Centrus Energy Corp (LEU) 2009 Q1 法說會逐字稿

Good day and welcome, everyone, to the USEC Inc. first-quarter 2009 earnings result conference call. Today's 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. Thank you for joining us for USEC's conference call regarding the first quarter of 2009 which ended March 31. With me today are John Welch, President and Chief Executive Officer; John Barpoulis, Senior Vice President and Chief Financial Officer; Phil Sewell, Senior Vice President; Bob Van Namen, Senior Vice President; and Tracy Mey, Controller and Chief Accounting Officer.

Before turning the call over to John Welch, 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 close. That news release is available on many financial websites as well as our corporate website, USEC.com.

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

I would like to remind everyone that certain of the information that we may discuss on this call today may be considered forward-looking information that involves risk and uncertainty including assumptions about the future performance of USEC. Our actual results may differ materially from those in our forward-looking statements. Additional information concerning factors that could cause actual results to materially differ from those in our forward-looking statements is contained in our filings with the SEC including our annual report on Form 10-K.

Finally, the forward-looking information provided today is time sensitive and is accurate only as of today, May 7, 2009. This property -- this call is the property of USEC. Any redistribution, retransmission, or rebroadcast of this call in any form without the express written consent of USEC is strictly prohibited.

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

Good morning and thank you for joining us this morning to discuss our first-quarter results. I will spend a few minutes reviewing our results at a high-level and John Barpoulis will provide more detail during his report. I will also address our progress on deploying the American Centrifuge technology and our current efforts to obtain funding through the Department of Energy Loan Guarantee Program. We also want to leave plenty of time for your questions. So with that, I will begin.

Taking a look at the bottom line, we recorded a loss of $2.1 million in the first quarter compared to net income of $4.4 million in the same quarter last year. SWU sales volumes were significantly higher, but our production and purchase cost also increased reducing our gross margins. In addition, expenses related to the American Centrifuge were $7.5 million higher than the same period last year, leaving us with a small net loss.

Even though we recorded a small loss for the quarter, our view of results for the full year has not changed. We reiterate our annual guidance for net income in a range of $25 to $50 million and cash flow from operations of $240 million to $275 million. Revenue for the quarter was up 47% year-over-year, which is roughly in line with our guidance for the full year.

As we noted throughout last year, our sales volumes was substantially lower in 2008 but we expect sales to rebound in 2009. A majority of reactors served by USEC are refueled on an 18- to 24-month cycle, so we are seeing deliveries scheduled in 2009 for many customers who refueled and purchased SWU from us in 2007.

On the cost side of the ledger, the price we pay Russia to purchased SWU will be 11% higher in 2009, the same increase that we saw last year. We purchase about half of our SWU apply some from Russia so this increase has a significant effect on our cost of sales.

We have signed a contract amendment with our Russian counterpart TENEX to adjust the pricing formula for the final four years of the historic Megaton to Megawatts agreement. The new pricing methodology is intended to enhance the stability of future pricing for both parties and provide us with better visibility in the future purchase cost through a formula that combines a different mix of price points and other pricing elements. US government has approved the change and we expect the Russian government will also consent to the change as it moves through their more lengthy approval process.

The other major cost component for our low enriched uranium segment is power, specifically the cost of electric power from the Tennessee Valley Authority. We have a contract until mid-2012 with TVA that provides moderate annual increases to the base price we pay plus an adjustment up or down based on TVA's cost of fuel and purchase power. This adjustment resulted in an 8% increase in fuel costs in 2007, but the price of generating fuels, particularly coal and natural gas, spiked in early 2008, sending the average fuel cost adjustment for the year up by 15% over our base price.

Fuel prices have been moderating in recent months but we still expect this fuel cost adjustment to continue to cause our power cost to remain above our base contract price this year. We have made certain assumptions about this fuel cost adjustment going forward but a fair amount of uncertainty remains.

Together these higher power costs and higher SWU purchase price paid to Russia will increase our cost of sales in 2009 at a rate higher than the improvement in prices billed to customers this year. The gross profit margin for the first quarter was 8% but we still anticipate a gross profit margin for the year of 10% to 12%.

The volatility in power cost is a perfect example of why we are so intensely focused on building the American Centrifuge plant. Today our largest cost of production is electricity but we can exert only limited management control over the price risk of power. American Centrifuge plant, on the other hand, will use only a small fraction of the power required by the current gaseous diffusion technology. We believe this lower power requirement should reduce our production costs and provide better operating cost stability.

Clearly we are making a large capital investment, but over the long term this fundamental change to our cost structure should significantly improve our gross profit margins and cash flow from operations.

Earlier this year, we announced that we were reducing the planned escalation of spending on the American Centrifuge project in 2009. That spending slowdown has allowed us to stretch out our cash resources and John will discuss our liquidity forecast during his report. Our plan called for 2009 to be a year when we would ramp up construction of the plant and prepare for high-volume manufacturing of the centrifuge machines.

Although we have slowed the planned buildup and buildout of the plant's infrastructure, we are still building, just not at the anticipated ramp-up levels. We remain focused on critical path items so that we will be positioned to accelerate construction activities once we gain greater certainty on DOE funding. Ultimately our decision to slow construction pending action by the DOE Loan Guarantee Program will increase costs and extend the schedule of the project.

We engaged our strategic suppliers to assess the potential impact on cost and schedule. The impact will greatly depend upon timing of any action by DOE and as we gain certainty on funding, we will be able to provide an update on cost and schedule.

I certainly don't want to leave an impression of doom and gloom regarding the project. We continue to see progress and success in a number of areas. Let me highlight a few. We expect to have a cascade of initial AC100 machines operational in the third quarter. We have many of the initial machines assembled, operating, and conditioned with uranium gas. Additional machines will be added during the summer until we reach 40 to 50 machines in lead cascade testing. These 40 to 50 machines are expected to operate into 2010.

This cascade is configured in a closed loop as required by our demonstration license, but otherwise will operate under commercial plant conditions well into next year. The machine components are being manufactured and assembled by our strategic suppliers as we help to create a world-class industrial infrastructure required for building these centrifuges.

We refer to our production centrifuge machines as the AC100 series design. Within that series we have finalized two design releases. The first was released to our suppliers in 2008 and that is the machine that is being assembled and operated and the cascade will operate this summer. We completed a second design release at the end of March, which we call the AC100 Mod 1 machine. We will continue to value engineer and improve the centrifuge design with a goal of reducing the cost of manufacturing and to simplify subsystems. Over time, this is expected to result in future versions of the AC100 series, Mod 2, 3, etc.

Our plan is to seek sustained improvement in centrifuge design that can be integrated into the plant. But I want to emphasize that as we build out the plant before we introduce a new version of the AC100, a design review board will examine any changes very carefully. They will determine if the improvements to performance or value engineering to reduce manufacturing costs justify a change. We will use a very disciplined approach and process before introducing improvements into the plant.

Given the continued uncertainty regarding the timing of the Loan Guarantee Program, we are still in the process of updating our project schedule and budget. We have said that our decision to slow spending on the project until DOE funding becomes more certain will have a negative effect on both schedule and cost. How much of an impact will depend on the duration of the slowdown in spending and whether further steps to conserve cash become necessary. We are working closely with our suppliers to evaluate and mitigate the potential cost and potential impact.

I want to make it clear that we do not expect to reduce spending in 2009 on our critical near-term items including the lead cascade test program, AC100 design, and value engineering. We actually spent more on ACP in the first quarter of 2009 than we did in the first quarter of 2008.

We continue to meet frequently with the staff of the loan guarantee office. Slowly but surely I think we are making progress towards our goal of receiving the funding we need for the plant. Timing of a decision by DOE remains an important issue, however. As we expected, it has taken a couple of months to get all the new administration's appointees into their positions at DOE.

In April, Energy Secretary Steven Chu announced a loan guarantee commitment for a solar energy company. We see this as a good sign. The Loan Guarantee Program was created in the Energy Policy Act of 2005 and this was the first project that received a conditional commitment from DOE.

Perhaps this alternate energy project has broken the logjam of applications. It appears Dr. Chu has made the Loan Guarantee Program a high priority for DOE and we are doing all that we can to have the American Centrifuge project received a conditional commitment for funding as soon as possible. We see these developments as a sign that this administration is serious about fulfilling campaign promises of supporting innovative energy projects.

Our American Centrifuge plant is well underway and our project can create or maintain 8000 jobs at a time when every new or retained job is critical for communities across our nation.

In our discussions with DOE, we have pointed out the strong attributes of the American Centrifuge project especially in relation to the projects submitted by our foreign-owned competitor. Our project has already been licensed by the Nuclear Regulatory Commission and is well underway. Our centrifuges proudly carry the Made in America label. We are leading the way to reestablish the uranium enrichment industrial base in the United States.

The American Centrifuge will provide our US utility customers with energy security they can count on, a domestic source of enrichment with US-controlled technology. Clearly our project is not only aligned with the criteria established for the Loan Guarantee Program, but it also fits well with our nation's economic priorities.

I think our message has been well received and we are working diligently to receive a funding commitment from DOE in the near term so that we can return to ramping up the project toward commercial operations. If however we do not see a path that leads to DOE funding commitment for our projects in the near term, we will be forced to take additional steps to slow down spending. We want to avoid that scenario if at all possible because it will dramatically affect the schedule and cost of the plant. And it will adversely affect thousands of workers preparing to support the American Centrifuge project.

In closing, let me emphasize that we strongly believe in our project and believe it is our best path for building shareholder value. We are prepared to quickly resume the ramp-up in hiring and spending on the project as funding becomes available. This project is critical for our Company and for our nation's energy security.

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

Thanks, John, and good morning, everyone. We expect to issue our 10-Q report later today which has significant detail, so I will keep my report to the highlights.

Starting at the top line for the quarter, revenue was $506 million, an increase of $162 million or 47% over the same quarter last year. SWU sales made up the majority of revenue at $428 million, an increase of 75% over the first quarter of 2008. SWU sales in the first quarter reflected a 66% increase in sales volume and a 5% increase in the average price billed to customers.

We are seeing the higher prices in contracts that we signed in recent years representing a larger portion in our mix of customer delivery, which is helping to bolster the average price billed to customers. The uranium revenue was $29 million, which was a decrease of $19 million over the same quarter last year. Once again, uranium sales are a good example of the variability of our revenue from quarter to quarter.

Looking at the first quarter of 2009 compared to the same period of 2008, uranium sales volume was down 66% but the average price billed to customers was up 77% due to the mix, timing, and terms of uranium contracts. Spot market prices for uranium declined in the past year while electric power costs generally increased, pressuring the economics of underfeeding the enrichment process to obtain uranium for resale. Given supply and demand conditions in the spot uranium market, we have seen fewer opportunities for near-term spot sales. Uranium prices began improving in April and we will continue to monitor and optimize the economics of our production based on the cost of power and the market conditions for SWU and uranium.

Bob Van Namen is here and can address any questions on market conditions for nuclear fuel, but while I'm on the subject, I want to point out that we've seen price indicators for SWU increase at the end of April to $163. The price had been fairly stable at about $160 for the past several months.

Turning back to the quarter, revenue for the US government contract segment was $49 million, down about $2 million from the same quarter last year. The driver here is that a contract to process out of spec uranium was completed in the 2008 period and was not a factor in the first quarter of 2009.

Turning next to cost of sales for the LEU segment, the cost of sales for SWU and uranium was about $415 million. That is $154 million or 59% more than the same quarter in 2008. Most of the increase was due to the 66% increase in SWU sales volume and higher SWU unit costs, partially offset by lower uranium sales volume. Cost of sales per SWU was 16% higher than in the first quarter of 2008 reflecting changes in our monthly moving average inventory costs.

As you know, under our monthly moving average inventory methodology, cost of sales reflects changes in production and purchase costs. Our production costs declined $16 million or 7% in the first quarter compared to the same quarter last year reflecting a 9% reduction in the amount of SWU produced. Production volume was also affected by reduced electricity availability and a partial loss of enrichment capacity for the Paducah plant following a severe ice storm in January. Although production was temporarily reduced, production volume in the quarter remained within the range of normal capacity.

The cost of electric power declined by $20 million in the quarter due to a 7% decline in megawatt hours purchased compared to the same quarter in 2008. In addition, the average cost per megawatt hour declined by 5% year over year as the impact of the recession has lowered TVA's fuel and purchase power costs recently. We continued to buy 2000 megawatts of power during non-summer months for our Paducah plant. The additional power is used to maintain efficient SWU production while taking advantage of the economics of underfeeding the enrichment process.

The quantity of uranium that is added to uranium inventory from underfeeding is accounted for as a byproduct of the enrichment process. Production costs are allocated to the uranium obtained from underfeeding based on the net realizable value of the uranium and the remainder of production cost is allocated to SWU inventory costs. Because uranium prices have fallen in recent months, the net realizable value of the uranium obtained from underfeeding has declined, resulting in a lower allocation of production costs to uranium. Production costs allocated to SWU inventories increased 28% on a per SWU cost basis during the first quarter.

The impact of higher prices paid to Russia will continue to affect profit margins in 2009. Under the market-based pricing formula and the recent pricing agreement for 2009 signed with Russia, the purchase price will increase 11% year over year. That's the same increase we saw in 2008.

Cost of sales in the government contract segment increased almost $5 million during the quarter compared to the same period last year, primarily due to costs incurred for anticipated new contract work in Portsmouth, Ohio, for which revenue has not yet been earned at the changes in the mix of contract services performed. We have since entered into a services contract with DOE regarding this work.

Gross profit for the first quarter was $42 million, an increase of $3 million from the same quarter of 2008. The gross profit increased for our LEU segment but declined for our government services segment. Our gross profit margin was 8% for the first quarter compared to 11% in the same quarter of 2007. The impact of higher inventory costs for purchases from Russia and the cost of electric power for SWU production were the largest factors in the profit margin decline as the average price billed to customers for both SWU and uranium were higher.

Below gross profit we have expenses for advanced technology, primarily the continued demonstration and development costs of American Centrifuge. During the quarter, our efforts to value engineer the AC100 series machine to lower its manufacturing cost increased the portion of spending that was expensed compared to the first quarter of 2008.

We were also involved with preparing for the next phase in the lead cascade testing program as our crews assembled and installed some initial AC100 series machines in Piketon. The amount of American Centrifuge spending expensed during the first quarter was about $31 million compared to $24 million in the same period last year. In addition to the advanced technology expenses during the first quarter, $130 million of spending was capitalized compared to $110 million in the same quarter of 2008.

As John noted earlier, we scaled back on our spending plan on the ACP for 2009, but we certainly have not stopped work on the project as this spending demonstrates. As we continue to move forward with the commercial deployment of the American Centrifuge, much of our spending will be capitalized but we will still have a significant advanced technology expense in 2009.

Selling, general and administrative expense increased by $2.5 million in the first quarter compared to the same period last year. There were increases in compensation and benefit-related expenses as well as consulting expense. In addition, the 2008 period included a $1 million credit for stock-based compensation due to a decline in the stock price in the first quarter of 2008.

We also saw a decrease of $6 million in interest expense as we repaid the remaining principal balance on the senior notes due in January 2009 and capitalized more of the interest paid.

Going to the bottom line, we recorded a net loss of $2.1 million in the first quarter compared to net income of $4.4 million in the same quarter last year. The basic and diluted EPS was a loss of $0.02 per share for 2009 in this quarter versus earnings of $0.04 per share for the same quarter of 2008.

As noted in our news release, we are reiterating our annual guidance for net income of $25 million to $50 million in 2009 on a gross profit margin in a range of approximately 10% to 12%. We also continue to expect cash flow from operations in a range of $240 million to $275 million. Please note that there are a number of factors listed in the outlook section of the news release that could affect net income and cash flow.

Turning next to cash, we ended the quarter with $38 million in cash compared to $249 million on December 31, 2008. The major draws on cash during the quarter were the repayment of the senior notes due in January 2009 of $96 million, capital expenditures mainly related to ACP of $117 million, and payments of an accounts payable balance of $122 million to Russia. Cash flow from operations during the first quarter was $24 million compared to cash flow from operations of $21 million in the same period last year.

We have an extensive discussion of our liquidity in the 10-Q, but the summary is this. Without a DOE loan guarantee or other financing and without taking into account any further reductions in our current rate of project spending, USEC anticipates that its cash, expected internally generated cash flow from operations and available borrowings under its revolving credit facility are sufficient to meet its cash needs for approximately nine to 12 months under the current rate of project spending.

If we determine that a loan guarantee or alternative financing is not forthcoming or available in the near term, we will take additional steps to implement further project spending reductions to maintain sufficient liquidity. You will note that is a longer period of liquidity than our guidance in February when we issued the 10-K. That reflects the impact of reduced spending on ACP compared to the planned spending thus far in 2009 and a decline in cash cost for electricity compared to our initial expectations.

To quickly summarize, financial results for the first quarter reflect a lower gross profit margin and the impact of higher ACP expense. Looking ahead, we continue to see stronger SWU sales in 2009 and substantially higher cash flow from operations, but higher costs will reduce our gross profit margin. And we are vigorously pursuing a DOE loan guarantee to raise the substantial capital we still need for ACP.

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

(Operator Instructions) Roger Read.

Good morning, gentlemen. Thanks for the overview. Against the kind of focus of the hour will be the spending on ACP, so maybe if we could talk about -- I understand liquidity issues. Is there anything else you would consider at this point on the capital raising front, be it debt or equity? Or have you all reached the point where it's DOE or kind of nothing given the way the market conditions have been and continue to be in terms of raising debt or equity?

I think we are very conscious of current financial market conditions and our guidance and I'd say our disclosure around our views of capital raising for ACP over time have evolved continuously to focusing on the DOE Loan Guarantee Program as the path for raising the debt capital that we believe we need to complete the American Centrifuge project. So that will continue to be the focus.

I'd say we are also trying to keep track of windows in the market and any changes in market conditions, but at this point we are very, very focused on raising the debt capital through the DOE Loan Guarantee Program and at this point, do not see any alternate path on that.

Okay. And is there anything that you are watching publicly out of the DOE at this point or maybe some activity or action by Congress that would lead you to believe that something else is happening -- a particular governor of a state that's arguing in favor of this program?

This is John. There clearly is a lot of support for the program. You saw yesterday out of the Energy Committee in the Senate this continued push for a loan guarantee entity not just for nuclear projects but for all clean energy projects, and you see that with very strong support in the Senate. So from that aspect I would say you see governors that both have a stake in the nuclear game and those governors specifically supporting our project and other projects very much engaged with their congressional counterparts to support a clean energy bank type of concept to support the financing for clean energy projects.

Downstream that would certainly I think will have an impact on the energy program for nuclear because that would get wrapped up under that umbrella. So I think you again see lots of strong support and Secretary Chu is very supportive of that initiative by Senator Bingaman and Senator Murkowski.

Okay. And then I guess switching gears more to the operational side on the near term, you did a good job explaining where power prices are relative to your base. But how would you say power prices compare 2009 first quarter and maybe what you see for the second quarter specifically against where you were in '08? Or is it fair to just look at the percentage change versus the base and the base is the same each year?

The base goes up moderately, as John stated, but we are looking at -- TVA's forecast is clearly very volatile and let me go through a couple of the components in that. Coal prices definitely stayed up as oil and natural gas dropped. They have started to come down as well, but they are still not at levels where TVA had its contract backlog previously. So we are still looking as TVA rolls over their contracts at prices getting higher there.

Probably the two major factors in TVA's power outlook right now, number one is the hydro situation. They have gotten a lot of rain in the Tennessee Valley. They are coming out of a two-year drought and hydro is probably the most attractively priced power they have. Second one is demand. As the economy has turned down, you are looking at decreased demand, lower cost for purchase power, so that is helping the overall adjustment factor as well.

But I think a relative change, the percentage change from the base is still probably the best barometer.

Okay. And how quickly can that pricing --? I mean is it as immediate as their prices go down and you see it 30 days later, is it a kind of a rolling 90-day issue?

It depends on what it's hitting in the TVA system. The coal prices definitely roll over a longer period than the purchase power prices and the hydro capacity. We are seeing major month-to-month fluctuations and we are working closely with TVA to try and get as accurate a forecast as we can of where we see the fuel cost adjusters going. But it definitely is moving month-to-month.

Okay. And to complete my jumping around everywhere in the Company, SWU pricing trends, relatively flat first several months of this year. You said they indicated some improvement in April. Given that we are generally seeing very little inflation much of anywhere, just kind of curious what you all think might have pushed SWU prices up in April. Is that sustainable or is it just sort of -- it depends on who is coming to market at a given moment trying to get refueled?

I think supply and demand do remain in tight balance. I think our outlook is for them to continue to remain firm. We have seen prices move up from $146 a year ago to $163 recently. So we do see that firming trend and we see quite a bit of stability in the market prices.

Okay. So just a good solid fundamental market there?

Yes.

Thank you.

Laurence Alexander.

Good morning. I guess a few odds and ends. First, there's been this trend recently of Russia's SWU costs to you escalating faster than your aggregate SWU price. Does the new agreement with Russia reverse that trend or how should we look at that?

I think there were two agreements with Russia. One on '09 and I think that is reflected in the guidance and outlook that we've provided. With respect to the longer-term outlook, the agreement that had been negotiated there does add a fixed component to the overall pricing and we hope it will add stability but that remains to be seen once that agreement is finally approved by the Russian government.

So I guess just to clarify, do you expect the recent margin squeeze to be reversed, hold the line, or probably get a little bit more squeezed but not at the same pace?

This is Phil Sewell. We expect the prices under the Russian contract to match the components that we have in our own pricing formula so that there would be better equity and fidelity associated with the trends and the movements in both of those areas. And so we should be seeing some modification or adjustment with respect to the previous two years increase.

Bob Van Namen here, Laurence. If I could just add a little bit more color on that because it does matter as to kind of the contract portfolio and how that's behaving. We do have a strong alignment in current contracts and contracts signed roughly since 2006 with market-related components and with power-related components. We do have some legacy contracts that are rolling off but are going to stick with us still for a few years that do not have that alignment. So we are somewhat playing catch-up on that. We are seeing more stability. We are working hard at it and we will get there, but it is a matter of time.

Bob, just so I understand the implication of that comment, if energy prices and SWU prices were to be flat going forward and you just had the contracts roll off, would your gross margins be going up or be going down?

As we sign new contracts, we are signing them at prices that are reflective of the market price increases that we've seen over the last several years so we will be getting higher prices under those existing contracts even absent any changes in power cost or market prices. So we are improving there. But again, we also have the changes in HEU that we talked about as those prices continue to go up and we have the TVA power costs that we still are hit with the fuel cost adjuster volatility.

So it is -- I think we have good alignment in recent years. We still have some legacy contracts but our alignment is much closer than we were, say, two to three years ago.

And then I guess just to flog the horse a little bit farther on, a little bit more on pricing. If SWU prices continue to rise and you have already signed provisional contracts for more than half of your ACP volume, do you get an escalator adjustment on those contracts?

I would rather not go into details on the ACP contract pricing structure. We have -- we are looking for a mix of contracts, some of which give us benefit from markets, such some of which give us stability under firm pricing. So we are -- have been in discussions with DOE as we go through the loan guarantee process, but we have a mix but I would rather not get specific on that.

Then one last question and you may not want to directly address this, but if you can give some color on it, this would be helpful. The -- with the contract for the construction of the ACP facility, the long-term agreement that you have already signed, if in a worst-case scenario where the ACP were to be pushed back by a couple of years, what is the maximum increase already embedded in those contracts that we should be penciling in?

Yes, that I would say, Laurence, is something that we really could not speculate on that type of scenario at this point. You know, we are working with our suppliers based on an outlook now to provide an update of cost and schedule as we have a clearer view on our timing for loan guarantee funding.

I think it's safe to say because I think again that the other side of the equation is that the number one priority and it's got two pieces to it for the utilities is that they want to understand what it is going to cost. They also want to understand that it's going to be there. So it's reliability of supply. So I think it is fairly safe to say that in our contracts with the utilities for the output of the ACP that their concerns in that area are being addressed. So they are comfortable they're not going to be caught short, but it may have to come from an alternate supply.

We've said that we have used GDP as a backup, as a backstop in entering into these contracts. So they wouldn't have signed the contracts if they didn't feel that they had protection through that transition period.

Okay, I'll hop back in queue. Thank you.

(Operator Instructions) Gabriela Bis, Goldman Sachs.

Good morning. So taking a step back, I was wondering if you could provide us with some color as to why having a domestic uranium enrichment source is of strategic importance for the US? And specifically, I am trying to understand why the government would consider awarding the loan guarantee to a foreign player?

My favorite question. First off, the domestic -- the need for a domestic base I think is a very high priority for the government and so domestic would in that term would include as long as it's available inside the United States. So those foreign suppliers that are building facilities such as LES or Areva is proposing, as well as American Centrifuge and if General Electric ever comes through would be part of that.

So I think from the government's perspective they are very pleased to see increased buildout of domestic sources to provide to the US market. Again remembering that none of us deal strictly in the US market. You know that 30% plus of our output goes overseas last year and it has varied for several years so that you build capacity here in the United States. Yes, it could be solely dedicated to US needs, but it also deals in an international market.

Certainly there is a lot of speculation on capacity. The ones that you know are real are those that are being built today. The one by the LES facility in New Mexico and the American Centrifuge project, which is underway, and then there are potential new projects. I certainly think there are features of our project that are much better aligned with the government's objectives of the Loan Guarantee Program than our foreign competitor.

You know, we represent newer, significantly improved energy-related technologies. The other individual has a technology that has been deployed around the world for over 20 years. We have significant improvements from an emission standpoint is that you need a lot less power to support our plant than you do the existing plant, so when the transition ultimately goes away from gaseous diffusion, that meets a lot of the greenhouse gas emission goals of the country.

Again, we said it is under -- our project is under construction today. It is providing jobs today. It is as shovel-ready as any project you could get. And we are the only technology that meets national security needs. So there is an important aspect of having a domestic enrichment base that needs to be based on US technologies so that it can meet national security needs. So clearly we feel that our -- the aspects of our project that are addressing key policy initiatives of the administration, that we are tailor-made for the program.

Great, thank you. That's wonderful color. If I can jump to uranium, given uranium sales have slowed in 2009, I was wondering if you can provide us with your thoughts on potential increase in uranium sales, given the potential bottoming of uranium prices.

Yes, Gabby, Bob Van Namen here. That is something we are keeping a very careful eye on. We are not selling aggressively into a market that we see as being weak. So in the last several weeks and roughly a month, we has seen prices picking up fairly dramatically and we are seeing demand come out as people see the prices moving out, so we are going to keep a careful eye on it. It continues to be one of the main features of the Paducah plant, its ability to under feed and to create uranium that we can then opportunistically sell.

So we will look for opportunities there but I would say I am looking for the price to firm before we are going out there selling.

Okay, great. Thank you very much.

Tom Lewis, High Road Value.

Yes, good morning. First question, with respect to your characterization of higher realized prices for uranium as mix timing and terms of contracts, should we be thinking about that as just the stars realigning up just right in this particular quarter, or is it more in -- should be thinking more in terms of the terms of your contracts being perhaps substantially different now and over the next few years as opposed to the most recent couple of years?

Let me clarify, is that SWU or uranium prices?

Yes, I'm sorry, I meant for uranium.

Okay, definitely we had a substantial amount of sales as prices were at some of their higher levels in the market, so that has helped draft up our overall sales prices. And I think that is reflected, Tom, again from a revenue standpoint recall we recognize the revenue on uranium based on when it is leaving the form -- in the form of LEU, so there is a timing element of course in our uranium revenue.

But as Bob was alluding to in that response and then I think his earlier response on overall uranium, we are seeing -- we have older, longer-term contracts that are rolling off and we have seen in this quarter a significant increase in the price of uranium that we are recognizing under that contract. That is an overall trend as those older contracts roll off.

Will uranium sales over the next couple of years compared to say last several tend to be as fixed or more opportunistic than in the past?

Definitely more opportunistic, Tom.

Okay. Second question, in your last update a quarter ago, you were expressing or I took them to be concerns about the ability of some of your suppliers for American Centrifuge and their ability to come up to speed with things that you were handing off to them. That wasn't there. Are you any more or less confident in that part of the puzzle right now than you were 90 days ago?

That's a good question. Certainly we have been very pleased by -- and very focused on that transition to the suppliers, and they have been building most if not all of the components that are going in the initial AC100 machines. We are still not done with that in that you are doing an initial transition, but you are building at what I would call a very low production rate to meet our immediate needs in the deployment of the initial AC100.

There are a whole bunch of issues of when we ramp up the production rate because -- and that is really tied up in the loan guarantee money and when we would really turn the manufacturers loose in ramping up to that. So our initial deployment and transition of the technology to the suppliers has gone very well. It has had some bumps in the road, as you would expect, and I would also expect that there will be issues as you transition that higher rate of production. So so far so good. Knock on wood.

But when we ramp up that production rate that will be a challenge. In areas such as the support modules, again, you are still at a low rate of production, but that's a perfect example of the support modules that are there for the machines. That went very well and you go through a lot of the issues of meeting cleanliness standards and all the one-time fixtures that get manufactured, lots of good lessons learned. But all the quality systems that Teledyne Brown had in place, were verified. They met their requirements there. And I think we all felt pretty comfortable in how we came through that.

But that's just an example of the kind of stuff we are doing, so there is still more to come but fairly pleased with the pace at which we've come through that.

Okay, great. Just one last question. As I'm reading about what I understand to be the largest nuclear power complex in the world there in Japan coming -- starting to come back online after being off for what, two years or so -- in your estimation is that something that moves the needle at all on the price of SWU in the world?

Bob Van Namen here. No, I don't think so. I think that the TEPCO reactors in the Kashiwazaki Plant are going to come back online. They are now interacting with their local communities to get the permissions to restart and that is factored into the forecasts and I think factored into everyone's expectation.

Well it wasn't really a factor of them going down and then -- okay, fair enough. Thank you.

Thank you and there are no additional questions.

Okay. Well thank you all for joining us this morning. I think as you can see that we are actively engaged with DOE regarding the Loan Guarantee Program and we remain cautiously optimistic based on the recent announcement by DOE that it is making a conditional commitment for a solar energy project. Although we have slowed spending on plant construction, we are certainly not standing still. Significant progress is being made and I look forward to bringing you another update in early August when we report our second-quarter results.

Thank you for your interest and investment in USEC and have a good day.

And that does conclude today's conference. Thank you for joining us and have a great day.