Centrus Energy Corp (LEU) 2011 Q4 法說會逐字稿

Greetings, and welcome to USEC Inc.'s fourth-quarter and year-end 2011 earnings 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 Inc. Thank you. Mr. Wingfield, you may begin.

Good morning. Thank you for joining us for USEC's conference call regarding the fourth-quarter and year-end review for 2011, which ended December 31. With me today are -- John Welch, President and Chief Executive Officer; John Barpoulis, Senior Vice President and Chief Financial Officer; Phil Sewell, Senior Vice President; Bob Van Namen, Senior Vice President; and Tracy Mey, 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 earlier today. 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 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 risk and uncertainty, including assumptions about the future performance of USEC.

Our actual results may differ materially from those in our forward-looking statements. Additional information concerning factors that could cause actual results to materially differ from those in our forward-looking statements is contained in our filings with the SEC, including our annual report on 10-K and our quarterly reports on Form 10-Q. Finally, the forward-looking information provided today is time-sensitive, and is accurate only as of today, March 14, 2012. This call is the property of USEC. Any redistribution, retransmission, or rebroadcast of this call in any form without the express written consent of USEC is strictly contributed. 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 today. Earlier this morning, we reported our fourth-quarter and year-end results. At the bottom line, we reported a substantial net loss. The net loss of $540.7 million for the full year was a result of a confluence of several factors, including non-cash writeoffs. John Barpoulis will have a more detailed discussion of these factors in his report, but let me address them at a high level. First, the expense for advanced technology was higher than in prior years, because of the impact of writeoffs associated with the American Centrifuge Project, and because of changes in how we are accounting for American Centrifuge spending. For the last several years, we have been capitalizing spending on the project for activities that were intended to be part of our commercial plant.

Beginning in the fourth quarter, we are now expensing all project spending, because the work we expect to do over the next two years will be related primarily to the research, development, and demonstration program, or RD&D. Expense for advanced technology for the full year totaled $273 million, including $127 million of previously capitalized spending related to earlier centrifuge machines that were determined to no longer be compatible with the commercial plant design. Those American Centrifuge expenses more than offset our $84 million gross profit. From an income tax viewpoint, that caused a substantial cumulative loss for the past several years that makes it difficult to assume we can use our tax benefit going forward. Therefore, USEC recorded a full valuation allowance for the net deferred tax assets of $369 million.

From an operations standpoint, our gross profit was lower due to lower sales volume of our products, uranium, and separative work units, or SWU, and higher cost. While much of our loss was due to expense related to the American Centrifuge Project, we also have high production costs at Paducah that are making profitable operations difficult going forward. Last summer, we said that there were three key factors that would drive our decision to operate our Paducah plant beyond May 2012. First, we need sufficient demand for Paducah's output of low enriched uranium; second, we need a program to re-enrich uranium tails stored at Paducah or find other demand for enrichment that would load the plant sufficiently to keep it economic; finally, we need attractive power pricing and supply to extend operations beyond the May 31 expiration date of our power contract with TVA.

At this point, we do not have these three elements in place. The earthquake, tsunami, and nuclear event in Japan a year ago has led to virtually all of Japan's reactors being temporarily shut down for inspections and refueling. It is uncertain how long these outages may extend, and our competitors have been left with significant supplies of low enriched uranium to sell in the near term. Our current view is that we do not see sufficient commercial demand to support Paducah production of LEU will for utility customers after the TVA contract expires.

Recently, there have been discussions about the potential for Bonneville Power Administration, a federal agency within DOE, to purchase a sufficient amount of SWU that could lead to continued operation at Paducah, perhaps for a year. However, these discussions may not be successful, and we could decide to cease enrichment at Paducah after our power contract with TVA expires. Therefore, we are simultaneously conducting a full review of our options going forward.

Let me take a few minutes to update you on the American Centrifuge Project. As you know, USEC applied for a loan guarantee from DOE in 2008, but it became apparent last summer that we had not addressed some technical and financial issues to DOE's satisfaction. Rather than move forward with a conditional commitment, DOE suggested a cost-sharing research, development, and demonstration program, or RD&D. DOE's interest in the RD&D program reflects their support for the American Centrifuge technology, and a recognition by the Administration regarding the essential national security role of an indigenous capacity to enrich uranium. The cost-sharing RD&D program will retire remaining technical risks that DOE foresees, and provides the basis to move forward and obtain a loan guarantee for the American Centrifuge plant. However, funding for this fiscal year for the RD&D program must be finalized in the very near future.

We are pleased to be included in the President's budget for 2013. We have begun work on the RD&D program, and funded it through March 2012. We are working with DOE and the Congress on government funding for the program for the rest of the year. We have been encouraged by the Administration's increasingly vocal support for the essential national security role that the American Centrifuge Project could play in providing an indigenous source of enriched uranium.

A clear expression of the Administration's viewpoint was voiced earlier this month by Thomas D'Agostino, Administrator of the National Nuclear Security Administration, during congressional testimony. To quote him directly -- what we believe is that it is very important to the United States to maintain indigenous US capability to enrich fissile material. It's important on a number of fronts. He went on to detail the need for domestic enrichment to provide nuclear fuel to keep carriers and submarines operating, to maintain the nation's tritium supply for strategic weapons, and to support America's position as the leader in non-proliferation efforts. The reason I am bringing that testimony to your attention is that we do see support for the American Centrifuge from the Administration. At the RD&D program is a bridge to a DOE loan guarantee and to commercial deployment of the technology. If we didn't see that support, we would not still be spending money on the program.

We have about three dozen machines in our lead cascade test program today, and under the RD&D program, we would build a full commercial cascade of 120 AC100 machines, along with related infrastructure. As you can see, there are a number of moving pieces and a fair amount of uncertainty. But one thing that seems certain to me is that 2012 will be a year of transition for USEC. We began that transition last year, as we concluded our cold shutdown work for DOE at the former Portsmouth plant. Based on our view of the near-term market for SWU, we are moving away from commercial production at Paducah. We are also focused on the RD&D program, which we see as a necessary demonstration of the technology which will provide a bridge to deploying American Centrifuge.

Frankly speaking, USEC is likely to be a smaller Company. We have started that process with the Contract Services segment. We have 1,000 fewer employees today than a year ago. At my direction, the Management team initiated a review of our organizational structure in early 2012, and we have engaged a management consulting firm to support this review. We expect the outcome of this review will result in a smaller workforce over time, and we expect to begin taking actions that will affect employees in the second quarter.

In closing, let me emphasize three things -- we still believe in the value to shareholders of our American Centrifuge technology. We were disappointed that we were unable to achieve a conditional commitment in 2011, but we see the RD&D program as a bridge to a loan guarantee and deployment of the technology commercially. Second, 2012 will be a year of transition for USEC. We are taking steps to evolve from our legacy operations that have defined as in the past, to a Company that is appropriately sized for the work we will do in the future. We will align our staffing and our cost structure with the realities of our business.

Finally, we have a positive long-term outlook for the enrichment market, and we are seeking to build on our strengths. We have substantial inventory assets that can be sold along with the material we buy from Russia. We have a 10-year supply contract with Russia after the megatons to megawatts program expires at the end of 2013. Our subsidiary, NAC dry cask storage business, has very good growth potential. Our American Centrifuge technology has value for both shareholders and the United States government. Now I would like to turn the call over to John Barpoulis for a more detailed report on our financial results. John?

Thanks, John, and good morning, everyone. I will go through our operational results for the year and then address the factors that were responsible for the substantial net loss we reported. I will have only limited comments on the fourth quarter. Starting at revenue for the year, total revenue was $1.67 billion, with SWU revenue making up $1.33 billion, or approximately 80% of that total. SWU volume declined 15% year over year, reflecting the variability of utility orders and refueling cycles. The average price billed to customers increased 3% compared to 2010, reflecting higher prices included in contracts signed in recent years.

Uranium revenue for the year was $132 million, compared to $236 million in 2010. The average price billed to customers increased by 20%, but the volume of uranium sold declined 53%, reflecting declines in the uranium inventory for sale. We continue to transition in our Contract Services segment in 2011, as we concluded the long-standing cold shutdown contract with the Department of Energy in September. This segment also includes revenue for our subsidiary, NAC International. Revenue from Contract Services totaled $209 million, compared to $278 million in 2010. The lower revenue was due primarily to the completion of the cold shutdown contract in September at the former Portsmouth plant.

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 through 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 purchase power. During 2011, our power costs declined because we purchased 11% fewer megawatt hours of electricity compared to 2010. Under our TVA contract, we reduced our non-summer month purchases from 2,000-megawatts to 1,650-megawatts beginning in September 2010.

However, the average cost per megawatt hour increased by 3% in 2011, reflecting TVA's fuel cost adjustment, as well as the fixed annual increase. The cost of power is about 70% of our cost of production. Production costs in 2011 declined $57 million, or 7% compared to 2010, due to a 10% reduction in overall production volume, partially offset by a 4% increase in unit production costs. Purchase costs of SWU from Russia under the megatons to megawatts program increased $20.5 million in 2011 compared to 2010, due to a 3% price increase 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 2011 was $1.39 billion, which was $232 million, or 14% lower than in 2010. This change was due to the reduced volume of SWU and uranium sold, but reflects the higher purchase costs from Russia, higher unit production costs, and the effect of higher inventory costs from prior periods. Cost of sales in the Contract Services segment during 2011 was $197 million -- a decrease of $57 million, or 23%, compared to 2010. As noted earlier, this reflects completion of the work at the Portsmouth plant in Ohio. Gross profit for 2011 was $84 million, compared $158 million in 2010. Our gross profit margin was 5% for 2011, compared to 7.8% in 2010.

I want to focus on two items below the gross profit line -- advanced technology and income tax. Nearly all of the expense in advanced technology is related to the demonstration of the American Centrifuge technology. In January, we issued an 8-K disclosing that we would expense previously capitalized work in progress costs related to centrifuge machines that were determined to no longer be compatible with the commercial plant design. Earlier in 2011, we expensed of the cost of centrifuge machines that had been damaged and were no longer usable. Together, these two items totaled approximately $137 million.

We also expensed about $10 million for previously capitalized amounts related to prepayments made to a supplier for the ACP. Our contract with this supplier could not be extended, and the $10 million represents the remaining balance of prepayments for materials we will not purchase under the contract. Beginning with the start of the fourth quarter, all American Centrifuge Project costs have been expensed, including interest expense that we would have previously capitalized. We have reduced the level of spending, and the project is focused on the RD&D program, rather than activities that would create capital assets. Therefore, we do not expect to capitalize spending related to the ACP until commercial plant deployment resumes. For the full year, advanced technology expense totaled $273 million, compared to $110 million in 2010 -- a difference of $163 million.

The other line item I want to discuss is income tax. In the same 8-K issued in January, we said we expected to record a full valuation allowance for the net deferred tax asset created by expensing the previously capitalized ACP spending, as well as all other previously recorded net deferred assets. We took that action as we completed our financial review of the fourth quarter. As we evaluated the likelihood that the tax asset could be realized in the future, we looked at many factors. We have a cumulative loss over the past three years, due to a significant loss incurred in 2011. This cumulative loss is a significant piece of negative evidence in the evaluation, and one that is very difficult to overcome.

In 2011, the net increase of $369 million in the valuation allowance reduces the net deferred tax assets to their realizable value as of December 31. The ultimate realization of the net deferred tax assets is dependent upon generating sufficient taxable income in future years, when deferred tax assets are recoverable or are expected to reverse. These two factors, expenses and charge related to the American Centrifuge Project and the tax-related valuation allowance, were the main drivers for our net loss of $540.7 million. These factors did not affect our cash flow from operations, which was $56.3 million.

Earlier this week, USEC and a group of lenders agreed to an extension of a credit facility that replaces a facility that was set to expire on May 31, 2012. The amended agreement provides for a credit facility of up to $235 million that will mature on May 31, 2013. The new facility includes a revolving credit facility of $150 million, including up to $75 million in letters of credit, and a term loan of $85 million. The prior facility also included a term loan of $85 million. The facility is secured by assets of USEC Inc. and its subsidiaries. Additional details regarding the facility were included in an 8-K filing made Tuesday and in our Annual Report on Form 10-K, which we expect to issue as soon as possible.

Normally, USEC provides annual guidance regarding a number of financial metrics with our year-end report. This year, however, our guidance will be limited. As noted in the earnings news release, there are a number of uncertainties that would make providing earnings and cash flow guidance subject to such a wide range, that we believe it would be of little value. In the next few weeks, for example, we will be making decisions regarding whether to cease enrichment at the Paducah plant. That decision will have an impact on cost of production. We are also subject to uncertainty regarding funding for the RD&D program, which affects spending levels for advanced technology after the first quarter.

We did, however, provide guidance for revenue. Regardless of any decision on continued operation of Paducah, we have significant sales of SWU in our backlog for delivery in 2012. We expect revenue from SWU sales of $1.45 billion to $1.5 billion, which is $100 million to $150 million more than in 2011. At December 31, 2011, we had a net inventory of SWU and uranium of $882 million. We will continue to buy 5.5 million SWU annually from Russia through the end of the megatons to megawatts program in December 2013.

In 2011, we signed a commercial contract with TENEX to continue purchasing SWU from Russia over the next decade. We expect to remain an important supplier of low enriched uranium for nuclear reactors. After we make decisions regarding whether to extend or cease enrichment at Paducah, we will revisit our financial metrics with an intent to provide additional guidance later in the year. And with that, Operator, we are now ready to take questions from our callers.

(Operator Instructions)

While we are allowing callers to queue up for questions, I know there were some developments last evening with respect to -- on the Senate side for our RD&D program. Perhaps we can touch on those developments.

Sure. I would be glad to update folks. I think as most of you know, we are currently pursuing both a legislative path and a non-legislative path for the RD&D funding. We are continuing to work very hard with DOE and members of Congress to provide DOE with the necessary transfer authority to utilize funding for the RD&D program from its existing FY 2012 budget prior to March 31, and we know that is going to be difficult.

Progress has been made in terms of the inclusion of an amendment for funding this authority in the Senate version of the Surface Transportation bill. However, there is no assurance at this time that that will be passed by the House and enacted. Therefore, we continue to work on a non-legislative path, and believe progress is being made in Congress towards support for DOE's use of existing authorities to make funding available via transfer of depleted uranium. Conversations on both these paths between the Hill, USEC, and DOE are ongoing.

Operator? We are ready for a question.

George Caffrey, JMP Securities.

A couple of questions -- first of all, with respect to Paducah. Could you talk a little bit about -- a little bit more in terms of what the drivers of the decision whether to shut down or not shut down Paducah? And if you do, if you were to cease, let's say, producing SWU there, would there be other activities that you might do which would generate additional income?

Yes, George, this is Bob Van Namen. I will hit on a couple of the key points and drivers. The first one would be the necessary economic equation for us to continue production. The plant is operating at its all-time most efficient level, operating very solidly with very high power utilization. So, we are very pleased with the current operation. What we really need to make the plant economical going forward is sufficient volume going through the facility. So, we like to operate the plant between 5 million and 6 million SWUs on an annual basis.

And as John touched on, with the events at Fukushima, we are seeing a lot of challenges in being able to place that into the commercial market. So, finding the ability to produce at 5 million SWUs, to use some of that capacity to enrich high-assay tails from the Department of Energy, and then the third key component to that is the power costs that we would see. That probably would have been the biggest challenge, if you asked me two years ago what we were facing. Now, with natural gas prices at all-time lows, we are really seeing very good buying opportunities for power. The volume is the biggest challenge.

We do see the opportunity, as John mentioned, with the Bonneville Power Administration, to be able to place the output through the BPA, have them purchase the low enriched uranium, and then use that to continue the operation of the plant. But as you know, it's now middle of March and we are on a fairly short timeframe to be able to make this decision. If we don't go forward with the operation of the plant, again, the Department of Energy would be taking back certain facilities under our lease, and we would look at doing work for them, if that is what they wanted to do for preparing the facility for decontamination/decommissioning.

Okay. And would there -- assuming that were to occur, is there any residual value which you might realize from the facility? Or in essence, is there nothing of value that you could realize there?

We would continue to use certain of the facilities for shipping and transfer for processing our inventory that would remain at the site, and then distributing that to our customers. And then, also, the Paducah facility is a key element of the megatons to megawatts program, which will wrap up at the end of 2013. So, we would continue to use those facilities for inventory and for shipping and transfer for the HEU deal.

And with this current softness -- next question, with the current softness in demand, which is an important driver of your decision on Paducah, do you see that changing any time in the -- over the course of the next couple years? Or will it take a longer period of time for demand to improve?

Very good question. Absolutely, we do see that changing. In Japan right now, 52 out of the 54 reactors that support the Japanese electric grid are now down for refueling and inspections. That is what is causing the majority of the hole in the market.

We do see that changing. They will be trying to get through the summer with limited power production capability, and we do see that potentially being the driver in bringing some of those units back on line. At the same time, you see worldwide demand continuing to grow. We have 26 reactors under construction in China. We have, I think --

A total of 60.

Yes, a total of 62 worldwide under construction. So, as those units come on line, they will be adding to the demand. We see continued production from the US fleet solidly, with continued uprates. And we have had good news in the recent past with the NRC issuing a combined operating license for the Southern Company unit. So, we see demand being solid. I think it will take several years to work off the effects from Fukushima, but the fundamentals for nuclear power are still very solid worldwide.

Okay. Turning a little bit to ACP and the RD&D program that you talk about -- assuming everything was to go as you would like it to go, could you walk through what the timeline and funding would look like over the course of the next couple years with the RD&D? But then, what it would look like beyond that? And while you are talking about that, could you also touch upon where would the status, if you will, of Toshiba at this point?

Sure, George, this is John Barpoulis. I will touch on the first part, with respect to the overall profile. And I think the project team is scoping the nature and the profile of the RD&D program now. But as in -- additional detail is provided in our 10-K, the total program as we have described in general is a two-year program totaling $375 million in total, with the government's portion being capped at $300 million. And so, really, if you take a look at that profile for rough purposes, we would certainly look at that amount spread over two years. With respect to B&W, Toshiba, or other --

And I also would add, George, it's both a mutual objective of ourselves and the government that the RD&D program leads to commercial deployment of the technology. They are very high on the technology. They want to see it deployed. They know that they need an indigenous source of supply. So, in parallel with the RD&D program would be our whole thought process for coming back at the loan guarantee, so that when you finish the RD&D process and you have retired any technical issues, project execution issues, then you are in the middle of a loan guarantee review process, so that you can go forward with the commercial deployment.

And that would be in 2014? Theoretically?

Yes, theoretically. In that timeframe, I think, would make sense.

But certainly look to reengage in 2013.

And certainly, the issues near-term are very much -- as you can imagine, we are very much focused on the end of March funding, so that we can get the balance of the FY 2012 funding, so that we know what path we are executing on. We are very encouraged by the FY '13 money being included in the President's budget, but there is a process we have to go through on that. And so, that becomes the short-term slug it out on the Hill to get the necessary authority for the government to transfer money and move on.

But you have an RD&D program, it helps de-risk the project. It provides a path to ultimately to -- coming back at the loan guarantee and for commercial deployment. Now, very solid support from our partners in this process, both Babcock & Wilcox and Toshiba.

And as you know, Toshiba's involvement potentially also includes the export credit agencies from Japan as part of the total debt draw that we would want to achieve. Their support has been very strong for the deployment of ACP. They are very much encouraged by the US government's position and desire to deploy ACP. And if you look back at it, all three of us -- USEC, Toshiba, and B&W fully have the right to walk away from this thing at this point in time, and none of us have done it, because we still see that path to deployment and the strong support from the government for going forward with that. I hope that answered all your questions.

It does. Well, with one more, and then I will get back in the queue. (laughter) When we look forward at CapEx over the next couple of years, it sounds like the unfunded portion of the $375 million for the program would give you $75 million, which you would need to come out of pocket for in terms of CapEx for ACP. Is that all there is over the course of the next few years? And what other CapEx beyond that might there be?

I think that that is certainly in our plan, in terms of additional investment. Just from a GAAP standpoint, we do not expect that to be capitalized. We expect all of the RD&D program funding, ultimately, likely to be expensed. But we are also -- while we have had a cooperative agreement in the past, we are also evaluating the nature of how we will be accounting for that. And as we have more clear -- a clearer view on our accounting for it, we will provide that in updated guidance.

Okay, thank you. I will get back in the queue.

Laurence Alexander, Jefferies & Co.

This is Lucy Watson on for Laurence today. Going back to your comments on the resizing of USEC for different scenarios -- maybe if we could look at it from a cost perspective. Would it be possible to walk through the gives and takes in your contingency plan around -- firstly, the RD&D funding agreement? And then, secondly, the potential continuation of production at Paducah once the TVA contract expires?

Lucy, maybe just to clarify the question, is it around anticipated total size of the business volumes that we would expect to see over that time period? Or were you looking at it at a different perspective?

Looking from a cost perspective. So, you had mentioned you have resized the government contract segment already. Just wondering if you have sort of a range of expectations in your contingency plan, based on those other two events?

This is Bob Van Namen. Maybe just a couple of comments on that. We are looking at those scenarios. As John said, we have engaged the outside consultant now to look at the resources required to execute. What would our corporate structure look like? What would the infrastructure need to be under those different scenarios? That is work that is going on right now. We don't have any conclusions at this point; but again, expect to wrap that up by the end of the second quarter.

Okay. And moving to the ACP expense run rate, it looks like if you back out the non-capitalized or uncapitalized expenses from 2011, you are operating at around a $34 million a quarter run rate for advanced technology expense. Would that be a reasonable expectation in Q1?

Lucy, I think that sounds a bit high, from a total ACP run rate, from a quarterly standpoint. We will have additional detail in the 10-K. What you will see in the fourth quarter is, I believe, about $190 million or so of total ACP advanced tech expense. But again, in the first quarter, we are expect -- if you take out the non-cash components of that -- and again, you will see more detail in our 10-K, you will see that we are in the $40 million to $50 million run rate, and expect in the first quarter that we will be around the $45 million or $44 million run rate. But again -- for the quarter, and again, we will have more information in our 10-K on that.

Okay. And acknowledging that you have not provided a full-year outlook for 2012, and understandably so, how are you thinking about the cash flow outlook for 2012, at least given what you know now? And what would be your confidence in that range?

I think, again, 2011, very important indicator in -- that are -- in spite of the significant net loss, that our core operations continued to produce positive cash flow in 2011 of $56 million. Again, I think that given the uncertainty around the decisions regarding the Paducah facility, and the nature and timing of RD&D funding, both very much will affect our cash outlook for the year. So, unfortunately, we can't provide more specific guidance at this time. But again, as we indicated, as those decisions become more clear and as the range narrows, we will certainly look to provide that kind of information.

Okay. A few more quick ones.

Lucy, the other thing I would add is -- again, from our standpoint, we see having -- within that range of scenarios, we see having more than adequate liquidity to support our ongoing operations for at least one year.

Okay. And in terms of negotiations with ACP suppliers, could you just provide an update on the status of those?

This is Phil Sewell. We have agreements with the suppliers to support the ongoing ACP program and the RD&D program that we are going to be working with the government, involves the suppliers continuing to provide the components necessary to build out a 120-machine cascade over the next two years, and operating that cascade in order to determine, I will say, validation of the reliability, availability, in a commercial environment.

So, we have ongoing contracts. They are meeting those contracts, and we will be working with them over this two-year time period and updating our loan guarantee for the purpose of supporting the financial conditions under which they will be supplying the machines and building out the plan. So, we will be working in two different areas. One is, supporting the technical verification under the RD&D program, and two, looking at updating our cost and schedule for the commercial plant, for the purposes of a loan guarantee.

And Lucy, let me add that one of the -- again, a joint objective between ourselves and the Department of Energy is that this RD&D program is a retiring risk and positioning everybody for commercial deployment. So, the use of our suppliers that would be there to build the whole plant and maintaining a critical capability with those suppliers as we go through this demonstration period is a priority of both of us. So, we are looking at how best to keep them engaged on the best position possible for remobilization as we go through the loan guarantee process.

Okay. And then, any visibility on gross margins embedded in your SWU backlog?

Again, at this point, we are comfortable providing the revenue guidance, Lucy, that we laid out. But again, given the uncertainty and things that could impact our cost of production and cost of sales at this point, not able to provide clear guidance on that for the year.

Okay. Thanks very much.

Bob Clutterbuck, Clutterbuck Capital Management.

This hopefully will be a very familiar theme from us. But John, back in August, we asked the question on this very call, as to what you thought the timing on a definitive agreement would be with the DOE, whether it be weeks or months or quarters. And John, you stated at that time it would be a matter of weeks, not months. And for the record, we did a little research yesterday, it has been actually 30 weeks, seven months, and now we are into the third quarter.

And given that, we would like to make two observations, and just ask you two questions. And please stop us if you disagree. And the great news is, we feel that it is quite apparent, and I think this echoes your comments that you just made in the call today, that the DOE and Secretary Chu and the Administration and Congress, for that matter, are all extraordinarily strongly in support of the ACP project. The bad news is, we believe over the last seven months that it has become abundantly clear that the huge stumbling block to that is the size, I guess I should probably say, or the lack thereof, of USEC.

So, given that, we have two questions. And again, these should be familiar questions to you. Would you please explain why a sale of USEC to a larger concern would not be in the absolute best interest of, we feel, the ACP project, the DOE, for that matter, national security and defense, and I think most obviously, importantly, the stakeholders of USEC, both equity and debt? And number two, why a sale to a larger concern should not be completed in a matter of weeks, and not months or quarters?

Bob, I would have been disappointed if you had not continued on your theme. We have a fiduciary duty, and both the Management and the Board are very serious about what that duty is. They continue to analyze potential value-maximizing strategies for stakeholders, and that includes strategic options.

I think one of the real challenges that we have today is that that research, development, and demonstration program is an absolute necessity. It is a necessary bridge to commercial deployment for the plan, whether it is USEC doing it or whether it is anybody else doing it. And so, again, we believe the best value for the shareholders is to go down the ACP path, and we see the support for that.

But the RD&D program is an absolutely essential element to having that nailed down to the greatest degree that we can, and that really becomes the funding sources for it. And so now you have the bridge and a path to the deployment. We will consider all options in doing that. The second half of your question is one of timing. I think without that bridge firmly in place, some of those strategic options aren't going to happen, those discussions aren't going to happen until you have that. So, I think that is about as far as I can go with being comparable in answering that question.

But ACP and affordable enrichment technology is the key of the future, and we have very strong support for doing that. The RD&D program and having that solidified is the necessary bridge. Then we need to get back at -- you are coming back at a loan guarantee, and you have to maximize the financial strength for the project and going after the loan guarantee. And that is where we have to look at how we improve our own balance sheet and our own credit rating and heading into that. And that is a lot of what we have talked about that we are going to go do. And then, we have to look at -- what is the right structure with strategic partners for being able to put the project in its best light, and going back to the loan guarantee?

Well, I appreciate the answer. And by the way, let's all keep our fingers crossed -- it's a big plus being on the Senate Transportation bill, and see if we can get it through the House.

Okay. Thank you, Bob.

Richard Howard, Prospector Partners.

I have two questions. If we had gotten the loan guarantee in 2008, would we have built centrifuges that in fact would not have been optimal?

No. It has, certainly from the Department's standpoint, it's their comfort with demonstrating reliability and availability. No one has a question, will the machines work, will they provide the separative capacity that is there? And so, we, in putting together our process that we laid out in 2008, we had gates that we would come through from a technical demonstration standpoint before you would go into full rate production. The Department's concern was, hey, they wanted to see more of those risks retired before they would commit to go do it.

So, I think the Department has taken a conservative and prudent position on that, and we certainly have been able to move forward. The writeoff of the machines -- we learned things in the incident that we had last year, that told us that we were going to have to make some improvements to the machine. We have done that; that meant that -- A, we had to write off the machines that were damaged last year, and that some of the earliest machines that we have built -- it just didn't made economic sense to modify them.

An excuse me, and those early machines were not designed or planned to be in a commercial plant if we got the loan guarantee, for the purpose of moving forward. So, they were going to be, I'll say, initially used, and we have a unique characteristic with our centrifuge technology in that you can replace individual machines. And you can put machines in and operate them, and then as you see improvements, then you can adjust and put those improvements in.

But to be clear, the machines that were capitalized were clearly intended to be a part of the commercial plant.

Yes, they were originally planned, and then -- but the idea is, you can replace components and improve.

Okay, fine. A second question concerns the $85 million bank facility?

Yes.

How much of the $882 million net SWU inventory is pledged as collateral to that loan?

The lenders have a security interest in our SWU and uranium inventory. But --

The entire inventory?

The entire inventory. But also of note, obviously, the facility size is $235 million. The funded term loan is $85 million. And the revolving piece is $150 million.

Can you give me a feel for how much potential collateral value is? That seems like a very small amount, given the clear ability to liquidate that inventory.

That inventory is accounted for at the lower of cost or market. And so, we see that as the minimum value of the gross inventory.

But you couldn't borrow $880 million against it? Could you borrow $500 million against it?

No, the revolving credit facility is, again, it's $235 million. That is the maximum amount, and it also includes a block built into that. So, no, we are clearly limited at the $235 million.

And you feel that is all that could be, in fact, borrowed against it under any circumstance?

The revolving credit facility, yes. But it's clear that the -- that additional collateral, or the lenders enjoy a significant amount of collateral.

Sorry to get focused on that.

No, that is okay.

But Lucy, and I have already lost her last name, asked a reasonable question, the gross margin embedded in the SWU inventory. Is there any reason to think it's any different than the gross margin of about 20% on your sales?

Rich, again, I think that the -- because of the uncertainty in the cost of production this year, that will affect cost of sales. It could be impacted by one-time items related to the Paducah plant. So, those may impact a gross profit for the business in 2012.

Got it. I just have one other comment. I would certainly hope that we wouldn't sell the Company at this point in time, as reflected by the prior question. Okay, good luck. We are behind you.

Ben Elias, Private Investor.

Sidely, I don't know if it's a technical question or what, but depending on people's estimates, there is about, I think, about 93 nuclear reactors that are supposedly going to be online by 2021. I think 63 are under construction today. I think utilities are well stocked in the near term, at least on the U-308 side. And China came in in 2010 with, I think 50 million pounds from Canada and secured some more from France. Now, I think in the near term everyone is well-stocked and you could have some deferrals, or you have seen.

But what lead time do you need -- or if you take 2021 as a drop-dead date, how many years prior to 2021 do you have to start gearing up for all the enrichment need? Or -- at least the mining companies talk about demand going from about 180 million pounds to 220 million pounds in that timeframe. So, how do we think about this? And how do we think about enrichment capacity, now that AREVA has sort of stalled their plans in Idaho?

Yes, Ben, this is Bob Van Namen. A complicated question, and let me try and step you through it in a couple of bites. The first piece is the transformation that the current industrial base is undergoing. You are seeing the AREVA gaseous diffusion plant come offline middle of 2012. They recently made that announcement, as they are coming up on a new centrifuge facility using the URENCO technology.

We will also -- again, as we have talked about extensively here, in the next several years be taking off the Paducah facility, which removes 5 million to 6 million SWUs of capacity. And then, by the end of 2013, you will be seeing the end of the highly enriched uranium, the megatons to megawatts deal with the Russians.

So, with those three capacities coming out of the market, those are being replaced by new projects, such as the American Centrifuge by the URENCO technology expansions and by the Russians selling more commercial SWUs into the market. So, you have a near-term transition going on, and then you are going to have capacity being built to meet the demands of the new reactors.

Generally, you are looking at an 8- to 10-year lead time for putting a new reactor in place. We look at -- again, after we would deploy the first 3.8 million SWUs of American Centrifuge, we are looking at somewhere along the lines of three to four years to put additional capacity into place.

So, we can very much build out additional capacity to meet the demands of the new reactors. One reminder is that the initial cores of these reactors are substantially larger than the reload requirements. And so, you do see in the 2015 to 2020 timeframe a large volume of new core production needing to happen from the existing infrastructure. This is one of the areas we think that the Paducah plant could be very valuable, and why we are trying to, as best we can, extend the life of that plant to be able to provide the flexibility to meet some of the initial core demands.

Okay, thank you.

Amer Tiwana, CRT Capital.

I have a question regarding the RD&D program -- you said there are essentially two paths, or one is the legislative path and the other is the non-legislative path. In the non-legislative path, you mentioned that you still require Congress approval. How does that work?

The close working relationship that DOE has had with the Congress on the RD&D program, anything that they would do or say in a non-legislative path, they would probably run by the Congress. I think most people agree -- the Department has the capability, the authority to go do a non-legislative tails exchange, but they are not going to do that without support from the Congress.

Sure. And do you think that there is ability to do that up to, let's say, $300 million worth of -- or in the amount of $300 million?

Well, the way the government is currently planning it is, the FY '12 issue would be $150 million in total. But the second increment of funding is contained in the FY '13 budget. And then, that is something that will be debated in Congress and ultimately approved with the FY '13 budget.

So, if you went a non-legislative path, you would be looking for building that bridge for the remainder of the fiscal year, as you get to the FY 2013 funding. The government also had some limited reprogramming they could do as part of that. But clearly, everybody's preferred path is to come up with a legislative solution that would support the anticipated FY '12 funding, which is $150 million from the government.

Understood. Thank you very much.

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

Well, thank you all for joining us this morning. We appreciate your attendance, especially on short notice. We expect to file our 10-K later today, and I certainly encourage you to call Steve Wingfield with any questions you might have. Needless to say, we expect 2012 to be a very challenging year, but the USEC Management team is focused on meeting those challenges and having further calls with you all to update you on how we are doing on that. Good day, and thank you very much for your participation.

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