Centrus Energy Corp (LEU) 2007 Q2 法說會逐字稿

Good day, and welcome, everyone to the USEC, Inc.'s Second 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, the Director of Investor Relations. Management will make opening remarks, which will be followed by a question and answer period.

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

Good morning. Thank you for joining us for USEC's conference call regarding the second quarter of 2007, which ended June 30th. With me today are John Welch, President and Chief Executive Officer, John Barpoulis, Senior Vice President, and Chief Financial Officer, and Tracy Mey, Controller and Chief Accounting Officer. Bob Van Namen, Senior Vice President is traveling and joins us by telephone.

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

Finally, the forward-looking information provided today is time-sensitive and is accurate only as of today, August 2, 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 everyone. Thank you for joining us to discuss our second 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 wanted to give you an update of our business, particularly the status of our demonstration of the American Centrifuge technology. We had a very good and very active second quarter. We received our construction and operating license from the United States Nuclear Regulatory Commission, and we started construction of the American Centrifuge plant. We also wrapped up months of negotiations with the Tennessee Valley Authority and entered into a five-year pricing agreement for the power we need to operate the Paducah plant. This agreement gives us added production at the Paducah plant, increases the opportunities to underfeed the enrichment process to obtain additional natural uranium, and it provides stability and predictability to our power cost.

We've updated our outlook for 2007 to take into account improvements to our business plan. We now expect a substantial improvement above our earlier guidance in our net income and cash flow from operations for 2007. John Barpoulis will cover that new guidance shortly.

We are also excited about the developments within the nuclear industry and continued signs that this should be a tremendous market for us in the years ahead. Just this week, for example, Constellation Energy applied for the first construction and operating license in three decades to build a new reactor on its Calvert Cliffs site in Maryland. And also, this week, Entergy ordered long lead time forgings for the large reactor components needed for a new nuclear plant. These are concrete steps that will transform the long anticipated nuclear renaissance from mere talks to solid actions And for us, a solid step forward that I'm sure will be of great interest to our investors. We have assembled and begun operating the centrifuges that make up our Lead Cascade of American Centrifuge machines.

Turning first to our results - as those of you who have followed USEC for a while know, our quarterly earnings and cash flow from operations can be pretty lumpy based on the timing and mix of customer deliveries. Revenue, net income, and cash flow from operations were lower for both the quarter and the six-month period compared to the same periods last year. While that's not a positive trend, it was expected. The main factors were timing of customer deliveries, the higher power costs that we have been paying for the past year, and increased spending on the American Centrifuge project.

Our loss in the second quarter was not as large as we anticipated. The bottom line, we had a net loss of $13.4 million, or $0.15 a share in the second quarter, and net income of $25.9 million, or $0.30 a share for first half of the year. Spending on the American Centrifuge project directly affects our net income, and advanced technology expenses increased $22 million or 49% in the six-month period compared to 2006. This reflects our efforts to begin Lead Cascade operations and prepare the Piketon facility for commercial plant construction.

As I previously said, we assembled, installed, and began spinning the First American Centrifuge prototype machines that will make our Lead Cascade during the quarter. Yesterday, along with our earnings news release, we issued an extensive and comprehensive update on where we are in the American Centrifuge program as we prepare to begin our integrated testing program of the machines in a cascade configuration. I am happy to report that we are very close to having Lead Cascade in operation and we will let you know when that occurs in the weeks to come.

Our team in Piketon is really eager to start the process of allowing uranium hexafluoride gas to flow from machine to machine, but we are systematically moving forward so that we can gain maximum testing value at each step of the process. With the Lead Cascade, we have commenced a demonstration and integrated testing phase that will continue for a number of months ahead. While the Lead Cascade is an important marker, we view the start of cascade operations as another step along our path to deploying this important technology.

We expect the Lead Cascade operation will position USEC to meet the revised October 2007 milestone, which is to have the Lead Cascade operational and generating product assay in a range usable by commercial nuclear power plants. Testing these prototype machines will provide important data that can help identify improvements in design, assembly, and operations that will be integrated into the AC100 series machines, the name we have given to our first production centrifuge machines.

I certainly don't want to repeat everything in our ACP update, but I think the key objectives for the Lead Cascade are worth noting here. Our goals for this integrated testing phase are to provide information on machine-to-machine interactions and the integrated efficiency of the full cascade, to demonstrate the capability of the cascade to generate product assays and arrange usable by commercial nuclear power plants, to confirm the design and performance of the centrifuge machine and cascade support systems, to verify cascade performance models under various operating conditions, to provide information on the performance of centrifuge components over time, and to give operators and technicians hands-on experience assembling, operating, and maintaining the machines.

In April, the NRC issued a construction and 30-year operating license for the American Centrifuge plant. In May, we officially began construction of the plant. As you know, the main structures for the plant already exists, so there was no ground-breaking ceremony. While we have started construction on the plan of the structure, we are mainly focused on transferring the technology to our strong team of strategic suppliers, which is made up of Honeywell International, ATK Composites, BWX Technologies, and Fluor Corporation.

So far, USEC has been making the vast majority of components for the American Centrifuge machines. Beginning last year, we began transferring the technology to our strategic suppliers. They will continue as together we prepare manufacturing capacity for the classified components and fabrications of the carbon fiber rotors. We will also transition the responsibility for rotor balancing to Honeywell in the near future. Our plan is for USEC and our suppliers to develop the manufacturing infrastructure and capacity to position us to begin high volume manufacturing in late 2008. Design and early construction of the feed and withdrawal facility will also continue into 2008. That facility is where the natural uranium will be fed into the commercial plant centrifuges and enriched product is removed.

On a parallel path with the Lead Cascade testing operations, we will continue to refine the design of the AC100 series machine that we expect to populate the plant. As our team of suppliers gain manufacturing experience, they will work closely with us to integrate changes, implement improvements to the machine design, and help us lower the capital cost per machine. We will continue to simplify the centrifuge machine design in order to achieve our twin goals of reducing costs and taking full advantage of technological advancements to improve performance.

One final note about our current target cost assessment for the deployment of the American Centrifuge plant. Earlier this year, we completed a comprehensive review and the target cost estimate of $2.3 billion to build the plant came out of that review. We said that estimate included -- that that estimate included amounts already spent, and included estimates for cost escalation, but did not include financing costs for a reserve for general contingencies. We've since begun procuring some of the parts and materials we'll need for the plant. Based on information we have to date, we believe that some of our costs could be higher than anticipated in our target estimate, particularly for the first machines manufactured by our suppliers. We are working to value engineer the machines to help offset the higher material costs seen in some of the initial procurements.

As we said, when the first target estimate was given earlier this year, in 2008, we'll have a much better view of the plant's ultimate cost. We expect to complete an update of our cost estimate in early 2008. That updated cost estimate will include a reserve for general contingencies, which is not included in our current cost estimate. This will reflect the maturity of the project as an updated view on materials and labor cost proceeds.

I would now like to give you a brief update on our efforts to obtain support from the U.S. government for our project. As we've noted before, we are seeking support in two principal areas. First, a loan guarantee for debt we would issue to build the American Centrifuge plant. Under this program, the government will not be loaning us the funds directly. Instead, if our project is approved, our debt would have government backing, which would reduce the perceived risk in the financial markets for this unique project. The second area involved the potential re-enrichment of higher assay depleted uranium, known as tails that currently belongs to the Department of Energy. We believe this project could be helpful to USEC, the government, and our utility customers who are faced with a near term shortfall of natural uranium supply.

While it may not appear to be much government movement on either of the initiatives, there is a great deal of activity going on here in Washington. For example, DOE is developing its rules and regulations for the loan guarantee program. Many representatives of Wall Street investment banks and from the nuclear power industry, including USEC, have provided suggestions to DOE on how to the program could be improved. We expect to see DOE's revised program rules in the weeks ahead.

We have submitted a pre-application for a loan guarantee and we believe our project is well qualified. We don't expect to hear about any potential awards before late this year or early 2008. At that point, potential participants would be invited to submit a formal loan guarantee application. Additional congressional appropriations may also be required before any meaningful loan guarantees could be offered.

Regarding the effort to reach an agreement with DOE to re-enrich the tails material - I have, in recent weeks, discussed the potential for such a program with officials from DOE, and have been on Capitol Hill, talking to legislators. I can tell you that there is strong support for unlocking the value that remains in the depleted uranium. There are many details still to be worked out, but there is just too much valuable material left in some 25 million kilograms of depleted uranium to be ignored. So, in my opinion, there will be some kind of tail re-enrichment program and I expect USEC to be involved.

The Government Accounting Office is reviewing current law to determine DOE's authority to transfer this material and its potential value, and it appears unlikely that DOE will move forward until the GAO reports back. Any agreement will require some action by the government and the nature and its timing of the actions on certain -- at this juncture.

So, wrapping up, I'd say our view of the world has improved substantially from this time last year, and even from earlier this year. We've been able to lock in our power for the next five years, which helps us mitigate our risk of higher power cost. The additional power we'll receive under the agreement gives us more flexibility in how we operate the Paducah plant. Market prices for our product remain strong and the nuclear industry that we supply continues to move towards a period of growth. We are feeling increasingly optimistic about our prospects.

Before I turn the call over to John, I want to quickly address a letter released yesterday by Congressmen John Dingell and Bart Stupak, regarding potential contracts for the decontamination and decommissioning, or D&D, of the Portsmouth and Paducah plants. We currently provide services to DOE to maintain the Portsmouth Gaseous Diffusion Plant in cold standby and prepare the plant for future D&D activities. In this role, USEC has been approached by a number of D&D contractors to see if we would be interested in participating in a venture or a consortium to bid for anticipated D&D work for the two gaseous diffusion plants. USEC has not made any decisions regarding these inquiries, nor entered into any agreements.

I think if you read the letter from the Congressmen to DOE, you'll see their concern appears to be focused on the contracting process through which DOE expects to award the ultimate D&D of the gaseous diffusion plants.

Separately, we've said in our disclosures that we have pursued potential investment or other participation by third parties in financing the American Centrifuge plant. USEC has had conversations with numerous third parties in our efforts to attract capital. Parties have proposed a variety of concepts, but none of these conversations have thus far resulted in any material agreements. In the absence of any material activity, we will not comment about the discussions we may or may not be having with private companies. And, as you know, as a policy, we do not comment on M&A activities.

Now I'd like to turn the call over to John Barpoulis for a report on the second quarter financials. John?

Thank you, John, and good morning, everyone. I'm going to keep my report rather brief because we want to get to your questions.

At the start of these reports, I often point out the long-term nature of our business model, and that the 12 to 24-month reactor refueling cycles can result in large quarterly swings, depending on the timing and mix of deliveries. This quarter is a good example of quarterly swings in customer deliveries and why we think a longer term view of our results is appropriate.

Starting at the topline, revenue for the quarter was $211 million or $314 million less than the same quarter last year. Drilling down, SWU sales made up the vast majority of the revenue at $146 million, a decrease of $258 million or 64% in the same quarter in 2006.

This is a good example of the variability of quarterly revenue. In the first quarter, we had the reverse situation that SWU revenue was 73% higher than the same quarter in 2006. SWU sales in the second quarter reflected a 65% decline in volume of customer deliveries, but a 3% increase in the average price billed to customers. The uranium revenues are often related to SWU deliveries, and uranium revenue was 7% lower than the same quarter last year. The volume of uranium sold declined 86%.

Our guidance for the full year of 2007 is that the volume of uranium delivered to customers under current contracts will be about half of what we recorded in 2006. Revenue from the government contract segment was roughly the same as the same quarter last year.

Looking at the six-month period, revenue is still lower than in 2006, but not to the extent seen in the second quarter. Revenue from SWU was $551 million, a 14% decrease from the first six months of 2006. And the uranium revenue was $32 million, a decline of 78% from the six-month period of 2006.

Turning to the cost of sales for the SWU and uranium segments. There was a 65% decline in costs for the quarter, in line with the decline in SWU volume delivered and reflecting an increase in SWU and uranium costs. Cost of sales for the segment in the six-month period was 21% lower, again due to declines in sales volume, partly offset by increases in unit costs. Cost of sales per SWU in the six-month period increased 9% compared to the same period of 2006, mainly representing the higher cost of electric power for the Paducah plant that is working through our SWU inventory.

Electric power costs were $97 million higher in the first half of 2007 compared to the same period last year. In the first half of 2006, the approximately 50% increase in our power costs had not yet taken effect. The impact of higher power costs are even more apparent in the unit production costs, which were up 34% compared to the first six months of 2006.

Gross profit for the quarter was $28 million and $101 million for the six-month period, a decrease of 65% and 41% from the same periods of 2006, respectively. Our gross profit margin for the first six months was approximately 15% compared to 19% in the first half of 2006. 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, totaled approximately $36 million, an increase of $8 million quarter-over-quarter.

In the six-month period, advanced technology expense was $69 million, a 47% increase over the first half of last year. 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 machines that make up the Lead Cascade. In addition to the ACP expense, about $32 million in spending related to the commercial plant was capitalized in the first half of 2007, compared to about $12 million capitalized in the same period of 2006.

Selling, general, and administrative expense decreased almost $2 million in the first half of 2007, compared to the same period last year. Much of that decrease was a result of a reversal of an accrued tax penalty. This is partially offset by higher compensation expenses related to the impact of a higher stock price on incentive compensation plans.

Bottom line, we recorded a net loss of $13.4 million, or $0.15 per share for the second quarter of 2007, compared to net income of $21.6 million, or $0.25 per share in the same quarter last year. For the six-month period, net income was $25.9 million, or $0.30 per share compared to $56.2 million or $0.65 per share in the same period of 2006. As we noted last quarter, net income was improved by tax-related affects of the non-cash reversals of accruals and accrued interest. In the six-month period, this totaled approximately $21 million.

The investment we are making in the American Centrifuge project had a substantial impact on net income. This investment in our future had the effect of reducing net income in the first half of 2007 by approximate $45 million, assuming a federal statutory income tax rate of 35%.

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 expense of approximately $71 million in the first six months of 2007, compared to $86 million in the same period last year.

Turning to cash, we had $48 million of cash on hand as of June 30, 2007, compared to $171 million on December 31, 2006. Cash used by operations in the first six months of 2007 was approximately $83 million compared to cash flow from operations of about $40 million in the same period last year. The $123 million dollar difference was primarily due to a $191 million net increase in inventory, which was planned to meet delivery obligations scheduled for the second half of the year.

We have updated our earnings and cash flow guidance for 2007 to reflect changes in our business plan. We have also refined our spending pattern for the remainder of the year for the American Centrifuge project. We provided a great deal of detail in our earnings news release, so I'm not going to go through all the changes. But I would like to highlight several items.

Our projection for revenue is relatively unchanged at $1.91 billion. One change inside that number is a $30 million increase in our projected uranium revenue. Keep in mind that our revenue recognition policy requires that natural uranium that we sell be used as feed in the enrichment process and leave USEC property as low enriched uranium product before revenue is recognized. Until the revenue is recognized, it is reported as deferred revenue, but the cash received is reflected in cash flow from operations. This accounts for some of the timing differences between net income and cash flow from operations.

Our guidance for the American Centrifuge project is for total spending of $320 million this year. That's about $20 million less than our earlier guidance. That spending will be split roughly between $135 million of expenses and $155 million in capital expenditures, with the rest going to prepayments for specialty materials and new manufacturing facilities for building the AC100 series centrifuge machines.

Our guidance notes that SWU deliveries are expected to be 6% to 8% higher than in 2006, which is a smaller increase than in our earlier guidance. We also expect prices billed to customers to be 6% to 8% higher, which is an improvement over our earlier projection. Our costs, primarily in electricity and higher purchase prices to Russia, will more than offset these revenue gains, and we expect our growth profit margin to be approximately 14%, which is less than last year's 18% gross margin. But I do think that some context is important here.

Last year at this time, we expected our gross margin for 2007 to be about 5%. We worked hard to trim costs and increase revenue, and our outlook improved to a 9% to 10% gross profit margin in our initial 2007 earnings guidance issued in February. With that as a backdrop, the 14% gross profit margin that we now expect is a substantial improvement.

Our earnings guidance for 2007 for net income is in a range of $70 million to $80 million. Taking into account our continued substantial investments in the American Centrifuge, the pro forma net income before ACP expenses is expected to be in a range of $158 million to $168 million.

We also expect cash flow from operations for 2007 to improve substantially over the previous guidance of negative cash flow and is now expected to be in a range of $25 million to $35 million. The improvement is primarily due to higher average uranium prices billed to customers, improved gross margin, and higher customer collections now anticipated in 2007, for SWU previously expected to be delivered late in the fourth quarter.

Our outlook also notes some potential upside to our guidance from the opportunistic sale of uranium inventory in excess of our internal needs. Any such additional sales are not in our current outlook for earnings or cash flow. Please note that our guidance is subject to a number of assumptions and uncertainties that we included in our news release that could affect results either positively or negatively. Please refer to those factors for more information.

That concludes the financial results analysis. And now I'll ask the operator to prompt our callers for questions.

(OPERATOR INSTRUCTIONS). We will take our first question from Laurence Alexander with Jeffries.

Good morning.

Good morning.

I guess the first question -- on the TVA contracts, you highlighted in the release that after the first three years, the maximum non-summer load will drop back to the 1650 megawatts. What's the thinking behind that? What's the strategy behind that?

Laurence, this is John. I'll take the first cut and then Bob can chime in later. One of the more interesting issues that's tied up in that is the transition for the Paducah plant at the end of that contract. Today, we project that we would operate the Paducah plant through May of 2012. TVA is clearly concerned about what is the transition from a very large power demand to potentially zero. And so we -- the contract basically shows a step-down in the last two years of the contract, but we fully expect that discussions will develop over the next couple of years relative to the actual point at which we would see some enrichment operations.

And if you think about the potential to enrich tails, both near-term and longer term, what the market might look like out in that timeframe, there's still a lot to be looked at for how we would ultimately transition out of the Paducah plant. And so I think the contract is reflective of future discussions relative to that transition period out in that timeframe.

Bob, anything else you wanted to add to that?

Laurence, the only other thing I would add is that it does help us to look forward and be able to see how both the uranium and the SWU market will develop. And we have firm commitments and a lot of business to be locked-in in the near term, but for the 2011, 2012 timeframe, using the 1650 megawatts, and then perhaps going back to TVA for additional power as we see how the uranium industry markets develop, I think gives us a lead time to be able to have those discussions.

Okay. And I guess just to shift over to the general contingency reserve, can you discuss what your criteria would be as you -- at what points you might trigger an increase in that reserve. And if you look at prior projects that you've been involved in, what you would consider a reasonable range? So at what point you would think you're going out -- beyond what you would've expected?

I think, Laurence, as John outlined in his comments that as we move through the rest of the year, we certainly expect to learn more about the design of components for the AC100 series machine as we finalize the design for components and aim to finalize the design for that series machine. We also would expect to learn more about the design for the balance of plant as well. So as we gather more information and get more facts, I think that will clearly facilitate and help our ability to go through and take a more probabilistic and risk based view of various line items within our target cost estimate. So that is what will form the basis of an informed contingency.

I don't think that -- there are certainly rules of thumb that one can use, but really, when it comes to a project of this nature, we would see those as arbitrary in that we would not seek to really be in a position to articulate a range at this time. But with more information, we think we can.

And my experience would be is that it's really a function of design maturity and risk in the deploying the technology. And so those areas that you have an eye level of design in and that you're very comfortable with the technology, the contingency you might have in there might be very low. And given where we were when we initially did the estimate, those kinds of things would likely be included because you have a very good view for where you were. It's the items that we're still evolving and you still wanted to see what's going on in the market that we would expect we'll get some feedback on.

We clearly had escalation in there on material cost. Some of that we've got covered, and then there are other items that we're seeing pressure on that. But I think we'd be in a best position to update that -- I think we've said early 2008 we would do another update.

And one last follow-up, if I may. If you look at the -- I understand you're very reluctant to give any directional certain year term outlooks, but if you look at just your order flows and likely order patterns, is there any reason for a significant upside versus last year in Q3 that would offset what happened in Q2? Or should we think about what happened in Q2 as being more sort of tied to order timing related to Q1?

I think, Laurence, as we articulated, this quarter was certainly a good example of the -- that the timing and mix of customer deliveries certainly impacts our quarter-to-quarter results, and that really is why we don't provide further clarity on quarter-to-quarter performance. What we do say is that we no longer expect the third quarter to be in a loss position as we have firmed up the timing and expected delivery of customer orders. But at this point, I don't think it would -- we're able to go beyond that.

Oh, but in terms of what happened in Q2, was that because of some orders from Q1 that were pushed back into Q2 -- Q2 orders -- a mixed effect between those two quarters?

I think that ultimately it really is a reflection of our customer requests for -- and their requested timing for deliveries.

Fair enough. Thank you.

Okay.

Our next question comes from Fadi Shadid with Freidman Billings and Ramsey.

Hey, good morning.

Good morning, Fadi.

Good morning, Fadi.

On the ACP update, a lot of the skepticism out there on American Centrifuge is unreliability. And what would it take in terms of running the Lead Cascade, how long for some of that reliability concern to be (inaudible) somewhat. I mean just in terms of reliability theory, is there a magic four, five months of running it, three months, that we can -- that the confidence increases x percent? That's my first question.

Well, I appreciate the fact that you slugged through that large disclosure and I'm chuckling a bit is that we felt that it was very important as you're heading into this phase of the program, which is a very important testing phase, that we really try and step back and give you all a view of what we're trying to accomplish in that period of time because there are lots of different things that we want to do, and certainly the operational experience that the people get is right at the top of the list.

We also included in that this discussion of what we call the Deterministic Approach, which is really the major move that went on in the aerospace industry as the computer modeling got so good in the '90s, which is a process by which you can model a lot of these reliability factors after a detailed engineering analysis - run it through a full failure modes effects and criticality analysis. And that allows you to really focus in on those areas that you can predict very well and some of which you might look for additional performance information.

So, for the most part, longevity type of reliability items are included in that deterministic approach. Now clearly, as you're operating the machines, if something were to come up, that might cause you to go back and look at some of those assumptions and that analysis. When you get to a point later on where you probably would be changing out machines and doing some sort of inspection of a machine, that might tell you that your models may have been too conservative and then that you've more range in there. But there's really no item in there that I would say that we have planned to go run for x period of time to validate a reliability model.

It is all tied up in that deterministic approach, which is a fairly common practice in high technology programs that's been going on for the last 15, 20 years.

Could there be a point four months from now where we have to do a lot of more redesigning work, or is it more tweaking as we see it now?

Based on our modeling of what we have, I would put it more in the tweaking arena. Models are very supportive of what we're putting together to go operate.

Okay. And more on ACP. It looks like you'll start -- the plan is to start assembling the machines in big quantities in '10. Is that the year where you can start producing commercial?

We've set as our target as beginning commercial operations late 2009. That's when we would be able to pull product and take it to the market. And then there's a whole deployment plan for numbers of machines, et cetera, out through the ultimate completion of the plant, which I believe we have late '12. But the nice thing about the centrifuges as opposed to the gaseous diffusion plant, we'll be able to pull product and take it to the market as we're building out the balance of the plant. We're able to do that as soon as we have A, the license to do so, and then we have the first slug of production machines in place.

Okay. Okay. And how about -- well, would you sign contracts against that output, or it's not necessarily how it works?

We'll ask Bob to respond, but I think during this transition period as it ramps up, I think that our plans are flexible. But I think, clearly, we do have our thoughts on the sales from the plant in the longer term. Bob, would you like to address that?

I think that in those early years, we're going to see a combination of contracting for ACP, contracting for gaseous diffusion, and then the HEU as well. So dovetailing that long-term ACP contracting supply into the contracts we need to underpin the financing. So it all fits together. We'll also be creating working stock inventory for the plant as well.

Okay. Thanks.

Our next question will come from Michael Gill with Speedwell Securities.

Yeah. I was caught by the fact that, in your guidance, you went from a $10 million interest expense to a $13 million interest income. And that's a $23 million move in your guidance. That's a huge move. What caused such a large move? I guess your debt would be $200 or $300 million smaller for such a big move.

Michael, I think that the bulk of that change, bulk from guidance in last year -- and it's guidance, our initial guidance really was with respect to the implementation of FIN 48 and the reversals around that. In addition, with our change in our view of cash from operations, we also expect to be borrowing less for the year. And so that also has resulted in less interest expense and more interest earnings.

Okay. Well it brings up the next question to you. You're supposed to be having financing in place by January 2008 now for the first 1 million SWU capacity, and it made me wonder whether or not it had -- the interest income had something to do with that. Could you give us any update on the financing?

Sure. I think I'll address it in two ways. Certainly, with respect to the milestone, the milestone itself is to secure a financing commitment for a 1 million SWU centrifuge plant. I think first, the milestone is a bit conceptual because obviously, we're looking to build a 3.8 million SWU plant, not just 1 million SWU plant.

Sources of capital for the American Centrifuge investment will ultimately be from the combination of cash from operations, cash on hand, our credit facility, and then the additional debt and equity, and also as we mentioned, potential third party, and/or government support. And I'd say we certainly look to meet the milestone through a combination of those sources.

I think it's also important to note though if we continue with our progress on the American Centrifuge program and don't think the milestone makes sense in its current form, we would revisit that with DOE. I think we also look to address future milestones with DOE, which are slightly out of sync based on our revised schedule. I think, with respect to raising capital itself, I think what we -- we listed out in the past, I think, the factors that we look to to drive our thoughts in the matter, and I think that we expect to access the capital markets in a manner and at times in our strategic interests.

We are looking at various financial products, including equity and debt securities, and we do continue to look at equity as a critical part of the capital plan for the American Centrifuge investment.

So there's nothing firm that you guys have in mind for the time being? It's just still evolving, you would say?

It is evolving, but I think, as we've said in the past, several factors impact our desired timing to raise capital. We look at financial market conditions, our long-term capital structure, the timing of capital needs, our cash from operations related to that, our progress on the American Centrifuge program, as well as SWU market outlook. We continue to look at all of these factors.

And then, as I've said, one thing that we know for certain is that it's impossible to have perfect timing. But we also think that the market's acceptance of any potential offerings will be improved by the progress that we can report on Lead Cascade and the overall American Centrifuge program.

Okay. Thanks. My last question, Areva has proposed an American domiciled centrifuge facility as well of 8 to 10 million SWU. Could you guys comment on that? How that would impact your future plans?

Well for what we have in front of us right now, Areva's proposal will have no impact on us. They're talking about a 3 million SWU plant, and it's very early. They haven't invested much in the progress to date, and so it could clearly move. We have a license from the NRC. We've begun construction. So, again, our belief is it has no impact on the build out of the first increment of the plant. We think we'll have our plant up and online four to five years before theirs would come online.

If anything, foreign investment building U.S. enrichment capacity only reinforces the need for a plant, and I think for a plant that's using U.S. owned centrifuge technology. With Arriva and Urenco using the same machines in all their facilities, the majority of western enrichment capacity could certainly become dependent on just one enrichment technology within a few years.

So I'd certainly see very strong support to go forward with the deployment of U.S. technology. And certainly, if there's any impact of looking at Areva might be as if and when we go to the next increment, but that would certainly be a function of overall market demands and the supply situation at the time.

And you're not going to look at your next increment until 2010, I believe?

Well that's -- when I'm sitting out in that timeframe, and I have the full financing, and we're chugging along, building the first plant, you certainly would be a lot more comfortable looking at that point in time. And certainly, before we bring people off a very high production machines on the existing plant, that would be an ideal to roll right into the next increment.

But overhanging all of that will certainly be market conditions, how fast the renaissance come, what's the demand for the product, and how we might go. But, boy, if we're out in that timeframe and on track for successful deployment of the first phase of it, we certainly would be in a good condition to go push the button to keep going.

Our license allows us to go up to 7 million SWU before we'd have to come back to the NRC.

Very good. Thank you,

Thank you.

Our next question comes from Mark Manley with Natexis Bleichroeder.

Hi. Good morning.

Good morning, Mark.

Just a quick question on the -- I think, before, you had mentioned you might not be able to underfeed in 2008. Has that now changed? I know you -- it looks like you might be able to do that for the remainder of this year, but in 2008, are you expecting a potential to do that?

Well I think what we have -- we've said two things in prior disclosure. One is that we had expected our uranium sales to be about half this year than last year and stepping down. And I think the other item is that, looking down the road, we had said there may be a risk of a potential shortfall in the future related to the differences between deliveries under our customer agreements and our obligations under the Russian agreement.

I think that the -- our new contract with TVA, providing us with a much greater certainty around our power costs down the road, as well as a really revised operating plan around current market dynamics, I think really give us the opportunity to re-evaluate our SWU and uranium and our underfeeding, which I think has facilitated us to move away from that earlier guidance and really provide us with the opportunity to more opportunistically sell additional uranium.

Bob, did I miss anything, or is there anything you'd like to add to that?

No. I think you captured it. I think that the TVA contract does give us the opportunity to underfeed as we see the opportunities to put material into the market. We do see strong supply demand fundamentals in the uranium market that we will look to take advantage of, and these opportunities, quite frankly, are going to extend for a number of years into the future. So it depends on the timing and the SWU demand versus uranium needs of the company, but we do see on a year-by-year basis, the opportunity to step in opportunistically.

Okay. Great. And if I can ask one more. What's your estimate of the loan guarantee that you might require from the government?

We did submit a pre-application in December of 2006 for the loan guarantee program. In that pre-application, we requested a proposed loan guarantee amount that was based on a preliminary view of our target cost estimate, plus assumed amounts for contingency financing costs, financial insurance costs, and any working capital related to the ramp-up of the commercial plant.

Our pre-application was based on information we knew at the time. I'd say we clearly hope to be invited to submit a formal application. That's the next step in the process. But we do not expect to hear back on that before the end of the year or early 2008, at which time we would expect to have updated information as we progress on American Centrifuge.

Thanks. And just actually one quick clarification. The revised guidance here for the rest of the year, how much of that would you say is due to the lower power costs than you've been paying in the last year, basically?

Well I think just to remark on the TVA agreement briefly, the TVA agreement did provide for a slight step-down, as compared with the one-year agreement with scheduled increases in the base price over the next five years. Albeit it is, with respect to the pricing earlier, prior to June 2006, it still represents that roughly 50% step-up in costs. And so, certainly, I give credit to both our negotiating team, led by Bob and TVA, for working out a fair agreement, but it does provide us with some additional flexibility in taking the plant up to 2,000 megawatts. And so certainly the combination of that higher production level and what we are able to do from a SWU and uranium sales, it does impact our guidance for the rest of the year.

Also, we give support and kudos to our operating staff at the GDP as well. They have been operating the plant at a lower cost level as well, and so that does also drive some of our guidance for the rest of the year.

Okay. Thank you.

And our next question will come from Mark Caruso with Millennium Partners.

Hi. Good morning. Just a few questions. On the loan guarantee front, does the limitation the DOE programmed to $2 billion or the new house proposal that I think (inaudible) affect your application at all?

There's still a lot being debated on that thing. But you are correct that the 2007 number was a smaller number. The proposal for 2008 is about $4 billion. I mean I can give you little bit of the time now kind of discussions on the Hill. The Senate is again showing very strong leadership relative to the loan program, is very active, and support of a lot of the recommended rules changes. And one of the things that they're proposing is if not no cap on the amount of the loan guarantee, a much larger number than has been talked about on the House side.

So when they go into conference, those will probably be key points on the loan guarantee program that are going to be debated. There is still very strong support from Congress for the loan guarantee program, and, if anything, they're pushing very hard to get back to what they believe are more of the intentions of the Energy Policy Act of 2005. And a lot of concern on the Hill that some of the limitations put in place a) were not intended, and b) not necessary to have an effective program to really help jumpstart the renaissance.

So there's still more to come on that. Clearly, we would like to see higher levels of authorization for that because clearly our project's -- it's not quite as big as a power plant, but it's certainly not a little --

Right.

-- couple of hundred million dollar size project.

And then as far as the tails go, I know recently there was an article out there saying that the DOE is putting up for bid some uranium. Do you think that's kind of their thought process in how the tails will go as well? Do you think it'll be a bid process?

I think what -- I think all of that is still unclear how they'll go with it. We are the only U.S. producer. So if you're going to use it with a U.S. entity, they're going to have to come to us. And so I'm sure there would be some sort of a bid process to do that.

I think that what you're saying in the HEU program is will likely be part of a much broader DOE plan for how they reduce their excess inventory. And that involves a lot of different things. They would like to probably get rid of that excess inventory, like any smart businessman would, and yet they want to do it in a manner that is not disruptive to the market. You clearly don't want to disincentivize the mines reopening that are going to be so important for the long-term stability in the uranium market.

So I think that that'll start to play itself out in a broader scope, which I think will help with the tails program because clearly there's value locked up in the high assay tails, and that's basically inventory with value, especially with uranium prices being where they are that they would want to take full advantage of.

Got you. And then just one last question. It's kind of alone the lines of what Fadi was asking with reliability. How much more visibility or reliability do you think the utilities need before you can kind of have more serious negotiations as far as contracting?

Well we certainly plan on inviting key utility people to come out and visit. And I think we will go in very detailed discussions with them, where we are in the project, both long-term as well as in the near term progress. And our thought process is that you retire a lot of those risk concerns in 2008. And so I think that's when we look to have very productive discussions with the utilities, late this year through next year.

And does that need to happen -- do you need to lock up some contracts with utilities before external, third-party financing, or can that happen independent of that?

Well I think that revenue and gross margin uncertainty in the long-term is something that, as we look at our long-term risk profile, that is a key in how we execute our financing plans. And so I do think that providing some limitations on that risk and to provide greater certainty of payback is something that's very important for our execution of our financing.

Got you. Great. Thanks so much, guys.

Sure. Thank you.

Thanks, Mark.

Our next question will come from Mark Levin with Dynamis Advisors.

Hey, gentlemen. Most of my questions have been asked and answered, but I want to dovetail the last question. You were talking about sort of mitigating the risk and that's more or less an -- mitigating the execution risk, and it's more or less an '08 issue. But when I look at sort of, and what I'm most confused about is sort of the financing requirement to sort of get you through '08, and there seems to be a pretty decent sized under coverage, and was just trying to get more details and more understanding of, as we sit here in August, how soon it will be before you provide better clarity with regard to how exactly you're going to finance '08.

We do clearly have a significant amount of spending plans for the remainder of 2007 and 2008. I think that we have certainly heard from a number of our shareholders suggesting that we should consider accessing the equity and debt capital markets in the near term. And we acknowledge that we are looking to raise a significant amount of capital. But again, other than laying out the parameters and the factors that we are considering, and the fact that we are considering various securities, we aren't looking to provide any specific guidance on timing nor size. But we are very focused on the capital that we need to raise to get us through the completion of the program.

Okay. And then secondly, with regard to cost estimate. That's the other area of confusion. I mean I guess you guys laid out that you'll provide more updated guidance at the beginning of the year when you have greater clarity on the $2.3 billion number. But because this is such a critical component for valuation, is there any means by which you can kind of give us sort of a snapshot in time as to where you might be in terms of order of magnitude relative to that $2.3 billion number? I mean is it an insignificant amount? Is it a -- I mean how would you sort of classify it? It's so critical.

Agreed. And we are very closely tracking and monitoring our progress toward our target estimate. I think that what we're trying to communicate in our release and in our 10-Q is that we went through this comprehensive review in creating our target cost estimate of $2.3, and we recognize we're trying to provide our investors with a sense of the snapshot at this point in time. We have made progress on the project. We have bids in hand that both, in some cases, exceed or are less than targets.

But at this point, the differences are not material enough for us to change that target estimate. So that remains our target estimate. But what John articulated in his comments and subsequently is that we know that we will continue to learn more through the rest of the year, and to the extent that we do see material changes, we will certainly let people know.

Okay. Great. Thanks very much.

Next we will go to Catherine Sellman with Atlas Capital

Good morning, everyone. Thanks for taking my question.

Good morning.

Good morning, Catherine.

I have yet another question on the cost for the American Centrifuge project. And in a nuclear trade journal, published at the end of July, it stated that according to your DOE application, USEC had given the total cost of the project as about -- as $3.63 billion, and had requested about $2.8 billion for a loan guarantee. Can you talk about the difference between that $3.6 billion and the $2.3 billion in the filings and in your discussion, and sort of what makes up the $1.3 billion difference between those two numbers, please?

Again, I touched on this a bit I think in response to an earlier question, but let me expand. We did submit that pre-application. Keep in mind, again, it's a pre-application. We did request a proposed loan guarantee amount that was based on our preliminary target cost estimate plus amounts for contingency, financing costs reflecting an explicit financing plan in that pre-application, surrounded by that loan guarantee, and then other non-cash items for financial assurance, and then any working capital.

That was based on limited information at the time and assumptions. And so I don't think it is fair to validate any assumptions publicly to the extent that we feel that anything deviates from our target cost estimate of $2.3. To the extent that we have additional information and data, we will certainly look to provide that to our customers and our investors.

When was that pre-application submitted then?

That was submitted in December 2006. And it does -- again, I'll reinforce it does reflect the same $2.3 target cost estimate.

Okay. So then that difference then we can conclude is financing costs and contingency, primarily, and non-cash financial assurance. Those three items are the difference.

Again, I -- all of those factors were, as you articulated, contingency, financing costs, financial assurance, working capital, all elements of what we included in our loan application. Again, it's a pre-application. We certainly hope to be invited to submit a formal application which would reflect any additional information that we have at that point and time.

Okay. And then the last question with the -- as this trade journal states, you're requesting $2.8 billion. That would cover more than your current estimate for the cost. Is that correct?

You know, again, I'm not going to validate, confirm, or otherwise look at any of the numbers that are being quoted in the Press.

Okay. Thank you very much.

Sure. Thank you.

Next we will go to Allen Rosenberg with Spectra Investment Group.

Yeah. I'd like to follow-up on the question about the loan guarantee. The guidelines for the initial $2 billion round don't include nuclear energy projects. And with the cap on the amount that can be guaranteed and the statutory first lien that DOE gets, it looks to me like the guarantees are fairly useless. Do you think you have a serious shot at getting a significant piece of financing for American Centrifuge guaranteed? And if so, how much will that help you to raise the funds you need?

Very good question. The initial solicitation in 2006, which was initially targeted for August and then pushed back to December, was really part of an, initially, a $2 billion pilot program for DOE, which I think, subsequently, they looked to increase to $4 billion. So I think there are certainly questions with respect to the size of their initial program, and then as John was outlining earlier, the size of the budget appropriations for FY2008, beginning October 1st. So I think there are certainly questions of appropriations, and the Senate and House are currently working through what that appropriated amount would be. That's number one.

Number two, I think touching on the rules of the program, I think that there has been really unanimous feedback to the DOE as part of their notice of proposed rulemaking that the current program does have -- it has problems in its rules. We provided feedback to the DOE in response to that notice. Our utilities and other parties were interested in the program also provided significant feedback, as well as the investment community. And I think they are -- hopefully, have received that information and are taking that into account as they're formulating the rules.

Do we qualify, which was part of your question. I think, yes. We believe that we qualify as both an advanced nuclear project, but also as an energy efficiency project due to the amount of power -- the lower amount of power that is required for operating the centrifuge technology as compared to the gaseous diffusion technology. And so we believe that we qualify under both aspects of the program.

The only thing I would add onto that program is it's also focused on fielding advanced technology, which clearly the technology represented in this centrifuge is far beyond anything that's been fielded anywhere else in the world.

To make the programmatic changes that you were suggesting need to be made, would that take Congressional action or is it just issues with the proposed rules?

They have the authority -- the Department of Energy has the authority to take the feedback from all of us and implement those in a revised set of rules. That's the reason they have the period to get input. I think certainly Treasury and OMB would also be involved with them, but the legislation that's out there today allows them to go take that input and revise the program. The biggest issue that you might have debate over would be the level, and that'll probably be the most important thing coming out of the deliberations this year would be the level of financing that would be supported.

Just my last question on this. Do you know what amount of preliminary applications have been filed?

Are you talking numbers?

Yeah.

I think that the DOE has -- on its website just noted that -- the total number of projects and applications they've received, I will tell you I don't -- I can't recall that number off the top of my head.

I can tell you it's a lot more than $2 billion.

Okay. Thank you.

As you would expect.

And our final question will come from Laurence Alexander with Jeffries.

Hi. Just one quick follow-up -- actually, two quick follow-ups. Is it fair to assume that your philosophy on the applications for the loan guarantees will be conservative on your cost?

Yes. That's a pretty fair assumption.

And also, in your experience, when competitors have added capacity in the U.S. market, or in other markets, how far in advance have they started pre-selling, and how far in advance would you like to pre-selling your capacity as it comes on?

I mean think historically, you would say -- and I think if you look at LES, they sold the output capacity for that plant quite a bit early. And then the market has changed drastically, and so -- I think for us the issue of when you pre-sell is when we feel we have the best position to take the utilities, when we understand the cost of the plant, the deployment schedule, all of those things, and retired much of the risk that we're dealing with while we're selling a test program would be the ideal time, I think, to go to the utilities. So I think it depends.

Bob, do you want to comment?

No. I think you captured it. I think that that very accurately reflects where I would come from.

Thank you.

Thanks.

And that will conclude today's question and answer session. For any additional or closing remarks, at this time, I would like to turn the call back over to Mr. Steve Wingfield. Please go ahead, sir.

This is John. Again, I'd like to thank you all for your questions this morning. I think as -- I appreciate you putting up with maybe a longer than normal briefing on our part to help bring you up to speed, but we really do appreciate your appreciation. We have a great deal of work ahead of us and we know it, and we are excited about the prospect both for the company and for the technology that we're fielding, as well as the industry in general.

Again, we thank you for your continued support.

That will conclude today's teleconference. We appreciate your participation. Everyone, have a great day.