Centrus Energy Corp (LEU) 2007 Q3 法說會逐字稿

Good day everyone and welcome to the USEC Inc. third 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 Mr. Steve Wingfield. Please go ahead, sir.

Good morning, and thank you for joining us for USEC's conference call regarding it's third quarter of 2007, which ended September 30th. 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, and Tracy Mey, Controller and Chief Accounting Officer. Before I turn the call over to John, I want to welcome all of our callers, as well as those listening to our webcast via the internet. This conference call follows our earnings news release issued yesterday after the markets closed.

USEC is making reference to nonGAAP financial information in both our earnings news release and on this conference call. A reconciliation of those nonGAAP 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 10Ks, 10Qs and 8Ks are available on our website. We expect to file our 10Q for the third 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 it 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 10K and subsequent quarterly 10Qs. Finally, the forward-looking information provided today is time-sensitive and is accurate only as of today, November the 2nd, 2007. This call is the property of USEC. Any redistribution, retransmission or rebroadcast of this call in any form without the expressed written consent of USEC is strictly prohibited. Thank you for your participation. And now I'd like to turn the call over to John Welch.

Thank you, Steve, and good morning to you all. Thank-- to discuss our third 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 my view of our business, the areas of specific Management focus and a status report on the integrated testing program of the American Centrifuge that we refer to as the Lead Cascade. We had a dynamic quarter, with a great deal of positive action on many fronts. It was a very profitable quarter, but it was also a quarter marked by wide swings in our stock price and high trading volume. Taking a look at the bottom line up front, we earned $45.6 million in the quarter, which was more than quadruple the amount earned in the third quarter of 2006. For the nine month period net income was $71.5 million compared to $66.1 million in the same period last year. When you take into account that the 2007 earnings are after approximately $100 million in expenses for the American Centrifuge, the results are even better.

We continue to focus on our near term profitability during this transition period from the gaseous diffusion plant at Paducah, Kentucky to the American Centrifuge plant we are building in Piketon, Ohio. We've also updated our outlook for 2007, improving net income and cash flow generated from operations reflects solid results from steps the Management team has taken since the summer of 2006. Our new guidance reflects improvement over our earlier guidance in both net income and cash flow from operations for 2007. John Barpoulis will cover that new guidance shortly during his report on financial results.

We reached an important milestone over the past several months. A successful initial phase of our Lead Cascade integrate testing program. As we reported extensively during our second quarter conference call, we built and individually tested a group of centrifuge machines during the spring and early summer. In August, we continued testing, leading to the operation of a Cascade of centrifuges ungassed, working together by the end of that month. In the week since our announcement that the integrated testing program is producing low enriched uranium, we have changed the Cascade configuration to alter flow rates and the number of stages. We have taken samples from the Cascade that demonstrate a range of assays of the uranium 235 isotope.

We are clearly pleased to see test results that we believe meet the October 2007 DOE milestone for demonstrating an ability to generate product assays in a range useable by commercial nuclear power plants. But we are even more satisfied to see the data from the test comes right on target with the predictions of our analytic models. This gives us even more confidence in the American Centrifuge technology we are working to deploy. The Department of Energy is completely aware of our progress and department officials have been on site to observe the Cascade in operation. The DOE will likely follow their past practice of having an independent team of nuclear experts review the results of the integrated testing program. And if DOE follows their best practice, they may not officially say whether the milestone has been met. Under the 2002 agreement that provided USEC with access to the American Centrifuge technology, we must notify DOE if we don't meet a milestone. In the spirit of good communications, we have typically notified DOE as we meet milestones.

We expect to continue these integrated tests for an extended period at a variety of operating conditions and Cascade configurations. The data collector from these tests will help confirm design parameters for the AC100 series machines that will be deployed in the commercial plant. While the Lead Cascade testing is progressing in Piketon, our American Centrifuge team in Oak Ridge is working to finalize the AC100 design. The work is focused on value engineering to help reduce the cost of the machine during high volume manufacturing by our strategic partners, as well as ensuring its reliability. Looking out a little further, we expect to deploy several dozen of the AC100 machines in the Lead Cascade in late 2008 and begin test operations in early 2009. As a reminder, our plan is to begin commercial operations in late '09, have a million (inaudible) online by the end 2010 and have all 11,500 machines of the initial phase operating in 2012. While this is a schedule with little slack, we are sharply focused on project management, doing everything possible to keep our capital costs in line.

We've also been involved in transferring knowledge regarding American Centrifuge technology to our strong team of strategic suppliers, which is made up of Honeywell International, ATK Composites, BWX Technologies and Fluor. That will continue, as we together-- as together we prepare manufacturing capacity for the classified components and fabrication of carbon fiber rotors. We will also transition the responsibility for rotor balancing to Honeywell. During the third quarter, we entered into a number of contracts, procured key components and materials for ACP and we expect to complete negotiations for additional contracts by year end. We now have contracts for carbon fiber needed to manufacture the rotors and for the outer steel casings of the machines. Our plan is for USEC and our suppliers to develop the manufacturing infrastructure and capacity to commence manufacturing AC100 centrifuges in late '08, ramping up the high volume manufacturing in 2010. 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 to lower the capital costs per machine.

As you know, USEC has been pursuing the possibility of U.S. Government loan guarantees for debt we would issue 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, this debt would have government backing, which would reduce the perceived risk in the financial markets for this unique project. In October, DOE issued final regulations for the program and invited 16 nonnuclear projects to submit full applications for a loan guarantee. To put this decision in context, the projects selected were substantially less costly than American Centrifuge and involved a variety of energy efficiency and alternative energy projects. We felt that the ACP 95% reduction in electrical power needed to produce nuclear fuel was a strong energy efficiency and air pollution reduction project.

Nonetheless, DOD-- DOE did not include ours or any nuclear projects in this initial phase of the program. We think we can make a strong case for American Centrifuge in the next round because of reliable domestic supply of nuclear fuel is important U.S. Utilities and the Government. The timing of the next round alone guarantees is uncertain and still requires some correct-- congressional action. We did find that the final regulations are a substantial improvement over the initial proposal for the loan guarantees. We are pleased that many of the concerns raised by USEC, the nuclear industry and the financial community were incorporated into the final regulations.

During this quarter, we also took a major step towards improving its prospects for the American Centrifuge program with our recent issuance of equity and convertible securities. The new regulations say a borrower must have significant equity in the project to qualify for the loan guarantee and clearly the money spent to date and the proceeds of the financing represent significant U.S. equity-- USEC equity investment. In fact, we believe our recent issuance of equity and convertible senior notes, along with cash generated from operations and borrowings under our bank credit facility, positions USEC to meet another milestone under our agreement with DOE. That milestone was a January 2008 deadline requires USEC to have a financing commitment secured for 1 million (inaudible) centrifuge plant.

The secondary that involves the U.S. government is the potential to re-enrich depleted uranium known as Tails. The depleted uranium of interest belongs to the Department of Energy and contains relatively higher amounts of uranium 235. We believe this project could be helpful to USEC, the Government and our utility customers who are faced with near term shortfall of natural uranium supply. The Government accountability office has been reviewing current law for several months to determine DOE's authority to transfer this material and its potential value. We understand that the GAO is expected to report back to Congress in the near term. Although the spot market price for uranium has been volatile in recent months, this depleted uranium is still a very valuable commodity. There are many details still to be worked out, but there is just too much valuable material left and some 25 million kilograms of depleted uranium to be ignored. Given that value, it seems likely that some kind of arrangement or contract will eventually evolve for the re-enrichment of those Tails.

Before I turn the call over to John, I'd like to give you my read on the progress our Company is making and how we are executing our plans. It's been two years since I joined USEC and during that time, the Management team has focused on reducing our risk profile on improving our overall financial performance. Let me quickly go through several key accomplishments year-to-date. First, our electric power contract with TVA. In June, we entered into a five year agreement that extends our relationship with TVA as our primary power provider. We have locked in our base power costs through 2012 with a fuel cost adjuster. This provides us with a better long term view of what we will pay for the largest component of our production costs.

Just as importantly, the agreement provides that USEC will purchase 2000 megawatts of electricity in nonsummer months for the first three years. This 25% increase in the amount of power delivered to USEC gives us flexibility in the operation of the plant. We can use the additional power to either underfeed the re-enrichment process and obtain additional uranium supplies for resale or we can produce more low enriched uranium. Right now the economics point to underfeeding and we will look to opportunistically sell uranium.

Secondly, we are improving the quality of future sales in our backlog. Our marketing and sales group has been meeting with customers to sell our product under our revised contracts that share risk with customers. We have been renegotiating contracts to improve terms for deliveries that will be made over the next few years. And we have begun talking to customers about longer term contracts for the output of American Centrifuge. We have found our customers have been very supportive of the ACP because it represents reliable U.S. based supply.

Third, we have continued to reduce our nonpower-related operating costs at Paducah to improve our gross profit margin. We have also kept SG&A costs in check. Throughout the Company, we've taken a number of steps to keep our costs as low as possible and collectively they have helped to improve our gross profit outlook, as 2007 progressed. These first three steps played an important role in the strong financial performance we turned in during the third quarter and has positioned USEC to do well over the next few years. Our goal is to maintain the profitability of our core business as we transition to American Centrifuge over several years.

Last, but not least, we are steadily reducing a risk profile to the American Centrifuge project. I am particularly pleased with our progress in this area. In the past year alone, we have entered into a long term leasing-- licensing agreement for the technology and establish a reasonable royalty payment to the Department of Energy. We've received a construction and operating license from the Nuclear Regulatory Commission for the plant. We've started major procurement of key materials and components of the centrifuge machines. We've initiated the Lead Cascade testing program and obtained results that we believe achieve the October 2007 milestone. And we've raised approximately $775 million that provides us with over $1 billion of liquidity for the next phase of the project deployment. We believe these very positive steps to improve our financial performance and reduce or mitigate risk will go a long way towards positioning USEC to obtain additional debt financing in the second half of 2008.

What I've come to appreciate over the past several months, especially in October, is that fluctuations in our stock price often appear to be driven by news events that are only tangentially related to the Company. We encourage our shareholders to evaluate this investment on the basis of our actions and our results. We are very pleased with our financial and operating performance thus far in 2007, as well as the results of the Lead Cascade integrated testing program. The market for our product remains strong and the nuclear industry that we supply continues to move towards a period of growth. We are certainly very upbeat about our Company's long term prospects. Now I'd like to turn the call over to John Barpoulis for a report on third quarter results. John?

Thank you, John, and good morning, everyone. I want to keep my report rather brief because we want to get to your questions. So I'll keep my report to the key points. We expect to issue our 10Q report later today, which will have substantial detail. I'm sure every CFO wants to have his or her Company judged over a longer term than one quarter, but with nuclear fuel, that is the nature of our business. Reactors are refueled on a 12 to 24 month cycle that can result in large quarterly swings depending on the timing and mix of deliveries. This year has been a good example of quarterly swings in the customer deliveries, their impact on revenue and why we think a longer term view of our results is appropriate. In the first quarter, we had SWU revenue that was 73% higher than the same quarter in 2006 followed by a second quarter with SWU revenue down 64% year-over-year and now in the third quarter we are reporting SWU revenue was up 44% compared to last year.

Starting at the top line for the quarter, revenue was $635 million, or $217 million more than the same quarter last year. Drilling down SWU sales made up the vast majority of the revenue at $484 million, an increase of $147 million, or 44% from the same quarter in 2006. SWU sales in the third quarter reflected 36% higher volume of customer deliveries and a 6% increase in the average price billed to customers. Uranium revenues are often related to SWU deliveries and uranium revenue was $102 million, almost 200% higher than the same quarter last year. Uranium volume increased 15% and the average price billed to customers was 159% higher. U.S. Government contracts and other was $49 million, an increase of $2 million, mainly due to increased sales by our subsidiary, NAC International.

Looking at the nine month period, revenue is a little better than in 2006 due to higher SWU sales. Total revenue for the period in 2007 is $1.311 billion up $6 million from last year. Revenue from SWU was $1.034 billion a 6% increase from the nine month period of 2006. SWU volume was down 2%, but the average price billed to customers increased 8%. We still see full year SWU volume coming in roughly 8% higher than in 2006. Uranium revenue was $134 million, a decline of $47 million, or 26% from the same nine month period of 2006. U.S. Government contract revenue was $6 million lower, reflecting reduced DOE contract work.

Turning to cost of sales for the SWU and uranium segment, there was a 47% increase in costs for the quarter, due to the higher SWU volume delivered and an increase in unit costs. Cost of sales for the segment in the nine month period was $19 million, or 2% higher than the same period last year, with an increase in unit costs being largely offset by declines in sales volumes. Cost of sales per SWU in the nine month period increased 8% 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 $110 million higher in the nine month period of 2007 compared to the same period last year, mainly due to higher cost per megawatt hour.

Gross profit for the quarter was $112 million, and $213 million for the nine month period, an increase of 115% in the quarter and a decrease of 5% in the nine month period compared to the same periods of 2006. Our gross profit margin for the nine months was approximately 16% compared to 17% in the same period last year. The major items below the gross profit line are advanced technology costs and our selling, general and administrative, or SG&A expense.

Advanced technology expenses, which are nearly entirely related to the American Centrifuge project, totaled approximately $31 million in the third quarter, an increase of $7 million quarter-over-quarter. In the nine month period, advanced technology expense was $100 million, a 41% 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 centrifuges used in the Lead Cascade test program.

In addition to the ACP expense, about $170 million related to the commercial plant was capitalized in the nine month period of 2007 compared to about $91 million capitalized in the same period of 2006. SG&A expense was $33 million in the nine month period of 2007, a decrease of almost $4 million compared to the same period last year. Much of that decrease was a result of a reversal of an accrued tax penalty and lower consulting expenses. This was partially offset by higher compensation expenses related to vesting of participants in our incentive compensation plans.

Bottom line, we recorded net income of $45.6 million, or $0.52 per share from the third quarter of 2007 compared to net income of $9.9 million, or $0.11 per share in the same quarter last year. For the nine month period, net income was $71.5 million, or $0.82 per share, compared to $66.1 million or $0.76 per share in the same period of 2006. As we noted in previous quarters this year, net income was improved by tax-related effects of the noncash reversals of accruals and accrued interest. In the nine month period, this totaled approximately $22 million. The investment we are 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 nine month period of 2007 by approximately $65 million, assuming a Federal statutory income tax rate of 35%.

USEC reported pro forma net income before American Centrifuge expenses of approximately $136 million in the first nine months of 2007 compared to $111 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 nonGAAP financial measure. As we move further into the construction phase of the American Centrifuge plant, a greater portion of the spending will be capitalized. Given this shift, we do not plan to report pro forma results to adjust for American Centrifuge expenses in 2008 and going forward.

Turning to cash, we had $775 million in cash on hand on September 30th, 2007 compared to $171 million on December 31st, 2006, and $48 million at the end of the second quarter. Cash used by operations in the nine month period of 2007 was approximately $104 million compared to cash flow from operations of about $153 million in the same period last year. The $257 million difference was due to a $91 million net increase in inventory reflecting increased production costs and the $127 million increase in accounts receivable in the third quarter following a high level of sales in September. The major factor that caused the increase in cash, of course, was the net proceeds from our issuance of common stock and convertible senior notes in September. This cash, along with access to a $400 million credit facility gives USEC over $1 billion of liquidity going into the ramp-up of construction on the American Centrifuge plant. This should provide us with ample liquidity well into 2009.

In yesterday's news release, we also updated our earnings and cash flow guidance for 2007. We have also refined our spending pattern for the remainder of the year for the American Centrifuge project. We provided details in our earnings news release, but I would like to highlight several items. Our projected total revenue is unchanged at approximately $1.91 billion. We expect the gross profit margin to be between 14% and 15%. That's a small change from the 14% gross profit margin in our August guidance, putting in a 1% change moves the gross profit by nearly $20 million.

Our guidance for the American Centrifuge project is for total spending of $300 million this year, and that's about $20 million less than the guidance provided in our second quarter call. Project spending will be split roughly between $135 million of expenses and $150 million in capital expenditures with the rest going to prepayments for specialty materials and new manufacturing facilities for building the AC100 series centrifuge machines. The amount of spending being expensed has not changed from last quarter's guidance, so that is not a factor in the net income improvement. We expect our selling, general and administrative, or SG&A expenses, to be about $3 million lower than our earlier guidance and that goes straight to the bottom line. Our earnings guidance for 2007 is for net income in a range of $80 million to $90 million. Taking into account our continued substantial investments in the American Centrifuge project, the pro forma net income before ACP expenses is expected to be in a range of $168 million to $178 million.

We also expect cash flow from operations for 2007 to improve over the previous guidance. We now expect cash flow from operations for the year to be in a range of $95 million to $105 million. The $70 million improvement is primarily due to the timing of customer collections in the fourth quarter, timing of payments to Russia and higher interest income. I would point out that our guidance does not include any potential opportunistic sales of uranium in 2007. Also, a note of caution on this guidance. Although we have firm orders from customers for the remainder of the year, movement of delivery dates in the final month can effect the period when revenue is recorded or when cash is collected from customers. We also have major procurement activities planned near year's end that could shift spending on the American Centrifuge project between the two calendar years. That concludes the financial results analysis and I'll ask the operator to prompt our callers for questions.

Thank you. (OPERATOR INSTRUCTIONS) Our first question will come from Laurence Alexander with Jefferies & Company.

Good morning.

Good morning, Laurence.

I guess two questions on risk management. There's been much discussion in the press recently about Tenex looking to possibly renegotiate some of the contracts associated with the bonds to megatons project, turn megatons to megawatts. Is there a opportunity in there for you to reduce the Tails assay component of your agreement with Tenex?

I think one of the things to think about, Laurence, this is John talking, is we don't believe that anything that goes on relative to -- and what you're referring to is the thought process that the Russians are looking for a better price for the uranium that they're selling to the--

Well but also they might look for a better price on the SWU and could you do a trade-off of the SWU price versus the Tails assay?

I don't think we're really -- typically we, we're right at the stage where we would finalize what the order would look like for next year, so we typically don't comment what goes into that. But there is the-- the first part is the formula where you're looking at the trailing indices to determine the price and in that discussion there may be an opportunity to look at that. But can't really comment where we are on that until we finalize the agreement with them.

Okay. And secondly, in term-- on the cost outlook for the (inaudible) for the American Centrifuge, how much of the total cost of the project is now contracted and firmly visible?

I think where we've -- I would say that we have very good visibility either through what has been spent to date. Our contracts are in place for probably about a $1 billion, $1.25 billion worth of the projected costs of the project. And on that portion of it, we have seen increased cost pressure in the range of 10% to 15%.

And finally, just so-- John, I'm not trying to get guidance on next year, I know you don't do that. As you think about the sort of contracts you already have in hand for SWU production at Paducah, what is the bias in margins compared to the contract that you've been executing on this year? As the mix evolves and the new contract terms roll in that you've been fighting for for a couple of years.

And again, Laurence, John Barpoulis, I appreciate your lead in there. We will-- we do expect to follow our historical practice of providing better insight and guidance into 2008 early next year, and so I think it's premature at this point to try to peel I think the onion on 2008 performance. I think we do expect to continue, as John has outlined, to be very focused on our near term performance, as well as keeping an eye on executing American Centrifuge. So as information becomes more detailed in the finds, we will let you know.

Okay. How do you feel about the quality of the mix?

Quality of mix in terms of customers, SWU, uranium?

And contracts, yes. Contracts and customers.

Yes Bob Van Namen here, we definitely are focused on the changing market conditions we're seeing. We've seen substantial increases in the market prices for enrichment and in our ability to get terms and conditions that meet the operating needs of the Company. So we do see older contracts continuing to roll off and the newer contracts taking up a larger portion of the overall deliveries and we're pleased with the direction that's heading.

Thank you.

Thank you.

Our next question will come from Mark Manley with Natixis.

Hi, good morning.

Good morning, Mark.

In the press release you mentioned that that you might expect to sign some additional contracts for the ACP before the end of the year. Can you give us a sense of what those might be?

I think the, the specific comment from John was that we have been in conversations with customers related to ACP contracts and I think--

Actually not customer contracts, but more so the construction and procurement-type contracts?

Oh, okay. I think and we can provide additional information in follow-up questions, but as we indicated in 8Ks released in August, we had signed agreements with respect to the steel casings for the centrifuge machines, as well as carbon fiber related to the machines. And as we continue to finalize the design for the AC100 machines, we do expect to complete additional procurements related to the machines later this year and early next year. As we finalize and advance the design for the balance of plant, we also do expect to enter into additional contracts related to that work as well.

And Mark, I think -- this is John. I would just add to that, is that through Fluor, who is the ACP contract, there's a lot of contracting activity that's going on for a lot of the infrastructure-type of activity and so some of that is ongoing. We typically haven't reported all those little contracts unless it's one of the bigger ones. But as we go down that path, then there's more and more significance to that, we would report it.

Okay. I was just trying to get a sense of what -- how you ramp up building one of these things. Well maybe I could--

John, do you have--

No, I think that in terms of expectations, in order to receive the centrifuges at the plant, there certainly needs to be a certain amount of infrastructure there--

Right.

And ready to receive. And so that certainly is the aspect of infrastructure that--.

I don't have the numbers and expected flow of those contracts at the tip of my tongue right now, but they're-- I know we've got those laid out and we have an expectation of when a lot of that's going to happen. I just don't have the details.

And with respect to numbers, I think we continue to provide the sense for 2008 that we're expecting to spend somewhere roughly in the neighborhood of $600 million on American Centrifuge next year, so that's reflecting a very significant step up in spending.

Right, right. Okay. If I could just switch to the Tails processing, what's the capacity, would you say, to process Tails, and where is that at Paducah?

Bob Van Namen here, I can talk qualitatively on that. We do have the additional tower that John mentioned in his discussion, the upwards to 2,000 megawatts, there perhaps is still some additional upside if we're able to find economical power to go above 2,000 megawatts. As you do strip the uranium harder, you do run into some efficiency issues and some trade-offs on your overall tool operations, so our -- it really is an economic question of the price of power, the relative price of SWU and the price of uranium that we do the internal optimization on.

So it's a -- we are happy with where we are now, again, keeping ourselves in balance with the HEU deal and generating additional uranium to be able to sell opportunistically into the market. We do have the ability also to process the DOE Tails, either using a portion of the nonsummer capacity that we have or going above our 900 megawatt operating level during the summer to strip the DOE Tails.

But in terms of gas to fusion equipment capacity, that's there, and so like the limiting factor is more the power than the gas fusion?

Yes, that is correct.

Okay. I'll drop back in the queue and come back for more.

Okay, thank you.

Thank you.

Our next question will come from Albert Kabili with Goldman Sachs. And sir, your line is open.

Yes, good morning, guys.

Good morning, Albert.

Quick question, John, on-- as you've seen the Lead Cascade operate now for a couple of months, as you look at your ultimate vision for the American Centrifuge projects ultimate reliability performance, efficiency and costs, where along the curve are we versus that ultimate view? Are we 80% there, 60% there?

Well I wish I had that exactly down. I will tell you that, that we had six major objectives that we had a Lead Cascade and some of them were focused on the-- just getting our operators familiar with operating in that kind of environment, you're taking the machines up and down a lot. So there's a tremendous amount of training that's accomplished in that. We're also-- we're very much looking at the interaction between machines, without creating instabilities that may cause an issue. So as far as the objectives that we were looking to get out of the Cascade operatings, we met all of those. So from that standpoint, I'd say we're very happy with what we've been able to demonstrate with that.

And in parallel, we continue to do testing of the improvements down in Oak Ridge, that we're doing in Oak Ridge that are going after more of the value engineering continuing to drive costs down to that. So I would say that we're pretty much on the plan that we laid out a year ago, but we have quite a bit of that kind of operational testing, whether it's back in the Lead Cascade or on the individual machines. A fair amount of that plan to continue in 2008. Looking at a machine design freeze at the end of the first quarter and then those AC100 machines will come up and be operating the Cascade by the end of the year.

So it's hard for me to -- are you 80% of where you would want to be? I mean from a schedule standpoint for the test program, out of Lead Cascade, we're right where we want to be and we still have testing to go on down in Oak Ridge. No we're probably won't be able to answer that question until I-- we start to see more of the test results that come out of that. But so far, we're quite optimistic that we're accomplishing exactly what we set out to do.

Okay, and it looks like with your recent deals, for example, Korea [Hydrate], seems like you're still selling the gas to fusion capacity. When do you start shifting over to selling ACP capacity?

We are in the process of doing that now, Al. We are engaging customers as we speak, talking about ACP supply, we are definitely focused on the transition issues that we have to come through going from gaseous diffusion and HEU supplied to the American Centrifuge and evolving the contract model to meet the needs of the American Centrifuge. But with the feedback we are getting is being very supportive of ACP and we're looking to go through the next six to nine months accomplishing that contracting and then being ready to support the debt needs that we have in 2008 for issuing additional debt to support the project.

Okay, got it. So if I understand it right then, within six to nine months, we can start seeing some contracts?

Yes, that is correct.

Okay, and then final question. There's been talk in the press, GE announcing a potential new centrifuge plant in 2012 and potentially selling SWU to some of your customers. Could you comment on that and what kind of a threat that represents to you?

We don't comment on our competitors' projects specifically, although I will say that we do know quite a bit about Silex and perhaps it does have a role substantially down the road in the marketplace. But if I could just take a minute to talk about the dynamics in the marketplace that Silex and Areva and LES are looking to fit into, it is a global market, is the first point to make. We get about 60% to 65% of our revenue from the U.S., 30% to 35% from Asia and 5% to 10% from Europe. Transportation is not a major component of the overall cost of nuclear power. The most important factor is really a stable regulatory and political platform for the facility. As we look out to 2010 to 2020, we are going to be taking 7 to 8 million SWUs of gaseous diffusion economic capacity out of the market, 5.5 million SWUs will be going away from the HEU deal and another 7 to 8 million will be going away as the French bring down their gaseous diffusion operations.

At the same time you're looking at solid demand from existing plants, you're looking at new reactors, such as the two reactors just announced by TVA at [Belafont], and the two reactors that NRG is looking to build in Texas, as well as substantial growth in markets like China, India and South Africa. So while we're seeing over 20 million SWUs worth of capacity come out of the market as we transition to an all centrifuge supply, World Nuclear Association predicts the growth in enrichment demand to be going from 40 to 45 million today to perhaps 60 to 75 million in their reference in upper case scenarios. We think even with the projects that are being considered and announced that we do have a strong opportunity for not only the first 3.8 million SWU of American Centrifuge, but perhaps for several increments beyond that and many of these projects are predicated on that new demand emerging in the marketplace.

Okay. Great. Thank you.

Thank you.

Our next question will come from Jefferson Companies, [Brett Levy].

Hey, guys. Most of my questions have been answered. I guess my only question is, as you guys look to the second half of '08 and raising some more debt capital, you got to be troubled with the sort of the divergence between kind of the market's receptivity to you, both from the debt and equity side and where the rating agencies are/ Is there kind of a plan to get the rating agencies -- because you're at CA2 CCC flat, well, well below investment grade and yet other aspects of this project seem to suggest a substantial amount of value. Is there, like, a plan to kind of show the rating agencies through some education process, where you guys can get to before you raise the money before you go out into the market, or does it just not matter to you?

No, absolutely, Brett. It matters to us and it's very important to us. I think as John outlined in our prepared comments, we are very focused on the risks in the business and the rate of improving our long term credit profile. And so over the next year, as we look to finalize the design for the AC100 centrifuge, advance the design for the balance of plan to supporting systems, we expect to complete our advised bottoms up estimate for the cost to complete the American Centrifuge plant. And as Bob outlined, we also expect to enter into contracts with customers for the sale of SWU output from the American Centrifuge plant. And so we are very focused over the next 12 months to be reducing the risk profile in our business, improving the overall credit profile.

As I've said before, when you look at nuclear fuel and nuclear power plants, you can't get more base load than nuclear, and that really does lend itself to longer term contracts in greater certainty in the overall credit profile in the business. And so as we look to evolve from a gaseous diffusion plant that has higher operating costs to an American Centrifuge based, enrichment production facility that has lower operating costs, I think on the whole, it looks to improve the overall credit profile of the business and so that's our focus. We certainly expect to spend time with the rating agencies, with our investment banks, as well as with the DOE related to the loan guarantee program.

All right. Thanks very much, guys.

Thank you.

Our next question will come from Fadi Shadid with Friedman, Billings, Ramsey.

Hey good morning.

Good morning, Fadi.

Couple of questions, the first one is on the ACP release, the update. Just to clarify, you talk about you say you expect to deploy several dozen AC100 machines in late '08 and begin to test operations in early 2009. My question is how is that different than the test operations now? I thought at that time we should be constructing rather than testing. What's the difference?

Well, now the AC100 machines would have the improvements that we're doing for the producibility, value engineering improvements to the machine to get to our target costs on the machine. So we'll want to put those in a Cascade. We will -- and in that process, we will start manufacturing. Those machines will be manufactured by our suppliers, and the idea of a bigger Cascade is really just that we're going to be coming off a production line. We're going to put it in and we'll put a series of them, probably several dozen on the Cascade operation and then the rest of them are are going into the plan itself. So it's indicative of we'll want to operate in the Cascade the final machine and it's really those machines will be part of the commercial plant when done. But an idea that we're going take some of those early ones and put it into a Cascade configuration in a small Cascade. And in the operational plan itself the Cascades are likely to be much bigger.

Okay. So there's -- the testing you're doing now is not the finalized the AC100 design, we're still going-- in early '09 we're going to have this final design that we're going --

That's the AC100. Again we're-- the-- we have a prototype machine that's in the Cascade right now that we've been running since late August, still going over the plan to continue to run that for different testing activities through the - into '08 and we'll be verifying some of the improvements as they come along down in Oak Ridge, but we'll continue to do that. And then what we're doing in Oak Ridge is the finalization of the production machine. That is the cost effective machine that we will take into production. That's the AC100 and some of those machines will lock that design down by th end of-- probably by the end of the first quarter and start to take that into production. Some of the early machines that come off that production line will go into a Cascade but that will be when our suppliers are doing their slow-- their ramp-up in production activities for full rate production.

Okay, okay. Another question, you started out this year with, about break-even guidance and now you're up to almost $100 million in net income. And a big part of that is underfeeding opportunities it seems in the uranium sales. And so my question is the sustainability of that, the fact that you've been underfeeding, does that mean that there's not going to be a time where you have to, like, overfeed, where you're short uranium or it's not how it works? Is it -- how does it work from, like, quarter-to-quarter?

Well, I think -- why don't I comment on the improvement and let Bob talk about the dynamics. I think when -- just want to focus on one of your, the first part of your question on kind of the key drivers in our improvement in gross margin -- in bottom line results in gross margin, from the beginning of the year. I think it really has been the result of focus in every element of the business. It is not just uranium. And so when you look at our enrichment segment, it is from both improvements on the uranium and the smooth side, especially in SWU prices and that as a result, as Bob alluded to in the work that we have done both on our backlog, but also with respect to the realization of market-related components and other components in the newer contracts as they begin to become a bigger piece of our overall sales. Within the government services segment, we also had improved gross margins.

On the operating side, the gaseous diffusion plant we continue to see improvements in nonpower operating costs. And as John alluded to, we're keeping SG&A in line and we also did have some of the related impact within (inaudible) from tax standpoint that was there. And clearly as part of that, we did have some spot sales of SWU during the year less of uranium. And so it really is, in terms of the improvement in our guidance, it is a reflection of improvements across the board. Now, I think with respect to longer term, again, we'll provide a better clarity on our 2008 guidance next year. We do expect to continue, as we said, to be pinched by higher power prices in the near term, as we aim to transition to American Centrifuge. Bob?

Couple of additional thoughts on the operations and marketing side. We do see, with the 2,000 megawatts of power for the next three years, our ability to use that power either to underfeed or to produce additional SWUs and continue to meet the customer demand on the SWU side. So the position we see ourselves being in is not being short of uranium, but actually being able to take advantage of some of the uranium opportunities. It is a very volatile market for uranium, so we are looking at this very opportunistically, again, as our customers' SWU demand needs evolve and the uranium market changes, we will be fine tuning the operations to take advantage of those. But as we have this additional tower, we do see it as a continued opportunity.

Okay. So I mean it's more of underfeeding opportunities rather than being short uranium?

Yes.

Okay, good. And just one accounting question. What would be, for '07, the like the diluted share count, just for our models?

Through the third quarter, it's about a penny difference because you're taking a weighted average look at the convertibles and we only had about three days in the third quarter.

How about like the fourth quarter and for the whole year, diluted share count given the capital raise?

I think that ultimately, again, we will have the greater impact of the, of the common offering reflected in that, in that diluted share count.

I'm just saying how many million shares will it be for the fourth quarter, or for the whole year you would expect it? Like the average weighted.

I think again, it was 23 million shares of additional shares issued. Expect somewhere in the mid-90s is my expectation on the weighted average basis.

Okay. Thank you.

Sure.

We have time for one more question. With that we will take a question from Mark Manley with Natixis.

Hi, thanks for the follow-up. Just a-- what was the uranium inventory and can you give me a sense of how much uranium was produced opportunistically in the third quarter?

I think with respect to-- we don't get into the specifics on uranium sales or value. I think the comments that we've certainly made in our guidance is that our guidance for the remainder of the year does not include the results of any opportunistic sales of uranium. So again, the guidance reflects improvements in our core business, but again, to us those are additional sales that we could make and to the extent that we do, that would be reflected in our results.

But historically, you can't give me a sense of how much you might have, or rough sense of how much might have been done in the third quarter?

No, and I think the -- what I could say is that for the most part any uranium sales this year have very much been reflective of what we had included in our original plan, reflecting some changes in market prices and very much some longer term contracts that we've had over time.

Okay. Do you have the inventory number for uranium, usually that's in the Q usually, right?

Dollar value--

Order of comps are market is what's usually in the Q. I think I'd just encourage you to take a look at the Q when it comes out. We'll have the additional information there.

All right, thanks very much.

Okay. Thank you.

At this time, I'll turn the conference back over to our presenters for any additional or closing remarks.

Well I guess just in a quick summary, thanks for your questions this morning and we really do appreciate your participation. In summary, we had a strong quarter financially and I continue to take my hats off to our employees for their hard work to deliver much better results than we expected at the start of the year and that has, as we've described, is across the board. In the no good deed goes unpunished category, we still got a lot ahead of us and you know that, and we're excited about the prospects for the Company and for the industry, and we look forward to the challenges ahead of us. And we thank you for your continued support.

And that does conclude today's teleconference. Thank you all for joining. Have a wonderful day.