Centrus Energy Corp (LEU) 2007 Q1 法說會逐字稿

Good day, everyone, and welcome, everyone, to this USEC Inc. first-quarter 2007 earnings results 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, Director of Investor Relations. Management will make opening remarks which will be followed by a question and answer period.

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

Good morning. Thank you for joining us for USEC's conference call regarding its first quarter of 2007 which ended March 31. 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 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 Friday after the market's close. USEC is making reference to non-GAAP financial information in both our earnings release 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.

I want to inform all of our listeners that our news releases and SEC filings, including our 10-K, 10-Q's and 8-K's are available on our website. We expect to file our 10-Q for the first quarter later today. 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 risk and uncertainty, including functions 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-Q's.

Finally, the forward-looking information provided today is time-sensitive and is accurate only as of today, May 7, 2007. This call is the property of USEC Inc. Any redistribution, retransmission or rebroadcast of this call in any form without the express written consent of USEC is strictly prohibited.

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

Thank you, Steve, and good morning to you all. Thank you for joining us to discuss our first-quarter 2007 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 update on our business, particularly the status of our demonstration of the American Centrifuge technology.

Turning first to our results, revenue, net income and cash flow from operations were higher as compared to the first quarter of 2006. The improved revenue was a result of higher SWU volume on higher average prices billed to customers. Notably, however, the gross profit was down as the impact of both higher power costs and higher purchase costs from Russia lowered our gross profit margin from almost 26% to approximately 16%. Net income improved, but that was largely due to a $16.9 million non-cash reversal of prior income tax-related accruals.

American Centrifuge project expenses increased about 70% quarter-over-quarter, reflecting our efforts to prepare the Piketon facility for commercial plant construction. We're also beginning to assemble and install the first American Centrifuge machines that will be our Lead Cascade. I'm pleased to report that we are making good progress toward our goal of having the Lead Cascade in operation in the middle of this year.

In April, the Nuclear Regulatory Commission issued USEC a construction and operating license for the American Centrifuge plant. A great deal of hard work went into our license application and related interactions for the NRC and the USEC staff responsible for sheparding the license process did an excellent job.

The NRC is also to be commended for staying on their schedule. I believe the transparent process that the NRC followed should give our nuclear utility customers a lot of confidence as they apply for construction and operating licenses for new reactors over the next several years.

Our license allows us to begin construction on the commercial plant, and that is what we will do over the next few weeks. We have a milestone under our agreement with the Department of Energy to begin construction and refurbishment by June, and I am confident that we will achieve that goal.

As many of you will remember, we have been in discussions with DOE regarding earlier milestones associated with Lead Cascade operations and with an initial financing commitment. In March, the DOE accepted our proposal that completion dates for two project milestones be rescheduled.

The October 2006 milestone related to Lead Cascade operations has been revised. We are now working toward having a Lead Cascade operational and generating product assay in a range usable by commercial nuclear power plants by October 2007. The January 2007 milestone requiring us to have secured a financing commitment for 1 million SWU centrifuge plant has been rescheduled to January 2008.

Under our revised deployment schedule for the project, we're working towards beginning commercial plant operations in late 2009. We anticipate having approximately 11,500 machines deployed in 2012. That would provide about 3.8 million SWU of production based on current estimates of machine output and plant availability.

This revised schedule is about a year later than the schedule established by the milestones contained in the DOE-USEC Agreement. We anticipate reaching agreement with DOE regarding those future milestones at a later date.

During 2007, we expect to begin constructing the balance of plant infrastructure as the American Centrifuge plant and working with our project participants to prepare the manufacturing facilities needed to produce the components for the centrifuge machines. The components will be manufactured in several locales, then shipped to Piketon to be assembled at the centrifuge plant.

As many of you know, most of the buildings that will make up our commercial plant facilities at Piketon already exist. We're leasing an impressive facility built by DOE in the 1980s with an area of some 25 football fields under roof specifically for centrifuges. When we say we're building the American Centrifuge plant, we mean that we're building the thousands of centrifuge machines and installing the related support systems. Our target estimate of $2.3 billion to build the plant maintains an ambitious schedule for demonstration and deployment activities. We are pursuing cost mitigation approaches involving value engineering, high-volume manufacturing efficiencies and potential refurbishment of certain systems rather than replacement to help hit our target cost estimate.

On our last call, we discussed our effort to seek investment or other participation and support from third parties and/or the US government to raise the capital needed for the project. We have also been exploring ways that our project participants and customers could support the financing. That effort continues, particularly with the government, which we believe has a significant strategic interest in the deployment of US owned centrifuge technology.

Some of our investors have asked how the government can help. We're currently focusing our efforts on two areas. First, we want to reach agreement with the Department of Energy to re-enrich their cylinders of depleted uranium stored at the plants in Paducah and Piketon. This material referred to as high assay tails contains economic quantities of the fissile isotope uranium 235.

With the recent upturn in uranium prices and a shortage of uranium in the marketplace, it now makes economic sense to reclaim the remaining U-235 isotope from this waste. This is clearly a situation that can benefit all parties involved. The additional uranium would provide our customers with needed supply today and also assure utilities planning to build reactors that there will be sufficient uranium to fuel new reactors. The government would benefit from a smaller disposal liability for the thousands of tail cylinders now being stored, and the ability to create a strategic inventory of uranium.

Re-enriching the tails would provide USEC with an additional revenue stream that can help offset the impact of higher electric power costs and improve our financial performance. All of this can be accomplished from stacks of tail cylinders long considered to be a liability, and importantly at no cost to the US taxpayer.

Our Paducah plant is the only domestic facility capable of processing and reclaiming the U-235 content from these cylinders. So we believe we are ideally suited to complete this task.

We have been making our case regarding the uranium tails material on Capitol Hill and discussing the matter with DOE, but it is a slow process with no guarantee of success.

Second, we're seeking loan guarantees for debt we will need to build the American Centrifuge plant. Under this program, the government would not be loaning us the funds directly. Instead, if our project is approved, our debt will have government backing, which would reduce the perceived risk in the financial markets for this unique project.

We expect to generate solid cash flow from the American Centrifuge plant once it is at full capacity. If we are successful in obtaining the loan guarantee, those cash flows would be used to repay debt and the guarantee should cost the taxpayers nothing. We have made a pre-application to the Department of Energy for their loan guarantee program, but it is unclear when the program rules will be finalized or when a decision on which projects to fund will be made.

The final topic I would like to address is our discussions with the Tennessee Valley Authority regarding power prices after June 1. As you will recall, we signed a one-year contract with TVA last spring, and we are back at the bargaining table with them now.

This is a sensitive juncture in the discussions, so I cannot say a great deal. We are seeking a longer-term for this agreement so that each side reduces both their risk profile and a substantial amount of management time needed to strike an agreement. We're also seeking a modest reduction from the 50% price hike we saw in last year's agreement.

We recognize that the calendar says we are at early May. Both sides want to reach an agreement. We are TVA's largest industrial customer, and clearly we need their electricity to operate Paducah. As soon as we reach an agreement, we will let you know.

Now I would like to turn the call over to John Barpoulis for a report on the first-quarter financials. John?

Good morning, everyone. I'm going to keep my report rather brief because one quarter does not tell much about how our business is operating. Those who follow USEC know the long-term nature of our business and that the 12 to 24-month reactor refueling cycle 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 at the topline, revenue for the quarter was $465 million or $104 million higher than the same quarter last year. Drilling down, SWU sales made up the vast majority of the revenue at $405 million, an increase of $171 million or 73%. This quarter-over-quarter increase in SWU revenue reflects the 56% increase in volume and an 11% increase in the average price billed to customers.

While SWU sales were stronger, as anticipated, the volume of uranium declined by 54% compared to the first quarter of last year. You will recall that our guidance for the full year 2007 is for the volume of uranium delivered to be about half of what we recorded in 2006.

Our revenue from the government contract segment also declined due to reductions in contract work at Paducah and Piketon and the timing of our sales for our subsidiary, NAC International.

Looking down the income statement, cost of sales for the SWU and uranium segment increased 56%, in line with the increase in SWU volume delivered and reflecting an increase in SWU and uranium costs. Cost of sales per SWU increased 8% compared to the first quarter of 2006, mainly representing the higher cost of electric power for the Paducah plant that is working through inventory. Electric power costs were up $55 million in the first quarter compared to the same period last year.

The impact of higher power costs are even more apparent in the unit production costs which were up 44% quarter over quarter. Gross profit for the quarter was $73 million, a decrease of $19 million or 20% from the first quarter of 2006. Our gross profit margin was 15.7% compared to 25.5% in the first quarter of 2006. The annual guidance for 2007 for the gross profit margin is roughly 9 to 10%. So you can see, we expect the deterioration in gross profit margin to continue as the higher power costs are more fully reflected in our cost of sales.

The major items below the gross profit line are advanced technology costs and our SG&A headquarters expense. Advanced technology expenses, which are nearly entirely related to the American Centrifuge project, totalled approximately $34 million, an increase of $14 million quarter-over-quarter. As John noted, this ramp-up in spending was related to our efforts to prepare the American Centrifuge facility for commercial plant construction and to assemble and operate the Lead Cascade.

In addition to the ACP expense, $13.5 million in spending related to the commercial plant was capitalized in the quarter compared to $5.6 million capitalized in the same period of 2006. Selling, general and administrative expense increased less than $1 million quarter-over-quarter. However, last year's first-quarter SG&A reflected a credit for a change in the Company's long-term incentive compensation program for senior executives, partially offset by higher expense for leased office space that we ceased using last year.

We don't usually get into the details about our provisions for income tax, but it is germane this quarter. We recorded a $5.9 million income tax benefit that included the effects of approximately $12.7 million of benefits due to the reversals of accruals previously recorded and those associated with the adoption of FASB interpretation Number 48 or FIN 48 as it is known. It is an interpretation that became effective January 1 of this year related to accounting for the uncertainty of income taxes.

Net income was $39.3 million or $0.45 per share for the first quarter of 2007 compared to net income of $34.6 million or $0.40 per share in the same period last year. The improved net income was a result of approximately $17 million in tax-related effects of the non-cash reversals of accruals I just detailed as well as accrued interest.

The investment we're making in the American Centrifuge project has a substantial impact on net income. This investment in our future had the effect of reducing net income in the first quarter of 2007 by approximately $22 million, assuming a federal statutory income tax rate of 35%. USEC reported pro forma net income before American Centrifuge expenses of approximately $61 million in the first quarter of 2007 compared to $47 million in the same period last year.

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.

Turning to cash, we had $239 million in cash on March 31 compared to $171 million on December 31, 2006. Cash flow from operations was approximately $88 million compared to $37 million in the same quarter last year. The $50 million difference was primarily due to the timing of payments to Russia and higher customer collections for revenues deferred until delivery.

We have updated our earnings guidance for 2007 to reflect the impact of approximately $17 million of non-cash reversals of prior income tax related accruals. USEC previously provided guidance of a net loss of 10 to $20 million, and we now expect net income for the full year to be about breakeven. We're not changing our guidance regarding revenue, cost of sales, gross profit margin and spending on the American Centrifuge project, and we also reiterate our cash flow from operations guidance in a range of negative 65 to $75 million.

I would note that our prior guidance included in the 10-K included a number of assumptions and uncertainties that could affect results positively or negatively, and those factors are also reiterated.

That concludes the financial results analysis, and I will ask the operator to prompt our callers for questions.

(OPERATOR INSTRUCTIONS). Mark Manley, Natexis Bleichroeder.

Paul is traveling at the moment. Could you give us maybe an update on some of the financing plans so you would signal there might be an equity offering on the horizon but given the update on capital planning and so in the centrifuge project? Any plans there?

Well, I think we have heard from a number of our shareholders suggesting that now would be a good time to enter the equity market. Certainly we continue to look at a potential equity offering as part of the capital plan for the American Centrifuge investment.

As we have said in the past, there really are several factors that impact our ability and desired timing to raise capital. Well-known factors including SWU market outlook, our long-term capital structure that we are targeting, timing of capital needs, our progress on American Centrifuge, certainly financial market conditions, cash from operations and then also, as most recently noted, progress in attracting investment or participation by a third-party and/or the US government to raise capital in 2008 and beyond. And John Welch outlined some of those initiatives in this area earlier in the call.

We continue to take these factors into account, and we certainly recognize that it is difficult to have perfect timing. I think the only certainty is that in hindsight the timing of any potential offering really will not be optimal based on one or more of those factors. So we continue to evaluate, and we will move from there.

Would it be safe to say that there would not be a decision until a better indication from the DOE on their funding ability is available?

I think again it is a function of the various factors, including government participation and things like, for example, our agreement that we are hoping to enter into with TVA shortly. Lead Cascade is coming up. So there are several factors that clearly impact our -- any desired timing to approach the capital markets. The more information we have, the more that we can tell our current and potential future investors.

Okay. Just one other question on uranium futures. What impacts positive or negative might future contracts have on your business?

I think that the uranium futures reflect I think an evolution in the uranium and SWU markets. And so I think we view that as positive, and I will ask Bob Van Namen if he has any thoughts as well.

No, I agree that customers have continued to look for more transparency in the marketplace, and I think that the futures will serve that purpose. The market still has some fundamental supply/demand balance issues that it has to work through over the next five to seven years. But the futures definitely will give more tools to the participants to be able to work through those issues.

Have you considered using them to balance out revenue expectations?

I think that given our subinvestment grade profile, it is difficult for us to financially hedge. We certainly seek to hedge through our contracts and otherwise, but that is something that we will evaluate going forward.

Laurence Alexander, Jefferies & Co.

I guess the first question -- this is a somewhat theoretical question. There has been some high-profile third-party estimates of where SWU equilibrium prices could end up at given where long-term uranium prices are right now. And I was wondering if you could help provide some clarity on how SWU pricing is set?

That is, do you support the view that in the right conditions, the $250 or $300 SWU price could be achieved, or does the industry work more on a cost plus model, and as people shift to lower cost production methods, the SWU price would have a natural bias downwards?

Let me take that. The current prices are clearly strongly influenced both by the supply and demand and by incremental cost of production. A lot of the estimates you talk about really focus on the interplay between the SWU and the uranium markets, but when you look at the SWU market itself, it really has factors that are dictated by its own supply/demand balance.

As the demand has increased in recent years due to nuclear power plant uprates and good operations, as well as some of uranium dynamics. The supply needed to meet that demand has come from gaseous diffusion plants using more, and by the way more expensive, power. Once that market transition completes to more of a centrifuge production base, you will still see supply and demand dictating prices. But that addition to supply to meet the demand will need to be covered both by operating and capital costs, as well as a satisfactory rate of return for the needed investment.

So I think that some of the estimates on the upward prices really focus on uranium and SWU interplay, but the SWU market itself has its own supply/demand dynamics that are really driving the current market.

And I guess secondly on your partners who are looking at building the centrifuges in the high-volume -- the industrial partners -- any color on their experience to date building the centrifuges? Are they proceeding according to expectations? Are they finding any hurdles?

I think as we have explained before, we have had those key suppliers involved in the process for quite a time now as you would expect. We have built the original machines that were tested out of our facilities in Oak Ridge, and we have had those suppliers next to us such that they could get comfortable with our processes, look at how they might improve on those in a large manufacturing environment. So there has been a lot of give and take on both sides, understanding what we are doing, as well as what they could do in a larger manufacturing sense.

So some of those suppliers have already, such as ATK, has built a rotor that we have gone through testing in our facility to validate that they can build to our design and that when they take it through their processes they can meet the specific requirements and that continues. We have done the same thing in some of the classified machining of components. But I would also tell you that I would consider that we're still in the early stages of that, and that transition is affecting itself as we build out some of the Lead Cascade machines and then as we do all the value engineering for the final design that will go into production. So that process is ongoing, and again we are encouraged by it, knock on wood. But, as we have said, we will operate the Lead Cascade this summer and gather as much as we can out of that to demonstrate commercial product assay, and in parallel with that, we are doing the value engineering to continue to develop the machine and drive it towards the cost affordability that is the basis for our project estimate, and that goes on in parallel.

And finally one last follow-up, if I may, is, in terms of the customers, the utilities that have the ability to move down to the lower tails assay because of flexible contract negotiated in prior years, do those more flexible contracts represent more than half of your contracts for 2007 and/or 2008?

I'm not going to comment on the specific makeup of our contract backlog, but sufficient to say that previous contracts, older contracts, did reflect the going terms at that time, which generally had a tails assay range of 0.2 to 0.35. Clearly our newer contracts are moving to a tighter range of tails assays.

Okay. But substantially all prior contracts, so it was not sort of on a 50-50 basis in 2000. The standard in 2000 was to have the flexible contract terms?

Right. The previous marketplace definition of tails clearly had the wider range.

Fadi Shadid, Friedman Billings Ramsey.

You're going to be spending on American Centrifuge over, I think, $300 million this year and you said twice that next year. Can you comment on what that money will go towards? What will that money be spent on?

Good question. (multiple speakers). I have asked a lot of the same questions on it. But you know we need to spend the money on a variety of activities that prepare for the operation. Let me try and go down the list.

We need to complete the engineering and design work for the full facility. As I mentioned, we continue to optimize the design of American Centrifuge, and we have started the process of placing orders for materials used both in construction and in fabrication. We were placing orders for plant equipment such as the pumps, the valves, the piping and some of the electrical gear, and we are actually doing some expanding manufacturing facilities that will be needed for the high-volume production. That is primarily at the vendors.

We have some construction at the site to do. Most of it is refurbish of existing buildings, but there are some new structures such as the feed and withdrawal facility that will be built. And clearly some of that money is going towards the assembly of the initial -- assembly and operation of the initial cascades, and there is a staffing issue that goes across the project that needs to be done both for USEC, for ATK, Honeywell, Fluor to get the staffing levels up to the level that will be needed to support the construction and test activities. So that is pretty much where it is going.

Okay. And do you know at this point how much will be, if any, will be capitalized this year, or is it all going to being expensed? At what point will they start capitalizing?

Well, I think we give you an estimate of about $340 million total of expense and capitalization this year. I think we are looking that about 120 of that would be expensed and 190, 200 of that would be capitalized.

And that compares to about $41 million ACP spending that was capitalized in 2006. Our ability to move from demonstration phase to a commercial plant phase where significant expenditures will be capitalized will be very much based on when the technology is determined to have a high probability of commercial success and when it meets our targets for physical control and technical achievement. And we continue to work through those this year.

Okay. And a quick question. You built inventories during the quarter, and you are back over the $1 billion mark on the balance sheet. Could you talk a little bit about that and how you think that will play out this year?

Yes, we are not anticipating to build inventories. I think I will just note that, in addition to building inventory, you may have noted on the liability side that we did have a slight increase in our inventories owed to customers and suppliers as well. So the buildup just on the asset side of the balance sheet may on its own look larger than I would say the net inventory balance is in reality.

And one other comment that, as we operate at lower power levels during the summer, we do build our inventory levels preparing to meet the summer obligations for deliveries.

Michael Gill, Speedwell Securities.

I would like to make sure I understand through the sub-milestones that lead up to the October Department of Energy milestone. I guess the first thing is that you had said that you were going to introduce UF6 into some test machines to verify Cascade configuration and support system functionality. Has that been done? Was it successful, or can you give us an update there?

Sure. As we stated, we anticipate operating Lead Cascade this summer. So the machines in final stages of manufacturing come together to support that operation this summer. The milestone with the Department of Energy to demonstrate that we can provide commercial grade assay is set in October so that should give us plenty of time to do that.

Okay. But you said that in February that at anytime in the very near future you were going to begin to introduce UF6 into some test machines.

Yes, and that has started.

That has started? So I thought that was different from the Piketon machines. That is not?

No, that is.

When were the first centrifuges for the Lead Cascade installed in Piketon?

Oh, boy. I would think --

You said you were going to start in March --

It was about three or four weeks ago. I'm trying to get the exact date. But we have had -- again, we've had reliability machines there that we have been doing testing on since last year, and now we have the first Lead Cascade machines in final assembly. And so in that reliability machine, we have put gas in there and have gotten some test data out of that.

Okay. Will the data for the -- with the timing of the milestone for the Department of Energy in October, was the timing the only thing that changed, or were there changes in the milestone requirements as well?

No, just timing.

Okay. Can I ask, will the data from the October milestone come from the operation of all the centrifuges in the Lead Cascade, or will we just take a smaller subset, meaning -- I don't know, the Lead Cascade can have something like 100 or 200 machines. Will it come from all of those machines, or will it only come from, say, a subset of 10 or 15 or 20 centrifuges?

I think let me just address your formal question for a moment. In addition to timing, there was a slight change in the nature of the October milestone -- now October milestone. Before it was satisfactory data from Lead Cascade, and now it is reflective of obtaining commercial grade inventory or SWU from a Lead Cascade.

And on the second question with respect to the number of machines, I think there has been -- there was some speculation of a significant number of machines. But again, we're expecting to have a Lead Cascade up and operating midyear, and the data will reflect the operations that we see from that cascade.

Great. When is the next time we can expect a Lead Cascade update? Would that be the second-quarter '07 conference call in early August?

Yes, we would certainly provide you an update then because we would expect to have it up and running.

But there will not be one in the intermediate time?

(multiple speakers). We don't have anything planned --

But, as information is available, we will always let our investors know.

Okay. How long will you have to operate the Lead Cascade to get the information that you need? How long do you anticipate that to take?

It is -- we would expect that we should be able to get that data fairly quickly once we have all of them operating. But again, you have got I call it the startup and test mentality. We have got to bring up multiple machines that are coming together that operate on the cascade configuration, and we're going to take our time to make sure that comes on nice and smooth and gives us all the data that we want. Once we are up and running in a cascade and operating according to that test plant, I think proven that we've got commercial grade assay come out of it fairly quickly.

It has got to be devilishly complex. We have to give you credit for that. We understand.

The last question, cost estimate update. I think you had said that it is going to be about a year from February and after the Lead Cascade has been operational for awhile. Is that still about the timeframe, say, early first quarter 2008 that we could get a cost estimate update?

No, I think clearly by that point we will have more information in hand. But at this point I don't think that we will lay out a schedule for a full update on project costs. But again, to the extent that we believe that it will appear to be different than our current target investment, that is something that we would pass on.

Clearly our position is that if something goes on that tells us that there is a problem with that estimate or things look a lot better than we anticipated, we have an obligation to let you know what we know then, which is pretty much what we did last year as we stepped through it. To go through a full-blown detailed review of the cost estimate takes a fair amount of time, and last year we dedicated a lot of time and resources to doing that. An update that we would give you in the near-term would primarily be based on something that has changed or that clearly we feel we need to get out to the shareholders to understand where we are. And that could be both positive and/or negative.

[Catherine Solmon], Atlas Capital.

I just have a couple of housekeeping questions. In your comments you had said that production costs were up 41% quarter-over-quarter. Is that relative to the December quarter or to March of '06?

And my second question is, could you give us an idea of how many units of SWU were in inventory at the end of this last quarter?

I will take those in order. I think that we had said that the production costs were up 44% versus 41%, and that is quarter-over-quarter, so first quarter of 2007 as compared with first quarter of 2006.

And on the units, we do not disclose the volume of SWU within our inventory. But again we try to give our investors a sense based on changes in overall value. And again, that is on our books at a lower cost of market and reflects a monthly moving average inventory method.

Okay. So no ballpark of volume this last quarter relative to a year ago?

No.

Baker Burleson, Fox Point Capital.

I just wanted to touch on the potential to get a deal with the government to reprocess the tails. Would that be an outright gift from the government to you guys of the high assay tails, or would it be you guys reprocess those for a fee? How do you think about that, and what would be the economic ramifications of the different ways that deal might be structured?

That is a great question. My view is that we welcome the opportunity to sit down and work out the details of that arrangement with the Department of Energy.

Our biggest effort has been to get them -- and to get multiple parties, not just the government -- to see that the market conditions are such that this could be a very valuable thing for all parties involved. You have a very tight uranium market that could use some additional uranium in the market. The department has talked about building a LEU reserve of some sort for the future. We're clearly looking for additional cash flow. And so I think once the process sinks in, that, hey, given the economics of the tails re-enrichment program, this is something that can be a true win-win for everybody. Then I think we have got to go roll our sleeves up with the Department of Energy and work out the details of the deal.

Okay. Thanks. One more follow-up on that. Is that a decision that can be made directly by DOE? Will that involve some sort of congressional approval being attached to a bill? How will that process actually work?

I think the easiest way to answer that is it depends on everything that is involved in it.

As far as having the authority to transfer the tails and have them re-enriched, the department has even said they believe that they have the authority to do that. But anything that would smell more like a barter type activity that we have used, say, to support the technetium cleanup, that would probably require some sort of legislation. Again, something that is being worked out both with the congressional folks, as well as with the department.

So the answer is, if it is very simple, they might just be able to do it on their own. But I think anything that is reflective more of a policy from the Department of Energy and how they want to deal with this liability in creating an asset, they are certainly going to want to take that to the hill and get an understanding for where they would like to go.

Laurence Alexander, Jefferies & Co.

I would just like to return to the inventory question for a moment. If you did want to work down inventories, how much flexibility do you have versus what is reported on the balance sheet? I mean just given -- taking into account your longer-term contracts with your customers?

Well, I think we have slimed down our inventories in general over prior years. But again, our inventory reflects working stock, sufficient inventory with respect to handling customer deliveries, as well as timing of anticipated deliveries from Russia onto the megatons to megawatts program.

But I think one thing to keep in mind as well is that our inventories are also part of the borrowing base calculation for our credit facility. And so it is something that we view as a source of capital that we could tap to the extent that it is needed, keeping very mindful of our delivery obligations. But at the same time it does -- could impact potentially borrowings, our ability to borrow under the credit facility.

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

Maybe a follow-up on the SWU prices question from earlier. I have kind of listened to the same presentations that are arguing theoretically we should be at SWU closer to 200 now and maybe higher going forward. Could you just talk more about what are the supply and demand fundamentals right now governing the SWU market?

It is said that maybe there is not much spare capacity to be had in the near-term, and that is why maybe prices are not being bid up. But -- and you also talked earlier about your outlook for the SWU market as driving your capital budget decisions. Could you just talk more about SWU price fundamentals?

Let me try the first one, and then I might come back for a clarification on the second one. We do see a pretty reasonable supply/demand balance in the current marketplace. You do have supply sufficient to meet demand. Demand is picking up for several reasons, including operations, as well as the uranium market people downflexing on their tails assay, therefore, asking for more SWUs. That SWU is being met by additional gaseous diffusion capacity.

In the dynamic, and I am talking mainly about a Western market supply/demand balance, you also have a pretty good overhang of additional Russian capacity that is available to the market. And so we keep an eye on that because they do have a substantial quantity of enrichment capacity available.

So I think when you're looking at supply/demand balance factors, you are looking at really the supply coming from gaseous diffusion plants necessary to clear that demand more than you are looking at the uranium market and backwards as the way that some of the experts have looked at it. If you would not mind just restating your second question?

No, I was going to say your capital budget or financing decision on American Centrifuge, that it may be also a function of your outlook for SWU market. So I was just kind of saying what is the outlook for SWU market on pricing?

I don't think that we would explicitly talk about our internal estimates for SWU market. But, from a financing standpoint, clearly SWU markets are a very important factor in our overall financing plan, and we see very positive bullish markets from that perspective. But it is also our objective or from a supplier standpoint that we like to see stable markets. So a long-term stable market I think would be of benefit from a financing perspective.

With no further questions, I would like to turn the call back to Mr. Steve Wingfield for any additional or closing remarks.

Okay. Thank you all for your questions this morning, and we appreciate your participation very much. Now we are in the midst of a critical period for our Company and I think as all you know. I want to ensure investors we are keenly focused on the strategic issues of our current operations, ramping up construction activities for the plant and securing the financing to make this project a success. I look forward to providing you an update on each of those items as we go forward and certainly in early August.

And with that, I thank you all for your participation.

And this concludes today's teleconference. We thank you for your participation and hope you have a wonderful day.