USEC Inc. Q2 2010 Earnings Call Transcript

| About: Centrus Energy (LEU)

USEC Inc. (USU) Q2 2010 Earnings Call Transcript August 4, 2010 8:30 AM ET


Steven Wingfield - Director, IR

John Welch - President and CEO

John Barpoulis - SVP and CFO

Phil Sewell - SVP

Bob Van Namen - SVP

Tracy Mey - Controller and CAO


Amanda Sigouin - Jefferies & Co.

Gabriela Bis - Goldman Sachs

George Caffrey - Miller Tabak


Greetings and welcome to the USEC Inc. second quarter conference call. At this time all participant are in a listen-only mode. (Operator Instructions). As a reminder this conference is being recorded. It is now my pleasure your host Steven Wingfield, Director of Investor Relations for USEC. Thank you Mr. Wingfield, you may begin.

Steven Wingfield

Good morning. Thank you for joining us for USEC’s conference call, regarding the second quarter of 2010, which ended June 30, 2010. 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 would like 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,

We want to inform all of our listeners that our news releases and SEC filings including our 10-K, 10-Q and 8-K are available on our website. We expect to file our quarterly report on 10-Q 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 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 of our forward-looking statements. Additional information concerning factors that could cause actual result 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 and quarterly reports Form 10-Q.

Finally, the forward-looking information provided today is time sensitive and is accurate only as of today, August 04, 2010. This call is the property of USEC and any redistribution, retransmission, rebroadcast of this call in any form without the express written consent of USEC is strictly prohibited. Thank you for your participation. And I now would like to turn the call over to John.

John Welch

Good morning. Thank you for joining us to discuss our second quarter results. Over the course of the next few minutes, I will briefly discuss our financial results for the second quarter and our outlook for 2010. I will also address our update to DOE on the progress we’ve made in the recent months to deploy the American Centrifuge Technology and provide sufficient time for your questions.

Taking a look at the bottom line for the quarter, we reported net income of $7.2 million compared to net income of $17.3 million in the second quarter of 2009. For the first half of 2010 we reported the net loss of $2.5 million. Our results in 2010 have been reduced by a one time charge of $6.5 million related to a change in tax treatment of Medicare reimbursements resulting from the health care legislation enacted earlier this year.

Many of the activities we have undertaken to address DOE’s concerns about technical aspects of the American Centrifuge are expensed in the $52 million in Advanced Technology expenses in the six months period had the effect of reducing our net income. On the positive side the results in the six month period include other income of $20 million resulting from DOE’s contribution for continued ACP activities.

Turning to our 2010 outlook yesterday we provided updated guidance for the year. Given our improved visibility on the spending pattern for the American Centrifuge project we added guidance for net income of approximately breakeven for 2010. The higher prices paid for fuel purchase from Russia over the last several years and higher electric power prices have increased our average inventory cost. The increases for these costs have been at a higher rate than the increase in average fuel price billed to customers. That has squeezed our gross profit margin in 2010. However, we purchased electricity this summer that is less costly than the power we bought last summer and that is modestly helping to improve the gross profit margin.

Our expectation is that revenue for the full year will be approximately $2 billion and we expect the gross profit margin that has improved to a range of 6% to 7%. Spending on the American Centrifuge that is expensed is expected to be approximately $110 million for the full year. Based on these projections we believe that our net income will be about breakeven for the full year.

John Barpoulis will have additional detail on the guidance in this financial report. Leveraging the value of our substantial investment in the American Centrifuge Technology has been a key element of our plan to enhance long-term shareholder value. Last week we submitted a comprehensive update to our application to DOE loan guarantee program. We provided what we believe is solid business case for the American Centrifuge that includes strong assurance of loan repayment. This was the combination of a year of sharply focused hard work by hundreds of USEC employees. I want to spend few minutes going through some of the highlights of this update.

Last fall, we took a hard look at the programs, starting with the thorough quality assurance program review. That was the foundation for our effort to address the technical and financial concerns raised by DOE’s loan guarantee office. In recent quarterly updates, you’ve heard our reports detailing our progress in addressing DOE’s technical concern. A key element of our response was a start up in operation of Lead Cascade of AC100 centrifuges power production ready machine.

We began operating in the Cascade under plant like conditions in March. This was an important step because it demonstrates our suppliers’ ability to manufacture and assemble the AC100 machine. It also demonstrates the machine to machine interaction in the cascade and which has been operating successfully since it came online. Last week we completed work needed to roughly double the number of machines on the multistage cascade to approximately 40 AC100 machines. We’ve accumulated more than 480,000 machine hours under our Lead Cascade testing program that began in mid 2007. We are building up to eight machines per month and these additional machines will help us accumulate additional machine hours for the AC100 Centrifuges in 2010.

Now while we have a solid machine in the AC100, we have continued development work and value engineering at our facilities in Oakridge, Tennessee. Our goal is to systematically work to increase the machine’s productivity and lower its unit manufacturing cost. As you know, we spend a fortune in the past year reviewing strategic alternatives. We announced in late May that we had signed a definitive agreement with Babcock & Wilcox and Toshiba to make a $200 million investment in USEC.

This investment will be spread out over three phases with each of those two companies making a $100 million investment. We are working to close the first phase of that investment of $75 million during the third quarter. This investment will support building the ACP and will create business opportunities for the three strategic partners throughout the nuclear fuel cycle.

Importantly, Toshiba’s investment provides the potential to access to capital from the Japanese export credit agencies. We have initiated discussions with these Japanese export credit agencies but I would caution that we are very early in that process. During the past year, we also took a number of steps to reduce the risk profile of our project and we updated the project scope cost and schedule based on closed collaboration with our suppliers. We preserved our ability to remobilize plant construction and we will be working with our EPC contract of Fluor to further complete the plant design which is over 80% complete for the total project. We work to address each of the concerns expressed last year by DOE’s loan guarantee program office and its advisers. We are confident that the steps I have described address those technical and financial concerns.

The comprehensive update we submitted to the DOE late last week included estimates on future completion costs. Based on the recent work we done with our suppliers, we estimate that the capital cost to complete the American Centrifuge from the point of financial closing of the DOE loan guarantee will be approximately $2.8 billion. I want to be absolutely clear on this point. The estimate of $2.8 billion is the cost of going forward from the point of receipt of long guarantee funding.

It does not include the previous program costs of approximately $1.8 billion invested in the project through June 30. Moreover it does not include spending on American Centrifuge until financial closing, overall project contingency, financing cost or financial assurance. Our estimate does include the cost of AC100 machine manufacturing and assembly EPC and related balance of plant work, start up and initial operations and project management. It is my view that USEC has reduced project risk significantly over the past year and our new estimate is based on a more mature project scope.

We are continuing to evaluate the appropriate level of overall contingency given this greater project maturity. We are also evaluating financing cost and financial assurance which will be affected by the ultimate financing plan, the amount of credit subsidy cost for a DOE loan guarantee and the amount and sources of additional financing we need to complete the project.

Since we issued our initial baseline project budget in 2008, our costs have increased due to several factors. These include the cost of demobilizing plant construction last year, the carrying cost during the past year and remobilizing under our project completion plan, refinement of cost estimates from our suppliers related to manufacturing the AC100 and higher EPC cost for designing and building out the plant infrastructure. This refinement reflects greater maturity of the scope of the project.

In regards to the construction schedule, we anticipate that it will require 18 months to 24 months to be in initial commercial operations upon receiving financing. During that period we will ramp up construction activities, rehire, train and obtain security clearances for craft workers, prepare our suppliers for high volume machine manufacturing and complete the uranium (inaudible) withdraw facility that is essential for commercial operations.

As you will recall, Centrifuge is a modular technology and we will begin operations for the fraction of the 11,500 centrifuges that will ultimately populate the plant. We anticipate that will require 30 months to 36 months to complete the entire plant after initial commercial operations. We continue to work with our suppliers to refine our estimates and seek reductions in the project cost and schedule.

In closing, let me emphasis four things, we strongly believe the American Centrifuge represents USEC’s best path to position itself competitively as a low cost producer over the long term in a growing uranium enrichment market and thus providing our nation with efficient, reliable access to enrich uranium.

We believe we have presented a solid business case to loan guarantee program office and will continue to work closely with DOE officials to ensure a timely review of the update. Over the past year, we have reduced project risk and increased its maturity and therefore we have a greater estimate and greater confidence in our cost estimate.

We also remain sharply focused on our current operations and we are closely evaluating our longer term transition to American Centrifuge over the next several years. Now, I would like to turn the call over to John Barpoulis to report on second quarter financial result. John?

John Barpoulis

Thanks John and good morning everyone. Starting with the revenue for the second quarter, total revenue was $460 million, a decrease of $55 million or 11% from the same quarter last year. SWU sales made up the majority of revenue totaling $331 million which was also down 11% over the same period last year. In the six month period, total revenue was $804 million, a decrease of $216 million or 21%.

SWU revenue in the first half of the year was down 25%. Those who have followed USEC for a while know that our revenues can swig significantly from quarter-to-quarter and in some cases year-to-year. In the first six month period of 2010, SWU volume was 28% lower than the same period of 2009, but we have updated our guidance for the year and we now think that SWU volume will be down about 10% compared to last year.

As SWU contract signed in recent years at higher prices and with price adjusters become a larger portion of our backlog, we are seeing an increase in average prices billed to customers. In the first half of 2010 average prices billed to customers rose 3% compared to the same period last year.

Uranium revenue was $85 million in the first half of 2010, which was a decrease of $39 million compared to the same period in 2009. Both uranium prices and volumes sold declined. Uranium market prices declined in 2009 and have been trading at a low $40 a pound for the past few months. However, we have seen an up tick in the past month and the price indicators for uranium were at $46 a pound early this week.

Finally, revenue from the US government contract segment in the six month period was $122 million, an increase of $25 million or 26% from the same period last year. The higher revenue reflects fee recognition on certain contracts with DOE and additional work in Ohio to prepare the site for decontamination and decommissioning. This segment also includes are subsidiary and NAC International.

On the cost side of the ledger, our two largest cost components continue to be 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 for moderate annual increases to the base price we pay, plus an adjustment up or down based on TVA’s cost of fuel and purchase power.

During the first half of 2010, power costs increased by $21 million compared to the same quarter last year. The average cost of power per megawatt hour increased 4%, which includes the effect of the power contracts fuel cost adjustment, but we also bought 3% more electricity in 2010 compared to last year largely as a result of the January 2009 ice storm that temporarily reduced power usage at the Paducah plant.

We expect to buy 5.5 million SWU from Russia in 2010 at a price that is 8% higher than last year’s. The price is set by contract and reflects market based prices and other factors. Purchase cost to Russia declined $119 million in the first half of 2010 due to the timing of deliveries early in the year. The purchase price paid to Russia was 11% higher in both 2008 and 2009 and those increases had a significant impact on the cost of sales embedded in our inventory cost.

We use the monthly moving average inventory cost method and these higher purchase and production cost components increased our cost of sales for the LEU segment. In the six-month period, the cost of sales for SWU and uranium was $626 million which was $181 million or 22% less than in 2009. The change was due in large part to the 28% decrease in SWU volume but the decline was offset by higher SWU unit costs.

Cost of sales in the government contract segment was $108 million in the first half of 2010, an increase of $14 million compared to the same period in 2009 reflecting costs associated with the expanded scope of shutdown activities at the Portsmouth gaseous diffusion plant in Ohio. Gross profit was $44 million for the second quarter and $71 million in the first six months of 2010, compared to $77 million and $120 million in the respective periods last year.

Although gross margins have improved in the US government contract segment, gross margins on the much larger LEU segments were pinched by higher average cost of sales and lower volumes. Our gross profit margin was 9.6% for the second quarter compared to 15% in the same quarter of 2009. In the six-month period the gross profit margin was 8.8% compared to 11.7% in the same period of 2009.

As John mentioned earlier, we updated our guidance on gross profit margin of 6% to 7% for the full year, an increase of 1 percentage point over our earlier guidance. Below the gross profit line we have expenses for Advanced Technology primarily related to the American Centrifuge. While we substantially demobilized and reduce project construction and machine manufacturing activities, we continue demonstration and development efforts to address DOE concerns in the first half of 2010. This resulted in significant but comparatively lower expense.

The demonstration expense relates to assembling machines and startup activities in the Lead Cascade testing program as well as development work in our facilities in Oakridge. The amount of Advanced Technology expense in the six-month period primarily related to the American Centrifuge project was about $52 million compared to $62 million in the same period of 2009.

Also included in the expense was approximately $1 million of work by NAC on the transportation version of the MAGNASTOR technology. As you will recall we had not yet fully demobilized American Centrifuge construction during the second quarter of 2009. Therefore you’ll see a bigger difference in capitalized spending when comparing the quarters. Spending that with capitalized in the second quarter was $71 million less than in the same period of 2009.

In the six-month period $64 million of ACP related activities were capitalized compared to $228 million in the same period last year. Selling, general and administrative expense was $29 million during the first half of 2010 or about $2 million lower than the same period last year. The largest factor was the reduction in spending on consultants.

In March DOE and USEC agreed to a $90 million cost sharing arrangement regarding certain American Centrifuge activities. DOE has made $45 million available for the project activities by taking the disposal obligation for a specific quantity of depleted uranium from USEC, which released cash that had been posted by USEC for future depleted uranium disposition.

During the first half of 2010, USEC spent $40 million under the cost sharing agreement with DOE. This resulted in the 50-50 cost sharing contribution of $20 million by DOE that was recognized as other income below the gross profit line.

A quick word about income taxes and effective rates. Because our expectation is that for the full year net income will be breakeven, we expect to see wide swings in the effective income tax rate. The dollar amount of the provision or credit for income tax is not expected to be large, but because of the denominator the net income or that loss is also small, the effective tax rates will show significant swings. In addition, our federal research credit that had been a benefit to USEC expired in 2009. We expect our overall effective tax rate to be roughly 60% in 2010 unless the federal research credit is extended this year.

If that were to occur we would expect the tax rate to be more in line with the tax rate seen in 2009 which was 38%. We also had a one-time charge to the income tax provision of $6.5 million related to the change in tax treatment of Medicare Part D reimbursements resulting from the new healthcare legislation signed into law in March.

Looking at the bottom line, we reported net income for the second quarter of $7.2 million compared to net income of $17.3 million in the same quarter of 2009. Over the six-month period, we had a net loss of $2.5 million compared to net income of $15.2 million in the same period last year. Turning next to cash, we ended the second quarter with $208 million in cash on hand compared to $32 million at March 31, 2010 and $131 million at December 31, 2009.

Cash flow provided by operations for the six-month period was $173 million compared to cash flow provided by operations of $222 million in the same period last year. That $49 million difference was due to several factors including a larger monetization of inventory to meet higher SWU sales in 2009. We had no borrowings under our revolving credit facility at the end of the quarter. You may have noticed that we expanded the credit facility by $25 million last week to $250 million of total lender commitments.

When we closed on the credit facility in February, we noted that it had an accordion feature that would allow us to expand it further. This expansion also increases on a dollar for dollar basis, our letter of credit sub-limit and our spending basket for ACP. We also expect to close on first phase of the investment by Toshiba and B&W during the third quarter. You will recall that the first phase is an investment of $75 million. We are currently negotiating the terms of our joint venture with B&W to build the AC100 machine which is one of the conditions of closing the first of three investment (charges).

As noted earlier, we have updated our guidance for 2010. With a plan for American Centrifuge spending that covers the rest of 2010 we can provide specific net income and cash flow guidance. We reiterated our earlier guidance for about approximately $2 billion in revenue with about $1.5 billion of that coming from SWU sales. You may have noticed that we tweaked that forecast to increase SWU sales volume and we now expect the average price billed to customers will rise 2% rather than 3%.

Revenue from uranium sales is expected to be in a range of $225 million to $250 million while our estimate for revenue from US government contracts remains at just under $300 million.

We were able to buy power this summer at market based prices that were below our initial forecast. We expect that will help improve gross profit margins and we increased our guidance to a range of 6% to 7% gross profit margin. We expect the ACP spending that will be expensed to total approximately $110 million over the full year. That will be partially offset by the cost sharing arrangement we reached with DOE that includes up to $45 million that you will see reflected under other income.

We continue to expect selling, general and administrative expense to come in at about $60 million. Going to the bottom line our guidance for net income is approximately breakeven. Net income will reflect net expenses related to ACP and the previously recorded charge of $6.5 million related to a change in tax treatment of future Medicare Part D reimbursements.

We had positive cash flow through the first half of 2010 but we expect that to swing to cash used in operations of approximately $100 million. As previously noted we expect to build inventory in 2010 in anticipation of future sales which is a draw on cash. We also anticipate CapEx related to ACP of about a $100 million. Please note that there are a number of additional factors listed in the outlook section of the news release that could affect income and cash flow.

To quickly summarize, we earned $7.2 million for the second quarter. We recorded a loss of $2.5 million for the first half of the year, which reflects a one time income tax provision adjustment and expenses related to the American Centrifuge project. We have accumulated more than 480,000 machine hours of experience with the American Centrifuge. Last week the cascade of AC 100 machine was nearly doubled to about 40 machines. Based on the progress we have made to address the technical and financial concerns of DOE we have provided a comprehensive update to our application to the loan guarantee office.

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

Question-And-Answer Session


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

Amanda Sigouin - Jefferies & Co.

Good morning. This is Amanda Sigouin on for Laurence. First a question on the better volume outlook for this year. Is this entirely due to pulling demand forward from 2011 and does this mean that we should expect less of recovery in volumes in 2011?

Bob Van Namen

This is Bob Van Namen. It is partially due to the acceleration of orders and partially due to customer movements and so it’s a combination depending on when our customers have the need for the low and mixed uranium, they might ask us for orders or we might go and ask them. So it’s a combination of the two and we are not providing any guidance on 2011 at this point. But we would look to do so in the normal course of our future calls.

Amanda Sigouin - Jefferies & Co.

Okay and regards to the additional costs for the ECPs that are not included in the $2.8 billion. That could increase the scope of the project you mentioned the financing expense and the project contingency and a couple of others. Can you give any detail around these expenses and the magnitude that these could potentially present?

John Barpoulis

John and I will take a shot at this. Let me take them one at a time. Overall project contingency, you are correct and we said that the $2.8 billion estimate is a snapshot at this point, reflecting our work with suppliers. We are currently evaluating appropriate level of overall project on a contingency and as you would expect that takes into account the level of risk in the estimate and in each of the specific areas and it also is a function of the maturity of the project. We are working towards fixed price or cost limit agreements with suppliers and the overall contingency will ultimately reflect those terms and conditions. John?

John Welch

John I will take the stab at the other two Amanda. I think with respect to the spending from now until financial closing, I think we’ve recognized that the timing ultimately to the objectives of conditional commitment and financial close is uncertain but it’s likely to be several months.

For the first half of the year, we spent about $52 million of ACP expenditures and capitalized about $64 million and also reflected the benefit of the $45 million of support from DOE and the $90 million profit agreement through other income. With respect to our outlook we mentioned that we foresee expensing about $110 million on ACP and incurring capitalized costs of about $100 million.

So one can get a sense for our expectations for this year. Also of notice that the scope under the profit agreement is through the end of this calendar year as well. So from that information one can develop a rough range but I always highlight that it’s very much subject to our continued progress on ACP, cash flow available liquidity and our timing expectations for events that we see forthcoming.

So we would certainly look to financially ramp down spending as necessary to leave within our means and then also to the extent that we see the ability to hit those milestones. There are certainly critical path items that we would like to ramp up in order to move forward and advance our schedule on ACP.

So, that provides certainly a fair amount of uncertainty with respect to any longer term views on that and our 10-Q has a significant amount of information on our spending as well and then last with respect to financing costs and financial assurance ultimately we’ve recognized that there is an uncertainty within those estimates, credit subsidy costs and the actual cost of realized sources of funding are uncertain and are key drivers to some uncertainty in those areas and while we have a pretty specific decontamination and decommissioning plant for American Centrifuge and ultimately the amount of financial assurance and any cash posted to that that we need to provide is uncertain as well and so that leads to additional uncertainty on that item. But to the extent that we do see additional certainty in those areas we’ll be updating our outlook.

Amanda Sigouin - Jefferies & Co.

Okay and thus regarding the additional financing needed to complete the project beyond the $2 billion from the DOE, I just wanted to make sure if this is clear. Is it something that you think the DOE will need to see you have in hand or before they approve the $2 billion loan guarantee or that could be coming half and faster to closing.

John Welch

I think that they need to be comfortable with the plan and that is certainly something that we expect to discuss with them in diligence. We certainly do need to have the kind of commitment or demonstrate that the capital is available at the time of closing.


Our next question is coming from line of Gabriela Bis with Goldman Sachs. Please state your question.

Gabriela Bis - Goldman Sachs

So just to follow-up on that question what is your expectation of timing for the DOE, the closing of the, I guess the financial closing of the DOE loan guarantee and then can you walk us through the steps that are necessary to get there.

John Welch

Sure Gabby. We expect that DOE in the next step will review our update and recommence due diligence on our application focusing on the concerns that they raised last summer. We certainly plan to work with the DOE loan guarantee program office staff and their technical, financial, and legal advisers regarding the merits of our application, and the new information that we are providing. The next formal step in the process is the conditional commitment and certainly as the name implies the conditional commitment will come with conditions. The period between the conditional commitment being offered and financial closing could be several months and so with respect to timing it’s a difficult to say until we have commenced discussions with the loan guarantee office and have a sense for what those conditions could be.

Gabriela Bis - Goldman Sachs

And the second question is you mentioned that there were three main contributors to the increase in budget for the ACP from about if I recall correctly $3.5 billion which was the earlier estimate to now closer to $5 billion. So I was wondering if you can provide a breakdown of how much of the increase was related to these three items. The demobilization and remobilization, the costs related to the additional design work and the cost related to the maturity of the scope of the project.

John Welch

Gabby I don’t think we are prepared at this point to provide say a precise dollar amount associated with each of those drivers. We’ve recognized that as we are working through our estimates with the suppliers heading towards updating our agreements with those suppliers that in our discussion those were the key drivers and those were the most significant drivers of the difference and the other thing and again I would emphasize is that the number that we are providing is reflective of our negotiations with the suppliers and what we are seeking to do here is that our investors and we’ve consistently being asked about is ultimately how much will it cost to complete the commercial plant. And so over the past several months we’ve been working with suppliers to update that estimate and so the information is based on those discussions.

Gabriela Bis - Goldman Sachs

If I understand you correctly I think you mentioned before that this is an estimate basically assuming that financial commitment is at the end of this year did I understand that correctly.

John Welch

No, this estimate is from the point of financial closing forward when we would expect to remobilize activities and it is an estimate of what it will cost to complete the plant. So it’s from the point of financial closing forward.


Our next question is coming from the line of George Caffrey with Miller Tabak. Please state your question.

George Caffrey - Miller Tabak

The other investors which you are speaking to potential investors you mentioned I think a Japanese export agencies and the like, are they requiring that you have received an answer from the DOE and/or requiring funding from the DOE before making investment or might they invest prior to that and then secondly the nature of the investments that you are talking to them about are they more equity like or are they more debt like.

John Barpoulis

What I would emphasize George is that those discussions are at a very early stage that it is certainly linked to our work and relationship with Toshiba and at this point we look to historically those entities have provided primarily debt but they provided a mix of capital very much depending on the project and the credit aspects of the project. So with respect to the nature of the capital very early in the process with respect to the nature of the discussions the debt and equity we’ve covered George and I’m sorry I forgot the other part.

George Caffrey - Miller Tabak

Well, the other had to do with the timing relative to DOE. Might they be willing to commit an advance of anything from the DOE.

John Barpoulis

I’m sorry on that response certainly the Japanese export credit agencies are looking to the US government and to DOE in their support of the project and so I think it would be highly unlikely that they would look to provide any capital in advance of closing on the DOE loan guarantee. Our view is that there would be a concurrent closing.

George Caffrey - Miller Tabak

And I’m not true that this was quite (asked) this way, but when would you expect to hear something not necessarily a commitment but some response to your application from the DOE.

John Barpoulis

Well, certainly George, we would expect to begin those details reviews with the Department of Energy in the near term and as John mentioned there’s both.

George Caffrey - Miller Tabak

Near term meaning the next month.

John Barpoulis

We would hope to engage them as quickly as possible but technical review and discussions, we would expect that to initiate very quickly. And in parallel bringing together financial advisers legal advisers, we would expect that to start fairly quickly.

I mean one of the things that we can assure you that as we progress down those discussions with the Department of Energy we’ll provide you updates on that. But we would expect the full due diligence very similar to what we went through last year, but again this is an update. So you would likely reengage the independent engineer person to review how we’ve addressed all of their issues and then reengage with the financial adviser for how we’ve addressed the financial concerns that were anticipated last year.

We would think that process could move along fairly briskly but we are really not providing any guidance when we would expect that from a timing standpoint.

George Caffrey - Miller Tabak

Okay, thank you and then one sort of top of the treetops question in Urenco having opened facility here in the States and Areva contemplating opening one, can you just comment in general how this might affect your plans in the future if at all?

John Barpoulis

Well, when I think about the opening of Urenco facility and the desire of Areva to build a plant in Ohio are both indicative of how robust the market is for enriched uranium and again you have capacity being added that is being added in the near term to replace the capacity of the Georges Besse I, the French gaseous diffusion plant and the anticipated replacement of our gaseous diffusion plant.

So the first phase is really a replacement of capacity and then you have building capacity through really deal with the market itself. We have 59 reactors that are under construction today, about 20 of those will actually come into operation by the end of 2011. So there is very much, the next phase is the growth and demand. The other thing I want to come back to and cover on the replacement of capacity is the other thing that this capacity is meant to address is the end of the Megatons to Megawatts program in 2013.

So you have the transition away from gaseous diffusion to centrifuge technology and need for capacity and the need to replace that Russia material in the marketplace and then clearly over the long term that is projected even in the most pessimistic case, about a 30% increase in demand for enriched uranium by 2025.


Thank you. Our next question is coming from Paul (Clegg) with Mizuho Securities. Please state your question.

Unidentified Analyst

Thanks. You have already talked about this credit bit but I thought would lob in one more on the Japanese credit export opportunity. I know it’s early, but in your preliminary discussions if you can get a sense or if it’s too early, it’s too early. Is the size of funding that might be available through that opportunity sufficient to meet your needs pass the loan guarantee plus the strategic investors and if not can you kind of for my edification talk a little bit again about what the backup plans are?

Bob Van Namen

Paul with respect to size that’s certainly our objectives and I think again at this point the discussions are I think too early to discuss sizing at amounts and ultimately it will be a reflection of our total needs and uses and their abstract capacity and so I will need to differ on that until we have more information and with respect to backup plans I think that certainly our expectation is to work with Toshiba on the Japanese export credit agency as we see that as a very interesting opportunity for us and then to the extent that in addition of course to our external capital we certainly will be looking to the cash flow that is generated by internal operations but to fund additional investments as well as one of the advantages of the modular construction is that the plant will be generating SWU and generating cash during its startup period and that’s also a component of funding for total capital cost.

Unidentified Analyst

Bob and just a clarification on that point I’ve been listening to stories for a while so I want to just make sure I understood the terminology, when you talk about initial commercial operations I think the term you use is 18 months to 24 months. Is that for first commercial (fuel) production and then the 36 months is a modular build up period.

Bob Van Namen

That’s right. It’s for the initial production of the first cascades that come online and then what we’re characterizing as full, some may have seen it as full production that ultimately is the 16 trends or the output from the two existing process buildings that we’re looking to fill out.

John Welch

And just to confirm we are getting commercial usable materials from those initial cascades as we build them up.


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

John Welch

Well, thank you all for participating in the call this morning. We’re pleased to report on the significant progress that we’ve made in recent months. And we stand ready to answer any questions from the loan guarantee office as we seek an expedited review of our update. I will be presenting the USEC’s story next Tuesday at the Jefferies Global Industrial Conference in New York and I look forward to seeing many of you there. We appreciate your support, your interest and your continued investment in USEC. Thank you very much.


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

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