Centrus Energy Corp (LEU) 2006 Q2 法說會逐字稿

Good day and welcome, everyone, to the USEC Inc.'s second quarter 2006 earnings compass 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 be followed by a question-and-answer period.

At this time I would like to turn the call over to Mr. Steven Wingfield. Please go ahead, Sir.

Good morning. Thank you for joining us for USEC's conference call regarding its second quarter 2006, which ended June 30. With me today are John Welch, President and Chief Executive Officer; John Barpoulis, Senior Vice President and Chief Financial Officer and Treasurer; and Bob Van Namen - Senior Vice President, Uranium Enrichment.

Before turning the call over to John, 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 to these non GAAP financial measures to 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 including our 10-K, 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 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 the 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 and subsequent quarterly 10-Qs.

Finally the forward-looking information provided today is time-sensitive and is accurate only as of today, August 3, 2006.

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.

So 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 our second quarter 2006 results. John Barpoulis will provide a detailed review of those financial results in just a moment.

Before we get to John's report, I want to give you an overview of our business including the impact of our new power purchase agreement with TVA and, most important, the status of our demonstration of the American Centrifuge technology.

Turning first to our results. As we projected, revenue in the quarter in the first six months of 2006 was substantially better than a year ago. Revenue was up 89% quarter-over-quarter on higher sales volume of SWU, and higher average prices billed to customers' for SWU.

For the first six months revenue was almost $300 million higher than the same period last year again mainly reflecting higher SWU volume and improved pricing.

We have given guidance that we expect SWU deliveries for the full year to be about 15% higher and SWU prices about 4% higher. Bottom-line, our net income for the quarter was about $22 million - well above last year's second quarter loss of $3 million - and the strong quarter performance built on our very good first quarter results, giving you net income of about $56 million for the first half of 2006, compared to a loss of about $2 million last year.

John Barpoulis will have more details on our financial performance in a few minutes.

While we are pleased with these financial results they reflect the past tense. We are benefiting from the work that was done over the past several years as USEC prepared for higher power cost.

Unfortunately the 50% increase in power prices we will pay TVA over the next year is above the level we expected. In our updated guidance, we said that absent additional measures to mitigate higher power cost and declining uranium sales we could see the gross profit margin for 2007 fall to less than 5%.

That is a future scenario we obviously want to improve upon. We continue to focus on improving the topline by benefiting from improved market prices, as well as looking for additional efficiencies in our operations. In addition, our customers, members of the nuclear fuel community, and other stakeholders have given us strong feedback that they want to see us and the American Centrifuge succeed. We also believe that the U.S. government is committed to maintaining a viable domestic enrichment capability. Our job is to focus this stakeholder support on the deployment of the American centrifuge and the long-term viability of the domestic enrichment industry.

Turning next to trade matters. Last month, the Sunset Review of the Russian suspension agreement was favorably concluded. The International Trade Commission voted to maintain limitations on the imports of Russian uranium products. The ITC found that lifting the suspension agreement would likely cause material injury to domestic producers of uranium products.

Their finding was a follow-on to the ruling made at the end of May with of the Department of Commerce that terminating the agreement will likely lead to the resumption of dumping by the Russians.

As is common in trade cases, appeals have been filed and it can take a year or more for these appeals to be resolved by the courts. We are pleased that Commerce and the ITC supported the position we took; and our expectation is that their rulings will ultimately be upheld. This is an important decision for maintaining our unique megatons to megawatts program and nonproliferation initiative that has eliminated nuclear materials equivalent to more than 11,000 warheads.

Through this program, Russia continues to enjoy a substantial share of the U.S. enrichment market. Russia recently indicated that an extension of the megatons to megawatts program beyond 2013 is unlikely but that it will continue to fulfill its commitments under the existing agreement.

This was also an important decision for the U.S. nuclear industry. As utility CEOs evaluate whether the economics support building a nuclear plant, a critical factor in that evaluation is a stable supply of nuclear fuel. From uranium mining to enrichment to fabrication of fuel assemblies, utility chiefs need assurance that the nuclear fuel will be there before investing in new plants.

Crude oil has been above $70.00 per barrel for several months and crude oil hit new record highs in July on geopolitical concerns. Every time Americans fill up their car, they can get a reminder of the consequences of being overly dependent on foreign sources of energy.

To avoid repeating this scenario, the nuclear industry needs a domestic enrichment capability that can provide a stable, long-term supply of domestically produced low enriched uranium and be competitive on the world market.

Bob Van Namen and I have been meeting with some of our customers' senior executives and we found strong support for American Centrifuge. It is clear they want a diverse and strong domestic enrichment industry that provides them diversity of supply in the long run, which is one of their key objectives.

Just as the nuclear industry needs a stable regulatory framework to commit to building new nuclear power plants, our customers need the assurance of an American domestic enrichment capacity and we will be there to provide it. In return we need the assurance of a stable market so that we can recoup our substantial investment in new centrifuge enrichment technology. The rulings by the Department of Commerce and International Trade Commission are important steps towards providing that stable marketplace.

Let me turn next to our progress on the American Centrifuge. Our investors have asked for more details about the demonstration of the American Centrifuge technology and we are trying to provide as much information as possible.

Let me start off by giving a summary level view. Plainly stated we are not exactly where we thought we would be at this point; but in our case not where we planned has provided some exciting possibilities. Let me explain.

We have been testing individual machines for a number of months at our Oak Ridge facility. During the past year as we encountered and resolved issues, we fell behind our schedule but we also found reasons to be strongly encouraged. As early as April, we achieved performance essentially at our target level of 320 SWUs per machine per year under suboptimal conditions.

We now believe that under optimal conditions there are opportunities for performance beyond what we originally targeted. This is an exciting development.

Using new materials and processes has created various challenges in manufacturing and testing that has caused some delays. As with almost any large-scale projects, such challenges are inevitable. Our teams of scientists and engineers are successfully solving these issues. As I said we had planned to install the first cascade of centrifuges in Piketon late this summer and again operating the machines shortly thereafter. We have the capability today to build and install a Lead Cascade and machine that can perform at less than our target level of performance.

We believe, however, that taking some additional time now to optimize the performance and reliability of the individual machines could result in deploying superior centrifuges in the commercial plant.

We are building the ACP to last for decades and, therefore, it makes sense to deploy machines that operate at higher output with demonstrated reliability and that will produce the greatest return for our shareholders. We expect to operate a small number of machines by late summer and we will continue to gather significant performance and reliability data this year from our prototype machines.

As investors know, under the DOE USEC agreement we have a milestone in October 2006 to obtain satisfactory, reliability and performance data from Lead Cascade operations. By October, we will have gathered performance and reliability data from the machines installed to date and from the testing to date of our prototype machines, subassemblies and components. We will also have gathered significant testing data from systems that will support Lead Cascade operations.

We will review the data we have with DOE as part of our discussions about the October milestone. DOE scientists and engineers work closely with the USEC team as part of the cooperative research and development agreement managed by UT-Battelle. DOE is aware of our machine performance testing as well as our progress in preparing the demonstration facilities for the Lead Cascade machines. We expect that we will reach a mutually acceptable agreement with DOE regarding the October milestone. We do not expect DOE to take any adverse action under our 2002 agreement.

On a parallel path, the process of obtaining a license to operate the American Centrifuge plant from the Nuclear Regulatory Commission is moving ahead. All indications are that the license will be issued in early 2007. The environmental impact statement was issued in May and the safety evaluation report is expected to be released later this month.

USEC's Board of Directors held its most recent meeting last week at the Piketon plant and received a full classified briefing from our scientists and engineers. The demonstration facility is ready for the Lead Cascade machines. And I can tell you the staff there is chomping at the bit to begin demonstration operations. But they understand the value of fully optimizing the design and improving the performance of our machines. I can tell you that when you spend the time with our centrifuge team, their enthusiasm is contagious.

To sum up, we now expect to operate a small number of centrifuges this year with the finalized machine design. We will install and operate centrifuges for the Lead Cascade by mid-2007. I want to emphasize that the data we have gathered so far gives us confidence that the machines we plan to deploy commercially will operate as well and possibly better than we had initially targeted.

We also recognize that the delays over the past year have impacted our near-term schedule for the program. As we obtain more performance and reliability data we will assess the impact of these delays on our overall schedule.

It is important that everyone understands that our priority is to execute our deployment plan in the most cost-effective manner possible. We believe this will maximize shareholder value over the long-term.

Before I turn the call over to John Barpoulis to report on our second quarter financial results, I would like to add a quick comment on our news release yesterday announcing his appointment as Chief Financial Officer.

John has done an outstanding job for USEC since he stepped into serve as the interim CFO in February. We conducted an extensive and thorough executive search and concluded the best person for the best person for USEC was John. He constantly demonstrates great leadership - not only for our financial group but also within a senior management team. We are pleased to have someone of John's caliber and experience on our team.

With that I'll turn it over to John.

John, thank you very much. I very much appreciate your support, that of the board, management team and especially the support that I've received throughout the USEC organization. And good morning to everyone on the phone.

Starting with the topline, revenue for the first half of year was $887 million or about $3 million more than the same period last year. Revenue in the second quarter was $525 million or about $250 million higher than the second quarter of 2005. Our gross profit for the first six months was $172 million or $82 million higher year over year. This reflects higher SWU volume and prices build to customers as well as continued strong sales of uranium.

Net income for the first half of the year was $56 million or $0.65 per share compared to a loss of $2 million or $0.02 per share last year. For the second quarter, net income was $22 million or $0.25 per share compared to a loss of $3 million or $0.03 per share in the same period last year.

Now let's get to the details. As I just highlighted, for the six-month period total revenue was $887 million or about $300 million more than the same period last year. We saw a 47% volume growth for SWU and a 7% increase in prices billed to customers. Uranium was also strong with a 39% increase in uranium sales volume and a 33% increase in uranium prices billed to customers.

Total revenue in the quarter was $525 million. Revenue from SWU sales increased to $211 million or more than 100% from the same quarter a year before. SWU sales volume was nearly double and the average price build for customers improved by 5%. Revenue from sales of uranium was $71 million, also more than double sales of the same quarter last year.

Revenue from U.S. government contracts and other was essentially flat in both the quarter and the six-month periods at $50 million and $102 million, respectively.

Uranium revenue includes amounts of previously deferred revenue that were recognized during the quarter. As we disclosed before USEC transfers title and collects cash from customers for uranium sales but does not recognize the revenue until the low enriched uranium is physically delivered. USEC continues to [underfeed] the enrichment process and to show a substantial amount of deferred revenue on the balance sheet related to uranium sales.

As of June 30, $108 million in deferred revenue with an expected gross profit of about $41 million has been deferred until subsequent quarters. At year end 2005 this deferred revenue amount was $107 million; and at March 31, the amount was $108 million. So you can see we have been adding deferred revenue at about the same pace as we have been recognizing revenue deferred from previous quarters.

The timing of recognition of this revenue cannot be determined as it is often dependent upon the sale of uranium by a broker to a utility and the utility's ultimate purchase and shipment of SWU from USEC.

Switching to the cost side of the business for the six-month period, cost of sales for the LEU segment was more than 50% higher, in line with the increase in the volume of SWU and uranium delivered. The average unit cost of sales for SWU for the period was 4% higher than in 2005. The increase was due to higher starting inventory costs, lower production volume, higher unit production costs, and higher purchase prices paid to Russia under the megatons to megawatts program. The purchase price paid to Russia is set by a market-based pricing formula that reflects increasing global SWU prices in recent years.

Cost of sales for U.S. government contracts declined $3.6 million on virtually the same revenue.

Looking at the entire enterprise, the gross profit for the six-month period was $172 million, an increase of $82 million or 91% over the same period last year. The gross profit margin was 19.4% for the six months, reflecting the impact of an unusually high margin in the first quarter.

For the second quarter, the gross profit was almost $80 million, an increase of $37 million or 89% over the same quarter in 2005. The gross profit margin for the quarter was 15.2%, which was the same as last year's second quarter.

Below the gross profit line are the expenses for selling, general, and administrative or SG&A, and the American Centrifuge project. SG&A for the first half of the year was $26 million, a 12% reduction year over year. We also took a $1.5 million special charge in the first quarter as we ceased use of leased headquarter space, vacated as part of last fall's restructuring of the organization.

USEC continues to make a substantial investment in the American Centrifuge technology, $46 million during the six-month period, which is about the same as the expense in the first half of 2005.

Total spending related to the American Centrifuge during the first half of this year was $58 million including capitalized cost of $12 million. That compares to approximately $54 million in the same period last year, of which $8 million was capitalized. This investment in our future had the effect of reducing net income by approximately $29 million in the period, assuming a 37% statutory tax rate. 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 $85 million in the first half of 2006 compared to $26 million for the same period in 2005 - an increase of over 200%. For the second quarter pro forma net income was $38 million compared to $12 million in the same quarter last year.

On a GAAP basis, we reported net income of $56 million for the first six months of 2006, compared to a loss of about $2 million in the same period last year. For the quarter net income was about $22 million compared to a loss of $3 million in the second quarter of 2005. I refer you to our earnings release for a detailed schedule reconciling pro forma net income to net income.

Turning next to cash, our cash flow from operating activities for the six-month period was approximately $40 million compared to $38 million in 2005. Operations generated more cash in 2006 than in the same period last year but this was offset by additional payments made to Russia under the megatons to megawatts program due the timing, higher payments for electric power due to prepayments to the TVA under the new contract and higher tax payments.

We ended the quarter with a cash balance of $22 million but at that time we also had a short-term borrowing under our bank credit facility of $26 million. During 2006, we expect to borrow on the credit facility from time to time to cover changes in working capital. We expect to stay operating cash flow positive for the year.

The largest change to our December 31st, 2005 cash position was the $289 million repayment of the senior notes that matured January 20. After that repayment our interest expense has been cut about half an hour debt to total capitalization ratio is down to about 15%.

In yesterday's news release we updated our earnings in cash flow guidance for 2006. Starting at the top we have increased guidance for revenues to approximately $1.8 billion with the increase coming from additional SWU sales. We now expect SWU to total about $1.3 billion, based on a 15% increase in volume of SWU delivered, compared to 2005 and the average price build customers improving by 4%.

Revenue guidance for uranium and U.S. government contracts and other remains relatively unchanged.

The biggest change to our outlook is in the amount of spending on the American Centrifuge project that will be expensed. Total spending will decline $5 million dollars to $185 million but the proportion being expenses is increased. We now project that spending will be split between $125 million expense and $60 million capitalized. We will continue to evaluate the split between expense and capital spending as the year progresses.

The additional American Centrifuge expense will produce net income by about $10 million and our earnings guidance is now for a range of $60 million to $70 million. Looking at net income on a pro forma basis, earnings will actually be higher than our earlier projection of $120 to $135 million. We now expect pro forma preferment net income in the range of what had reported to $150 million to the increase due to improving gross margins. Again please refer to our earnings release for a reconciliation of these pro forma numbers.

We factored in our expected power costs in the second half of the year and the monthly moving average inventory methodology will slow the impact of higher power prices on net income. We now expect a gross profit margin for 2006 of approximately 16%. We expect to generate approximately $135 to $145 million in cash flow from operations in 2006. This internal cash generation will be sufficient to cofund spending on the American Centrifuge through this year.

We normally provide annual guidance early in the calendar year for that year; but we want to make sure that investors fully understand the impact that 50% higher power prices will have on 2007 earnings and beyond. Clearly this substantial change in our production cost structure and a reduction in uranium sales will squeeze profit margins. We see scenarios where our gross profit margin has declined to less than 5%.

As John Welch mentioned earlier we are actively engaged to find ways to improve this outlook and we will continue to work hard to find ways to mitigate the higher power costs.

So to summarize, the first half of 2006 showed solid improvement that our earlier guidance suggested. We had improved revenue on solid volumes with higher prices billed to customers for both SWU and uranium. Clearly we have much to do over the next several months in testing our American Centrifuge technology and working to mitigate higher power prices. We are sharply focused on these areas and look forward to providing an update when we report our third quarter results.

That completes our remarks and, operator, we are now ready to take questions from the callers.

(OPERATOR INSTRUCTIONS). Fadi Shadid of Friedman Billings Ramsey.

Good morning. Couple of questions. I will stick to one or two initially. On the new timeline for the Lead Cascade, can we look forward to something in the interim between now and mid '07? Something like, can we decide on the final design of the individual machine before we send them to manufacturing to assemble the Lead Cascade? Is that essentially a milestone that we could look forward to?

This is John. The answer is yes. Our objectives, we will continue to evaluate weight cost schedule type activities through the end of the year and to evaluate where we stand there, relative to the machines, we would hope to have that design locked in as soon as we can and our target is to have that locked down by the end of the year.

And how long does it -- I will wait for that question. Another thing is on the TVA contract when you signed the one that goes until mid next year gas prices and coal prices were higher, probably, than where they are now. Could you potentially negotiate something for the following year - '07, '08 - that would be less? Is that something you'll be looking at soon?

This is Bob Van Namen. Yes. We are definitely hopeful we have seen coal and gas prices back down somewhat. We are faced with a very hot summer with very high electricity demand right now. We will be talking with TVA over the next several months to finalize and do have expectations that we, well, we will have to see where things go with TVA. It is very difficult to predict.

Thank you.

Paul Clegg from Natexis.

Good morning. First of all, congratulations to John Barpoulis.

Thank you, Paul.

When you look at your financing position over the next, let's say, 12 months I would think there has to be an equity offering in there somewhere just given the constraints of your credit agreement. When do you actually have to pull the trigger on an equity offering so that you have enough leeway not to run into some sort of liquidity issues?

And will you be in a position to announce some favorable news prior to that time period that could perhaps help the stock avoid some of the dilution issues that some of us are concerned about?

I think, let's answer that question in two parts. I think, first, with respect to liquidity. We clearly state in our 10-Q that we - under our existing credit facility and cash generated from operations - that we expect it will have sufficient liquidity even with a step down in the credit facility for the next 12 months; and that is something that we will obviously be reporting on quarterly.

I think with respect to the timing of any type of offering and schedule, John touched a bit on the schedule in his responses to Fadi on the first question but I would say our plan has been and continues to be to finance the project through that combination of internally generated cash flow and proceeds from equity and debt offerings. We are still looking to pursue an equity offering at some point over the next 12 months or so. And that, we would look to subsequently issue debt in late 2007, '08 timeframe.

But obviously as we've said before, several factors impact our ability and desired timing to do that between financial market conditions, timing of our capital needs, targeted long-term capital structures to a market outlook. Especially our progress on the American Centrifuge program and our forecasted Cash From Operation. So we will continue to look at all those factors and evaluate our options.

Okay but if you go beyond a 12-month period where you've stated you have enough liquidity you have some sort of contingency plans, I suppose, for boosting those liquidity levels perhaps involving inventory or something like that?

I think that, when it comes to looking at what we have to manage, we have our inventory levels, we have our cash generated from operations, and spending on the American Centrifuge profile. So obviously as we look forward, we are balancing everything and balancing our capital needs and expected capital raising.

And if I may, just one follow-up. I think a lot of people understand that your investment story today is one of a few years of, let's say, earnings pain followed by a potentially big payoff with a conversion to centrifuge. But I would like you to address one potential risk issued that we haven't heard you talk too much about recently and that is the cost of the centrifuge.

We assume in our model that you are going to spend significantly more than what your last public estimate was; and of course you haven't gotten any firm price contracts from your vendors yet. Could you just update us on the timeframe where you expect to get those fixed-price contracts and, perhaps, maybe comment on our assumption that it's very likely that the cost will go up?

Let me -- why don't I have Bob talk a little bit about just our whole thought process and how we worked to the customers on that and I will come back and wrap up on our total cost side of it.

What we are looking at for sales contracts is to be in discussions with our customers starting now for supply from the American Centrifuge for 2011 and beyond. Then we would be looking to finalize those contracts once we have the specific cost information starting in mid 2007 and hopefully wrapping up by the end of the year.

I'm sorry. End of 2007?

Right. For the discussions with the customers on the long-term sales contract from American Centrifuge.

Okay.

And, clearly, the utilities would like to see long-term contracts that gives them access to SWU over the long-term especially post-2013 when the Megaton to Megawatts program is over. We clearly are much more comfortable on the cost position when we have locked down the design and have the full cost of the project updated which we are going through and we will have one update on that this year.

By the end of the year we would expect, as they continue to test through mid next year, we will go through another update to that - specially as we transition to the manufacturing to the vendors. I mean, just a comment on that a little bit right now is we have vendors that are building to our design today. ATK, in particular. We are evaluating how they are coming through that.

There's - as you would expect as you transition to someone who is in the business of doing high-volume, high-quality materials there -- we are most encouraged by what we're seeing at this point. But until we finally lock down a fixed-price production contract with them, we are still sort of not real comfortable of totally nailing down the total cost of that.

But we will certainly be going through that over the next year as we transition to them as we lock down the design and then transition to them on manufacturing.

So if I understanding -- I'm sorry -- if I understand you correctly then there is a period at the end of the year where you will come back to us with a new cost update? And then there's a subsequent adjustment to that bid next year?

I would think that is probably about right because we will certainly communicate to you what we know when we know it. But we would still have a factor that as we go through that transition with the vendors where we would probably feel a lot more comfortable on that.

Now, clearly, what that drives to is okay, what's the total cost of the project? Are you still seeing good signals, relative to the viability of the project itself? Even with what we would call it are the -- what I call sort of the [federations] that we are going through to optimize this design you create a cost envelope around the project and the schedule envelope. Then you go looking at market conditions.

Where we believe this machine will ultimately end up from a cost per SWU standpoint for the plant and looking at the market conditions, and everything else that is going around the nuclear industry in general, I would have to say that all the lights are still green for the project. I mean I think -- this is the exciting thing about potentially better performance out of the machine. Because it starts to change that equation as well as we look at the initial 3.5 million SWU at the plant.

And when you talk about an adjustment to the total cost bid next year, is that a smaller variation do you think or -- ?

I hope so. I mean that's the -- the risk profile on the program as we've talked before, Paul, is that you break it into three pieces. There's clearly the demonstration activity and what we believe individual machines will cost. Then we have the transition to the major manufacturers; and then there's building out the plant.

Certainly on a risk scale, the front piece probably has the most variability in it, and that is what we are retiring on a daily basis. Some of that risk. Then we come through with the vendors. The one that I am least worried about is how we build out the plant because from a relative technology standpoint, technology risk it's the least.

So yes middle of next year is probably when I can feel a hell of a lot more comfortable that we have got the envelope is tight as we can have it around the project itself. Albeit we know there will be challenges each step of the way.

Thanks very much.

Laurence Alexander of Jefferson Co.

Good morning. First question is on the stakeholders who are expressing enthusiasm for the project. Are they going so far as to discuss measures that might help your nearer term cash flows over the next couple of years or is it more taking the form of pricing on the longer-term contracts that you might -- so that you can recoup your costs of the American Centrifuge.

I would say our discussions cover both. And certainly we are focused on how do we mitigate the impact of the power cost near-term so we -- because clearly that's what impacts cash flow which impacts on which financing is required and, certainly, with the utility customers we are focused on the (indiscernible) of that.

And with the mention of the 5% gross margins as one possible scenario for next year, can you put a little more detail on how you are -- what the moving parts might be in terms of what leverage you have to pull and what the magnitude of those levers might be?

I think at this point we are not looking to provide any guidance for 2007. Clearly, there's been a range of views on what gross margin could be for us in 2007. We really want to communicate that we are going to be impacted by the increased power prices in our declining uranium revenue. Again as John has outlined, we are looking at ways to mitigate that but we want to set a mark out there.

On your '06 outlook, implicit in your outlook for the '06 uranium and SWU sales. What are some of the inventory positions you expect to have at the end of the year?

There is more information that will be provided in the 10-Q in general but, typically, we have not gotten into specific volume of inventory level for competitive purposes.

Okay. And finally on the -- to the extent that you can improve the efficiency of your machines, will you see a concomitant improvement in the capital intensity or the cost per SWU once the machines are up and running? Or is it going to be where it's a cost machine going to be ramping up a little bit as well as you use new materials?

That's a good question. I'm not sure I have the answer at this point. It's a complicated machine and we are not allowed to talk about the [Hudson] or what I would call the guts of the machine because that's in a highly classified area. But it -- really, the performance and the optimization of the performance; the costs associated with getting those last few SWUs or the last 10 or 20% of it - that's not where the cost is. Cost is in the big pieces which are the rotor, end cap assemblies, things like that.

So our hope is, optimistically, that you are not going to be paying a big price for that additional performance there and that is why the economics can start to look so good. But we won't know that for a while.

Thank you.

(OPERATOR INSTRUCTIONS). [John Scott] of The Pilgrim Fund.

I saw this week in the Chattanooga Times that TVA, Exelon, Duke, and Southern had signed an agreement, a significant agreement with Louisiana Energy Services. And it seems like we are stuck in a delay but they are -- we haven't really talked about competition. I was wondering if you could address that.

Sure. This is Bob Van Namen. Couple of words that we have seen a number of commitments publicized for the LES project over the last several years. The number of the companies that you mentioned were actual partners in the initial stages of the LES project. LES is a Urenco project - one of our competitors that's based in Europe.

And so what we're seeing is they would have been signing these contracts whether it be from LES or from their home operations in Europe and expansions there either way. We - looking forward - continue to see a very robust market for demand going forward. We are seeing a lot of utilities out talking about new build. We are seeing demand continue to increase because of movements in the uranium market. And we are very optimistic that when we are ready to sell that 3.5 million SWUs or perhaps more, that will have a good market for it. So it is not a concern for us right now.

Lastly, electricity rates for next year. Are you locked in or is there any kind of possibility that it's based on this year's rates and that with the high power outages this year that electricity rates could even notch up further next year?

As I said to the previous question, there is always uncertainty when we are going into the negotiations with TVA on these power costs. And we also mentioned the fact that gas and coal prices have dropped. One mitigating factor is the fact that now TVA is going to be bringing on restarting the Brown Ferry unit - a nuclear unit that is going have very attractive economics in their service territory.

So there is a lot of offsetting factors . There TVA had recently announced a rate decrease, going into next year. So -- for their industrial municipal customers. So we will see but, again, optimistic going into the discussion.

Thank you.

(OPERATOR INSTRUCTIONS). Paul Clegg of Natexis.

Just to actually trace back to one of the questions that we had earlier. Regarding the 5% gross margin outlook for '07. Can you at least respond to whether or not that includes any deferred revenue from uranium sales?

I'm sorry we try not to speculate on the timing of when we may be recognizing that deferred revenue and, again, don't want to provide any further guidance, I think, on 2007.

Then if I may just one technical question. You talked about Centrifuge performance and how you may actually do better by taking this additional time. What is the best that Centrifuge has ever done in testing performance if you go back and look at the DOE program?

That's a good question and I think that I put it as -- it's under the category of "hey, where have we come from?" and I think maybe a little bit of the history from the DOE program is appropriate.

We took the basics of the DOE design that had populated the [GSEP] facility in Portsmouth and that thing had run for almost 10 years with very extremely high reliability. And it performed about four to five times better than anything in the world. I think the nameplate data out in that time frame was 200 SWU per year. So about in the range of 200 SWU per machine which is about five times better than what was the state of the market at that point in time.

Where we went from that is, we took advantage of that design and reliability data and then we took advantage of the data from DOE's Advanced Gas Centrifuge program, which was still going on in Oakridge at the time at their demonstration facility. And there was even better performance that was coming out of that machine. And that is where the idea of continuing to evolve to advanced materials certainly was brought forth.

We brought that design experience forward to today, including the materials, the control systems and reassembled core members of that engineering and scientific team. It's safe to say, though, that the ACP machines that we are talking about are not your father's American Centrifuge. It has evolved quite a bit and that is where we are seeing some of the performance.

The performance makes us very optimistic about the machines and the ultimate plant and that clearly means a great deal to the ultimate economics of the project and our ability to field an extremely cost-competitive enrichment capability for the United States. Again in our view we think it's prudent to take the time now to ensure the returns later. And if that means taking more time then that is what we're going to do and I think DOE and our long-term shareholders would expect nothing less from us on that front.

So if you had -- so, it's possible that you could breakthrough that 320 SWU per machine number and if you could do it for the same CapEx cost, all the better.

All the better is right. Being able to get the kind of performance we've got in suboptimal conditions certainly gives us a lot of optimism outside of the equation.

Thank you.

Laurence Alexander of Jefferies & Co.

I would like to flog a horse in a slightly different way. If you are looking at the '07 comment on the gross margins, I presume there's a spectrum of scenarios that you are considering. And is it fair to say that the -- for you to highlight it as directly as you have, the 5% margins are probably somewhere near the center rather than being one of the far distant outliers off in the Gamma Quadrant?

A Star Trek reference. It's just --

I will try everything (MULTIPLE SPEAKERS) laughing.

I will do what I can. Clearly as one looks at our profile - you certainly have as has been outlined, and Bob has touched on is the power price risk in next year. So clearly that is something that is a variable, but again we are not looking to provide further guidance on the position. I think again we are trying to set a mark. But I think ultimately what we are focused on and what we are trying to communicate there is getting to the long-term.

And I know that our investors and other stakeholders are very much focused on -- given that potential impact, how are we looking to raise the capital? What I would say to that is raising capital -- one thing we've come to appreciate is that it is much more than just walking around with your hand out on Wall Street. That may have been the perception of USEC in the past. But I can tell you that that is not John Welch's USEC.

What John has impressed upon this management team is that the nuclear sector is in the midst of transformation and that USEC gains to help lead that change. Companies internationally as we have seen are positioning themselves for roles in the nuclear renaissance. And we know that stability throughout the fuel cycles is really a key to that.

So raising capital starts with a vision for our role in that transformation and a business model to go with it that balances our risks and returns. So we aim to be a leading, stable, and reliable supplier of SWU and I know that's been hit home here with the American Centrifuge Technology leading that transformation. We clearly are looking and need the participation of our critical stakeholders as we transform our business model.

Bob has touched on customers, suppliers, our vendors for the American centrifuge program. The federal government, state and community leaders. We've never planned to build this project on our own. What we see as critical is how risk is shared amongst our stakeholders, lenders and investors with whom and how we ultimately finance the construction of the plan will be directly a function of their involvement.

Customers, in terms of the strength in their commitment to purchase SWU, and our commitment to deliver. Vendors working with us to mitigate costs and schedule risks and of course federal, state, local leaders and their support for the program and market stability. So we are very much focused on gross margins but also how we are looking to finance the future. That is how I would try to get as much as I can on that one.

Fair enough. And when you look at (indiscernible) milestone in (technical difficulties) if you look at the different data points that they are looking for what is the data point that is most difficult for you to meet from where you are now?

Just a little bit of background is that I think that with DOE and maybe even need to go back. Why the agreement in the first place? Clearly where DOE was focused at wanted to maintain the current industrial base until we are ready to transition to the new one. Therefore the requirements keep operating GDP until you are ready to transition to ACP.

Then it was to set up a series of milestones that kept us on a path towards fielding a commercial plant. So and this is a milestone that is looking at Lead Cascade reliability data; but in many ways it's a series of data points that they are looking at. They have been looking at performance and reliability data at each step of the way. They are going to continue to look at more.

Clearly we won't have as much as we would have liked to have had in a fully operational Lead Cascade in October. So I think all of that will be taken in the context, are we really on a successful path towards commercialization of that plant?

Because that is everyone's objective and they are going to want to feel comfortable that "Hey, are you making the right kind of progress? You need to. Are you getting there?" And then we'll come through with them where we are. They know where we are now. They will know where we are in October and they will have a good feeling for where we think we will be in the future beyond that; and then we'll come out of that with a review and a conclusion from that.

In some ways, they are not separate issues but one of them are clearly the Department of Energy milestones but I'm as -- believe me I'm as much focused on what we need to do to execute the program in the most cost-effective manner for ensuring the best long-term capability that can be fielded and do best for the shareholders. So I think that in some ways they are separate issues and in some ways they clearly intersect on these milestones; and that is what we will be presenting to the Department of Energy.

Thank you.

Fadi Shadid of Friedman Billings Ramsey.

Question on SWU volumes. Could you remind us what the original guidance was for year-over-year increase? Now it's 15%. What was it before and why the increase?

We did not provide specific guidance on the SWU volume numbers that were in the basis. It has increased for several factors, one of which is that our customers - given the changes in uranium prices - they are giving us less uranium and taking more SWU. And then the second factor is that they continue to operate their plants very well so we are seeing customers with requirements contracts asking as for more enrichment to continue to fuel their reactors.

Those are the two main drivers we are looking at.

And are you -- does it for next year's guidance for margins, what kind of sales forecast is included in that?

Again, Fadi, we are not looking to provide any further details at this point, just trying to set some expectations. But appreciate the question.

Thank you.

At this time, there appears to be no further questions. I would like to turn the call back to our speakers for any closing remarks.

Thank you all for your questions. We expected a lively call and I appreciate the feedback you provided. John Barpoulis and I look forward to meeting many of you in the near future and having continued interactions. Again, thank you for joining us and good day.

(technical difficulty) today's conference; we thank you for your participation and have a wonderful day.