Centrus Energy Corp (LEU) 2007 Q4 法說會逐字稿

Good day and welcome, everyone, to the USEC Inc.'s fourth-quarter and 2007 earnings results conference call. Today's call is being recorded.

With us today from the Company are 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 session.

Now, I'm pleased to turn the meeting over to Steve Wingfield.

Good morning. Thank you for joining us for USEC's conference call regarding its fourth quarter and full year 2007, which ended December 31.

With me today are John Welch, President and Chief Executive Officer; John Barpoulis, Senior Vice President and Chief Financial Officer; Bob Van Namen, Senior Vice President; Phil Sewell, Senior Vice President; and Tracy Mey, Controller and Chief Accounting Officer.

Before turning to call over to John, I'd love to welcome all of our callers as well as those listening to our webcast via the Internet.

This conference call follows our earnings news release issued yesterday after the markets closed.

USEC is making reference to non-GAAP financial information in both our earnings news release and on this conference call. A reconciliation of these non-GAAP financial measures to the comparable GAAP financial measures is contained in the earnings news release. That news release is available on many financial Web sites, as well as our corporate Web site, USEC.com.

I want to inform all of our listeners that our news releases and SEC filings, including our 10-K, 10-Qs and 8-Ks, are available on our Web site. We expect to file our 10-K for 2007 later today. A replay of this call also will be available later this morning on the USEC Web site.

I'd like to remind everyone that certain of the information that we may discuss on the 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 10-K and subsequent quarterly 10-Ks.

Finally, the forward-looking information provided today is time sensitive and accurate as of today, February 26, 2008.

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. Now I'd like to turn the call over to John Welch.

Thank you, Steve, and good morning to you all. Thank you for joining us to discuss our 2007 results.

John Barpoulis will provide a detailed review of the financial results in just a moment. Before that, however, I want to give you a status report on the American Centrifuge project. I also want to outline the areas specific for management focus in 2008. We have a lot to cover and I want to leave plenty of time to your questions, so we will jump right in.

Taking a quick look at the bottom line upfront, we earned $25.1 million in the fourth quarter and $96.6 million for the full year.

Last February, when we held this call, we were projecting a small net loss for the year. We were able to significantly improve the results as the year went on, thanks to hard work by the people at our Paducah plant to cut production costs and a five-year power purchase agreement with TVA that gives us additional production flexibility. When you take into account that our 2007 net income is after $126 million in expenses for American Centrifuge, the results are even better.

As we go forward, you'll see a strong management emphasis on maintaining our profitability over the next several years, as we transition the gaseous diffusion plant at Paducah to the American Centrifuge plant we're building in Piketon, Ohio.

In addition to our earnings release, we also issued an update yesterday on our continued progress with the American Centrifuge project. I'm sure that, for many of you, the take-away was that the price tag for the plant has gone up substantially. Let me give you my views on our American Centrifuge achievements in 2007, the factors underpinning the cost escalation, and the steps we have ahead of us.

In many ways, 2007 was a year of accomplishment for the project. The United States Nuclear Regulatory Commission issued a 30-year operating license for the American Centrifuge plant. We began construction on the plant in May. Over the summer, we assembled and tested a group of American Centrifuge prototype machines and began operating them in a closed-loop Cascade in August. The lead Cascade integrated testing program continued into the fall, achieving a list of objectives we set. We also met an important milestone under our agreement with the Department of Energy. As we previously reported, the Cascade operation generated product assays in a range usable by a commercial nuclear power plant.

We gained an enormous amount of information about the machine, the machine interaction in the Cascade, and verified that Cascade performance under a variety of operating conditions. This information is being factored into the design of the AC100 machine.

In addition to the milestone regarding the lead Cascade operations, we met two other milestones with the Department of Energy in the past year. We began plant construction, and we arranged for financing for a 1 million SWU plant. The proceeds from the issuance of equity and convertible notes last September, combined with an existing credit facility and cash flow from operations, were more than sufficient to meet that milestone.

The Department of Energy is completely aware of our progress, and we hold regular coordination meetings. However, DOE is not obligated to tell us whether they agree that the milestones have 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, but we typically give them notice as we meet each milestone.

In parallel with our Lead Cascade testing program in Piketon, our American Centrifuge team in Oak Ridge, Tennessee is working to finalize the AC100 design. Improved components have been tested and the initial design release for the AC100 machine is slated for the end of March. We and our strategic suppliers will use the specifications from this design release to begin making various components and test [fees] variety of operating conditions at our Oak Ridge facilities over a six-month period this year.

We have also been involved in transferring knowledge regarding the American Centrifuge technology to our strong team of strategic suppliers, which is made up of Honeywell International, ATK Composites, Babcock and Wilcox, Fluor Corporation, and Major Tool. Looking ahead for the rest of 2008, these suppliers will proceed with preparing their manufacturing facilities for the AC100. We've given them a goal of being in position to assemble and install a Cascade of 30 to 40 AC100 machines, based on this initial design release, in late 2008. We will then begin integrated testing of these machines in a Cascade configuration early next year.

The final design for the AC100 machines that we will deploy in the commercial plant will reflect any improvements that result from this testing program. We will continue our efforts to identify improvements in design, assembly and operations to lower the cost of the machine while ensuring its long-term reliability.

Even as these first machines are being deployed, as an enrichment company focused on reliable and competitive supplier, we will continue our research and development efforts. We believe the American Centrifuge machines have potential beyond the 350-SWU performance we have today. New computer-driven analytic capability and precision manufacturing methods provide USEC with opportunities to develop machines that are even more productive. Such improvements, however, would only be implemented into production machines when we determine that they can be introduced in a cost-effective manner.

Reaching our goal of an even more productive centrifuge will require additional research and development spending, which is expensed. We are seeking to maintain our technological advantage over the long-term.

One of the first steps I took as CEO was to order a top-to-bottom review of the American Centrifuge program from both a cost and schedule standpoint. After a lot of work and feedback from our suppliers, we established a target cost estimate in early 2007 of $2.3 billion. We called it a target estimate because it included goals for cost reductions through value engineering, and we recognized that we were very early in the design of the balance of the plant.

During 2007, we began the procurement process for various components of the plant in the Centrifuge machines. We saw variances develop between our target cost, baseline, and the bids we received. In September, we said the variances were about 15% greater than the target estimate. That helped to form our view at that time that a reserve for general contingencies of 15% to 20% was reasonable.

That brings us to today. Our spending and commitments to date have remained within that 15% to 20% contingency range, but as we negotiate with our strategic suppliers on commercial plant activities, we see clear signs that the overall cost of the ACP will be higher than we estimated. Moreover, we have not yet gained the cost savings we seek from value engineering.

I suspect that many of you are familiar with cost trends in construction and are not totally surprised by the higher cost. The energy trade journals are full of articles about substantial increases in power projects and nuclear power plants that are still on the drawing board. In a recent Energy Conference presentation, Cambridge Energy Research Associates said that construction costs for nuclear power plants were up about 40% in the past year.

Believe me, we're not trying to hide behind a bunch of excuses that construction costs are higher, but we are also not immune to what's happening in the energy industry.

We are re-creating an industrial base for uranium enrichment in the United States, and we're doing it at a time when steel, concrete, aluminum and especially skilled labor needed for this industrial base are experiencing big increases in costs, and we know our competitors are facing the same cost pressures as they build new enrichment facilities.

Here are the facts. We're in the midst of a bottom-up review and update of our 2007 target cost estimate. Because of the greater design maturity of the AC100 and the plant, the fidelity of the comprehensive budget that comes out of the review will be much better. We know the costs of the American Centrifuge will be higher than that 2007 estimate, and we are in tough negotiations with our suppliers to go through their proposals line by line. Our efforts to achieve significant savings through value engineering have not yet borne fruit, in part because we focused more of our resources in 2007 on the Lead Cascade integrated testing program than we had initially anticipated. When we finish this review in the second quarter, we will have a comprehensive project budget.

At this point, we believe that budget will be about $3.5 billion, which includes the $650 million spent to date through the end of '07 but doesn't include the cost of financing or financial assurance. We are negotiating hard to control these costs. This budget will have a refined work breakdown structure based on a much more advanced machine and balance of plant design. We will have completed the process of implementing cost controls and earned value metrics that are essential for effective project management.

In our review, we are also looking at the ACP deployment schedule. We are taking a close look at whether project risk and cost can be improved by changing the timing of the final design release for the AC100, when to begin manufacturing AC100 components for the commercial plant, and when to ramp up high-volume manufacturing.

So as a result of the review, we could slow the pace of one or more steps in order to lower the overall risk and cost of the project. Our management team is absolutely committed to keeping this project attractive for our investors and price-competitive for our customers.

Fortunately, the market for nuclear fuel is strong, and given nuclear power's clean air credentials, we expect to see many reactors built in the United States, and they already are being built around the world. We expect to see that over the next several decades. We see solid customer demand for enrichment that will be met by the American Centrifuge plant.

In an ACP-related personnel matter, Vic Lopiano, who has been the Vice President responsible for the American Centrifuge program, has decided to leave the Company to pursue another opportunity. Lopiano reported to Senior Vice President Phil Sewell. We expect to make an announcement regarding an interim replacement for Mr. Lopiano within the next week.

Several of our shareholders have asked for an update on DOE's loan guarantee program. We are pleased to see legislation passed in December that authorized up to $38 billion in loan guarantees for new energy projects. That authorization included about $20 billion for nuclear power projects and set aside up to $2 billion in loan guarantees for projects related to the front end of the nuclear fuel cycle. We believe that very much includes the American Centrifuge project.

As far as an update since the passage of that legislation, there's not much new to add. The Department of Energy is preparing a report on the loan guarantee program for congressional appropriations committees. Later this spring, we expect DOE to request proposals on the loan guarantee program. We will be ready to apply for the program a when that request is issued.

We believe the American Centrifuge project is an attractive candidate for loan guarantee program for a number of reasons -- 95% energy savings achieved by the American Centrifuge; the environmental attributes of nuclear power; our project already has its NRC license; we have a substantial equity in the project; and the plant is already under construction. Obviously, this is a competitive process, but we have an attractive package to present to DOE. We will keep you informed as the process moves forward.

Before I turn the call over to John, I'd like to give you a quick look at my to-do list for 2008. At the top of the list is crisp American Centrifuge execution. I hit many of the high points on that earlier -- develop a comprehensive project budget that we can manage and execute; move from a prototype machine to the AC100 series machine; develop the manufacturing infrastructure; and continued completion of the balance of the plant.

Related to ACP, we have begun a series of meetings with customers to discuss long-term contracts for [Fluor] production from ACP. We expect to sign a number of contracts in 2008, and these initial meetings have been going well. We will be looking to complete a substantial debt financing later this year and securing a backlog of contracts tied to the new plant is essential to that financing effort.

Second, as we expect to be operating at the Paducah plant for a number of years, we need to optimize our near-term core business. That means we need to continue to improve plant operations, find an optimal balance between producing LEU and under-feeding the enrichment process to obtain uranium that can be sold, make a decision in the next few months on an extension of the GDP lease, expand revenue opportunities for our government service segment, and work with the government to implement a high [assay tails] processing program.

Third is to develop a comprehensive plan for the next several years of transition from Paducah to ACP. This will include planning for the completion of the Megaton to Megawatt program, determining the timing for phase-out of commercial enrichment at Paducah, managing inventory as we add the output of the ACP to our existing streams of supply, and further developing our risk-management plan.

Fourth -- in close cooperation with the U.S. government, manage our relationship with Russia as a supplier and a competitor. As you likely have read, the U.S. and Russia signed an amendment to the Russian suspension agreement that provides a roadmap for direct Russians sales to U.S. utilities after the Megatons to Megawatts program ends in 2013.

At this point, I'd like to turn the call over to John Barpoulis for a report on the fourth-quarter financials. John?

Thank you, John, and good morning, everyone. We want to get to your questions quickly, so I will keep my report to the key points. We expect to issue our 10-K report later today, and its 125-plus pages have substantial detail.

Each quarter, I start my report suggesting that investors view our financials over a one to two-year period, due to the nature of the nuclear fuel business cycle. Reactors are refueled on a 12 to 24-month cycle, and that can result in large quarterly swings depending on the timing and mix of deliveries. As you can see with our 2008 guidance, that refueling cycle and the mix of customer deliveries can also caused swings in our annual results.

Starting at the top line for the quarter, revenue was $617 million or $73 million more than the same quarter last year. As is the norm, SWU sales made up the best majority of the revenue at $536 million, an increase of $174 million or 48% from the same quarter in 2006. SWU sales in the fourth quarter reflect a 33% higher volume of customer deliveries and an 11% increase in the average price billed to customers.

Uranium revenue was $29 million, about $106 million less than the same quarter last year, as both volume and price declined. U.S. government contracts and other was $52 million, an increase of almost $6 million, reflecting additional scope of work performed at the Piketon site under the [cold] shutdown contract with DOE.

Looking at the full-year period, SWU revenue was $233 million, higher than in 2006, due to higher SWU sales volume and average price. Total revenue for the period in 2007 is $1.928 billion, an increase of $79 million over last year. Revenue from SWU in 2007 was $1.571 billion, a 17% increase over 2006. SWU volume increased 8%, and the average price billed to customers increased 9%.

Uranium revenue was $164 million, a decline of $153 million or 48% from 2006. This is consistent with our long-standing disclosure that much of our original pre-IPO uranium inventory would be sold by 2007. U.S. government contract revenue was nearly unchanged at $194 million for the year.

Turning next to cost of sales for the LEU segment, for the year, cost of sales per SWU and uranium increased $124 million or 9%. That's in line with the increase in SWU volume.

As you know, under our monthly moving average inventory methodology, cost of sales reflects changes in production and purchase costs. The unit cost of sales for SWU increased 7% compared to 2006, mainly due to the higher cost of electric power for the Paducah plant that is working through our SWU inventory and to a lesser extent higher purchase prices paid to Russia.

Production costs were $157 million higher in 2007 than in 2006 with all of that increase attributable to electric power purchases. We bought more electricity under our revised agreement with TVA, and we paid more for it per megawatt hour.

Gross profit was $75 million in the quarter and $288 million for the year. That's a decrease of 34% in the quarter and 15% for the full year, compared to the same periods of 2006. Our gross profit margin was 12% for the quarter and 15% for the full year. That's a significant decline compared to the 18% for the full year 2006. There were a number of factors responsible for this margin squeeze, but the most significant were lower uranium sales and power and purchase costs that increased at a greater rate than our average prices billed to customers. But given that, 18 months ago, we provided guidance for a gross profit margin in 2007 of about 5% with an implied large net loss, our performance was much better than anticipated.

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 $27 million in the fourth quarter, a decline of $7 million quarter-over-quarter. For the full year, advanced technology expense was $127 million, an increase of $22 million or 21% over 2006. As John noted, this ramp-up in spending was related to our efforts to prepare and operate the American Centrifuge demonstration facility in the second half of the year and our continued development work at Oak Ridge related to the AC100 series of commercial centrifuge machines. In addition to the advanced technology expenses, about $119 million related to ACP was capitalized in 2007, compared to about $41 million capitalized in 2006. As we move forward with the commercial deployment of the American Centrifuge, the largest portion of spending will be capitalized.

SG&A expense was $45 million in 2007, a decrease of almost $4 million compared to the previous year. Much of that decrease was the result of a reversal of an accrued tax penalty and lower consulting expenses. This is partially offset by higher compensation expenses related to the vesting of participants in our incentive compensation plans.

Bottom-line, we recorded net income of $25.1 million or $0.22 per share in the fourth quarter of 2007, compared to net income of $40.1 million or $0.46 per share in the same quarter of 2006. For the full year, net income was $96.6 million or $1.04 per share, compared to $106.2 million or $1.22 per share in 2006. As we noted in previous quarters in 2007, net income was improved by the impacts of non-cash reversals of prior income tax-related accruals of 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 2007 by approximately $82 million, assuming a federal statutory income tax rate of 35%.

USEC reported pro forma net income, before American Centrifuge expenses, of approximately $179 million in 2007, compared to $173 million in 2006. 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.

As we move further into the construction phase of the American Centrifuge plant, a greater portion of spending will be capitalized. Given the shift to capitalizing much of the ACP spending, we will not report pro forma results to adjust for American Centrifuge expenses in 2008 and going forward. We will continue to report the amount of advanced technology expense related to ACP and the impact on net income can be easily calculated.

Turning to cash, we had $886 million in cash on hand as of December 31, 2007, compared to $171 million on December 31, 2006. Much of this cash balance reflects the $775 million in net proceeds of the equity and convertible debt offering completed in September.

Cash flow from operations in 2007 was approximately $109 million compared to the cash flow from operations of about $278 million in 2006. The $169 million difference was due to smaller reductions in inventory year-over-year, reflecting a reduction in SWU and uranium quantities, offset by increases in average prices in inventory for both SWU and uranium. This cash, along with access to a $400 million credit facility, gives USEC over $1 billion of liquidity. This should provide us with ample liquidity through 2009.

In yesterday's news release, we provided earnings and cash flow guidance for 2008. We attempted to provide a detailed view of revenue and a gross profit range, several factors that could affect our net income guidance, and other metrics. The guidance is fairly detailed, and I would like to highlight several items.

Our projected total revenue is in a range of $1.7 billion to $1.78 billion, which is down year-over-year, mainly due to a 15% to 20% reduction in SWU sales volume. I often point out on these calls that our business is rather lumpy, and this is a good case in point.

A majority of our customers refuel their reactors on an 18-month or 24-month cycle. We've typically sold between 10 million and 12 million SWU, and you can see the impact of that swing in deliveries on our SWU revenue line looking back a few years. We were at the low end of that range in 2004 and at the high end of that range in 2007.

Because of the long-term nature of our contracts, we have decent visibility into our revenue over the next couple of years. As we look at 2008, we expect one of those low-tide years, but that SWU deliveries will rebound in 2009.

Uranium revenue is anticipated to be nearly flat compared to 2007. Volume delivered will likely be down, but the average price billed to customers is expected to be higher.

One wild card here is the timing of revenue recognition. While we have an informed view of when deferred revenue related to uranium sales might be recognized, based on when the LEU should be delivered to our customers, the actual timing is uncertain. An increase in uranium revenue would improve gross profit margins.

In recent years, we've been focused on how higher power costs would affect gross margins. With the five-year power agreement we signed with TVA in 2007, we now have relative stability in that cost line year-over-year, and the power price increase from 2007 is modest. We remain subject to fuel adjustment provisions of the agreement.

The price we pay Russia in 2008 under the Megatons to Megawatts contract, however, will increase by about 10% from 2007. The purchase price is set under a multi-year retrospective view of global market prices. While we benefit from the strong improvement in market prices over the past several years, the price we pay Russia is increasing at a faster pace than the amount we collect from customers, which puts pressure on our gross profit margin. We expect the gross profit margin to be roughly 13% to 14%, compared to the 15% seen in 2007.

Our guidance for the American Centrifuge project is for total spending of $650 million to $700 million this year. That's a little higher than our previous guidance for 2008 ACP spending, and reflects the ramp-up in the program that we described in the separate American Centrifuge update we issued yesterday. Project spending will include approximately $125 million of expenses with the rest attributable to capital expenditures and prepayments for specialty materials and new manufacturing facilities for building the AC100 centrifuge machines.

We expect our selling, general and administrative or SG&A expenses to be about $55 million. While SG&A expenses are anticipated to be higher than in 2007, last year's total reflected a credit from the reversal of a previously accrued tax penalty.

Our earnings guidance for 2008 is for net income in a range of $25 million to $45 million. That's a fairly wide range to start the year, but it reflects the range of revenue and gross profit margin. As the year progresses and we get better insight into customer deliveries and deferred revenue recognition, we will update our guidance.

Also, please review the list of factors that can affect net income that we included in our earnings press release.

Looking at our cash flow guidance, we expect cash flow from operations to be a negative $60 million to $80 million. That of course includes the amount of ACP spending that we expensed. The other factors that are swinging cash flow from operations to negative are higher disbursements for electric power as we build LEU inventory for 2009 deliveries and increase purchase costs to Russia.

Looking out a little further, we expect cash flow from operations to improve significantly in 2009. For example, about 15% of SWU sales volume in 2008 will be delivered in December. That means the cash will be collected in early 2009. As I mentioned earlier, we expect SWU sales volumes in 2009 to return to the levels we saw in 2007, and average prices billed to customers should improve. Those two factors will drive cash flow from operations. That also illustrates the cash flow may move between years based on the timing and mix of customer deliveries.

So, to summarize, our financial results for 2007 were far better than our initial review for both earnings and cash flow from operations. We have excellent liquidity for our American Centrifuge project and other financial requirements well into 2009. Our guidance for 2008 is down from our 2007 results but is consistent with the cycle of our customers' fuel needs tied to refueling reactors on an 18 to 24-month cycle. Looking ahead, we see stronger sales in 2009.

That concludes my report. I will ask the operator to prompt our callers for questions.

Thank you, gentlemen. (OPERATOR INSTRUCTIONS). Albert Kabili, Goldman Sachs.

This is [Gabby Biss] filling in for Al today. I just had a couple of quick questions. First, you mentioned in the call that, in September, you provided us with some estimates on the costs associated with ACP. It came into about $2.7 billion with contingencies. Now you're seeing these costs closer to $3.5 billion. Could you run us through some of the key drivers and provide us with more color behind this big increase? Is it mainly the commodity cost pressures that you're seeing?

Secondly, are you thinking about any kind of contingency to these estimates? I just want to figure out how big the difference will be when you give us another update in the second quarter.

This is John. I will take a shot at that. I think you correctly surmised that in the fall, we had said $2.3 billion and that a 15% to 20% contingency was appropriate at that time. That was really, as I mentioned in my part of it, was what we were getting back as we were negotiating these contracts for certain parts of the project. That was reflecting some of that commodity pressure that you talk about.

So if you look at that, what you are really talking about, from that point of $2.7 billion to $2.8 billion to where we are today, there's about $700 million to $800 million worth of difference there.

Let me address what's driving costs higher in those areas. More than half of the increase is driven by a significant increase in expected EPC costs, both indirect and direct cost. That's primarily the fluoroscopal work. As I mentioned earlier, back when we did our target estimate last February, that was at a relatively low design completion of the plant. We are seeing an increase in labor hours, rates, engineering, home office support, construction management and direct fuel cost. As I said, that's about half of the increase.

We also see anticipated centrifuge machine manufacturing and assembly costs increasing in both direct and indirect costs related to project management supervision, G&A fees, direct labor hour rates and materials. As we mentioned, we have not been able to achieve the full value engineering that we anticipated in that activity, so where we are in coming to that estimate with a supplier is a much more conservative position until we have demonstrated that value engineering. That is potentially an area of improvement going forward, but for where we are right now, that makes up another major portion of the $700 million to $800 million.

We also expect some higher expected demonstration costs as we will work to finalize the AC100 design and continue to pursue value engineering improvements for the machine manufacturing cost.

To the greatest degree possible, for what we know today, we have, in that estimate that we're looking through now, accounted for the anticipated cost in specialty materials and things like that. Again, a lot of that is already under contract such as the Hexcel contract which covers all of the carbon fiber, so there is some escalation potential there but none of the big, dramatic changes that we experience in these estimates going forward.

So we feel a lot more comfortable about where we are in the cost estimate for several reasons, one being the design maturity of the machine, about 95% done, and the maturity of the plant design. We're really into what I would term -- we're full all the preliminary design [activation] and really into the detailed design activities, which a lot of that is just cranking the paperwork out to go do the actual refurbishment and build. So there's a lot more confidence in the estimate of today than there was, but the real cost growth and the surprising growth, quite honestly, from where we were in the fall was in those three areas that I went through.

Okay, thank you. You know, it seems like you guys have great visibility into 2008, so if I understand you correctly, you say it's going to be the cash flows and the deliveries are going to be more back-end loaded. Is that correct?

Yes, and I think that we're saying two things. One is that in the relative level of SWU deliveries in 2008, compared to 2007, will be lower, but also, as indicated, that there's a significant amount that is in the fourth quarter and in December. So that is, in terms of the delivery levels, that certainly impacts our expected revenues in 2008, but it is even more importantly impacting our current outlook for cash from operations. Again, important to reinforce there that the timing and mix of customer deliveries very much impacts our expected cash from operations. That could shift this year. We will let you know if things change.

Okay, and one final question -- in the press release on the ACP update, there's a comment that you guys make about AC100 design release will not meet you desired targets for machine costs and performance. Could you please help me understand what this means? Are you referring to the target output that it's not meeting your targets, or is it the reliability of the machines? How close are you to commerciality?

Okay, let me take a shot at that, and Phil will back make up -- keep me out of trouble.

We do anticipate that this initial design release will have a SWU performance of 350 SWU. There's nothing that has changed on that.

When we say this initial design release won't meet our targets for performance, we're really talking about performance other than SWU efficiency. We still need to validate and give ourselves confirmation that we have performance margin in certain operating environments and on a handful of components. It's a relatively small number but there is additional testing that will be required.

Phil, anything you want to add beyond that?

It's just that we will be continuing through Lead Cascade operations to prove out and validate these margins that we're looking for. We are in the process of Lead Cascade operations now, that we will put prototype components in as the year goes on. We will finalize design as we continue the testing of those components for the AC100 machine that we will then build and then a Cascade by the end of the year and operate in 2007 -- all of which -- 2009 -- all of which will be intending to validate the margins for those components that John referred to. So, 350 SWU performance is there. We're very confident of it, and we just want to make sure that we validate the margins that we need for all of the components.

Okay, thank you for taking my questions. I will jump back in the queue.

Mark Manley, Natixis Bleichroeder.

Back on the ACP cost estimates, I wanted to kind of drill down on how the numbers are calculated. How much of the estimate is based on assumption -- the new estimate of $3.5 million, based on assumptions of future material and labor price increases? Can you give me a sense of the sensitivities to that?

I don't have those specific numbers on that. John, do you want to --?

Mark, I think it's important to emphasize where we are in the cost estimate and our budgeting process. I think, just to reinforce there, we are negotiating with our suppliers on their respective scopes and costs for the American Centrifuge commercial plant. We are not done in those negotiations and we really plan to continue into the second quarter, at which time we will produce a project budget. So what we're trying to provide investors right now is our best current snapshot of where we are. We've published a number because of the material increase that we're seeing in our negotiations compared to our earlier estimates.

I just want to reinforce. As John mentioned earlier, our suppliers are working with much more detailed but not yet final designs for the machine and EPC scope, including balance of plant. Again, our key suppliers are working at a very detailed or breakdown structure level, and so as we have additional information, largely as we emerge from the project budgeting process, we will share I'm sure a greater level of detail on specifics.

Just to emphasize a bit, I mentioned earlier that carbon fiber is one area that we've tied down. We've completed the contract for all of the casings, so all of the steel associated with a casing is tied down.

It was about $500 million almost in contracts for materials and commodities.

Okay, good.

Maybe on those and on future ones, I kind of got the impression that a lot of your contracts were on a cost-plus basis for the moment, but it sounds like your carbon fiber and steel would be on a fixed-cost basis. You know, of the total, what do you expect to be cost-plus and could you sort of confirm the structure of the carbon fiber and steel contracts?

Sure. I think, as we described in our disclosures and in I'd say previous conversations, philosophically we're looking to migrate from -- you know, currently we're operating under cost-reimbursable type contracts, and we're looking to migrate more towards cost-plus incentives and/or fixed-price type contracts.

You know, two contracts I think that we issued [ATK] regarding back in August I think are good examples of how we are seeking to address commodity risk in the project. Again, the ATK excel contract with respect to carbon fiber addressed our carbon fiber needs for project rotors, and we're not subject to carbon fiber risks for that piece that had an inflation, a GDP-type of escalation component. So that is an example of how we're looking to address materials costs.

On the steel casings, that's an example where, within that contract, we do have steel commodity risk but when we place the order for the steel, that risk is addressed.

So I think those are examples of the I'll say the contracting philosophy. However, I think we can say that we don't expect to reach an agreement with our EPC contractor on a fixed-priced type of arrangement; we don't believe that's market-based on the feedback we received. So I think what we see there is that we expect to then therefore contract at a lower level in order to get to, again, address both commodity and other cost risks for the project. So you'll likely see more reports from us on additional contracts that we will be executing.

Phil?

The distinction there is between volume materials and labor. In volume materials, there's a lot more definition with respect to the cost, and we have that embedded in the contracting philosophy. With respect to the labor component for EPC and for the manufacturing, we're moving from originally cost contracts to cost-plus incentive to drive those costs down and provide incentive for all parties to hit the targets we're looking at.

Okay. Just finally, if I could ask -- in the press release, you talk about possibly extending the timeframe of the APC project and doing more value engineering to get costs down. We are looking at that as an option. What do you think the changes are of that, and how long might that get extended?

I mean, as you would expect, we're looking at how to most cost-effectively balance risk, cost schedule. You know as I've said to you all before, I said we're not going to do anything stupid in this thing. If a little more time of testing gets us -- retires risk and allows us to do better from a cost perspective, we will look at that very hard and do that trade-off. In that context -- clearly if you're going to go do something like that, you're playing that under the context of your overall business.

From where we are today to where we were in 2006 at looking at the viability of continuing to operate the Paducah plant, we're in a much different position because of our ability to under-feed, our ability to get a better price for the SWU that we're selling, our recent contracts that are reflective of that. Paducah provides a very good buffer, relative to a start-up of the American Centrifuge. So I think that description is sort of code word for, hey, when we come out with a budget on this thing, we will have also tried to have drawn it through a knothole of managing the risk side of the equation, looking at our overall business operation, and trying to put the most cost effective plan in-place. That's why, when I talked about two of my major objectives this year are deal with transition issues and start-up issues associated with ACP -- because we've got to play that out in the context of the entire business -- fortunately which is a lot better looking than it was right after we saw a 50% increase in power.

Okay, thanks very much.

Laurence Alexander, Jefferies & Co.

This is [Lucy Lofton] speaking for Laurence today. I just had a question about the contracts that you currently have in your backlog. All else being equal, would you expect SWU gross profit margins to be up or down in 2009 from 2008?

I think that we aren't providing specific guidance at this point for 2009. Clearly, in our outlook, we're trying to give our investors a sense for very important trends. So on the information that we're providing for 2009, I think SWU deliveries are up; we expect average prices under those contracts to be up. But as with respect to the cost side, we mentioned there that the costs for purchase prices from Russia are increasing. That is an area of uncertainty in terms of providing actual guidance at this point for 2009. Bob?

I have nothing to add there. (multiple speakers)

Okay. As you consider potential delays to the ACP project, are you looking to push back when you begin initial production in customer sales, or are you looking for more of a gradual ramp-up of capacity after the initial production comes onstream?

We're not at this point looking to change the schedule at all. I think, as John was mentioning, the overall cost and schedule are part of our project budget review and analysis.

I think two other very important factors are with respect to customer contracts and progress that we make there and also our overall detailed financing plans.

Tom Lewis, Century Management.

The first question -- you say, in your press release, that, in this year, you expect prices build to be flat with last year, which is a bit at odds with the trend of the way that your contracts roll through. Is that just a reflection of the mix of how those contracts are -- when those contracts -- that contracts underlying the deliveries were signed or is there something else there that causes this departure from an otherwise favorable trend in SWU build price?

No, I think -- Bob Van Namen here -- as John said, we're going to see prices continue to go up in 2009 but remain flat or a slight uptick in 2008. That is simply the way that the contract mixes have come. We're having a lower volume of deliveries so in 2009, we will read adding more of the new deliveries under the higher-priced contracts.

Okay. Have you gotten any closer to being able to determine what kind of depreciable life you're going to assign to your centrifuge units?

What we've said is that we're looking at a 30-year life for the plant. I think the lease is 36 years, all-in.

I think an important analysis that we're going through, Tom, is upfront versus operating costs and some different trade-offs that we're looking at there. So that I don't think will impact depreciable life but I think it will certainly impact upfront in the ongoing cost profiles.

Okay, so as I'm trying to think about how these cost increases affect the -- in your capital costs -- affect your production costs down the road. I'm thinking in terms of depreciation expense per SWU. I mean we all have to try to form our judgments there, and get a sense okay, so it's a couple hundred million more, how much does that move the needle? Should I think of the depreciation of a centrifuge or a -- not the whole plant, but on this sort of unit basis, should I think about the depreciable life of a centrifuge or perhaps even a component within that centrifuge as being something different than 30 years?

I certainly wouldn't look down at that level of detail. I can tell you that, since this is a relatively novel facility, for U.S. GAAP purposes, we are certainly working now on exactly how things should be depreciated. So you know, our thinking and our analyses around our accounting are evolving, so I think it's premature to provide a greater level of detail there beyond the 30-year.

Okay, and last question -- is there anything you can think about whereby these cost pressures that you face to build enrichment capacity, where a competitor, for whatever reason, might not be facing the exact same cost pressures?

No, we believe very strongly that the cost pressures we are seeing, our competitors are seeing, in fact perhaps more so with different currency impacts.

Brett Levy, Jefferies & Co.

Most of my questions have been asked. Can you guys talk a little bit? You mentioned that you're working on a debt financing plan later this year. Can you talk about sort of what markets you are looking at, what size you're looking at, what tenor, etc., just to tell a little bit around the objectives and the overall amount of debt that you plan on adding this year?

Sure. I think, first, I will start with our current liquidity status, which is very strong coming out of our securities offerings in the fall, thanks to our investors. We anticipate our investment in ACP will be funded with the cash we have on hand, which was over $880 million as of December 31. Anticipated cash from existing operations, we've got available borrowing capacity under our credit facility, and then proceeds from the debt offerings that you're mentioning.

I would reinforce our preferred path to raising the debt is through a DOE loan guarantee, but we are also pursuing or evaluating more traditional corporate approaches.

As we work to complete the project budget in the second quarter, we will also be working to advance our financing plan. We hope to be positioned to submit an application to the loan guarantee program if a solicitation for nuclear projects like ours is issued.

On the non-guarantee front, again we will be pursuing these in parallel. I certainly will be looking at market conditions, and certainly what makes the most sense in terms of our long-term capital structure, while also maintaining the flexibility to proceed with an expansion of the facility if market conditions warrant them. But as we refine our financing plan, we will certainly provide more information.

It's not something where you are prepared to say the size of the transaction at this point?

No, not at this point.

Peter Bonney, QVT Financial.

First, I'd like to say that I'm very disappointed with the upbeat tone of this conference call. You just announced an ACP cost increases, which is roughly equal to the entire market cap of USEC. This is, from my perspective, a major failure and I think you owe your investors an apology. The costs you cited as having changed have been increasing for a very long time at this point, and I don't believe that all of your labor and materials costs have moved 30% in the last two months.

I'm extremely unhappy with your failure to issue guidance on the size of the increase last year, despite repeated direct questions in other public forums, and I don't feel confident that we can believe the $3.5 billion figure.

My question is the following. You've spoken at length about project milestones and SWU per machine, but not as far as I'm aware about ROI or IRR. So first, I would strongly urge you to disclose your expectations for ACP's financial performance. This is a commercial enterprise and as investors, we have right to know whether ACP will provide a reasonable return on our capital.

Second, your press release alluded to the possibility of I think slowing down the rate of spending on ACP. Has the Board considered whether ACP still makes economic sense in light of your new cost expectations?

I will answer that in a couple of ways. First, I think that, if you think that this management team is happy about the expected increase in total costs, I think you're sadly mistaken. I think, as John outlined, we are negotiating very hard with our suppliers and we're looking at ways to drive down the costs, point one.

I think point two is any implication that our disclosures do not reflect our best judgment at the time is incorrect as well. As we have said repeatedly, we let our investors know how things stand when we know it. I'd like to reinforce there that we are in the middle of this process on building up this cost budget. We, frankly, struggled with exactly what kind of disclosure we should have. We are in the midst that process and our best snapshot at this point is the $3.5 billion.

I think the last point would be we are always looking at overall project economics, and I think there, to me, five key factors drive the economic view. It's construction costs; it's operating costs, financing costs and structure, our enrichment market pricing, and our competitive position. As we mentioned with Tom Lewis, we believe that all of our competitors are seeing similar cost pressures, and we believe that will result in upward pressure on enrichment market pricing.

We believe strongly in ACP, and we believe that it will have a place in the nuclear market. So Peter, I appreciate your comments and we will certainly factor that into our disclosure in terms of economic objectives going forward.

Have -- I mean, are you prepared to give any figure for what you expect the IRR of the project to be?

I don't think that it makes sense for us to be disclosing IRR targets. What I do think is -- what we've said is that we're certainly looking out for market-based returns.

Okay. I'm not sure what that means, but I would again strongly encourage you to find a way to come up with a disclosure on that front that you're comfortable with.

Okay, thank you and we appreciate it.

Baker Burleson, Fox Point capital.

I know you guys aren't thrilled with this call, but I appreciate all of the detail that you've been willing to give us. It certainly helps the evaluation easier; it makes the evaluation easier.

Anyway, my question is I just want to kind of doublecheck some math with you. If we are at $3.5 billion now for ACP and $615 million has been spent, there's about $880 million in cash, I get to about $2 billion-ish that you need to finish ACP. I know you guys have always said equity first and then debt. Is that still realistic at this point, with $2 billion to go, given the current state of the debt markets?

Yes, we're sticking with our plan and philosophy. I think the other very important piece of the capital equation is our expected cash from operations over the long-term over this time period. As John mentioned in both his prepared text and in an earlier answer, we're in a much different position there than we were a year and a half ago. We accomplished a lot in 2007. We also are providing a sense of 2009 with respect to revenues, and so that is an important factor in the capital equation as well. Clearly, we're still looking for the remaining capital to be debt, but as we go through this year and we refine that financing plan, we will let you know if that changes.

I just want to press you on that a little bit, John. I mean, I'm just trying to figure out. You've already got quite a bit of debt on the balance sheet. How much can you really put on? I mean, I understand there's a possibility of the DOE loan guarantee, but maybe ask it to you this way. As you talk to your bankers, is going to be an asset-based type facility? Would this be based on more traditional metrics like EBITDA? I'm just really struggling with how you get $2 billion in debt on this enterprise at this point.

Oh, agreed. Clearly, going down the non-government guaranteed path will result in some asset-backed secured financing. There's no doubt there. I think, given the strength of our existing operations, we certainly are looking at a more corporate approach to that. So on the whole, I will continue to be looking at debt; that is our plan. If that changes, we will let you know.

Okay. You've spoken a little bit about improved cash from operations, but as I look '06, '07, '08, cash from operations has been on a pretty steep curve downwards. What is there to make us think that that's going to get a lot better in '09, other than -- I know you guys have said it but what is there to make you think that trend reverses and that the legacy business produces enough cash to make a real dent in the $2 billion you need?

Well, I think there are two factors to the response. The first is one needs to look at the level of ACP expense and cash from ops; that's a very significant factor. So, one needs to back that out to look at the cash contribution from existing operations.

Understood.

Then on the second point, that is very specifically why we felt it was important this year to deviate from past practice and provide a sense for 2009, because of the trends that we see there in terms of revenue. That's a key driver. Also, that is why we gave more color around the cash that we are expecting around the end of 2008 versus early 2009, because that can change.

I got you. All right, good luck, guys. Thanks.

This does conclude today's Q&A session. Mr. Welch, I'd like to turn the conference back to you, sir, for any additional or closing remarks.

Once again, we thank you all for your questions this morning. We know in many ways we are dealing with a tough issue of cost increase. Again, from management's point, you know, we've been working very hard to operate the existing business in a way that adequately is reflective of what you should expect from us in how we manage the business and what we've been able to garner out of that. It certainly has helped us align our development of the project much better than what we were looking at a couple of years ago. We've worked hard at that. We continue to work very hard on a day-to-day basis at that performance. We're dealing with a very challenging project that we've got our best efforts and as good a team as we can assemble and we will continue to work with that.

The biggest thing that I would offer you in looking at this revised cost estimate is the level of design maturity for where we are today and much better knowledge and ability to project into the future. But none of us are happy where we are, but I do think, in many ways, it's reflective of the environment we're trying to deploy this plan.

So again, we thank you for joining us this morning and we look forward to working with all of you.

This does conclude today's USEC Incorporated fourth-quarter 2007 earnings results. We thank you all for your participation. You may now disconnect your lines.