would highlight is that, and this is very -- this is an amateur looking at nuclear science, if you have a doubling in the price of uranium, and you have not seen a similar reaction to the price of SWU, arguably there is an arbitrage for the prospective acquirer of SWU, which would lead you to believe that most of your customers, would much rather prefer to buy an incremental unit of SWU versus uranium, which would lead one to also believe that the demand for SWU should increase fairly materially, but that's just a layman's understanding of the market.

The other thing is with the SWU prices, and I know UX reports, and granted these are off-market, but SWU price is now about 114 on a spot basis, versus your contracted of 102. This quarter the reason why the gross margin was so low, was that a function of some really old contracts that had really bad pricing? Or is there any other reason for that?

The majority of it is the continued rolloff of the older price contracts that we said we had signed when SWU prices were down, much lower than where they are today.

When will these contracts -- when will these contracts you delivered this quarter, when do these (indiscernible) roll off, the really bad ones?

We expect the majority of them to have been finished within '05, with a few tailing into '06, but not very much at this point.

Great. I didn't realize that. My last comment is, you know, the market for nuclear really has improved, and there are clear indications in the marketplace in the industry, especially now that Westinghouse is up for sale, that competitors to Areva who have full front-end and back-end including an enrichment facility, that in order to compete for new builds nuclear reactors, it's important that their competitors have an integrated response to Areva.

So many people are speculating that USEC would be a logical acquisition candidate, for either the new buyer of Westinghouse, or prospectively GE in their nuclear arm. I would think that great way to enhance shareholder value, and I suspect that you are going to do a debt offering this year, as opposed to any other type of offering, it would be really a great shareholder value option, if one were to explore those opportunities.

Thank you.

Thanks.

And we will go now to Peter Lieu with Lieu Capital Management.

Hello, good morning. I think your IR people know that I have been involved with your stock for over five years, so I'm not just a last minute guy coming in to take a shot at you. I know that you have had a lot of issues to deal with, including senior management issues.

But I must say, your long-term enthusiasm for the nuclear industry is not shared by your investors. There is quite a disconnect between your positive communications, and the actual performance of the stock, which has been cut in half since its March peak. And your Chairman has indicated that you are going to try to correct some of the mistakes in investor communications, most of which is a series of unpleasant surprises.

We can take surprises in the timely manner, but they seem to come at the most inopportune time, and it brings on heavy selling pressure. What can you do to avoid this in the future?

I would hope as we started in the second quarter, that we will continue at all times to keep our investor appraised of what is happening within the Company.

Our policy throughout this year has been to really inform the investor as soon as we are aware of something, and to make sure our communications continue to be open with all of our shareholders. As with any case, there is good news, and there is not so good news, that comes as we move forward with Centrifuge. But it is something we truly believe in and as we said before as we hit the little bumps we overcome them and move on to the next.

But I appreciate your comments, and our issue is to make sure that we have far more open communications.

One of the things I would like to do, I would like to see, is some kind of sizing for next year, which you have traditionally not said anything until the end of the year. Would you care to make some general comments about next year?

In terms of our income and projections for next year?

Mostly your cash flow and your ability to maintain your dividend.

Sure. At this stage, you are correct, we generally won't comment and have not commented on that, until we do our earnings release for the end of the year.

There are many things that are in-flux always in our fourth quarter, particularly sales that would move from the December to January, or January to December. And therefore given those potential fluxes, we’d rather not be issuing guidance that could change, as customers determine the timing of their flux in their orders.

The dividend policy is that which is set every quarter by the Board. And they really need to be looking at that every quarter, dependent on our cash flow or other needs.

Several quarters ago, I asked you to comment about your ability to set some financing and at that time, you told me it was a changing market and you were waiting for the best time. Surely if you had consummated a credit facility say six months ago instead of waiting so long, where Mr. Greenspan has said very obviously he is going to fight inflation and hike up the rates, that you might have been able to get somewhat better terms now, some of this is good hindsight, but there were a lot of messages that interest rates were going up, and I'm just wondering if you could have gotten better terms, if you had done something three to six months ago?

We have seen some interesting things in the market, Peter, and I again appreciate your comments. While the interest rates have risen, we have actually seen the basis points go down, as it relates to our type of offering. And the terms and conditions that we have gotten on our revolver have been extremely favorable, and really were our key focus, that gives us first, the flexibility that we need in the long-term, and in particular as we get through the Centrifuge process.

My last question, please ignore if I missed it on the conference call is, is there any new news on the Tennessee Valley Authority negotiation for the new rates coming up?

This is John. Probably the answer to your direct answer to your question is no, from what you were last communicated. But I can certainly tell you that we are in discussions with TVA. And part of any sort of negotiation is they certainly can understand what our concerns are, and what impacts the potential energy increases have on our business, and a lot of it is at the education process.

But we have upcoming meetings at the highest levels, to continue to come through this issue. Clearly it is a concern for us, and we were working on it aggressively, and we are also, certainly the action that we have taken on the SG&A side, as well as the focus on increased operational efficiency at the plants, are a reflection in our mind to put us to start to take mitigating activities where we can, to deal with the potential for higher electricity costs. So we are continuing to be focused on it, but nothing new to report on that front at this point.

Thank you very much.

And it appears we have no further questions at this time. So I would like to turn the call back over to John Welch for any additional or closing remarks.

I would like to thank everyone that joined us on the call for their insightful questions and certainly my view on these calls is that they are a great opportunities for two-way communications, and we appreciate that opportunity. We also appreciate the feedback you provided, and look forward to meeting with many of you in the months to come. Thank you very much.

And that does conclude today's conference call. Thank you for your participation, and you may disconnect at this time.