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EX-32 - EX-32 - CENTRUS ENERGY CORPex32.htm
EX-10.2 - EX-10.2 - CENTRUS ENERGY CORPex10_2.htm
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EX-10.4 - EX-10.4 - CENTRUS ENERGY CORPex10_4.htm
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EX-31.2 - EX-31.2 - CENTRUS ENERGY CORPex31_2.htm





UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
 

ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarter ended June 30, 2010
OR

o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 1-14287
 
USEC Inc.
(Exact name of registrant as specified in its charter)

Delaware
52-2107911
(State of incorporation)
(I.R.S. Employer Identification No.)

Two Democracy Center
6903 Rockledge Drive, Bethesda, Maryland 20817
(301) 564-3200

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes ý   No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý   No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer
ý
 
Accelerated filer
o
Non-accelerated filer
o
 
Smaller reporting company
o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes o. No ý

As of July 15, 2010, there were 114,190,954 shares of Common Stock issued and outstanding.

 



 
 

 

TABLE OF CONTENTS
   
Page
 
PART I – FINANCIAL INFORMATION
 
   
Item 1.
Financial Statements:
 
 
Consolidated Condensed Balance Sheets at June 30, 2010 and December 31, 2009 (Unaudited)
4
 
Consolidated Condensed Statements of Operations for the Three and Six Months Ended June 30, 2010 and 2009 (Unaudited)
5
 
Consolidated Condensed Statements of Cash Flows for the Six Months Ended June 30, 2010 and 2009 (Unaudited)
6
 
Notes to Consolidated Condensed Financial Statements (Unaudited)
7
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
18
Item 3.
Quantitative and Qualitative Disclosures about Market Risk                                                                                                             
44
Item 4.
Controls and Procedures
44
 
PART II – OTHER INFORMATION
 
   
Item 1.
Legal Proceedings                                                                                                             
45
Item 1A.
Risk Factors                                                                                                             
45
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds                                                                                                             
54
Item 4.
Submission of Matters to a Vote of Security Holders                                                                                                             
54
Item 6.
Exhibits                                                                                                             
55
Signature                                                                                                                             
56
Exhibit Index                                                                                                                              
57


 
 
2

 

This quarterly report on Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2, contains “forward-looking statements” – that is, statements related to future events. In this context, forward-looking statements may address our expected future business and financial performance, and often contain words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “will” and other words of similar meaning. Forward-looking statements by their nature address matters that are, to different degrees, uncertain. For USEC, particular risks and uncertainties that could cause our actual future results to differ materially from those expressed in our forward-looking statements include, but are not limited to: risks related to the deployment of the American Centrifuge technology, including risks related to performance, cost, schedule and financing; our success in obtaining a loan guarantee for the American Centrifuge Plant, including our ability to address the technical and financial concerns raised by the U.S. Department of Energy (“DOE”); our ability to raise capital beyond the $2 billion of DOE loan guarantee funding for which we have applied; the impact of the demobilization of the American Centrifuge project and uncertainty regarding our ability to remobilize the project and the potential for termination of the project; our ability to meet milestones under the June 2002 DOE-USEC Agreement related to the deployment of the American Centrifuge technology; restrictions in our revolving credit facility that may impact our operating and financial flexibility and spending on the American Centrifuge project; our ability to expand our revolving credit facility with additional commitments from financial institutions to increase the total capacity beyond $250 million; risks related to the completion of the announced three-phased strategic investment by Toshiba Corporation (“Toshiba”) and The Babcock & Wilcox Company (“B&W”), including our ability to satisfy the significant closing conditions in the securities purchase agreement governing the transactions and the impact of a failure to consummate the transactions on our business and prospects; certain restrictions that may be placed on our business as a result of the transactions with Toshiba and B&W; our ability to achieve the benefits of any strategic relationships with Toshiba and B&W; uncertainty regarding the cost of electric power used at our gaseous diffusion plant; our dependence on deliveries under the Russian Contract and on a single production facility; our inability under many existing long-term contracts to directly pass on to customers increases in our costs; the decrease or elimination of duties charged on imports of foreign-produced low enriched uranium; pricing trends and demand in the uranium and enrichment markets and their impact on our profitability; changes to, or termination of, our contracts with the U.S. government; limitations on our ability to compete for potential contracts with the U.S. government; changes in U.S. government priorities and the availability of government funding, including loan guarantees; the impact of government regulation; the outcome of legal proceedings and other contingencies (including lawsuits and government investigations or audits); the competitive environment for our products and services; changes in the nuclear energy industry; the impact of volatile financial market conditions on our business, liquidity, prospects, pension assets and credit and insurance facilities; and other risks and uncertainties discussed in this and our other filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K. Revenue and operating results can fluctuate significantly from quarter to quarter, and in some cases, year to year. For a discussion of these risks and uncertainties and other factors that may affect our future results, please see Item 1A entitled “Risk Factors” and the other sections of this report and our annual report on Form 10-K.  Readers are urged to carefully review and consider the various disclosures made in this report and in our other filings with the Securities and Exchange Commission that attempt to advise interested parties of the risks and factors that may affect our business. We do not undertake to update our forward-looking statements except as required by law.
 
3

 

USEC Inc.
CONSOLIDATED CONDENSED BALANCE SHEETS (Unaudited)
(millions)
 
 
   
June 30,
2010
   
December 31,
2009
 
ASSETS
           
Current Assets
           
Cash and cash equivalents                                                                                                  
  $ 207.5     $ 131.3  
Accounts receivable, net                                                                                                  
    121.1       191.4  
Inventories                                                                                                  
    1,359.8       1,301.2  
Deferred income taxes                                                                                                  
    43.4       48.6  
Deferred costs associated with deferred revenue                                                                                                  
    286.8       244.4  
Other current assets                                                                                                  
    68.1       52.7  
Total Current Assets                                                                                               
    2,086.7       1,969.6  
Property, Plant and Equipment, net                                                                                                     
    1,170.0       1,115.1  
Other Long-Term Assets
               
Deferred income taxes                                                                                                  
    259.0       270.3  
Deposits for surety bonds                                                                                                  
    155.3       158.3  
Deferred financing costs, net                                                                                                  
    12.7       12.0  
Goodwill                                                                                                  
    6.8       6.8  
Total Other Long-Term Assets                                                                                               
    433.8       447.4  
Total Assets                                                                                                     
  $ 3,690.5     $ 3,532.1  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current Liabilities
               
Accounts payable and accrued liabilities                                                                                                  
  $ 138.1     $ 153.4  
Payables under Russian Contract                                                                                                  
    188.6       134.8  
Inventories owed to customers and suppliers                                                                                                  
    572.3       469.4  
Deferred revenue and advances from customers                                                                                                  
    379.8       325.0  
Total Current Liabilities                                                                                               
    1,278.8       1,082.6  
Long-Term Debt                                                                                                     
    575.0       575.0  
Other Long-Term Liabilities
               
Depleted uranium disposition                                                                                                  
    115.0       155.6  
Postretirement health and life benefit obligations                                                                                                  
    172.2       168.9  
Pension benefit liabilities                                                                                                  
    179.9       176.6  
Other liabilities                                                                                                  
    88.9       97.8  
Total Other Long-Term Liabilities                                                                                               
    556.0       598.9  
Commitments and Contingencies (Note 11)                                                                                                     
               
Stockholders’ Equity                                                                                                     
    1,280.7       1,275.6  
Total Liabilities and Stockholders’ Equity                                                                                                     
  $ 3,690.5     $ 3,532.1  

See notes to consolidated condensed financial statements.



 
4

 

USEC Inc.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
(millions, except per share data)

   
Three Months Ended
 June 30,
   
Six Months Ended
 June 30,
 
   
2010
   
2009
   
2010
   
2009
 
Revenue:
                       
Separative work units
  $ 331.0     $ 371.3     $ 597.6     $ 799.2  
Uranium
    69.6       95.4       85.2       124.0  
U.S. government contracts and other
    59.1       47.6       121.6        96.7  
Total revenue
    459.7       514.3       804.4       1,019.9  
Cost of sales:
                               
Separative work units and uranium
    358.6       391.9       625.8       806.8  
U.S. government contracts and other
     57.0        45.0       107.8        93.5  
Total cost of sales
    415.6       436.9       733.6       900.3  
Gross profit
    44.1       77.4       70.8       119.6  
Advanced technology costs
    26.0       30.7       51.7       62.1  
Selling, general and administrative
    14.3       16.6       29.4       31.1  
Other (income)
    (10.3 )     -       (20.0 )     -  
Operating income
    14.1       30.1       9.7       26.4  
Interest expense
    0.1       0.3       0.1       0.8  
Interest (income)
     (0.1 )      (0.4 )     (0.2 )     (1.0 )
Income before income taxes
    14.1       30.2       9.8       26.6  
Provision for income taxes
    6.9       12.9       12.3       11.4  
Net income (loss)
  $ 7.2     $ 17.3     $ (2.5 )   $ 15.2  
Net income (loss) per share – basic
  $ .06     $ .16     $ (.02 )   $ .14  
Net income (loss) per share – diluted
  $ .04     $ .11     $ (.02 )   $ .10  
Weighted-average number of shares outstanding:
                               
Basic
    112.9       111.5       112.3       111.1  
Diluted
    161.4       160.3       112.3       159.8  

See notes to consolidated condensed financial statements.


 
5

 

USEC Inc.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
(millions)

   
Six Months Ended
June 30,
 
   
2010
   
2009
 
Cash Flows from Operating Activities
           
Net income (loss)                                                                                                             
  $ (2.5 )   $ 15.2  
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
               
Depreciation and amortization                                                                                                     
    19.5       14.7  
Deferred income taxes                                                                                                     
    14.5       (8.1 )
Other non-cash income on release of disposal obligation                                                                                                    
    (20.0 )     -  
Changes in operating assets and liabilities:
               
Accounts receivable – (increase) decrease                                                                                                 
    70.3       (77.3 )
Inventories – decrease                                                                                                 
    44.3       109.7  
Payables under Russian Contract – increase                                                                                                 
    53.8       136.7  
Deferred revenue, net of deferred costs – increase (decrease)    
    31.6       (15.5 )
Accrued depleted uranium disposition – increase (decrease)      
    (40.6 )     23.5  
Accounts payable and other liabilities – increase (decrease)      
    (3.0 )     10.4  
Other, net                                                                                                 
    5.3       12.4  
Net Cash Provided by (Used in) Operating Activities                                                                                                             
    173.2       221.7  
                 
Cash Flows Used in Investing Activities
               
Capital expenditures                                                                                                             
    (87.9 )     (257.8 )
Deposits for surety bonds – (increase) decrease                                                                                                             
    3.0       (38.2 )
Net Cash (Used in) Investing Activities                                                                                                             
    (84.9 )     (296.0 )
                 
Cash Flows Used in Financing Activities
               
Borrowings under credit facility                                                                                                             
    38.2       -  
Repayments under credit facility                                                                                                             
    (38.2 )     -  
Repayment and repurchases of senior notes                                                                                                             
    -       (95.7 )
Payments for deferred financing costs                                                                                                             
    (9.6 )     -  
Common stock issued (purchased), net                                                                                                             
    (2.5 )     (0.8 )
Net Cash (Used in) Financing Activities                                                                                                             
    (12.1 )     (96.5 )
Net Increase (Decrease)                                                                                                             
    76.2       (170.8 )
Cash and Cash Equivalents at Beginning of Period                                                                                                             
    131.3       248.5  
Cash and Cash Equivalents at End of Period                                                                                                             
  $ 207.5     $ 77.7  
Supplemental Cash Flow Information:
               
Interest paid, net of amount capitalized                                                                                                         
  $ -     $ 1.9  
Income taxes paid, net of refunds                                                                                                         
    15.5       4.3  

See notes to consolidated condensed financial statements.

 
6

 

USEC Inc.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)


1. BASIS OF PRESENTATION

The unaudited consolidated condensed financial statements as of and for the three and six months ended June 30, 2010 and 2009 have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The unaudited consolidated condensed financial statements reflect all adjustments which are, in the opinion of management, necessary for a fair statement of the financial results for the interim period. Certain information and notes normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) have been omitted pursuant to such rules and regulations. Certain amounts in the consolidated condensed financial statements have been reclassified to conform with the current presentation.

Operating results for the three and six months ended June 30, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010. The unaudited consolidated condensed financial statements should be read in conjunction with the consolidated financial statements and related notes and management's discussion and analysis of financial condition and results of operations included in the annual report on Form 10-K for the year ended December 31, 2009.

2. INVENTORIES

USEC is a supplier of low enriched uranium (“LEU) for nuclear fuel power plants. LEU consists of two components: separative work units (“SWU”) and uranium. SWU is a standard unit of measurement that represents the effort required to transform a given amount of natural uranium into two components: enriched uranium having a higher percentage of U235 and depleted uranium having a lower percentage of U235. The SWU contained in LEU is calculated using an industry standard formula based on the physics of enrichment. The amount of enrichment deemed to be contained in LEU under this formula is commonly referred to as its SWU component and the quantity of natural uranium used in the production of LEU under this formula is referred to as its uranium component.

USEC holds uranium at the Paducah gaseous diffusion plant (“GDP”) in the form of natural uranium and as the uranium component of LEU. USEC holds SWU as the SWU component of LEU. USEC may also hold title to the uranium and SWU components of LEU at fabricators to meet book transfer requests by customers. Fabricators process LEU into fuel for use in nuclear reactors. Components of inventories follow:

   
June 30,
2010
   
December 31,
2009
 
   
(millions)
 
Current assets:
           
Separative work units                                                                   
  $ 878.1     $ 805.1  
Uranium                                                                   
    468.9       482.1  
Materials and supplies                                                                   
    12.8       14.0  
      1,359.8       1,301.2  
Current liabilities:
               
Inventories owed to customers and suppliers
    (572.3 )     (469.4 )
Inventories, net
  $ 787.5     $ 831.8  

 
 
7

 
Inventories Owed to Customers and Suppliers

Generally, title to uranium provided by customers as part of their enrichment contracts does not pass to USEC until delivery of LEU. In limited cases, however, title to the uranium passes to USEC immediately upon delivery of the uranium by the customer. Additionally, USEC owed SWU and uranium inventories to fabricators with a cost totaling $572.1 million at June 30, 2010 and $469.2 million at December 31, 2009. Under inventory optimization arrangements between USEC and domestic fabricators, fabricators order bulk quantities of LEU from USEC based on scheduled or anticipated orders from utility customers for deliveries in future periods. As delivery obligations under actual customer orders arise, USEC satisfies these obligations by arranging for the transfer to the customer of title to the specified quantity of LEU at the fabricator. USEC’s balances of SWU and uranium vary over time based on the timing and size of the fabricator’s LEU orders from USEC. Balances can be positive or negative at the discretion of the fabricator. Fabricators have other inventory supplies and, where a fabricator has elected to order less material from USEC than USEC is required to deliver to its customers at the fabricator, the fabricator will use these other inventories to satisfy USEC’s customer order obligations on USEC’s behalf. In such cases, the transfer of title of LEU from USEC to the customer results in quantities of SWU and uranium owed by USEC to the fabricator. The amounts of SWU and uranium owed to fabricators are satisfied as future bulk deliveries of LEU are made.

Uranium Provided by Customers and Suppliers

USEC held uranium with estimated fair values of approximately $2.5 billion at June 30, 2010, and $2.8 billion at December 31, 2009, to which title was held by customers and suppliers and for which no assets or liabilities were recorded on the balance sheet. The reduction reflects a 3% decline in the uranium spot price indicator and an 8% decline in quantities. Utility customers provide uranium to USEC as part of their enrichment contracts. Title to uranium provided by customers generally remains with the customer until delivery of LEU at which time title to LEU is transferred to the customer, and title to uranium is transferred to USEC.

3. PROPERTY, PLANT AND EQUIPMENT

A summary of changes in property, plant and equipment follows (in millions):

   
December 31,
2009
   
Capital Expenditures
(Depreciation)
   
Transfers
and
Retirements
   
June 30,
2010
 
Construction work in progress
  $ 991.4     $ 68.8     $ (7.2 )   $ 1,053.0  
Leasehold improvements                                          
    182.6       -       2.7       185.3  
Machinery and equipment
    260.1        2.3       4.4       266.8  
      1,434.1       71.1       (0.1 )     1,505.1  
Accumulated depreciation and amortization
    (319.0 )     (16.2 )     0.1       (335.1 )
    $ 1,115.1     $ 54.9     $ -     $ 1,170.0  

Capital expenditures include items in accounts payable and accrued liabilities at June 30, 2010 for which cash is paid in subsequent periods.

USEC is working to deploy the American Centrifuge technology at the American Centrifuge Plant (“ACP”) in Piketon, Ohio. Capital expenditures related to the ACP, which is primarily included in the construction work in progress balance, totaled $1,078.4 million at June 30, 2010 and $1,023.1 million at December 31, 2009. Capitalized asset retirement obligations included in construction work in progress totaled $19.3 million at June 30, 2010 and December 31, 2009.

 
 
8

 
 
USEC has significantly demobilized and reduced construction and machine manufacturing activities in the American Centrifuge project because of a lack of progress in obtaining and the uncertainty of timing for additional financing for the project. USEC continues its centrifuge testing program and its development efforts. USEC concluded in 2009 that future cash flows from the ACP will exceed its capital investment based on a probability-weighted analysis. USEC continues to believe there have been no events or changes in conditions that would cause USEC to reassess this conclusion. Since USEC believes its capital investment is fully recoverable, no impairment for costs previously capitalized is anticipated at this time. USEC will continue to evaluate this assessment as conditions change.
 
 
4. DEFERRED REVENUE AND ADVANCES FROM CUSTOMERS
   
June 30,
2010
   
December 31,
2009
 
   
(millions)
 
Deferred revenue
  $ 344.8     $ 301.9  
Advances from customers
     35.0       23.1  
    $ 379.8     $ 325.0  

 
Related costs associated with deferred revenue totaled $286.8 million at June 30, 2010 and $244.4 million at December 31, 2009.

Advances from customers includes $4.9 million as of June 30, 2010 and $22.7 million as of December 31, 2009 for future services to be provided for DOE in our U.S. government contracts segment. DOE is funding this work through an arrangement whereby DOE transfers uranium to USEC which USEC immediately sells in the market.

Advances from customers also includes $25.0 million as of June 30, 2010, representing the balance of $45 million of support from DOE pursuant to a cooperative agreement entered into with DOE for pro-rata cost sharing support for continued American Centrifuge activities with a total estimated cost of $90 million. DOE made the $45 million available by taking the disposal obligation for a specific quantity of depleted uranium from USEC, which enabled USEC to release encumbered funds for investment in the American Centrifuge technology that USEC had otherwise committed to future depleted uranium disposition obligations. The $45 million in encumbered funds are reflected in other long-term assets as deposits for surety bonds as of June 30, 2010. In July 2010, surety bonds and related deposits were reduced, and USEC received the $45 million in cash. In the six months ended June 30, 2010, USEC made qualifying American Centrifuge expenditures of $40.0 million. DOE’s contribution on a 50% pro rata basis, or $20.0 million, is recognized as other income in the six months ended June 30, 2010. If USEC determines that it is unable to provide cost sharing of at least $45 million, DOE’s contribution and assumption of depleted uranium obligations will be reduced pro rata.


 
9

 

5. DEBT

The carrying value of USEC’s long-term debt was $575.0 million at June 30, 2010 and December 31, 2009, consisting of 3.0% convertible senior notes due October 1, 2014. Interest on the notes is payable semi-annually in arrears on April 1 and October 1 of each year. The estimated fair value of the convertible notes, based on the trading price as of the balance sheet date, was $432.0 million at June 30, 2010 and $372.0 million at December 31, 2009. The notes were not eligible for conversion to common stock as of June 30, 2010 or December 31, 2009.

On February 26, 2010, USEC replaced its $400.0 million revolving credit facility, scheduled to mature on August 18, 2010, with a new 27-month credit facility that matures May 31, 2012. The new syndicated bank credit facility initially provided up to $225.0 million in revolving credit commitments, including up to $100.0 million in letters of credit, secured by assets of USEC Inc. and its subsidiaries, excluding equity in, and assets of, subsidiaries created to carry out future commercial American Centrifuge activities. In July 2010, the revolving credit commitments were expanded to $250.0 million, including up to $125.0 million in letters of credit. As with the former credit facility, borrowings under the new credit facility are subject to limitations based on established percentages of qualifying assets such as eligible accounts receivable and inventory.

Utilization of the current revolving credit facility at June 30, 2010 and the former revolving credit facility at December 31, 2009 follows:
 
   
June 30,
   
December 31,
 
   
2010
   
2009
 
   
(millions)
 
Short-term borrowings                                                                    
  $ -     $ -  
Letters of credit                                                                    
    37.9       45.4  
Available credit                                                                    
    187.1       295.5  


6. INCOME TAX UPDATE

The provision for income taxes for the six months ended June 30, 2010 includes a charge of $6.5 million related to the change in tax treatment of Medicare Part D reimbursements as a result of the Patient Protection and Affordable Care Act as modified by the Reconciliation Act of 2010 (collectively referred to as “the Act”) signed into law at the end of March 2010. The charge was due to a reduction in USEC’s deferred tax asset as a result of a change to the tax treatment of Medicare Part D reimbursements. Under the Act, the tax-deductible prescription drug costs will be reduced by the amount of the federal subsidy. Under Financial Accounting Standards Board guidance, the effect of changes in tax laws or rates on deferred tax assets and liabilities is reflected in the period that includes the enactment date, even though the changes may not be effective until future periods.


 
10

 

7. STOCKHOLDERS’ EQUITY

Changes in stockholders' equity were as follows (in millions, except per share data):

   
Common
Stock,
Par Value
$.10 per
Share
   
Excess of
Capital over
Par Value
   
 
Retained
Earnings
   
 
 
 
Treasury
Stock
   
Accumulated
Other Compre-hensive Income (Loss)
   
 
Total
Stockholders’ Equity
   
 
Comprehensive Income (Loss)
 
Balance at December 31, 2009
  $ 12.3     $ 1,179.6     $ 322.4     $ (71.3 )   $ (167.4 )   $ 1,275.6        
Restricted and other stock issued, net
    -       (9.6 )     -       13.2       -       3.6       -  
Amortization of actuarial losses and prior service costs (credits), net of income tax of $2.0 million
    -       -       -       -       4.0       4.0       4.0  
Net (loss)
    -       -       (2.5 )      -       -       (2.5 )     (2.5 )
Balance at June 30, 2010
  $ 12.3     $ 1,170.0     $ 319.9     $ (58.1 )   $ (163.4 )   $ 1,280.7     $ 1.5  

Amortization of actuarial losses and prior service costs (credits), net of tax, are those related to pension and postretirement health and life benefits as presented on a pre-tax basis in note 8.

8. PENSION AND POSTRETIREMENT HEALTH AND LIFE BENEFITS

The components of net benefit costs for pension and postretirement health and life benefit plans were as follows (in millions):
 
 
 
Defined Benefit Pension Plans
   
 Postretirement Health and Life Benefits Plans
 
   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2010
   
2009
   
2010
   
2009
   
2010
   
2009
   
2010
   
2009
 
Service costs
  $ 4.9     $ 4.6     $ 9.7     $ 9.3     $ 1.3     $ 1.1     $ 2.5     $ 2.3  
Interest costs
    12.2       11.9       24.4       23.8       2.9       3.1       5.9       6.3  
Expected return on plan assets
(gains)
    (12.3 )     (10.6 )     (24.4 )     (21.3 )     (0.9 )     (0.7 )     (1.8 )     (1.5 )
Amortization of prior service costs
(credits)
    0.5       0.4       0.9       0.8       (2.1 )     (3.6 )     (4.2 )     (7.2 )
Amortization of actuarial losses
    4.0       6.0       8.0       12.0       0.6       1.1       1.3       2.1  
Net benefit costs
  $ 9.3     $ 12.3     $ 18.6     $ 24.6     $ 1.8     $ 1.0     $ 3.7     $ 2.0  

USEC expects total cash contributions to the plans in 2010 will be as follows: $14.7 million for the defined benefit pension plans and $6.3 million for the postretirement health and life benefit plans. Of those amounts, contributions made as of June 30, 2010 were $6.4 million and $3.2 million related to the defined benefit pension plans and postretirement health and life benefit plans, respectively.


 
11

 

9. STOCK-BASED COMPENSATION

   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2010
   
2009
   
2010
   
2009
 
   
(millions)
 
Total stock-based compensation costs:
                       
Restricted stock and restricted stock units
  $ 2.0     $ 2.6     $ 4.9     $ 4.6  
Stock options, performance awards and other
    0.4       0.3       1.1       1.0  
Less: costs capitalized as part of inventory
    (0.1 )     (0.1 )     (0.2 )     (0.2 )
Expense included in selling, general and administrative
  $ 2.3     $ 2.8     $ 5.8     $ 5.4  
  Total after-tax expense
  $ 1.4     $ 1.8     $ 3.7     $ 3.5  

There were 22,876 stock options exercised in the six months ended June 30, 2010. Cash received from the exercise of the options was $0.1 million. The intrinsic value of the options exercised was less than $0.1 million. There were no stock options exercised in the six months ended June 30, 2009.

Assumptions used in the Black-Scholes option pricing model to value option grants follow.

 
Three Months Ended June 30,
Six Months Ended June 30,
 
2010
2009
2010
2009
Risk-free interest rate
-
-
1.4%
1.4%
Expected dividend yield
-
-
-
-
Expected volatility
-
-
72%
65%
Expected option life
-
-
4 years
3.8 years
Weighted-average grant date fair value
-
-
$2.81
$1.81
Options granted
0
0
766,050
1,091,300

As of June 30, 2010, there was $11.9 million of unrecognized compensation cost, adjusted for estimated forfeitures, related to non-vested stock-based payments granted, of which $9.1 million relates to restricted shares and restricted stock units, and $2.8 million relates to stock options. That cost is expected to be recognized over a weighted-average period of 2.1 years.


 
12

 

10. NET INCOME PER SHARE

Basic net income per share is calculated by dividing net income by the weighted average number of shares of common stock outstanding during the period, excluding any unvested restricted stock.

In calculating diluted net income per share, the numerator is increased by interest expense on the convertible notes, net of amount capitalized and net of tax, and the denominator is increased by the weighted average number of shares resulting from potentially dilutive stock compensation awards and the convertible notes, assuming full conversion.
 

   
Three Months Ended
  June 30, 
   
Six Months Ended
  June 30,
 
   
2010
   
2009
   
2010
   
2009
 
   
(in millions)
 
Numerator:
                       
Net income (loss)
  $ 7.2     $ 17.3     $ (2.5 )   $ 15.2  
Net interest expense on convertible notes (a)
     -        -    
(b)
      0.2  
Net income (loss) if-converted
    7.2       17.3       (2.5 )     15.4  
                                 
Denominator:
                               
Weighted average common shares
    114.9       113.0       114.3       112.5  
Less: Weighted average unvested restricted stock
    2.0       1.5       2.0       1.4  
Denominator for basic calculation
    112.9       111.5       112.3       111.1  
                                 
Weighted average effect of dilutive securities:
                               
Convertible notes
    48.1       48.1    
(b)
      48.1  
Stock compensation awards
    0.4       0.7    
(b)
      0.6  
Denominator for diluted calculation
    161.4       160.3       112.3       159.8  
                                 
Net income (loss) per share – basic
  $ .06     $ .16     $ (.02 )   $ .14  
Net income (loss) per share – diluted
  $ .04     $ .11    
$           (.02) (b)
    $ .10  

(a)  
Interest expense on convertible notes net of amount capitalized and net of tax.
 
(b)  
No dilutive effect of convertible notes or stock compensation awards is recognized in a period in which a net loss has occurred.  Net interest expense on convertible notes was less than .01 million and weighted average number of shares for the convertible notes and stock compensation awards was 48.1 million and 0.4 million, respectively.
 

Options to purchase shares of common stock having an exercise price greater than the average share market price are excluded from the calculation of diluted earnings per share (options in millions):
 
Three Months Ended
  June 30,   
Six Months Ended
  June 30, 
 
2010
2009
2010
2009
Options excluded from diluted earnings per share
1.8
1.9
2.6
1.9
Exercise price of excluded options
$5.86 to $16.90
$5.86 to $16.90
$5.00 to $16.90
$5.86 to $16.90




 
13

 

11. COMMITMENTS AND CONTINGENCIES

American Centrifuge Plant

Project Funding

USEC needs to raise a significant amount of additional capital to continue funding and to complete the American Centrifuge Plant. USEC believes a loan guarantee under the DOE Loan Guarantee Program is critical to raising the capital needed to complete the American Centrifuge Plant. The DOE Loan Guarantee Program was created by the Energy Policy Act of 2005 and in December 2007, federal legislation authorized funding levels of up to $2 billion for advanced facilities for the front end of the nuclear fuel cycle, which includes uranium enrichment. DOE subsequently reallocated an additional $2 billion in loan guarantee authority to the front-end nuclear facilities loan guarantee solicitation. In July 2008, USEC applied to the DOE Loan Guarantee Program for $2 billion in U.S. government guaranteed debt financing for the ACP.  Areva, a company more than 90% owned by the French government, also applied for $2 billion of U.S. government guaranteed financing under this program for a proposed plant in the United States. DOE announced in May 2010 that it has provided Areva with a conditional commitment for a loan guarantee from the reallocated funding authority. DOE has said that $2 billion in funding for projects in the front end of the nuclear fuel cycle remains available but USEC has no assurance that a DOE loan guarantee will be made available to USEC. In August 2009, DOE and USEC announced an agreement to delay a final review of USEC’s loan guarantee application. Since that time, USEC has worked to address the technical and financial concerns raised by DOE. USEC submitted an update to its application in July 2010.

On May 25, 2010, USEC announced that Toshiba Corporation (“Toshiba”) and Babcock & Wilcox Investment Company, an affiliate of The Babcock & Wilcox Company (“B&W”), have signed a definitive agreement to make a $200 million investment in USEC. Under the terms of the agreement, Toshiba and B&W will each invest $100 million over three phases, each of which is subject to specific closing conditions. To complete the project, USEC will require additional capital beyond the $2 billion DOE loan guarantee, proceeds from the announced investment from Toshiba and B&W and internally generated cash flow.

USEC has initiated discussions with Japanese export credit agencies regarding financing a portion of the cost of building the plant. However, USEC has no assurance that it will be successful in obtaining any or all of the financing it is seeking.

Milestones under the 2002 DOE-USEC Agreement

In 2002, USEC and DOE signed an agreement (such agreement, as amended, the “2002 DOE-USEC Agreement”) in which USEC and DOE made long-term commitments directed at resolving issues related to the stability and security of the domestic uranium enrichment industry. The 2002 DOE-USEC Agreement contains specific project milestones relating to the ACP. Four milestones remain relating to the financing and operation of the ACP. In early August 2009 USEC began demobilization of the American Centrifuge project.  As a result, USEC requested a modification to the 2002 DOE-USEC Agreement to extend the remaining ACP milestones under the 2002 DOE-USEC Agreement. In January 2010, USEC and DOE amended the 2002 DOE-USEC Agreement to extend by one year to November 2010 the financing milestone that required that USEC secure firm financing commitment(s) for the construction of the commercial American Centrifuge Plant with an annual capacity of approximately 3.5 million SWU per year.  The remaining three milestones were not adjusted by the January 2010 amendment, however, DOE and USEC have agreed to discuss adjustment of the remaining three milestones as may be appropriate based on, among other things, progress in achieving the November 2010 financing milestone and the technical progress of the program. In the January 2010 amendment to the 2002 DOE-USEC Agreement, DOE and USEC acknowledged that USEC’s obligations with respect to the ACP milestones under the 2002 DOE-USEC Agreement are not dependent on the issuance by DOE of a loan guarantee to USEC. However, USEC has communicated to DOE that its ability to meet the remaining milestones is dependent on its obtaining a commitment and funding for a loan guarantee from DOE. USEC will also need additional financing commitments beyond a DOE loan guarantee to meet the November 2010 financing milestone.

 
 
14

 
The 2002 DOE-USEC Agreement provides DOE with specific remedies if USEC fails to meet a milestone that would materially impact USEC’s ability to begin commercial operations of the American Centrifuge Plant on schedule and such delay was within USEC’s control or was due to USEC’s fault or negligence. These remedies could include terminating the 2002 DOE-USEC Agreement, revoking USEC’s access to DOE’s U.S. centrifuge technology that USEC requires for the success of the American Centrifuge project and requiring USEC to transfer its rights in the American Centrifuge technology and facilities to DOE, and to reimburse DOE for certain costs associated with the American Centrifuge project. DOE could also recommend that USEC be removed as the sole U.S. Executive Agent under the Megatons-to-Megawatts program, which if such recommendation led to a U.S. government decision to remove USEC as sole Executive Agent, could reduce or terminate USEC’s access to Russian LEU in future years, subject to rights granted to USEC under a 1997 memorandum of agreement between USEC and the U.S. government to continue to purchase Russian SWU at prices, in quantities and under terms previously agreed with the Russian executive agent. Any of these actions could have a material adverse impact on USEC’s business.

The 2002 DOE-USEC Agreement provides that if a delaying event beyond the control and without the fault or negligence of USEC occurs which would affect USEC’s ability to meet an ACP milestone, DOE and USEC will jointly meet to discuss in good faith possible adjustments to the milestones as appropriate to accommodate the delaying event.

USEC’s right to continue operating the Paducah GDP under its lease with DOE is not subject to meeting the ACP milestones.

Obligation Under Lease Agreement for Power Contract

Cost of sales and other long-term liabilities were reduced by $7.8 million in the second quarter of 2010 due to a change in estimate of USEC’s share of future demolition and severance costs for a power plant that was built to supply power to the Paducah GDP.  DOE is obligated to pay the owner/operator of the plant a portion of such costs (net of salvage credits including the value of land) and USEC is obligated under the lease agreement with DOE to fund such payments except for portions attributable to power consumed by DOE. Given additional information obtained by USEC during the second quarter of 2010, USEC believes that the amount of its liability for such payments that can be reasonably estimated at this time with respect to the plant’s shutdown, which is not anticipated to occur before 2055, is lower than the previously recorded long-term liability. USEC will reassess the need for additional accruals on a recurring basis as information becomes available.

 
 
15

 
Legal Matters

DOE Contract Services Matter

The U.S. Department of Justice (“DOJ”) asserted in a letter to USEC dated July 10, 2006 that DOE may have sustained damages in an amount that exceeds $6.9 million under USEC’s contract with DOE for the supply of cold standby services at the Portsmouth GDP. DOJ indicated that it was assessing possible violations of the Civil False Claims Act (“FCA”), which allows for treble damages and civil penalties, and related claims in connection with invoices submitted under that contract.  USEC responded to DOJ’s letter in September 2006, stating that the government does not have a legitimate basis for asserting any FCA or related claims under the cold standby contract, and USEC has been cooperating with DOJ and the DOE Office of Investigations with respect to their inquiries into this matter. In a supplemental presentation by DOJ and DOE on October 18, 2007, DOJ identified revised assertions of alleged overcharges of at least $14.6 million on the cold standby contract and two other cost-type contracts, again potentially in violation of the FCA. USEC has responded to these assertions and has provided several follow-up responses to DOJ and DOE in response to their requests for additional data and analysis. As part of USEC’s continuing discussions with DOJ, USEC and DOJ have agreed several times to extend the statute of limitations for this matter.  USEC does not believe that there is any basis for an FCA or related claim and does not anticipate that any such claim will be filed against it in connection with this matter.  Accordingly, no loss has been accrued.

Contractor Matter

On June 22, 2010, USEC and our engineering, procurement and construction contractor for the American Centrifuge Plant, Fluor Enterprises, Inc., agreed to a settlement regarding a complaint filed on October 16, 2009 in the U.S. District Court for the Southern District of Ohio by a subcontractor, Rampart Hydro Services, L.P., regarding monies owed for work performed under a contract with USEC.  As part of the settlement, the complaint was dismissed with prejudice.

Other Legal Matters

USEC is subject to various other legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business. While the outcome of these claims cannot be predicted with certainty, USEC does not believe that the outcome of any of these legal matters will have a material adverse effect on its results of operations or financial condition.


 
16

 

12.      SEGMENT INFORMATION

USEC has two reportable segments:  the LEU segment with two components, SWU and uranium, and the U.S. government contracts segment.  The LEU segment is USEC’s primary business focus and includes sales of the SWU component of LEU, sales of both the SWU and uranium components of LEU, and sales of uranium. The U.S. government contracts segment includes work performed for DOE and DOE contractors at the Portsmouth and Paducah GDPs, as well as nuclear energy services and technologies provided by NAC International Inc. Gross profit is USEC’s measure for segment reporting. Intersegment sales between the reportable segments were less than $0.1 million in each period presented below and have been eliminated in consolidation.
 
   
Three Months Ended
  June 30,
   
Six Months Ended
 June 30,
 
   
2010
   
2009
   
2010
   
2009
 
   
(millions)
 
Revenue
                       
LEU segment:
                       
Separative work units
  $ 331.0     $ 371.3     $ 597.6     $ 799.2  
  Uranium
    69.6       95.4       85.2       124.0  
      400.6       466.7       682.8       923.2  
U.S. government contracts segment
    59.1       47.6       121.6       96.7  
    $ 459.7     $ 514.3     $ 804.4     $ 1,019.9  
                                 
Segment Gross Profit
                               
LEU segment
  $ 42.0     $ 74.8     $ 57.0     $ 116.4  
U.S. government contracts segment
    2.1       2.6       13.8       3.2  
Gross profit
    44.1       77.4       70.8       119.6  
Advanced technology costs
    26.0       30.7       51.7       62.1  
Selling, general and administrative
    14.3       16.6       29.4       31.1  
Other (income)
    (10.3 )     -       (20.0 )     -  
Operating income
    14.1       30.1       9.7       26.4  
Interest expense (income), net
    -       (0.1 )     (0.1 )     (0.2 )
Income before income taxes
  $ 14.1     $ 30.2     $ 9.8     $ 26.6  


 
17

 

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with, and is qualified in its entirety by reference to, the consolidated condensed financial statements and related notes set forth in Part I, Item 1 of this report as well as the risks and uncertainties presented in Item 1A of this report and the annual report on Form 10-K for the year ended December 31, 2009.


Overview

USEC, a global energy company, is a leading supplier of low enriched uranium (“LEU”) for commercial nuclear power plants. LEU is a critical component in the production of nuclear fuel for reactors to produce electricity. We:
 
·  
supply LEU to both domestic and international utilities for use in about 150 nuclear reactors worldwide,
 
·  
are deploying what we anticipate will be the world’s most advanced uranium enrichment technology, known as the American Centrifuge,
 
·  
are the exclusive executive agent for the U.S. government under a nuclear nonproliferation program with Russia, known as Megatons to Megawatts,
 
·  
perform contract work for the U.S. Department of Energy (“DOE”) and its contractors at the Paducah and Portsmouth gaseous diffusion plants (“GDPs”), and
 
·  
provide transportation and storage systems for spent nuclear fuel and provide nuclear and energy consulting services.

LEU consists of two components: separative work units (“SWU”) and uranium. SWU is a standard unit of measurement that represents the effort required to transform a given amount of natural uranium into two components: enriched uranium having a higher percentage of U235 and depleted uranium having a lower percentage of U235. The SWU contained in LEU is calculated using an industry standard formula based on the physics of enrichment. The amount of enrichment deemed to be contained in LEU under this formula is commonly referred to as its SWU component and the quantity of natural uranium used in the production of LEU under this formula is referred to as its uranium component.
 
We produce or acquire LEU from two principal sources. We produce about half of our supply of LEU at the Paducah GDP in Paducah, Kentucky. Under the Megatons to Megawatts program, we acquire LEU from Russia under a contract, which we refer to as the Russian Contract, to purchase the SWU component of LEU recovered from dismantled nuclear weapons from the former Soviet Union for use as fuel in commercial nuclear power plants.
 
Our View of the Business Today

We expect that the long-term market for nuclear fuel will be vibrant and growing. A global fleet of approximately 440 operating nuclear power reactors provides the nuclear fuel industry with steady demand for enriched uranium. In addition, 59 new reactors are under construction worldwide with 19 of those expected to begin operation during 2010 and 2011. Looking out further, the World Nuclear Association reports that about 150 additional reactors are on order or planned, and more than 300 more reactors have been proposed. For the first time in decades, it appears that new reactors will be built in the United States in response to an emphasis on reducing greenhouse gas emissions combined with the economic and energy security benefits of nuclear power. Balanced against this enthusiasm for building new reactors is the length and uncertainty of the regulatory process for licensing and capital cost for building new reactors that has increased substantially over the last several years. In addition, projections for electric power demand have declined as a result of the recession that began in 2008 and the slow pace of the economic recovery. This may slow the need for new base load nuclear power capacity. Nonetheless, population growth, increasing per capita demand for electric power, improving public acceptance, and environmental concerns regarding burning fossil fuels provide a strong business case for our investment in the American Centrifuge technology.

 
 
18

 
During the first half of 2010, we have been working on a number of strategic initiatives.  While we focused on the steps needed to obtain the necessary capital for and restart construction of the American Centrifuge Plant (“ACP”), we have also continued to focus on our core businesses. This includes continued safe and efficient operation of the Paducah gaseous diffusion plant (“GDP”) and contract work for DOE at the Paducah plant and the former Portsmouth GDP in Piketon, Ohio.

Over the next several years, the enrichment industry will be going through its most significant change in decades. Faced with this uncertainty and systemic change, as well as volatility in the uranium market over the last several years, our customers have covered most of their SWU requirements over the next two years under long-term contracts. We are working to develop future plans for the Paducah GDP, which includes evaluating SWU supply and demand, electric power prices, and our ability to secure economic power for the Paducah plant as well as continuing discussions with customers about their future plans given evolving SWU supply. Our customers have told us that they value diversity of supply. The highly successful Megatons to Megawatts program will expire at the end of 2013 and the Russians will have the ability to sell LEU containing up to 20 percent of U.S. SWU demand directly to U.S. utilities. The French are transitioning to centrifuge-based production in France and expect to end production at their gaseous diffusion plant there. Areva also plans to build an enrichment plant in the United States. Urenco has announced expansion of its European enrichment plants and recently began production from a facility in New Mexico. We believe our Paducah GDP can continue to be an important source of capacity during this market transition but economic power prices and sufficient demand to permit efficient operation of the plant beyond the expiration of our current power agreement in May 2012 will be key factors in evaluating our future plans for the facility.

Our government services business includes work with the U.S. government to accelerate the cleanup of the former Portsmouth GDP. We previously operated the plant and maintained the facility in a state of standby readiness for several years. In addition to work to prepare the site for decontamination and decommissioning under the existing cold shutdown contract, we signed an agreement in 2009 for additional surveillance, maintenance and deactivation work. DOE is funding this work through an arrangement whereby DOE transfers to us uranium which we immediately sell. We have completed the four competitive sales of uranium that will fund the work through September 30, 2010. In July 2010, DOE issued a notice that it intends to extend the base contract through December 31, 2010 with an option to extend it to March 31, 2011. DOE is working through the process of extending the cold shutdown contract and the extension is subject to DOE funding and Congressional appropriations. Separately, we are seeking the opportunity to be a subcontractor for subsequent work at Portsmouth as the decontamination and decommissioning project proceeds over the next several years. More detail is provided below in “Overview – Revenue from U.S. Government Contracts.”

We continue our testing program and development efforts to deploy the American Centrifuge technology. In July 2010, we submitted a comprehensive update to our loan guarantee application for the $2 billion in federal loan guarantee authority that remains available under the 2008 solicitation for Front End Nuclear Fuel facilities. We took many steps to address the technical and financial concerns raised by DOE in 2009. Among the steps we have taken in the past year:

·  
Completed a thorough quality assurance program review;
 
·  
Worked with our strategic suppliers to build and operate more than 40 AC100 machines, which are the production-ready commercial centrifuge machines;
 
 
19

 
·  
Assembled and operated AC100 machines configured for a multi-stage cascade that replicates anticipated commercial plant conditions;
 
·  
Gained substantial cascade operating experience, including maintenance and repairs in an operating environment;
 
·  
Continued development work and value engineering to increase the machine’s productivity and lower its unit cost;
 
·  
Entered into an agreement for a strategic investment of $200 million by two leading companies in the nuclear industry; and
 
·  
Produced detailed updates to project scope, cost and schedule based on close collaboration with our suppliers.
 

If we are successful in obtaining a loan guarantee and other financing required to complete the project, the American Centrifuge project could create nearly 8,000 jobs in the United States, with almost half located in Ohio. More detail, including detail regarding the cost update, is provided below in “Overview—American Centrifuge Plant Update.”

Agreement for Investment by Toshiba and B&W

On May 25, 2010, we announced that nuclear industry leaders Toshiba Corporation (“Toshiba”) and Babcock & Wilcox Investment Company, an affiliate of The Babcock & Wilcox Company (“B&W”), signed a definitive agreement to make a $200 million investment in USEC. Under the terms of the agreement, Toshiba and B&W will each invest $100 million over three phases, each of which is subject to specific closing conditions. The investment is expected to strengthen USEC’s financial position for the deployment of the American Centrifuge Plant and create key new business opportunities throughout the nuclear fuel cycle. Under the parties’ arrangement to work together on additional strategic business opportunities, USEC could sell enriched uranium in connection with Toshiba’s nuclear power plant construction proposals. Toshiba’s agreement to invest also opens the potential of financing through Japanese export credit agencies, which we are pursuing along with other financing initiatives related to obtaining the remaining financing needed for the American Centrifuge project. More detail is provided in “Liquidity and Capital Resources”.

The first phase of the investment is for a total of $75 million and is expected to close in the third quarter of 2010. Conditions for the first phase include obtaining necessary regulatory approvals and concluding agreements related to a joint venture between USEC and B&W announced last year to manufacture USEC’s commercial AC100 centrifuge machines for the American Centrifuge Plant. We have received confirmation from the U.S. Nuclear Regulatory Commission (“NRC”) that NRC consent for the first two phases of the investment is not required. However, the third phase of the investment is expected to require further review by the NRC and DOE related to foreign ownership, control, or influence (“FOCI”) and other matters and it is anticipated that negation action plans relating to Toshiba’s investment in the Company or other mitigation measures may be required. We intend to use the funds for general corporate purposes and for investment in the American Centrifuge Plant. The initial phase investment would help USEC continue deployment of the American Centrifuge Plant during 2010.

The second phase of the investment is for a total of $50 million and is contingent upon USEC receiving a conditional loan guarantee commitment from DOE, among other closing conditions. The third phase of the investment is for a total of $75 million and is contingent upon the closing on a DOE loan guarantee, as well as other closing conditions including regulatory review and USEC shareholder approval. For their investment, Toshiba and B&W will receive convertible preferred stock as well as warrants to purchase shares of common stock, which would be exercisable in the future. Additional information about the transactions, including a copy of the securities purchase agreement, can be found in the Current Report on Form 8-K filed by us on May 25, 2010.  
 
 
 
20

 
American Centrifuge Plant Update

We have been building a uranium enrichment plant that uses a highly efficient uranium enrichment gas centrifuge technology that we call the American Centrifuge. This technology is capable of reducing our electricity usage in producing low enriched uranium by approximately 95 percent on a per SWU unit basis, significantly reducing the largest production cost component of our current gaseous diffusion technology. As of June 30, 2010, we have invested approximately $1.8 billion in the American Centrifuge program, which includes approximately $710 million charged to expense over several years for technology development. We have operated centrifuges as part of our lead cascade test program for over 480,000 machine hours, giving us the data and expertise to support our loan guarantee application and begin the transition to commercial operation.

We began construction on the ACP in May 2007 after being issued a construction and operating license by the NRC. In August 2007, we began demonstrating American Centrifuge machines in a cascade configuration. Subsequently, in July 2008, we applied for $2 billion in financing from the DOE Loan Guarantee Program to finance the commercial plant. In August 2009, DOE and USEC announced an agreement to delay a final review of our loan guarantee application. DOE raised a number of technical and financial concerns regarding our loan guarantee application, and we have focused on addressing these concerns during the past year. Due to the uncertainty of funding, we significantly demobilized and reduced construction and machine manufacturing activities in the American Centrifuge project. Because we deferred high-volume machine manufacturing, work at all of our strategic suppliers has been sharply reduced.

During this demobilization period, we have been focused on addressing DOE’s concerns and have worked to position the project to obtain a loan guarantee. Among our accomplishments, we:
 
·  
Assembled, installed and operated production-ready AC100 machines in a commercial plant cascade configuration;
 
·  
Worked with our suppliers to manufacture additional AC100 machines;
 
·  
Continued machine technology development in Oak Ridge in support of lead cascade testing, value engineering and increasing machine productivity; and
 
·  
Preserved our ability to remobilize plant construction by working with our engineering, procurement and construction contractor on the 80% complete plant design and conducting a detailed cost and schedule assessment for completing the commercial plant.
 
In March 2010, we began operation of our AC100 Lead Cascade in Piketon. Approximately two dozen AC100 machines have been operating in a cascade in a commercial plant configuration. This is an important accomplishment in our efforts to respond to DOE’s technical concerns. These are production machines primarily built by our suppliers, and the cascade’s operation highlights the continued progress we are making. The cascade has been operating successfully and our objective is to accumulate significant cascade run-time while we continue to manufacture and install additional centrifuge machines.

Our centrifuge manufacturing suppliers assembled approximately 20 additional machines earlier this year that we have operated individually. During the third quarter we have reconfigured the AC100 cascade to introduce these additional machines, thus creating a cascade with about 40 AC100 machines. Our suppliers are continuing to build and assemble additional AC100 machines, which will increase the total number of machine hours of AC100 centrifuge operation.

 
21

 
During the second quarter we took the initial cascade of prototype machines that had been operating since August 2007 off-line. We have disassembled and examined components from some of those prototype machines as an element of our deterministic approach to assuring reliability of the AC100 centrifuges. The machine positions in the demonstration area used for the initial cascade have been refurbished with upgraded control systems and instrumentation in preparation for installation of 25 AC100 machines during 2010. These additional machines will run individually to provide additional data and to accumulate additional operating hours. By the end of 2010 we expect to have roughly 65 AC100 machines in operation. This activity maintains our supplier base and demonstrates the capability to manufacture production-ready centrifuge machines within our design specifications.

To assist in funding these demonstration activities, we entered into a cooperative agreement with DOE in March 2010 for pro-rata cost sharing support for continued American Centrifuge activities with a total estimated cost of $90 million. DOE has made $45 million available by taking the disposal obligation for a specific quantity of depleted uranium from USEC, which enabled USEC to release encumbered funds for investment in American Centrifuge technology that USEC had otherwise committed to future depleted uranium disposition obligations.  The $90 million of cost-sharing supports over 350 jobs in the continued operation of the AC100 cascade, manufacturing of additional AC100 centrifuge machines, and refinement to the rotor tube manufacturing process in preparation for full, high-rate production.

We need additional financing to complete plant construction, and we have reduced the scope of project activities that were underway in 2009 until we have that financing. We do not believe public market financing for a large capital project deploying innovative technology such as American Centrifuge is available given current financial market conditions. We believe a loan guarantee under the DOE Loan Guarantee Program is critical to raising the capital needed to complete the American Centrifuge Plant. The DOE Loan Guarantee Program was created by the Energy Policy Act of 2005, and in December 2007, federal legislation authorized funding levels of up to $2 billion for advanced facilities for the front end of the nuclear fuel cycle, which includes uranium enrichment.  DOE subsequently reallocated an additional $2 billion in loan guarantee authority to the front-end nuclear facilities loan guarantee solicitation. In July 2008, we applied to the DOE Loan Guarantee Program for $2 billion in U.S. government guaranteed debt financing for the ACP. Areva, a company that is more than 90% owned by the French government, also applied for $2 billion of U.S. government guaranteed financing under this program for a proposed plant in the United States. DOE announced in May 2010 that it has provided Areva with a conditional commitment for a loan guarantee from the reallocated funding authority. DOE has said that $2 billion in funding for projects in the front end of the nuclear fuel cycle remains available but we have no assurance that a DOE Loan Guarantee will be made available to us. In addition, to complete the project, USEC will require additional capital beyond the $2 billion DOE loan guarantee, proceeds from the announced investment from Toshiba and B&W, and internally generated cash flow. We have also initiated discussions with Japanese export credit agencies regarding financing a portion of the cost of building the plant. However, we have no assurance that we will be successful in obtaining any or all of the financing we are seeking.

The success of the Lead Cascade testing program of AC100 machines and the strategic investment by Toshiba and B&W are positive steps towards addressing the technical and financial concerns raised by DOE in 2009. In July 2010, we updated our application with the DOE Loan Guarantee Program.

 
22

 
Over the past several months, we have been working with our suppliers to update the scope, cost and schedule to build the ACP. Several factors have contributed to the increase in our cost estimates since we established our initial baseline project budget in 2008, including:
 
·  
Costs related to the demobilization and remobilization and costs associated with continued ACP activities prior to any remobilization period;
 
·  
Cost increases as a result of additional design work and refined cost estimates from our suppliers related to machine manufacturing and engineering, procurement and construction (“EPC”) costs; and
 
·  
Costs related to the maturity of scope of the project.
 
Based on our work with suppliers to date, we estimate the cost to complete the American Centrifuge project from the point of closing on financing on a DOE loan guarantee will be approximately $2.8 billion. This estimate includes AC100 machine manufacturing and assembly, EPC and related balance-of-plant work, start-up and initial operations, and project management. We believe we have reduced significant risk in the American Centrifuge project since our initial baseline project budget in 2008 and our new cost estimate is based on a significantly more mature project scope.

The $2.8 billion estimate is a go-forward cost estimate and does not include spending from now until financial closing of a DOE loan guarantee, our $1.8 billion investment through June 30, 2010, overall project contingency, financing costs or financial assurance. Until potential financial closing of a DOE loan guarantee, we expect to continue to invest at a rate consistent with our anticipated spending indicated in our outlook for the remainder of 2010, while taking into account our anticipated cash from operations and other available liquidity. We are currently evaluating the appropriate level for the overall project contingency taking into account the level of risk given the maturity of the project.  We are also evaluating the financing costs and financial assurance required for the project, which will be affected by, among other things, the overall financing plan for the project, the amount of the credit subsidy cost for any DOE loan guarantee, and the amount and sources of the additional financing we need to complete the project.

We continue to work with suppliers to refine our estimates and seek reductions in the project cost. With respect to schedule, we anticipate it will require 18 to 24 months to begin initial commercial operations upon receiving financing. We also anticipate that it will require 30 to 36 months to complete the plant after initial commercial operations. We continue to work with our EPC contractor and suppliers to reduce the deployment schedule for the ACP.

Continued deployment of the ACP remains subject to available liquidity, limitations in our credit facility on spending on the ACP, our willingness to invest further in the project absent funding commitments to complete the project, our ability to obtain a DOE loan guarantee and additional capital, other risks related to the deployment of the ACP, and the negative impact of delays or a termination of the ACP on our business and prospects described in the risk factors in Item 1A of this report and of our 2009 Annual Report on Form 10-K.


 
23

 
Revenue from Sales of SWU and Uranium

Revenue from our LEU segment is derived primarily from:
 
·  
sales of the SWU component of LEU,
·  
sales of both the SWU and uranium components of LEU, and
·  
sales of uranium.

The majority of our customers are domestic and international utilities that operate nuclear power plants, with international sales constituting 34% of revenue from our LEU segment in 2009. Our agreements with electric utilities are primarily long-term, fixed-commitment contracts under which our customers are obligated to purchase a specified quantity of SWU from us or long-term requirements contracts under which our customers are obligated to purchase a percentage of their SWU requirements from us. Under requirements contracts, a customer only makes purchases when its reactor has requirements for additional fuel. Our agreements for uranium sales are generally shorter-term, fixed-commitment contracts.

Our revenues and operating results can fluctuate significantly from quarter to quarter, and in some cases, year to year. Revenue is recognized at the time LEU or uranium is delivered under the terms of contracts with domestic and international electric utility customers. Customer demand is affected by, among other things, reactor operations, maintenance and the timing of refueling outages. Utilities typically schedule the shutdown of their reactors for refueling to coincide with the low electricity demand periods of spring and fall. Thus, some reactors are scheduled for annual or two-year refuelings in the spring or fall, or for 18-month cycles alternating between both seasons.

Customer payments for the SWU component of LEU typically average approximately $15 to $20 million per order. As a result, a relatively small change in the timing of customer orders for LEU due to a change in a customer’s refueling schedule may cause operating results to be substantially above or below expectations. Customer requirements and orders are more predictable over the longer term, and we believe our performance is best measured on an annual, or even longer, business cycle. Our revenue could be adversely affected by actions of the NRC or nuclear regulators in foreign countries issuing orders to modify, delay, suspend or shut down nuclear reactor operations within their jurisdictions.

Customer orders that are related to their requirements for enrichment may be delayed due to outages, changes in refueling schedules or delays in the initial startup of a reactor. In addition, in order to enhance our liquidity and manage our working capital in light of anticipated sales and inventory levels, we work periodically with customers regarding the timing of their orders, including advancement. As our customers have purchased more of their SWU supply under long-term contracts due to the transition to centrifuge-based supply and the uncertainty of supply during this transition, USEC has advanced orders rather than sell material into a spot market that has little near-term uncommitted demand. Most of these orders have been advanced within a calendar year. However, some orders have advanced from 2011 into 2010. Based on our outlook for demand, we expect to continue to work with customers to advance orders. If customers agree to advance orders without delivery, a sale is recorded as deferred revenue. Alternatively, if customers agree to advance orders and delivery, revenue would be recorded in an earlier than originally anticipated period. The advancement of orders will have the effect of accelerating our receipt of cash from such advanced sales, although the amount of cash we receive from such sales may be reduced as a result of the terms mutually agreed with customers in connection with advancement. However, this could have the effect of reducing backlog and revenues in future years if we do not replace these orders with additional sales. Looking a few years out, we expect an increase in uncommitted demand that could provide the opportunity to make additional near-term sales in those years to supplement our backlog and thus decrease the need to advance orders in the future. Our ability to advance orders depends on the willingness of our customers to agree to advancement on terms that we find acceptable.

 
 
24

 
Our financial performance over time can be significantly affected by changes in prices for SWU and uranium.  The long-term SWU price indicator, as published by TradeTech, LLC in Nuclear Market Review, is an indication of base-year prices under new long-term enrichment contracts in our primary markets. Since our backlog includes contracts awarded to us in previous years, the average SWU price billed to customers typically lags behind the current price indicators by several years. Following are TradeTech’s long-term SWU price indicator, the long-term price for uranium hexafluoride (“UF6”), as calculated by USEC using indicators published in Nuclear Market Review, and TradeTech’s spot price indicator for UF6:
 
 
June 30,
December 31,
June 30,
 
2010
2009
2009
Long-term SWU price indicator ($/SWU)
$160.00
$165.00
$165.00
UF6:
     
Long-term price composite ($/KgU)
 168.27
167.77
182.09
Spot price indicator ($/KgU)                                                      
 116.00
120.00
137.00

A substantial portion of our earnings and cash flows in recent years has been derived from sales of uranium, including uranium generated by underfeeding the production process at the Paducah GDP. We may also purchase uranium from suppliers in connection with specific customer contracts, as we have in the past. Underfeeding is a mode of operation that uses or feeds less uranium but requires more SWU in the enrichment process, which requires more electric power. In producing the same amount of LEU, we vary our production process to underfeed uranium based on the economics of the cost of electric power relative to the prices of uranium and enrichment, resulting in excess uranium that we can sell. Spot market prices for uranium declined in the past two years, reducing the value of underfeeding the enrichment process to obtain uranium for resale. We expect uranium sales to have less of an impact on earnings going forward. Our average unit cost for uranium inventory has risen over the past several years as uranium generated from underfeeding has replaced the uranium inventories transferred to us at the time of USEC’s privatization. We will continue to monitor and optimize the economics of our production based on the cost of power and market conditions for SWU and uranium.

We supply uranium to the Russian Federation for the LEU we receive under the Russian Contract. We replenish our uranium inventory with uranium supplied by customers under our contracts for the sale of SWU and through underfeeding our production process.

Under the terms of many uranium sale agreements, title to uranium is transferred to the customer and we receive payment under normal credit terms without physically delivering the uranium to the customer. The recognition of revenue and earnings for such uranium sales is deferred until LEU associated with such uranium is physically delivered to the customer rather than at the time title to uranium transfers to the customer. The timing of revenue recognition for uranium sales is uncertain.

Revenue from U.S. Government Contracts

We perform and earn revenue from contract work for DOE and DOE contractors at the Paducah and Portsmouth GDPs, including a contract for surveillance, maintenance and deactivation (“cold shutdown”) work at the Portsmouth GDP to prepare it for decontamination and decommissioning work in future years. Revenue from cold shutdown work comprised 70% of revenue for the U.S. government contracts segment in the six months ended June 30, 2010. Continuation of U.S. government contracts is subject to DOE funding and Congressional appropriations. The term of the contract for Portsmouth GDP cold shutdown work is through September 30, 2010. In July 2010, DOE issued a notice that it intends to extend the cold shutdown contract through December 31, 2010 with an option to extend it to March 31, 2011. DOE is working through the process of extending the cold shutdown contract and the extension is subject to DOE funding and Congressional appropriations. Separately, we are seeking the opportunity to be a subcontractor for subsequent work at Portsmouth as the decontamination and decommissioning project proceeds over the next several years.

 
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Revenue from U.S. government contracts is based on allowable costs for work performed as determined under government cost accounting standards. Allowable costs include direct costs as well as allocations of indirect plant and corporate overhead costs and are subject to audit by the Defense Contract Audit Agency (“DCAA”). Also refer to “DOE Contract Services Matter” in note 11 to the consolidated condensed financial statements. Revenue from the U.S. government contracts segment includes revenue from our subsidiary NAC International Inc. (“NAC”).

From January 2006 through December 2009, DOE had only approved provisional billing rates based on 2006 budgetary estimates even though updated provisional rates had been submitted based on more current information. In addition, we have finalized and submitted to DOE Incurred Cost Submissions for Portsmouth and Paducah GDP contract work for the six months ended December 31, 2002 and the years ended December 31, 2003, 2004, 2005, 2006, 2007, 2008 and 2009. Based on the results of our Incurred Cost Submissions for those years, we believe that additional amounts can be billed and revenue of approximately $1.2 million may be recognizable. There is also the potential for additional revenue to be recognized related to our valuation allowances pending the outcome of DCAA audits and DOE reviews.  However, because these periods have not been audited, uncertainty exists and we have not yet recognized this additional revenue.

As a part of performing contract work for DOE, certain contractual issues, scope of work uncertainties, and various disputes may arise from time to time. Issues unique to USEC can arise as a result of our history of being privatized from the U.S. government and our lease and other contracts with DOE. We bill certain pension and postretirement benefit costs to DOE pursuant to an advance agreement with DOE that addresses issues unique to USEC’s privatization. In response to an issue raised by DOE's Contracting Officer, during the second quarter, we and DOE agreed to certain adjustments to the actuarial calculations of the pension cost we previously claimed, which had the effect of reducing the potential unrecognized revenue related to our Incurred Cost Submissions described above from the previously reported $8.8 million to $1.2 million.

DOE is funding certain additional work under the Portsmouth GDP cold shutdown contract through an arrangement whereby DOE transfers to us uranium which we immediately sell. USEC’s receipt of the uranium is not considered a purchase by us and no revenue or cost of sales is recorded upon its sale. This is because we have no significant risks or rewards of ownership and no potential profit or loss related to the uranium sale. The amount of work to be provided, and therefore the total value of the contract modification, will be dependent on the net value of the uranium realized by USEC upon each sale. Net value of the uranium equals the cash proceeds from sales less USEC’s selling and handling costs. The net value from the uranium sale is recorded as deferred revenue. Revenue is recognized in our U.S. government contracts segment as cold shutdown services are provided.

 
26

 
Cost of Sales

Cost of sales for SWU and uranium is based on the amount of SWU and uranium sold and delivered during the period and is determined by a combination of inventory levels and costs, production costs, and purchase costs. We produce about one-half of our SWU supply at the Paducah GDP. Production costs consist principally of electric power, labor and benefits, long-term depleted uranium disposition cost estimates, materials, depreciation and amortization, and maintenance and repairs. The quantity of uranium that is added to uranium inventory from underfeeding is accounted for as a byproduct of the enrichment process. Production costs are allocated to the uranium added to inventory based on the net realizable value of the uranium, and the remainder of production costs is allocated to SWU inventory costs. Under the monthly moving average inventory cost method that we use, an increase or decrease in production or purchase costs will have an effect on inventory costs and cost of sales over current and future periods.

We purchase about one-half of our SWU supply under the Russian Contract. We have agreed to purchase approximately 5.5 million SWU each calendar year for the remaining term of the Russian Contract through 2013. Prices are determined using a discount from an index of international and U.S. price points, including both long-term and spot prices, as well as other pricing elements. The pricing methodology, which includes a multi-year retrospective view of market-based price points, is intended to enhance the stability of future pricing and minimize the disruptive effect of short-term market price swings. The price per SWU under the Russian Contract for 2010 is 8% higher compared to 2009. Officials of the Russian government have indicated that Russia will not extend the Russian Contract under the government-to-government agreement beyond 2013. Accordingly, at this time we do not anticipate that we will purchase Russian SWU under the Megatons to Megawatts program after 2013. Given the success of the Megatons to Megawatts program, we believe that there could be the potential for future cooperation. However, the timing and prospects of any future cooperation are uncertain.

We provide for the remainder of our supply mix from the Paducah GDP. The gaseous diffusion process uses significant amounts of electric power to enrich uranium. Costs for electric power are approximately 70% of production costs at the Paducah GDP. We purchase most of the electric power for the Paducah GDP under a power purchase agreement with TVA that expires May 31, 2012. Under the terms of our contract with TVA, beginning September 1, 2010, we will buy 1,650 megawatts instead of the 2,000 megawatts we have been purchasing in non-summer months since 2007. The reduction in power purchased should not negatively affect plant efficiency. The base price under the TVA power contract increases moderately based on a fixed, annual schedule, and is subject to a fuel cost adjustment provision to reflect changes in TVA’s fuel costs, purchased-power costs, and related costs. The impact of the fuel cost adjustment has been negative for USEC, imposing an average increase over base contract prices of about 7% in the six months ended June 30, 2010, compared to annual amounts of 6% in 2009, 15% in 2008 and 8% in 2007. Fuel cost adjustments in a given period are based in part on TVA’s estimates as well as revisions of estimates for electric power delivered in prior periods. The impact of future fuel cost adjustments, which are substantially influenced by coal and purchased-power prices and hydroelectric power availability, is uncertain and our cost of power could fluctuate in the future above or below the agreed increases in the base energy price. We expect the fuel cost adjustment to continue to cause our purchase cost to remain above base contract prices, but the extent of the impact is uncertain given volatile energy prices and electricity demand.


 
27

 

We store depleted uranium generated from our operations at the Paducah and Portsmouth GDPs and accrue estimated costs for its future disposition. Under federal law, we have the option to send our depleted uranium to DOE for disposition, but are continuing to explore a number of competitive alternatives. DOE has constructed new facilities at the Paducah and Portsmouth GDPs to process large quantities of depleted uranium owned by DOE. Operations have commenced at the Portsmouth facility in a test environment. If we were to dispose of our depleted uranium with DOE, we would be required to reimburse DOE for the related costs of disposing of our depleted uranium, including our pro rata share of DOE’s capital costs. Processing DOE’s depleted uranium is expected to take about 25 years. The timing of the disposal of our depleted uranium has not been determined. The long-term liability for depleted uranium disposition is dependent upon the volume of depleted uranium that we generate and estimated processing, transportation and disposal costs. Our estimate of the unit disposal cost is based primarily on estimated cost data obtained from DOE without consideration given to contingencies or reserves. The NRC requires that we guarantee the disposition of our depleted uranium with financial assurance. Our estimate of the unit disposition cost for accrual purposes is approximately 30% less than the unit disposition cost for financial assurance purposes, which includes contingencies and other potential costs as required by the NRC. Our estimated cost and accrued liability, as well as financial assurance we provide for the disposition of depleted uranium, are subject to change as additional information becomes available.
 
Advanced Technology Costs – American Centrifuge
 
Costs relating to the American Centrifuge technology are charged to expense or capitalized based on the nature of the activities and estimates and judgments involving the completion of project milestones. Costs relating to the demonstration of American Centrifuge technology are charged to expense as incurred. Demonstration costs historically have included NRC licensing of the American Centrifuge Demonstration Facility in Piketon, Ohio, engineering activities, and assembling and testing of centrifuge machines and equipment at centrifuge test facilities located in Oak Ridge, Tennessee and at the American Centrifuge Demonstration Facility.

Expenditures related to American Centrifuge technology for the six months ended June 30, 2010 and 2009, as well as cumulative expenditures as of June 30, 2010, follow (in millions):

   
Six Months 
Ended June 30,
   
Cumulative
as of
June 30,
 
   
2010
   
2009
   
2010
 
Amount expensed (A) 
  $ 50.7     $ 61.9     $ 710.3  
Amount capitalized (B) 
    63.6       228.0       1,111.9  
Total ACP expenditures, including accruals (C) 
  $ 114.3     $ 289.9     $ 1,822.2  
                         
(A)  Expense included as part of Advanced Technology Costs.
 
(B)  Amounts capitalized as part of property, plant and equipment total $1,078.4 million as of June 30, 2010, including capitalized interest of $60.8 million. Prepayments to suppliers for services not yet performed totaled $33.5 million as of June 30, 2010.
 
(C)  Total ACP expenditures are all American Centrifuge costs including, but not limited to, demonstration facility, licensing activities, commercial plant facility, program management, interest related costs and accrued asset retirement obligations capitalized. This includes $11.9 million of accruals at June 30, 2010.
 

Capitalized costs relating to the American Centrifuge technology include NRC licensing of the American Centrifuge Plant, engineering activities, construction of AC100 centrifuge machines and equipment, process and support equipment, leasehold improvements and other costs directly associated with the commercial plant. Capitalized centrifuge costs are recorded in property, plant and equipment, primarily as part of construction work in progress. Of the costs capitalized to date, approximately 60% relate to the American Centrifuge Plant in Piketon, Ohio and 40% relate to machine manufacturing and assembly efforts primarily occurring in Oak Ridge, Tennessee.
 

 
 
28

 
Deferred financing costs, net, includes approximately $2.0 million for costs related to the DOE Loan Guarantee Program, such as loan guarantee application fees paid to DOE and third-party costs. Deferred financing costs related to the DOE Loan Guarantee Program will be amortized over the life of the loan or, if USEC does not receive a loan, charged to expense.

The continued capitalization of American Centrifuge costs is subject to ongoing review and successful project completion. If conditions change and deployment were no longer probable, costs that were previously capitalized would be charged to expense.

As previously discussed under “– Overview – American Centrifuge Plant Update,” DOE and USEC announced in August 2009 an agreement to delay a final review of USEC’s loan guarantee application. Since that time, USEC significantly demobilized and reduced construction and machine manufacturing activities in the American Centrifuge project and has worked to address the technical and financial concerns raised by DOE. USEC submitted an update to its application in July 2010. In parallel, we continue our centrifuge testing program and our development efforts. Based on a probability-weighted analysis, we believe that future cash flows from the ACP will exceed our capital investment. Since we believe our capital investment is fully recoverable, no impairment for costs previously capitalized is anticipated at this time. We will continue to evaluate this assessment as conditions change.

For a discussion regarding financing for the American Centrifuge project, see “Management’s Discussion and Analysis – Liquidity and Capital Resources.” Risks and uncertainties related to the financing, construction and deployment of the American Centrifuge Plant are described in Item 1A, “Risk Factors” of this report and our 2009 Annual Report on Form 10-K.
 
Advanced Technology Costs – MAGNASTOR™
 
Advanced technology costs also include research and development efforts undertaken for NAC, relating primarily to its new generation MAGNASTOR dual-purpose dry storage system for spent fuel. In February 2009, MAGNASTOR was added to the NRC’s list of dry storage casks approved for use under a general license. MAGNASTOR has the largest storage and thermal capacity of any cask system approved to date. NAC continues to seek license amendments for the expanded use of the technology and expects to submit a license application for the MAGNASTOR transportation cask system, MAGNATRAN, later this year.

Results of Operations – Three and Six Months Ended June 30, 2010 and 2009

Segment Information

We have two reportable segments measured and presented through the gross profit line of our income statement: the LEU segment with two components, SWU and uranium, and the U.S. government contracts segment. The LEU segment is our primary business focus and includes sales of the SWU component of LEU, sales of both SWU and uranium components of LEU, and sales of uranium. The U.S. government contracts segment includes work performed for DOE and its contractors at the Portsmouth and Paducah GDPs, as well as nuclear energy services and technologies provided by NAC. Intersegment sales between our reportable segments were less than $0.1 million in each period presented below and have been eliminated in consolidation.


 
29

 

The following table presents elements of the accompanying consolidated condensed statements of operations that are categorized by segment (dollar amounts in millions):

 
   
Three Months Ended June 30,
             
   
2010
   
2009
   
Change
   
%
 
LEU segment
                       
Revenue:
                       
   SWU revenue
  $ 331.0     $ 371.3     $ (40.3 )     (11 )%
Uranium revenue
    69.6       95.4       (25.8 )     (27 )%
Total
    400.6       466.7       (66.1 )     (14 )%
Cost of sales
    358.6       391.9       33.3       8 %
Gross profit
  $ 42.0     $ 74.8     $ (32.8 )     (44 )%
                                 
U.S. government contracts segment
                               
Revenue
  $ 59.1     $ 47.6     $ 11.5       24 %
Cost of sales
    57.0       45.0       (12.0 )     (27 )%
Gross profit
  $ 2.1     $ 2.6     $ (0.5 )     (19 )%
                                 
Total
                               
Revenue
  $ 459.7     $ 514.3     $ (54.6 )     (11 )%
Cost of sales
    415.6       436.9       21.3       5 %
Gross profit
  $ 44.1     $ 77.4     $ (33.3 )     (43 )%


   
Six Months Ended June 30,
             
   
2010
   
2009
   
Change
   
%
 
LEU segment
                       
Revenue:
                       
SWU revenue
  $ 597.6     $ 799.2     $ (201.6 )     (25 )%
Uranium revenue
    85.2       124.0       (38.8 )     (31 )%
Total
    682.8       923.2       (240.4 )     (26 )%
Cost of sales
    625.8       806.8       181.0       22 %
Gross profit
  $ 57.0     $ 116.4     $ (59.4 )     (51 )%
                                 
U.S. government contracts segment
                               
Revenue
  $ 121.6     $ 96.7     $ 24.9       26 %
Cost of sales
    107.8       93.5       (14.3 )     (15 )%
Gross profit
  $ 13.8     $ 3.2     $ 10.6       331 %
                                 
Total
                               
Revenue
  $ 804.4     $ 1,019.9     $ (215.5 )     (21 )%
Cost of sales
    733.6       900.3       166.7       19 %
Gross profit
  $ 70.8     $ 119.6     $ (48.8 )     (41 )%


Revenue

The volume of SWU sales declined 11% in the three months and 28% in the six months ended June 30, 2010, compared to the corresponding periods in 2009, reflecting the variability in timing of utility customer orders. The average price billed to customers for sales of SWU was flat in the three-month period and increased 3% in the six months ended June 30, 2010 compared to the corresponding period in 2009, reflecting the particular contracts under which SWU were sold during the periods as well as the general trend of higher prices under contracts signed in recent years.
 

 
 
30

 
 The volume of uranium sold declined 5% in the three months and 13% in the six months ended June 30, 2010 compared to the corresponding periods in 2009. The average price declined 23% in the three-month period and 21% in the six-month period. Sales volumes reflect the timing of customer orders and average prices reflect the particular price mix of contracts under which uranium was sold.

Revenue from the U.S. government contracts segment increased $11.5 million in the three months and $24.9 million in the six months ended June 30, 2010, compared to the corresponding periods in 2009, primarily due to additional cold shutdown services performed at the Portsmouth GDP and fee recognition in the first quarter of 2010 on certain contracts.

Cost of Sales

Cost of sales for the LEU segment declined $33.3 million in the three months and $181.0 million in the six months ended June 30, 2010, compared to the corresponding periods in 2009, primarily due to lower SWU sales volumes.

Cost of sales per SWU was 1% lower in the three months ended June 30, 2010 compared to the corresponding period in 2009. Cost of sales per SWU was 4% higher in the six months ended June 30, 2010 compared to the corresponding period in 2009. Cost of sales and other long-term liabilities were reduced by $7.8 million in the second quarter of 2010 due to a change in estimate of our share of future demolition and severance costs for a power plant that was built to supply power to the Paducah GDP.  DOE is obligated to pay the owner/operator of the plant a portion of such costs (net of salvage credits including the value of land) and we are obligated under our lease agreement with DOE to fund such payments except for portions attributable to power consumed by DOE. In addition, there was a charge to cost of sales of $11.4 million in the corresponding period in 2009 for an increase in the estimated unit disposal cost of depleted uranium. Excluding the effects of these changes in estimates, cost of sales per SWU was 5% higher in the three months and 7% higher in the six months ended June 30, 2010 compared to the corresponding periods in 2009.

Under our monthly moving average cost method, new production and acquisition costs are averaged with the cost of inventories at the beginning of the period. An increase or decrease in production or purchase costs will have an effect on inventory costs and cost of sales over current and future periods. Cost of sales per SWU in 2010 is negatively impacted by a greater allocation of production costs to SWU inventory in recent quarters due to declines in uranium values. Production costs are allocated to uranium from underfeeding based on its net realizable value, and the remainder is allocated to SWU inventory costs.

In the three months ended June 30, 2010, production costs and volume were about the same as in the corresponding period in 2009. In the six months ended June 30, 2010, production costs increased $17.5 million (or 4%) and production volume increased 5% compared to the corresponding period in 2009. The cost of electric power increased by $20.8 million (or 7%) in the six-month period due to a 4% increase in the average cost per megawatt hour and a 3% increase in megawatt hours purchased. Enrichment capacity and related power purchases were temporarily reduced in the first quarter of 2009 due to an ice storm.

We purchase approximately 5.5 million SWU per year under the Russian Contract. Purchase costs for the SWU component of LEU under the Russian Contract declined $119.0 million in the six months ended June 30, 2010 compared to the corresponding period in 2009, reflecting decreased volume due to the timing of deliveries partially offset by an 8% increase in the market-based unit purchase cost.


 
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Cost of sales for the U.S. government contracts segment increased $12.0 million in the three months and $14.3 million in the six months ended June 30, 2010, compared to the corresponding periods in 2009, primarily due to additional cold shutdown services performed at the Portsmouth GDP.

Gross Profit

Gross profit declined $33.3 million in the three months ended June 30, 2010 compared to the corresponding period in 2009. Our gross profit margin was 9.6% in the three months ended June 30, 2010, compared to 15.0% in the corresponding period in 2009. Gross profit for the LEU segment declined $32.8 million in the three-month period due to lower gross profits for uranium sales on a per unit basis primarily as a result of the decline in the average selling price of uranium and lower volumes sold for both SWU and uranium.

Gross profit for the U.S. government contracts segment declined $0.5 million in the three months ended June 30, 2010, compared to the corresponding period in 2009.

Gross profit declined $48.8 million in the six months ended June 30, 2010 compared to the corresponding period in 2009. Our gross profit margin was 8.8% in the six months ended June 30, 2010, compared to 11.7% in the corresponding period in 2009. Gross profit for the LEU segment declined $59.4 million in the six-month period due to lower gross profits on a per unit basis primarily as a result of increases in the average cost of sales and lower volumes sold.

Gross profit for the U.S. government contracts segment increased $10.6 million in the six months ended June 30, 2010, compared to the corresponding period in 2009, reflecting fee recognition in the first quarter of 2010 on certain contracts and slightly higher contract service work performed at the Portsmouth and Paducah GDPs.


 
32

 

Non-Segment Information

The following table presents elements of the accompanying consolidated condensed statements of operations that are not categorized by segment (dollar amounts in millions):

   
Three Months Ended June 30,
             
   
2010
   
2009
   
Change
   
%
 
Gross profit
  $ 44.1     $ 77.4     $ (33.3 )     (43 )%
Advanced technology costs
    26.0       30.7       4.7       15 %
Selling, general and administrative
    14.3       16.6       2.3       14 %
Other (income)
    (10.3 )     -       10.3       -  
Operating income
    14.1       30.1       (16.0 )     (53 )%
Interest expense
    0.1       0.3       0.2       67 %
Interest (income)
    (0.1 )     (0.4 )     (0.3 )     (75 )%
Income before income taxes
    14.1       30.2       (16.1 )     (53 )%
Provision for income taxes
    6.9       12.9       6.0       47 %
Net income
  $ 7.2     $ 17.3     $ (10.1 )     (58 )%


   
Six Months Ended June 30,
             
   
2010
   
2009
   
Change
   
%
 
Gross profit
  $ 70.8     $ 119.6     $ (48.8 )     (41 )%
Advanced technology costs
    51.7       62.1       10.4       17 %
Selling, general and administrative
    29.4       31.1       1.7       5 %
Other (income)
    (20.0 )     -       20.0       -  
Operating income
    9.7       26.4       (16.7 )     (63 )%
Interest expense
    0.1       0.8       0.7       88 %
Interest (income)
    (0.2 )     (1.0 )     (0.8 )     (80 )%
Income before income taxes
    9.8       26.6       (16.8 )     (63 )%
Provision for income taxes
    12.3       11.4       (0.9 )     (8 )%
Net income (loss)
  $ (2.5 )   $ 15.2     $ (17.7 )     (116 )%

 
Advanced Technology Costs

Advanced technology costs declined $4.7 million in the three months and $10.4 million in the six months ended June 30, 2010, compared to the corresponding period in 2009, reflecting the demobilization of the American Centrifuge project in the latter half of 2009.

Advanced technology costs include expenses by NAC to develop its MAGNASTOR storage and transportation technology of $1.0 million in the six months ended June 30, 2010 and $0.2 million in the corresponding period of 2009.


 
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Selling, General and Administrative

Selling, general and administrative (“SG&A”) expenses declined $2.3 million in the three months and $1.7 million in the six months ended June 30, 2010 compared to the corresponding periods in 2009. Consulting expenses declined $2.5 million and $3.0 million in the three- and six-month periods, respectively. Stock-based compensation increased $0.4 million in the six-month period compared to the corresponding period in 2009.

Other (Income)

We reached a cooperative agreement with DOE in March 2010 to provide for pro-rata cost sharing support for continued funding of American Centrifuge activities with a total estimated cost of $90 million. DOE has made $45 million available by taking the disposal obligation for a specific quantity of depleted uranium from USEC, which released encumbered funds for investment in the American Centrifuge technology that USEC had otherwise committed to future depleted uranium disposition obligations. In July 2010, surety bonds and related deposits were reduced, and USEC received the $45 million in cash. In the six months ended June 30, 2010, USEC made qualifying American Centrifuge expenditures of $40.0 million. DOE’s contribution on a 50% pro rata basis, or $20.0 million, is recognized as other income in the six months ended June 30, 2010, including $10.3 million in the three months ended June 30, 2010.

Interest Expense and Interest Income

Interest expense declined $0.2 million in the three months and $0.7 million in the six months ended June 30, 2010, compared to the corresponding periods in 2009.  Interest capitalized for American Centrifuge increased from $11.4 million in the six months ended June 30, 2009 to $12.9 million in the six months ended June 30, 2010, or an increase of $1.5 million in interest that was not expensed as a period cost.

Interest income declined $0.3 million in the three months and $0.8 million in the six months ended June 30, 2010, compared to the corresponding periods in 2009, reflecting lower interest rates and average cash balances.

Provision for Income Taxes

The income tax provision was $6.9 million in the three months and $12.3 million in the six months ended June 30, 2010. The provision for the six-month period included a one-time charge of $6.5 million related to the change in tax treatment of Medicare Part D reimbursements as a result of the Patient Protection and Affordable Care Act as modified by the Reconciliation Act of 2010 (collectively referred to as “the Act”) signed into law at the end of March, 2010. The charge was due to a reduction in the Company’s deferred tax asset as a result of a change to the tax treatment of Medicare Part D reimbursements. Under the Act, the tax-deductible prescription drug costs will be reduced by the amount of the federal subsidy. Under Financial Accounting Standards Board guidance, the effect of changes in tax laws or rates on deferred tax assets and liabilities is reflected in the period that includes the enactment date, even though the changes may not be effective until future periods. The provision for the six-month period also included a $0.3 million benefit for the reversal of previously accrued amounts associated with liabilities for unrecognized benefits.

Excluding the impact of the Act and the reversal of previously accrued amounts associated with liabilities for unrecognized benefits, the overall effective tax rate for 2010 is expected to be slightly over 60%.  The overall effective tax rate for 2009 was 38%. The increase in the overall effective tax rate is primarily due to a decrease in the federal research credit that expired after 2009 and a decrease in expected 2010 income before income taxes compared to 2009. Although we are uncertain if or when the federal research credit will be extended, if it is extended in 2010, we would expect to record an income tax benefit for the federal research credit in an amount in excess of $2 million which would be expected to more closely align the 2010 and 2009 overall effective tax rates. Furthermore, the impact of state income taxes on the effective rate increased from 4% to 17% even though the amount of state tax expense is less than the prior year and the rate differential is due to a larger decrease in the overall provision for income taxes as compared to state income taxes from the prior year.
 

 
 
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Net Income

Net income declined $10.1 million (or $0.10 per share–basic and $0.07 per share–diluted) in the three months ended June 30, 2010, compared with the corresponding period in 2009, reflecting the after-tax effects of lower unit profits on uranium sales and lower volumes of SWU and uranium sold, partially offset by other income resulting from DOE’s contribution for continued ACP activities, and reduced advanced technology expenses.

Net income declined $17.7 million (or $0.16 per share–basic and $0.12 per share–diluted) in the six months ended June 30, 2010, compared with the corresponding period in 2009, reflecting the after-tax effects of lower unit profits and volumes sold in the LEU segment and the tax provision charge of $6.5 million in the first quarter of 2010 related to the effect of changes in tax laws on our deferred tax assets, partially offset by the after-tax effects of an increase in gross profits in the government contracts segment, other income resulting from DOE’s contribution for continued ACP activities, and reduced advanced technology expenses.

2010 Outlook Update

Based on the financial results of the first six months, our view of the anticipated spending pattern for the American Centrifuge project, and our outlook for results for the remainder of the year, we are providing the following earnings and cash flow guidance for 2010.

We expect revenue for 2010 of approximately $2 billion, with revenue from SWU sales expected to be roughly $1.5 billion. This assumes a 10% reduction in SWU sales volume compared to 2009, which is an improvement over our initial guidance, and a 2% increase in the average price billed to customers compared to 2009. Revenue from the sale of uranium is expected to be in a range of $225 to $250 million dollars. Uranium revenue can be volatile due to deferral of revenue recognition until the uranium sold and delivered is used as the uranium component of low enriched uranium. We continue to expect revenue from the U.S. government contracts segment at just under $300 million.

Electric power continues to be the major driver in our cost of sales. Electricity is expected to be about 70% of the cost of SWU production for 2010. We will buy less power in the second half of 2010 as our power agreement with the Tennessee Valley Authority reduces our purchases from 2000 megawatts to 1650 megawatts of electricity in the non-summer months, beginning September 1, 2010. In addition, market-based power purchased during the summer of 2010 was less expensive than forecast and the fuel cost adjustment thus far in 2010 in the TVA contract has also been lower than in our previous forecast. We produce approximately half of our SWU supply and purchase half from Russia under the Megatons to Megawatts program. We continue to expect that purchases from Russia will cost 8% more in 2010 compared to the previous year.

We use the monthly moving average inventory cost methodology and our cost of sales continues to reflect higher production and purchase costs rolling through our inventory. These costs have risen at a higher rate than our average price billed to customers, which has caused our gross profit margin to decline over the past three years. We currently anticipate our gross profit margin for 2010 will be in a range of 6% to 7%, which is an improvement over our initial guidance that is a result of slightly lower power costs.
 

 
 
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Spending on the American Centrifuge project that is expensed is expected to be approximately $110 million for the full year. A cost-sharing arrangement reached with the Department of Energy to offset a portion of our American Centrifuge demonstration and development activities is expected to provide $45 million under “other income.” Also below the gross profit line, we expect spending on selling, general and administrative to be approximately $60 million, in line with our previous guidance. In addition, our results will be affected by a one-time charge of $6.5 million taken in the first quarter of 2010 related to a change in tax treatment of Medicare Part D reimbursements as a result of health care legislation signed in March 2010.

We expect net income for the full year 2010 to be approximately breakeven, after the impact of expenses related to the American Centrifuge project.

We expect to build inventory in the second half of 2010 for future sales, which will have a negative effect on cash flow from operations. We anticipate cash flow from operations to swing from a positive in the first half of 2010 to cash used in operations in the full year of approximately $100 million. We also expect capital expenditures related to the American Centrifuge Plant to total approximately $100 million.

Our financial guidance is subject to a number of assumptions and uncertainties that could affect results either positively or negatively. Variations from our expectations could cause substantial differences between our guidance and ultimate results. Among the factors that could affect our results are:
 
·  
Changes to the electric power fuel cost adjustment from our current projection;
 
·  
The timing of recognition of previously deferred revenue, particularly related to the sale of uranium;
 
·  
Ability to expand the existing credit facility or otherwise raise capital for investment in the ACP;
 
·  
Changes to planned spending on the ACP;
 
·  
Movement and timing of customer orders;
 
·  
Changes to SWU and uranium price indicators, and changes in inflation that can affect the price of SWU billed to customers;
 
·  
Economics of underfeeding the production process at the Paducah GDP to make additional uranium sales; and
 
·  
Actions taken by governmental bodies or agencies.
 


 
36

 
Liquidity and Capital Resources

Key factors that can affect liquidity requirements for our existing operations include the timing and amount of customer sales and power purchases.

We believe our sales backlog in our LEU segment is a source of stability for our liquidity position. The source of SWU supply and the duration of contracts is evolving, however, to reflect our expected transition from GDP operations and the expiration of the Megatons to Megawatts program to a SWU supply dominated by American Centrifuge operations. As we work through the transition to ACP, sales sourced from ACP output which currently make up approximately one-third of our backlog are expected to make up a greater percentage of our sales backlog. Contracts for output from the ACP are longer in duration than our contracts for sales from current operations. Since 2006, we have included in our SWU contracts pricing indices that are intended to correlate with our sources for enrichment supply. Although sales prices under many of our SWU contracts are adjusted in part based on changes in market prices for SWU and electric power, the impact of market volatility in these indices is generally mitigated through the use of market price averages over time. Additionally, changes in the power price component of sales prices are intended to mitigate the effects of changes in our power costs.

Customer orders that are related to their requirements for enrichment may be delayed due to outages, changes in refueling schedules or delays in the initial startup of a reactor. In addition, in order to enhance our liquidity and manage our working capital in light of anticipated sales and inventory levels, we work periodically with customers regarding the timing of their orders, including advancement. As our customers have purchased more of their SWU supply under long-term contracts due to the transition to centrifuge-based supply and the uncertainty of supply during this transition, USEC has advanced orders rather than sell material into a spot market that has little near-term uncommitted demand. Most of these orders have been advanced within a calendar year. However, some orders have advanced from 2011 into 2010. Based on our outlook for demand, we expect to continue to work with customers to advance orders. The advancement of orders will have the effect of accelerating our receipt of cash from such advanced sales, although the amount of cash we receive from such sales may be reduced as a result of the terms mutually agreed with customers in connection with advancement. However, this could have the effect of reducing backlog and revenues in future years if we do not replace these orders with additional sales. Looking a few years out, we expect an increase in uncommitted demand that could provide the opportunity to make additional near-term sales in those years to supplement our backlog and thus decrease the need to advance orders in the future. Our ability to advance orders depends on the willingness of our customers to agree to advancement on terms that we find acceptable.

We purchase most of the electric power for the Paducah GDP under a power purchase agreement with TVA. The base price under the TVA power contract increases moderately based on a fixed, annual schedule, and is subject to a fuel cost adjustment provision to reflect changes in TVA’s fuel costs, purchased-power costs, and related costs. The impact of future fuel cost adjustments, which are substantially influenced by coal and purchased-power prices and hydroelectric power availability, is uncertain and our cost of power could fluctuate in the future above or below the agreed increases in the base energy price. We expect the fuel cost adjustment to continue to cause our purchase cost for power to remain above the base energy prices, but the impact is uncertain given volatile energy prices and electricity demand. A change of one percentage point in the average annual fuel cost adjustment would change our annual costs for electric power by an estimated $4 to $5.5 million.
 

 
 
37

 
We expect our cash, internally generated cash from our LEU and government services operations, and available borrowings under our revolving credit facility will provide sufficient cash to meet our cash needs for at least 12 months. Additional funds may be necessary sooner than we currently anticipate if we are not successful in our efforts to reduce spending and conserve cash or in the event of unanticipated payments to suppliers, increases in financial assurance, any shortfall in our estimated levels of operating cash flow or available borrowings under the revolving credit facility, or to meet other unanticipated expenses. However, we could further reduce our anticipated spending on the American Centrifuge project to an asset maintenance level, providing additional flexibility to address unanticipated cash requirements. As discussed below under "–Capital Structure and Financial Resources," our new credit facility can be expanded up to an aggregate of $350 million, subject to our obtaining additional commitments. Absent an increase in commitments or us raising additional capital in the near-term, our ability to spend on the American Centrifuge project is constrained by the restrictions in the credit facility to up to $115 million over the term of the facility. The $45 million made available by DOE pursuant to a cooperative agreement entered into with DOE in March 2010 for continued American Centrifuge activities is not restricted by the credit facility.

We need significant additional financing to complete construction of the American Centrifuge Plant and we have reduced the scope of project activities that were underway in 2009 until we have that financing.

On May 25, 2010, we announced that nuclear industry leaders Toshiba Corporation (“Toshiba”) and Babcock & Wilcox Investment Company, an affiliate of The Babcock & Wilcox Company (“B&W”), have signed a definitive agreement to make a $200 million investment in USEC. Under the terms of the agreement, Toshiba and B&W will each invest $100 million in USEC over three phases, each of which is subject to specific closing conditions.  Closing for the first phase of $75 million is expected in the third quarter of 2010. Conditions for the first phase include obtaining necessary regulatory approvals and concluding agreements related to a joint venture between USEC and B&W announced last year to manufacture USEC’s commercial AC100 centrifuge machines for the American Centrifuge Plant. For their investment, the companies would receive convertible preferred stock as well as warrants to purchase shares of common stock, which would be exercisable in the future. We intend to use the funds for general corporate purposes and for investment in the American Centrifuge Plant. The initial phase investment would help USEC continue deployment of the American Centrifuge Plant during 2010.

We do not believe public market financing for a large capital project deploying innovative technology such as American Centrifuge is available given current financial market conditions. We believe a loan guarantee under the DOE Loan Guarantee Program is critical to raising the capital needed to complete the American Centrifuge Plant. The DOE Loan Guarantee Program was created by the Energy Policy Act of 2005, and in December 2007, federal legislation authorized funding levels of up to $2 billion for advanced facilities for the front end of the nuclear fuel cycle, which includes uranium enrichment. DOE subsequently reallocated an additional $2 billion in loan guarantee authority to the front-end nuclear facilities loan guarantee solicitation. In July 2008, we applied to the DOE Loan Guarantee Program for $2 billion in U.S. government guaranteed debt financing for the American Centrifuge Plant. Areva, a company more than 90% owned by the French government, also applied for $2 billion of U.S. government guaranteed financing under this program for a proposed plant in the United States. DOE announced in May 2010 that it has provided Areva with a conditional commitment for a loan guarantee from the reallocated funding authority. DOE has said that $2 billion in funding for projects in the front end of the nuclear fuel cycle remains available but we have no assurance that a DOE Loan Guarantee will be made available to us.

In addition, to complete the project, we will require additional capital beyond the $2 billion DOE loan guarantee, proceeds from the announced investment from Toshiba and B&W, and internally generated cash flow, and in order to obtain a DOE loan guarantee, we will need to demonstrate the availability of that funding. We have initiated discussions with Japanese export credit agencies regarding financing a portion of the cost of building the plant. However, we have no assurance that they will be willing to provide the financing needed and on what terms.

 
 
38

 
Over the past several months, we have been working with our suppliers to update the scope, cost and schedule to build the ACP. Based on our work with suppliers to date, we estimate the cost to complete the American Centrifuge project from the point of closing on financing on a DOE loan guarantee will be approximately $2.8 billion. This estimate includes AC100 machine manufacturing and assembly, EPC and related balance-of-plant work, start-up and initial operations, and project management. We believe we have reduced significant risk in the American Centrifuge project since our initial baseline project budget in 2008 and our new cost estimate is based on a significantly more mature project scope.

The $2.8 billion estimate is a go-forward cost estimate and does not include spending from now until financial closing of a DOE loan guarantee, our $1.8 billion investment through June 30, 2010, overall project contingency, financing costs or financial assurance. Until potential financial closing of a DOE loan guarantee, we expect to continue to invest at a rate consistent with our anticipated spending indicated in our outlook for the remainder of 2010, while taking into account our anticipated cash from operations and other available liquidity. We are currently evaluating the appropriate level for overall project contingency taking into account the level of risk given the maturity of the project.  We are also evaluating the financing costs and financial assurance required for the project, which will be affected by, among other things, the overall financing plan for the project, the amount of the credit subsidy cost for any DOE loan guarantee, and the amount and sources of the additional financing we need to complete the project. We continue to work with suppliers to refine our estimates and seek reductions in the project cost.

We expect to fund continued spending through the closing on a DOE loan guarantee through the proceeds from the first two phases of the announced investment from Toshiba and B&W and through our cash from existing operations, including the $45 million of cost sharing provided by DOE under the cooperative agreement entered into in March 2010.

We are seeking to fund the additional $2.8 billion of costs to complete the American Centrifuge project and additional amounts that are needed to cover overall project contingency, financing costs and financial assurance through a combination of the $2 billion of DOE loan guarantee funding for which we have applied, the proceeds from the third phase of the investment from Toshiba and B&W of $75 million, additional funding from Japanese export credit agencies and/or other third parties, cash on hand and prospective cash from existing USEC operations, and prospective reinvested project cash. Many of these sources of capital are inter-related. For example, the third phase of investment from Toshiba and B&W is contingent upon the closing of a DOE loan guarantee and in order to close on a DOE loan guarantee we will need to demonstrate that all sources of capital needed to complete the project are available. We have no assurance that we will be successful in raising this capital.




 
39

 

The change in cash and cash equivalents from our consolidated condensed statements of cash flows are as follows on a summarized basis (in millions):
 
   
Six Months Ended June 30,
 
   
2010
   
2009
 
Net Cash Provided by (Used in) Operating Activities
  $ 173.2     $ 221.7  
Net Cash (Used in) Investing Activities
    (84.9 )     (296.0 )
Net Cash (Used in) Financing Activities
    (12.1 )     (96.5 )
Net Increase (Decrease) in Cash and Cash Equivalents
  $ 76.2     $ (170.8 )

Operating Activities

Payables under the Russian Contract increased $53.8 million in the six months ended June 30, 2010, due to the timing of deliveries, representing additions to inventory that did not require a cash outlay. Overall, inventories declined $44.3 million in the current period, representing a monetization of inventory built up in the prior year. In addition, the decrease in accounts receivable provided cash of $70.3 million.

Investing Activities

Capital expenditures were $87.9 million in the six months ended June 30, 2010, compared with $257.8 million in the corresponding period in 2009. Capital expenditures during these periods are principally associated with the American Centrifuge Plant, including prepayments made to suppliers for services not yet performed. Based on our agreement regarding a financial assurance surety bond, cash collateral deposits of $3.0 million were returned following the signing of our new revolving credit facility.

Financing Activities

Borrowings and repayments under the revolving credit facility totaled $38.2 million in the six months ended June 30, 2010. We plan to borrow on the revolving credit facility from time to time based on the timing of our working capital needs.

There were 115.1 million shares of common stock outstanding at June 30, 2010, compared with 113.4 million at December 31, 2009, an increase of 1.7 million shares (or 1.5%).

Working Capital
   
June 30,
   
December 31,
 
   
2010
   
2009
 
   
(millions)
 
Cash and cash equivalents                                                                       
  $ 207.5     $ 131.3  
Accounts receivable, net                                                                       
    121.1       191.4  
Inventories, net                                                                       
    787.5       831.8  
Other current assets and liabilities, net                                                                       
    (308.2 )     (267.5 )
Working capital                                                                    
  $ 807.9     $ 887.0  


 
40

 

Capital Structure and Financial Resources

At June 30, 2010, our long-term debt consisted of $575.0 million in 3.0% convertible senior notes due October 1, 2014. These notes are unsecured obligations and rank on a parity with all of our other unsecured and unsubordinated indebtedness. Financing costs of $14.3 million related to the convertible notes were deferred and are being amortized over the life of the debt. Unamortized financing costs were $9.1 million at June 30, 2010. Our debt to total capitalization ratio was 31% at June 30, 2010 and December 31, 2009.

On February 26, 2010, we replaced our $400.0 million revolving credit facility, scheduled to mature on August 18, 2010, with a new 27-month credit facility that matures May 31, 2012. The new syndicated bank credit facility initially provided up to $225.0 million in revolving credit commitments, including up to $100.0 million in letters of credit, secured by assets of USEC Inc. and our subsidiaries, excluding equity in, and assets of, subsidiaries created to carry out future commercial American Centrifuge activities. In July 2010, the revolving credit commitments were expanded to $250.0 million, including up to $125.0 million in letters of credit. Financing costs totaling $7.9 million to obtain the credit facility were deferred and are being amortized over the life of the facility. Unamortized financing costs were $6.7 million at June 30, 2010. The remaining balance of unamortized financing costs for the former credit facility of $0.5 million was expensed in the first quarter of 2010.

Utilization of our current revolving credit facility at June 30, 2010 and our former revolving credit facility at December 31, 2009 follows:
 
 
June 30,
December 31,
 
2010
2009
 
(millions)
Short-term borrowings                                                                    
$ -
 $  -
Letters of credit                                                                    
37.9
45.4
Available credit                                                                    
187.1
295.5


Borrowings under the credit facilities are subject to limitations based on established percentages of qualifying assets such as eligible accounts receivable and inventory. Available credit reflects the levels of qualifying assets at the end of the previous month less any borrowings or letters of credit. The revolving credit facilities contain various reserve provisions that reduce available borrowings under the facility periodically or restrict the use of borrowings. As of June 30, 2010 and December 31, 2009, we had met all of the reserve provision requirements by a large margin. As of June 30, 2010 and December 31, 2009, we were in compliance with all of the various customary operating and financial covenants included in each credit facility.

The new credit facility contains an accordion feature that allows us to expand the size of the facility up to an aggregate of $350.0 million in revolving credit commitments, subject to our obtaining additional commitments. In the event of such an increase in commitments, our letter of credit sublimit will also increase dollar for dollar up to a maximum of $150.0 million. To date we have secured an additional $25 million in lender commitments; however, we may not be successful in our efforts to secure additional lender commitments. The credit facility is available to finance working capital needs and general corporate purposes.
 

 
 
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Under the terms of the new credit facility, we are subject to restrictions on our ability to spend on the American Centrifuge project. Subject to certain limitations when Availability falls below certain thresholds, the credit facility permits us to spend up to $115 million for the American Centrifuge project over the term of the credit facility (the “ACP Spending Basket”). However, for every additional dollar of aggregate lender commitments that we obtain under the accordion feature described above, the ACP Spending Basket is increased by one dollar up to a maximum of $165.0 million. The credit facility does not restrict the investment of proceeds of grants and certain other financial accommodations (excluding proceeds from the issuance of debt or equity by the borrowers) that may be received from DOE or other third parties that are specifically designated for investment in the American Centrifuge project. Under this provision, the $45 million made available by DOE pursuant to a cooperative agreement entered into with DOE in March 2010 for continued American Centrifuge activities is not restricted by the credit facility or counted towards the ACP Spending Basket. In addition to the ACP Spending Basket, the new credit facility also permits the investment in the American Centrifuge project of net proceeds from additional capital raised by us (such as the announced investment from Toshiba and B&W), subject to certain provisions and certain limitations when Availability falls below certain thresholds. If we are unable to expand the size of the credit facility (and the ACP Spending Basket) through the accordion feature described above or to raise additional proceeds or capital that are permitted under the credit facility to be invested in the American Centrifuge project outside of the ACP Spending Basket, the size of the ACP Spending Basket would necessitate further reductions in spending on the American Centrifuge project. The investment from Toshiba and B&W would not be restricted or counted towards the ACP Spending Basket.

The credit facility includes provisions permitting transfer of assets related to the American Centrifuge project to enable USEC to separately finance the American Centrifuge project. USEC’s subsidiaries created to carry out future commercial American Centrifuge activities will not be guarantors under the credit facility, and their assets will not be pledged as collateral.

Outstanding borrowings under the new credit facility bear interest at a variable rate equal to, based on our election, either:
 
 
·
the sum of (1) the greater of a) the JPMorgan Chase Bank prime rate, b) the federal funds rate plus ½ of 1%, or c) 1-month LIBOR plus 1%  plus (2) a margin ranging from 2.25% to 2.75% based upon availability, or
 
 
·
the sum of LIBOR plus a margin ranging from 4.0% to 4.5% based upon availability.

As with the former facility, borrowings under the new credit facility are subject to limitations based on established percentages of qualifying assets pledged as collateral to the lenders, such as eligible accounts receivable and USEC-owned inventory. The new credit facility contains various reserve provisions that reduce available borrowings under the facility periodically or restrict the use of borrowings if certain requirements are not met. Additional details are provided in our 2009 Annual Report on Form 10-K.

As with the former facility, the new revolving credit facility includes various customary operating and financial covenants, including restrictions on the incurrence and prepayment of other indebtedness, granting of liens, sales of assets, making of investments, maintenance of a minimum amount of collateral, and payment of dividends or other distributions. In addition, the new revolving credit facility prohibits our payment of cash dividends or distributions to holders of our common stock. However, as described in Item 1A, “Risk Factors,” in our 2009 Annual Report on Form 10-K, the more restrictive nature of the covenants under the new credit facility, combined with the smaller size of the credit facility, makes compliance with the covenants under the credit facility more difficult should we encounter unanticipated adverse events. Complying with these covenants may also limit our flexibility to successfully execute our business strategy. Failure to satisfy the covenants would constitute an event of default under the credit facility.


 
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Default under, or failure to comply with the Russian Contract, the 2002 DOE-USEC Agreement (other than the milestones related to deployment of the American Centrifuge project), the lease of the GDPs or any other material contract or agreement with the DOE, or any exercise by DOE of its rights or remedies under the 2002 DOE-USEC Agreement, would also be considered to be an event of default under the new credit facility if it would reasonably be expected to result in a material adverse effect on (i) our business, assets, operations or condition (taken as a whole), (ii) our ability to perform any of our obligations under the revolving credit facility, (iii) the assets pledged as collateral under the credit facility; (iv) the rights or remedies under the credit facility of the lenders or J.P. Morgan as administrative agent; or (v) the lien or lien priority with respect to the collateral of J.P. Morgan as administrative agent.

Off-Balance Sheet Arrangements

Other than the letters of credit issued under the credit facility, and the surety bonds, contractual commitments and the license agreement with DOE relating to the American Centrifuge technology disclosed in our 2009 Annual Report, there were no material off-balance sheet arrangements, obligations, or other relationships at June 30, 2010 or December 31, 2009.

New Accounting Standards Not Yet Implemented

We have reviewed recently issued accounting standards that are not yet effective and have determined that none would have a material impact to USEC’s consolidated financial statements.



 
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Item 3. Quantitative and Qualitative Disclosures about Market Risk

At June 30, 2010, the balance sheet carrying amounts for cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, and payables under the Russian Contract approximate fair value because of the short-term nature of the instruments.

USEC has not entered into financial instruments for trading purposes. At June 30, 2010, our debt consisted of the 3.0% convertible senior notes with a balance sheet carrying value of $575.0 million. The fair value of the convertible notes, based on the trading price as of June 30, 2010, was $432.0 million.

Reference is made to additional information reported in management’s discussion and analysis of financial condition and results of operations included herein for quantitative and qualitative disclosures relating to:
 
 
commodity price risk for electric power requirements for the Paducah GDP (refer to “Overview – Cost of Sales” and “Results of Operations – Cost of Sales”), and
 
 
interest rate risk relating to any outstanding borrowings at variable interest rates under our revolving credit agreement (refer to “Liquidity and Capital Resources – Capital Structure and Financial Resources”).
 

Item 4. Controls and Procedures

Effectiveness of Our Disclosure Controls and Procedures
 
Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b) as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective at a reasonable assurance level.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended June 30, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


 
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USEC Inc.
PART II.  OTHER INFORMATION

Item 1.  Legal Proceedings

Reference is made to information regarding (a) the U.S. Department of Justice’s investigation of a possible claim relating to USEC’s contracts with the U.S. Department of Energy for the supply of cold standby and other services at the Portsmouth GDP and (b) settlement of a contractor’s claim, reported in note 11 to the consolidated condensed financial statements.

USEC is subject to various other legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business. While the outcome of these claims cannot be predicted with certainty, we do not believe that the outcome of any of these legal matters will have a material adverse effect on our results of operations or financial condition.

Item 1A.  Risk Factors

Investors should carefully consider the updated risk factors below and the other risk factors in Item 1A of our 2009 Annual Report on Form 10-K, in addition to the other information in this Quarterly Report on Form 10-Q.

We may not be successful in our efforts to address the concerns raised by DOE regarding our loan guarantee application and to obtain a loan guarantee from DOE, which would have a significant impact on the American Centrifuge project and our prospects.

We must raise capital to remobilize and to complete the ACP. We believe a loan guarantee under  the DOE Loan Guarantee Program is critical to raising capital needed to complete the American Centrifuge project. We believe that without a clear path forward to obtaining a DOE loan guarantee our prospects for raising capital for the ACP from other third parties are significantly diminished.  Therefore, we believe that a loan guarantee is critical to the future of the American Centrifuge project and our prospects. However, we cannot give any assurance that we will be selected or that we will receive a DOE loan guarantee at all, in the amount or the timeframe we seek or on terms that we find acceptable.

The DOE Loan Guarantee Program was created by the Energy Policy Act of 2005 and in December 2007, federal legislation authorized funding levels of up to $2 billion for advanced facilities for the front end of the nuclear fuel cycle, which includes uranium enrichment. We applied for $2 billion in funding in July 2008. On August 4, 2009, DOE and USEC announced an agreement to delay a final review of our loan guarantee application for the ACP. DOE raised several concerns with respect to our loan guarantee application, both financial and technical, that we will be required to address to DOE's satisfaction in order to obtain a loan guarantee. We have been working to address these issues. Our efforts to address DOE’s concerns focused on:
 
·  
Completing our review of our quality assurance program and implementing corrective actions as needed;
 
·  
Startup and operations of the AC100 lead cascade testing program in early 2010 using upgraded production machines to improve DOE’s confidence in the machines’ reliability through consistent operation;
 
·  
Maintaining and demonstrating centrifuge machine manufacturing capability; and
 
·  
Establishing a revised baseline cost and schedule for the project, taking into account the demobilization and remobilization costs and associated delays.