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USEC Inc. (NYSE:USU)

Q1 2011 Earnings Call

May 4, 2011 8:30 AM ET

Executives

Steven Wingfield – Director, Investor Relations

John Welch – President and CEO

John Barpoulis – Senior Vice President and CFO

Philip Sewell – Senior Vice President

Bob Van Namen – Senior Vice President

Tracy Mey – Vice President and Chief Accounting Officer

Analysts

Paul Clegg – Mizuho

Laurence Alexander – Jefferies

George Caffrey – Miller Tabak Roberts Securities

Ben Elias – Sterne, Agee

Operator

Greetings. And welcome to the USEC Inc. First Quarter Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the prepared remarks. (Operator Instructions)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Steven Wingfield, Director of Investor Relations for USEC Inc. Thank you, Mr. Wingfield. You may begin.

Steven Wingfield

Good morning. Thank you for joining us for USEC’s conference call regarding the first quarter of 2011, which ended March 31st. With me today are John Welch, President and Chief Executive Officer; John Barpoulis, Senior Vice President and Chief Financial Officer; Philip Sewell, Senior Vice President; Bob Van Namen, Senior Vice President; Tracy Mey, Vice President and Chief Accounting Officer.

Before turning the call over to John Welch, I’d like to welcome all of our callers, as well as those listening to our webcast. This conference call follows our earnings news release issued yesterday after the 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 quarterly report on Form 10-Q 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 risks and uncertainties, 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 and quarterly reports on Form 10-Q.

Finally, the forward-looking information provided today is time sensitive and is accurate only as of today, May 4, 2011.

This call is the property of USEC. Any redistribution, retransmission or rebroadcast of this call in any form without express written consent of USEC is strictly prohibited.

Thank you for your participation and now, I’d like to turn the call over to John Welch.

John Welch

Good morning. And thank you for joining us to discuss our first quarter results. Given our annual earnings guidance, I’m sure it didn’t come as a surprise that we report a loss for the quarter. However, we have been successful to date in our efforts to mitigate costs related to the transition of our contract services business and we will continue to be focused on mitigating these transition costs as we move forward.

John Barpoulis will go through our earnings in detail in a few minutes, as well as our reiterated guidance for 2011.

During this call, we’ll provide an update on our American Centrifuge project and the approval process for a loan guarantee. We’ll cover the supply agreement that we signed in March with Russia that will provide us with continued access to this important source of low enriched uranium through 2022 and we will also discuss the transition of the contract services work we performed in recent years at the former Portsmouth gaseous diffusion plant.

I will start off with a brief summary of our financial results. Our first quarter revenue came in at $381 million, which was an increase of about $36 million from the revenue reported the first quarter of 2010. But our costs were higher particularly related to contract services as we transitioned away from the cold shutdown work we’ve done for DOE over the past several years.

The gross profit margin for the quarter was 3.7%, which was below the range we have forecasted for the full year. Bottom line, we lost $16.6 million, compared to a loss of $9.7 million in the first quarter of last year. And that bottom line captures fairly (inaudible) the reason why we are so sharply focused on moving the American Centrifuge project ahead.

Electric power constitutes about 70% of our production costs and these costs have been trending higher. Our Centrifuge technology requires 95% less electricity to produce the same amount of low enriched uranium.

Shifting our production to the American Centrifuge will be an inflexion point for the significant improvement and our profitability of our business. That’s our vision for creating long-term shareholder value.

Let me update you on the activities of the past few months that are essential elements of the transition of our business. As you are aware, the DOE loan guarantee program has substantially completed the due diligence and negotiations stage of the DOE loan guarantee application process and has advanced the ACP application to the next phase.

DOE’s credit group and the office of management and budget are now reviewing the credit package, which includes the negotiated term sheet. The term sheet includes specific terms and conditions we must meet to close on a loan guarantee.

These two groups working on parallel paths will provide an estimated preliminary credit subsidy cost range. We believe the national security value of the American Centrifuge project and our $100 million royalty payment to the government should be part of that calculation.

After that credit subsidy cost range has been determined, the credit package will go to the DOE’s credit review Board. Their prompt approval would position energy secretary issue to issue of conditional commitment for a $2 billion loan guarantee before the end of this quarter. As always, we will continue to keep you appraised of all significant developments.

I also want to take this opportunity to provide our view on the current environment for nuclear energy. Many of our investors have asked, how the Japanese earthquake and tsunami and resulting emergency at the Fukushima Daiichi plant would affect the future of nuclear power. We’ve also been asked about its effect on potential financing by the Japanese export credit agencies.

First, let me say, our hearts collapse to the Japanese people. The earthquake was among the worst in their history and the resulting tsunami was even more deadly. Thousands died and thousands more are still missing, despite this terrible toll, the Japanese people are working hard to rebuild their nation.

Clearly, the events in Japan have had a profound near-term impact on the nuclear power industry but the world needs nuclear power in the long-term to meet a growing demand for electricity. The Obama administration has continued to make strong statements in support of nuclear power and the President has said that nuclear power must be part of the energy mix going forward.

One potential outcome could be new regulations here and abroad regarding storage of used nuclear fuel. Today used or spent fuel is typically stored in pools to keep the fuel covered with water. Some industry leaders have suggested requirements that overuse fuel be moved from pool storage to dry storage.

Our NAC International Subsidiary is an industry leader in dry cask storage and would be well-positioned to respond to new requirements, if needed. The President of NAC and members of his staff have been in Japan to offer assistance in the recovery.

In regards to continued financial support for the American Centrifuge project, I would point out that the primary mission of the Japanese export credit agencies is to promote overseas development for Japanese companies, like Toshiba and to assure the availability of strategically important natural resources for that nation.

We do not believe that mission will change due to the rebuilding of homes, businesses and infrastructure in Japan. In fact, that mission maybe viewed as more important than ever, with our advisors we continue to work with representatives of the export credit agencies.

Yesterday we announced that our joint venture with Babcock & Wilcox to build the AC100 machines was officially launched. The joint company American Centrifuge Manufacturing, LLC, will provide integrated manufacturer and assembly of the uranium enrichment centrifuges that will populate the American Centrifuge plant.

You may recall that the build out of the plant involves approximately 11,500 machines. The new company will work out of USEC’s existing American Centrifuge Technology and Manufacturing Center in Oak Ridge. These jobs are part of the 8000 direct and indirect jobs that the American Centrifuge project is expected to create or support in several states, many of them in Ohio.

Our strategic suppliers continue to build high quality components for the AC100 centrifuges, our production ready machine. We are adding machines to lead cascade to increase the number of machine hours for the AC100, further establishing its reliability and providing the ACP staff valuable operating experience.

The uranium enrichment industry has been going through a technology transition for the past decade. By the time the current decade is over, gaseous diffusion plants will likely be shutdown. Advanced gas centrifuges will provide most of the world’s enrichment capacity. This industry transformation will ensure that reactors can be fueled reliably and economically for many years to come. At USEC, we are also in the midst of our own transformation.

First, we are nearing the end of the historic Megatons to Megawatts program, when complete at the end of 2013, we will have helped recycle nuclear material equivalent to 20,000 nuclear warheads, we are quite proud of that accomplishment.

Today Russia material makes up about half of our LEU supply. In March, we announced a long-term agreement with TENEX that will provide us with flexible commercial supply of Russian LEU through 2022.

Under terms of the new contract, the LEU supply would begin in 2013 and increase until it reaches a level in 2015 that is about one-half of the amount we currently purchase under the Megatons to Megawatts program. The contract has a flexibility to increase that amount under a mutual option that could bring purchases up to the same level as the Megatons to Megawatts program after 2015.

This contract is subject to approvals and completion of administrative arrangements. We have a couple of years before the first deliveries under the new commercial contract and we are confident that it will be approved.

Second, we’ve taken significant steps to transition our government contract work in Ohio. In 2002 we made the economic decision to close the Portsmouth gaseous diffusion plant in Southern Ohio. DOE asked USEC to maintain the facility in case the plant was needed in an emergency, that request began a series of service contracts with DOE that have continued until this year.

But decontamination and decommissioning of facility of this size is not our core expertise and last summer, the D&D contract was awarded to a joint venture of two companies we know very well, Fluor and Babcock & Wilcox.

In September we de-leased several large facilities including three large production buildings, so that the D&D process could begin. In late March, many USEC employees who have been doing work as part of our contract services team transitioned to the D&D contractors. Our first quarter results reflect pension costs related to that transition.

In closing, let me emphasize two things, we are very pleased to see our loan guarantee application moving forward and are optimistic that we are on a path that makes receipt of a conditional commitment achievable this quarter.

We belief strongly that the American Centrifuge is our best path to delivering long-term shareholder value, by successfully deploying this innovative technology, USEC will be positioned to be highly competitive over the long-term.

Second, time is of the essence. We have been spending restrictions, we have spending restrictions related to our credit facility that are coming into play. The strategic investment in USEC requires a conditional commitment by June 30th for the next tranche of $50 million. We are very mindful of our liquidity and credit facility limitations. Our spending on the project is not open ended and we need to see action towards the conditional commitment in the very near-term.

Now, I’d like to turn the call over to John Barpoulis for report on first quarter financial results. John?

John Barpoulis

Thanks, John, and good morning, everyone. Starting with revenue for the quarter, total revenue was $381 million, an increase of 10% from the same quarter last year. SWU sales made up the majority of revenue and totaled $309 million that was $42 million higher than the same period last year.

In the first quarter, SWU volume was 9% higher than the same quarter of 2010, but for the year, we have reiterated our guidance that SWU volume will be about 10% lower in 2011, compared to last year.

In recent years we have signed SWU purchase contracts at higher prices and with price adjustors, as these improved contracts make up a larger portion of our backlog we are seeing increase in average prices built to customers. In the first quarter, average prices built to customers rose 6% year-over-year.

Uranium revenue was $14 million in the first quarter, which was a decrease of just under $2 million, compared to the same quarter in 2010. Uranium prices improved significantly during 2010 and that trend was reflected in our first quarter sales.

The average pricing uranium revenue was 44% higher than a year ago but volume was down 38%. Uranium spot prices have been volatile and lower since the events in Japan but the long-term uranium price has remained close to $70 per pound.

Long-term SWU prices have remained steady at $158 per SWU according to published price indicators. As background, we under feed the enrichment process when it makes economic sense. We can obtain uranium for resale by using more electric power and less natural uranium feed stock.

The economics of underfeeding enrichment process are affected by uranium prices and the cost of electric power. At present, the economics favor continued underfeeding of the enrichment process.

Turning back to revenue, the first quarter marked a milestone in the contract services segment as we transitioned away from the cold shutdown contract with the Department of Energy at the end of March.

This segment also includes revenue from our subsidiary NAC International. Revenue for the quarter was $58 million, a decrease of about $5 million from the same quarter last year. For the rest of 2011, quarterly comparisons of revenue will show substantial reduction compared to prior years for this segment.

On the cost side of the ledger, our two largest cost components are electric power and the price we pay Russia to purchase SWU. We have a power contract until May 2012 with the Tennessee Valley Authority or TVA.

That agreement provides moderate annual increases to the base price we pay plus an adjustment based on TVA’s cost of fuel and purchase power. During the first quarter, our power costs decreased by $14 million or 8% compared to the same quarter last year but that was because we are buying less electricity.

Under our TVA contract, we reduced our non-summer purchases from 2000 mega watts to 1650 megawatts beginning in September 2010. The average cost of power per megawatt hour increased 11%, which includes the effect of the power contracts fuel cost adjustment.

Due to winter ice near Russia and the established shipping schedule, we did not receive any deliveries under the Megatons to Megawatts program during the first quarter of either 2010 or 2011. Those shipments have now started and we expect the price paid to Russia will be 3% higher in 2011 than compared to last year.

The purchase price paid to Russia was 8% higher in 2010 than the year before and these increases had a significant effect on the cost of sales embedded in our inventory costs. These higher purchase and production costs components affect our cost of sales for the LEU segment.

The cost of sales for SWU and uranium was $307 million, which was $40 million or 15% higher than in 2010. This change was due to the increase in SWU volume and higher SWU unit costs.

Cost of sales in the contract services segment was $59 million, an increase of almost $9 million compared to the same quarter in 2010. This reflects the temporary increase in contract services work at the Portsmouth plant in Ohio and pension costs as well as higher costs for NAC.

As you can see, we had a small loss for the contract services segment in connection with the transition of USEC employees to a new DOE contractor following the expiration of the cold shutdown contract of March 28. We recorded a curtailment charge of $3.2 million for the defined benefit pension plan as part of that transition. We have additional information about the transition within the contract services segment in our 10-Q which we expect to file later today.

Gross profit was $14 million for the first quarter compared to $27 million in the same period last year. Our gross profit margin was 3.7% for the first quarter, compared to 7.7% in the same quarter of 2010.

Even though the average price built to customers for SWU was 6% higher, the impact of higher inventory costs for purchases from Russia and the cost of electric power for SWU production in earlier periods and a small loss in our contract services segment caused the profit margin to decline.

As John mentioned earlier, we reiterated our guidance on gross profit margin of 4% to 5% for the full year. Below the gross profit line, we have expenses for advanced technology primarily related to the American Centrifuge.

In late 2009, we substantially demobilized and reduced project construction and most machine manufacturing activities. However, we have continued to operate the Lead Cascade test program to increase the machine hours of our AC100 centrifuges providing additional assurance of performance, reliability and planned availability.

The amount of advanced technology expense in the quarter primarily related to the American Centrifuge project was about $27 million or $1 million more than in the first quarter of 2010. Also included in this expense was approximately $0.5 million of work by NAC on a transportation version of the MAGNASTOR technology.

Selling, general and administrative expense was $15.5 million during the first quarter slightly higher from a year ago due to salary and employee benefits. In January 2011, we executed an exchange of our 2014 convertible notes with a face value of $45 million for shares of common stock that resulted in a $3.1 million gain on debt extinguishment.

In the first quarter of 2010, we had an income statement item not repeated in 2011. Last year, we had a one-time charge to the income tax provision of $6.5 million, related to the change in tax treatment of future Medicare reimbursements that were the results of the new health care law.

Looking at the bottom line, we reported that the net loss of $16.6 million for the first quarter, compared to a net loss of $9.7 million in the same quarter of 2010. The diluted and basic loss per share are the same, $0.14 in the first quarter of 2011 and $0.09 in the same quarter of 2010.

Turning next to cash, we ended the quarter with $150 million in cash, compared to $151 million on December 31, 2010 and $33 million on March 31, 2010. Major draws on cash for the quarter were payment of an account’s payable balance of $201 million to Russia and capital expenditures of $51 million primarily related to the American Centrifuge plant.

Cash flow from operations for the first quarter was $51 million, compared to cash flow used in operations of $43 million in the same period last year. Offsetting the large Russian payable were payments receivables made by customers monetization of inventory and a $62 million increase in the deferred revenue balance.

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

In reiterating our revenue and gross profit margin guidance for 2011, one item that we updated is spending on the American Centrifuge project. We expect to spend approximately $110 million both expensed and capitalized on the project through June 30, 2011.

We will, of course, review our spending plan on the American Centrifuge project throughout the year. Our ACP’s spending is limited by our credit facility covenants absent additional capital.

Issuance of the conditional commitment by DOE is a condition to the next tranche of funding from Toshiba and BMW. If we significantly modify our ACP spending plan, we will keep you informed.

Advanced technology expense for the project has a direct effect on net income and at this point, uncertainty on spending levels beyond the second quarter has let us to continue refraining from bottom line guidance.

But as we said in our initial guidance, taking in to account our anticipated ACP spending and our anticipated gross profit margin, we expect to report a net loss for the year. We expect our LEU segment to generate cash in 2011 but ACP spending and potential payments related to the transition of contract services work at Portsmouth site reduce cash flow from operations.

Please note that there are a number of additional factors listed in the outlook section of the news release that could affect net income and cash flow.

To quickly summarize, we recorded a loss for the quarter but a loss was expected. We took several steps to mitigate potential severance and pension liabilities which had the effect of limiting that loss. We reported that we substantially completed the due diligence and negotiation stage of the application process for a $2 billion loan guarantee and the process has advanced to the next phase.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from Paul Clegg with Mizuho. Please state your question.

Paul Clegg – Mizuho

Hi guys. Thanks for taking my question.

John Welch

Good morning, Paul.

John Barpoulis

Good morning, Paul.

Paul Clegg – Mizuho

Have you had any discussions with BMW and Toshiba about their intent that the DOE actually takes longer than June 30 to get conditional commitment? You know, presumably they could choose to renegotiate or provide some sort of waiver or extension. But have you had any discussions there?

John Welch

First, Paul, let me state that BMW and Toshiba remain extremely supportive of the project each step of the way and so as you would expect with BMW, the discussions are little more detailed than they are with Toshiba just given the sensitive nature of the technology that we are dealing with. But they are both very supportive of the project each step of the way.

We certainly are all fully aware of the limitations and the agreement that we have and the end of June is a target to deal with any sort of issues for further timing. We have not had any of those discussions about an extension to date but again we still feel they are fully supportive of the project and we would expect to enter in to those kinds of discussions if we saw a delay.

Clearly, we are making it very succinct and to the point with the Department of Energy and with others within the government that it is time to make a decision on this and move on. And so I’m hoping that we should be able to close this thing by the end of this quarter and that’s the guidance that we provided.

Paul Clegg – Mizuho

Okay. Thanks and then you also mentioned that -- I think, this is what I heard you say the credit subsidy fee should include your royalty payment. Can you expand on that a little bit and how receptive has the DOE been to that suggestion?

John Welch

There have actually been some very good exchanges that we’ve had directly with the Department of Energy and actually some exchanges that have occurred in the hill and questioning during different committees’ hearings that there is a good recognition that there is a national security element to the deployment of the American Centrifuge plant.

We have provided some recommendations for how that could be looked at through the whole credit subsidy calculation but the national security aspects of the project are pretty clear both on the ability to meet future defense needs as well as playing in to the whole element of non-proliferation policies of the country.

And you also mentioned the royalty payment, the technology was initially developed by the Department of Energy. We have advanced it to a very large degree but there are a stream of royalty payments that are part of the ultimate technology agreement that we worked out with the Department of Energy and that will certainly make it a revenue provider over the life of the ACP project to the United States government.

Paul Clegg – Mizuho

But they are receptive to the idea that those revenue payments for the royalty could be used to cover the credit subsidy fee?

John Welch

They acknowledged that those payments are something that should be considered in that calculation.

Paul Clegg – Mizuho

Interesting. Okay. And then I wanted to ask you about any -- so you mentioned that during the prepared comments but it seems like there is potentially an interesting market opportunity developing there around dry cast storage and Fukushima incident. Can you give us a lit bit more disclosure on how that business is performing now and discuss the potential size of the market opportunity there.

John Welch

Think I will have Bob Van Namen address that since he has direct responsibility for that.

Bob Van Namen

Sure, Paul. A good question, we are looking at several areas of potential opportunities for NAC. One is dealing directly with the Fukushima accident and the site and clean up and clearly they are a technology leader that has a lot of capability when it comes to dealing with both spent fuel storage, damaged fuel and packaging and transportation. So we do see that as a very robust opportunity.

We are coordinating very closely with Toshiba as we look at opportunities there and we do see this as an excellent market. Second piece that John mentioned in his prepared remarks was on the spent fuel pool situation and that is around the world going to be an excellent opportunity with U.S., European and the Asian markets.

We do see definitely a move to take spent fuel out of pools and put into dry cast storage and -- see us in a very good position with the MAGNASTOR technology as well as several other products that they have available.

Paul Clegg – Mizuho

Is there any way to sort of gauge the market size, though, like could you say on a per reactor basis that the dry cast storage needs would be x amount and the revenue opportunity is therefore this much?

John Welch

It’s really difficult to quantify because it depends on the changes in the regulatory structure and how much they would like to remove from the spent fuel pool. So its’ hard to judge the actual size without knowing what the regulatory changes look like.

Paul Clegg – Mizuho

Okay. I will jump back in the queue. Thanks, guys.

Operator

Our next question comes from Laurence Alexander with Jefferies. Please state your question.

Laurence Alexander – Jefferies

Good morning.

John Welch

Good morning, Laurence.

Laurence Alexander – Jefferies

I guess, first question is can you give us an update on the status of the ongoing negotiations with TVA and in particular, are they willing to give you sort of flexibility depending on, or are you basically waiting for the DOE before the TVA is willing to settle?

John Welch

I will turn to Bob again on that.

Bob Namen

Sure. Couple of comments, we continue to have discussions with TVA and other suppliers about near-term power supply and about the potential for Paducah operations beyond May 2012. We are making progress in those discussions, TVA is showing signs of some flexibility there and we do see some good opportunities as we look at it and we’ve talked about this before.

It really is two issues, we are carefully monitoring on the power situation and on Paducah extension. One of them is the power prices and the other is the high assay tails program with the Department of Energy. I think those are both very important elements.

So we see near-term power really being influenced by fuel cost adjustors and those are taking some positive movements given the hydro capacity in the Tennessee valley and then the high assay tails program again is something we will carefully evaluate for post May 2012 operations.

Laurence Alexander – Jefferies

And is there movement on the part of the government in terms of more urgency to do the high assay tails program?

John Welch

We do see a very strong recognition of the government that Paducah is a valuable asset. We do see them carefully considering the concept and trying to evaluate how best to proceed and not have an adverse impact on the uranium markets. So we do see that absolutely playing out.

Laurence Alexander – Jefferies

And then with the DOE, if you get the decision, by June, you know, what happens next, that is how long does it take for them to actually start issuing enough checks to give you a Line of Credits that you can change your activities?

John Welch

There is probably several aspects of that. One is the next tranche of money that we get from Toshiba and BMW is conditioned on the – the condition on commitment. So that clearly provides additional $50 million to proceed forward.

Then there is a timeframe going from conditional commitment to closing. That is involved and that is certainly -- we expect that there are conditions that would have to be in place too close both financial and potentially some project related milestones that would have to be achieved. We would think that we could close, if received by June that we could close on the loan guarantee by the end of the year and that’s the guidance that we have provided.

Now the amount of remobilization that would occur, there maybe additional work that we could look at doing in that timeframe between conditional commitment and closing, but that’s something we would look at and discuss very closely with our strategic partners and that [wouldn’t] be focused on risk reduction activities, activities that would help us greatly in getting the project to lowest cost and schedule it we could do. But certainly the majority of the remobilization would occur after closing when the real money would be flowing.

Laurence Alexander – Jefferies

And then lastly, just for a revisit topic from prior calls, the improved quality of the contracts that you have for Paducah, that you have been putting in place over the past few years, should those start to translate into better margins and all else being equal, there is no further fluctuation in energy prices in 2012, 2013 or is there any color you can give us on what to expect there?

John Welch

And just to clarify, we do not necessarily do Paducah specific contracts. We will contract on the basis of our entire portfolio of supply. We do see continued improvements in those contracts as we roll off some of the older ones that had lower prices or less, what I call risk mitigation factors, such as power adjustors. So we do see our portfolio continuing to improve but I can’t quantify that.

Laurence Alexander – Jefferies

Thank you.

Operator

Thank you. Our next question comes from George Caffrey with Miller Tabak Roberts Securities. Please state your question.

George Caffrey – Miller Tabak Roberts Securities

Thank you. Good morning.

John Welch

Good morning, George.

George Caffrey – Miller Tabak Roberts Securities

Couple of questions. First of all, could you refresh as terms of the range of need which you were expecting to be provided by the Japanese EXIM bank’s potentially at least. And then along those lines, would their participation, in any way, be part of contingent approval from the DOE?

John Barpoulis

George, it’s John Barpoulis. First, with respect to the amount of capital we are seeking from the Japanese Export Credit agencies. We have outlined that we are seeking a $ 1billion of capital through that process.

And second, with respect to the interaction between DOE and the Japanese Export Credit agencies, I think that the Japanese export credit agencies are certainly looking to DOE to lead this process as they would be providing the greater amount of debt with respect to the $2 billion versus a billion. And we would be looking for a simultaneous closing on the DOE loan guarantee and any funding from the Japanese Export Credit Agencies.

George Caffrey – Miller Tabak Roberts Securities

Understood. I guess that the flip of that, though, is the DOE is expecting that or would it be a condition of the commitment that you receive the some sort of commitment from the Japanese EXIM bank? Is that likelihood?

John Barpoulis

We do expect that a condition to close on the loan guarantee will be sufficient capital to complete the project including the capital from the Japanese export credit agencies.

George Caffrey – Miller Tabak Roberts Securities

Okay. All right. As far as the royalty fee and the subsidy cost is concerned, subsidy cost, that needs to be paid upfront, is that correct?

John Barpoulis

That’s correct.

George Caffrey – Miller Tabak Roberts Securities

Okay. And so, therefore, the view would be that this would be applied overtime to the royalty fee?

John Welch

Sorry, George. As John outlined in his response, we are aware that as the Department of Energy determines the credit subsidy cost, that there are several factors that it takes into account, one of which, we believe, will be that stream of royalty payments that the U.S. government will receive.

George Caffrey – Miller Tabak Roberts Securities

I guess what I’m getting at is when the money would be required to be paid, in other words, would it be expected that the royalty could offset the credit subsidy and be paid overtime or would the credit subsidy need to be paid upfront and then being applied against the royalty fee?

John Welch

Again, the credit subsidy cost is paid upfront and the amount of that credit subsidy cost may take into account the -- anticipated may take into account this stream of benefits to the government.

George Caffrey – Miller Tabak Roberts Securities

I understand now. Thank you very much.

John Welch

Thank you.

Operator

Thank you. (Operator Instructions) Our next question comes from Ben Elias with Sterne, Agee.

Please state your question.

Ben Elias – Sterne, Agee

Thank you. Good morning.

John Welch

Good morning, Ben.

Bob Namen

Good morning, Ben.

Ben Elias – Sterne, Agee

I’m kind of surprised at the timeframe you have between the conditional and closing on the loan guarantee. I know it’s not a very -- it’s different factors that play but Areva who received their conditional guarantee last year and -- it’s taken them a while. What gives you the confidence or what do you have to do that they didn’t have to do? What speeds this up for you?

John Welch

Actually I will put just the opposite. What is it that we don’t have to do that they have to do? We have a license. We have had a license since 2007 and we have been working on the plan based on that license from that time forward. All the rumors are that Areva will be getting license shortly, but they do not have a license. So our ability to close from a license standpoint is much quicker.

Ben Elias – Sterne, Agee

So it’s just, the license is the biggest, sort of, impediment from conditional to actually receiving the money or are there couple of other factors?

John Welch

No. Again, we have a license, so it is no impediment to closing. Our issue was strictly pulling together the various aspects of both financially and if there are any project related issues that would be there.

The fact that you’ve got outside agencies providing credit as well as the Department of Energy, it’s just going to take some time. But, again, we think that if done by the second quarter or conditional commitment, you could close by the end of the year.

Ben Elias – Sterne, Agee

Okay. Thank you.

John Welch

Thanks, Ben.

Operator

Our next question comes from Paul Clegg with Mizuho. Please state your question.

Paul Clegg – Mizuho

Hey, guys. Thanks for the follow-up. You’ve laid out the process pretty clearly for the DOE credit approval and the steps that you have to go through, can you do the same thing for the Japanese side? What steps are needed to get to approval and how long could that take?

Paul Welch

We -- with respect to the steps with the Japanese export credit agencies, I think that, that is a much clearer and historically laid out process and again, Paul, we do expect to be working through with the Japanese export credit agencies on a timing that coincides with the closing on the loan guarantee.

And as that process, as we get further down that process I think we will provide more disclosure around that.

Paul Clegg – Mizuho

Okay. And then just one last one -- the I think you have kind of touched on this in your guidance but I just want to make sure that I understand. On the BMW-USEC co-venture for manufacturing centrifuge machines what level of spending is authorized under that venture before you get the, the conditional loan commitment -- loan guarantee commitment?

Paul Welch

Well there are limitations on spending on the total project and they are a subset of the total project spending limits.

Paul Clegg – Mizuho

And so, maybe it’s more, maybe it’s more question on what’s actually in the credit agreement than in terms of limitations?

John Welch

There is no specific limitation, Paul, to that level of detail as John outlined. We are looking at total spending on the project and the machine manufacturing is a very important piece of that.

Paul Clegg – Mizuho

Okay. All right. Thanks, guys.

John Welch

Okay. Thank you.

John Welch

I think that’s it for the questions. Thank you all for participating in the call this morning. We are pleased to report on the significant progress we’ve made in recent months and believe me we are working hard to continue that progress towards a conditional commitment from DOE this quarter. We appreciate your support, your interest and your continued investment in USEC. Thank you very much.

Operator

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

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