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Executives

Steven Wingfield – Director, Investor Relations

John Welch – President & Chief Executive Officer

John Barpoulis – Senior Vice President & Chief Financial Officer

Bob Van Namen – Senior Vice President, Uranium Enrichment

Analysts

Lucy Watson – Jefferies

Gabriel Abis – Goldman Sachs

Tom Lewis – Century Management

USEC Inc. (USU) Q4 2008 Earnings Call Transcript February 26, 2009 8:30 AM ET

Operator

Good day and welcome everyone to the USEC Inc. Fourth Quarter 2008 Earnings Results Conference Call. This call is being recorded. With us today from the company is Mr. John Welch, President and Chief Executive Officer, and Mr. Steven Wingfield, the Director of Investor Relations. Management will make opening remarks, which will be followed by a question-and-answer period.

At this time, I would like to turn the call over to Mr. Steve Wingfield. Please go ahead, sir.

Steven Wingfield

Good morning. Thank you for joining us for USEC’s conference call on the fourth quarter and full year 2008, which ended December 31 2008. With me today are, John Welch, President and Chief Executive Officer; John Barpoulis, Senior Vice President and Chief Financial Officer; Phil Sewell, Senior Vice President, Bob Van Namen, Senior Vice President; and Tracy Mey, Controller and Chief Accounting Officer.

Before turning the call over to John Welch, I want to welcome all of our callers, as well as those listening to our webcast via the Internet. This conference call follows our earnings news release issued yesterday after the markets closed. That news release is available on many financial websites, as well as our corporate website usec.com.

I want to inform all of our listeners that our news releases and SEC filings, including our 10-K, 10-Qs, and 8-Ks, are available on our website. We expect to file our annual report on Form 10-K later today. A replay of this call also will be available later this morning on the USEC website. I’d like to remind everyone that certain of the information that we may discuss on this call today maybe considered forward-looking information that involves risk and uncertainty, including assumptions about the future performance of USEC.

Our actual results may differ materially from those in our forward-looking statements. Additional information concerning factors that could cause actual results to materially differ from those in our forward-looking statements is contained in our filings with the SEC, including our annual report on Form 10-K.

Finally, the forward-looking information provided today is time-sensitive and is accurate only as of today, February 26, 2009. This call is the property of USEC. Any redistribution, retransmission or re-broadcast of this call in any form without the expressed written consent of USEC is strictly prohibited. Thanks for your participation, and now I would like to turn the call over to John.

John Welch

Good morning to you all and thank you for joining us to discuss our 2008 results. We pre-announced our results early in February and so you are likely aware that we had a better than expected fourth quarter which in turn pushed our net income for the year above the range in our guidance.

Taking a look at the bottom line, we earned $25.1 million in the fourth quarter matching the net income in the same quarter last year. For the full year, we earned $48.7 million compared to $96.6 in the same period of last year. Revenue tracked our expectations for the year. As we noted throughout 2008, our sales volume was substantially lower in 2008 than in 2007. And as we have also noted we expect 2009 sales volume to be at least as good as 2007, a year when we set a record for revenue and volume. Majority of the reactors served by USEC are refueled on an 18 to 24 month cycle, so we are seeing the delivery scheduled in 2009 for many customers who refueled and purchased fuel from us in 2007.

We provided guidance for 2009 in the earnings release that went out yesterday after the markets closed. John Barpoulis, will go into more detail about those guidance during his remarks, but I would like to hit on a few of the highlights of that guidance. We expect a strong uptick in revenue as a result of a 40% increase in SWU sales volume. We also expect the average price for SWU build to customer to increase 10%. We see total revenue coming in a range of $2.2 billion to $2.5 billion, with approximately $1.8 billion coming from the sale of SWU.

Revenue from government services are expected to be relatively flat year-over-year. Uranium revenue will decline to about $200 million as spot prices for uranium softened throughout 2008.

Uranium prices have been just below $50 a pound so far this year. While we have good news on the revenue side, our costs are expected to rise faster than revenues and we see pressure on our gross profit margin in 2009. Our cost for the SWU we purchased from Russia went up 11% in 2008 and we expect those purchase cost to rise by a similar rate in 2009. As you know, we purchased about half of our SWU supply from Russia so this increase will have a significant effect on our cost of sales. We've recently signed an agreement with TENEX, the Russian executive agent regarding the formula we use to set the price for purchases from Russia during the period of 2010 to 2013.

The current price, pricing methodology uses a discount from an index of international and U.S. price points including both long and short-term spot prices. The new pricing methodology is intended to enhance the stability of future pricing for both parties, through a formula that combines the different mix of price points and other pricing elements. We expect this amendment will help moderate the year-over-year increases we’ve seen in 2008 and ‘09 and provide us with better visibility into future purchase cost.

This new agreement requires government approvals from both the United States and Russia. The other major cost component of our Low Enriched Uranium segment is power specifically, the cost of electrical power from the Tennessee Valley Authority. In 2007, we signed a five-year contract with TVA that provided moderate annual increases to the base price we pay. This contract also includes an adjustment up or down based on TVA’s cost of fuel and purchase power.

This adjustment was fairly modest in 2007, when the price of coal spiked in early 2008 the fuel cost adjustment significantly increased our power cost. Coal prices have come down somewhat since the summer’s peak, but not to the extent seen for other fossil fuels. The issue is made worse by a lingering drought in the Tennessee Valley. Lower reservoir levels have substantially reduced the amount of hydropower generated by TVA and increased power purchases from other utilities.

The fuel cost adjustments in 2008 imposed an average increase over a base contract prices of about 15%. We expect the fuel cost adjustment to continue to cause our power cost to remain, above our base contract price. TVA has publicly said that their fuel costs have declined in recent months, but coal prices remain above their price level of early 2008.

TVA continues to forecast increased fuel and purchase power cost for 2009. We made certain assumptions about those fuel cost adjustment going forward, but a large degree of uncertainty remains.

Together, the higher power cost and a higher SWU purchase cost paid to Russia will increase our cost of sales in 2009 at a rate higher than the improvements in prices billed to customers this year. We anticipate a gross profit margin this year of 10% to 12% which is down from the 14% recorded in 2008. This erosion of our profit margin provides an excellent reminder of why we are so sharply focused on building the American Centrifuge Plant. We have little control over the price we pay for power and electricity makes up 70% to 75% of Paducah’s production cost.

The American Centrifuge Plant on the other hand uses 95% less electricity than the current gaseous diffusion technology. This lower variable cost for power should reduce our production cash cost while providing operating cost stability after our initial capital investment.

Returning to our 2009 outlook, we expect net income in an range of $25 million to $50 million, that wide range reflects the uncertainty of power cost as well as the variability of timing for the recognition of uranium revenue. Later in the year, we will update this guidance as we gain clarity.

During 2008, we built inventory in advance of the expected increase in SWU volume to be sold this year. In fact our net inventories increased by $270 million. We expect to monetize this inventory in 2009 and we look for cash flow generated from operations to be in the range of $240 to $275 million.

Embedded in our guidances is some expectation that we will expense roughly a $120 million on the American Centrifuge Plant in 2009. In addition, our baseline plan called for spending approximately $700 million in capital expenditures for ACP. I want to say at the outset that this spending projection will likely be adjusted by the time we talk with you again after the first quarter.

Earlier this month, we announced that we were moderating the planned spending on the American Centrifuge Plant in 2009. We had anticipated that the DOE under the Bush administration would make the project selection for a Loan Guarantee before leaving office, but that did not happen.

It takes time for the staff appointments below the Secretary of Energy to be made and ratified by the Senate and we thought it prudent to reduce the rate of increase and planned spending on the project. We have been very pleased with the actions taken already by Energy Secretary, Steven Chu. DOE issued a news release last week announcing a sweeping reorganization of the department’s Loan Guarantee Program. DOE expects to be in a position to begin offering loan guarantees later this spring. We see this as an excellent sign of this administration is serious about supporting innovative energy projects.

Our American Centrifuge Plant is well underway and we are on the cost book creating thousands of jobs at a time when every new job is critical for communities across the nation. Later today, we will issue our annual report on Form 10-K, as it’s typical for these documents we will provide a wide range of information on the company including an update on our progress to build the American Centrifuge Plant.

There were several points regarding ACP that I want to emphasize to our investors. First, given the uncertainty regarding the timing of Loan Guarantee Program, we have not updated our project schedule, we've said that our decision to slow spending on the project until DOE funding becomes more certain will likely have a negative impact on both schedule and cost. How much of an impact it will depend on the duration of the slowdown and spending, and whether further steps to conserve cash become necessary. We’re working with our suppliers to evaluate and minimize the potential cost and schedule impact.

Secondly, do not expect to reduce spending in 2009 on our critical near-term items including the Lead Cascade Test Program AC100 design and value engineering. Third, we are currently building the AC100 cascade and expect to begin operation of our five-stage cascade midway through 2009. Although this cascade will operate in a close look configuration, the flow of uranium feed and tails between individual machines and the cascade, will be similar to those expected in commercial plant operations.

Additional machines will be added until we reach a cascade of 40 to 50 machines, which we expect to do late in the third quarter. This cascade will operate for the rest of 2009 as intended to provide additional data on equipment operation and reliability that could identify opportunities to further optimize a centrifuge and cascade design. Our lead cascade integrated testing program that has been underway since August 2007 continues to provide us with valuable information. We’d love more than 150,000 machine hours since the lead cascade operations begin.

We have swapped out comp bonus in the original cascade with AC100 comp bonus to give us additional operating hours for the improved parts. Changing the comp bonus also allows us to analyze the impact of operations on them with just part of our deterministic approach to long-term reliability of the centrifuges. And my final point, we are working with the Department of Energy Loan Guarantee Office on a regular basis to answer their questions and expeditiously move the process forward.

Dr. Chu has publicly made the point several times that the long guarantee process must be accelerated, and we have seen a new sense of urgency trickling down through the Department. We voice the strong attributes to the American Centrifuge Project especially in relation to the application put in by our for a known competitor. Our project is licensed by the NRC and well underway.

Our centrifuge has utilized classified U.S. technology and proudly carry the Made in America label. We are leading the way to reestablish the uranium enrichment industrial base in the United States. Our project alone has the potential to create more than 6000 direct and indirect jobs in the very near term. The American Centrifuge will provide our U.S. utility customers with a domestic source of enrichment with U.S. controls technology, that’s energy security they can count on.

In short, our project does not only align with the criteria established for the Loan Guarantee Program, but also fits well with our nation’s economic priorities. We are working diligently to have the project selected by DOE in the near-term, so that we can return to ramping up the project toward commercial operations. If we do not see a path that leads to DOE funding our project later this year, we must take additional steps to slowdown spending. We want to avoid that scenario if at all possible because it will dramatically affect both the schedule and cost of the plant.

We remain very bullish on our project and believe it is our best path for building shareholder value. We are prepared to quickly resume the ramp up in hiring and spending and on the project as funding becomes available. This project is critical for our company and for our nation’s energy security.

Now, I’d like to turn the call over to John Barpoulis to report on the fourth quarter and full year 2008 financials. John?

John Barpoulis

Thanks John, and good morning everyone. We want to get to your questions and since we expect to issue our 10-K report later today I will keep my report to the highlights. I’ll also give some color to our results for the fourth quarter since the 10-K is more focused on the full year.

Starting at the top line for the quarter, revenue was $432 million, a decrease of 30% or $185 million over the same quarter of last year. As it’s the norm, SWU sales made up the majority of revenue at $314. SWU sales in the fourth quarter reflected a 45% decline in sales volume, but a 6% increase in the average price billed to customers.

The good news here is that we are seeing the higher prices in contracts we signed in recent years being part of a mix of delivery. We expect that trend to continue in 2009 as average SWU prices billed to customers are anticipated to increase by approximately 10% year-over-year.

Uranium revenue was $63 million, which was an increase of more than 100% over the same quarter last year. This is a good example of the variability of our sales quarter-to-quarter. In the third quarter of 2008, uranium revenue was about half that reported in the quarter of 2007. Uranium sales volume was down 37%, but the average price billed to customers was up by more than 200%.

Nonetheless, we saw uranium prices dropped during the second half of 2008, along with other energy commodities due to the selling by financial players and recessionary concerns. Although we believe there is solid demand for uranium over the medium-to-long-term, uranium prices are well below where they were a year ago. We will seek to be opportunistic in placing the uranium we obtain from underfeeding into the market in the coming months.

Turning back to the quarter, the U.S. Government Contract segment contributed $55 million, 6% more than the same quarter last year. The mix there is increased revenue from NAC, offset by the completion of the uranium remediation work for DOE.

Looking now at revenue from the full year, total revenue was $1.615 million, down 16%. The timing of reactor refueling can clearly be seen during 2008, as SWU volume was down 27% year-over-year. Average SWU prices billed to customers increased 2% compared to 2007.

Uranium revenue was $54 million, or 33% higher year-over-year. Uranium volume was down 4% but the average price billed to customers increased 38%. Our Government Contract segment contributed $222 million, which is $28 million or 14% more than 2007. The increase was primarily due to increased contract work related to cold shutdown efforts at the Portsmouth GDP, incremental revenue for DOE contract work done in prior years that was recognized in 2008 and the timing of sales by NAC.

Turning next to the cost of sales for the LEU segment. I’m going to stick to the full year as the factors are the same throughout the year, but some of the variability gets smoothed out over the annual period. The cost of sales for SWU and uranium was just over $1.2 billion, that’s $271 million or 18% less than 2007, and mainly due to the decline in SWU sales volume offset by 4% higher unit costs.

As you know, under our monthly moving average inventory methodology, cost of sales reflects changes in production and purchase costs. Our production cost increased 14% during the year, reflecting a 12% increase in the amount of power purchased. The average cost per megawatt hour increased by 6% year-over-year. We bought 2000 megawatts of power, 24/7 during the non-summer months from TVA in 2008. That translates into $1.6 million more megawatt hours of electricity being purchased in 2008 than in 2007.

The additional power is used to increase SWU production and to underfeed the enrichment process. Production volume was up by 10% as we built inventory in advance of sales in 2009, as well as taking advantage of the economics of underfeeding. The quantity of uranium that is added to uranium inventory from underfeeding is accounted for as a by-product of our enrichment process.

Production costs are allocated to the uranium obtained from underfeeding, based on the net realizable value of the uranium and the remainder of the production cost is allocated to SWU inventory costs. Our overall unit production cost increased 3% during 2008.

The impact of higher prices paid to Russia also affected profit margins. In 2008, the price we paid to Russia under the market-based pricing formula was 11% higher than in 2007. John noted earlier, that we expect the increase in 2009 to be similar to the one seen in 2008. Cost of sales in the Government Contract segment increased $17 million during the year, compared to 2007, primarily due to increased contract work related to cold shutdown efforts at the Portsmouth plan, and additional NAC costs related to the timing of sales.

Gross profit for the fourth quarter was $78 million, an increase of $3.5 million from the same quarter of 2007. Our gross profit margin was 18% for the fourth quarter, compared to 12% in the same quarter of 2007. For the full year, the gross profit was $229 million, which was $59 million or 20% lower than 2007.

The gross profit margin was 14.2% for 2008, compared to 14.9% in 2007. The low gross profit we have expenses for advanced technology, primarily that continued demonstration and development cost of American Centrifuge. The amount expensed in 2008 was $110 million, compared to $127 million in 2007.

The reduction in advanced technology expense is due to reduced activities associated with assembling and testing centrifuges and equipment at our test facilities in Oak Ridge and increased spending and activities related to the capitalized construction work in progress on the centrifuge machines and the ACP.

Although advanced technology expenses were down 13% in 2008, we significantly increased the pace of spending on the plant. In addition to the advanced technology expenses, $420 million of spending is capitalized compared to $119 million in 2007. As we continue to move forward with the commercial deployment of the American Centrifuge, much of our spending will be capitalized, but we will still have significant advanced technology expenses in 2009.

Selling general and administrative expense increased by $9 million in 2008 compared to 2007, but the previous year’s expense that is benefited from a reversal of a previously accrued tax penalty of more than $3 million. Compensation and benefit related expenses increased by $2 million, and consulting expenses were $2 million higher compared to 2007. Travel expenses were also $1 million higher, reflecting additional travel related to the American Centrifuge project.

Going to the bottom line, we recorded net income of $25.1 million in the fourth quarter, which match the net income in the same quarter of 2007. For the year, we recorded net income of $48.7 million, or $0.35 per diluted share, compared to $96.6 million or $0.94 per diluted share in 2007.

The basic EPS was $0.44 per share in 2008, versus the $1.4 per share in 2007. I would note that the results in 2007 benefited from $22 million from the non-cash reversal of perviously recorded accruals for taxes and interest associated with the accounting standard known as FIN 48.

We did a little better than our guidance for the year due to better than anticipated results in the fourth quarter. The biggest drivers for the improvement were the timing of recognition of previously deferred revenue for uranium sales, and lower than expected, that lower than planned ACP expense. To a lesser extent, the cost of power moderated somewhat in the fourth quarter, compared to TVA’s forecast.

Turning next to cash, we ended the year with $249 million in cash, compared to $886 million on December 31 2007. The cash flow used in operations during 2008 was $105 million, compared to cash flow generated by operations of $109 million in 2007. The $214 million difference between the two years was the results of a build a net inventory of $271 million year-over-year.

The other draw on our cash balance was the higher level of capital expenditures, $442 million related to the American Centrifuge project, and $54 million in the early repurchases of our senior notes that matured in January 2009. On January 20, we repaid the remaining principal of $96 million on those senior notes.

We have an extensive discussion of our liquidity in the 10-K, but I can simplify it for this call. With added DOE Loan Guarantee or other financing, and without taking into account the USEC’s plans to slowdown project spending in 2009, USEC anticipates that its cash expected internally generated cash flow from operations, and available borrowings under its revolving credit facility, would be sufficient to meet its cash needs for approximately 6 to 9 months under the baseline budgeting schedule.

Taking into account USEC’s plan to slowdown project spending, USEC anticipates that its liquidity will be sufficient beyond this period. In the yesterday’s news release, we also said our earnings and cash flow guidance for 2009. As noted in the news release, our guidance is subject to a number of assumptions and uncertainties that could affect results.

Although our base cost for power is set under a 5-year contract with TVA, we expect that fuel cost and purchase power cost adjustment in that contract to increase our cost. This will negatively affect our production cost and cash flow from operations for 2009, just how large this fuel cost adjustment will be this year is an open issue. We’ve all seen volatility in the energy markets recently and the forecast from TVA has mirrored this volatility.

We expect that gross profit margin of 10% to 12% for 2009, down from 14% last year. Below the gross profit line, expenses related to the American Centrifuge project are expected to be about $120 million so that is already subject to revision depending on the outcome of the DOE Loan Guarantee.

We anticipate that our corporate overhead, our selling, general and administrative expenses or SG&A will be approximately $57 million. The downturn in the global stock markets have resulted in a sharp downturn in the fair value of our pension and post retirement benefit plan assets, which will result in higher net benefit costs in 2009. These costs are embedded in our cost of sales, as well as SG&A. Combined this net benefit cost is expected to be approximately $51 million higher than in 2009 than last year.

Earlier John discussed our guidance regarding revenue, net income, and cash flow. You probably notice that our range – the range in our guidance is fairly wide, but that reflects variability that we see in some of our key cost factors, the timing of revenue recognition for uranium sales, and the impact of our spending slowdown on expenses for the American Centrifuge project.

We expect net income in a range of $25 million to $50 million. To quickly summarize, financial results for the fourth quarter and full year 2008 were better than expected due to the reasons I laid out. Looking ahead, we see stronger sales in 2009 and substantially higher cash flow from operations, but higher cost will squeeze our gross profit margin. And we are vigorously pursuing a DOE Loan Guarantee to raise the substantial capital we need to complete the ACP.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We’ll go first to Laurence Alexander of Jefferies.

Laurence Alexander – Jefferies

Good morning.

John Barpoulis

Good morning Laurence.

Laurence Alexander – Jefferies

I guess first of all, given the historical lumpiness quarter-by-quarter in your business, how many months of liquidity are you comfortable with before you start to changing your spending plans?

John Barpoulis

Laurence, I think we are constantly looking at our liquidity capabilities, resources, as well as our expected spending profile. I think our expectation in our plan is to always ensure that we have sufficient liquidity for our ongoing business. And so that, that’s clearly our priority. I couldn’t tell you a specific number of month horizon, I can just tell you that we are ensuring that we’re capable of meeting that.

Laurence Alexander – Jefferies

And then how much if you ratcheted back your spending to the minimum level that you identified, what would that level be on a run rate basis?

John Barpoulis

I think that is indicated I think in our release earlier in the month. We are now in detailed discussion with our suppliers, looking at the overall spending profile with a view in mind of when funding could be available from DOE. We expect that that timeframe changes very much a function of our discussions with DOE and their progress in reviewing our application, we would need to begin to further ratchet down our spending profile. And so, again I wouldn’t give you a dollar threshold, but it’s something that will be a function of the horizon to get to DOE Loan Guarantee funding.

Laurence Alexander – Jefferies

And then have the DEO given any color on and how sort of delays in your schedule affects their perspective on the program? Or how they look at your funding request versus other applicants?

John Barpoulis

No I think that they have in the course of our various conversations, the discussions have been very constructive. They’ve provided us with constructed feedback and I would characterize it as a dialog it’s in parallel with any other discussions that they may be having.

Laurence Alexander – Jefferies

Okay, thank you.

John Barpoulis

Thank you.

Operator

We will go next to Roger Read of Natixis Bleichroeder.

Roger Reed – Natiexis Bleichroeder

Hey, good morning gentlemen.

John Barpoulis

Good morning Roger.

John Welch

Good morning Roger.

Roger Reed – Natiexis Bleichroeder

I guess kind of following-up on Laurence’s question there, you indicate you are optimistic that DOE might have something moving forward. I guess, late spring I think I wrote down, is there a - I don’t know is there an announcement that we could watch or commentary we could watch on DOE that would lead us to believe that that is a more or less likely event. I mean, it’s certainly been much more vocal over the last, lets say two months and probably we heard in the prior 12 months, but I just wondered if there is any sort of hurdles or anything we should look for here?

John Barpoulis

Yeah this is John. I think certainly we are encouraged by Secretary Chu’s comments that they would like to start making announcements in April. I mean, we need to remember that in December of 2007, there were 16 renewable projects that were selected. None of those have been finalized yet and then of course we’re clearly focused on the second phase with the Loan Guarantee Program, which was our nuclear projects both fuel cycle as well as the reactor projects. I think you can look that it would follow a three-phase type of approach. There would be a selection, which then is followed by a period of getting to a conditional commitment and then there is a third phase, which would be the detailed final negotiations leading up to closing. That’s expected to be a multiple month timeframe, but certainly the first hurdle you would expect to see and the case of the nuclear projects would be selection on the case of renewable projects you would probably hear an announcement more along the lines of conditional commitment and we certainly are hoping that his projection of doing that mid later or part of April would hold true.

Roger Reed – Natiexis Bleichroeder

Okay. So, in terms of how we should consider your spending on ACP in 2009, and this process of getting the DOE to commit to actually provide funding. I mean, it’s probably we are probably looking at delay that takes most of 2009. You think that’s a reasonable assumption on our part?

John Welch

I mean, I think I certainly would hope that it's not that long. I think that we have been given indications that once they get to a selection point, that the process is several months, but we would hope it does not take that long. John, anything else you want to add to that?

John Barpoulis

No, I think to the extent that there is a view or we have a view as we get more information, clearly we’ll be providing that as I’m sure DOE will, as well as they move forward in the steps in the process. Again, the steps in the process selection, commitment, and then closing on alone itself with funding. And so those are the three concrete steps that we would look toward and any announcements by DOE on that as well.

Roger Reed – Natiexis Bleichroeder

Okay, thank you. That’s helpful. I guess, move to the operational side, we saw the 8-K on the Russian agreement the other day, talked a little bit about here on the call. As we look at Russian prices 2008 up 11% roughly the same level in 2009. As I look to 10, 11, 12 as the agreement runs its course, should I consider price increases or cost increases to you, obviously considerably less than that 11%, about the same, or it’s just going to depend based on what the markers and indexes tell us?

Phil Sewell

This is Phil Sewell. The new agreement with the Russians represents a new pricing methodology that really provides more stability with respect to future pricing. And with that stability, we’re looking for a moderation of the rate of increase in prices under that contract. And the Russians were looking for stability in terms of flow of income, and payments to them and because of that, we have a recent agreement with them that represents, I’ll say, pricing that is more consistent with the pricing in the marketplace with customers. And therefore, the moderation will be consistent with what we’re seeing today in our sales contracts and throughout the future.

Roger Reed - Natiexis Bleichroeder

Okay, that’s kind of what I thought, just want to make sure. And then my final question, on the TVA power gone through the coal is the big driver there along with the drought conditions, other than watching the weather channel for rain, is there any particular coal price that you think is a sort of a trigger point where we could say, coal prices dropped below this then you are kind of back to the base cost as opposed to base plus a premium?

Robert Van Namen

Sure, Bob Van Namen here. A couple of things to watch out for one is, you don’t necessarily look for rainfall as much as you do run off and I’ve learned in no uncertain terms the difference because, given the fact that TVA has been through a drought for several years, the ground is still fairly dry. They have to get a enough range to really soak into the ground as well as being able to replenish the reservoir. So, keep an eye on both those factors. On the coal subject, obviously coal rose and stuck up at higher prices much longer than we saw oil and natural gas. It has definitely started to come back down, but TVA still does have a large backlog of coal contracts that are substantially below even where the market price is today. So, we are looking for them to judiciously replenish their backlog of coal contracts and do so at the market optimum time, we do continue to see because coal prices do continue to stick up above historical levels, if there will still be some upward pressure on prices as they roll off their coal, but again we are seeing that offset by hopefully the return of hydro prices, their operations on their nuclear units and the fact that purchased power is coming down as natural gas prices come down.

Roger Reed - Natiexis Bleichroeder

Okay, that's helpful. Thank you.

Operator

We will go next to Gabriela Bis of Goldman Sachs.

Gabriela Bis – Goldman Sachs

Good morning

John Barpoulis

Hi, Gabby.

John Welch

Good morning.

Gabriela Bis – Goldman Sachs

Can you provide us a little bit of guidance on how you expect the breakdown of quarterly revenues for 2009, do you expected to be more primarily a front-end loaded, back-end loaded, anything would be helpful?

John Barpoulis

I know it’s something that we recognize that our investors and analysts would like to get a better sense of the quarterly information, but again due to the lumpiness, on the whole we do not provide specifics on a quarterly basis and we also recognize our customers do modify the timing of the deliveries. I would say that again not providing any quantitative guidance. I think that we are seeking and hoping that the delivery schedule is more stable over the year and as opposed to very either volatile or spotty quarters. That’s an objective, but again I won’t provide a quantitative guidance for you.

Gabriela Bis – Goldman Sachs

Okay, thank you.

John Barpoulis

Sure.

Gabriela Bis – Goldman Sachs

And can you provide us with a refresher on the details surrounding the DOE Loan Guarantee and how you expect the program will pan out? Is it going to be direct financing from the government? Do you still expect that only one project will be chosen for the full amount, and if you could just give us a little refresher that be great?

John Barpoulis

Sure, with respect to process, we have been meeting with the Loan Guarantee Program staff regularly for month. We had submitted our parts one and parts two of our application in July and August of last year. The deadlines for those were September and December of last year and so we have provide our applications well ahead of the deadline. Once the application was in, we began to have a conversation with DOE staffs and well I can’t really disclose the content of this discussions, and again those discussions I think have been constructive. We receive constructive feedback from the Loan Guarantee Office. The staff is evaluating not only our projects, obviously our competing bid, as well as the nuclear power plant projects and alternative energy projects. So they’ve got a full play. With respect to the steps in the process, the first step would be a selection of a project under the solicitation, the second step would be, after selection, we would expect - one would expect we are negotiating with the Loan Guarantee staff on a conditional commitment, and so the next step would be a commitment a formal commitment. And then, between the commitment and final closing on the loan, obviously at that point you are putting in place all of the necessary documentation to get to closing. So those are the three steps. With respect to, whether, who actually does the financing, or the program has evolved, so that it is, I wouldn’t call just a Loan Guarantee Program anymore, the funding would be from the Department of Treasury in our case, in the case of someone who is seeking the level of that guarantee that we are. So seeking a that 100% of our debt is guaranteed, the guarantor technically is the Department of Energy, but the Department of Treasury would be the lender. Last is, with respect to whether they would award all 2 billion or something less to a project, we have applied for 2 billion, because that is the amount that we need from that standpoint and so we do not expect that there would be a reduced amount, on the other hand, it’s a function of what DOE will actually do. John?

John Barpoulis

Yeah, the only thing I would add to that Gabriela is, the size and cost of the project were designed to meet the policy objectives of Department of Energy, and the Energy Policy Act 2005 that established the Loan Guarantee Program. Without the full $2 billion we’d have to take a very hard look at the impacts of the reduced funding on the project and including the basic economics of the projects itself.

Gabriela Bis – Goldman Sachs

Great. Thank you, and one little detailed question. Did you guys provide any tax guidance for 2009 as it’s similar to '08 around 30% at there?

John Barpoulis

We encourage people and our guidance to use the statutory levels and obviously as we go through the year to the extent that changes we would update.

Gabriela Bis – Goldman Sachs

Great. Thank you very much.

Operator

We’ll go to Suzanna Trostdorf of Swiss Re

Suzanna Trostdorf – Swiss Re

Good morning.

John Barpoulis

Good morning.

Suzanna Trostdorf – Swiss Re

I have basically three questions. One is a followup question to make sure my understanding is correct. You mentioned in terms of the DOE plan approval, those three phases and then you mentioned the timing indication end or later part of April, can you reconfirm for which phase it was, whether it’s for the selection or you already think there would be an announcement for the conditional commitment?

John Barpoulis

The timing that John had outlined with respect to the end of April is not with respect to our project, it is with respect to Secretary Chu’s announcements of leaking to announce and that would be selections we believe at the end of April, but again I would look to his specific wordings on what that’s said.

Suzanna Trostdorf – Swiss Re

Okay. Thank you. The second question relates to the pension liabilities. I just noted on the balance sheet that they increased by $200 million from quarter-to-quarter. Can you give us a little bit more color around that and also get us some insight of how much or if there any unfunded and you mentioned that you need to fund another $15 million, but can you provide us a bit more color around it? And also in terms of cost increases for 2009, you gave us some indication, but what do we expect thereafter?

John Barpoulis

As with many companies, that has defined benefit plans, we were not unaffected by the events of the fourth quarter of 2008 and continued volatility in the stock markets. We have conservatively invested our pension assets, but again those did see declines. The balance sheet number that you mentioned is a shift from a net pension asset to a net pension liability. In our guidance we did outlined that the, the increase in expense is the GAAP side, the increase in funding in 2009 was about $15 million. And so that is the level that we will expect for 2009. Again the funding level is a function of the funding requirements under the Pension Protection Act of 2006 as well IRS guidelines, and so will be following those. With respect to - we provide our guidance for one year with respect to anything further out, very much a function of future years, but also a function of the performance of our asset investments. So, there is a considerable amount of detail on our pensions that will be provided in the 10-K, rather than getting into selective numbers here. I would encourage you to take a look at the footnotes.

Suzanna Trostdorf – Swiss Re

And the final question is regarding the revolving credit facility, the 400 million, which I believe expires in August 2010. It includes some financial covenants. Now given to the situation at you will, I think in the front-end of this year continue to invest in the ACP, for the ACP program to what extent are you coming to financial levels, which might hit covenants?

John Barpoulis

There are – there is one financial covenants. That covenants only kicks in when we exceed certain availability thresholds or usage thresholds. And so, we do not - have not met those thresholds, and now at this point or previously. Again, there is a considerable amount of detail - additional detail in our 10-K with respect to the credit facility and the various levels that we will certainly be keeping an eye on with respect to availability. And I would again encourage you to take a look at those.

Suzanna Trostdorf – Swiss Re

Can I just followup on the financial covenants, which is mentioned, or it was mentioned before in your filings, but was never defined in terms of what level it is? Can you provide some more in sight, what – is this the minimum that growth covenant or leverage covenants?

John Barpoulis

I would encourage you - actually the credit facility itself is a filed document. And so to the extent that you would like to take a look at the specific definitions around that financial covenants to look at, it is a coverage, a debt service coverage, covenant.

Suzanna Trostdorf – Swiss Re

Thank you, very much.

John Barpoulis

Okay, thank you.

John Welch

Thank you.

Operator

At this time, there are no other questions in the queue. I will turn the conference back to Mr. John Welch for any additional remarks.

John Welch

Well, thank you for your questions this morning. We have made substantial progress on our project during 2008. And we are clearly at an inflection point regarding the future of nuclear power in the United States and we are attempting lead that effort to reestablishing, the manufacturing infrastructure for our industry. We are actively engaged with DOE regarding the Loan Guarantee Program and we are cautiously optimistic based on recent actions and statements by Secretary Chu.

As we move forward, the American Centrifuge Project, we are also keeping a sharp focus on our current operations. We have a vision for delivering long-term shareholder value, and we are focused on executing that plan. Thank you for your interest and investment in USEC and have a good day.

Operator

That concludes today’s conference call. We thank you for your participation. You may disconnect at this time.

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