Centrus Energy Corp (LEU) 2010 Q4 法說會逐字稿

Greetings, and welcome to the USEC, Inc., fourth 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, Stephen Wingfield, Director of Investor Relations for USEC. Thank you, Mr. Wingfield. You may begin.

Good morning. Thank you for joining us for USEC's conference call regarding the fourth quarter and full year 2010, 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; and Tracy Mey, Vice President 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. 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 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 annual report on Form 10-K 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 risks and uncertainties, 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, includingour annual report on Form 10-K and quarterly reports on Form 10-Q. Finally, the forward-looking information provided today is time sensitive and is accurate only as of today, February 23, 2011.

This call is the property of USEC. Any redistribution, retransmission or rebroadcast of this call in any form without express written consent of USEC is strictly prohibited.

Thank you for your participation. Now I would like to turn the call over to John Welch

Good morning, and thank you for joining us to discuss our fourth quarter and full-year 2010 results. We issued our earnings yesterday, and the results were a bit better than we anticipated in prior guidance. John Barpoulis will go through our earnings in detail in a few minutes, as well as our guidance for 2011. During this call, we'll provide an update on our American Centrifuge project and where we are in discussions with the Department of Energy's Loan Guarantee Program Office. We will also discuss the transition of the contract services work we have performed in recent years at the former Portsmouth Gaseous Diffusion Plant. I will start off with a brief summary of our financial results.

Our 2010 revenue came in at $2 billion, which was nearly unchanged from the revenue reported for 2009. The gross profit margin was 7.8%, which was somewhat above the range of our guidance. We earned $7.5 million for the full year, and our annual results were certainly aided by our fourth quarter net income of $9 million. Although our earnings were below those in 2009, the financial results in both the fourth quarter and full-year 2009 reflected the receipt of approximately $70 million from a trade case settlement with Eurodif and its affiliates that had a significant impact on net income for 2009.

Since the summer of 2009, the people involved in our American Centrifuge project have made significant progress on many fronts to address or mitigate project risk during the past 18 months. Our strategic suppliers have been building high-quality components for AC100 centrifuges, our production-ready machine. We have completed a $90 million cooperative agreement with DOE for continued American Centrifuge activities. This agreement supported Lead Cascade operations, manufacturing of additional AC100 machines and refinements to the manufacturing process. The Lead Cascade of AC100 centrifuges has logged more than 400,000 machine hours since the summer of 2009. This experience gives us high confidence in the performance of the AC100 and provides extensive operating data that supports our loan guarantee application.

We've agreed to a joint venture with Babcock & Wilcox to serve as a single point of machine manufacturing accountability that is moving forward, and the strategic investment by industry leaders Babcock & Wilcox and Toshiba has strengthened our financial profile and opened the door to additional financing. We are seeking financing of up to $1 billion from the Japanese export credit agencies, and discussions with them continue on a parallel path with our DOE negotiations, indeed it's been a busy 18 months.

When we held our last conference call in early November, we were about to begin discussions with DOE on a term sheet for a loan guarantee. The Loan Guarantee Office had largely completed their initial technical review in October and provided us with a draft term sheet that served as a framework for our discussions. DOE's decision to begin its next phase of due diligence towards a conditional commitment reflects the significant progress of the past year on both technical and financial fronts. This due diligence involves everything you would expect in a multi-billion-dollar financing. DOE has hired independent advisers, and many of their officials have toured our facilities.

I am very pleased to report that negotiations on a term sheet are making good progress. I'm optimistic that we can reach an agreement on terms in the near future and that DOE will then be able to move promptly to issue the conditional commitment. It is certainly not a done deal, but I am pleased with the progress made in recent weeks. I want to emphasize that funding doesn't come at the point of a conditional commitment. More work will remain to meet any DOE preconditions and to finalize loan documents which then could lead to funding for the project later this year.

I also want to clear up any confusion about our deployment schedule for constructing the American Centrifuge Plant. Last week we announced that we had reached an agreement with DOE regarding several milestones under our 2002 agreement. Under that revised agreement, several milestones were reset. We appreciate the Department's flexibility and its desire to establish an amended set of milestones for the project. As previously stated, our internal schedule anticipates that we will need approximately 24 months to begin initial commercial operations upon receiving financing to complete the plant. Further, we estimate that it will require about 36 months to complete the plant after initial operations begin.

Even as these discussions continue, we are building components for approximately eight centrifuge machines each month. Over the next several months we will be installing additional machines to accumulate more machine hours for the AC100 centrifuge machine that will populate the American Centrifuge Plant. We have a solid machine that is demonstrating its capable of producing 350 SWU machine per year. Yet we continue to development work and value engineering in our facilities in Oakridge, Tennessee, in order to systematically increase the machine's productivity and decrease it's unit manufacturing cost.

With a loan guarantee, ACP will help meet USnuclear energy needs and provide a long-term reliable and secure fuel source for nuclear power plants, both domestically and around the world. And meeting those needs will give USEC investors an opportunity to reach -- to achieve a return on their investment. 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. We appreciate your patience and confidence as we work to obtain financing needed to complete the plant.

In 2002, after we made the economic decision to close the Portsmouth Gaseous Diffusion Plant in Southern Ohio, DOE asked USEC to maintain the facility in a warm shutdown condition so that the plant could be restarted in an emergency. That request began a series of service contracts with DOE that have continued until now. But at its core, USEC is a uranium enrichment company. It is now time for us to turn over these facilities to specialists for decontamination and decommissioning.

Last summer, DOE awarded a contract for decontamination and decommission, or D&D, to a joint venture of Fluor and BMW. In September we deleased several large facilities, including three large production buildings, so that the D&D process could begin. We expect by the end of March many USEC employees in Ohio who have been doing work as part of our contract services with DOE will transition to the D&D contractors. Discussions continue with the D&D contractor and DOE concerning strategies for avoiding or lessening severance liabilities. However, the end of the service contract with DOE could result in USEC incurring severance costs, as well as adjustments to pension and post-retirement benefits. We believe DOE is responsible for a substantial portion of these liabilities, and I said discussions with DOE and the D&D contractor continue. We expect to issue our annual report on Form 10-K later today, and the report contains additional information about these transitions cost.

In closing, let me emphasize two things. We continue to believe strongly that the American Centrifuge is our best path to deliver shareholder value. Our earnings outlook for 2011, which John Barpoulis will provide in a moment, makes it clear that the high energy cost of gaseous diffusion is not competitive over the long term. By successfully deploying this innovative technology, USEC will be positioned to be highly competitive over the long term as a low-cost producer that can meet the growing demand for uranium enrichment. We are making solid progress towards obtaining a conditional commitment from the DOE Loan Guarantee Program. During the past year, we have demonstrated the technical strength of the AC100 machine, we've systematically reduced or mitigated project risk, and we developed a path towards additional funding for the project.

Now I'd like to turn the call over to John Barpoulis for a report on fourth quarter financial results. John?

Thanks, John, and good morning, everyone.

I'll start with revenue for the fourth quarter. As is the norm, SWU sales made up the majority of revenue, totaling $520 million, which was an increase of $139 million or 36% over the same period last year. Uranium revenue was $72 million, which was more than double sales in the fourth quarter of 2009. Contract services revenue was also higher than the same period of 2009, as we neared the end of our accelerated cleanup work at the former Portsmouth plant.

For the full year 2010, total revenue is $2.035 billion, virtually unchanged from 2009. SWU revenue for the year was down $126 million or 8%. The volume of SWU sales in 2010 was down 10% compared to 2009. Although our backlog still contains contracts that were entered into prior to 2006, the average invoice price to customers was up 3% in 2010 year over year. In recent years, we have signed SWU contracts at higher prices and with indices that reflect changes to SWU market prices and electrical power prices. As these contracts have become a larger portion of our backlog, we have seen the average prices billed to customers improve.

Uranium revenue was $236 million in 2010, which was an increase of $55 million compared to 2009. Uranium volumes were up 47%, but prices invoiced to customers were down 11%, reflecting a decline in uranium prices seen in 2009 and the first half of 2010. As many of you know, uranium prices have improved significantly in the last several months and have recently been quoted around $70 a pound.

Revenue from contract services in 2010 was $278 million, an increase of $69 million or 33% from 2009. The higher revenue reflects additional work in Ohio to prepare the Portsmouth site for the decontamination and decommissioning contractor and fee recognition on certain contracts from prior years. This segment also includes revenue from our subsidiary NAC International, which saw a 26% increase in revenue.

On the cost side of the ledger, our two largest cost components continue to be electrical power and the price we pay Russia to purchase SWU. We have a power contract through May 2012 with Tennessee Valley Authority, or TVA. That agreement provides for moderate annual increases to the base price we pay, plus an adjustment based on TVA's cost of fuel and purchase power. Unfortunately, over the past couple years the adjustments have been to increase the price. During 2010, the fuel cost adjustment increased our price per megawatt hour by 10% over the base price, compared to 6% in 2009. Our contract with TVA called for a step-down in power delivered to us beginning September 1, 2010. As a result, we bought 6% less electricity during 2010, and our power costs decreased by $11 million compared to 2009.

Production costs declined $13 million or 2% in 2010, compared to the year prior due to a 4% decrease in production volume, partially offset by a 2% increase in unit production costs. We bought 5.5 million SWU under the Megatons to Megawatts Program in 2010 at a price that was 8% higher than in 2009. As a result, purchase costs to Russia increased $50 million in 2010. The price is set by contract and reflects a pricing formula that includes market raised price points.

We use the monthly moving average inventory cost method, and these higher purchased and production costs components increase our cost of sales for the LEU segment. The cost of sales for SWU and uranium was $1.62 billion, which was $17 million or 1% less than in 2009. A decline in SWU volume delivered was partially offset by higher uranium volume sold and higher units costs. Cost of sales in the contract services segment was $254 million in 2010, an increase of $62 million compared to 2009, reflecting costs associated with the expanded scope of shutdown activities at the Portsmouth Gaseous Diffusion Plant in Ohio and increase in NAC costs.

Gross profit was $158 million for 2010, compared to $205 million in 2009. Our gross profit improved in the contract services segment, but gross profit on the much larger LEU segment was down 28% due to lower volumes and higher average cost of sales. Put another way, the average price per SWU paid by our customers increased at a lower rate than the increase in our cost of electricity and purchases from Russia.

Our gross profit margin was 7.8% in 2010 compared to 10.1% in 2009. Below the gross profit line, we have expenses for advanced technology, primarily related to the American Centrifuge. We substantially demobilized and reduced construction and machine manufacturing activities in 2009. We did, however, continue limited manufacturing, assembly and operation of the AC100 machines and Lead Cascade test program and ongoing development efforts pending receipt of funding to remobilize the project and complete the plan. These activities resulted in significant but comparatively lower expense. The amount of advanced technology expense in 2010, primarily related to the American Centrifuge project, was $110 million compared to $118 million in 2009.

Also included in the advanced technology expense was $2.4 million of work by NAC on its industry leading MAGNASTOR technology and MAGNATRAN, a transportation version of the MAGNASTOR technology. Although the portion of expense related to American Centrifuge declined $10 million year over year, the effect of demobilization can clearly be seen in our capital spending on the project. Spending that was capitalized in 2010 was $130 million, including $32 million in capitalized interest.

In 2009, capital expenditures related to ACP were $379 million or $249 million more than in 2010. Selling, general, and administrative expense was $59 million during 2010, which was nearly unchanged compared to 2009. A reduction in spending on consultants was offset by increases in salaries, other compensation and employee benefits.

In March 2010, DOE and USEC agreed to a $90 million cost sharing arrangement regarding certain American Centrifuge activities. Through December 31, USEC had qualifying expenses of approximately $89 million under the cost sharing agreement with DOE. This resulted in a 50/50 cost sharing contribution of more than $44 million by DOE that was recognized as other income below the gross profit line. This program was completed in early January.

There was a new line item at year end related to the cost of issuing preferred stock that is part of the $200 million investment by Babcock & Wilcox and Toshiba. The first phase of this investment of $75 million was completed in September. The issuance cost for the investment was $6.6 million.

I want to repeat a word of caution when looking at the effective rate of our income tax in 2010. The provision for income taxes was $19.4 million,with an effective tax rate of 72%. Our small net income results in a situation where relatively small tax adjustments can have a substantial impact on the effective tax rate. We've seen several unusual items impact our tax calculation, such as treatment of future Medicare Part D reimbursements, nondeductible dividends and issuance cost for the preferred shares bought by Toshiba and Babcock & Wilcox, and the renewal of a federal research credit that Congress passed in late 2010.

Looking at the bottom line, we reported net income for the fourth quarter of $9 million compared to net income of $49.5 million in the same quarter of 2009. For the full year, net income was $7.5 million, compared to net income of $58.5 million in the same period last year. As John noted earlier, results in 2009 reflect a significant impact of receipt in the fourth quarter of $70 million pretax related to the settlement of our trade case with Eurodif. Results in 2010 reflect the impact of the cost sharing arrangement with DOE.

Turning next to cash. We ended the year with $151 million in cash on hand, compared to $131 million at December 31, 2009. We closed on the first phase of the investment by Toshiba and Babcock & Wilcox in September 2010. This first phase of their $200 million investment provided $75 million. We had no short-term borrowings under our revolving credit facility at the end of the year.

Cash flow provided by operations in 2010 was $23 million compared to $443 million in 2009. The $420 million difference was due to several factors, including a significant monetization of SWU inventory in 2009. I want to note that we have strong sales at the end of the fourth quarter of 2010, and we had an accounts receivable balance at the end of the year of $309 million that we are collecting from customers.

We typically provide earnings and cash flow guidance for the year with our fourth quarter results. We are providing a number of financial metrics for 2011, but because our spending level on the American Centrifuge project for the full year remains uncertain pending a decision by the DOE Loan Guarantee Program, we cannot with any reasonable degree of accuracy provide a specific earnings or cash flow range.

We expect revenue to total $1.7 billion,as revenue in both business segments will likely decline compared to 2010, with a significant decline in revenue expected in our contract services segment. Revenue from SWU sales is expected to be $1.4 billion, or about $100 million less than 2010. We expect SWU sales volume to decline about 10% and prices billed to customers to rise by approximately 3%. Revenue from uranium sales is expected to decline by about $85 million. And as noted earlier, we expect our contract services work for DOE at the former Portsmouth plant to decline significantly.

Looking at our costs, electricity remains the largest cost of production of SWU. Under our contract, we will buy less power from TVA in 2011, but increases in fuel cost adjustment may partially offset the reduction in purchases. A change in the pricing mechanism under the Megatons to Megawatts Program in 2009 will moderate the increase we pay to Russia in 2011. In 2011 we expect to pay Russia 3% more for the SWU we purchase compared to a 8% increase in 2010 and a 11% increase in 2009. Other over the last several years, our gross profit margin has been squeezed by these higher prices paid for SWU purchased from Russia and higher power prices. Together these costs have increased the average cost imbedded in our inventory.

Our guidance for gross profit margin for 2011 is 4% to 5%. We will of course work hard during the year to improve the profit margin as we did in 2010. But we have limited near-term control of our two largest costs, electric power and purchases from Russia. Our revenue and gross profit margin guidance implies a gross margin in the range of $70 million to $80 million.

The amount of spending during 2011 on the American Centrifuge project will be directly related to our progress in obtaining a conditional commitment from DOE and timely closing a loan guarantee and related funding. We are also restricted by the covenants of our credit facility. We expect total spending on the project in the first quarter, both expense and capital expenditures, to be approximately $50 million.

Although we are not providing a specific earnings range; given the expected gross profit range; known spending on the project; and corporate selling, general, and administrative of approximately $60 million; we expect to report a net loss for 2011. We expect our current enrichment operations to generate cash in 2011, but ACP spending and potential payments related to the transition of our contract services work for DOE will reduce cash flow for operations. The full guidance for 2011 was in our earnings news release yesterday, and it includes a number of caveats and factors that could effect our results. Please consider those in evaluating this outlook.

To quickly summarize, we earned $7.5 million for the year in 2010. That's an improvement over the break even result we provided in our guidance for the year. Cash flow from operations was positive. Again, an improvement over our expectations. Our guidance for 2011 is for a net loss based on a gross profit margin range of 4% to 5%. And it's this profit margin squeeze that makes it abundantly clear that our investments in American Centrifuge is vital to the long term profitability of our Company.

And, operator, with that we are now ready to take questions from our callers.

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

Hi. This [Jeff] on for Lawrence

Good morning, Jeff.

Good. Now that you guys are in active discussions with lenders, can you benchmark what kind of margin structure is embedded in the ACP contracts?

Yes, this is John. Let me take a cut at that. John Welch. As John Barpoulis said, our two largest production expenses today are electric power and people. Electricity counts for about 70% of our existing production costs, and we talked about the whole reason for moving to American Centrifuge was that we can cut that power requirements per unit delivered by 95%. So that clearly drives the economics and will allow us to say hundreds of millions of dollars in power costs annually. The staffing of the plant is about half of the thousand employees now working at Paducah plant, and most importantly is when we look for future expansion that doubles the output of the plant, we're probably only talking 40 to 50 additional heads.

At this point in time, we're really not providing long term gross profit margin guidance. During this decade, we recognize that we'll be going through a big transformation and building out American Centrifuge, completing the Russian HEU agreement, and as we move towards retiring the Paducah Gaseous Diffusion Plant. But when we look longer term, clearly we will be a centrifuge-based Company, and to give you some sort of projection, I would take a look at the financial statements of Urenco. It's about the only publicly available information for a pure centrifuge-based company that's available. In 2009 Urenco's statements and information showed an EBITDA profit margin of roughly 60%. We certainly look at that as a good objective for USEC to meet or beat in the very long term.

Great. And I guess as a follow-up on margins, on your existing contracts at Paducah, how should margins evolve over the next few years, and I guess assuming SWU prices don't change, should margins rise 200 to 300 basis points over the next several years as the older contracts roll off?

Again, we don't speculate on the actual margins and improvements there, but I can discuss a little bit about some of the trends. We clearly are rolling off older contracts. Last year we had about half of our contracts delivered under backlog commitments that were prior to 2006. It will be substantially less than that this year. We do see continued improvement in pricing, and our ability to get new sales booked at the higher market prices definitely helps our sales price. So keeping pace and exceeding the price behavior under the Russian HEU and the Paducah costs is something we're shooting for, we think we can accomplish.

Great. Thanks for taking my questions.

Thank you.

Our next question is coming from Paul Clegg with Mizuho Securities. Please state your question.

Hi, guys. Thanks for taking my question.

Hi, Paul, nice to have you back.

Thanks. Can you talk about the contracting efforts at Paducah?It looks like contract of SWU delivers are down year over year in 2011. Is that a trend issue or timing issue? And if it's a trend, is there anything you can do to reverse it? Get more salespeople out trying to expand the capacity utilization of the facility?

Paul, this is Bob Van Namen. A couple of quick comments on that. We do see our deliveries fluctuate year to year. We've had a number of high years and several low years when you look back over the past three to four. So we definitely see cycles in that. We do see near-term open demand as being very limited over the next several years, and we are looking to keep a good solid price in the market. So we do tend to moderate Paducah production as our customer demand kind of goes up and goes down. We do see demand increasing in the -- and open demand increasing in the 2013 to 2014 time frame. So looking to, again, a good balanced solid market over the next several years, with a good opportunity for a step up in the 2013, 2014 time frame.

Okay. And then obviously your uranium sales forecasts are also down considerably in 2011 even as uranium prices are up. Can you comment on the opportunity for underfeeding out of Paducah during 2011, and how that changes, I guess, if your SWU volumes are down about 10% year over year? And is there any possibility of you being able to expand that number during the year.

Yes. Just as a little bit of a background, the diffusion process, we can create uranium by underfeeding the enrichment process, effectively using extra power to work the uranium harder and substituting that power for uranium, thus creating uranium for us to be able to sell in the market. We always are balancing the SWU demand, the outlook for SWU from our customers, along with uranium prices. And again, we benefit by the fact that we can take power and create uranium. And at today's market prices that is a fairly attractive opportunity for us.

It also has another benefit in that as uranium prices go up, our customers under fixed commitment contracts will ask us for additional SWUs, so that creates more demand in the marketplace. They want us to work their uranium harder as well. So we do see stretching the Cascade, underfeeding the process is giving us an opportunity to create more uranium. We also have to keep a careful eye on power prices and how that fits in. We do see some attractive power price opportunities going forward, so we do see the opportunity to benefit from uranium.

So if I can maybe just dig into that just a little bit further. The year over year decline in uranium revenue forecast has a lot to do with where you are today on the existing TVA contract, I guess, combined with sequentially down SWU volumes. But as you see the -- as you see potential opportunities on power prices, as you said, that could create the opportunity for some upside on the -- on underfeeding if you're able to take advantage of it?

It could. We also have deferred revenue as part of our uranium revenue numbers. And uranium that was delivered to customers in previous years or was sold to customers but not delivered until the last year. We did have a high volume of deferred revenue in 2010, as well.

Okay. That may not be repeated in 2011?

Correct.

And then just a final question about -- you sound like you're still in kind of ongoing negotiations with the DOE to see who bears the lion's share of some of the contract transition costs of Portsmouth? Can you just kind of walk us through the time line and process for figuring out how much of that the DOE agrees to bear? Could this be a long drawn-out process, and are they all cash costs? I'm just trying to get a sense of whether or not there's a point during the year where we see a large charge, or if we are given some sort of advanced notice of when and how much that will be.

Yes. We'll tag team you on this one. How about if I talk about the process for the discussions with DOE and let John talk about some of the issues related to those potential liabilities. We are in discussions, I would say, on a daily basis with DOE and with the Fluor BMW D&D contractor up in Portsmouth about the transition. As John said, we will be looking to transition at least part of the work force likely by the end of March time frame. And as part of those discussions, we have a number of issues that we're looking to reach resolution with DOE on. So I would say in the first half of this year, we won't have all of the issues resolved, but we should have a much clearer picture about the liabilities and about the transition issues.

And, Paul, this is John Barpoulis completing the tag team. With respect to the liabilities, these are very much -- we put some numbers out in the earnings release , and there's more information in the 10-K -- that these are -- it will very much be a function of the transition and how we work the transition with DOE and the new decommissioning and -- decontamination decommissioning contractor. As we noted in the release, at the end of the cold shutdown contract, that could result in us incurring some employee-related severance costs. We estimate that liability could be about $25 million. Again, very much going to be a function of the transition. It could be up to that amount. But again, DOE would be responsible for a substantial portion of that, which we estimate at about $18.5 million.

With respect to some pension, post-retirement, health potential related costs, again the end of contract activities could also trigger closing adjustments it those plans. Certain costs may be accelerated, and again, we believe a portion of those costs would -- a significant portion of those costs would be recoverable from DOE. Again, we put out the numbers. Closing adjustments, to our pension plan could be up to $32 million and for post-retirement, health benefit plans up to $15 million. Again, all before DOE recoveries. Those would be cash over a period of time. But again, expected to recover from DOE, and we're working with DOE on how to mitigate the overall transition costs as we work with

And is the most likely scenario a charge in the -- perhaps a significant charge in the first quarter that's not today in your guidance followed by a recovery subsequently from DOE?

Again, timing is uncertain. Amounts are uncertain. Again, we're aiming to mitigate or eliminate these as part of the transition. An example is certainly with employees that are leaving our employment but beginning jobs with the decommissioning and decontamination contractor the next day. Clearly, that -- we're looking to provide a smooth transition for our employees as well as with DOE. And again, the structure of the transition is also uncertain. So again, uncertainty of timing and amounts.

So it get -- okay. Okay. So there's no gun to your head to have to take these charges as of the first quarter. It really will depend on when you terminate discussions, or when you come to a conclusion, rather, in discussions with the DOE on these matters.

Yes. Entirely a function of the timing and structure of the transition.

Okay. Thanks, guys. I'll jump back in the queue

Thanks, Paul.

Our next question is coming from Charles Fishman with Pritchard Capital Partners. Please state your question.

Good morning. Let's see. First off, in your release last night in the progress of the ACP, you said that the DOE independent engineers are preparing a report. Can I ask -- back in October when you received the term sheet from the DOE, you indicated that you got the initial sign-off, initial technical sign-off. Was this independent engineer on board at that time, and was this the entity that made -- that helped the DOE make that initial determination? So are we talking about just finalizing the due diligence report, or is there the risk of a surprise here that this particular independent engineer doesn't think things are as good technically?

The -- maybe, Charles -- this is John well much. I'll take you back in time. In August of 2009, the Department of Energy identified technical issues that they wanted to see addressed. I think we previously talked about the fact that we worked through very extensive work plan to address those issues and have been reviewing that with the Nuclear Energy portion of the Department of Energy on a quarterly basis. The $90 million joint funding activity to address demonstration was part of that.

So the first thing is the Department of Energy wanted to do, after we had done an update through the loan guarantee application, was to do their own assessment. Have we made enough technical progress on addressing those issues to a warrant -- to warrant full-born technical due diligence?So in October, that is what we received. The go ahead from their internal technical team that we had made enough progress from August 2009 on addressing those issues.

Then the formal independent engineer, Parsons, was brought aboard at that time frame to do their evaluation, and those activities were kicked off in the late October, early November time frame. That is the same independent engineer that was involved the summer before, albeit with mostly new members. We have been going through that review. There was very close interaction, no surprises from anything that we had been reporting on. They found no surprises. They actually found extremely positive progress in addressing those issues. Again, we didn't see anything being identified through that process that was a surprise to us.

They prepared a report mid-January that was very positive. They're going through final due diligence and discussions between the financial arm of the Loan Guarantee Office, and that's -- if they're going to be preconditions for closing, that would be part of a conditional commitment that will likely come out of that activity. But the progress, yes, it's taken a fair amount of time to come through it, but it's been very formal in nature, very productive, highly professional-type activities.

Okay. And another question on the -- also on that release last night from the -- on the progress of the ACP. You indicated that negotiations with the Japanese export agencies would potentially provide up to $1 billion. It's my understanding, now, that loan, they will key on the DOE loan guarantee, and obviously, I guess the DOE is keying on this as part of your financing plan. So the two are sort of joined at the hip. Correct?

Yes. That's correct.

And then -- now, with the $1 billion from the Japanese export agencies, would that be the same seniority as the DOE loan guarantee?

We do expect that any debt provided by the Japanese ECAs, as seen in other precedent transactions, would likely be on a [peri cutsu] basis with a DOE loan.

Okay. So then, John, could we think of the interest rate similar to what the DOE loan guarantee would be too?

I think structurally they're different programs, and so we do expect to pay margins on borrowings consistent with each of the program designs.

Okay. Thank you. Helpful.

Sure. Thanks, Charles.

Our next question is coming from George Calfary with Miller Tabak. Please state your question.

Sure. Good morning.

Good morning, George.

A couple of questions. Again, getting back again to Portsmouth, is it your expectation that the majority of the employees would be transitioned over to Fluor and BMW?

This is Bob Van Namen. We are working down that path now. We would not say that's a certainty, but we clearly see benefits in having that amount of the transition where the majority of the work force goes over to the LLC.

And for -- let's say for each individual that moves over, I'm going to -- presumably, that would eliminate -- it would eliminate the severance expense? Would it also eliminate any pension liability, things of that nature?

Yes, muchof those discussions is what is involved in diagramming out the transition. There's a lot of uncertainty as to how that is going to play out, and a lot of it is subject to Fluor and BMW and the type of contracts and offers that they have with the employees. So again, too early to speculate on how that's all going to come out, butthat is -- the goal is that the transition could be as smooth as possible to minimize the liabilities.

Okay. And when I look at the line item of contract services, is that exclusively Portsmouth, or is there anything else in that line item?

Yes. Two other things are in there. We do some government services work at Paducah as well, and then NAC International, the subsidiary down in Atlanta Georgia that does spent fuel transportation and storage as well as consulting, is also included there.

Can you share with us kind of the -- on a percentage basis what those two would represent of that total?

No, we do not have that broken out. But I would say at this point, the large majority is Portsmouth.

Yes. And are there any opportunities for other activity in the near future or even in the immediate future with the DOE for other services?

Let me give you two thoughts on that. Again, NAC does a lot of work with the government on spent fuel transportation. We consider the upside on spent fuel storage as being a good one with Yucca Mountain continuing to go through evaluations and delays and possible terminations. So we do see our customers around the world needing continued spent fuel storage services, and NAC is very well positioned to take advantage of that.

Okay. Thank you. And John, you -- I believe in the last call, at least in my notes, I believe you indicated that you were hopeful of a timing on a close with the DOE sometime in the second quarter of this year. Do you want to modify that timetable at this point, or is that still good?

The -- I mean I think we're very close towards a conditional commitment. A lot -- to be able to answer that question we would have to know what all the final terms were going to be, and as you would expect, it's like any good negotiation. Then the closing will clearly be a function, if there are any preconditions there, that we have to come through. I think what we've said in our guidance is -- and what I said earlier was that we believe that it can still be closed this year. We don't know to tell you the truth. As we know more in a conditional equipment, or we're able to lean forward a little bit more knowing the terms and the things that we come through. But it clearly takes some time to get to that closing activity.

Would -- if I heard you correctly, maybe 2Q might be more accurate for a conditional commitment, and then after seeing that you would make some evaluation as to when you might close? Is that how you are looking at it now?

I wouldn't speculate.

Okay.

I know you -- you're trying to infer too much that we're just not comfortable saying right now. But I can tell you that I feel we're very close.

Okay. And one last thing is, could you tell me the number of machines that are currently up at ACP now?

We've had -- boy, there's -- off the top of my head, I probably can't tell you the exact numbers. But we've had a series of demonstration activities that have been going on for the -- since 2007. It's safe to say those machines that we started in 2007 we have taken offline, because now all the running that we're doing is of the AC100 machines. We've had multiple Cascade activities going on. I think we're getting -- we're bringing one of the Cascades down to bring it -- to put the new machines in that we referenced earlier to go. But there is one series of machines that is operating today [half] speed on gas, but I don't have the exact number with me.

Okay. Well, I'll follow up on it.

But it's still a very dynamic program.

Sure.

And everything we're doing in that program to demonstrate the readiness of the machine, the performance of the machine, we're doing all of that hand in glove with the Department of Energy and independent engineers so they understand what objectives we're trying to achieve with each piece of that.

Thank you very much.

Yes. Thanks, George.

(Operator Instructions). Our next question is a follow-up coming from Paul Clegg with Mizuho Securities. Please state your question.

Hi, guys. The -- I've got a couple more things here.

Okay.

The question about the possibility of a tail stripping contract?You had a press release about this not that long ago. I don't know if there's anything new you can disclose, but maybe digging into a little bit of detail about which part of the DOE are you talking to about this? Is that completely separate from the folks you talked to about ACP and does it need to be bid out broadly as your understanding, or is it something that can just get awarded without a lot of other announcements?

This is Bob Van Namen. It is a separate part of the Department of Energy from what we were discussing the Loan Guarantee Program with, so it generally tends to be in the Environmental Management and Nuclear Energy areas of DOE.

We do not have a structure yet. We have not reached any sort of conclusion. We've had conceptual discussions and are still on that basis right now for the tails program. So it is -- what we see it as is a good win-win opportunity. The Department of Energy has these tails that are on the books as liabilities, and we can take that and turn it into an asset with our available capacity at Paducah. So it is on that basis that we've been having these discussions. And again, still at a very early could conceptual stage.

Okay. And it's too early to say their -- the sense from the DOE this is something that could be bid out or something that could just be awarded?

That is something, again, we have that level of specificity of discussions on.

Too early to say. and on ACP spending, $50 million dollars in the first quarter. It's, let's say a decent number for not knowing yet for sure about the loan guarantee. If there's no response in the second quarter -- I don't want to get too theoretical here, but I guess if there's -- at what point do you start to see that number trail off considerably if we don't hear anything back from the DOE?

Paul, this is John Barpoulis. Again, we're looking to move forward on ACP. And as we always say we will live within our cash from operations and constraints so we will not peg a specific time frame, and we'll continue to press forward with it.

I mean, Paul, the biggest thing that our investors, our customers, and we would like to see is the clear path to the loan guarantee. I can tell you from a project standpoint, we're managing it in a demobilized state and a cost constrained state. The clearer that loan guarantee comes, my whole frame of reference I would hope would change very positively. And there sure are a hell of a lot of things I would like to be doing right now to drive risk out of the project, and -- but we need that clear path. And until then, we will continue to be very conservative in how we're spending our shareholders' money.

Okay. Understood. And then just a follow-up on the guidance basically. The guidance is to have a net loss in 2011, but I wasn't clear whether or not that would be the case with or without ACP spend being?

That was intended to reflect the inclusion of ACP expense.

I see. So if there's no -- ex ACP spending, would you be in a net profit situation in 2011 based on your current outlook?

Again, in the guidance we left out there, you can clearly see that we expected a gross profit of $70 million to $80 million, and you can see the single line item of SG&A of about $60 million, so you can get a sense for contribution from existing operations. Obviously, our financial is very much a function of our progress on ACP and the timing and amounts of that with respect to potential remobilization. So that was the intent of the communication.

Okay. And then just finally, I guess I'm still a little confused about the Portsmouth transition, and I think it's a timing issue for me. Since the contract ends, as I understand it, before the employees transition to BMW and Fluor, and before you actually resolve -- potentially before you resolve your cost issues with the DOE, it seems like there's kind of a gap in timing there. Do you provide the employees to the BMW, Fluor JV on a contract basis until you work out the details?

Let me clarify that. What ends as of the end of March is the cold shutdown contract. There are two scopes of work that we perform in general big buckets. One is the cold shutdown work that is preparing the site for transition to the D&D. The second is what we call the government or infrastructure support work, things like security and fire and water, and that work will continue after the end of March. So we will have, again, a relationship with Fluor and BMW, which provides mutual support of people for their mission on the D&D work and for our infrastructure support work. That is one of the details we're working through right now.

Okay. Thanks very much, guys.

Okay. Thanks, Paul.

We have no further questions at this time. I would like to turn the floor back over to management for any closing comments.

Thank you all for participating on the call this morning. I think it's safe to say we're pleased with our accomplishments during 2010 regarding the American Centrifuge and with the recent progress towards obtaining a conditional commitment on DOE on funding to build the plant. We are intently focused on moving the process forward as quickly as possible. We appreciate your support, your interest and your continued investment in USEC. Thank you, and good day.

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