Centrus Energy Corp (LEU) 2010 Q2 法說會逐字稿

Greetings, and welcome to the USEC Inc. second quarter conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the prepared remarks.

(Operator Instructions).

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Steven Wingfield, Director of Investor Relations for USEC. Thank you, Mr. Wingfield. You may begin.

Good morning, and thank you for joining us for USEC's conference call regarding our second quarter results for 2010 which ended June 30, 2010. 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 would like 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. That news release is available on many financial websites as well as our corporate website, USEC.com.

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

I'd like to remind everyone that certain of the information that we may discuss on this call 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 the factors that could cause actual results to materially differ from those in our forward-looking statements is contained in our filings with the SEC including our annual report on Form 10-K and quarterly reports on Form 10-Q.

Finally, the forward-looking statement is time sensitive and it is accurate only as of today, August 4, 2010. This call is the property of USEC and any redistribution, retransmission, rebroadcast of this call in any form without the expressed written consent of USEC is strictly prohibited. Thank you for your participation and now I would like to turn the call over to John.

Good morning. Thank you for joining us to discuss our second quarter results.

Over the course of the next few minutes, I will briefly discuss our financial results for the second quarter and our outlook for 2010. I will also address our update to DOE on the progress we've made in recent months to deploy the American Centrifuge technology and provide sufficient time for your questions. Taking a look at the bottom line for the quarter, we reported net income of $7.2 million compared to net income of $17.3 million in the second quarter of 2009. For the first half of 2010, we reported a net loss of $2.5 million.

Our results in 2010 have been reduced by one-time charge of $6.5 million related to a change in tax treatment of Medicare reimbursements resulting from the healthcare legislation enacted earlier this year. Many of the activities we have undertaken to address the DOE's concerns about technical aspects of the American Centrifuge are expensed in the $52 million in advanced technology expenses in the six month period had the affect of reducing our net income. On the positive side, the results in the six month period include other income of $20 million resulting from DOE's contribution for continued ACP activities.

Turning to our 2010 outlook, yesterday we provided updated guidance for the year. Given our improved visibility on the spending pattern for the American Centrifuge project, we added guidance for net income of approximately breakeven for 2010. The higher prices paid for SWU purchase from Russia over the last several years and higher electric power prices have increased our average inventory cost. The increases for these costs have been at a higher rate than the increase in average SWU price billed to customers. That has squeezed our gross profit margin in 2010. However, we purchased electricity this summer that is less costly than the power we bought last summer and that is modestly helping to improve the gross profit margin.

Our expectation is that revenue for the full year will be approximately $2 billion and we expect the gross profit margin that has improved to a range of 6% to 7%. Spending on the American Centrifuge that is expensed is expected to be approximately $110 million for the full year. Based on these projections, we believe that our net income will be about breakeven for the full year. John Barpoulis will have additional details on the guidance in his financial report. Leveraging the value of our substantial investment in the American Centrifuge technology has been a key element of our plan to enhance long-term shareholder value. Last week, we submitted a comprehensive update to our applications to DOE Loan Guarantee Program. We provided what we believed is a solid business case for the American Centrifuge that includes a strong assurance of loan repayment. This was the culmination of a year of sharply focused hard work by hundreds of USEC employees.

I want to spend a few minutes going through some of the highlights of this update. Last fall, we took a hard look at the program starting with a thorough quality assurance program review. That was the foundation for our effort to address the technical and financial concerns raised by DOE's Loan Guarantee office. In recent quarterly updates, you've heard our reports detailing our progress and addressing DOE's technical concerns. A key element of our response was a start-up in operation of a Lead Cascade of AC100 centrifuges, our production ready machine. We began operating the cascade under plant-like conditions in March. This was an important step because it demonstrates our supplier's ability to manufacture and assemble the AC100 machine. It also demonstrates the machine to machine interaction in the cascade which has been operating successfully since it came online.

Last week, we completed work needed to roughly double the number of machines in the multistage cascade to approximately 40 AC100 machines. We have accumulated more than 480,000 machine hours under our Lead Cascade testing program that began in mid-2007. We are building up to eight machines per month and these additional machines will help us accumulate additional machine hours for the AC100 centrifuges in 2010. While we have a solid machine in AC100, we have continued development work in value engineering at our facilities in Oak Ridge, Tennessee. Our goal is to systematically work to increase the machine's productivity and lower its unit manufacturing cost. As you know, we spent a portion of the past year reviewing our strategic alternatives.

We announced in late May that we have signed a definitive agreement with Babcock & Wilcox and Toshiba to make a $200 million investment in USEC. This investment will be spread out over three phases with each of those two companies making $100 million investment. We are working to close the first phase of that investment of $75 million during the third quarter. This investment will support building the ACP and will create business opportunities for the three strategic partners throughout the nuclear fuel cycle. Importantly, Toshiba's investment provides the potential to access -- to capital from the Japanese export credit agencies. We have initiated discussions with these Japanese export credit agencies, but I would caution that we are very early in that process.

During the past year we also took a number of steps to reduce the risk profile of our project and we updated the project scope, cost, and schedule based on close collaboration with our suppliers. We preserved our ability to remobilize plant construction and we will be working with our EPC contractor, Fluor, to further complete the plant design which is over 80% complete for the total project. We worked to address each of the concerns expressed last year by DOE's Loan Guarantee Program office and its advisors. We are confident that the steps I've described address those technical and financial concerns. The comprehensive update we submitted to DOE late last week included estimates on future completion cost. Based on the recent work we have done with our suppliers, we estimate that the capital cost to complete the American Centrifuge from the point of financial closing of the DOE Loan Guarantee will be approximately $2.8 billion.

I want to be absolutely clear on this point. The estimate of $2.8 billion is the cost of going forward from the point of receipt of Loan Guarantee funding. It does not include the previous program cost of approximately $1.8 billion invested in the project through June 30. Moreover, it does not include spending on American Centrifuge until financial closing, overall project contingency, financing cost,or financial assurance. Our estimate does include the AC100 machine manufacturing and assembly, EPC and related balance of plant work, start-up and initial operations and project management. It is my view that USEC has reduced project risk significantly over the past year and our new estimate is based on a more mature project scope. We are continuing to evaluate the appropriate level of overall contingency given this greater project maturity. We are also evaluating financing cost and financial assurance which will be affected by the ultimate financing plan, the amount of credit subsidy cost for a DOE Loan Guarantee and the amount and sources of additional financing we need to complete the project.

Since we issued our initial baseline project budget in 2008, our costs have increased due to several factors. These include the cost of demobilizing plant construction last year, the carrying cost during the past year and remobilizing under our project completion plan. Refinement of cost estimates from our suppliers related to manufacturing the AC100 and higher EPC cost for designing and building out the plant infrastructure. This refinement reflects greater maturity of the scope of the project. In regards to the construction schedule, we anticipate that it will require 18 months to 24 months to begin initial commercial operations upon receiving financing. During that period, we will ramp up construction activities, rehire, train and obtain security clearances for craft workers, prepare our suppliers for high volume machine manufacturing and complete the uranium feed and withdrawal facility that is essential for commercial operations.

As you recall, Centrifuge is a modular technology, and we will begin operations with the fraction of the 11,500 centrifuges that will ultimately populate the plant. We anticipate that it will require 30 months to 36 months to complete the entire plant after initial commercial operations. We continue to work with our suppliers to refine our estimates and seek reductions in the project cost and schedule.

In closing, let me emphasize four things. We strongly believe the American Centrifuge represents USEC's best path to position itself competitively as a low-cost producer over the long term in a growing uranium enrichment market and thus providing our nation with a efficient, reliable access to enriched uranium. We believe we have presented a solid business case to Loan Guarantee Program office and we'll continue to work closely with DOE officials to ensure a timely review of the update. Over the past year, we have reduced project risk and increased its maturity and therefore, we have a greater estimate and greater confidence in our cost estimate. And we also remain sharply focused on our current operations and we are closely evaluating our longer term transition to American Centrifuge over the next several years.

Now, I'd like to turn the call over to John Barpoulis to report on second quarter financial results. John?

Thanks, John, and good morning everyone. Starting with revenue for the second quarter, total revenue was $460 million, a decrease of $55 million, or 11%, from the same quarter last year. SWU sales made up the majority of revenue totaling $331 million, which was also down 11% over the same period last year. In the six month period, total revenue was $804 million, a decrease of $216 million, or 21%. SWU revenue in the first half of the year was down 25%. Those who have followed USEC for a while know that our revenues can swing significantly from quarter-to-quarter and in some cases, year-to-year. In the first six month period of 2010, SWU volume was 28% lower than the same period of 2009, but we have updated our guidance and we now think that SWU volume will be down about 10% compared to last year.

As SWU contracts signed in recent years at higher prices and with price adjustors become a larger portion of our backlog, we are seeing an increase in average prices billed to customers. In the first half of 2010, average prices billed to customers rose 3% compared to the same period last year. Uranium revenue was $85 million in the first half of 2010, which was a decrease of $39 million compared to the same period in 2009. Both uranium prices and volume sold declined. Uranium market prices declined in 2009 and have been trading in the low $40 a pound for the past few months. However, we have seen an uptick in the past month and the price indicators for uranium were $46 a pound earlier this week.

Finally, revenue from the US government contract segment in the six month period was $122 million, an increase of $25 million or 26% from the same period last year. The higher revenue reflects fee recognition on certain contracts with DOE and additional work in Ohio to prepare the site for decontamination and decommissioning. This segment also includes our subsidiary, NAC International. On the cost side of the ledger, our two largest cost components continue to be electric power and the price we pay Russia to purchase SWU. We have a power contract through May 2012 with the Tennessee Valley Authority, or TVA. That agreement provides for moderate annual increases to the base price we pay plus an adjustment offer down based on TVA's cost of fuel and purchase power.

During the first half of 2010, our power cost increased by $21 million compared to the same quarter last year. The average cost of power per megawatt hour increased 4%, which includes the effect of the power contract's fuel cost adjustment. But we also bought 3% more electricity in 2010 compared to last year, largely as a result of a January 2009 ice storm that temporarily reduced power usage at the Paducah Plant. We expect to buy 5.5 million SWU from Russia in 2010 at a price that is 8% higher than last year. The price is set by contract and reflects market base prices and other factors. Purchase costs to Russia designed $119 million in the first half of 2010 due to the timing of deliveries earlier in the year. The purchase price paid to Russia was 11% higher in both 2008 and 2009 and those increases had a significant effect on the cost of sale embedded in our inventory cost.

We used the monthly moving average inventory cost method and these higher purchase and production cost components increased our cost of sales for the LEU segment. In the six month period, the cost of sales for SWU and uranium was $626 million, which was $181 million or 22% less than in 2009. This change was due in large part to the 28% decrease in SWU volume of the decline was offset by higher unit cost. Cost of sales in the government contract segment was $108 million in the first half of 2010, an increase of $14 million compared to the same period in 2009 reflecting costs associated with the expended scope of shutdown activities at the Portsmouth Gaseous Diffusion Plant in Ohio.

Gross profit was $44 million for the second quarter and $71 million in the first six months of 2010 compared to $77 million and $120 million in the respected periods last year. Although gross margins have improved in the US government contract segment, gross margins on a much larger LEU segment were pinched by higher average cost of sales and lower volumes. Our gross profit margin was 9.6% for the second quarter compared to 15% in the same quarter of 2009. In the six month period, the gross profit margin was 8.8% compared to 11.7% in the same period of 2009. As John mentioned earlier, we updated our guidance on gross profit margin of 6% to 7% for the full year, an increase of one percentage point over our earlier guidance.

Below the gross profit line, we have expenses for advanced technology primarily related to the American Centrifuge. While we substantially demobilized and reduced project construction and machine manufacturing activities, we continued demonstration and development effort to address the DOE's concerns in the first half of 2010. This resulted in significant but comparatively lower expense. The demonstration expense relates to assembly machines and start up activities in the Lead Cascade testing program as well as development work in our facilities in Oak Ridge. The amount of advanced technology expense in the six month period, primarily related to the American Centrifuge project, was about $52 million compared to $62 million in the same period of 2009.

Also included in the expense was approximately $1 million of work by NAC on a transportation version of the MAGNASTOR technology. As you will recall, we had not yet fully demobilized American Centrifuge construction during the second quarter of 2009. Therefore, you will see a bigger difference in capitalized spending when comparing the quarters. Spending that was capitalized in the second quarter was $71 million less than in the same period of 2009. In the six month period, $64 million of ACP-related activities were capitalized compared to $228 million in the same period last year.

Selling, general and administrative expense was $29 million during the first half of 2010, or about $2 million lower than the same period last year. The largest factor was a reduction in spending on consultants. In March, DOE and USEC agreed to a $90 million cost sharing arrangement regarding certain American Centrifuge activities. DOE has made $45 million available for the project activities by taking the disposal obligation for a specific quantity of depleted uranium from USEC which released cash that had been posted by USEC for future depleted uranium disposition. During the first half of 2010, USEC spent $40 million under the cost sharing agreement with DOE. This resulted is a 50/50 cost sharing contribution of $20 million by DOE that was recognized by other income below the gross profit line.

A quick word about income taxes and effective rates. Because our expectation is that for the full year, net income will be breakeven, we expect to see wide swings in the effective income tax rates. The dollar amount of the provision, or credit, for income tax is not expected to be large but because the denominator, the net income or net loss, is also small, the effective tax rate will show significant swings. In addition, a federal research credit that had been a benefit to USEC expired in 2009. We expect our overall effective tax rate to be roughly 60% in 2010 unless the federal research credit is extended this year. If that were to occur, we would expect the tax rate to be more in line with the tax rate seen in 2009, which was 38%. We also had a one-time charge to the income tax provision of $6.5 million related to the change in tax treatment of Medicare Part D reimbursements resulting from the new healthcare legislation signed into law in March.

Looking at the bottom line, we reported net income for the second quarter of $7.2 million compared to net income of $17.3 million in the same quarter of 2009. Over the six month period, we had a net loss of $2.5 million compared to net income of $15.2 million in the same period last year. Turning next to cash, we ended the second quarter with $208 million in cash on hand compared to $32 million at March 31, 2010 and $131 million at December 31, 2009. Cash flow provided by operations for the six month period was $173 million compared to cash flow provided of operations of $222 million in the same period last year. That $49 million difference was due to several factors including a larger monetization of inventory to meet higher SWU sales in 2009.

We had no borrowings under our revolving credit facility at the end of the quarter. You may have noticed that we expanded the credit facility by $25 million last week to $250 million of total under our commitments. When we closed on the credit facility in February, we noted that it had an accordion feature that would allow us to expand it further. This expansion also increases on a dollar-for-dollar basis, our letter of credit sub-limit and our spending basket for ACP. We also expect to close on the first phase of the investment by Toshiba and B&W during the third quarter. You will recall that the first phase is an investment of $75 million. We are currently negotiating the terms of our joint venture with B&W to build the AC100 machine, which is one of the conditions of closing the first of three investment tranches.

As noted earlier, we have updated our guidance for 2010. With a plan for American Centrifuge spending that covers the rest of 2010, we can provide specific net income and cash flow guidance. We reiterated our earlier guidance for approximately $2 billion in revenue with about $1.5 billion of that coming from SWU sales. You may have noticed that we tweaked that forecast to increase SWU sale volume and we now expect the average price billed to customers will rise 2% rather than 3%. Revenue from uranium sales is expected to be in the range of $225 million to $250 million, while our estimate for revenue from US government contracts remains at just under $300 million.

We were able to buy power this summer at market-based prices that were below our initial forecast. We expect that it will help improve gross profit margins and we increased our guidance to a range of 6% to 7% gross profit margin. We expect ACP spending that will be expensed to total approximately $110 million over the full year. That will be partially offset by the cost sharing arrangement we reached with DOE that includes up to $45 million that you will see reflected under other income. We continue to expect selling, general and administrative expense to come in at about $60 million.

Going to the bottom line, our guidance for net income is approximately breakeven. Net income will reflect expenses related to ACP and the previously recorded charge of $6.5 million related to a change in tax treatment of future Medicare Part D reimbursements. We had positive cash flow through the first half of 2010, but we expect that to swing to cash used in operations of approximately $100 million. As previously noted, we expect to build inventory in 2010 in anticipation of future sales which is a draw in cash. We also anticipate CapEx related to ACP of about $100 million. Please note that there are a number of additional factors listed in the outlook section of the news release that could affect net income and cash flow.

To quickly summarize, we earned $7.2 million for the second quarter. We recorded a loss of $2.5 million for the first half of the year which reflects the one-time income tax provision adjustment and expenses related to the American Centrifuge project. We have accumulated more than 480,000 machine hours of experience with the American Centrifuge. Last week, the cascade of AC100 machines was nearly doubled to about 40 machines. Based on the progress we have made to address the technical and financial concerns of DOE, we have provided a comprehensive update to our application to the Loan Guarantee office. And with that, operator, we are now ready to take questions from our callers.

Thank you. (Operator Instructions). Our first question is coming from Laurence Alexander with Jefferies & Company. Please state your question.

Good morning. This is Amanda Sigouin on for Lawrence.

Good morning Amanda.

First a question around the better volume outlook for this year. Is this entirely due to pulling demand forward from 2011, and does this mean less of a recovery in volume in 2011?

This is Bob Van Namen. It is partially due to the acceleration of orders and partially due to customer movements. It's always a combination depending on when our customers have the needs for the low enriched uranium. They might ask us for orders or we might go and ask them. It's a combination of the two and we are not providing any guidance on 2011 at this point.

But we would do so in the normal course of our future calls.

Okay. In regards to the additional cost for the ACP that are not included in the $2.8 billion that could increase the scope of the project, you mentioned the financing expense, the project contingency and a couple others, can you give details around these expenses and the magnitude that these could potentially possess?

John Barpoulis. This is John Welch. John and I will take a shot at this. Let me take it one at a time. Overall project contingency, you are correct and we said that the $2.8 billion estimate is a snapshot at this point affecting our work with suppliers. We are currently evaluating appropriate level of overall project contingency, and as you would expect, that takes into account the level of risk in the estimate and in each of the specific areas and it also is a function of the maturity of the project. We are working towards fixed price for cost limited agreements with suppliers and any overall contingency will ultimately reflect those terms and conditions. John?

And John, I'll take a stab at the other two, Amanda. I think with respect to the spending from now until financial closing, I think we recognize that the timing ultimately to the objectives of conditional commitment and financial close is uncertain but it's likely to be several months. For the first half of the year, we expensed about $52 million of ACP expenditures and capitalized about $64 million and also reflected the benefit of the $45 million of support from DOE under the $90 million cooperative agreement through other income. With respect to our outlook, we mentioned that we foresee expensing about $110 million on ACP and incurring capitalized cost of about $100 million. So one can get a sense for our expectations for this year. Also note that the scope under cooperative agreement is through the end of this calendar year as well. So from that information, one can develop a rough range but I always highlight that it's very much subject to our continued progress on ACP, cash flow available, liquidity and our timing expectations for events that we see forthcoming.

So we would certainly look to potential ramp down spending as necessary to live within our means and then also, to the extent that we see the ability to hit those milestones, there are certainly critical path items that we would like to ramp up in order to move forward and advance our schedule on ACP. So that provides certainly a fair amount of uncertainty with respect to any longer term views on that. And our 10-Q has a significant amount of information on our spending as well. Then last, with respect to financing cost and financial assurance, ultimately we recognize that there is uncertainty within those estimates, credit subsidy cost and the actual cost of realized sources of funding are uncertain, and are key drivers to some uncertainty in those areas. While we have a pretty specific decontamination and decommissioning plan for American Centrifuge, ultimately the amount of financial assurance and any cash posted to that, that we need to provide is uncertain as well so that leads to additional uncertainty on that item. But to the extent that we do see additional certainty in those areas, we will be updating our outlook.

Okay. Just regarding the additional financing needed to complete the project beyond the $2 billion from the DOE, I want to make sure this is clear, is this something that you think the DOE will need to see you have in hand before they are -- approve the $2 billion loan guarantee or that could be something that happens after the closing.

I think they need to be comfortable with the plan and that is certainly something we expect to discuss with them in diligence. We do need to have those either commitments or demonstrate that the capital is available at the time of closing.

Thank you.

Thank you.

Our next question is coming from the line of Gabriela Bis with Goldman Sachs. Please state your question.

Good morning.

Good morning, Gabby.

Just to follow up on that question, what is your expectation of timing for the DOE, the closing of the -- I guess, the financial closing of the DOE loan guarantee. And then can you walk us through the steps that are necessary to get there?

Sure, Gabby. We expect that DOE in the next step will review our update and recommence due diligence on our application focusing on the concerns that they raised last summer. We certainly plan to work with the DOE Loan Guarantee Program office staff and their technical, financial, and legal advice sores regarding the merits of our application and the new information that we are providing. The next formal step in the process is a conditional commitment and certainly as the name implies, the conditional commitment will come with conditions. The period between that conditional commitment being offered and the financial closing could be several months. And so with respect to timing is difficult to say until we have commenced discussions with the Loan Guarantee Program office and have a sense for what those conditions could be.

Thank you. Second question is you mentioned that there are three main contributors to the increase in the budget for ACP from, if I recall correctly, $3.5 billion which was the earlier estimate to now closer to $5 billion. So I was wondering if you can provide a breakdown of how much of the increase was related to these three items, demobilization, remobilization, the cost related to the additional design work and the cost to the maturity of the scope of the project?

Gabby, I don't we are prepared at this point to provide, say, a precise dollar amount associated with each of those drivers. We recognize that as we are working through our estimates with suppliers heading toward updating our agreements with those suppliers, that in our discussions, those were the key drivers and those were the most significant drivers of the difference. And the other thing, again, I would emphasize is that the number that we are providing is reflective of our negotiations with the suppliers. And what we are seeking to do here is that our investors --what we have heard being asked of us is ultimately, how much will it cost to complete the commercial plant? So over the past several months we have been working with suppliers to update that estimate and so the information is based on those discussions.

Okay. If I understand you correctly I think you mentioned before that this is an estimate basically assuming that financial commitment is at the end of this year. Did I understand that correctly?

No. This estimate is from the point of financial closing forward when we would expect to remobilize activities and it is an estimate of what it will cost to complete the plant. So it's from the point of financial closing forward.

Got it. Thank you very much.

Thank you.

Our next question is coming from the like of George Caffrey with Miller Tabak. Please state your question.

Thank you guys.

Good morning George.

Good morning. The other investors which you are speaking to, potential investors, you mentioned I think a Japanese export agencies and the like, are they requiring that you have received an answer from the DOE and/or requiring funding from the DOE before making investment or might they invest prior to that? And then secondly, the nature of the investments that you are talking to them about, are they more equity-like or are they more debt-like?

What I would emphasize is that those discussions at a very early stage, that it is certainly linked to our work and relationship with Toshiba, and at this point we look to -- historically, those entities have provided primarily debt but they've provided a mix of capital very much dependent on the project and the credit aspects of the project. So with respect to the nature of the capital, very early in the process. With respect to the nature of the discussions, the -- debt and equity recovered, George, and I'm sorry. I forgot the other --

The other had to do with the timing relative to DOE, might they be willing to commit in advance of anything hearing from the DOE?

And I'm sorry. On that response, certainly the Japanese export credit agencies are looking to the US government and to DOE in their support of the project. So it would be highly unlikely that they would look to provide any capital in advance of closing on the DOE loan guarantee. Our view is that they would be a concurrent closing.

I'm not sure that this was quite asked this way but when would you expect to hear something, not necessarily a commitment but some response to your application from the DOE?

Certainly George, we would expect to begin those detailed reviews with the Department of Energy in the near term. As John mentioned there's --

Near term meaning the next month?

We would hope to engage on that as quickly as possible. The technical review and discussions, we would expect that to initiate very quickly. And in parallel bringing together financial advisors, legal advisors. We would expect that to start fairly quickly. One of the things that we can assure you as we progress down those discussions with the Department of Energy, we'll provide you updates on that but we would expect a full due diligence very similar to what we went through last year but again this is an update. So you would likely reengage the independent engineer persons to review how we would address all of their issues and then reengage with the financial advisor for how we would address the financial concerns that we anticipated last year. We would think that, that process could move fairly briskly but we are really not providing any guidance when we would expect that from the timing standpoint.

Okay. Thank you. One top of the treetops question with Urenco, having opened a facility here in the States and recontemplating opening one. Can you just comment in general how that might affect your plans in the future, if at all?

One, I think that the opening of the Urenco facility and the desire of Areva to build a plant in Idaho are both indicative of how robust the market is for enriched uranium. Again, you have capacity being added that is being added in the near term to replace the capacity of the George Besse I, the French gaseous diffusion plant and the anticipated replacement of our gaseous diffusion plant. So the first phase is really replacement of capacity, and then you have building capacity through, really, deal with the market itself. We have 59 reactors that are under construction today. About 20 of those will actually come into operation by the end of 2011. So there is very much -- the next phase is the growth in demand.

The other thing I want to come back to and cover on the replacement of capacity is the other thing that this capacity is meant to address the end of the Megatons to Megawatts program in 2013. So you have the transition away from gaseous diffusion to centrifuge technology and the need for capacity and the need to replace that Russian material in the marketplace and then clearly, over the long term there's projected, even in the most pessimistic case, about a 30% increase in demand for enriched uranium by 2025.

Thank you very much.

Yes sir.

Thank you. Our next question is coming from Paul Clegg with [Jefferies & Company]. Please state your question.

Good morning guys.

Good morning. Welcome back.

You've already talked about this quite a bit but I thought I'd log in one more on the Japanese credit export opportunity. I know it's early but in your preliminary discussions, if you can get a sense, or if it's too early, it's too early. Is the size of funding that might be available through that opportunity sufficient to meet your needs past the loan guarantee plus the strategic investors? And if not, can you, for my edification, talk a little bit again about what the backup plans are?

Paul, with respect to size, that is certainly our objective and I think again at this point the discussions are, I think, too early to discuss sizing and amounts and ultimately it will be a reflection of our total needs and uses and their appetite and capacity. So I'll need to defer on that until we have more information. With respect to backup plans, I think that certainly is our expectation is to work with Toshiba on the Japanese expert credit agency. As we see that as a very interesting opportunity for us and then to the extent that in addition, of course, to our external capital, we would be looking to the cash flow that is generated by internal operations to fund the additional investment. As well as one of the advantages of the modular construction is that the plant will be generating SWU and generating cash during its start-up period and that is also a component of funding for total capital cost.

Just a clarification on that point. I've been away from the story for awhile so I want to make sure I understood the terminology. When you talk about initial commercial operations, I think that's the term you used, 18 to 24 months, is that for first commercial SWU production or and then the 36 months is a modular build up period?

That's right. It's the initial production of the first cascades that come online and then what we are characterizing as full -- some may have seen it as full production that ultimately is the 16 [trays] or the output from the two existing process buildings that we're looking to fill out.

And just to confirm, you are getting commercial usable material from those initial cascades as you build them out.

Okay. Perfect. Thanks very much guys.

Thanks, Paul.

Mr. Welch, there are no further questions at this time. I would now turn the floor back over to you for any closing comments.

Thank you all for participating in the call this morning. We are pleased to report on the significant progress that we have made in recent months and we stand ready to answer any questions from the loan guarantee office as we seek an expedited review of our update. I will be presenting the USEC story next Tuesday at the Jefferies Global Industrial Conference in New York and I look forward to seeing many of you there. We appreciate your support, your interest and your continued investment in USEC. Thank you very much.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time and we thank you for your participation.