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USEC Inc. (NYSE:USU)

Q3 2007 Earnings Call

November 2, 2007, 08:30 a.m. ET

Executives

John Welch - Chief Executive Officer, President

John Barpoulis - Chief Financial Officer

Robert Van Namen - Sr. VP of Uranium Enrichment

Steven Wingfield – Director, Investor Relations

J. Tracy Mey, Controller & Chief Accounting Officer

Analysts

Laurence Alexander - Jefferies & Company

Mark Henley

Albert Kabili - Goldman Sachs

Brett Neve – Jefferies & Company

Fadi Shadid - Friedman Billings Ramsey

Operator

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. Steven Wingfield. Please go ahead, sir.

Steven Wingfield

Good morning and thank you for joining us in USEC’s conference call for the third quarter of 2007, which ended September 30th. With me today are John Welch, our President and Chief Executive Officer, John Barpoulis, Senior Vice President and Chief Financial Officer, Bob Van Namen, Senior Vice President and J. Tracy Mey, Controller & Chief Accounting Officer

Before I turn the call over to John, 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 market close. USEC is making reference to non-GAAP financial information in both our press release and in this earnings call. A reconciliation of those non-GAAP financial measures to the comparable GAAP financial measures is contained in the earnings news release. That news release is available on many financial websites, as well as our corporate website www.usec.com.

I want to inform all of our listeners that our news releases and SEC filings, including our 10-Ks, 10-Qs, and 8Ks, are available on our website. We expect to file our 10-Q for the third quarter SEC later today. A replay of this call will also be available later this morning on the USEC website.

I would like to remind everyone that some of the information we will discuss on this call may be considered forward-looking information that involves risks and uncertainties, including our 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 reports, our form 10-Ks and subsequent quarterly 10-Qs. Finally, the forward-looking information provided today is time-sensitive and is accurate only as of today, November 2nd 2007.

This call is the property of USEC. Any re-distribution, re-transmission or re-broadcast of this call in any form without the express written permission of USEC is prohibited. Thank you for your participation and I would now like to turn the call over to John Welch.

John Welch

Thank you Steve and good morning to you all. I will discuss the third quarter 2007 results. John Barpoulis will provide a detailed review of the financial results in just a moment. Before we get to John’s report, I want to give you my view of our business, the areas of specific management focus, and a status report on the integrated testing program with the American Centrifuge that we refer to as Lead Cascade.

We had a dynamic quarter, with a great deal of positive action on many fronts. It was a profitable quarter, but it was also a quarter marked by wide swings in our stock price and high trading volumes. Taking a look at our bottom-line upfront, we earned $45.6 million in the quarter, which was more than quadruple the amount earned in the third quarter of 2006. For the nine-month period, net income was $71.5 million, compared to $66.1 million in the same period last year. When you take into account that the 2007 earnings are after approximately $100 million in expenses in the American Centrifuge, the results are even better.

We continue to focus on our near-term profitability during this transition period from the gaseous diffusion plant at Paducah, Kentucky to the American Centrifuge plant we are building in Piketon, Ohio. We have also updated our outlook for 2007, improving net income and cash flow generated from operations, reflects solid results in steps that the management team has taken since the summer of 2006. Our new guidance reflects improvement over our earlier guidance on both net income and cash flow generated from operations. John Barpoulis will cover that new guidance shortly during his report on financial results.

We reached an important milestone over the past several months: a successful initial phase for Lead Cascade integrated testing program. As we reported extensively during our second quarter conference call, we built and individually tested a group of centrifuge machines during the spring and early summer. In August, we continued testing, leading to the operation of a cascade of centrifuges and gas working together by the end of that month. In the weeks since our announcement that the integrated testing program is producing low-enriched uranium, we have changed the cascade configuration to alter floor rates in a number of stages. We have taken samples from the cascade that demonstrate. We have taken samples from the cascades that demonstrate a range of assays of the Uranium-235 isotope. We are clearly pleased to see test results that we believe meet the October 2007 DOE milestone for demonstrating an ability to generate product assays in a range useable by commercial nuclear power plants. But we are even more satisfied to see the data from the tests come right on target with the predictions of our analytic models. This gives us even more confidence in the American Centrifuge technology we are working to deploy. The Department of Energy is completely aware of our progress and department officials have been on site to observe the cascade in operation. The DOE will likely follow their past practice of having independent team of nuclear experts review the results of the integrated testing program. And if DOE follows their best practice, they may not officially say whether the milestone has been met. Under the 2002 agreement that provided USEC access to the American Centrifuge Technology, we must notify DOE if we do not meet the milestone. In the spirit of good communications, we have typically notified DOE as we meet milestones. We expect to continue this integrated test for an extended period at a variety of operating conditions and cascade configurations. The data collected from these tests will help confirm design parameters for the AC100 series machines that will be deployed in the commercial plant.

While the Lead Cascade testing was progressing in Piketon, our American Centrifuge team in Oak Ridge is working to finalize the AC100 design. The work is focused on value engineering to help reduced the cost of the machine during high volume manufacturing by our strategic partners, as well as ensuring its reliability.

Looking out a little further, we expect to deploy several dozen of AC100 machines in Lead Cascade in late 2008 and begin test operations in early 2009. As a reminder, our plan is to begin commercial operations in late ’09, have a million-SWU online by the end of 2010 and have all 11,500 machines of the initial phase operating in 2012. While this is a schedule with little slack, we are sharply focused on project management, doing everything possible to keep our capital costs in-line. We have also been involved in transferring knowledge regarding American Centrifuge technology to a strong team of strategic suppliers, which is made up of Honeywell International, ATK Composites, BWX Technologies and Fluor. That will continue as together we prepare manufacturing capacity for the classified components in fabrication of carbon fiber rotors. We will also transition our responsibility for rotor balancing to Honeywell.

During the third quarter, we entered into a number of contracts for pure key components and materials for ACP, and we expect to complete negotiations for additional contracts by year-end. We now have contracts for carbon fiber needed to manufacture the rotors and for the outer steel casings of the machines. Our plan is for USEC and our suppliers to develop the manufacturing infrastructure and capacity to commence manufacturing AC100 centrifuges in late ’08, ramping up the high volume manufacturing in 2010. As our team of suppliers gain manufacturing experience, they will work closely with us to integrate changes, implement improvements to the machine design, and help us to lower the capital cost per machine.

As you know, USEC has been pursuing the possibility of US Government loan guarantees for debt we would issue to build the American Centrifuge Plant. Under this program, the government will not be loaning us the funds directly. Instead, if our project is approved, this step would have government backing which would reduce the perceived risk in the financial margins for this unique project. In October, DOE issued final regulations for the program and invited 16 non-nuclear projects to submit full applications for a loan guarantee. To put this decision in context, the projects selected were substantially less costly than American Centrifuge and involved a variety of energy efficiency and alternative energy projects. We felt that the ACP’s 95% reduction electrical power needed to produce nuclear fuel was a strong energy efficiency and air pollution reduction project. Nonetheless, DOE did not include ours or any nuclear projects in this initial phase of the program. We think we can make a strong case for American Centrifuge in the next round because a reliable domestic supply of nuclear fuel is important to US utilities and the government. The timing of the next round of loan guarantees is uncertain and still requires some congressional action. We did find that the final regulations are a substantial improvement over the initial proposal for the loan guarantees. We are pleased that many of the concerns raised by USEC and the nuclear and the financial community were incorporated into the final regulations.

This quarter, we also took a major step towards improving risk prospects for the American Centrifuge Program with our recent issuance of equity and convertible securities. The new regulations say a borrower must have significant equity on the project to qualify for the loan guarantee, and clearly, the money spent to date and the proceeds of the financing represents significant USEC equity investment.

In fact, we believe our recent issuance of equity and convertible senior notes, along with cash generated from operations and borrowings under our bank credit facility, positions USEC to meet another milestone under our agreement with DOE. That milestone, with a January 2008 deadline, requires USEC to have a financing commitment secured for 1 million SWU centrifuge plant.

The second area that involves the US Government is the potential to re-enrich depleted uranium known as tails. The depleted uranium of interest belongs to the Department of Energy and contains relatively higher amounts of Uranium 235. We believe this project could be helpful to USEC, the government and our utility customers who are faced with near term shortfall of natural uranium supply. The Government Accountability Office has been reviewing current law for several months to determine DOE’s authority to transfer this material and its potential value. We understand that the GAO is expected to report back to Congress in the near term.

Although the spot market price for uranium has been volatile in recent months, this depleted uranium is still a very valuable commodity. There are many details still to be worked out but there is just too much valuable material left in some 25 million kilograms of depleted uranium to be ignored. Given that value, it seems likely that some kind of arrangement or contract will eventually evolve for the re-enrichment of those tails.

Before I turn the call over to John, I would like to give you my read on the progress our company is making and how we are executing our plans. It has been two years since I joined USEC and during that time the management team has focused on reducing our risk profile and improving our overall financial performance. Let me quickly go through several key accomplishments here to date.

First, our electric power contract with TVA. In June, we entered into a five-year agreement that extends our relationship with TVA as our primary power provider. We have locked in our base power cost through 2012 with a fuel cost adjuster. This provides us with a better long-term view of what we will pay for the largest component of our production cost. Just as importantly, the agreement provides that USEC will purchase 2,000 megawatts of electricity in non-summer months for the first three years. This 25% increase in the amount of power delivered to USEC gives us flexibility in the operation of the plant.

We can use the additional power to either underfeed the re-enrichment process and obtain additional uranium supplies for resale or we can produce more low-enriched uranium. Right now, the economics point to underfeeding and we will look to opportunistically sell uranium.

Second, we are improving the quality of future sales in our backlog. Our marketing and sales group has been meeting with customers to sell our product under our revised contracts that share risks with customers. We have been renegotiating contracts to improve terms for deliveries that will be made over the next few years, and we have began talking to customers about longer-term contracts for the output of American Centrifuge. We have found our customers have been very supportive of the ACP because it represents reliable US-based supply.

Third, we have continued to reduce our non-power-related operating costs at Paducah to improve our gross profit margin. We have also kept SG&A costs in check. Throughout the company, we have taken a number of steps to keep our costs as low as possible. Collectively they have helped to improve our gross profit outlook as 2007 progress.

These first three steps played an important role in the strong financial performance we turned in during the third quarter and has positioned USEC to do well over the next few years. Our goal is to maintain the profitability of our core business as we transition to American Centrifuge over several years.

Last but not least, we are steadily reducing the risk profile of the American Centrifuge project. I am particularly pleased with our progress in this area. In the past year alone, we have entered into a long-term lease and licensing agreement with the technology and established a reasonable royalty payment to the Department of Energy.

We have received the construction and operating license from the Nuclear Regulatory Commission for the plant. We started major procurement of key materials and components of the centrifuge machines. We have initiated the Lead Cascade testing program and obtained results that we believe achieved the October 2007 milestone. We have raised approximately $775 million that provides us with over a billion dollars of liquidity for the next phase of the project deployment. We believe these very positive steps to improve our financial performance and reduce or mitigate risk will go a long way towards positioning USEC to obtain additional debt financing in the second half of 2008.

What we have come to appreciate over the past several months, especially in October, is the fluctuations in our stock prices often appeared to be driven by news events that are only tangentially related to the company. We encourage our shareholders to evaluate this investment on the basis of our actions and our results.

We are very pleased with our financial and operating performance thus far 2007 as well as the results of the Lead Cascade integrated testing program. The market for our product remains strong and the nuclear industry that we supply continues to move towards a period of growth. We are certainly very upbeat about our company’s long-term prospects.

Now, I would like to turn the caller to John Barpoulis for a report on third quarter results. John?

John Barpoulis

Thank you John and good morning everyone. I want to keep my report rather brief because we want to get to your questions. So, I will keep my report to the key points. We expect to issue our 10-Q report later today, which will have substantial detail.

I am sure every CFO wants to have his or her company judged over a longer term than one quarter. But with nuclear fuel, such as the nature of our business, reactors are refuelled on a 12 to 24 months cycle that can result in large quarterly swings depending on the timing and mix of deliveries. This year has been a good example of quarterly swings on the customer deliveries. They impact on our revenue and that’s why we think a longer-term view of our results is appropriate.

In the first quarter we had SWU revenue that was 73% higher than the same quarter in 2006, followed by a second quarter with SWU revenue down 64% year over year. Now on the third quarter, we are reporting SWU revenue is up 44% compared to last year.

Starting at the top line for the quarter, revenue is $635 million or $217 million more than the same quarter last year. Drilling down, SWU sales made up the vast majority of the revenue as $484 million, an increase of $147 million or 44% from the same quarter in 2006. SWU sales on the third quarter reflected 36% higher volume of customer deliveries and a 6% increase in the average price billed to customers.

Uranium revenues are often related to SWU deliveries and uranium revenue was $102 million, almost 200% higher than the same quarter last year. Uranium volume increased 15% and the average price billed to customers was 159% higher.

U.S. government contracts and other was $49 million, an increased of $2 million mainly due to increased sales by our subsidiary NAC International.

Looking at the nine month period, revenue is a little better than in 2006 due to higher SWU sales. Total revenue for the period in 2007 is $1.311 billion, up $6 million from last year. Revenue from SWU was $1.034 billion, a 6% increase from the nine month period of 2006. SWU volume was down 2% but the average price billed to customers increased 8%. We still see full year SWU volume coming in roughly 8% higher than in 2006 and uranium revenue was $134 million, a decline of $47 million or 26% from the same nine-month period of 2006. US government contract revenue was $6 million lower reflecting reduced DOE contract work.

Turning to cost of sales for the SWU and uranium segment, there was a 47% increase in costs for the quarter due to the higher SWU volume delivered and an increase in unit costs. Costs of sales for the segment in the nine-month period increased by $19 million or 2% higher than the same period last year, with an increase in unit costs being largely offset by decline in sales volumes.

Costs of sales per SWU in the nine-month period increased 8% compared to the same period of 2006, mainly representing the higher cost of electric power for the Paducah plant that is working through our SWU inventory.

Electric power costs were $110 million higher in the nine-month period of 2007 compared to the same period last year mainly due to higher cost per megawatt hour.

Gross profits for the quarter was $112 million and $213 million for the nine-month period, an increase of 115% in the quarter and a decrease of 5% in the nine-month period compared to the same period of 2006.

Our gross profit margin for the nine months was approximately 16% compared to 17% in the same period last year. The major items below the gross profit line are advanced technology costs in our selling general and administrative or SG&A expense.

Advanced technology expenses, which are nearly entirely related to the American Centrifuge Project totalled approximately $31 million in the third quarter, an increase of $7 million quarter-over-quarter.

In the nine -month period, advanced technology expense was $100 million, a 41% increase over the first half of last year. As John noted, this ramp up in spending was related to our efforts to prepare the American Centrifuge facility for commercial plant construction and to assemble and operate the centrifuges used in the Lead Cascade test program.

In addition to the ACP expense, about $170 million related to the commercial plant was capitalized in the nine-month period of 2007, compared to about $91 million capitalized in the same period of 2006.

SG&A expense is $33 million in the nine-month period of 2007, a decrease of almost $4 million compared to the same period last year. Much of that decrease was a result of a reversal of an accrued tax penalty in lower consulting expenses. This was partially offset by higher compensation expenses related to vesting of participants in our incentive compensation plans.

Bottom line, we recorded a net income of $45.6 million or $0.52 per share for the third quarter of 2007, compared to net income of $9.9 million or $0.11 per share in the same quarter last year. For the nine-month period, net income was $71.5 million or $0.82 cents per share compared to $66.1 million or $0.76 per share in the same period of 2006.

As we noted in previous quarters this year, net income was improved by tax related effects of the non-cash reversal of accruals and accrued interests. In the nine-month period, this totalled approximately $22 million.

The investment we are making in the American Centrifuge Project has a substantial impact on net income. This investment in our future has the effect of reducing net income in the nine-month period of 2007 by approximately $65 million assuming a Federal Statutory Income Tax Rate of 35%.

USEC reported pro forma net income before American Centrifuge expenses of approximately $136 million in the first nine months of 2007 compared to $111 million in the same period last year.

To help investors evaluate the impact of this adjustment to current financial results, we reported pro forma net income before American Centrifuge expenses, which is a non-GAAP financial measure.

As we move further into the construction phase of the American Centrifuge Plant, a greater portion of its spending will be capitalized. Given this shift, we do not plan to report pro forma results to adjust for American Centrifuge expenses in 2008 and going forward.

Turning to cash, we had $775 million in cash on-hand on September 30, 2007 compared to $171 million on December 31, 2006 and $48 million at the end of the second quarter. Cash used by operations in the nine-month period of 2007was approximately $104 million compared to cash flow from operations of about $153 million in the same period last year. The $257 million difference was due to a $91 million net increase in the inventory reflecting increased production costs and the $127 million increase in the accounts receivable in the third quarter following a high level of sales in September. The major factor that caused the increase in cash, of course, was the net proceeds from our issuance of common stocks and convertible senior notes in September.

This cash along with access to $400 million credit facility gives USEC over a billion dollars of acuity going into the ramp up of construction on the American Centrifuge Plant. This should provide us with ample liquidity well into 2009.

In yesterday’s news release, we also updated our earnings and cash flow guidance for 2007. We have also refined our spending pattern for the remainder of the year for the American Centrifuge Project. We provided details in our earnings news release, but I would like to highlight several items.

Our projected total revenue is unchanged at approximately $1.91 billion. We expect the gross profit margin to be between 14% and 15 %. That is a small change from the 14% gross profit margin in our August guidance, but even a 1% change moves the gross profit by nearly $20 million. Our guidance for the American Centrifuge Project is for total spending of $300 million this year, and that is about $20 million less than the guidance provided in our second quarter call.

Project spending will be split roughly between $135 of expenses and $150 million in capital expenditures, with the rest going to prepayments for specialty materials and new manufacturing facilities for building the AC100 Series centrifuge machine. The amount of spending being expensed has not changed from last quarter’s guidance, so that it is not a factor in the net income improvement.

We expect our selling, general and administrative or SG&A expenses to be about $3 million lower than our earlier guidance and that goes straight to the bottom line. Our earnings guidance for 2007 is for net income in a range of $80 million to $90 million, taking into account our continued substantial investment in the American Centrifuge Project, the pro forma net income before ACP expenses is expected to be in the range of $168 million to $178 million.

We also expect cash flow from operations for 2007 to improve over the previous guidance. We now expect cash flow from operations for the year to be in a range of $95 million to $105 million. The $70 million improvement is primarily due to the timing of customer collections in the fourth quarter, timing of payments to Russia, and higher interest income.

I would point out that our guidance does not include any potential opportunistic sales of uranium in 2007. Also a note of caution on this guidance, although we have firm orders from customers for the remainder of the year, movement of delivery dates in the final month can affect the period when revenue is recorded or when cash is collected from customers.

We also have major procurement activities planned near year’s end that could shift spending on the American Centrifuge Project between the two calendar years.

That concludes the financial results analysis. Can I ask the operator to prompt our callers for questions?

Question-and-Answer Session

Operator

Our first question will come from Laurence Alexander with Jefferies & Company.

Laurence Alexander - Jefferies & Company

I guess two questions on risk management. There has been much discussion in the press recently about Tenex looking to possibly renegotiate some of the contracts associated with the Megatons to Megawatts project. Is there an opportunity in there for you to reduce the tails assay component of your agreement with Tenex?

John Welch

I think one of the things to think about Laurence, this is John talking. We do not believe that anything that goes on relative to, and what you are referring to is the thought process that the Russians are looking for a better price for the uranium that they are selling to the—

Laurence Alexander - Jefferies & Company

Well, but also they might look for better price on the SWU and could you do a trade-off of the SWU price versus the tails assay?

John Welch

Typically, we are right at the stage where we had to finalize what the order would like for next year, so we typically do not comment what goes into that, but the first part is the formula where you are looking at the trailing industries to determine the price and in that discussion there may be an opportunity to look at that, but I cannot really comment where we are not until we finalize the agreement with them.

Laurence Alexander - Jefferies & Company

And secondly on the cost outlook for the American Centrifuge, how much of the total cost of the project is now contracted and firmly visible?

John Welch

I would say that we have had very good visibility either to what has been spent to date or contracts that are in place for probably about a billion, $1.25 billion worth of the projected cost of the project and on that portion of it we have seen increased cost pressure on the range of 10% to 15%.

Laurence Alexander - Jefferies & Company

John, I am not trying to get guidance for next year, I know you do not do that. As you think about the contracts you already have in hand for SWU production at Paducah, what is the bias in margin compared to the contract that you have been executing on this year? As the mix involves and the new contract terms roll in that you have been fighting for the last couple of years.

John Barpoulis

I appreciate your lead in there. We do expect to follow our historical practice of providing a better insight and guidance into 2008 early next year and I think it is pretty immature at this point to try to peel, I think the onion on 2008 performance. I think we do expect to continue as John has outlined to be very focused on our near term performance, as well as keeping an eye on executing American Centrifuge. As information becomes more detailed and refined, we will let you know.

Laurence Alexander - Jefferies & Company

Okay. How do you feel about the quality of the mix?

John Barpoulis

Quality of mix in terms of customer SWU uranium?

Laurence Alexander - Jefferies & Company

And contracts, yes, the contracts and customers.

Bob Van Namen

We definitely are focused on the changing market conditions we are seeing. We have seen substantial increases in the market prices for enrichment and in our ability to get terms and conditions that meet the operating needs of the company so we do see older contracts continuing to roll off and the newer contracts taking up a larger portion of the overall deliveries and we are pleased with the direction that it is heading.

Lawrence Alexander - Jefferies & Company

Thank you.

Operator

Our next question will come from Mark Henley.

Mark Henley

In the press release you mentioned that you might expect to sign for additional contracts for the ACP before the end of the year. Can you give us a sense of what those might be?

John Welch

I think the specific comment from John was that we have been in conversations with customers related to ACP contracts.

Mark Henley

Actually, not customer contracts, but more so the construction and the procurement type of contracts.

John Balpouris

I think we can provide additional information in follow up questions, but as we indicated in TKA’s release in August, we had signed agreements with respect to the steel casings for the centrifuge machines as well as carbon fiber related to the machines. And as we continue to finalize the design for the AC100 machines, we do expect to complete additional procurements related to the machines later this year and early next year as we finalize and advance the design for the balance of the plant. We also do expect to enter into additional contracts related to that work as well.

John Welch

What I would just add to that is who is the EPC contractor, there is a lot of contracting activity that is going on for a lot of the infrastructure type of activity and so some of that is ongoing. We typically have not reported all those little contracts unless it is one of the bigger ones. But as we go down that path and there is more and more significance to that, we would report it.

Mark Henley

Okay, I would just try to get a sense of how you ramp up building one of these things? Maybe I could…

John Welch

John, do you have…?

John Barpoulis

No, I think in terms of expectations, in order to receive the centrifuges at the plant, there certainly needs to be a certain amount of infrastructure there and ready to receive. And so, that certainly is the aspect of infrastructure that-

John Welch

I do not have the numbers and the expected flow of those contracts; they are at the tip of my tongue right now. I know we have got those laid out. We have an expectations on when all that is going to happen, I just do not have the details.

John Barpoulis

With respect to numbers, I think we continue to provide the sense for 2008 that we are expecting to spend somewhere roughly in the neighborhood of $600 million on American Centrifuge next year. So that is reflecting a very significant step up in spending.

Mark Henley

Right, if I could just switch to tails processing. What is the capacity would you say to the process tails and where? Is that at Paducah?

Bob Van Namen

Bob Van Namen here, I can talk qualitatively on that. We do have the additional power that John mentioned in his discussion. The upwards to 2000 megawatts there perhaps is still from additional upside, if we are able to find the economical power to go above 2000 megawatts. As you do strip the uranium harder, you do run into some sufficiency issues and some trade-offs on your overall SWU operation. It really is an economic question of the price of power, the relative price of SWU and the price of uranium that we do the internal optimization on. We are happy with where we are now. Again, keeping ourselves in balance with the HGU deal and generating additional uranium to be able to sell opportunistically into the markets.

We do have the ability also to process the deal retails either using the portion of the non-summer capacity that we havem or going above our 900 megawatt operating level during the summer to strip the deal retail.

Mark Henley

But in terms of gas diffusion equipment capacity that is there, is there a set of limiting factors more to power than the gas diffusion?

Bob Van Namen

Yes, that is correct.

Mark Henley

Okay, I will drop back into the queue and come back for more.

Operator

Our next question will come from Albert Kabili with Goldman Sachs. Sir, your line is open.

Albert Kabili - Goldman Sachs

Yes, good morning guys. Quick question, John. As you have seen the Lead Cascade fully operate now for a couple of months, as you look at your ultimate vision for the American Centrifuge project’s ultimate reliability, performance efficiency and cost, where along the curve are we versus that ultimate view? Are we 80% there, 60% there?

John Welch

I wish I had got that exactly down. I would tell you that we have six major objectives that we had on our Lead Cascades and some of them are focused on the—just getting our operators familiar with operating in that kind of environment. You are taking the machines up and down, so a tremendous amount of training was accomplished in that. We are also very much looking at the interaction between machines, was that creating instability that may cause an issue? As far as the objectives that we were looking to get out of the cascade operations, we have met all of those. So from that standpoint, I would us say I am very happy with what we have been able to demonstrate with that.

And in parallel, we continued to do testing of the improvements down in Oak Ridge, that we are doing in Oak Ridge, that are going after more of the value engineering we continue to drive cost down for that. So I would say that we are pretty much on the plan that we laid that a year ago, but we have quite a bit of that kind of operational testing whether it is back in the Lead Cascade or on the individual machines. A fair amount of that plan to continue in 2008 looking at the machines, design freeze. But at the end of the first quarter and then those AC100 machine will come up and be operated in the cascade by the end of the year. So it is hard to meet to, you know, are you 80% of where you would want to be? I mean from a schedule standpoint for the test program at a Lead Cascade, we are right where we want to be and we still have testing to go on down in Oak Ridge. I probably would not answer that question until we start to see more of the test results that come out of that, but so far we are quit optimistic that we are accomplishing exactly what we set out to do.

Albert Kabili - Goldman Sachs

Okay, and it looks like you with your recent deals for example Korea Hydro, seems like you are still selling the gas effusion capacity. When do you start shifting over to selling ACP capacity?

We are in the process of doing that now Al, we are engaging customers as we speak. Talking about ACP supply; we are definitely focused on the transition issues that we have to come through, going to gaseous diffusion and AGU supply to the American Centrifuge, and evolving the contract model to meet the needs of the American Centrifuge, but with the feedback we are getting, it has been very supportive of ACP. And we are looking to go through the next six to nine months accomplishing that contracting and then being ready to support the debt needs that we have in 2008 for issuing additional debt to support the project.

Albert Kabili - Goldman Sachs

So if I understand it right, within six to nine months we can start seeing some contracts?

John Welch

Yes, that is correct.

Albert Kabili - Goldman Sachs

Okay, and then final question, you know there have been talk in the press, GE announcing a potential new centrifuge plant in 2012 and potentially selling SWU to some of your customers. Could you comment on that? What kind of a threat that represents to you?

John Welch

We do not comment on our competitor’s projects, specifically although I will say that we do know quit a bit about Xylex. Perhaps it does have a role substantially down the road in the market place, but if I could just take a minute to talk about the dynamics in the market place that Xylex, Ariva and LES are looking to fit into. It is a global market, it is a first point to make we get about 60% to 65% of our revenue from the US, 30% to 35% from Asia, 5% to 10% from Europe.

Transportation is not a major component of the overall cost of nuclear power. The most important factor is really a stable regulatory and political platform for the facility.

As we look out to 2010 to 2020 we are going to be taking 7 to 8 million SWUS of gaseous diffusion, economic capacity out of the market, 5.5 million SWUS will be going to wave from the HEU deal and another 7 to 8 million will be going away as the French bring down their gaseous diffusion operation.

At the same time you are looking for solid demand from existing plants. You are looking at new reactors such as the two reactors just announced by TVA at Bellefonte and the two reactors that NRG is looking to build in Texas, as well as substantial growth in markets like China, India and South Africa.

So while we are seeing over 20 million SWUS worth of capacity come-out of the market as we transition to an all Centrifuge supply, World Nuclear Association predicts the growth and enrichment demand to be going from 40 to 45 million today, to perhaps 60 to 75 million in their reference and upper case scenarios.

We think that even with the projects that are being considered and announced, that we do have a strong opportunity for not only the first 3.8 million SWU of American Centrifuge, but perhaps for several increments beyond that, and many of these projects are predicated on that new demand emerging in the market place.

Albert Kabili - Goldman Sachs

Okay, great, thank you.

Operator

Okay, our next question will come from Jefferies & Company’s Brett Neve.

Brett Neve – Jefferies & Company

Hey guys, most of my questions have been answered. I guess my only question is that you guys looked to the second half of ’08 and raising some more debt capital. You have got to be troubled with the divergence between the market’s receptivity to both on the debt and equity side and where the rating agencies are. Is there kind of a plan to get the rating agency, because you are at CA to Triple C flat, well below investment grade and yet other aspects of this project seems to suggest us a substantial amount of value. Is there like a plan to kind of show the rating agencies through some education process where you guys can get to before you raise the money, before you go out into the market, or it does not just matter to you?

John Welch

Oh no, absolutely. It matters to us and it is very important to us. I think as John outlined in our prepared comments, we are very focused on the risks in the business and the rate at improving our long-term credit profile. And so over the next year, as we look to finalize the design for the AC100 centrifuge, advance the design for the balance of the plant and supporting systems, we expect to complete our advice, bottom’s up estimate for the cost to complete the American Centrifuge Plant. And as Bob outlined, we also expect to enter into contracts with customers for the sale of two outputs from the American Centrifuge Plant.

So, we are very focused over the next 12 months to be reducing the risk profile on our business and improving the overall credit profile. As I have said before, when you look at that nuclear fuel and nuclear power plants, you cannot get more base loads in nuclear and that really does lend itself to longer term contracts and greater certainty in the overall credit profile on the business. And so as we look to evolve from a gaseous diffusion plant that has higher operating cost to an American Centrifuge based enrichment production facility that has lower operating cost, I think on the whole, if it looks to improve the overall credit profile of the business and so that is our focus. We certainly expect to spend time with the rating agencies with our investment banks as well as with the DOE related to the loan guarantee program.

Brett Neve – Jefferies & Company

All right, thanks very much guys.

John Barpoulis

Thank you.

Operator

Our next question will come from Fadi Shadid with Friedman Billings Ramsey.

Fadi Shadid - Friedman Billings Ramsey

A couple of questions, the first one is on the ACP release of the update. Just to clarify, you said you expected to deploy several dozen AC100 machines and lay it away and then begin to test the operations in early 2009. My question is how is that different in the test operations now? I thought at that time we should be constructing rather than testing and what is the difference?

John Welch

The AC100 machines would have the improvements that we are doing for the produceability and value engineering improvements to the machine to get to our target cost on the machine. So, I want to put that as in the cascade.

In that process, we will start manufacturing those machines will be manufactured by our suppliers, and the idea of a bigger cascade is really just that we are going to be coming off for production line. We are going to put it in it and we will put a series of them probably with several dozens in the cascade operation and then the rest of them we are going into that plant itself.

So, it is indicative of, we want to operate in the cascade, the final machine and that really those machines will be part of the commercial plant when done, but an idea that we are going to take some of those early ones and put it into a cascade configuration and a small cascade. I mean, the operational plant itself, the cascades are likely to be much bigger.

Fadi Shadid - Friedman Billings Ramsey

The testing we are doing now is not to finalize the AC100 design. We are still in early ’09 we are going to have this final design that we are going to—

John Welch

That is the AC100. Again, we have a prototype machine that is in the cascade right now that we have been running since late August. We are still going with the plan that continued to run that from different testing activities in 2008, and I will be verifying some of the improvements as they come along down in Oakridge, but will continue to do that and then what we are doing in Oakridge is the finalization of the production machine. That is the cost effective machine that we will take in the production. That is the AC100 and some of those machines will lock that design down probably by the end of the first quarter and start to take that in the production.

Some of the early machines that come off that production line will go into a cascade but that will be when our suppliers are doing their ramp up in production activities for full rate production.

Fadi Shadid - Friedman Billings Ramsey

Okay, another question. You started out this year with above break-even guidance and now you are up to almost $100 million in net income and big part of that is underfeeding opportunities it seems in uranium sales. My question is the sustainability of the fact that you have been underfeeding, does that mean that there is not going to be a time where you have to like overfeed, where you are short uranium? Or it is not how it works? How does it work from like quarter to quarter?

John Barpoulis

Why don’t I comment on the improvements? I will let Bob talk about the dynamics. I just want to focus on the first part of your question on the key drivers in our improvement in bottomline results and gross margin from the beginning of the year.

It really has been the result of focus in every element of the business. It is not just uranium, and so when you look at our enrichment segment, it is from both improvements of the uranium and the SWU side, especially in SWU prices. And that as a result, as Bob alluded to, in the work that we had done, both on our backlog but also with respect to the realization of market related components and other components in the newer contracts as they begin to become a bigger piece of our overall sales.

Within the government services segments, we also had improved gross margins. On the operating side of the gaseous diffusion plant, we continue to see improvements in non-power operating cost. And as John alluded to, we are keeping our SG&A in line. We also did have some of the related impact from a tax standpoint that not was there.

Critically as part of that, we did have some spot sales of SWU during the year, less so of uranium. And so, it really is in terms of the improvement in our guidance, it is the reflection of improvements of across the board.

I think with respect to longer term again, we will provide a better clarity on our 2008 guidance next year. We do expect to continue as we said to be pinched by higher power prices in the near term as we aim to transition to American Centrifuge. Bob?

Bob Van Namen

A couple of additional thoughts on the operations and marketing side. We do see, with the 2,000 megawatts of power for the next three years, our ability to use that power either to underfeed or to produce additional SWUs and continue to meet the customer demand on the SWU side.

So the position we see ourselves is not being short of uranium but actually being able to take advantage of some uranium opportunities. It is a very volatile market for uranium so we are looking at this very opportunistically. Again, as our customers’ SWU demand needs evolve and the uranium market changes, we will be fine-tuning the operations to take advantage of those. But as we have this additional power, we do see it is a continued opportunity.

Fadi Shadid - Friedman Billings Ramsey

Okay, so it is more of underfeeding opportunities rather than being short Uranium. Okay, good. Just one accounting question, what would be for ’07 the diluted share count? Just for our models.

John Welch

Through the third quarter, it is about a tiny difference because you take a weighted average look at the convertibles, we only have about three days in the third quarter.

Fadi Shadid - Friedman Billings Ramsey

How about like the fourth quarter or for the whole year diluted share count, given the capital raise?

John Balpouris

I think that ultimately again we will have the greater impact of the common offering reflected in that diluted share count.

Fadi Shadid - Friedman Billings Ramsey

How many millions shares will it be for the fourth quarter or for the whole year you would expect then? Like the average weighted?

John Balpouris

I think it will be 23 million shares, of additional shares issued back somewhere in the mid-’90s is my expectation on a weighted average basis.

Fadi Shadid - Friedman Billings Ramsey

Okay, thank you.

Operator

We have time for one more question. Without that, we will take a question from Mark Henley.

Mark Henley

Hi, thanks for the followup. What was the uranium inventory? Can you give me a sense of how much uranium was produced opportunistically in the third quarter?

Bob Van Namen

I think with respect, we do not get into the specifics on uranium sales or value. I think the comments that we surely made in our guidance is that our guidance for the remainder of the year does not include the result of any opportunistic sales of uranium. So again the guidance reflects improvements in our core business. But again, to us, those are additional sale that we could make to the extent that we do. That would be reflected in our results.

Mark Henley

But historically you cannot give me a sense of how much you might have, or rough sense of how much might have been done in the third quarter?

John Balpouris

No, and I think what I could say is that for the most part any uranium sales this year are very much being reflective of what we had included in our original plan, reflecting some changes in market prices and very much some longer term contracts that we have had over time.

Mark Henley

Okay, do you have the inventory number for—usually that is in the queue usually, right?

Bob Van Namen

Dollar value at lower of cost to market is what is usually in the queue. I think I would just encourage you to take look at the queue when it comes out. We will put additional information there.

Mark Henley

Thanks very much.

Bob Van Namen

Okay, thank you.

Operator

At this time I will turn the conference back over to our presenters for any additional or closing remarks.

John Welch

Well, just a quick summary. Thanks for your questions this morning. We really do appreciate your participation.

In summary, we had a strong quarter financially and I continue to take my hands up to our employees for their hard work to deliver much better results than we expected at the start of the year and that as we described is across the board. In the “no good deed goes unpunished” category we still got a lot ahead of us and you know that and we are excited about the prospects for the company and for the industry and we look forward to the challenges ahead of us. We thank you for your continued support.

Operator

And that does conclude today’s teleconference. Thank you all for joining. Have a wonderful day.

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