Centrus Energy Corp (LEU) 2005 Q4 法說會逐字稿

Good day and welcome to the USEC Inc. fourth-quarter 2005 earnings conference call. This call is being recorded.

With us today from the Company is Mr. John Welch, President and Chief Executive Officer, and Mr. Steven Wingfield, the Director of Investor Relations. Management will make opening remarks, which will followed by a question-and-answer period.

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

Thank you, good morning. Thank you for joining us for USEC's conference call regarding its fourth-quarter and year-end report for 2005, which ended December 31st. With me today to discuss our financial results are John Welch, President and Chief Executive Officer; Ellen Wolf, Senior Vice President and Chief Financial Officer; and John Barpoulis, Vice President and Treasurer, who will begin serving as USEC's interim Chief Financial Officer beginning in a few days.

Before I turn the call over to John Welch, I would like 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 markets closed. 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 SEC filings, which would mean our 10-K, our 10-Qs and 8-Ks, are available on our Website. We expect to file our 2005 10-K in the next few days. A replay of this call also will be available later this morning on the USEC Website.

I'd like to remind everyone that certain of the information that we may discuss in this call today may be considered forward-looking information that involves risks 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 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 10-K. Finally, the forward-looking information provided today is time sensitive and is accurate only as of today, February 22nd, 2006. This call is the property at 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. Now I'd like to turn the call over to John Welch.

Thank you, Steve, and good morning to you all. Welcome to USEC's conference call to discuss the fourth-quarter and full-year results. Ellen will provide a detailed look at those results in just a moment, but I want to give you my views on 2005 and an outlook for 2006.

Turning first to 2005. When you look at the bottom line, our net income, it looks very similar to 2004, but 2005 was a better year in many ways. The gradual decline over several years in our average SWU price billed to customers ended and prices turned higher in 2005, a trend we expect to continue. Deliveries to customers improved, and the combination of higher volume and prices led to a 6% or $58 million increase in SWU revenue year-over-year.

Revenue from sales of natural uranium was up 17%. Revenue from our newly-acquired NAC International subsidiary was responsible for about half of the increase, the U.S. Government and other lines, which was up about $47 million year-over-year. This higher revenue, coupled with cost control, delivered a gross profit of $230 million, an 18% improvement over the previous year.

Our expenses for American Centrifuge were higher, and several charges related to the restructuring of USEC's operations in 2005 decreased the amount of net income to a level that was just about unchanged year-over-year, but our core business was clearly stronger.

John Barpoulis will give a report on our earnings guidance after Ellen completes her report on our 2005 results. We see continued improvement in 2006 of our financial results, with net income more than tripling from 2005. I want to add a note of caution, however, as this trend is not sustainable over the next several years in the face of higher power prices.

As I'm sure most of you know, electric power costs are a key component in gaseous diffusion enrichment production. Power accounted for about 60% of our production cost in 2005. As many of you are aware, power prices have increased dramatically since 2000, when we signed our last contract. So it is a given that we will pay substantially more for electricity beginning on the 1st of June.

The amount of this increase is the subject of ongoing negotiations with the Tennessee Valley Authority. We expect an increase of approximately 50%. The exact amount of the increase will be subject to the amount of power we purchase during the summer and future adjustments relative to TVA's fuel and purchase power cost. Because we are at a sensitive stage in these discussions, I do not want to comment further on the substance of the negotiations. I don't think that would be in the best interest of the Company or its shareholders.

Clearly, this price hike will increase our costs and reduce our profit margins in 2007 and beyond until we have substantial output from the American Centrifuge Plant. So while we are pleased to see that net income is forecasted to improve in 2006, we do not want to leave the impression that the trend will continue. We are taking significant steps to mitigate the impact of the higher power cost, but we do not believe we can completely negate the impact.

Two weeks ago, as part of the scheduled meeting of the USEC Board of Directors, the common stock dividend was eliminated. This was not an easy decision for the Board because many of our retail shareholders favored continuation of the dividend as a way to return value to shareholders. While the Board appreciates that position, the directors take a longer strategic view for USEC.

As the Company moves step-by-step closer to a future of building the American Centrifuge Plant, the Company must consider where its cash can best be used in creating long-term value for the shareholder. The use of $50 million per year and a quarter of the billion dollars over the next five years is the first step in financing the future.

Next to come will be an equity offering later this year that John Barpoulis will address in a few minutes. After this equity offering, we do not anticipate needing additional funding until 2008, when we expect to tap the debt market.

Before I turn the call over to Ellen for a report on our 2005 financial results, I would like to thank her for her service to USEC over the past two plus years. I especially appreciate her professionalism and personal commitment. She strengthened our financial staff with solid hires, including John Barpoulis, about a year ago. She also [champed] in a culture that values process, which is essential to complying with Sarbanes-Oxley.

I know her colleagues at USEC and I will miss her and we wish her well with her new endeavor. Ellen?

Thank you, John, for those kind words. Before discussing the financial results, I would first like to express my appreciation to John and all of my colleagues here at USEC for the opportunity that they've given me to work with him over the past two years. I continue to believe in this Company, its employees and the role it has played and will play in that future in providing clean, low-cost nuclear energy for America and its many customers overseas.

Now turning to our financial results. We are in the final phase of completing our annual audit with PricewaterhouseCoopers and expect to file our annual report on 10-K in the near future. Let me first provide a few highlights and then get into the details.

Starting with the top line, revenue for the fourth quarter was almost $100 million lower than the fourth quarter of '04. You may recall that about half of the annual revenue in 2004 was recorded in the fourth quarter, which set a record for quarterly revenue for USEC. Comparing, however, the full years, revenue in 2005 was $142 million more than 2004, or about 10% higher. The increase was broad-based, with each of our business lines showing improvement.

Our gross profit for the fourth quarter was up by 15% year-over-year, which helped to drive our gross profit margin for the year to 14.7%, an improvement of about 1 percentage point over the prior year.

For the fourth quarter, net income was $29.6 million compared to $28.2 million in the same period of 2004. For the full year, net income in 2005 was $22.3 million compared to $23.5 million in '04. Because we have recorded net losses in the second and third quarters in 2005, net income in the fourth quarter was higher than for the full year.

To put the two years into perspective, however, I want to point out that in 2005, we expensed approximately $93 million in advanced technology costs to develop the American Centrifuge technology compared to $58 million in 2004. On a pro forma basis, net income before American Centrifuge expenses in 2005 was $79.8 million compared to $59.5 million in 2004. In addition, in 2005, we recorded onetime special charges that had the effect of further reducing net income by approximately $9 million.

Now let's go into the details, beginning with the quarter. Total revenue in the quarter was approximately $550 million. Revenue from SWU sales decreased $112 million, or 23%, from the same quarter a year before. Interestingly, however, third-quarter 2005 SWU revenue had been higher by the same $112 million amount compared to the year before, illustrating that SWU revenue in '05 was spread more evenly than we saw in 2004.

Revenue from uranium was about $122 million, and essentially flat compared to the same quarter in the previous year. Revenue from U.S. Government contracts and other for the quarter was $56 million, an increase of about 25% that largely reflects the addition of NAC International, the subsidiary we had acquired in November of 2004.

For the full year, revenue totaled $1.56 billion, an increase of $142 million. Both SWU and uranium revenue were higher compared to 2004 due to higher sales volumes. After several years of gradually declining SWU prices billed to customers, we did see a 2% increase in average prices in 2005. Market prices for uranium were sharply higher in 2005.

Although most of our inventory of uranium was sold several years ago at prevailing lower prices, the sale of uranium obtained from underfeeding our Paducah plant and sold at today's higher prices helped improve the average price billed to customers for uranium in 2005 by 17%.

Under our revenue recognition policy, USEC transfers titles and collect cash from customers for uranium sales, but does not recognize the revenue until the uranium leaves the enrichment plant property in the form of low-enriched uranium. In 2005, USEC continued to underfeed the enrichment process and capture the benefit of higher uranium prices, and there has been a substantial increase in deferred revenue on the balance sheet related to uranium sales.

At December 31st, 2005, $107 million in revenue with an expected gross profit of $51 million has been deferred until subsequent quarters. At year-end 2004, this amount was $21 million in deferred revenue with a gross profit of $1 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's ultimate purchase and shipment of SWU from USEC.

Our other business segment, U.S. Government contract work, saw a $47 million increase in revenue year-over-year, again due to inclusion of NAC, increased cleanup operations involving contaminated uranium and other projects.

Switching to the cost side of the business. As you would expect, the growth in sales volume brought a corresponding increase in the cost of sales for SWU and uranium. The average unit cost of sales for SWU for 2005 was 3% higher than in 2004. The increase was due to higher production costs, particularly higher power prices during the summer, a higher accrual rate for disposal of depleted uranium, and higher purchase price in prior periods paid to Russia under the megatons-to-megawatts program. Prices paid Russia are set by a market-based pricing formula that reflects increasing global SWU prices in recent years.

Cost of sales for U.S. government contracts and other increased $30 million. That reflects the added cost of NAC and a broader scope of other projects.

The gross profit for 2005 was approximately $230 million, an increase of $35 million, or 18%, over 2004. The gross profit margin for the year was 14.7% compared to 13.7% in the same period last year. Most of the improvement can be attributed to higher margins on uranium sales, made possible by our underfeeding initiatives.

Below the gross profit line are the expenses for the selling, general and administrative expenses, or SG&A, and the American Centrifuge project. SG&A for the year was $62 million, a 3% year-over-year. We made significant profit progress in our effort to reduce SG&A, but much of the improvement was offset by the addition of SG&A attributed to NAC and a onetime charge for a settlement agreement with a former executive. Consulting and compensation expenses declined more than $10 million in 2005.

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 2005 was approximately $109 million, of which about $93 million was expensed and $16 million was capitalized. In comparison, spending in the same period of 2004 was approximately $64 million, with $58 million being expensed and $6 million being capitalized.

The higher level of spending in 2005 reflects an increase in the number of employees working at American Centrifuge, increased spending on manufacturing centrifuge components for the Lead Cascade, and the cost to refurbish and upgrade systems that will support the Lead Cascade.

This investment in our future had the effect of reducing net income by approximately $57.5 million in 2005. To help investors evaluate the impact of this adjustment to current financial results, we reported pro forma net income for American Centrifuge expenses, which is a non-GAAP financial measure.

USEC reported pro forma net income before American Centrifuge expenses of $46.4 million in the fourth quarter and $79.8 million for the full year of 2005. That compares to pro forma net income of $41.7 million in the fourth quarter of '04, and $59.5 million for the full year of '04. That's a 34% improvement year-over-year.

On a GAAP basis, we reported net income of 29.6 million for the fourth quarter and net income of 22.3 million for the full year. These results include an after-tax charge of $4.7 million for companywide restructuring. In comparison, we reported net income of $28.2 million and $23.5 million last year for the quarter and the full year periods, respectively. I would refer you to our earnings release for a detailed schedule of reconciling pro forma net income to GAAP net income.

Turning next to cash. Our cash flow from operating activities for 2005 was approximately $189 million compared to $53 million in 2004. The $136 million improvement in '05 was due to a reduction of USEC's uranium inventory, cash received on uranium sales that are deferred for revenue recognition, and timing of payments to Russia under the megatons-to-megawatts program.

We ended 2005 with a cash balance of $259 million. On January 20th, 2006, we used that cash and short-term borrowings under our bank credit facility to pay off the remaining $289 million in maturing bonds, and we then repaid the short-term borrowings by the end of January.

That concludes our report on USEC's financial and operating results for 2005. Looking forward now to 2006, I'd like to turn the call over to John Barpoulis, who will take on the role of interim Chief Financial Officer, and with that responsibility, the integrity of the Company's financial statements. John?

Thank you, Ellen. Good morning, everyone. It's a pleasure to speak with our investors this morning, and I look forward to meeting many of you in the weeks and months ahead.

Starting with the bottom line, USEC is providing guidance for net income in a range of 70 to $80 million for 2006. Clearly, that is better than our results in 2005, but as John mentioned earlier, this should not be seen as a sustainable upward trend over the near-term. In our earnings news release, we listed a number of assumptions and uncertainties that should be considered when evaluating this guidance.

Starting at the top line, we expect revenue of approximately $1.75 billion, with about $1.25 billion coming from the sale of SWU. We expect to see both higher volume and prices for SWU in 2006.

Uranium is expected to generate about $300 million, as average prices billed to customers are expected to rise by 20 to 25%. Included in uranium revenue is approximately $80 million from new sales of uranium obtained from underfeeding at the Paducah plant and previously deferred uranium revenue. Our other business segment, U.S. Government contracts and other, is expected to generate revenue of approximately $190 million.

We've made certain assumptions about power costs in the second half of the year and purchase costs under the Russian contract. The monthly moving average inventory method will slow the impact of higher power prices on net income, and we expect a gross profit margin in a range of 15 to 16%.

The two largest items below gross profit are Selling, General and Administrative, or SG&A, and advanced technology costs related to the American Centrifuge. During 2005, a major focus of management was reducing our SG&A. We expect to see the results of this effort in 2006. We anticipate SG&A expense will be about 7 to $9 million below the level of the past two years, or about $55 million.

We will continue demonstrating the American Centrifuge in 2006 and the expense will continue to have substantial impact on net income. As we build the Lead Cascade and make investments in equipment for the commercial plant, we expect a growing portion of this spending to be capitalized.

USEC plans to spend approximately $190 million on the American Centrifuge program in 2006. We project that between 80 and $90 million will be expensed and 100 to $110 million will be capitalized. As the demonstration proceeds during the year, we will regularly assess this allocation. If more of the spending is allocated to expense, this will reduce net income.

Demonstration expense of 80 to $90 million will have the effect of reducing net income by about 50 to $55 million. Therefore, pro forma net income before American Centrifuge expenses will be in a range of 120 to $135 million.

Turning next to cash, we expect to generate approximately 145 to $155 million in cash flow from operations in 2006. This internal cash generation will be sufficient to fund spending on the American Centrifuge through this year. Because we repaid the bonds that matured in January with cash on hand and borrowings under our credit facility, net cash flow for the year is expected to be negative by at least $200 million prior to any external financing activities.

As noted in our earnings release yesterday and a previous statement by Chairman Jim Mellor, we anticipate going to the equity markets around mid-year. Following this offering, we do not anticipate needing additional funding until 2008, when we anticipate approaching the debt markets.

We will have more details of the larger financing plan later this year and how we see our capital structure going forward. I cannot yet tell you the size of a potential secondary offering. We are well aware of our shareholders' concern about stock dilution through a secondary offering. The key reasons that the Board gave for redirecting the dividend to building the American Centrifuge Plant was to reduce external financing requirements and that certainly includes the size of a potential equity offering.

So to summarize, our net income in 2006 is expected to improve and cash flow from operations remain strong. SWU prices billed to customers have reversed years of a downward trend, and the steps taken to reduce our overhead costs are bearing fruit. 2006 results should improve over 2005, but clearly we are also focused on the impact of higher power prices until we have significant output from the American Centrifuge Plant.

And with that, operator, we are now ready to take questions from our callers.

(OPERATOR INSTRUCTIONS) Tom Lewis with Century Management.

Good morning. First question, with respect to the 15 to 16% gross margin outlook, is that for the whole year or what you're pointing at after you kind of work through the -- worked off the old inventory and average cost accounting isn't helping you so much?

That's our projection for the whole year.

That is your projection for the whole year. Okay. Well, that sort of suggests that --considering that you're -- I'm assuming you're not producing at a real high rate in the summer, your average cost is helping you for the better part of the year.

And it's not as if anybody here is surprised to know that profitability will be heading down, but it looks like -- trying to get a handle on how far down is down.

Can we assume, when I look at this nice backlog of new orders that you put up, that you were thinking that these cost increases will be reflected in selling prices in '07 and '08?

Many of our backlog are contracts that have been around for a number of years. The new contracts that we are entering into will be reflective of higher prices in the SWU market. But our current backlog has been there for a number of years.

Okay. Well, I guess the other question I would have for you is the -- you've said you're going to do an equity offering at mid-year this year. Can you tell us -- every few years we get into an equity market that doesn't lend itself to an offering. Do you have a backup plan?

Well, I think, Tom, again, we continue to evaluate the timing, size and which equity markets to approach. We're certainly aware of our shareholders' concern and how markets may change. So I'd say several factors certainly impact any potential capital offering -- financial market conditions, timing of our capital needs, our overall SWU market outlook, and our cash from operations as well.

So we continue to work with our advisors to structure an offering that will provide us with capital structure for when Centrifuge is complete. And to the extent that markets do change, I'd say we certainly will reevaluate our approach.

Okay. Let's let somebody else ask a question.

Paul Clegg of Natexis.

Good morning. Your top-line guidance for '06 seems to imply a jump in the SWU volume, which is I think what Ellen just said as well. But how much of the expected increase in SWU volume in '06 is due to increased customer orders? And then is there any component that is actually due to underfeeding through your accounting treatment?

If you're talking about the SWU line, there is no underfeeding in the SWU line. And the increase in that is due to a combination of quantity and price.

Okay. So you are expecting then a fairly large increase in volume?

Yes. If you'll remember TEPCO, which had been down, will continue to now increase its volume because almost all of the reactors are now back online.

Right. And if I may, just a couple of quick follow-ups here, and then I'll let somebody else get on. But if you get the Lead Cascade machines installed by the first half of '06, that leaves you about -- if I'm calculating it correctly -- about four months to test them to meet the DOE milestones of October for performance and reliability data. It that enough time? How can we get comfortable that that's enough time to really assess reliability and performance?

Certainly on an individual machine basis, we're gathering performance and reliability data as we speak. Now we take it into a full cascade, and so the biggest thing we're looking for there is how do the machines, when staged together, how do they -- what is their performance and the output that comes out of that. The reliability issues are certainly something that you're looking at at that point, but it's not the real driver. It's how we actually bring the machines together, how they cascade up and the total performance, i.e. enrichment, is the item that were focusing at.

So to a degree, we are certainly gathering good reliability data; we have throughout this test process. I think will have a very -- if we are able to populate and get the thing according to schedule in the June time frame, I think we're pretty confident we will have some very good reliability and performance data to present to the Department of Energy at that point.

Okay. And just one follow-up, if I may. NAC looks like it's ramping up very quickly. Can we expect to see this trend continue and can you make any comments on the margins at NAC?

I think first off, the biggest thing you're seeing at NAC is you're seeing the full-year impact as opposed to just having it for a partial year. And certainly their business is one that -- I wouldn't say has big ones and zeros -- but their projects, where they're putting the --transportation services and the [cast] for movement of fuel, those are big activities. We have some important bids out there now that we're looking at.

But the biggest thing that you're seeing there is the impact of full year. And you know, the MAGNASTOR container has gone its final licensing, it's involved in some of those bids. This is certainly a year we'd like to see some big wins out of NAC. But the biggest delta that your seeing there is the full-year impact.

Any ability to comment on margins at NAC at this point?

Not at this point.

Thank you.

Fadi Shadid from Friedman, Billings, Ramsey.

Good morning. One follow-up on the equity raise plans. Is there any flexibility to wait till at least get by a milestone, especially the reliability and performance data in October? Would that make the case stronger to investors on the certainty of the technology? Could the equity raise wait until then, or how do you that milestone in terms of importance for the technology?

I think that any capital offering, and especially an equity offering, really is a balance of the timing, again, of our needs, of the appetite of the capital markets and other factors. Again, based on the information we have at this point, we're looking to go to the markets around mid-year. But again, that could change as circumstances arise.

Okay. Another question, in the press release you cite that you'll be looking at opportunities for new revenue sources going forward. What are the possibilities?

Certainly anything that is a direct spinoff of enrichment activities are things that are being looked at there. We had the Energy Northwest activity last year. It's not clear whether those kinds of opportunities are there or not, but we will continue to pursue those.

On SWU prices going forward, it looks like -- you talked about 3 or 4% increase next year. It looks like that gets you up to maybe $106 or so for SWU. How do we think about that going forward beyond next year?

Is your question in terms of what we -- I mean, right now the market price, the published market prices have long-term SWU at about 113, even going higher, and the spot prices are a little bit higher than that. So in terms of where it's going, where we see the market going, is an increase in SWU pricing.

But in terms of your backlog and contracted position, when will we get to $113 for SWU, realized prices?

And that we don't talk about. We only do one year in advance in terms of disclosure and we have talked about where we expect to see it going in '06. I would remind you that remember, it takes a while, because your contracts that are signed today -- we still have contracts that were signed at earlier dates.

Okay, thank you.

[David Rosen] of [Green River Management].

Actually, that was a really good entrance into what I wanted to ask. First, excellent 2006 guidance. Talking about 2007 and also talking about the marketplace, my understanding is actually TradeTech long-term SWU pricing is currently 118. So --.

The figures that I've given you are as of the end of the year. So that may be.

We had the average of TradeTech and Ux at about 116, is what we're seeing at this point.

Okay. Fair enough. I guess the point is, when we think about the market environment here, we have -- you have basically four -- you have four people in the industry. You have TENEX, which has restrictions on where they can sell, i.e. they must sell through you, at least in North America, and the restrictions in Europe. You have Ariva, which has now come out publicly and said we have similar power contractors -- we have power contractor issue. As a result, we're going to increase our prices; otherwise we're not going to sell to foreign markets. And then Urenco and you guys.

So if I think about it, it seems to me like 40 to 50% of the market, which is you guys and Ariva, have had these similar power issues. And with only one other real competitive bidder in these markets, wouldn't you guys expect to see the cost of power reflected in market prices?

You would expect to see some of it reflected in market prices, yes.

So if I actually -- we're actually starting to see increases in SWU prizes, so if I actually look out even going out to 2007, again now, understanding that when you talk about your power contract, you are currently -- what is it -- 80% of your power you actually purchase in a fixed manner and the remaining 20% has already been floating. Is that the appropriate numbers?

That is in the ballpark. It certainly depends how we decide to operate -- how much we purchase during the summer, during the summer months.

Okay. So on a weighted average basis -- and I guess the kind of nice thing about this is that you actually are going to have -- your contracts in your backlog, presumably, the SWU prices should be improving year-over-year because, like the prior questioner, he said you're basically at 106 this year, and in the future, since we know spot prices are currently at 116, 118 -- term prices, I mean, and going higher -- we should expect that should offset a reasonable portion of your power contract. Would that not be a fair statement?

I don't think we can really get into the exact details. I think that, David, a fair thing to look at is we certainly anticipated that the power prices were going to go up. And you saw a lot of action taken in '05 and even before that in anticipation of that. I think that what we are looking at today is more than we would have expected this time a year ago. Of course, that was before a couple of major storms and the big impact on LNG -- on gas prices overall.

I'm not going to go in and comment on individual contracts or what we have in there. But we have our work cut out for us relative to mitigating the impact of power and, as we said in the press release, we have some aggressive things to go do beyond what we've done in the past, and we're not real comfortable saying we can mitigate that full impact.

In my previous lives, we used to dub it as "no good deed goes unpunished." We did at a lot of hard things over the last couple of years to take cost out of the business; we've seen the benefit of that in our results from '05; you're going to continue to see it in '06.

But we're back at the trough. We've got to go turn the nut a little bit tighter to deal with that kind of situation. There are a lot of people in a lot of other industries that are facing the same kind of pressure. It's going to be a tough road to come through while we're financing and building a bridge to the next generation of technology in American Centrifuge.

Right. I appreciate that. I guess the only point that I'm making is, I mean, you guys gave pro forma guidance of like somewhere between 120,$135 million in net income. So on an earnings basis, it's like $1.50 -- roughly call it $1.50 a share. Your stock's at $11.50. So I mean if I look at a multiple on that, it's pretty ridiculous.

If I then go forward and people are trying to look at it and say, what is my earnings trough at? I think the question that everyone is asking is you're already at 125 to 130. You've given an indication of where your power contract is going, and that is 80% of it is fixed. And there's clearly going to be a number of mitigating factors, including increases in prices and additional underfeeding.

I guess the question is, people want some clarity as to what we should see on a [state-to-state] basis. The numbers that I've put together, and you can take them -- of course, I'm looking at it outsider -- is that you're not going to mitigate 100% of it, but you are going to mitigate a significant portion of it. But we will leave it that at that.

The second question is, you gave guidance that $80 million worth of underfeeding you're going to realize in 2006. Your deferred revenue balance right now is like 103 million. Are you still underfeeding your plant in 2006?

Of the 300 million uranium revenues for 2006, we said 80 million is new uranium sales and recognition of deferred revenue.

And, David, to your question, we've had to make certain assumptions as to whether or not we would be able to recognize any of that underfeeding in '06 or whether, like we had to defer most of it in '05, would we again be in a situation where we would have to defer for revenue purposes anything we achieved in '06.

So, would you suspect that you'd have a similar deferred revenue balance at the end of '06 as you have at the end of '05?

We would not -- it would be premature and we would not feel comfortable commenting on a balance sheet account a year from now.

Okay. That is all I've got, thank you.

Steve (indiscernible) of [Anchorage Capital Management].

Just a question on that depleted uranium. It looks like you accrued 20 million in 2005. I wanted to understand when that would become a cash item and what you forecasted for 2006?

Are you talking about the other long-term assets? I'm sorry.

Well, if you look in the cash flow statement, under D&A, you have depleted uranium disposition, 19.8, as an add-back to cash flow. I assume that was an accrual of some sort in the income statement. So I wanted to just understand what that is and when that becomes a cash item and how much you are accruing in '06 for that as well?

That is 20 to 30 years out. That relates to our increase and our accruals for disposition for our tails disposal. So that is significantly in the future.

So that thing about 2006, are you accruing a similar amount in your guidance?

2006 -- well, we don't talk about the individual components. 2006 will be higher. I'd refer you to the 10-K, where we give a thorough discussion about that account for '05, and then talk about its impact on '06. But we expect it to go up because part of '05, the tails disposal, was handled by DOE.

What percentage of the year?

Again, they handled some of it through June, not all of it through June. And again, I would wait and ask that when the K comes out, if you would take a look at the disclosure there.

Okay, thank you. And on the tax line, just trying to understand why cash taxes were higher in '05 than previous years.

Part of it was relating to taxes that we owed for '04. '04 was a higher year than anticipated. And second, for tax purposes, the revenue that we are deferring for book purposes is taxable revenue for tax purposes.

Okay. And final question on the power contract. When you talk about the 50% increase, when was that sort of set? Obviously, gas prices have come down and so have SO2 credits. Just trying to understand what kind of pass-throughs you will get going forward and how that might impact the actual anticipated increase in power cost.

Our assumption -- is our contract, as you know, runs through the end of May. So our assumption is beginning on June 1st. We are still looking at the summer power and we're still in negotiations with this.

One thing to note is that the period of the contract will probably be relatively short compared to the old one. And I think that is in our best interest. As the market settles out, I don't think TVA is not interested in a long-term contract and I don't think with these market conditions we want to go too long either. So it will probably be a short-term contract.

What kind of time are you thinking -- is it one, two years or longer than that period?

No, it wouldn't be longer than two years. It might be more like a year.

Okay. That is all I have. Thank you.

David Shanzer of Janney Montgomery.

Good morning. Could you give us a little color or opinion as to where you see the competitive landscape currently and whether you see any changes in the near to intermediate-term future?

I think actually David did a pretty good summary of the competitive posture that -- certainly TENEX and Urenco are centrifuge-based providers of SWU, and both ourselves and Ariva are in the process of transitioning over the next five years, five plus years, to centrifuge-based. And of course the interesting thing about the market is that there are limitations as to how much can be sold in different parts of the world, and it's not a pure commodity type market.

But clearly the trends in the market are moving up, as described. It certainly makes our decision on where we go with American Centrifuge pretty clear, because that's clearly the technology to go to and there's a bright future for that technology.

Okay. In terms of how earnings will flow during '06, do you think that pattern will pretty much be the same as in '05?

David, what you'll see is a pattern -- as we said, our cycles are either 18 to 24 months, and we're going to see starting with the 18 cycle. So I would expect our second and third quarters to be higher than we have had historically. And we will not be as dependent upon the fourth quarter.

Okay. Out of curiosity, say, is the current level of deferred revenue higher than you might have anticipated, say, a couple of months ago?

Ultimately, the level of deferred revenue is unpredictable by its very nature. And so it's something that we clearly monitor and try to adjust our forecast from time to time.

Okay, thank you.

Tony (indiscernible).

Good morning, John. Just one question. Do we still expect to save 95% of our energy costs after the centrifuge is in place?

Tony, that is still pretty much our estimate. We don't see anything to tell us anything different.

So it is that whatever the cost for power, it is a rather short-term phenomenon.

It's a little longer-term than I would like. We won't have 3.5 million SWUs until 2011. So we're going to be running a gaseous diffusion plant and dealing with the cost issues and the vagaries of power through that time frame.

Thank you very much. And thank you very much, Ellen.

Bob Mitchell of Adit Capital.

If 60% of the cost of producing enriched uranium for you guys is electricity, and TVA power costs are going up by about 50%, am I in the ballpark to think that you're going to see a $30 cost increase per produced SWU, which will take you up to maybe 130, $135 per SWU?

I'm not going to comment on that.

I assumed that would be the answer. This is a fairly basic question when anybody would try to take a look at your business model going forward. To the extent you'll be doing an equity roadshow, isn't that a question that you would pretty much have to answer for anybody to be able to put together some sort of assumptions on '07, '08 profitability?

Generally, we don't comment on the difference between our cost for production versus purchase. We treat it all ask one inventory and a roadshow will address our total cost for a SWU.

Thank you. And also, some folks in the industry have characterized your SWU relationship with the Russians as kind of a sweetheart deal at the moment. And they, under certain circumstance, can do a price reopener during '07. Can you comment on the likelihood of the Russians being able to renegotiate price with you on that relationship?

Right now, the price is set upon the moving average that's reflective of the market conditions. So it's going to change based on what's going on in the marketplace.

Okay, thank you. And then finally, on the American Centrifuge, if that Lead Cascade is operating for four months, to what degree would that actually kind of comfort folks on the reliability issue when -- and correct me if I'm wrong -- but aren't other centrifuges requiring downtime, and yours is different than the others in that it will not require any downtime. So to the extent it operates, let's assume flawlessly, for four months, is that long enough to comfort anyone on the reliability issue?

Again, there are a couple of things to consider there. In the basic operation of the plant, a centrifuge plant that runs today has the ability to take off specific parts of the plant to do maintenance, things like that. But for the most part, these machines run for a long time and are very reliable.

Again, we are drawing upon the experience that the Department of Energy has had in this area in their program -- what -- over about $3 billion worth of investment and they ran plants down in Oak Ridge, as well as the gas centrifuge plant in Piketon, and there is a fair amount of good reliability data there. That is one of the reasons we had comfort basically piggybacking their development work with minor changes in materials and the control systems.

And if we can repeat similar type performance data that was seen back in that program, our degree of confidence and reliability goes up as well. So we're not starting cold from scratch. We have an awful lot of historical data that we're drawing on and operational experience.

Okay, great. Thanks for your help and congratulations on your quarter.

[Peter Liu], Liu Capital Management.

Good morning. Congratulations.

I'm sorry, you're cutting in and out.

(technical difficulty) with the bond refinancing. But I'm a little bit curious about the timing of the equity issue, because your timing comes at a juncture when power prices are going to really rocket and interest rates in the second half of next year might be considerably higher than where they are today.

Earlier, one of your questioners had suggested that you might want to defer the timing of the offering. I'm just wondering, there must be some very good news coming in the second half of this year that you're not prepared to talk about now, because otherwise your equity offering is going to climb up a very icy slope. And I would like you to comment on what potential good news you might have in the second half that you can demonstrate to your shareholders.

Again, Peter, as I think we had discussed earlier, we are currently anticipating going to market around mid-year. But again, as circumstances change, those plans could change. I don't think other than the information and news that we provided on this call and that will be forthcoming in our 10-K, I don't think that we're able to or it's appropriate to predict what additional achievements could occur this year.

I'd like you to comment a little more about possible cash flow considerations in 2007, because I am more concerned with your cash flow than revenue recognition. I think as long as your cash flow is moving up, your operations will be in good shape. So I don't really care if you are able to recognize the revenues. Maybe you can talk a little bit about some cash flow considerations for 2007.

I think, Peter, the cash impact of the increased power cost would be seen immediately for 2006, as reflected within our numbers. But again, we're not looking to forecast for 2007 --

Peter, I would remind you, as we've disclosed here in terms of cash flow, other than the offering in '06, we do not expect to have to go back to the market for cash for Centrifuge until sometime in '08.

Well, with the stock where it is now -- I mean, it used to settle at a 20% premium to the 200-day moving average; now it's selling at a fairly deep discount. So I just wonder why you want to sell your stock at such cheap prices, especially with the prospect of a huge power cost increase in the second half, which will not be viewed constructively. So I'm hoping that you'll be able to differ the equity offering.

Peter, thank you very much for that.

Operator?

At this time, I'd like to turn the conference back over to Mr. John Welch for any closing or final remarks.

Thank you. Thank you all for your insightful questions. We expected a pretty lively call and I appreciate the feedback you've provided. John Barpoulis and I look forward to meeting many of you in the months to come. Good day. Thank you.

This does conclude today's conference. You may now disconnect. We thank you for your participation.