Centrus Energy Corp (LEU) 2011 Q2 法說會逐字稿

Greetings and welcome to the USEC Inc. second-quarter conference call. (Operator Instructions). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Stephen 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 the second quarter of 2011, which ended June 30.

With me today are John Welch, President and Chief Executive Officer; John Barpoulis, Senior Vice President and Chief Financial Officer; Philip Sewell, Senior Vice President; 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 market's 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 intend to file our quarterly report on Form 10-Q before the end of this week. 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, our quarterly reports on Form 10-Q, and finally, the forward-looking information provided today is time-sensitive and is accurate only as of today, August 4, 2011. This call is the property of USEC, and any distribution, retransmission and 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 Welch.

Good morning and thank you for joining us to discuss our second-quarter results. Yesterday we reported a gross profit of $33 million and a net loss of $21 million. That is a bit better than our prior guidance. Two of the biggest differences between the second quarters of 2010 and 2011 are related to spending on the American Centrifuge Project. Last year about half of the expense for our American Centrifuge was offset by a cooperative cost-sharing program with the Department of Energy or DOE. That program added $20 million of other income in the first six months of 2010.

In addition, this year we expensed $9.6 million in the second quarter for centrifuge equipment that had been previously capitalized. We continue to be successful in our efforts to mitigate costs related to the transition of our contract services business, and we will continue to be focused on mitigating these transition costs as we finish de-leasing the former Portsmouth plant later this year.

Our second-quarter revenue came in at $454 million, which was about $5 million less revenue than reported for the second quarter of 2010. In addition, our costs were also higher, particularly for the electricity we purchase from the Tennessee Valley Authority. While our five-year contract with TVA provides for modest annual increases to the price we pay, a separate fuel cost adjustment has been higher than expected. Severe weather in the mid-South during the spring knocked down access to several TVA power stations, reacquiring TVA to purchase power from outside its system. Because electric power accounts for about 70% of our production cost, this contributed to an increase in our unit production cost of 9% compared to the second quarter of 2010. John Barpoulis will go through our earnings in detail in a few minutes, as well as our updated guidance for 2011.

Let me spend a few minutes updating you on the activities we have taken over the past few months to transition our Uranium Enrichment business to the American Centrifuge. When we reported first-quarter earnings in May and provided an update at the end of June, we had hoped that DOE would have provided a conditional commitment for a $2 billion loan guarantee by now. That did not happen, but we still see a path for financing the project. We still believe in the project, and we still see American Centrifuge as the best way to deliver shareholder value.

It has been two years since DOE asked us to address their financial and technical concerns. We've spent countless hours addressing those concerns, which include assembling a Lead Cascade of production-ready AC100 machines. A year ago in July 2010 we submitted a comprehensive update to our loan guarantee application.

Last October DOE informed us that it had largely completed its initial technical review, and we proceeded to the next step in the process, negotiating a term sheet for the loan guarantee. In April 2011 we reached a significant milestone in the process, completing the due diligence and negotiation stage. A draft credit package that included the negotiated terms sheet was submitted on parallel paths to DOE's credit group and to the office of management and budget, the National Economic council and the Treasury Department for review and determination of an estimated credit subsidy cost range.

At the end of June, we took additional steps to provide an additional limited period of time to complete this review process and to obtain a decision from DOE on the conditional commitment. These USEC actions included working with our lenders to amend our credit facility and entering into a standstill agreement with Toshiba and B&W regarding closing on a $50 million second phase of their strategic investment.

Recently DOE officials have verbally indicated that USEC needs additional financial and project execution depth to achieve a manageable credit subsidy cost and to proceed with a loan guarantee. We are working with DOE and its advisors on reviewing structuring options to address the remaining concerns in order to move forward on ACP and to obtain a conditional commitment and loan guarantee.

We have also retained financial and other advisors who are helping in this review of structuring options and pursuit of strategic alternatives. There is a wide range of options available, and our review will be through the prism of which options deliver the best value to the shareholders.

We are fully engaged and have an ongoing dialogue with our strategic investors, Toshiba and Babcock & Wilcox. As you know, each company has a representative on our Board of Directors, so they are completely aware of our discussions with DOE. All three companies have the option of ending their investment as of the end of June 30. As I have previously mentioned, we all signed a standstill agreement through August 15. We are working to extend the agreement to allow time for the review of structuring options to take place.

In the meantime, the project is not standing still. The Lead Cascade test program continues. We did have an electrical fault in the plant's support system that led to the failure of some of the machines in June. This event was not related to machine technology and machine design or machine manufacturer. This is a test and demonstration program, and the important outcome is to implement the lessons learned from this event. The commercial plant's systems design will include safeguards and redundancy to ensure that the issues identified will not occur in the commercial operation of the plant. All of the available centrifuges in Lead Cascade test and demonstration program have returned to operation, and additional centrifuges will be added over the next several months.

On our last call, we announced that we had launched with B&W a joint company for the manufacture and assembly of the AC100 machines. I am pleased to report that the startup of that joint venture has gone well.

American Centrifuge Manufacturing, or ACM, consolidates accountability for centrifuge manufacturing and assembly under one business unit. We believe this consolidation will ensure that our AC100s will be built in a cost-efficient manner but also to consistent high standards. The new company operations are located in USEC's existing American Centrifuge technology and manufacturing center in Oak Ridge, Tennessee. These are skilled, well-paid positions. If we can obtain the DOE loan guarantee and related financing, ACM would hire additional staff. These jobs are part of the 8000 direct and indirect jobs that the American Centrifuge Project is expected to create or support in several states.

In closing, let me emphasize three things. While the process of obtaining a loan guarantee has taken much longer than we anticipated, it is clear that DOE and the administration want to see the project move forward. We still see a path for funding the project through the DOE program. We sincerely appreciate the patience of our investors, customers and suppliers. We believe strongly that the American Centrifuge is our best path to deliver long-term shareholder value.

Second, we need to resolve the remaining DOE issues surrounding conditional commitment for a DOE loan guarantee as soon as possible. While the end of the quarter with over $340 million in cash, we are very mindful of our limitations.

Third, we are absolutely committed to pursuing the structuring option or strategic alternative that delivers the highest return to shareholders for our enterprise value and the investment we have made in American Centrifuge Project over the last several years. The management team and Board of Directors have significant equity holdings, and our interests are aligned.

Now I would like to turn the call over to John Barpoulis for a report on second-quarter financial results. John?

Thanks, John, and good morning, everyone. Starting with revenue for the quarter, total revenue was $454 million with SWU sales making up the majority of revenue at $330 million. The decrease in revenue year over year for SWU sales was less than $1 million. The volume of SWU sold was 1% lower, and the average price billed to customers was 1% higher.

Looking at revenue for the six-month period, total revenue was $835 million with SWU revenue making up $639 million of that total. SWU revenue increased 7% compared to the same period of 2010.

The volume of SWU sold increased 3% in the six-month period, and the average price billed to customers also increased 3%. In recent years we have signed SWU contracts at higher prices and with price adjusters. As these improved contracts make up a larger portion of our backlog, we are seeing an increase in average prices billed to customers. Uranium revenue was $68 million in the quarter, which was a decrease of just under $2 million compared to the second quarter of 2010. In the six-month period, uranium revenue was $82 million, which was a decrease of $3 million.

Uranium prices improved during 2010, and that trend was reflected in our sales for the first half of 2011. The average price in uranium revenue was 36% higher than a year ago, but volume was down 29%, reflecting declines in uranium inventory for sale. Uranium spot prices have been volatile and lower since the tsunami in Japan, but the long-term price for uranium has remained fairly constant.

Turning back to revenue, we continue to transition in our contract services segment as we conclude the long-standing full coal shutdown contract with the Department of Energy. This segment also includes revenue for our subsidiary, NAC International.

Revenue for the second quarter was $56 million, a decrease of about $3 million from the same quarter last year. In the six-month period, revenue for this segment was $114 million or about $7 million less than the same period in 2010. We are continuing to wind down operations at the former Portsmouth Gaseous Diffusion Plant and transitioning to the decontamination decommissioning contractor there. We anticipate completing this transition of operations and affected employees by the end of September.

Switching to the cost side of the ledger, our two largest cost components are electric power and the price we pay Russia to purchase SWU. We have a power contract until May 2012 with the Tennessee Valley Authority or TVA. That agreement provides moderate annual increases to the base price we pay, plus an adjustment based on TVA's cost of fuel and purchased power.

During the first half of 2011, our power costs declined because we purchased 21% fewer megawatt hours of electricity compared to the same period last year. Under our TVA contract, we have reduced our non-summer month purchases from 2000 MW to 1650 MW beginning in September 2010.

However, the average costs per megawatt hour increased by 7% in the first half of 2011, reflecting a higher TVA fuel cost adjustment, as well as the fixed annual increase in the TVA power contract. The fuel cost adjustment added about 13% over the base contract price in the six-month period. That is well above our estimate for the year.

For context the full-year adjustment was 10% in 2010. The higher fuel adjustment was due to severe tornado and thunder storm damage in the mid-South during April and May that reduced TVA's generating capacity and required the purchase of significant amounts of higher cost replacement power.

Deliveries of SWU from Russia under the Megatons to Megawatts program resumed during the second quarter. Purchase costs declined $43 million during the first half of 2011 compared to the same period last year, but that was due to the timing of deliveries. The purchase cost increased 3% year over year.

These higher purchase and production cost components affect our cost of sales for the LEU segment. The cost of sales for SWU and uranium in the six-month period of 2011 was $676 million, which was $50 million or 8% higher than in 2010. This change was due to the 3% increase in SWU volume and 9% higher SWU unit costs compared to the first half of 2010. Cost of sales in the contract services segment during the six-month period was $112 million, an increase of $4 million compared to the same period in 2010. This reflects short-term work at the Portsmouth plant in Ohio and a $5 million curtailment charge for the retirement benefits of USEC employees transitioning to the new D&D contractor there, as well as higher costs associated with increased sales at NAC.

We have additional information about the transition within our contract services segment in our 10-Q, which we intend to file before the end of this week.

Gross profit was $33 million for the second quarter compared to $44 million in the same quarter last year. Our gross profit margin was 7.3% for the second quarter compared to 9.6% in the same quarter of 2010. In the 2011 six-month period, the gross profit was $47 million compared to $71 million in the same period of 2010. The gross profit margin was 5.6% so far this year compared to 8.8% in the first half of 2010.

Even though the average price billed to customers for SWU is 3% higher in the first half of 2011, the impact of higher inventory costs for purchases from Russia and the cost of electric power for SWU production in earlier periods and the small profit in contract services caused the overall gross profit margin to decline.

As John mentioned earlier, we updated our financial guidance, and we now expect a gross profit margin of 6% for the full year. That is an improvement over our initial guidance of 4% to 5% for 2011.

Below the gross profit line, we have expenses for advanced technology, primarily related to the American Centrifuge. In late 2009 we substantially de-mobilized and reduced project construction and most machine manufacturing activities. However, we have continued to operate a Lead Cascade program to increase machine operating hours of our AC100 centrifuges, providing additional assurance of performance, reliability and plant availability. The amount of advanced technology expense in the six-month period of 2011, primarily related to the American Centrifuge Project, was about $60 million or $8.5 million more than in the first half of 2010.

In the second quarter, we expensed $9.6 million of previously capitalized construction costs and associated capitalized interest costs related to a number of centrifuges machines that were irreparably damaged in the Lead Cascade test and demonstration program. Last year USEC and DOE implemented a cooperative cost-sharing agreement for American Centrifuge activities. That $90 million program was completed in January 2011 when USEC made the final qualifying expense of $1.2 million. With cost sharing, that resulted in $600,000 that was recognized as other income. In the comparable six-month period of 2010, $20 million was recognized as other income that represented DOE's 50-50 pro rata share of qualified expense.

Also, included in the 2011 advanced technology expense was less than $1 million of work by NAC on a transportation version of the MAGNASTOR technology.

Selling, general and administrative expense was $32 million during the first half of 2011, about $3 million higher from a year ago, primarily due to the slightly higher salary and employee benefit costs.

Looking at the bottom line, we reported a net loss of $21.2 million for the second quarter compared to net income of $7.2 million in the same quarter of 2010. For the six-month period ended June 30, we reported a loss of $37.8 million compared to a net loss of $2.5 million in the same period of 2010.

Turning next to cash, we ended the quarter with a balance of $340 million compared to $151 million in cash on December 31, 2010, and $208 million on June 30, 2010. The major sources of cash during the first half of 2011 were payments by customers on Accounts Receivable that provided cash of $175 million and monetization of inventories that provided $174 million.

Payments to Russia, payables to Russia and capital expenditures related to the American Centrifuge Project represented the most significant draws on cash during the first half of the year. Cash flow from operations for the six-month period of 2011 was $286 million compared to cash flow from operations of $173 million in the same period last year.

We had no borrowings under the revolving portion of our credit facility at June 30, but we expect to borrow on the facility from time to time later this year based on working capital needs.

I want to make one point very clearly. I'm keeping a very close eye on our liquidity outlook. We ended the quarter with approximately $340 million, and our strongly held management philosophy is that we will not spend ourselves into a problem with liquidity. We know cash is king, and therefore, we have only authorized project spending for short increments of time and for limited amounts of money.

In yesterday's earnings release, we provided an update of our 2011 guidance. These are generally modest adjustments that reflect the half-year's actual results, some shifts in timing of SWU deliveries and additional revenue in the contract services segment. Let me provide a few highlights.

We anticipate total revenue of $1.7 billion, which is consistent with our initial guidance. We expect SWU revenue to be slightly below our original guidance of $1.4 billion, while uranium revenue expectations remain at $150 million. We anticipate contract services revenue will be approximately $200 million, an increase of $50 million above the initial guidance.

Electricity remains our largest production cost component. We are buying less electric power in 2011 than we did in 2010 for our contract with TVA, and the dollars spent on electricity will decline. However, the fuel cost adjustment has been higher than expected. TVA bought replacement power this spring due to damage from tornadoes and other severe storms, and this summer's heat wave will not help. We are continuing to evaluate our TVA load profile with the goal of optimizing power purchases and reducing our exposure to fuel cost volatility.

Our purchase costs paid to Russia under the Megatons to Megawatts program will increase 3% year over year, the smallest price increase we have seen in recent years. Due to lower production costs and a small increase in the average price billed to customers, we now anticipate a gross profit margin of 6% compared to the 4% to 5% guidance provided at the start of the year. We expect selling, general and administrative to come in at approximately $60 million. That is unchanged from our initial guidance. Our view on spending on the American Centrifuge project continues to be a function of our progress toward a conditional commitment and toward a timely closing on a DOE loan guarantee and related funding. As the year has gone on, we have incrementally allocated our spending on the project in 2011.

We now anticipate that total spending, both capitalized and expensed, will be approximately $145 million through the end of August. Because project spending has a significant effect on net income and cash flow and the full year's spending is still uncertain, we are not providing guidance on net income or cash flow from operations at this time.

That said, when you look at spending on the project in the first half of the year and our anticipated gross profit margin, we expect to report a net loss in each quarter in 2011. We also expect that our enrichment operations will generate positive cash flow from operations.

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 recorded losses for the quarter and six-month period, but these were anticipated in our prior guidance. We updated our guidance, and we see an improved gross profit margin for 2011 compared to our initial guidance, and we are sharply focused on delivering shareholder value during the review of structuring options and strategic alternatives.

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

(Operator Instructions).

While the operator is polling for questions, I would like to touch on a question that we received from investors recently and specifically would like to ask Bob Van Namen to touch on the status of our power contract discussions with TVA.

Thank you, John. As you know, the power element is a very important one for our continued operation at the Paducah plant. First, a quick update on the operations.

The plant continues to operate well, and it has a very strong and talented and committed workforce. We see no issues with the plant, which would prevent further operation beyond the May 2012 timeframe.

We also see a good outlook for power supply post-May 2012. Natural gas supply, which dominates the market electricity prices, remains strong. We continue, as John said, to see volatility in the TVA fuel cost adjustment mechanism, and we will look to minimize our exposure to this volatility in future power procurements.

Power is one element of the economic equation necessary to support the continued operation of the plant. The other two elements are sufficient market demand for the output of the plant and a high assay tails re-enrichment program with the Department of Energy.

We continue to closely monitor the supply/demand situation after the tsunami and earthquake in Japan and its impact on reactor operations. We are encouraged that the House Energy Subcommittee led by Chairman Whitfield from Kentucky recently passed legislation providing for a tails re-enrichment program. In the end all of the pieces need to fit together for us to extend Paducah operations. We remain committed and optimistic that we can obtain sufficient clarity by early in the fourth quarter this year to make that decision.

Back to you, John.

Operator, we would like to take our first call.

Laurence Alexander, Jefferies & Co.

Just a couple just to elaborate on that. So, first of all, it sounds as if you're now saying that you need the high assay tails program to be confirmed to justify continuing Paducah? Is that the case?

Yes, it is one of the elements. It is a key element. We are seeing the market demand in the near-term being reasonably thin, and we like to operate the plant between 5 and 6 million SWU. So having that high assay tails program to pull off about a third of the overall output of the plant is a needed part of the equation.

And so can you just walk us through the long-term contracts you have in your backlog? That is how many SWU are you -- do you have visibility on over the next few years? And then if you do decide to discontinue Paducah, how do you service those customers, and do you pay penalty clauses?

We have a number of elements of supply still at our disposal. We have a substantial inventory that backstops the HEU deal and the continued Paducah operation. As you know, the Megatons to Megawatts deal will be ending in 2013. So we still have supply from that. We have a good amount of inventory under again the backstop set that we will be drawing down after Paducah and the Megatons to Megawatts comes to an end. We also have the TSA agreement with the Russians. So these elements together, along with startup SWUs from the American Centrifuge plant and continued Paducah operation, give us a variety of sources of material.

And then if you were to take the parts of your business that are covered under long-term contracts, which are already largely set, I mean you could almost sort of divide your business into the parts that you can predict and the parts that you cannot predict. Have you tried running an exercise where you figure out how much free cash flow or EBITDA is embedded in those long-term contracts that you have visibility on? So that your creditors and your investors can have a better sense for what the baseline business can sustain plus -- and then factor in the variability around energy costs and around the ECP costs?

I think that from a backlog standpoint we typically do provide that update on total backlog in our 10-K, which most recently I believe was just under $7 billion in the previous 10-K just to clarify the backlog question.

And, as we do look at our operations, we certainly do look at our LEU segment as a continuum. That being said, as we have established the financing and business model for the American Centrifuge Project and specifically in line of the project finance approach, there are certain contracts that are more directly related to the American Centrifuge program and to support that financing.

And so I would say that we certainly are conscious and look at the support of the capital structure between the sources for existing LEU operations and to support the financing effort for American Centrifuge. I would also add that we are also focused on providing continuity of supply for our customers, and so we are trying to make that as seamless as possible from an external standpoint.

And maybe if I can ask for an elaboration on that, so on the $7 billion in the backlog, do you have visibility to be able to say what the embedded EBITDA in that backlog is given that your contract structures have been changing significantly over the last few years and those new contract structures will be flowing through in the future?

And then just as a follow-on, can you address if there is any -- what leverage you would have for cost-cutting or restructuring apart from the ACP, or are you pretty much already about as lean as you can get on the cost side?

I will cover the EBITDA question first. I think we provide our guidance on our annual basis, so I think it would be a challenge for us to provide any EBITDA further out and also recognizing the various variables associated with our sources of production with respect to the power market but also on the revenue side.

I would also note that we do have additional information in our full 10-Q, our 10-Q -- 10-K rather with respect to the subset of that backlog, which is associated with the timeframe through about 2015. That number from our 10-K was $4.7 billion.

We do expect again from a gross profit margin standpoint for the year that we see that improving from our earlier guidance from 4% to 5% to 6%. And so I think that is the best we can provide with respect to gross profit margin guidance in the near-term. Bob?

Yes, just a couple of quick comments on cost cutting. With 70% of the production cost from Paducah coming from power, that is clearly our main focus. That is why we are still concentrating on TVA and non-TVA power supplies for extended operation and to be able to improve the margins from that production. So I do think from a cost and personnel, the maintenance, the other facilities, we are about as lean as we can get, but we do focus on power opportunities as our main source.

Paul Clegg, Mizuho.

I'm trying to understand what structuring options and strategic alternatives encompasses, so I will just ask one flat-out question; is USEC for sale?

Well, reviewing structure options or strategic alternatives can encompass a wide range of potential outcomes. And, as you would expect, our comment would be it is incorrect to assume that the sale of the Company is the sole or even the primary goal of that activity. Clearly we are trying to respond to the Department of Energy's issues surrounding increased project execution strength and increased ability to support any of the financial issues that come up in the deployment of the plant.

We remain committed to the deployment of the plant, and we are looking to address the indications that we need this additional financial and project depth, and it is clearly focused on achieving a manageable credit subsidy cost so that we can go forward with the loan guarantee.

Did the DOE give you any range of the potential subsidy, credit subsidy?

We have not been provided with an estimated range for a credit subsidy cost for ACP. Based on our conversations with government officials, again, DOE would like to see some additional financial and project execution depth to proceed with the loan guarantee. As John indicated, this additional depth would also help achieve a manageable credit subsidy cost. We are, frankly, working with DOE and their advisors on reviewing these structuring options to address the issues.

I think in addition we have advocated that as the government is going through this determination of credit subsidy costs that the government should consider the very unique aspects associated with the project, such as national security value, nonproliferation value, the $2 billion of equity investment that the Company has made to date, that our investors have made to date, the pledge of non-project collateral as part of the overall financing package, the modular design of the plant, and not least the $100 million royalty fee that would be paid to the US government once the plant is operational.

Are they going to let you use the royalty payments as an offset to the credit subsidy?

We certainly hope so.

Okay. (multiple speakers) -- not been decided yet?

They have the recognize that revenue stream.

Okay and just a couple of other brief ones. The Japanese export credit agencies, no real mention of that. Are they still in the picture? What do they need to see happen? Any change there?

No change. They are still in the picture and are working through their diligence process.

Okay. And then one question we have gotten is, it seemed like you were pretty far along in the process of this substantial completion of the application moving forward towards the term sheet. So why did not the DOE raise any of these concerns before now? And I'm sure that is a question you probably asked them.

Needless to say, it has taken longer than we anticipated it would. Based on some of precedents that have gone on in the loan guarantee program in general, there are indications that the government's process to determine credit subsidy costs can be very challenging. We cannot speculate with respect to the timing of this feedback from DOE, but as challenging as it is, we remain focused on a path that will maximize the shareholder value and the deployment of the project, we believe, is the path to do that. We have very good strategic partners in B&W and Toshiba. That is why they are the first ones we are turning to in any sort of look at structurally how we would address the concerns. But, on the other hand, we readily admit our liquidity is not unlimited, and so this cannot go on forever.

I think our view is that this is a process that is in the range of weeks, not months, to come through these issues and get to a decision point. But we clearly share the frustration with our stakeholders.

And then one final one, you touched on this point, but you do have strong partners in the centrifuge project. So I'm a little bit perplexed by the characterization that you need more depth in project execution. I understand the financial part of it. They clearly want a buffer there, but what do you understand that to mean and what sorts of things can you do to improve the project execution depth?

Well, certainly part of the dilemma in that is that we are in a de-mobilized state right now basically running demonstration activities. And through those demonstration activities, we are demonstrating readiness of the machine, readiness of our operations to transition.

So I think, as we look to the full project execution, a larger project, again, there is a concern of scale. How do you best put the right resources, adequate resources, and this was down to our supplier base as well? That gives you high confidence that you can go forward.

Clearly one of the issues we are dealing with is that this technology, albeit fielded in the 80s, this particular machine has not been deployed commercially. That is why we are doing so much testing. So I think when you look at depth of resources and project execution you are thinking on a grander scale. Every time you have issues that you are dealing with, you are looking at how best do we strengthen the project for that execution. That is clearly an item that when we move to the next phase of the project through our license at the nuclear regulatory commission we will be looking at very closely as well. You know, the initial license is for the Cascade. They will be back in as we get the approval to move to commercial operation.

I think it is more a matter of scale than anything else.

George Caffrey, Miller Tabak Roberts.

If I understood you correctly when you were talking about the financial and project execution, the pushback you were getting from the DOE, you are talking about scale. Is this something that you can prove vis-a-vis like an engineering design, or is this much more what I would call time-consuming process related to building and implementing additional centrifuges, etc., etc.?

I think the more time-consuming things is what we have been ticking off that list as we have gone through these demonstration activities since 2007. An example I would give is we have a rate of centrifuge manufacturing that is much higher than we are manufacturing today when we are in full rig production. And so a series of activities we have been carrying out with our suppliers and with B&W this past year is to demonstrate each of the aspects of how we are going to manufacture the machines and actually ran through a period of time where we demonstrated the rate at which we could build the machines. And then if you look at if you add two or three more trains on that, that you would be up to that maximum production rate. We came through that very solidly.

So the big, heavier items related to facilities and demonstration of machines, we are through that. I think it is really the management structure and the program management side of the house, is it strong enough to carry out that big a complex project? And we certainly know the project controls that are in place when you are in full execution of the project are going to be a lot greater than they are for our current state of affairs.

Thank you. And who is the consultant?

I'm sorry, George, in what capacity?

You mentioned that you have hired financial -- not financial -- you have hired consultants to assist you in the process, I think?

Yes, we have. We have retained advisors. We will not name the entities specifically, but I think I can assure our investors, stakeholders we work with reputable firms. I think a long list certainly includes the firms that cover us from an equity and analyst perspective that have joined us on the call today, as well as the [name] institutions in our lender group.

Okay. And the NRC application that required for you to go beyond the summer of 2012, did that have any impact at all? Was that at all related to the DOE request, or are they mutually exclusive?

Mutually exclusive. It is just part of the update process of the license.

Okay. And then one last question and this relates to the issue with respect to the centrifuges back, I think, it was in June due to the electrical fault, could you just talk a little bit about what the required reporting requirements are for when you have an event like that?

Well, let me walk through and provide a little more color on the expense itself. The expense was not in asset impairment. We did charge to expense cost for centrifuge equipment that had previously been capitalized and assessed in the preparation of our quarter-end financial statements. And so this expense included the machines but --

Are you asking about the event in June? Was that the question?

Not so much what the event was, but in terms of reporting whether it is to regulatory authorities or anything. (multiple speakers)

With respect to regulatory reporting, within 24 hours of any sort of -- especially while you are going through a loan guarantee process, you are keeping the Department of Energy loan guarantee office up to speed on anything that is going on in the plant. If you had a electrical storm that took power out for a short period of time, you got it back, you are going to report all of that.

K-1600, our test facility in Oak Ridge, the regulatory responsibility there is with the Department of Energy. In the case of the Lead Cascade in Piketon, the regulatory agency there is Nuclear Regulatory Commission, and they were informed of the event.

Robert Clutterbuck, Robert Clutterbuck Fund.

John, this is a little reiteration of some of the other questions, but the way we look at -- to restate what you said earlier, in October of 2010, we essentially had a term sheet. In May of 2011, the big thing was just the final terms of financing. And now I'm not exactly even sure what additional financial project execution means, but it seems we are semi back to square one. Our greatest concern continues to be the endless summer scenario where the DOE just continues to put that carrot out there on the American Centrifuge project, and we are always just missing it.

Can you give any guidance as to the timeline? Are we talking weeks, months, quarters, years? And also, I think this question was asked earlier, but if you could maybe ask it in different way, could you give us some guidance on the scope of the strategic initiatives?

Why don't I touch on the timing aspect? I think, first, I can say we certainly appreciate the patience of not just our investors, but all those associated with the project -- customers, project suppliers and employees -- and that patience is not unlimited. I can tell you that from a timing and limitation standpoint that as CFO I am -- we are very, very focused on preserving adequate liquidity for the Company in ongoing operations. Ultimately we know we can't and will not keep spending without a clear path to that conditional equipment from DOE, and we continue to work with them to ensure that that path is clear and better defined.

So what you are saying is you're just keeping an eye on it, but, again, it could be weeks, it could be months, it could be quarters.

I think we think in terms of weeks at this point, and I don't think we're looking at quarters and years.

And you can be assured, Bob, that these are the same kind of questions that we are getting from the board. If we are not seeing a steady progress towards moving forward with the project, we are not afraid to do what we have to do. And the department knows that. Certainly in our discussions with them, the department and the administration very much wants to move forward with the project. We clearly are trying to -- the question was asked earlier on credit subsidy cost range. We clearly need to roll our sleeves up with the department and understand what the challenge there is or what we are looking for. That process is ongoing. We can't let it be an endless process, but it has been made very clear to us that we need to look at some financial strengthening of the project, and that is what we are now taking a look at.

But my view is this has got to be a weekly -- week by week process, and if we don't see that there is in end game that gets us to maximize the value for the shareholders in it, then we will have to take action in the other direction.

All right. Well, terrific. That almost leads into, and I know you probably can't go into great detail, but on the strategic initiative side, potentially you are just going to do whatever is right for the shareholders?

That is our focus. Absolutely.

Okay. Thank you, gentlemen, and god speed.

Brian Grad, DLS Capital Management.

Thanks, guys. I think that last gentlemen pretty much answered my question.

Ben Elias, Sterne, Agee.

I just wanted to clarify, so with the question of additional debt, it is more -- you are going to have to provide more information? You don't have to take take any actions? Is that a correct way to look at it?

I think that it will be both. I think that we are certainly seeking to better define that, as well as taking actions as John outlined earlier to resolve these indications.

Okay. You have a successful agreement. I think it expires August 15. I think in the press release you indicated that you are in discussions and perhaps we get another extension. How are you thinking in terms of your end deadline that you have for the third tranche? Is that going to be negotiated or renegotiated right now, or these will have an expectation of getting the final loan guarantee by year-end?

I think we are very conscious of the aspects of our agreement with B&W and Toshiba. I think we are fortunate in that our strategic investors have been working very closely with the Company, looking at the individual. Certainly B&W is part of the joint venture to build AC100 machines. Each company has a representative on our Board of Directors. Each company has some kind of personnel working with USEC employees to make the project a success. I think we have been clear about the work we have been doing together with respect to the June 30 deadline or the June 30 date in the agreement and are certainly aware of the year-end aspect as well.

The agreement also has built-in mechanisms related to that third deadline. But I think it is fair to say that we continue to work very closely with our strategic investors. We cannot speak for them obviously, but we continue to work very closely with them.

My question -- we don't doubt the interest and co-operation with the strategic investors. Quite clearly, the DOE, for lack of a better term, has been the one dropping the ball here. Is it reasonable to expect them to move from conditional loan guarantee if you say it is in a couple of weeks from September through December? And I know AREVA, you know, their issue is a little different, but they got the traditional loan guarantee last year. They still have not got the final approval. So I'm just looking to establish a reasonable timeline. I know B&W and Toshiba will go the distance, but what is your expectation of the DOE?

I will add a little color to that is that a) in talking with them, it is clear both with administration representatives and DOE, they want to find a way to move forward with the project. So once we get to a conditional commitment, it still does take time to close whether it is a four to six-month timeframe, but that is mostly the issue of going through the documentation side of it. We have a license to operate the plant. We are operating under that today. AREVA does not have that.

And so as far as regulatory issues or regulatory approvals, things like that, we should be able to move very quickly. But it is still does take time to across all the T's and dot all the I's. And I think if you look at it through DOE's perspective, all of this due diligence I think is certainly focused today. When they provide a conditional commitment, they would like to feel that it is something that everybody is going to be agreeable with, and we can rapidly take it to closing.

There are not many programs that can generate the number of jobs that this program has, so you can certainly understand why they would like to do it. But they certainly want to protect the taxpayers in the process and ensure the loan can be repaid.

Randy Laufman, Imperial Capital.

I just wanted to touch on cash flow real quickly and working capital. I know a lot of your future spending has to do with the level of spending on ACP, but could you give us some guidance on working capital and cash flow maybe through the end of the year? Should we expect a big reversal at some point in the working capital and cash flow as we saw this quarter?

In our guidance outlined as a whole, we are expecting positive cash from operations from our segments for the year. So I just want to make that clear upfront.

I think the second piece, Randy, with respect to drivers of working capital, certainly the shape and profile of our operations in Paducah in terms of we will run that at lower power levels in the summer and higher in non-summer months that are drivers in the timing of our working capital needs. The shifts with respect to the delivery of the LEU or SWU from Russia will happen during the months where the ports are clear, and so that also tends to be during the mid and toward the end of the year. And so those are drivers from a production cost standpoint. And then obviously we are looking at the timing of delivery at our deliveries to customers.

And so the one aspect of our business is that we are lumpy, and we do have our working capital needs. And so that is the reason for the relative size of our credit facility to be able to handle those. And so, again, at the end of the quarter with no draws on that credit facility, that is fully available, and from a directional standpoint, while I will not quantify it specifically, expecting net positive cash from existing operations.

Ben Mackovjak, Rivanna Capital.

If the situation was not costing me so much money, it would almost be laughable considering AIG was given $85 billion with a day of consideration. But that's not my question. My question is, what are the restrictions on who could buy the ACP or the Company as a whole?

I think that we are certainly wary of foreign ownership limitations with respect to our NRC licenses as certainly a clear factor, but on the whole I would not want to speculate on limiting our options per se.

The other item is the classified material, the classification and sensitivity of the technology that we are dealing with. But, other than that, I don't think there are limitations.

And is there a situation where the ACP could just be sold and the rest of the Company would stay as USEC?

Again, we would not want to limit the thoughts that we are thinking through. Obviously we look at our long-term enrichment segment and providing delivery of enrichment to our customers. I think one can certainly get into the aspects of project finance and capital that effectively provide capital for specifically the ACP project and for its operations all in ways to in effect monetize the value of ACP for our shareholders whether that is in an upfront basis or over time. Again, don't want to imply that we are limiting the options that we are looking at, but also not to speculate too far on paths that we could go down.

Paul Clegg, Mizuho.

A question about the order book on ACP. I think you have mentioned a figure in the past, but could you update us on how much of the order book for ACP is filled at this time? I think you have talked about the first 10 years in the past. And then if you could break that down, I'm curious of how much of that would come from the US versus Asia.

And I wanted to talk about this basically in the context of where do you think the DOE could come out on a requirement as a precondition for a guarantee?

Bob Van Namen to talk about the backlog a little bit. We don't give specific updates on the timing of the backlog itself, other than the breakdown John mentioned before just given the 10-K on our overall backlog.

Just to mention, currently our portfolio is roughly 65% domestic, 35% international. We have tried to hold a similar structure for that for the ACP. We have had success in the US, in Europe and in Asia with our long-term contracting there. So we like the idea of continued with a diversified position with a number of the key customers around the world. We do not see the constitution of the backlog as having any impact on the DOE loan guarantee discussions.

It is John Barpoulis. I think that while not getting into specifics with respect to preconditions or aspects of the term sheet that we have worked on with DOE, ultimately the revenues from ACP-related contracts are a very key part of the credit picture. And ultimately we have worked through and are working through a path that we think is ultimately achievable and that we can live up to. And, of course, there is no assurance that the terms that we have worked on with DOE may not change. But ultimately we think that we have ironed out a path that we can achieve as part of our path on the project.

And just to clarify, when I talked about the backlog, I meant the geographic diversity of the backup we did not see as being a factor in those discussions.

I see, but the overall size of it could be?

Absolutely.

Any sense of how much they might require to get a comfortable level of credit subsidy?

No, not right now. I think from our standpoint as much as it is an indication for a parameter with DOE, it is a very important factor for USEC and our shareholders in providing that assurance of return of payment on the debt, as well as adequate assurance around return of investment on our capital.

Okay. Very good. Thanks, guys.

Thank you. There are no further questions at this time. I would like to hand the floor back over to management for any closing comments.

I would like to thank you all for participating in the call this morning. Again, we appreciate your patience as we work through with the Department of Energy to conclude their review process, and we certainly believe that is in the near term. We are committed to protecting the investment we have made in American Centrifuge in the project and delivering shareholder value. Thank you all, and have a good day.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you all for your participation.