Centrus Energy Corp (LEU) 2006 Q4 法說會逐字稿

Good day, everyone, and welcome to the USEC Inc. fourth quarter 2006 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 from the director of Investor Relations. Management will make opening remarks which will be followed by a question-and-answer session. At this time I would like to turn the call over to Mr. Steve Wingfield. Please go ahead, sir.

Thank you. Good morning. Thank you for joining us for USEC's conference call regarding its fourth quarter and full-year 2006 results. With me today are John Welch, President and Chief Executive Officer; John Barpoulis, Senior Vice President and Chief Financial Officer; Bob Van Namen, Senior Vice President for Uranium Enrichment; and Tracy Mey, Controller and Chief Accounting Officer. 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 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.

Third, 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. We expect to file our 10-K for 2006 later today. A replay of this call will also 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 risk and uncertainty, including assumptions about the future performance of USEC. Our actual results may differ materially from those in our forward-looking statements.

Additional information concerning factors that could cause actual results to materially differ from those in our forward-looking statements is contained in our filings with the SEC including our annual report on form 10-K and subsequent quarterly 10-Qs. Finally, the forward-looking information provided today is time sensitive and is accurate only as of today, February 27, 2007. This call is the property of USEC. Any redistribution, retransmission or rebroadcast of this call in any form without the express written consent of USEC is strictly prohibited.

Thank you for your participation. Now I would like to turn the call over to John Welch.

Thank you, Steve, and good morning to all. I want to warn everyone upfront that both John Barpoulis and I are under the weather a bit, probably has something to do with all this changing weather in our region. Fortunately we do not think that it is transmittable over the line. But thank you for joining us to discuss our 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 went to give you an update on our business, particularly the status of our demonstration of the American Centrifuge Technology. Turning first to our results, revenue, gross profit, net income and cash flow from operations all improved in 2006. The improved results were a result of higher SWU volume on higher average prices billed to customers, as well as higher prices for uranium. And while expenses for the American Centrifuge increased by $11 million compared to 2005, lower interest expense and lower headquarters expense more than offset that higher advanced technology expense.

Our net income was $106 million, a substantial improvement over last year's $22 million. Again John will have more details on our financial performance in a few minutes. The USEC management team and our employees at five facilities have focused on lowering our cost structure over the last several years. The 2006 results are a testament to that endeavor. Despite that effort, the 50% plus increase in power prices that occurred in mid 2006 will have a much more significant impact on our financial results in 2007.

As you undoubtedly saw in our 2007 outlook, we expect our gross profit margin in 2007 to be about half of the margin recorded in 2006. We continue to seek ways to mitigate this sea change in the cost structure of our domestic production. While we are looking for additional efficiencies in our operations, electricity is such a big portion of our cost structure, about 70%, that nearly everything else on the cost side has a limited impact.

We have approached the U.S. government regarding ways that we could take on the mutually beneficial task of harvesting value from thousands of cylinders of depleted uranium from decades of operations at the gaseous diffusion plants in Kentucky and Ohio. Such an arrangement could provide USEC with additional cash flow that would be dedicated to financing the American Centrifuge plant. This could also be very helpful to our customers because it would provide an additional source of uranium at a time when supplies are tight. We are still in the early stages of these discussions.

We believe that the U.S. government has committed to maintaining a viable domestic enrichment capability and their support is essential. There are many signs that support for nuclear power is growing in this country and around the world because nuclear power is one of the leading choices for environmentally responsible electricity generation. In fact, the nuclear industry today is at its best point in more than two decades. Governmental policy, public acceptance, environmental concerns by global warming and economics have come together to promote new nuclear power plant construction in the United States and many other nations.

Better performance, lower cost and the lengthening record of safety at the existing fleet of 435 commercial reactors worldwide have served to improve the reputation of nuclear power as a solution to a growing demand for electricity. The U.S. nuclear energy industry expects utilities to bring applications for more than 25 new plants to the Nuclear Regulatory Commission over the next several years. To meet this current and future demand for low enriched uranium the nuclear fuel industry must be revitalized. We think the American Centrifuge is the answer. We are talking with a variety of stakeholders, our customers, the government and the industry about ways they can support USEC as we transition to production from the American Centrifuge plant.

Let me turn next to our progress on the American Centrifuge. Keeping with our commitment to provide more details about our progress and demonstrating and preparing to deploy the American Centrifuge technology, we issued an update on the program about two weeks ago. Bottom line upfront, we set a target cost estimate of $2.3 billion for the project, which includes the $371 million we had spent through 2006, but does not include financing costs or reserve for general contingencies.

Last year we initiated a complete bottom-up review of the American Centrifuge program to develop a better estimate of the costs and schedule for constructing the enrichment plant. As this review progressed we reported to you in November that our new estimate would be significantly higher than the initial estimate of $1.7 billion that was developed in 2002, based on extrapolated data from the U.S. Department of Energy Centrifuge Project. As we did our comprehensive review, we used a variety of data points to develop this updated target estimate. We also gathered significant input from our project participants, and we will need their assistance to meet our target. This is an ambitious plan from both a cost and schedule perspective. We are pursuing cost mitigation approaches involving value engineering, high-volume manufacturing efficiencies and system refurbishment to meet the target estimate.

As many of you will recall, we opted to delay building our Lead Cascade of centrifuges last year to allow for additional testing of individual machines and facilities in Oak Ridge, Tennessee. This resulted in a delay of about one year but also allowed the USEC project team at Oak Ridge to resolve issues concerning components and materials, and to successfully test machines with an output of approximately 350 SWU per machine per year. We had previously set the target performance at 320 SWU per machine per year, which was about eight times greater than the next best commercially deployable centrifuge. That 10% improvement in performance to date adds approximately 300,000 SWU to the previously expected plant capacity of 3.5 million SWU.

Our current estimate is that the commercial plant will have an output of 3.8 million SWU based on our current estimate of machine output and overall plant availability. We believe that the increased plant capacity will help to offset some of the cost increase over the long-term.

Turning next to the schedule, the one year delay in operating our Lead Cascade is basically rolled through the rest of the schedule. We are now working toward beginning commercial plant operations in late 2009 and having about 11,500 machines deployed in 2012. In the near-term we have frozen the design for the centrifuge machines that will be deployed over the next several months in the initial Lead Cascade. We have begun building the centrifuges for the Lead Cascade, and we are a target to begin operations by midyear.

Although we froze the design of the centrifuge machines being installed in Lead Cascade, during 2007 our project team in Oak Ridge will continue to optimize the performance of the centrifuge machines and conduct value engineering demonstrations. Their work is intended to achieve the lower centrifuge unit costs that our target cost estimate assumes.

During the past four years we have been funding the development and demonstration of the American Centrifuge technology through internally generated cash from operations. We expect to have sufficient cash or access to cash through our bank credit facility to fund activities this year. That includes building and evaluating the Lead Cascade. We expect to spend about $340 million in 2007 on the project and about double that next year. That is about $1 billion needed for this year and next.

To fund this spending pattern on the American Centrifuge project our plan has been to use internally generated cash flow together with funds raised through equity and debt offerings. However, given the declining level of cash generated from our existing operations, the increase in cost to complete the American Centrifuge project and the current level of perceived risk in the project, USEC will need assistance. We are seeking some form of investment or other participation by a third party and/or the United States government to raise the capital required in 2008 and beyond to complete the project on our deployment schedule.

We had been exploring such investment or other participation with companies that might have a strategic interest in the nuclear fuel business and with the U.S. government which we believe has an interest in the deployment of U.S. owned centrifuge technology. We have also been exploring ways in which our customers and American Centrifuge project participants and vendors could help support the financing of the project. In addition, we continue to pursue operational initiatives to improve our financial position and increase the probability of successful financing of the project.

In 2002 we signed a wide ranging agreement with the Department of Energy regarding many facets of our relationship. One section covers the American Centrifuge and contains a number of milestones to track our progress in demonstrating and deploying the technology. The milestones were intended to assure that USEC stays intently focused on moving this important project forward. The further you get into a project, however, the more opportunities there are for unexpected events and delays to occur.

During the last several months we have been discussing with DOE our progress towards the October 2006 milestone of obtaining satisfactory reliability and performance data from Lead Cascade operations. We are also discussing with DOE a January 2007 milestone for securing a financing commitment. Clearly we have made significant progress towards successful deployment of the American Centrifuge, and we have demonstrated our continuing strong commitment to the project. We expect to reach mutually acceptable agreement with DOE regarding these milestones.

About 2.5 years ago we began the process of obtaining a license to operate the American Centrifuge plan from the Nuclear Regulatory Commission. That process is nearly complete. All indications are that the license will be issued in April by the NRC following affirmative action by the Atomic Safety Licensing Board. With that license in hand we expect to begin construction of the commercial plant shortly thereafter. Of course the buildings with one million square feet under roof already exist. So beginning construction will involve the systems and infrastructure inside the facilities.

I want to quickly bring you up to speed on our negotiations with our electricity provider, TVA on a new pricing agreement. Our current pricing agreement will expire at the end of May. Most of you remember that a year ago we were also negotiating with TVA on a pricing agreement, but we had a very different energy environment at that time. Natural gas prices were high and volatile after Hurricane Katrina's damage to the Gulf region, and coal prices had spiked as the global economy heated up. Both of those energy fuels have pulled back in price.

Another positive factor is at the core of our business. TVA's Browns Ferry Unit 1 is on track to restart operations by May after a nearly total refurbishment. Nuclear power has the lowest operating costs and the addition of this large, nearly 1300 megawatt baseload unit is expected to lower TVA's costs. We do not know the outcome of these contract negotiations, and we will not be able to report on them for another month or two, but I think both sides would like to strike a longer-term agreement. We certainly will inform you when we reach that agreement.

To sum up, we have begun building the Lead Cascade machines and expect to begin installing them soon. We are on track to begin operating the Lead Cascade by mid 2007. Our project team in Oak Ridge is continuing to optimize individual machines as they seek to improve performance and meet our $2.3 billion target estimate for the project. And we will continue to meet with the U.S. government, interested third parties regarding investment or other participation to raise the capital needed to build the plant.

Now I will ask John Barpoulis to report on our financial results for the quarter and year-to-date.

Thank you, John. Good morning, everyone. I'm going to focus mainly on our annual results, but I'll also touch on the fourth quarter. As those of you who have followed the company for a while know, the long-term nature of our business and the 12 to 24 months reactor refueling cycles can result in large quarterly swings depending on the timing and mix of deliveries. We think a longer-term view of our results is appropriate.

Starting with the top line, revenue for the year was nearly $1.85 billion or about $290 million more than 2005. Inside that total, SWU revenue was $1,337,000,000, an increase of about $250 million. That 23% improvement reflects an 18% increase in volume and a 5% increase in average price billed to customers. Uranium revenue is $317 million, an increase of $55 million over 2005. Uranium volume was down year-over-year, and the revenue improvement was entirely due to a 45% increase in the average price billed to customers. Revenue from the U.S. government contracts and other declined 8% to $195 million. The decline is due to a smaller scope of contract and other work for the Department of Energy and the related costs were also lower.

Now let's get to the details for the quarter. Revenue from SWU sales were about $9 million lower or about 3% from the same quarter a year before. SWU sales volume was 3% lower and the average price billed to customers improved by 1% compared to the same period last year. Revenue from sales of uranium was $14 million higher than the fourth quarter of 2005, again due entirely to higher prices as volume declined. Revenue from our second business segment of the U.S. government contracts and other, was $46 million for the quarter, about $10 million lower than the same quarter of 2005.

Uranium revenue in 2005 and 2006 reflects the benefit of underfeeding the enrichment process to obtain additional uranium supplies. The uranium revenue line includes amounts of previously deferred revenue that were recognized during the quarter. As we disclosed before, USEC transfers title and collects cash from some customers for uranium sales but does not recognize the revenue until the low enriched uranium is physically delivered. USEC continues to show a substantial amount of deferred revenue on the balance sheet related mainly to uranium sales.

As of December 31, 2006, $129 million in deferred revenue with an expected gross profit of $51 million has been deferred until subsequent quarters. During the first half of 2006 this deferred revenue amount was $108 million, rising to $118 million at September 30th. So you can see we have been adding to deferred revenue. The timing of this revenue cannot be determined with precision as it is often dependent on the sale of uranium by a broker to a utility and the utility's ultimate purchase and shipment of LEU from USEC.

In 2005 and 2006 USEC was able to underfeed the enrichment process to obtain additional uranium supplies. Going forward in 2007 we may still obtain uranium from underfeeding but a combination of factors will limit the new uranium supplies we will have to sell into the market. First, our customers are requesting lower tails assays when they place their order for low enriched uranium. Although we sell more SWU when customers use contractual flexibility to order lower tails assays, we lose out on the opportunity to obtain higher margin uranium by underfeeding the enrichment process.

Second, our contract with Russia is based on a fixed tails assay of 0.3% U-235. However, our customers generally are not required to order LEU at a 0.3% tails assay, which means that there may be a discrepancy between the amount of natural uranium we give the Russians. And the uranium that we later receive from customers who receive Russian weapons LEU. We are also trying to minimize the difference in our new sales contracts by requiring customers to deliver amounts of natural uranium that are closer to the amounts that we deliver under the Russian contract.

If customers continue to request lower tails assays, our opportunity to benefit from underfeeding the Paducah plant enrichment process will be reduced. The benefits of underfeeding are also reduced by higher power prices. In the future we may need to buy natural uranium supplies in the market or seek alternate sources to supplement our inventory, though that is not an issue for 2007.

Switching to the cost side of the business for 2006, cost of sales for the LEU segment was 17% higher, in line with the increase in the volume of SWU delivered. The average unit cost of sales for SWU in 2006 is 2% higher than in 2005. The increase in unit cost of sales was due to a higher starting inventory cost, unit production costs that increased by 13% due to higher power 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 and has increased as market prices have increased in recent years.

Cost of sales for U.S. government contracts in 2006 declined $19 million as the scope of contract work was reduced. We also expect it to decrease in 2007. Looking at the entire enterprise, the gross profit for 2006 was $337 million, an increase of $107 million or 47% over 2005. This improvement reflects higher SWU sales volume and prices billed to customers as well as continued sales of uranium. The gross profit margin was 18% for the year compared to 15% in 2005. Below the gross profit line are the expenses for selling, general and administrative or SG&A and the American Centrifuge project.

SG&A for 2006 was $49 million, $13 million reduction year-over-year that is a result of our organizational restructuring in late 2005. Salaries and related employee benefit expenses and office rent were all lower. SG&A in 2005 included a $7.6 million charge for a settlement of USEC's former president. As John discussed earlier, we made a substantial investment in the American Centrifuge technology last year. Our total spending amounted to $145 million during 2006, which is about $35 million more than was spent in 2005. Expenses related to the American Centrifuge project during 2006 were $103 million compared to $93 million in 2005.

Capitalized costs related to the commercial plant totaled $41 million in 2006 compared to $16 million that was capitalized in 2005. This investment in the American Centrifuge project had the effect of reducing net income by approximately $65 million in 2006 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 $171 million in 2006 compared to $80 million in 2005. For the fourth quarter pro forma net income before American Centrifuge expenses was $61 million compared to $46 million in the same quarter of 2005. On a GAAP basis we reported net income of $106 million for 2006 compared to $22 million for 2005. For the fourth quarter net income was about $40 million compared to $30 million in the same 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 year was $278 million compared to $189 million in 2005. Operations generated more cash in 2006 than in 2005 due to improved net income and a net reduction in uranium and SWU inventories SWU inventories. This year's improved cash inflow was partially offset by higher payments for electric power and prepayments to TVA under the power contract that went into effect June 1, 2006 and higher tax payments. We ended the year with a cash balance of $171 million.

There were no short-term borrowing under our bank credit facility but letters of credit outstanding totaled $36 million. The largest change to our December 31, 2005 cash position was the $289 million repayment of senior notes that matured in January, 2006. After that repayment our interest expense has been more than cut in half, $15 million in 2006 compared to $40 million in 2005. And our debt to total capitalization ratio is about 13%.

In yesterday's news release we provided earnings and cash flow guidance for 2007. Clearly this outlook is a substantial stepdown from 2006, and it is an outlook that we have cautioned investors about since last summer. This guidance is somewhat better than the 5% gross profit margin we warned about but when your largest production expense goes up by 50% plus it will impact the bottom line. Starting at the top, we expect revenue of approximately $1.86 billion, SWU revenue will account for most of that total, $1.54 billion. We expect SWU volume will increase by about 10% over 2006 and that the average price bulled to customers will go up 4% to 5%. Higher market prices for uranium are prompting our customers to select lower tails assays when they place their orders, resulting in the higher volume of SWU sales.

Revenue from uranium is expected to total approximately $135 million, less than half of the total in 2006. Our other business segment, U.S. government contracts, is expected to bring in about $185 million in revenue. We expect our cost of sales to increase in 2007. In addition to higher electric power costs, increasing our production costs, purchase price we paid to Russia under the megatons to megawatts program, is expected to increase by about 5%. Our production costs and the price we pay Russia for low enriched uranium are both increasing faster than our average price billed to customers. The end result, we expect our gross profit margin to be lower over the next several years, and we expect our gross profit margin in 2007 will be roughly 9 to 10%. Below the gross profit line we expect selling, general and administrative or SG&A to be approximately $53 million and interest expense will be about $10 million.

Two weeks ago we put out a news release updating our estimate for completing the American Centrifuge plant to $2.3 billion in nominal dollars including amounts already spent and not including financing costs, or a reserve for general contingencies. We said we expect to spend about $340 million this year. We project that spending will be split approximately $130 million expensed, $190 million capitalized and the remainder in prepayments for specialty materials and new manufacturing facilities. The allocation of spending between expense and capital expenditures will be dependent upon our ability to move the project of the demonstration phase of installing the Lead Cascade to a commercial plant phase later this year where significant spending can be capitalized.

If our spending allocation between expense and capital expenditures holds true, the $130 million in expense will have the effect of reducing net income in 2007 by approximately $85 million. Our earnings guidance is for a net loss in a range of $10 to $20 million for the year with losses expected in the second and third quarters. Looking at annual guidance from a pro forma basis, net income before American Centrifuge expenses is expected to be in a range of $65 million to $75 million. Again, please refer to our earnings release for a reconciliation of these pro forma numbers.

Cash flow from operations in 2007 is expected to be $-65 million to $-75 million. That is a reduction of approximately $350 million from 2006. The reduction in cash flow from operations is expected to be a result of lower customer collections due to the timing of orders expected to be delivered in the fourth quarter of 2007, and revenue recognition of deferred sales where the cash was previously collected.

Other factors include higher disbursements for electric power, higher spending on the American Centrifuge program and higher disbursements to Russia under the megatons to megawatts program. USEC expects to end the year with short-term debt under the bank credit facility and a small cash balance.

So to summarize, our 2006 financial performance showed solid improvement over 2005 results with improved revenue from strong SWU sales volumes and from higher prices billed to customers. Uranium was also a solid contributor that helped to bring higher gross margins. Our 2007 outlook reflects declining gross profit margins that are the inevitable result of substantially higher electric power costs and declining uranium sales. I want to assure you that we are not accepting a loss for the year as a set of [compli], we are working on initiatives to reduce our costs and potentially improve revenues, but our guidance is our view of where the business is today.

Over the next several months we expect to make progress in a number of areas regarding our American Centrifuge technology as we receive a construction and operating license for the commercial plant at [Piketon] from the NRC and begin operating the initial Lead Cascade machines. We will update you on our progress as we move forward.

Operator, we are now ready to take questions from our callers.

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

A couple questions. First is the revenue increase 10% next year. Looks like that is all coming from inventories. Could you talk more about that, and could that go on for the next couple of years?

On the utilization of inventory that is certainly something that from a capital perspective is one of the factors that we are looking at in order to bridge ourselves to the American Centrifuge period. So that its clearly one of the factors that we discussed in the past. Maybe Bob can talk about our level of inventory.

We have had inventory levels that we have been on a conscious effort to refine and get to what we feel is the optimum level to ensure reliable supply and yet not carry too high an inventory level. So last year and this year we are looking to really get to the point where we are at the optimum level for inventory.

Are these like voluntary sales, or is this because you have to meet the lower tails assay nominations?

It's a combination of factors. I think you can look at increased demand from our customers due to lower tails assays. We've also looked at opportunities for short-term sales due to the higher market prices. And so I think it's a combination of factors and the inventory drawdowns. Also related to the fact that we have been incurring higher power costs from TVA. So the overall economics really point to driving to that optimum level and doing it over the time period of 2006 and 2007.

Okay. The other question, the split between what is capitalized and what is expensed, 130 expensed and 190 capitalized I think. What does that assume in terms of progress? Does that mean the Lead Cascade is up in May, June or what is that technical criteria that estimate assumes?

It does basically reflect the schedule we've laid out with the Lead Cascade coming online in the summer. I think ultimately the capitalized costs relating to the American Centrifuge technology include or will include items like our NRC licensing, engineering activities, construction of the machines and equipment, leasehold improvements and other costs associated with the plant. Ultimately our ability to move from the demonstration phase to the commercial phase really is a function of when the technology is determined to have a high probability of commercial success. And ultimately when the program meets company targets of physical control and technical achievement. And that is something that we continue to work on.

Okay and last question, have you started discussing with strategic partners on some help with financing American Centrifuge or these are just ideas for now?

It is our long-standing policy obviously not to comment on specific questions about M&A activity, and that stands. I think what we are seeking to communicate to our investors is that, again, given the decline in cash flow, higher costs, we have been and continue to reevaluate all of our options. We know that in order to meet our revised ACP schedule, we will need significant additional capital resources, and we're investigating ways that third parties, including the U.S. government, can help put us in a better position to raise the capital we need over the mid to long-term.

Paul Clegg, Natexis Bleichroeder.

I guess this is sort of a big picture question, but you just mentioned U.S. government; you talked about financing issues for the centrifuge looking for third party participation. Obviously SWU markets are pretty tight right now and they are only getting tighter, but we're trying to build more reactors. And I guess unless you're able to finance and build new centrifuges there is not going to be a lot of reasonably priced enrichment to feed these new reactors. So it is really kind of an industry issue I would argue, and possibly an energy policy issue. So with that in mind obviously the government found it reasonable to provide loan guarantees for the initial new reactor builds people are talking about. It would seem like there could be some sort of role the government could play here in helping secure financing for the source of the SWU that feeds these reactors. So I don't know how much you can say but can you kind of comment on that thought process and the role, if you can talk about perhaps the type of role the government can play going forward in helping to finance ACP.

As I said earlier, there is no doubt that the government has a very high interest in a viable, domestic enrichment industry and also has an interest in an enrichment industry that's based on U.S. technology. So the loan guarantee process since the Energy Policy Act of 2005 put in place is certainly something that we believe we qualify under, whether it is for energy conservation issues or just nuclear power in general. So we formerly went through a pre-application process and submitted that in December this year. It is a competitive process. We will be rolled up into that as other people are looking to take advantage of that, especially utilities looking at building new plants.

We happen to think that our issues are very near-term and most of those will be out -- we could be rolled over to a longer-term position in a timeframe to free up loan guarantee coverage for the utilities, as well. So we think we can be very competitive in that process for the loan guarantee and as you know, that would make a huge difference relative to financing for the project.

When could you potentially hear something back on that?

We were very pleased to hear that under the continuing resolution that for 2007 since there still is no formal budget, but the continuing resolution that went in place in the middle of February did include the additional money that was required to get the office moving and that also took it to a higher level of loan guarantee funding. I think closer to the $9 billion number.

Its $4 billion for 2007 and the President's budget (multiple speakers).

The new budget (multiple speakers) takes it up to $9. So that's all very encouraging. As to when exactly they would come to that process I think John may have some more up-to-date info than I do.

Paul, one thing that came out of the February continuing resolution was also that the -- there is a mandate for the DOE to establish the program rules by August. And our utility customers have also been voicing support for the guarantee program as well. Something that clearly from the nuclear fuel supply standpoint it is a very critical program that folks are evaluating. The preliminary program guidelines are problematic, and we certainly hope to work with our customers and financial institutions to voice ways to improve the ultimate design of the program, again that we think will be established in August.

So we may have some sort of update in August but probably no answer specifically on whether or not you could get funding until much later than that?

We will have a better sense of the program rules by August, and I would not expect to hear more about the potential awards for 2007 and into fiscal year 2008, beginning October first for the government.

If I may just one follow-up, you talked about locking in your SWU per machine design at 320. And I just wanted -- this is really just for the Lead Cascade, though, there is still the potential that once you get some work done on the Lead Cascade that you could actually talk about a design that allows for higher SWU per machine for the rest of the facility. Is that correct?

Just to clarify, we had announced that the lead design or the design for the Lead Cascade was frozen at 350 SWU.

Excuse me. 320 was the old number.

Right, so the following question was related to (multiple speakers) performance?

Exactly upside after the Lead Cascade.

I think one of the reasons to operate the Cascade is because that is when you're getting, not just individual machine, but the tying together of the machines and its ultimate impact on overall plant availability. I don't think we are in any position right now to say that we are targeting anything beyond that 350. We demonstrate on an individual machine basis that we could get it, we can get it reliably, we know want to demonstrate that in the Cascade. And our whole focus with continued testing in Oak Ridge while that Lead Cascade is operating is focused on value engineering, manufacturability so that we get the full efficiencies and can drive towards the $2.3 billion number.

Okay, thanks. I will jump back in the queue.

Laurence Alexander, Jefferies & Co.

First question just on the cash flow for outlook for '07, how much cash flow would push from '07 into 2008 by changing the order of timing?

I don't think we provide a breakdown of numbers, but clearly similar to the profile in 2005 we are expecting a significant amount of our revenue, customer deliveries, to occur in the fourth quarter. Again the first impact from that decline in cash flow for the full-year is clearly the higher power costs and the second impact is that timing of customer delivery. It is something that is a risk and an opportunity, to the extent the customer orders move up into November and October time periods. We could realize that cash this year but again, what we are including in our outlook is really our best look at expected customer deliveries for the year.

But just in terms of rough orders of magnitude, was the cash flow pushed into 2008 more of an impact than the cash flow that was pulled into 2006? Or should we hear they are lifting roughly the same?

I would certainly look back to 2005. But again, I wouldn't want to provide that level of precision in the quarterly guidance as we said upfront, we are expecting losses in the second and third quarter. So I think that certainly gives you a sense of their potential for the fourth quarter.

Right. I guess a longer-term structural question. Can you give a top-down assessment of what you think are the key mismatches in USEC's risk profile and how you can change the business, is it smarter to deal with them?

Favorite subject, risk. Risk is something that I think this management team could talk about for this entire call. Certainly when the new members of management looked ahead in early 2006 I think it was pretty clear to us that we had a number of risk factors we needed to work on towards retiring or mitigating. Clearly that has been a major focus of the team for 2006, and we know it will be for 2007. I think first my framework for walking through risk is always walking through an income statement and so first, clearly we should look at the correlation between our revenues and cost of goods sold.

Traditionally SWU contracts have included an inflation clause that increased the price billed to customers by the gross domestic product deflator. That GDP. During a period of relatively stable electricity prices the inflation clause was sufficient, but following the 50% plus jump in our power costs we needed our customers to share the risk of higher power costs. So starting in 2006 we introduced an electric power formula into our contracts. So also in 2006 we introduced a SWU price index in our pricing formula that shares the risk of higher future SWU price indicators with our customers.

So again, our compliments to Bob Van Namen's team in incorporating metrics that will better balance risk down the road. I think also looking at correlation, looking at uranium opportunity and risk we recognize that the change in customer order patterns to a lower tails assay are increasingly not in line with the terms of our megatons to megawatts program. That program is based on the assumption that customers will specify again that U-235 tails assay at 0.3%.

As uranium prices have increased more rapidly than SWU prices, our customer who had flexibility in their contracts began specifying the tails assay at lower than 0.3%. And so again, that is causing us to reevaluate our underfeeding program and again, in order to better optimize our bottom line in light of that risk.

American Centrifuge clearly on its own deserves its own category in risk, and there are several risks that we are looking to mitigate here. Performance, cost and schedule are the mantra of the project team. Give Phil Sewell, Vic Lopiano and the project team a tremendous amount of credit. It is something that they are very focused on. And ultimately we aim to share those risks with our key project participants when we move into the commercial plant phase. Now we've worked through the challenges regarding components and materials while optimizing the machine to improve its performance and reliability. And as we've mentioned, we recently froze the design for our Lead Cascade.

On regulatory risk we are in the final six weeks or so in our licensing process with the NRC. And then in terms of long-term market risk we are very supportive of the U.S. government's position to create a domestic SWU market that encourages competition but also supports investment in new capacity. So we are evaluating long-term for the appropriate long-term contracting strategy for the American Centrifuge plant, very much a focus for us in 2007. So again, I hate to drone on about risk, but I very much want to emphasize that this management team is focused on identifying key risks and then creating plans to mitigate those risks. And we recognize that 2007 is a critical year for narrowing the risk band in the American Centrifuge program, ultimately to facilitate our capital raising activities.

I guess if we can just put one sort of benchmark or stake in the ground, the contracts that you've already been negotiating, if your entire portfolio was based on those contracts at current SWU prices with no spot uranium sales, would you be able to get gross margins above 15%?

Don't know if we have looked at something from that perspective, so I don't know if I can answer that question directly. But again clearly since we are trying to create a pricing formula that reflects our sources of production, roughly half of that being our Paducah plant, roughly half being the megatons to megawatts program, we are seeking to create a pricing formula that better balances and mitigates the risk. And so I wouldn't pronounce or forecast gross profit margin percentages. I think that is clearly something that would be in a much longer term. But we are structuring to better balance our production and revenue profile.

But do you believe that the contracts you have in place, the terms you have in place are already adequate to get gross margins back to where they were even if the American Centrifuge doesn't come on stream? On an ongoing basis for Paducah?

Again, I think that we clearly aren't providing guidance past 2007. Ultimately we have our backlog that does consist of the older contracts that are inflation based, and some did have market indicators. But ultimately it will take some time for that to get in place. Clearly starting in 2013 with ACP online we are clearly looking to have a structure in place that again returns us to better gross margin profile.

That's very helpful. Thank you.

(OPERATOR INSTRUCTIONS) Michael Gill, Speedwell Securities.

(inaudible)

Paul Clegg, Natexis.

When you talk about cost mitigation could you give us a sense of the potential scale there?

I am trying to reflect on two things. First is a reference to cost mitigation and otherwise moving forward. I think clearly we have focused over the past several years on cost reductions. I would say that at this point a lot of the blood has been squeezed from the orange. But at the same time, given the change in market dynamics we are always looking to better optimize our operations and mix. And so we seek opportunities to improve our gross margin from a revenue standpoint. Then we continue to optimize from an operations standpoint. I'll also say we are very focused and vigilant about SG&A, and that is something that we continue to focus on as a management team since that is something within our control.

Given our existing outlook for the percentage of ACP cost that you will expense in 2007 there is still a possibility that you could be breakeven on a GAAP basis, but you're not putting a stake in the ground there yet. Is that a fair way to put it?

Clearly the amount of ACP expense is a big driver for the net results for the year. So again, trying to reflect indications on that pro forma basis but not at this point putting a further stake in the ground.

Okay and if I may one more. The cash flow from operations guidance, you've alluded to this earlier, but I just wanted to make sure I am clear on this. Obviously a very large differential between the 278 million positive in '06 and -65 to -75 million. Can you give us a sense of the breakdown of the year-over-year delta between those two numbers? And how much of it was due to higher costs from Russian contract power costs, etc. versus cash receipt timing issues?

I think we have in the outlook an indication of certainly the factors for increases in revenue in terms of what was driven by volume, what was driven by anticipated increases in prices to customers. I think we've also provided some indication on the cost side what is related to production cost increases versus increases in the megatons to megawatts program. Clearly the timing of collection with our customers is a significant factor for the fourth quarter. So again, I don't think we are at this point able to go in much further detail. But those are all the factors, clearly in the timing this year.

Okay. Thank you.

Michael Gill, Speedwell Securities.

I am trying to figure out the amount of electricity costs that are actually going to hit in 2007 versus the cash costs you're going to incur. I think you guys are running at about $300 million a year in 2005 for electricity. If you are up about 58% now that puts you up around $475 million for electricity costs. How much of that will be realized in 2007 given the average monthly cost inventory method?

I think from just from a cash standpoint clearly in 2006 the new contract began June 1, 2006. And so 2006 reflected a little over half a year from a cash standpoint, and 2007 we will reflect obviously a full-year of I'd say the remainder of this contract; but remember we are in the midst of negotiating our agreement with TVA for everything beyond May 31 of this year, so there is uncertainty in the power cost. So again from a cash standpoint I would say that we are looking at a full-year versus the half-year last year with some risk and opportunity there.

In terms of how it rolls through our net income, again it is something that we said 2006 did not largely reflect the impact of that cost. We clearly do expect 2007 to see the greater amount of impact from that step-up throughout the year. And that will I think largely be seen this year. We may again, see some next year as well but it will largely be seen in 2007.

Largely, so it's close to 100%?

Yes. But again, reflecting please recall, we have this contract period beyond June 1 of 2007. We're in the midst of negotiations and that could change.

And one other point on that as we go through the full impact in 2007 it also raises our inventory level, which then will carry on into future periods, as well.

Right, because I know you go on spot electricity for the summer so realistically from a cash perspective the new contract really didn't hit quite as much until the fall. And then you have a timelag before it really hits the income statement, I thought.

Yes. And just to clarify it, so we don't fully go spot in the summer, that is typically something that we do contract for in advance as optimally as we can. Last year we had secured that in the second quarter.

Okay. Another question on gross profit, you said in the guidance that you were going to be lower gross profit for 2007 and succeeding years. Does that mean that 2008 is going to be lower than 2007 or just that it's going to be lower again than 2006 was?

Again, we're not providing further guidance for 2008. But clearly we are trying to communicate -- it is our expectation we will be under significant gross margin pressure. We said in the third quarter of 2006, we were expecting a 5% gross margin, gross profit margin in 2007. And as we worked through that and tried to improve it, low and behold we're at this point looking at 9 to 10%. So I certainly would be hesitant to provide any great outlook. But for the most part it is trending downward.

And in 2007 you're going to be running out of inventory sales. Were all those inventory sales, are those already at fixed contracted prices, or is there a chance that those prices could still go up?

Let me talk about the combination. We do have a number of our customers who are operating at lower or transacting at lower tails assay therefore asking for higher SWU's, and the prices are reflective of their existing contract prices. We also are making some short-term sales into the market that we are able to benefit from the higher prices in the market, as well. So it's a combination.

I am sorry, I misstated that. I guess when I said inventory I was thinking about uranium sales, I was not thinking about that inventory, which is different. So you're going to do $135 million of uranium sales in 2007 by your guidance. Is that at prices that have already been contracted?

What we said in the past is our uranium sales have largely been presold. And so that certainly holds true for 2007.

But in 2006 it went up by 45% so I just said, to me it could go up more or not.

I think that the contracts with market indices are fewer in 2007. So I don't think we would expect to have as much risk or opportunity in that uranium revenue line.

Okay, good. Back to electricity. If we are spending $435 million give or take at current prices, which obviously could go up or down in your TVA contracts, does that mean that when the new ACP comes on stream are we still looking at a 95% efficiency improvement for the ACP over the current operations?

Roughly, yes.

Okay, so that would mean that we would save somewhere around $425 million or so for every year the ACP is up and running and the Paducah is not having to be run, correct?

I did not do the math, but sounds in the ballpark.

Something like that, okay. So every year that we get a delay that is in an additional amount of costs that we are going to have to incur by certain opportunity costs by continuing to operate Paducah?

That is a fact.

That's my questions. Thank you.

Fadi Shadid, Friedman, Billings, Ramsey.

Bob, could you talk about the backlog, what does it look like now and what our customer patterns will look like in '07? Are you signing more contracts in '07 than same in '06? Can you just talk more about that?

First I will go back to John's comment that we are working very hard on the structure of the American Centrifuge contracts, looking forward and making sure that we have those contracts fit correctly with the financing need of the overall cost profile of American Centrifuge. That being said, we are focused now selling between now and 2013 for the output from the Paducah plant and from the HEU deal and also incorporating a lot of the risk mitigation activities that John said about the power adjustor, the market adjustor and a tighter tails assay to more reflect our HEU obligation. So 2006 was when we really started that. We continue to have success in the market and talking with the customers about the needs of the Corporation. And so we look to continue to contract through the 2013 period for the HEU quantities and then for the duration of the Paducah operating life for that output.

And could you talk a little bit more or how the new contracts to balance out the risks, what kind of new things you are doing, just remind us of that again.

We have three components in our price. One is a gross domestic product inflator, and then we have a power adjustor that reflects overall power prices in the U.S. market. And then the third is a SWU market component that gets us aligned with our ATU costs. So those three components fit into our overall price that goes to the customers for our newer contracts.

Laurence Alexander, Jefferies & Co.

I promise this one won't ask for a forecast. The 5% gross margin expectation you had initially versus where you now look at '07 -- can you just walk us through what has changed to get -- what have you done or what changed in the marketplace and how much was under your control and how much wasn't under your control to get from the 5% to the 10% gross margin outlook for '07?

I think it is clearly a function of timing, mix of customers and increase in revenue line. I will not break down what is within our control and outside of our control. I do say that our sales and marketing and operations team all deserve a great amount of credit for focusing on ways to improve revenue and also optimize operations as compared to that 5% estimate. So we clearly had some benefit from the economy and increases in GDP and how that factored into the revenue formulas. But a good portion of it was internal, as well.

That is all the time we have for questions today. I would like to turn it back to our speakers for any closing or additional remarks.

I would like to thank you all for your questions. We expected a lot of feedback. We got it, and we look forward to continuing to interface with the investment community as we go through what will be a very challenging year for us, 2007. We have a lot on the table, a lot of things will become clear. We look forward to communicating with you as we go through that this year. Thank you all.

Thank you. That does conclude our conference for today. Thank you very much for your participation. Hope you have a great day.