Centrus Energy Corp (LEU) 2012 Q3 法說會逐字稿

Greetings and welcome to the USEC third quarter 2012 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 reminder, this conference is being recorded. It is now my pleasure to introduce your host, Steven Wingfield, Director of Investor Relations for USEC Inc. Thank you, Mr. Wingfield. You may begin.

Good morning and thank you for joining us for the USEC conference call regarding our third quarter, which ended September 30. With me today are John Welch, President and Chief Executive Officer; John Barpoulis, Senior Vice President and Chief Financial Officer; Bob Van Namen, Senior Vice President; Phil Sewell, 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 afternoon. That news release is available on many financial websites and our Corporate website, USEC.com.

All of our news releases and SEC filings including our 10-K, 10-Qs, 8-Ks are available on our website. We intend to file our Quarterly Report on Form 10-Q later today. A replay of this call will be available later this morning on the USEC website.

We know that many investors in the Mid-Atlantic region are still recovering from the effects of Hurricane Sandy this week, and not everyone who plans to participate in today's call will be able to dial in. But we also know that the normal practice of many investors is to read a transcript of the call rather than to listen live. So we made the decision to go forward with releasing our earnings release and holding the call as scheduled. And as always, I will be available after the call for follow-up questions.

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. Official information concerning factors that could cause actual results to materially differ from those in our forward-looking statement is contained in our filings with the SEC, including our Annual Report on Form 10-K and Quarterly Reports on Form 10-Q.

Finally, the forward-looking information provided today is time-sensitive and accurate as of today, November 1, 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 strictly prohibited. Thank you for your participation. Now I would like to turn the call over to John Welch.

Good morning and thank you for joining us today. We know that many of you were affected by Hurricane Sandy, and we appreciate your participation.

Yesterday afternoon we reported our third-quarter results. Our revenue, gross profit and net income were all higher compared to the same quarter last year. Our results were affected by two agreements with the Department of Energy and others, and I'm pleased to report that we are executing those agreements well.

John Barpoulis will provide a report on our financial results shortly. I will begin our call with a high-level view of our operations at the Paducah, Kentucky plant, and provide an update on the American Centrifuge Project.

You'll recall that in May we entered into a multiparty arrangement that would allow us to continue to economically enrich uranium at the Paducah Gaseous Diffusion Plant through next May. It is proving to be a positive agreement for all parties involved.

Second, we secured near-term funding for the research, development and demonstration programs for the American Centrifuge technology, which we call RD&D. We are off to a great start on that program, and we have attracted a very strong board of managers to provide oversight to the program, as provided under our agreement with DOE.

In addition to two USEC members, this board includes representatives from leaders in the nuclear industry, Babcock & Wilcox, Exelon and Toshiba, as well as two independent members with strong industry credentials.

I will start with enrichment operations at Paducah. The multiparty agreements executed in May are somewhat complex, but work well because the program is a win for everyone involved. Under the agreement USEC is feeding depleted uranium tails into the Paducah plant rather than the usual method of using natural uranium as the feedstock. These tails are from DOE enrichment operations prior to 1993.

This byproduct material contains higher amounts of the valuable uranium 235 isotope than the depleted uranium byproduct we have generated in recent years. The government considered this so-called tails material to be a liability, to be disposed of sometime in the future. Our product from enriching these depleted tails continues to be the same low enriched uranium that Paducah has been delivered to customers for decades.

We're delivering LEU to Energy Northwest, which in turn will sell much of that LEU to the Tennessee Valley Authority later this decade. It's not often that a program can be crafted in a way that so clearly benefits all parties.

TVA continues to sell USEC a significant amount of electricity. TVA's customers as well as consumers who buy power from Energy Northwest will benefit from lower-cost nuclear fuel. Our nation benefits from TVA reactors using our fuel through a special program that provides DOE with tritium, a radioactive isotope essential to our nation's national security defense programs. Nuclear fuel for these defense programs must come from US sources. This program assures DOE will have sufficient amounts and a secure source of tritium to meet our national security needs until the American Centrifuge plant can serve that role.

This contract maintains jobs for more than 1000 USEC employees in Kentucky, and USEC benefit from additional SWU sales. This program continues commercial enrichment through May 2013, which provides additional time for USEC and DOE to plan for an orderly transition.

The Paducah plant is owned by DOE, and USEC has leased portions of the Paducah site since the 1990s. We are meeting frequently with DOE officials to anticipate and address a wide range of issues that invariably will arise in turning leased areas back to DOE. Our employees continue to operate the plant at a very high level of efficiency.

The gaseous diffusion technology, however, uses significant amounts of electric power that puts the Paducah plant at a competitive disadvantage, due to the volatility of electricity prices. The roughly 50 nuclear reactors that are shut down in Japan and Germany have caused an oversupply of LEU in the market. We had hoped to continue enriching at Paducah as we build out the American Centrifuge plant.

However, delays in the deployment of ACP and current market conditions have meant that we expect there to be a transition period of several years until the ACP is in commercial operations. During this period we would no longer be enriching uranium at Paducah, but instead would make sales from our existing inventory and future purchases under our supply agreement with Russia. Although we continue to look for ways to economically extend enrichment at Paducah, we believe it will be difficult to extend commercial enrichment beyond May 2013.

As we look to the future, we are sharply focused on positioning USEC to build its next-generation uranium enrichment plant in Piketon, Ohio. The RD&D program provides a clear path to reducing project risks so that we can provide a solid update in 2013 to our application that remains pending at DOE's loan guarantee office.

We have made significant progress since the RD&D agreement with DOE became effective in June. Working with our suppliers, we have built dozens of finely tuned AC100 centrifuge machines.

We are preparing a section of the American Centrifuge plant for what will essentially be the first commercial cascade. We have installed service modules, an important part of the plan infrastructure that will provide operators with control systems and a means for moving uranium gas between 120 machines.

The RD&D program is vitally important to our Company. It is a key element in our plan to obtain a loan guarantee and to deploy the American Centrifuge technology. The program goals are simple. Build and operate a commercial cascade of AC100 centrifuge machines, obtain reliability data from hundreds of thousands of machine hours and test the balance of the plant systems.

Let me run through some of our accomplishments to date. We have achieved the first two of the five technical milestones under the RD&D agreement. During the third quarter DOE certified the second milestone, which tested a key component through the completion of 20 machine years with AC100 centrifuge machines.

The remaining three milestones have a completion date at the end of 2013, tied to the conclusion of the program. We are continuing to build commercial AC100 centrifuge machines. At the end of September we had about 80 machines assembled and conditioned on uranium gas, and we continue to add to that number.

Our team is installing new plant control infrastructure and balance of plant systems such as the service modules that I mentioned earlier. These initial six service modules each include the wiring and piping to connect 20 centrifuges to the cascade.

The RD&D program is being managed and directed through our subsidiary, American Centrifuge Demonstration LLC. The board of managers for ACD has met several times, and we will benefit from the experience brought by these industry leaders.

The ACD board selected Luis Reyes as its Chairman, one of two independent representatives. Luis is the retired Executive Director for Operations at the Nuclear Regulatory Commission and brings a wealth of industry experience to the board.

Our strategic investors, B&W and Toshiba, continue to recognize the value of this demonstration program. As you know, both companies have representatives serving on the USEC Board of Directors. We're also pleased to have the industry expertise of our largest customer and the largest nuclear operator in the United States, Exelon.

Robert Warther from Babcock & Wilcox serves as deputy program manager under Paul Sullivan, USEC's Vice President for American Centrifuge. We recently moved Jim Lewis, the general manager of the Paducah plant, to the American Centrifuge program. Jim brings decades of enrichment plant experience to the project.

That builds on a move we made last year to put Steve Penrod from the Paducah plant in charge of our integrated enrichment operations. All this demonstrates our commitment to excellent execution on the RD&D program, and a crisply run RD&D program in turn will help us prepare a solid update for our application with DOE's loan guarantee program in 2013.

We were very pleased to see support for additional funding for the RD&D program during the quarter. Under the terms of the $350 million cooperative agreement, DOE provides 80% of the pro rata cost share and USEC provides 20% through the end of 2013.

Congress passed and the President signed legislation in late September that included additional funding for the government's $280 million share. The continuing resolution signed by the President provides funding at an annual rate of $100 million for the RD&D program, which we expect to result in an additional $45.7 million of funding during the six months covered by the spending measure.

I think the vote that provided additional funding demonstrates that the RD&D program has strong bipartisan support. We will continue to work with Congress and DOE to obtain the remaining funding as soon as practical.

As we have said, the RD&D program does not guarantee a DOE loan guarantee, but I believe we will have a much stronger application as a result of the RD&D program. Any remaining technology risk will have been substantially reduced. Our suppliers will be in a better position to enter into fixed price contracts, and we will have had the benefit of working with industry leaders to make the project even better.

However, we still have a lot of work to do to get an updated loan guarantee application, including updating the cost and schedule for the project and looking at ways to improve our credit profile, balance sheet and ability to successfully finance the project.

In summary, we had a solid third quarter from financial, operational and strategic points of view. We reported net income of $4.5 million. We ended the quarter with a cash balance of more than $300 million. We reported cash flow from operations of $180 million. We reiterated our guidance that we expect to end the year with more than $200 million cash balance.

We continue to run the Paducah plant at peak efficiency and successfully meet the terms of the multipart agreements, and we are on a path to meet the objectives of the RD&D program during 2013, thanks to the support of Congress and the administration.

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. As you read in our earnings release, the results for the third quarter improved as compared with the same period last year. Let me give you some highlights of our financial results, with an emphasis on the longer non-month period.

Starting with revenue for the third quarter, total revenue was $570 million, with SWU revenue making up $560 million of the total. We regularly note that our SWU revenue can be lumpy from quarter to quarter, and this quarter is a case in point. SWU revenue in the third quarter of 2012 was 88% higher than the same quarter last year.

You can also see the declining trend for contract services and natural uranium revenues as a percentage of our total revenues. Nonetheless, total revenue for the third quarter was 52% higher than the same quarter in 2011.

Looking at the first nine months of 2012, revenue was just under $1.5 billion, an increase of $287 million or 24% compared to 2011. The volume of SWU sales was 83% higher in the third quarter and 50% in the nine-month period compared to the same period last year. The average price billed to customers increased 3% year-over-year in both the three-month and nine-month periods.

We recorded no uranium sales in the third quarter and $3.6 million in uranium sales in the nine-month period in 2012. These results were expected, as most of our inventories of uranium available for sale were sold in prior years and we expect this trend to continue.

Our contract services segment underwent a transition in 2011 as we completed our government contract work at the former Portsmouth plant. Revenue from contract services in the nine-month period of 2012 was $49 million compared to $170 million in the same period last year. The contract services segment includes revenue for our subsidiary, NAC International, which will dominate revenue in the segment going forward.

For the nine-month period NAC's revenue increased year-over-year by less than $1 million, primarily as a result of timing and sales related to dry cask storage systems.

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

I would note that under our new contract for extending enrichment operations at Paducah, we are passing the TVA fuel cost adjustments through to Energy Northwest.

The cost of power is about 70% of our cost of production. In the first nine months of 2012 production costs increased $6 million or 1% compared to the same period of 2011, despite a 6% increase in production volume.

Unit production costs declined 5% year-over-year during the nine-month period, reflecting the lower unit production costs under the depleted uranium enrichment program and increased production volumes in the first two quarters.

The average cost per megawatt hour decreased 3% in the nine-month period, reflecting the lower unit power cost beginning in June under the amended TVA power contract. Purchase costs for the SWU component of LEU from Russia under the Megatons to Megawatts program increased $10.5 million in the nine-month period compared to the same period of 2011. The price we are paying Russia in 2012 increased 2% year-over-year under the market-based pricing formula.

The cost of sales for the LEU segment in the three-month and nine-month periods of 2012 were higher than in 2011 due to higher SWU sales volumes and unit costs, partially offset by lower uranium sales volumes. Cost of sales for SWU was 2% higher in the third quarter and 1% higher in the nine-month period compared to the same periods of 2011. There were a number of factors that affect the cost of sales in the 2012 period that are detailed in the earnings news release and the third-quarter 10-Q that we intend to issue later today.

Cost of sales in the contract services segment during the nine-month period was about $44 million, a decrease of $117 million. As noted earlier, these costs were mostly incurred by NAC in the current year, and the decrease reflects the completion of the government contract work in 2011 at the former Portsmouth plant in Ohio.

Gross profit for the third quarter was $38 million compared to $27 million in the same quarter of 2011. For the nine-month period of 2012 the gross profit was $89 million compared to $74 million in the same period last year. This 20% increase was primarily due to higher SWU sales volumes, offset by lower uranium sales. Our gross profit margin in the first nine months of 2012 was 5.9%, 0.2% less than the same period of 2011.

Below the gross profit line we had several significant expenses as well as an offsetting other income entry for DOE's pro rata share of the RD&D program. Selling, general and administrative expense was $43 million in the nine-month period of 2012 compared to $48 million in the same period last year.

As we have said throughout 2012, our business is in a state of transition, and we engaged a management consulting firm to support a review of our organizational structure. Initial actions related to our organizational structure have resulted in workforce reductions in Maryland, Ohio and Tennessee.

Taken together, charges for advisory support, other advisors, and workforce reduction and severance totaled $11 million in the first nine months of 2012. Advanced technology expense continues to represent a large investment in the American Centrifuge technology. This expense was $45 million in the third quarter of 2012 and $168 million in the nine-month period.

I would point out that the nine-month period expense includes $45 million related to the title transfer of previously capitalized American Centrifuge machinery and equipment to DOE, as provided for in our RD&D cooperative agreement. Nearly all of the expense for advanced technology is related to the demonstration of the American Centrifuge technology.

Since the fourth quarter of 2011, all American Centrifuge project costs have been expensed, including interest expense that we would have previously capitalized when we were preparing for commercial plant deployment. This interest expense in the nine-month period of 2012 was $38 million. We do not expect capitalized spending related to the ACP until commercial plant deployment resumes.

We have shared the RD&D program costs with the DOE since the agreement became effective on June 1. DOE's share of 80%, which is reported as other income, was $35 million in the quarter and $45 million in the nine-month period of 2012.

At the bottom line we reported net income of $4.5 million for the third quarter, an increase of $11.4 million over the same quarter in 2011. This improvement reflects higher gross profits from the LEU segment and DOE's pro rata cost-sharing support for the RD&D program.

For the nine-month period, we reported a net loss of $116 million compared to a net loss of $45 million during the same period of 2011. The increased cost was a result of higher ACP-related project costs that were expensed, including the expense of machinery and equipment in the second quarter associated with our cooperative agreement with DOE.

Our results were also negatively affected by the special charges related to our organizational structure review and workforce reductions. Although these factors had a significant impact on our P&L statement for the first nine months, we are also reporting cash flow from operations of $181 million compared to $107 million for the first nine months of 2011. You can see the impact of this cash generation as our cash balance grew to $303 million as of September 30 from $229 million as of June 30 and $38 million at the end of 2011.

We updated our guidance for 2012 with our second-quarter earnings news release, and we have reiterated that guidance with a small upward adjustment to cash flow from operations. Importantly, we continue to expect our cash balance to exceed $200 million at the end of 2012.

With that, operator, we are ready to take questions from our callers.

(Operator Instructions)

While we are waiting for those with questions to queue up, we have had one question that has come up from a number of investors recently regarding the end of the Megatons to Megawatts program next year. Phil, can you give us an update on the program for everyone?

Thank you, I will be glad to. While 2013 is the last year of the historic and highly successful Megatons to Megawatts program, we will continue to have a significant supply of Russian low enriched uranium to sell to our customers. We recently concluded our annual delivery arrangements under the Megatons to Megawatts program with TENEX for 2013.

We're proud to be completing a program that will have basically eliminated an amount of highly enriched uranium equal to that contained in 20,000 nuclear warheads. And it has been a good program for our investors. That's why we are pleased to have a separate commercial contract with Russia to purchase supplies through 2022.

We are in the process of developing protocols and delivery mechanisms for this transitional supply arrangement with TENEX. The amount we will purchase from Russia will ramp up in annual volumes over a couple years. And we will share an opportunity to exercise an option to purchase additional SWU if we have a contract to place this material with our customers.

If we fully exercise the option SWU amounts, we will be annually purchasing about the same amount of SWU from Russia as we do today, approximately 5.5 million SWU. This provides USEC with a bridge supply until the American Centrifuge plant is producing significant quantities of nuclear fuel later this decade.

Thank you, Phil. Operator, we are ready for the questions.

Laurence Alexander, Jefferies & Co.

I guess just a few questions. Just thank you for teeing off with the update on the Russian program. Just to help people do the bridge for covering their interest expense, how much free cash flow should we expect a fully ramped 5.5 million SWU purchase under the Russian agreement to deliver?

It's John Barpoulis. I think that the volumes of SWU purchased under that program ramp up over the first couple of years. And I think it will very much be a function of, obviously, the contracts with customers over that time period and how that transition rolls through. I think ultimately we will be best providing guidance on cash generated by that and gross profit generated over that time period, as we do in our ordinary course. Bob, anything to add?

Yes, just one aspect. The TSA agreement does have factors in the pricing that keep it aligned with our customer deliveries and the pricing that we are seeing in the market. So even though we are seeing a lot of changes in market prices, we do see a good correlation between TSA deliveries and preserving our margin with the customer contracts that we will be delivering under.

So your margin will be preserved compared to your current margins, your current gross margins?

I was talking about just an alignment on a go-forward basis with TSA that indicates some of the volatility for market rises that we are seeing, and not necessarily comparing it against previous deliveries.

Well, since in about eight months' time you will be operating with Paducah wound down, you will just be running off of the tail end of the Russian contract, will the margins at that point be higher or lower than your blended average right now?

Unfortunately, Lawrence, at this point we are not able to provide that specific of guidance around future flows. I understand the importance of the question. It also is a function of certain milestones that we do achieve over an extended period of time, but there is a -- clearly, we expect a margin built-in. We do expect to provide clarity around 2013 guidance, as we do in our ordinary course in February.

I guess if I can come at it from another angle, then, to not touch on the forward-looking aspect, if you look at the last 12 months, would the margins embedded in the Russian portion of your activities be higher or lower?

This is an area, Lawrence, where I would not rely on our past reporting. While the pricing formulas are similar, there are slight differences. So again, I'll have to rely on our forward-looking aspects when we get to 2013.

Okay, lastly and then I'll drop back in queue, in terms of inventory, can you just walk through the Paducah wind-down, what your inventory balances should do over the next six to 12 months? And inventory associated to the ACP backlog -- sorry, let me rephrase that. The ACP backlog -- does it still exist, or will you now have to go out and renegotiate agreements with potential customers?

Bob, do you want to cover the customer aspect?

Sure. We have a portfolio of ACP contracts that do contemplate or can be served by other means. So we are constantly keeping our customers up to speed on those, the status of ACP and then how we intend to cover those other contracts. They have had very positive discussions to date. They will continue over the next year.

With respect to the inventory aspect of your question, I think that is -- our inventory plan is certainly a very key part of our Paducah transition planning efforts. And so what we do expect -- we do expect to update our overall backlog and obviously our net inventory balances, inventory balance in this Q, backlog at the end of the year.

I would say we expect that inventory to wind down over a period of years, of a few years. So it will take some time and, again, very much will be a function of the customer contracts over that time period.

Bob Clutterbuck, Clutterbuck Capital Management.

First off, if you could touch a little bit on the RD&D program and elaborate just a little more? Congratulations on getting it funded through March 31. Obviously, the plan is to go until December 31.

Can you touch in a little more detail on any timing or expectations? Obviously, we have an election coming up in a week, but about getting the additional funding from March 31 through December 31?

Sure, Bob. John Welch here. Again going back -- I will go back a little bit to take you through each of the steps and then bring you right up to what we see ahead of us.

As you know, it's a $350 million cost share research, development and demonstration program, 80/20 split, which means $280 million for the Department of Energy and $70 million for USEC, over roughly an 18-month life of the program. That initial agreement included DOE's funding initially of about $88 million. So that's the first phase.

We are pleased with the support shown by Congress and the administration with the continuing resolution. The first increment of that $100 million run rate we expect to result in about $45.7 million of additional funding in the six-month period ending March 31, 2013. The remaining funding from DOE has not yet been authorized, and is subject to congressional action which could include additional appropriations, transfer or reprogram authority or other sources available to DOE.

We will continue to work with DOE and Congress to fully fund the R&D program through December 2013. But as you noted, we have those items ahead of us.

And Jack, continuing on that same thought, you mentioned several times on the two most recent calls that the current plan is to -- late spring or early summer, to refile on the DOE loan, and you have said that clearly you will have to have the financing in place prior to that. Can you comment as to where that stands from a timing point of view and give as much meat into those comments as you can, as sequentially what your thoughts are at this time?

You know, it's -- as John had mentioned, there are several things that we look at when we want to be able to do when we come back to that. But we would expect one of the first things we have to do is complete a revised estimate of cost and schedules, which will also need to update views for amounts, for adequacy, adequate contingency, startup costs and financial costs. So then that gets to total cost of the project.

Until we have done that, we don't have a 100% accurate estimate of the total funding requirements. As you know, we are looking for $2 million from --

$2 billion.

Yes, $2 billion from the Department of Energy loan guarantee program, and about -- up to $1 billion worth of Japanese export credit agency support. We have spent a lot of time keeping those organizations up to date. They remain engaged on the project, and even last month representatives toured the American Centrifuge plant as part of the continuing dialogue.

So as you look at -- as the RD&D program moves towards completion at the end of the year, we would clearly want to have the financing in place to allow us to transition directly into building the plant. There are a series of things that we want to be doing and have in place before we go back for the loan guarantee application, such that it is the strongest package that we can do. But if you just look at the timing, we would want to be back into the full bore evaluation process with the Department of Energy by the end of the second quarter.

John, anything else you wanted to add?

I think, John, you touched on the timing aspect. And I think, Bob, what I would reiterate is that our ideal timing to close on the financing to support commercial deployment of ACP would be for that financing to close concurrent with the termination or the end of the RD&D program. As John outlined, that will require us to be taking steps in advance of that and really on a continuing basis to keep folks informed on our progress.

That includes conversations with the -- including Toshiba and the Japanese export credit agencies to make sure that they are aware of our progress on the ACP RD&D program, and that we are prepared to update that application as well as our DOE loan guarantee application.

Okay, great. And, guys, just one more question and I'll get out of the queue. Recently there was an article; it was about two weeks ago and I forget which publication, but on negotiations with the PBGC regarding the wind down of Paducah. Can you comment in any detail where those would stand and what type of magnitude that would have on the liabilities?

Sure, Bob. I think that, look, in light of the uncertainties and challenges facing us -- and ultimately, this is part of our desire to improve our credit profile and ability to successfully finance ACP -- we have indicated that we expect to pursue discussions with several key stakeholders regarding ways to improve capital structure.

Currently, we are working with advisors and developing options for a possible restructuring of our balance sheet and how to address our very key liabilities, but obviously a very sensitive topic at this point. I don't think it would be appropriate to speculate on any path of discussions with any of those particular stakeholders, including the PBGC.

Look, we've got a -- I think we have a very strong track record of transparency in our disclosure regarding our business prospects. And I think, as you know, when we have something substantive on this or any related front, we will certainly let folks know.

Jason Adler of GMP Securities.

You actually just answered the capital structure question. So thanks.

Rich Howard, Prospector Partners.

Well, I might as well follow up on that as well. Improving the credit profile is part of your plan. I applaud that. When do you think we are going to have some visibility on that?

I think, as we know and as there is material progress or developments, we will let you know. I think it's fair to say that it is very much a function of clarity around our business and business prospects, and certainly two very important elements of that are our Paducah transition and our execution of the RD&D program, as well as our commercialization plans for the American Centrifuge program.

And so, as we are putting those pieces in place, those are all aspects that will influence, certainly, or future business prospects and how key stakeholders can all participate in that. So we do expect to be working on that in the near-term. Again, we will let you know as there are developments.

And do you have a specific plan in mind at this point, or is it still a work in progress? And I say that because events are going to overtake us very soon.

I think it's fair to say that it is a work in process, that we are currently working with advisors and develop options along those lines.

So they have proposed options to you?

Again, I don't think it's fair to get into -- to speculate on back and forth. But we are working with our advisors on the best options for our stakeholders.

Okay, I have an easy question for you. The R&D spend in the fourth quarter -- RD&D spend in the fourth quarter, your share will about double? Is that correct?

Our share on a rate basis will continue to be at a 20% funding level. I don't think that the dollar amounts will ramp up that quickly to double. I think that our expected pace of spending would be pretty consistent with that in the third quarter, but perhaps slightly stepped up.

And when we talk about additional funding that was allowed, all of that funding is, however, included in the $280 million that the DOE is putting into RD&D? Is that correct?

Right, the $280 million represents DOE's 80% share of the total $350 million program.

Well, I congratulate you on the progress that you are making. Thanks very much.

Steve Robinson, Arden Partners.

Just a follow up on the Russian contract, try to -- one more time in a different way. Can you just talk about the nature of the contract? Is it a sort of a cost-plus type of arrangement? Just to give us a -- it's obviously important to cash flow going forward.

So there seems to be some reluctance to talk about specifically what's the arrangement. But it would be helpful for us to understand as much as you can on the contract and the cash flows we should expect going forward, because it's going to be key for the next few years.

It's John Barpoulis, and I'll ask Phil to follow up. I think, look, the key variables from a financial standpoint, again very much appreciated that our stakeholders want to get a better sense for cash being generated on a go-forward basis.

Key variables are ultimately the market-based pricing formula that is proprietary that we can't get into, but ultimately is our source of supply. And on the customer side it's a function of the pricing within the customer contracts and the very specific deliveries associated with that supply over a time period.

We do expect that overall formula to be positive in terms of producing the gross profit and cash flow. But again, at this point we are not able to provide clarity around dollars and gross profit margin guidance until we have greater definition around those two very key variables.

Just following up on the RD&D share, the surety bonds balance is coming down. And I know that has been part of the funding. I just want to make sure that I understood exactly on the matching of the reimbursement. When you guys are booking your expenses and the contra-expense associated with RD&D program, is that cash flow matched on a quarter-to-quarter basis? Or is there any sort of lag or catch-up that we need to be concerned about?

Very fair question. And as anything with USEC, it is complex. What I think is important to know is, from the income and timing standpoint, you see that reflected in our advanced technology expense line item from the expenditure standpoint, and DOE's portion of the cost share appearing in our other income line item.

The cash picture is related directly to the sources of funding for our 20%. Obviously, that's funded out of our cash balance and cash flow from operations.

When one takes a look at DOE's contribution, this initial portion was funded by their acceptance of tails which resulted in, as you can see on our balance sheet, a significant reduction in the depleted uranium liability, which was a strong positive for us. You also see the surety bond balance and cash collateralization coming down. A portion of that, of the $87.7 million that was part of this first phase of tails acceptance by DOE -- I believe about a little under $60 million was received in the third quarter.

We've got additional disclosure on this, on the mechanics of the details in the Q. But again, about $60 million came in, in the third quarter. The remainder we expect to be coming in, early in the fourth quarter.

And then with the appropriations in the continuing resolution, we will flip into a cost reimbursement approach on RD&D spending related to that portion on a monthly basis. Is that helpful?

Yes, on the mechanics. And it just stepping back a bit, just on the timing of the payment, so if I look at this on a -- if I look at the program going forward, and it's going to be sort of hard, as you say, due to the complexity, to strip it out and follow it. But just conceptually, there's not going to be cash coming in, in one quarter, that needs to get paid out the next quarter, in terms of my monitoring your liquidity profile?

No. I think it's fair to say, again, we have this arrangement upfront with respect to tails. And then on an ongoing basis it's basically a monthly arrears type of reimbursement.

Got you. Okay, fair enough. Two other questions, quick one -- the cash balance, do the cash balances sit at all entities, or is it predominantly at the ultimate Holding Company? Or where is the cash today?

Steve, we don't break that down from the public standpoint. Again, USEC is a pretty straightforward, call it, Company from an entity standpoint. But cash is basically consolidated.

And I guess one final question -- the ACP program. You talk about on the five technical milestones to have been achieved thus far, just reading from your 8-K, and then you have got three more that need to be completed by December 31. I guess just you expect, obviously, to hit those remaining three milestones? You wouldn't have any technical issues?

Well, we certainly plan to meet all of those milestones. And as you would expect, in any big, complex project, there's a very detailed work breakdown structure that has things planned out over a period of time and you are measuring your progress against that.

We have a certified earned value management system that we are employing for keeping track of that to see how we're doing. So everything that we can tell right now, we are on track to be able to perform the project as envisioned.

There are other performance indicators that we also report against as those are realized. We have been able to get a lot of machine runtime and deal with some reliability issues, especially the second one, which was looking at a specific component. There will be a time after the first of the year, which we have a major shutdown to basically get all of the full cascade support systems up and running, machines in place such that we are ready to go run the cascade for its performance period.

So -- but as everything we see right now and how we are performing against that, I think we are very cautiously optimistic we are going to -- we believe we can deliver exactly on what was promised. There are some more details in the Q that would give you a feeling on the performance indicators, things like that.

Okay, and then just in terms of timing -- so the funding you received takes you out to the end of Q1. You want to be fully complete with your application in Q2 with approval, it sounds like, by year-end. Right? So if you have got all the technical milestones achieved by -- let's say, so you've got that 2013, right? Got you.

So, shouldn't the technical milestones be achieved by the time you have your application in? I guess that's what I'm not quite understanding. I think you said you want to have your full application in by June and then there's a few remaining milestones outstanding at that point?

I think that's right. As John outlined, we have achieved certain milestones. We also have -- the remaining milestones are largely at the back end of the program. So it's our expectation that obviously we will be aware of our progress at the time that we submit the updates to our application, and obviously aware of the progress there.

I think that there are likely also -- we would expect to have a condition to closing on any of the financing that we have adequately met these milestones and the progress along the way.

Laurence Alexander, Jefferies & Co.

Just a couple of quick ones -- first, is there anything in terms of order timing or lumpiness that could be pulling shipments or volumes into Q4 from the first half of 2013?

I don't think anything, aside from the guidance that we've provided for the rest of the year. I think that those, frankly -- all of those orders, at this point, are confirmed. So, again, we are looking now at order confirmations in 2013.

Correct.

Okay, and secondly, thank you for the walk-through on the contract structure. I do want to come at it from one more angle, again for the Russian contract. Does the contract expressly rule out negative gross margins? Or, depending on how the formulas evolve over time, are negative gross margins or negative EBIT margins -- actually, let's just focus on gross margins. Are negative gross margins possible?

I would be disappointed if you weren't peeling further on the onion. It's a very important topic; we recognize that. There is nothing expressly prohibiting gross margins -- again, I think this is getting to our alignment of our revenue sources and customer contracts with the market-based pricing formula in this commercial supply.

Okay. And then lastly, can you give an update on your thinking in terms of how fast, if necessary, you could scale down your SG&A and RD&D costs further, if at some point in the next couple of years that became necessary?

Well, you sound like you have been at some of our strategy sessions, because when we started at the beginning of the year, the whole look structurally at the organization, it was very much with a long-term view. And certainly, at the beginning of the year we weren't sure if Paducah was going to be operating beyond May or not.

But the next big step in organizational structure you would expect is when you are no longer enriching at Paducah. You still have a lot of activity to do at Paducah and you have a lot of inventory to deliver, but the structure would change. And as that business base adjusts, SG&A structure has to adjust accordingly.

And in the profile that we laid out to you, which there certainly is a potential that you've ceased enriching at Paducah and you are using your transitional supply from Russia to carry the business while you are building out ACP, that's going to necessitate a much leaner SG&A structure through that period. So, yes, we absolutely have that mapped out. And none of it will be easy, but what we tried to do in 2012 was to get ahead -- where we could, get ahead of that downturn.

The next big event would be Paducah, but clearly pointing towards a very lean period from an SG&A standpoint that we are going to have to run before we get to ACP and the growth comes back.

And then just lastly, if I may, is there anything in your licensing relationships or customer relationships that could provide a platform for some kind of partnership with one of the other enrichment providers -- Areva or Urenco -- that you could monetize?

I think the short answer there is no. I think that we believe that one of our strengths is our knowledge of the US regulatory environment and our stellar operations of enrichment in that environment. But otherwise, no.

Rich Howard of Prospector Partners.

I was looking at the statements that you expect cash at the end of the year to be $200 million or more than $200 million. Obviously, you have $300 million now, and obviously $300 million is more than $200 million. So I suppose it doesn't really say much one way or the other. But with the pay down of the surety bond, do you have specific things in mind which will cause cash to go down, really at all in the fourth quarter?

I think that the most significant driver in this time of the year with respect to cash is related to our purchase of Russian material. So what you -- again, from an expectation standpoint you will see, likely see inventories building as that cash flow is declining.

So that would be the key swing factor in the fourth quarter?

We believe that's the most material use of cash that we expect for the rest of the year.

Okay. That's great. Thanks.

There are no further questions at this time. I would like to turn the floor back over to Mr. Welch for any closing remarks.

Well, thank you all for your questions this morning. As always, we appreciate your participation in this quarterly call because it provides an important channel for two-way communications. And if we need to follow up with any of you beyond this call, you know how to get hold us. Thank you and have a good day.

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