10-K 1 form10-k.htm ANNUAL REPORT form10-k.htm



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

FORM 10-K


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

For the fiscal year ended December 31, 2011

Commission file number 1-14287
 
USEC Inc.
Delaware
52-2107911
(State of incorporation)
(I.R.S. Employer Identification No.)
 
Two Democracy Center,  6903 Rockledge Drive, Bethesda, Maryland 20817
(301) 564-3200


Securities registered pursuant to Section 12(b) of the Act:

Title of each class
Name of each exchange on which registered
Common Stock, par value $.10 per share
Preferred Stock Purchase Rights
New York Stock Exchange
New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.Yes o.   No þ
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.Yes o.   No þ
 
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 þ   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 (§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 þ   No o.
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.      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.
 
Large accelerated filer  o                     Accelerated filer  þ                    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 Act).
Yes o.   No þ
 
The aggregate market value of Common Stock held by non-affiliates computed by reference to the price at which the Common Stock was last sold as reported on the New York Stock Exchange as of June 30, 2011, was $395.4 million. As of February 29, 2012, there were 122,153,992 shares of Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934 for the annual meeting of shareholders to be held on April 26, 2012, are incorporated by reference into Part III.
 
 



 
 

 

TABLE OF CONTENTS
   
Page
 
PART I
 
Items 1 and 2.
Business and Properties                                                                                            
4
Item 1A.
Risk Factors                                                                                            
30
Item 1B.
Unresolved Staff Comments                                                                                            
68
Item 3.
Legal Proceedings                                                                                            
68
Item 4.
Mine Safety Disclosures 
68
 
Executive Officers of the Company                                                                                            
69
 
PART II
 
Item 5.
Market for Registrant’s Common Equity; Related Stockholder
Matters and Issuer Purchases of Equity Securities
 
71
Item 6.
Selected Financial Data                                                                                            
75
Item 7.
Management’s Discussion and Analysis of Financial Condition and
Results of Operations                                                                                        
 
77
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
118
Item 8.
Consolidated Financial Statements and Supplementary Data
118
Item 9.
Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure                                                                                        
 
118
Item 9A.
Controls and Procedures                                                                                            
118
Item 9B.
Other Information                                                                                            
119
 
PART III
 
Item 10.
Directors, Executive Officers and Corporate Governance                                                                                            
120
Item 11.
Executive Compensation                                                                                            
120
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
120
Item 13.
Certain Relationships and Related Transactions, and Director Independence
120
Item 14.
Principal Accounting Fees and Services                                                                                            
120
 
PART IV
 
Item 15.
Exhibits, Financial Statement Schedules                                                                                            
121
Signatures                                                                                                                   
122
Consolidated Financial Statements                                                                                                                   
124 – 174
Glossary                                                                                                                   
175
Exhibit Index                                                                                                                   
178
__________________


This annual report on Form 10-K, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7, contains “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934 – 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 ongoing transition of our business, including uncertainty regarding the continued operation of the Paducah gaseous diffusion plant beyond May 2012 and uncertainty regarding continued funding for the American Centrifuge project and the impact of decisions we may make in the near term on our business and prospects; the impact of the March 2011 earthquake and tsunami in Japan on the nuclear industry and on our business, results of operations and prospects;  the impact of excess supply in the market and the lack of uncommitted demand for low enriched uranium over the next 2-4 years; the potential impacts of a decision to cease enrichment operations at Paducah; the outcome of ongoing discussions with the U.S. Department of Energy (“DOE”) regarding the research, development and demonstration (“RD&D”) program, including uncertainty regarding the timing, amount and availability of funding for such RD&D program and the dependency of government funding on Congressional appropriations and the potential for us to make a decision at any time to further reduce spending and demobilize the project based on the timing and likelihood of an agreement with DOE and any government funding; the impact of any conditions that are placed on us or on the American Centrifuge project in connection with or as a condition to the RD&D program or other funding, including a restructuring of our role and investment in the project; limitations on our ability to provide any required cost sharing under the RD&D program; the ultimate success of efforts to obtain a DOE loan guarantee for the American Centrifuge project, including the ability through the RD&D program or otherwise to address the concerns raised by DOE with respect to the financial and project execution depth of the project, and the timing and terms thereof; the impact of actions we have taken or may take to reduce spending on the American Centrifuge project, including the potential loss of key suppliers and employees, and impacts to cost and schedule; the impact of delays in the American Centrifuge project and uncertainty regarding our ability to remobilize the project; the potential for DOE to seek to exercise its remedies under the June 2002 DOE-USEC agreement; risks related to the completion of the remaining two phases of the three-phased strategic investment by Toshiba Corporation (“Toshiba”) and Babcock & Wilcox Investment Company (“B&W”), including uncertainty regarding the potential participation of Toshiba and B&W in any potential project structure that may be required under the RD&D program, and the potential for immediate termination of the securities purchase agreement governing their investments;
 
 
 
2

 
 
 
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; our ability to extend, renew or replace our credit facility that matures on May 31, 2013 and the impact of a failure to timely renew on our ability to continue as a going concern; restrictions in our credit facility that may impact our operating and financial flexibility and spending on the American Centrifuge project; our ability to actively manage and enhance our liquidity and working capital and the potential adverse consequences of any actions taken on the long term value of our ongoing operations; uncertainty regarding the cost of electric power used at our gaseous diffusion plant; our dependence on deliveries of LEU from Russia under a commercial agreement (the “Russian Contract”) with a Russian government entity known as Techsnabexport (“TENEX”) and on a single production facility and the potential for us to cease commercial enrichment of uranium in the event of a decision to shut down Paducah enrichment operations; limitations on our ability to import the Russian LEU we buy under the new supply agreement into the United States and other countries; 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; movement and timing of customer orders; changes to, or termination of, our contracts with the U.S. government, risks related to delays in payment for our contract services work performed for DOE; changes in U.S. government priorities and the availability of government funding, including loan guarantees; our subsidiary NAC may not perform as expected; the impact of government regulation by DOE and the U.S. Nuclear Regulatory Commission; 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; risks related to the underfunding of our defined benefit pension plans and the impact of the potential requirement to accelerate the funding of these obligations on our liquidity; uncertainty regarding the continued capitalization of certain assets related to the American Centrifuge Plant and the impact of a potential impairment of these assets on our results of operations; the impact of potential changes in the ownership of our stock on our ability to realize the value of our deferred tax benefits; the timing of recognition of previously deferred revenue; and other risks and uncertainties discussed in this and our other filings with the Securities and Exchange Commission. 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 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 to reflect events or circumstances that may arise after the date of this annual report on Form 10-K except as required by law.

 
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Items 1 and 2.  Business and Properties

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;
 
 
• 
enrich uranium at the Paducah gaseous diffusion plant (“GDP”) that we lease from the U.S. Department of Energy (“DOE”);
 
 
• 
are the exclusive executive agent for the U.S. government under a nuclear nonproliferation program with Russia, known as Megatons to Megawatts;
 
 
• 
are working to deploy what we believe is the world’s most advanced uranium enrichment technology, known as the American Centrifuge;
 
 
• 
provide transportation and storage systems for spent nuclear fuel and provide nuclear and energy consulting services; and
 
 
• 
perform limited contract work for DOE and its contractors at the Paducah and Portsmouth sites.
 
Our business is in a state of significant transition. Managing this transition has been made more challenging by the events of 2011. In March 2011, an earthquake, tsunami and its aftermath caused irreparable damage to four reactors in Japan and subsequently resulted in more than 50 reactors in Japan and Germany being off-line at the start of 2012. The shutdown of these reactors has affected supply and demand for LEU over the next 2-4 years and this impact could grow more significant over time depending on the length and severity of delays or cancellations of deliveries. During 2011, we also experienced further delays in our efforts to finance a next generation uranium enrichment plant, the American Centrifuge project. As described below, we have significant decisions to make in 2012 regarding major aspects of our business.  We also must continue to manage events that occur that are outside of our control, including actions that may be taken by vendors, customers, creditors, and other third parties in response to our decisions or based on their view of our financial strength and future business prospects. Events that unfold in 2012 will define our business into the future. For a discussion of the potential risks and uncertainties facing our business, see Item 1A, Risk Factors.

During 2011 we completed the transition of our Portsmouth contract services business. In September 2011 we transferred facilities at the former Portsmouth gaseous diffusion plant that we were maintaining for DOE to the DOE decontamination and decommissioning (“D&D”) contractor for the site. This was work we had been doing since the Portsmouth GDP ceased enrichment in 2001 and represented the bulk of our contract services work. Going forward, revenue from this segment will be substantially lower and will be derived primarily from our wholly owned subsidiary, NAC International (“NAC”). We believe NAC is well positioned to continue to participate in the growing spent fuel market worldwide.

We expect to make an important decision regarding the continued operation of the Paducah GDP by May 2012. A decision to shut down Paducah would result in our ceasing, for at least a period of time, commercial enrichment of uranium. Although we are working hard to identify a way to keep this plant open, we do not currently believe the factors are in place to support continued operation. In particular, based on current market conditions, we do not see any significant uncommitted demand for LEU over the next two to four years. In order to continue to operate beyond May 2012, we will need a combination of additional demand for LEU, an agreement with DOE for programs such as enriching a portion of DOE’s depleted uranium (“tails”) stockpile, and an acceptable power supply arrangement to support the plant production needed to operate the plant in an economic manner. Based upon our assessment of current market conditions and discussions with utility customers, we do not believe there is sufficient uncommitted demand for LEU to support a Paducah extension even with an agreement with DOE for tails re-enrichment to absorb a significant portion of the plant production capacity. Therefore, at some point in the next 18 months we expect to cease commercial enrichment at the Paducah GDP but the facility may remain operational to meet other requirements. We have viewed continued Paducah operations as a bridge to our ultimate deployment of the American Centrifuge technology. A decision to shut down the Paducah GDP before we have established a definitive timeline for future deployment of the American Centrifuge Plant could significantly impact our competitive position. For a discussion of the potential implications of a decision to shut down Paducah operations and the risks of continued Paducah operations, see Item 1A, Risk Factors.

 
4

 
We are in a period of significant uncertainty regarding the American Centrifuge project.  We cannot continue to fund the project on our own and we are working to secure funding for a two-year cost-sharing research, development and demonstration (“RD&D”) program with DOE to enable us to continue spending and determine our ability to successfully deploy the American Centrifuge project. Under the cost-sharing arrangement, DOE’s total contribution would be capped at $300 million. In parallel, we are also making preparations for a potential demobilization of the project if DOE funding is not obtained for the RD&D program. We expect that any deployment will likely require restructuring of the project and our investment.
 
We are in the last two years of the 20-year contract implementing the Megatons to Megawatts program. In March 2011, we signed a commercial agreement with Russia that provides continued access to this important source of supply following the conclusion of the Megatons to Megawatts program. We have also agreed to conduct a feasibility study to explore the possible deployment of an enrichment plant in the United States employing Russian centrifuge technology.

USEC Inc. is organized under Delaware law. USEC was a U.S. government corporation until July 28, 1998, when the company completed an initial public offering of common stock. In connection with the privatization, the U.S. government transferred all of its interest in the business to USEC, with the exception of certain liabilities from prior operations of the U.S. government. However, our business continues to be highly dependent on the U.S. government. References to “USEC” or “we” include USEC Inc. and its wholly owned subsidiaries as well as the predecessor to USEC unless the context otherwise indicates. A glossary of certain terms used in our industry and herein is included in Part IV of this annual report.

Uranium and Enrichment

In its natural state, uranium is principally comprised of two isotopes: uranium-235 (“U235”) and uranium-238 (“U238”).  U238 is the more abundant isotope, but it is not readily fissionable in light water nuclear reactors.  U235 is fissile, but its concentration in natural uranium is only 0.711% by weight. Most commercial nuclear power reactors require LEU fuel with a U235 concentration greater than natural uranium and up to 5% by weight. Uranium enrichment is the process by which the concentration of U235 is increased to that level.

The following outlines the steps for converting natural uranium into LEU fuel, commonly known as the nuclear fuel cycle:

Mining and Milling – Natural, or unenriched, uranium is removed from the earth in the form of ore and then crushed and concentrated.
 
Conversion – Uranium concentrates (“U3O8”) are combined with fluorine gas to produce uranium hexafluoride (“UF6”), a solid at room temperature and a gas when heated. UF6 is shipped to an enrichment plant.
 
 
5

 
Enrichment – UF6 is enriched in a process that increases the concentration of the U235 isotope in the UF6 from its natural state of 0.711% up to 5%, which is usable as a fuel for light water commercial nuclear power reactors. Depleted uranium is a by-product of the uranium enrichment process. The standard measure of uranium enrichment is a separative work unit (“SWU”). A SWU represents the effort that is required to transform a given amount of natural uranium into two streams of uranium, one enriched in the U235 isotope and the other depleted in the U235 isotope.  SWUs are measured using a standard formula derived from the physics of uranium 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 deemed to be used in the production of LEU under this formula is referred to as its uranium component.
 
Fuel Fabrication – LEU is converted to uranium oxide and formed into small ceramic pellets by fabricators.  The pellets are loaded into metal tubes that form fuel assemblies, which are shipped to nuclear power plants.
 
Nuclear Power Plant – The fuel assemblies are loaded into nuclear reactors to create energy from a controlled chain reaction. Nuclear power plants generate approximately 20% of U.S. electricity and 14% of the world’s electricity.
 
Spent Fuel Storage – After the nuclear fuel has been in a reactor for several years, its efficiency is reduced and the assembly is removed from the reactor’s core. The spent fuel is warm and radioactive and is kept in a deep pool of water for several years. Many utilities have elected to then move the spent fuel into steel or concrete and steel casks for interim storage.
 
Consumers – Businesses and homeowners rely on the steady, baseload electricity supplied by nuclear power and value its clean air qualities.
 
 
We currently 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 the other half of our LEU supply from Russia under a contract (“the Russian Contract”), whereby we purchase the SWU component of LEU derived from dismantled nuclear weapons from the former Soviet Union for use as fuel in commercial nuclear power plants.


 
6

 

Products and Services

Low Enriched 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 23% of revenue from our LEU segment in 2011. 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.

Contract Services

We perform and earn revenue from contract work through our subsidiary NAC and from contract work for DOE and DOE contractors at the Paducah GDP and the site of the former Portsmouth GDP in Piketon, Ohio.  NAC provides nuclear energy services and technologies, specializing in:

 
• 
design, fabrication and implementation of spent nuclear fuel technologies including the high capacity MAGNASTOR® system, 
•       nuclear materials transportation, and
•       nuclear fuel cycle consulting services.

Historically, the majority of revenues from our contract services segment resulted from work performed under contract with DOE to maintain and prepare the former Portsmouth GDP for decontamination and decommissioning (“D&D”). On September 30, 2011, our contracts for maintaining the Portsmouth facilities and performing services for DOE at Portsmouth expired and we completed the transition of facilities to a new DOE contractor responsible for the D&D of the Portsmouth site. Consequently, we ceased providing government contract services at Portsmouth on September 30, 2011. We will continue to provide some limited services to DOE and its contractors at our Paducah site and at the Portsmouth site related to facilities we continue to lease for the American Centrifuge Plant. Revenue from our contract services segment, however, will decrease significantly going forward compared to prior periods and will be comprised primarily of revenue generated by NAC.  


 
7

 

Revenue by Geographic Area, Major Customers and Segment Information

Revenue attributed to domestic and foreign customers, including customers in a foreign country representing 10% or more of total revenue (Japan in 2011 and 2009), follows (in millions):
 
   
Years Ended December 31,
 
   
2011
   
2010
   
2009
 
United States
  $ 1,322.7     $ 1,487.5     $ 1,402.2  
Foreign:
                       
Japan
    200.0       199.7       305.0  
Other
    149.1       348.2       329.6  
      349.1       547.9       634.6  
Total revenue
  $ 1,671.8     $ 2,035.4     $ 2,036.8  


In 2011, our 10 largest customers in the LEU segment represented 55% of total revenue and our three largest customers in the LEU segment represented 26% of total revenue. In 2011, 2010 and 2009, revenue from Exelon Corporation and in 2010, revenue from Entergy Corporation and from U.S. government contracts, each represented more than 10%, but less than 15%, of total revenue. No other customer represented more than 10% of total revenue in 2011, 2010 or 2009. Revenue by segment follows (in millions):

   
Years Ended December 31,
 
   
2011
   
2010
   
2009
 
LEU segment revenue                                                       
  $ 1,462.7     $ 1,757.5     $ 1,827.7  
Contract services segment revenue:
                       
DOE and DOE contractors                                                   
    139.9       242.7       183.0  
Other                                                   
    69.2       35.2       26.1  
      209.1       277.9       209.1  
Total revenue                                                       
  $ 1,671.8     $ 2,035.4     $ 2,036.8  


SWU and Uranium Backlog

Backlog is the estimated aggregate dollar amount of SWU and uranium sales that we expect to recognize as revenue in future periods under contracts with customers. At December 31, 2011, we had contracts with customers aggregating an estimated $5.8 billion, including $1.5 billion expected to be delivered in 2012 and $3.5 billion through 2015. Backlog was $6.7 billion at December 31, 2010 and $8.0 billion at December 31, 2009. Backlog is partially based on customers’ estimates of their fuel requirements and other assumptions including our estimates of selling prices, which are subject to change. Depending on the terms of specific contracts, prices may be adjusted based on published SWU or uranium market price indicators prevailing at the time of delivery. Other pricing elements may include escalation based on a general inflation index, a power price index, or a multiplier of our actual unit power cost. We utilize external composite forecasts of future market prices and inflation rates in our pricing estimates. For a discussion of uncertainty related to our backlog, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – LEU Segment – Revenue from Sales of SWU and Uranium.”


 
8

 

Gaseous Diffusion Process
 
Two existing technologies are currently used commercially to enrich uranium for nuclear power plants: gaseous diffusion and gas centrifuge. We currently use the older gaseous diffusion technology and are working to deploy gas centrifuge technology to replace our gaseous diffusion operations. See “Business and Properties – The American Centrifuge Plant.”
 
The uranium enrichment process separates the lighter U235 isotope from the heavier U238 isotope. The fundamental building block of the gaseous diffusion enrichment process is known as a stage, consisting of a compressor, a converter, a control valve and associated piping. Compressors driven by large electric motors are used to circulate the process gas and maintain flow. Converters contain porous tubes known as a barrier through which process gas is diffused. Stages are grouped together in series to form an operating unit called a cell. A cell is the smallest group of stages that can be removed from service for maintenance. Gaseous diffusion plants are designed so that cells can be taken off line with little or no interruption in the process.
 
The process begins with the heating of solid UF6 to form a gas that is forced through the barrier. Because U235  is lighter than U238, it moves through the barrier more easily. As the gas moves, the two isotopes are separated, increasing the U235 concentration and decreasing the concentration of U238  in the finished product. The gaseous diffusion process requires significant amounts of electric power to push uranium through the barrier.
 
Paducah GDP
 
We operate the Paducah GDP located in Paducah, Kentucky. The Paducah GDP includes four process buildings and is one of the largest industrial facilities in the world. The process buildings have a total floor area of 150 acres, and the site covers 750 acres. We estimate that the maximum capacity of the existing equipment is about 8 million SWU per year. In 2011, we produced more than 5 million SWU at the Paducah GDP for both LEU production and underfeeding uranium, as described below under “Raw Materials—Uranium.” The Paducah GDP has been certified by the U.S. Nuclear Regulatory Commission (“NRC”) to produce LEU up to an assay of 5.5% U235.

We lease the Paducah GDP from DOE. The lease covers the buildings and facilities relating to gaseous diffusion activities. Major provisions of the lease follow:
 
 
 • 
except as provided in the 2002 DOE-USEC Agreement (described under “Business and Properties – 2002 DOE-USEC Agreement and Related Agreements with DOE”), we have the right to renew the lease indefinitely in six-year increments and can adjust the property under lease to meet our changing requirements. The current lease term expires in 2016.  Under the terms of the lease, we can terminate the lease prior to expiration upon two year’s prior notice. We can also de-lease portions of the property under lease upon 60 days prior notice with DOE’s consent, which cannot be unreasonably withheld;
 
 • 
we may leave the property in an “as is” condition at termination of the lease, but must remove wastes we generate and must place the plant in a safe shutdown condition;
 
 • 
the U.S. government is responsible for environmental liabilities associated with plant operations prior to July 28, 1998;
 
 • 
DOE is responsible for the costs of decontamination and decommissioning of the plant;
 
 • 
title to capital improvements not removed by us will transfer to DOE at the end of the lease term, and if we elect to remove any capital improvements, we are required to pay any increases in DOE’s decontamination and decommissioning costs that are a result of our removing the capital improvements;
 
 • 
DOE must indemnify us for costs and expenses related to claims asserted against us or incurred by us arising out of the U.S. government’s operation, occupation, or use of the plant prior to July 28, 1998; and
 
 • 
DOE must indemnify us against claims for public liability (as defined in the Atomic Energy Act of 1954, as amended) from a nuclear incident or precautionary evacuation in connection with activities under the lease. Under the Price-Anderson Act, DOE’s financial obligations under the indemnity are capped at approximately $12 billion for each nuclear incident or precautionary evacuation occurring inside the United States to which the indemnity applies.
 
There is also a stand-alone amendment to the GDP facility lease for our long-term use of facilities at the Portsmouth site for the American Centrifuge Plant. Further details are provided in “Business and Properties – The American Centrifuge Plant.”
 
 
9

 
Raw Materials
 
Electric Power
 
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. In 2011, the power load at the Paducah GDP averaged 1,376 megawatts. We purchase most of the electric power for the Paducah GDP from Tennessee Valley Authority (“TVA”) under a power purchase agreement that expires May 31, 2012. The base price under the TVA power contract increased moderately during the term of the contract 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 imposed an average increase over base contract prices of about 12% in 2011, 10% in 2010, and 6% in 2009. The average fuel cost adjustment in 2011 was affected by TVA’s temporary power generating capacity losses during April and May, which were caused by severe tornado and thunderstorm damage, necessitating the purchase of significant volumes of higher cost replacement power. 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. We expect the fuel cost adjustment to continue to cause our purchase cost to remain above base contract prices for the remainder of the power contract through May 2012.

The monthly quantities of power purchased by USEC under the TVA power contract are fixed. Under the terms of the agreement, beginning September 1, 2010, we began to buy 1,650 megawatts instead of the 2,000 megawatts we had been purchasing in non-summer months since 2007. This reduction was included in the contract to provide a transition for the TVA power system for the end of the power contract in 2012. In addition, as a result of flood conditions near the Paducah plant, we coordinated with TVA to ramp down power purchases in 2011 to summer operation levels earlier than planned. Some of this power that was deferred in 2011 due to the flood conditions was purchased by us as supplemental power in February 2012. In the summer months (June – August), we supplemented the 300 megawatts we buy under the TVA contract with additional power purchased at market-based prices.

As discussed under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as part of our transition planning, we are evaluating possible sources of power for delivery after May 31, 2012.  We have been in discussions with TVA and potential alternate sources of electricity. However, we have not been willing to commit to any power purchases until we believe the plant economics can support a decision to extend Paducah commercial enrichment operations. Without extended operations, we would require significantly less power as we gradually transition to a level where we would maintain the facility at a non-production electricity load that is 2% to 3% of our current power purchase.

We are required to provide financial assurance to support our payment obligations to TVA. These include a letter of credit and weekly prepayments based on TVA’s estimate of the price and our usage of power.
 

 
 
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Uranium
 
Uranium is a naturally occurring element and is mined from deposits located in Canada, Australia and other countries. According to the World Nuclear Association, there are adequate measured resources of uranium to fuel nuclear power at current usage rates for at least 80 years. In 2011, the Paducah GDP used the equivalent of approximately 7 million kilograms of uranium in the production of LEU.
 
Mined uranium ore is crushed and concentrated and sent to a uranium conversion facility where it is converted to UF6, a form suitable for uranium enrichment. Two commercial uranium converters in North America, Cameco Corporation and ConverDyn, deliver and hold title to uranium at the Paducah GDP.
 
Utility customers provide uranium to us as part of their enrichment contracts or purchase the uranium required to produce LEU from us. Customers who provide uranium to us generally do so by acquiring title to uranium from Cameco, ConverDyn and other suppliers at the Paducah GDP. At December 31, 2011, we held uranium to which title was held by customers and suppliers with a value of $2.9 billion based on published price indicators. The uranium is fungible and commingled with our uranium inventory. 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 we take title to the uranium.
 
The quantity of uranium used in the production of LEU is to a certain extent interchangeable with the amount of SWU required to enrich the uranium. Underfeeding is a mode of operation that uses or feeds less uranium. Underfeeding supplements our supply of 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. Underfeeding the enrichment process provides us with our primary source for uranium that we sell.  

Coolant

The Paducah GDP uses Freon as the primary process coolant. The production of Freon in the United States was terminated in 1995 and Freon is no longer commercially available. We estimate that our current supply of Freon would be sufficient to support at least 10 years of continued operations at current use rates.

GDP Equipment
 
GDP equipment components (such as compressors, coolers, motors and valves) requiring maintenance are removed from service and repaired or rebuilt on site. Common industrial components, such as the breakers, condensers and transformers in the electrical system, are procured as needed. Some components and systems are no longer produced, and spare parts may not be readily available. In these situations, replacement components or systems are identified, tested, and procured from existing commercial sources, or the plants’ technical and fabrication capabilities are used to design and build replacements. Spare parts were also salvaged as part of cleanup efforts at the Portsmouth site for use in the Paducah GDP.


 
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Equipment utilization at the Paducah GDP averaged 96% in 2011 compared to 97% in 2010. Equipment utilization is based on a measure of cells in operation. The utilization of equipment is highly dependent on power availability and costs. We reduce equipment utilization and the related power load in the summer months when the cost of electric power is high. Equipment utilization is also affected by repairs and maintenance activities. In 2011, we reduced equipment utilization to summer operation levels earlier than planned due to Ohio River flooding and its impact on our power suppliers.
 
Russian Contract (“Megatons to Megawatts”)
 
We are the U.S. government’s exclusive executive agent (“Executive Agent”) in connection with a government-to-government nonproliferation agreement between the United States and the Russian Federation. Under the agreement, we have been designated by the U.S. government to order LEU derived from dismantled Soviet nuclear weapons. In January 1994, USEC signed a commercial agreement (“Russian Contract”) with a Russian government entity known as OAO Techsnabexport (“TENEX”), to implement the program. We expect the Russian Contract to be completed by the end of 2013. Purchases under the Russian Contract constitute approximately one-half of our supply mix. Over the life of the Russian Contract, we expect to purchase a total of 92 million SWU contained in LEU derived from 500 metric tons of highly enriched uranium, the equivalent of about 20,000 nuclear warheads. Refer to “Russian Supply Agreement” below regarding access to Russian LEU after the Megatons to Megawatts program concludes.

Prices under the Russian Contract are determined using a discount from an index of published 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 pricing and minimize the disruptive effect of short-term market price swings. The price per SWU under the Russian Contract for 2012 is 2% higher compared to 2011, and in 2011 was 3% higher compared to 2010.

 Under the Russian Contract, we are obligated to provide to TENEX an amount of uranium equivalent to the uranium component of LEU delivered to us by TENEX, totaling about 9 million kilograms per year. We credit the uranium to an account at the Paducah GDP maintained on behalf of TENEX. TENEX holds the uranium or sells or otherwise exchanges this uranium in transactions with other suppliers or utility customers. From time to time, TENEX may take physical delivery of uranium supplied by a uranium converter that would otherwise deliver such uranium to us. Under these arrangements, the converter provides uranium to TENEX for shipment back to Russia, and the converter receives an equivalent amount of uranium in its account at the Paducah GDP.

Under the terms of a 1997 memorandum of agreement between USEC and the U.S. government, we can be terminated, or resign, as the U.S. Executive Agent, or one or more additional executive agents may be named. Any new executive agent could represent a significant new competitor. However, under the 1997 memorandum of agreement, we have the right and obligation to pay for and take delivery of LEU that is to be delivered in the year of the date of termination and in the following year if USEC and TENEX have agreed upon a price and quantity.

 
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Russian Supply Agreement

On March 23, 2011, USEC signed an agreement with TENEX for the 10-year supply of Russian LEU, which became effective in December 2011. Unlike the Megatons to Megawatts program, the quantities supplied under the new agreement will come from Russia’s commercial enrichment activities rather than from downblending of excess Russian weapons material. Under the terms of the new agreement, the supply of LEU to USEC will begin in 2013 and increase until it reaches a level in 2015 that includes a quantity of SWU equal to approximately one-half the level currently supplied by TENEX to USEC under the Megatons to Megawatts program. Beginning in 2015, TENEX and USEC also may mutually agree to increase the purchases and sales of SWU by certain additional optional quantities of SWU up to an amount equal to the amount USEC now purchases each year under the Megatons to Megawatts program. Deliveries under the new supply agreement are expected to continue through 2022.  The pricing terms for SWU under the agreement are based on a mix of market-related price points and other factors. Similar to the Megatons to Megawatts program, USEC will purchase the SWU component of the LEU and deliver natural uranium to TENEX for the LEU’s uranium component.

The LEU that we obtain from TENEX under the new agreement will be subject to quotas and other restrictions applicable to commercial Russian LEU that do not apply to LEU supplied to us under the Megatons to Megawatts program. Refer to “Competition and Foreign Trade – Limitations on Imports of LEU from Russia.”

2002 DOE-USEC Agreement and Related Agreements with DOE

On June 17, 2002, USEC and DOE signed an agreement in which both parties made long-term commitments directed at resolving issues related to the stability and security of the domestic uranium enrichment industry (such agreement, as amended, the “2002 DOE-USEC Agreement”). We and DOE have entered into subsequent agreements relating to these commitments and have amended the 2002 DOE-USEC Agreement, most recently in February 2011. The following is a summary of material provisions and an update of activities under the 2002 DOE-USEC Agreement and related agreements:

Advanced Enrichment Technology
 
The 2002 DOE-USEC Agreement provides that we will begin operation of an enrichment facility using advanced enrichment technology in accordance with certain milestones. A discussion of our American Centrifuge uranium enrichment technology and those milestones is included under the caption “Business and Properties—The American Centrifuge Plant —Project Milestones under the 2002 DOE-USEC Agreement.”
 
Domestic Enrichment Facilities
 
Under the 2002 DOE-USEC Agreement, we agreed to operate the Paducah GDP at a production rate at or above 3.5 million SWU per year. In 2011, we produced more than 5 million SWU for both LEU production and underfeeding uranium. The Paducah GDP operates most efficiently in the range of 5 to 6 million SWU per year. Operating the Paducah GDP at levels below 5 million SWU would have a negative impact on plant economics. Under the 2002 DOE-USEC Agreement, production at Paducah may not be reduced below a minimum of 3.5 million SWU per year until six months before we have completed an enrichment facility using advanced technology such as centrifuge technology capable of producing LEU containing 3.5 million SWU per year. If the Paducah GDP is operated at less than the specified 3.5 million SWU in any given fiscal year, we may cure the defect by increasing LEU production to the 3.5 million SWU level in the next fiscal year. We may only use the right to cure once in each six-year lease period. If we do not maintain the requisite level of operations at the Paducah GDP and have not cured the deficiency, we are required to waive our exclusive rights to lease the Paducah GDP and portions of the Portsmouth site. Under the 2002 DOE-USEC Agreement, if we believe the enrichment market is otherwise stable and viable but that a significant change has taken place in the domestic or international enrichment markets such that continued operation of the Paducah GDP at or above the 3.5 million SWU per year level is commercially impractical, we have the right under the 2002 DOE-USEC Agreement to present our position to DOE. However, we have no assurance that DOE will agree with our position or agree to amend the 2002 DOE-USEC Agreement.


 
13

 

In addition to the requirements to produce LEU containing 3.5 million SWU per year described above, if we “cease operations” at the Paducah GDP or lose our certification from the NRC, DOE may take actions it deems necessary to transition operation of the plant from us to ensure the continuity of domestic enrichment operations and the fulfillment of supply contracts. We will be deemed to have “ceased operations” at the Paducah GDP if we (1) make a determination to cease enrichment at the plant, (2) produce less than 1 million SWU per year or (3) fail to meet specific maintenance and operational criteria established in the 2002 DOE-USEC Agreement. As part of transitioning operations under the 2002 DOE-USEC Agreement, (1) DOE may designate an alternate operator, (2) DOE may terminate all or any portion of leasehold and/or require return of leased facilities in good and operable condition, (3) we would be obligated to waive our right to lease the GDP, and (4) we would be obligated to not oppose legislation sought by DOE to permit implementation of DOE’s rights under the 2002 DOE-USEC Agreement.

Megatons to Megawatts
 
 The 2002 DOE-USEC Agreement provides that DOE will recommend against removal, in whole or in part, of us as the U.S. Executive Agent under the government-to-government nonproliferation agreement between the United States and the Russian Federation as long as we order the specified amount of LEU from TENEX and comply with our obligations under the 2002 DOE-USEC Agreement and the Russian Contract. Remedies provided to DOE under the 2002 DOE-USEC Agreement related to USEC’s role under the Megatons to Megawatts program do not apply to the new commercial Russian Supply Agreement.

Other
 
The 2002 DOE-USEC Agreement contains force majeure provisions that excuse our failure to perform under the agreement if such failure arises from causes beyond our control and without our fault or negligence.

The American Centrifuge Plant
 
We are working to deploy the American Centrifuge technology, a highly efficient uranium enrichment gas centrifuge technology. The American Centrifuge technology requires 95% less electricity to produce low enriched uranium on a per SWU unit basis than our existing gaseous diffusion technology. The deployment of this technology would significantly reduce both our production costs and our exposure to price volatility for electricity, the largest production cost component of our current gaseous diffusion technology. We are working to deploy this technology in the American Centrifuge Plant (“ACP”) in Piketon, Ohio. This new facility would modernize our production capacity and position us to be competitive in the long term.

As of December 31, 2011, we have invested approximately $2.2 billion in the American Centrifuge program, which includes $1.0 billion charged to expense over several years for technology development and demonstration. We began construction on the ACP in May 2007 after being issued a construction and operating license by the NRC. We have operated centrifuges as part of our lead cascade test program for more than 100 machine years since August 2007. This experience gives us confidence in the performance of our technology, and provides operating data and expertise for future commercial deployment. The American Centrifuge technology is a disciplined evolution of classified U.S. centrifuge technology originally developed by DOE and successfully demonstrated during the 1980s. DOE invested $3 billion over 10 years to develop the centrifuge technology, built approximately 1,500 machines and accumulated more than 10 million machine hours of run time. USEC has improved the DOE technology through advanced materials, updated electronics and design enhancements based on highly advanced computer modeling capabilities.

 
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We need significant additional financing in order to complete the ACP.  We applied for a $2 billion loan guarantee under the DOE Loan Guarantee Program in July 2008 and our efforts since then and throughout most of 2011 focused on obtaining a conditional commitment for a loan guarantee so that we could move forward with the commercialization of the American Centrifuge technology.  However, DOE raised concerns regarding the financial and project execution depth of the American Centrifuge project that we were not able to overcome to DOE’s satisfaction during 2011.  Instead of moving forward with a conditional commitment for a loan guarantee, in the fall of 2011, DOE proposed a two-year cost share research, development and demonstration (“RD&D”) program for the project to enhance the technical and financial readiness of the centrifuge technology for commercialization. Under the cost-sharing arrangement, DOE’s total contribution would be capped at $300 million. DOE indicated that our application for a DOE loan guarantee would remain pending during the RD&D program but has given us no assurance that a successful RD&D program will result in a loan guarantee.

RD&D Program

The RD&D program involves manufacturing and operating additional production-design machines so that key systems can be tested as they would actually operate at the scale necessary for full commercialization. The proposed program scope is to construct and operate at least one complete demonstration cascade of 120 commercial centrifuge machines. As initially planned, the American Centrifuge Plant would include 96 such cascades, each containing 120 machines. During late 2011 and early 2012, our American Centrifuge project efforts shifted to focus on the planning and implementation of the RD&D program and efforts that are currently underway in Piketon, Ohio and Oak Ridge, Tennessee are based upon the proposed RD&D program scope.  We are currently building machines and parts that would be installed in the demonstration cascade that would be built and operated as part of the RD&D program.

The RD&D program is expected to be a two-year program implemented through a cost sharing arrangement whereby DOE would initially provide up to 80% of the costs of the program. DOE has proposed funding one half of its $300 million contribution in government fiscal year 2012, with the remainder in government fiscal year 2013. We have been working with DOE and Congress to secure DOE funding for the RD&D program. However, DOE’s share of funding for the program has not yet been provided and the source for such funding is uncertain. The current political environment in Washington has significantly slowed the legislative process. The two houses of Congress are each held by a different political party and in an election year the necessary bipartisan support will be difficult to achieve.

Due to constraints on our ability to continue to spend on the project, on March 13, 2012, we entered into an agreement with DOE that enables us to provide interim funding of $44 million. This funding was provided by DOE acquiring from us U.S. origin LEU in exchange for the transfer of quantities of our depleted uranium (“tails”) to DOE. This enables us to release encumbered funds of approximately $44 million that were previously provided as financial assurance for the disposition of such depleted uranium. We expect that this LEU acquired by DOE could be returned to us as part of DOE’s cost share under the RD&D program if government funding is provided for the RD&D program in government fiscal year 2012.  However, if the RD&D program does not move forward, the LEU would not be returned to us, and DOE would not reimburse these ACP costs. The $44 million of funding is expected to enable us to fund the ACP program activities through the end of March 2012. In order to stay within the $44 million, we have further reduced our spending from the spending reductions implemented in October 2011.

 
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Continuation of the RD&D program beyond the end of March 2012 will require additional funding. As described above, we are working with DOE and Congress to provide funding for government fiscal year 2012.  Even if DOE funding were provided for the RD&D program for government fiscal year 2012, funding for the RD&D program beyond government fiscal year 2012 would be subject to future appropriations. President Obama’s fiscal year 2013 budget proposal includes $150 million for the RD&D program. However, we have no assurance that the President’s budget will be passed in its current form or at all. We have no assurance that we will be able to reach agreement with DOE regarding any phase of the RD&D program or that any funding will be provided or that the LEU will be returned. We also have no assurance that we will ultimately be able to obtain a loan guarantee and the timing thereof. Any agreement for the RD&D program would likely require restructuring of the project and of our investment. In light of our inability to reach a conditional commitment for a DOE loan guarantee to date, and given the significant uncertainty surrounding our prospects for finalizing an agreement and obtaining funding from DOE for an RD&D program and the timing thereof, we continue to evaluate our options concerning the American Centrifuge project. If we are unable to secure funding for the RD&D program beyond March 31, 2012, we expect to begin demobilizing the project. Our evaluation of these options is ongoing and a decision could be made at any time.

Potential Project Demobilization

In light of uncertainty regarding our prospects for funding for the RD&D program, planning is continuing regarding a potential demobilization of the project.  The initial actions that could be taken as part of a demobilization include:

·  
shutdown of the operation of centrifuge machines in the lead cascade in Piketon, Ohio as well as machines operating in test facilities in Oak Ridge, Tennessee;
 
·  
preparation for decontamination and decommissioning of lead cascade and Oak Ridge operations;
 
·  
development of a transportation, consolidation and storage plan for classified material and information;
 
·  
layoffs of American Centrifuge employees not needed to carry out demobilization; and
 
·  
continued suspension of work by suppliers under their contracts and discussions with suppliers regarding demobilization planning.

On September 30, 2011, the Company sent Worker Adjustment and Retraining Notification (“WARN”) Act notices to all of the approximately 450 USEC American Centrifuge workers informing them of potential future layoffs and also suspended a number of contracts with suppliers and contractors involved in the American Centrifuge project and advised them that USEC may demobilize the project. An updated WARN Act notice was sent to these workers in November informing them that potential future layoffs could occur as early as January 2012. These WARN Act notices have now expired. In the event we demobilize the project, we may need to issue new notices under the WARN Act. We currently estimate that we could incur total employee related severance costs of approximately $15 million for all American Centrifuge workers in the event of a full demobilization of the project. In addition, we currently estimate ongoing contractual commitments at December 31, 2011 of approximately $38 million. This includes contractual termination penalties related to both prepayment and contractual commitment amounts of $17 million in connection with a demobilization.  Depending on the length of the demobilization period, we would also incur costs related to the execution of the demobilization of up to approximately $55 million in addition to the severance costs, contractual commitments, contractual termination penalties and other related costs described above. These costs of demobilization do not reflect any offsets for salvage or other recovery value of American Centrifuge project assets. Due to the classified nature of the American Centrifuge technology and the license that we have from the Nuclear Regulatory Commission, we must develop and execute a transportation, consolidation and storage plan for classified material and information. We must also develop and have approved a decontamination and decommissioning plan for the lead cascade and other nuclear operations. See below regarding “—Financial Assurance for Decontamination and Decommissioning.”

 
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Oak Ridge Workforce Reduction

The reduced project scope under the RD&D program does not support the full complement of centrifuge design and engineering workforce at Oak Ridge that was in place during 2011. In January 2012, we examined the needs of the RD&D program and the funding requirements to sustain the workforce at the existing level. Due to the limited level of funding available, we executed a reduction in force of 20 employees. A charge of approximately $0.6 million will be incurred in the first quarter of 2012 for one-time termination benefits consisting of severance payments and short-term health care coverage. Related cash expenditures are expected primarily in the first quarter of 2012.

Project Spending

Our spending on the American Centrifuge in 2011 was incrementally allocated as we continuously evaluated our spending plan and our path toward a DOE loan guarantee commitment or other funding for the project. Beginning in October 2011, we reduced our monthly spending on the American Centrifuge project by approximately 30% (as compared to the average monthly rate of spending in the prior months of 2011) and also suspended a number of contracts with suppliers and contractors involved in the American Centrifuge.

With the potential for cost sharing for the RD&D program and the agreement with DOE that enabled us to release encumbered funds of approximately $44 million, we are continuing spending on the American Centrifuge project at a reduced rate into the first quarter of 2012. This rate of spending is lower than the spending resulting from the reductions implemented in October 2011. Our spending on ACP beyond amounts already committed to date will be dependent on our expectations regarding the success and timing of any agreement with DOE to provide for continued funding under the RD&D program and the amount of anticipated DOE funding in a given government fiscal year.

Although we have been funding the RD&D program on our own, restrictions in our new credit facility will significantly limit our spending on the American Centrifuge project going forward. In particular, without an agreement for the RD&D program, our credit facility significantly restricts our spending on the project beyond May 2012 (except for spending needed to carry out a project demobilization). In addition, continued spending on the ACP remains subject to our available liquidity, funding under the RD&D program, our willingness to invest further in the project absent funding commitments to complete the project, our ability following the RD&D program to obtain a DOE loan guarantee and additional capital, other risks related to the deployment of the ACP, as described in further detail in Item 1A, Risk Factors.

Beginning with the start of the fourth quarter of 2011, all project costs incurred have been expensed, including interest expense that previously would have been capitalized. Our spending at the reduced levels relates primarily to development and maintenance activities rather than capital asset creation. We also expect to expense costs under the RD&D program as incurred. Capitalization of expenditures related to ACP has ceased until commercial plant deployment resumes.  If conditions change, including if the current path to commercial deployment were no longer probable or our anticipated role in the project were changed, we could expense up to the full amount of previously capitalized costs related to the ACP of up to $1.1 billion as early as the first quarter of 2012. Events that could impact our views as to the probability of deployment or our projections include a failure to successfully enter into an agreement with DOE to provide funding for the project as part of the RD&D program or an unfavorable determination in any phase of the RD&D program regarding the restructuring of the project.


 
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Project Cost and Schedule

We expect that if we move forward with the RD&D program, we will be reevaluating the approach to the commercial deployment of the technology, including the development of a comprehensive revised cost estimate and schedule for the commercial deployment. The RD&D program is expected to take approximately two years to complete and commercial deployment would not be expected to commence before it is completed.

Based on our previous cost estimate of $2.8 billion to complete the American Centrifuge project from the point of closing on financing, we continue to expect the funding needed to complete the project to be substantial. Our previous cost estimate was the basis of the update to our loan guarantee application submitted in July 2010. The estimate was a go-forward cost estimate and did not include our investment to date, spending from then until financial closing, overall project contingency, financing costs or financial assurance. There are significant carrying costs associated with the project and maintaining the manufacturing infrastructure. These costs could be substantial and, depending on the length of the RD&D program or any demobilization period, could threaten the overall economics of the project. In addition, continued delays in the project have made discussions with suppliers very challenging. We are not currently negotiating with suppliers regarding the transition to fixed cost or maximum cost contracts to complete the project and these efforts would have to be re-commenced in connection with any revised deployment plan that is developed during the RD&D program.

Any revised cost estimate and schedule for the project would depend on a large variety of factors, including how we ultimately deploy the project, the outcome of future discussions with suppliers, changes in commodity and other costs, the outcome of the RD&D program and the ability to develop and implement cost saving and value engineering actions. Further increases in the cost of the ACP would increase the amount of external capital we must raise and would adversely affect our ability to successfully finance and deploy the ACP. For a discussion of the uncertainties regarding financing for the American Centrifuge project, see Item 1A, Risk Factors.

Investment by Toshiba and B&W

On May 25, 2010, we announced that Toshiba Corporation (“Toshiba”) and Babcock & Wilcox Investment Company (“B&W”) signed a definitive agreement to make a $200 million investment over three phases upon the satisfaction at each phase of certain closing conditions. Under the terms of the agreement, Toshiba and B&W would invest equally in each of the phases in an aggregate amount of $100 million each. On September 2, 2010, the first closing of $75 million occurred. Toshiba and B&W purchased 75,000 shares of convertible preferred stock, and warrants to purchase 6.25 million shares of common stock at an exercise price of $7.50 per share, which will be exercisable in the future. However, the remaining two phases of the investment were conditioned upon, among other things, progress in our obtaining a loan guarantee from DOE and so no additional investment has been made to date. During 2011, we agreed several times with the investors through a standstill agreement not to exercise our respective rights to terminate the securities purchase agreement and we continue to have discussions with the investors regarding their investment. Currently, we and the investors (as to such investor’s obligations) have the right to terminate the securities purchase agreement. If the securities purchase agreement governing the Transactions is terminated, each of Toshiba and B&W must elect to either convert its shares of preferred stock into a new class of common stock (or a new class of preferred stock) or to sell its shares of preferred stock pursuant to an orderly sale arrangement. As a result of certain NYSE limitations on our issuance of common stock, depending on the share price at the time of termination, some of Toshiba and B&W's preferred stock may not be able to be converted or sold and would remain outstanding. We could be required to redeem such shares for cash or SWU, at our election, at August 31, 2012, which could harm our financial condition. However, our ability to redeem may be limited by Delaware law, and if not limited may result in mandatory prepayment of our credit facility.

Additional information about the transactions, including a copy of the securities purchase agreement and other agreements, can be found in the Current Reports on Form 8-K filed by us on May 25, 2010 and on September 2, 2010.  

 
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Lead Cascade Test Program
 
The lead cascade test program in Piketon, Ohio began operations in August 2007 and has accumulated over 100 machine years of runtime. Through the lead cascade test program, we demonstrate the performance of centrifuge machines, demonstrate the reliability of machine components, obtain data on machine-to-machine interactions, verify cascade performance models under a variety of operating conditions, and obtain operating experience for our plant operators and technicians. Data from this testing program has provided valuable assembly, operating and maintenance information, as well as operations experience for the American Centrifuge Plant staff. The initial lead cascade test program involving USEC-produced prototype machines was completed in early 2010. These centrifuge machines were expensed as constructed since we did not expect them to be used in a future commercial plant.

In parallel with the final operations of the prototype centrifuge machines, we began installing the first group of AC100 centrifuge machines. The AC100 series design has met the targeted performance goal of 350 SWU per machine, per year. Our strategic suppliers manufactured parts for the AC100 centrifuge machines, replicating on a commercial basis manufacturing that we previously self-performed in building our prototype centrifuge machines. Installation of these AC100 centrifuge machines further demonstrated the ability of our suppliers to build components, assemble the machines and successfully bring them into operation. These centrifuge machines operated successfully in a cascade configuration beginning in March 2010 and demonstrated the ability to produce the full range of commercial product assays required by our customers for low enriched uranium.

In order to keep our supplier base intact, we continued to manufacture AC100 centrifuge machines in 2011 which we used to replace the initial set of AC100 machines to optimize the use of the limited centrifuge machine positions available to us in the lead cascade test program. Costs related to the initial set of AC100 machines that were removed from the lead cascade totaling $127.1 million were expensed in the fourth quarter of 2011 since we determined that these machines are no longer compatible with the current commercial plant design and we do not expect them to be used in a future commercial plant.

In June 2011, several lead cascade machines failed during an extended period of off-normal operating conditions. The off-normal conditions occurred as a result of a power interruption caused by an electrical fault in the lead cascade support systems and compounding issues experienced during the efforts to restore power. In the second quarter of 2011, we expensed $9.6 million of costs related to the centrifuge machines damaged in the June event.  Since the June event, the centrifuges being operated in the lead cascade facility in Piketon, Ohio have not been operated on UF6 gas, and we have committed to the NRC not to reintroduce UF6 gas into these machines until the NRC has completed its review of the event. Beginning in the first quarter of 2012, we have been modifying the current set of AC100 machines in the lead cascade to install a safety enhancement in response to the June event.  Under the expected terms of the RD&D program, we would continue to install additional AC100 machines to the current set of machines to complete and operate a 120 machine commercial plant cascade configuration. We are also enhancing facility maintenance, operator training and procedures as corrective actions to the circumstances that resulted in the June event.
 
 

 
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Continued lead cascade operations will accomplish two of the primary objectives of the proposed RD&D program. The first objective is to demonstrate sufficient run time on the AC100 centrifuges to establish the high confidence level in cascade reliability required by DOE to support loan guarantee financing for the commercial plant. A second objective is to build out and demonstrate the full level of balance of plant system redundancy designed for the commercial plant, which was not available for lead cascade operations during the June event.

Manufacturing Infrastructure

We are working with our strategic suppliers to maintain the manufacturing infrastructure developed over the last several years. However, we are constrained by our reduced level of spending. The RD&D program would provide for the continued production of AC100 machines, which helps our suppliers gain additional cost experience and familiarity with the manufacturing process. Although we have delayed high-volume production of the AC100 machines, our strategic suppliers have demonstrated flexibility and initiative to keep their role in the project moving forward. However, we could face challenges with ensuring the ability and willingness of our strategic suppliers to continue at low rates of production for a prolonged period of time absent greater certainty on funding for the project and a definitive timeline for full remobilization.

As part of our effort to reduce or mitigate project risks, we established a joint company with Babcock & Wilcox Technical Services Group, Inc. for the manufacture and assembly of AC100 centrifuge machines. The joint company became effective May 1, 2011, and is known as American Centrifuge Manufacturing, LLC. It consolidates the authority and accountability for centrifuge machine manufacturing and assembly in one business unit which assumes contractual accountability over the family of centrifuge parts manufacturers.  With this consolidation, the entire manufacturing program can be managed centrally for cost efficiency, lean manufacturing, and application of consistent standards of high quality across the entire machine manufacturing base. In addition, certain key suppliers and sub-suppliers conducted production runs in their facilities for a period of time to successfully demonstrate production of machine components and assembly at a sustained production rate that we expect to reach during high-volume machine manufacturing. The production demonstration was also intended to provide suppliers with experience that would facilitate a transition to fixed-price contracts.

Construction of the American Centrifuge Plant

Most of the buildings required for the commercial plant were constructed in Piketon during the 1980s by DOE. These existing structures include a centrifuge assembly building, a uranium feed and withdrawal building, and two enrichment production buildings with space for approximately 11,500 centrifuges. We began renovating and building the ACP following receipt of a construction and operating license from the NRC in April 2007.

Construction of the physical plant includes various systems including electric, telecommunications, HVAC and water distribution. Other plant infrastructure that must be completed include the piping that enables UF6 gas to flow throughout the enrichment production facility, process systems to support the centrifuge machines and cascades, a distributed control system to monitor and control the enrichment processing equipment, and facilities to feed natural uranium into the process system and withdraw enriched uranium product. We demobilized most construction activities in August 2009.


 
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Project Milestones under the 2002 DOE-USEC Agreement
 
The 2002 DOE-USEC Agreement, as amended most recently in February 2011, provides that we will develop, demonstrate and deploy the American Centrifuge technology in accordance with 15 milestones as follows:
         
Milestones under
2002 DOE-USEC Agreement
  
 Milestone
Date
  
 Achievement
Date
   
 Begin refurbishment of K-1600 centrifuge testing facility in Oak Ridge, Tennessee
  
December 2002
 
December 2002
 Build and begin testing a centrifuge end cap
  
January 2003
 
January 2003
 Submit license application for Lead Cascade to NRC
  
April 2003
 
February 2003
 NRC dockets Lead Cascade application
  
June 2003
 
March 2003
 First rotor tube manufactured
  
November 2003
 
September 2003
 Centrifuge testing begins
  
January 2005
 
January 2005
 Submit license application for commercial plant to NRC
  
March 2005
 
August 2004
 NRC dockets commercial plant application
  
May 2005
 
October 2004
 Begin Lead Cascade centrifuge manufacturing
  
June 2005
 
April 2005
 Begin commercial plant construction and refurbishment
  
June 2007
 
May 2007
 Lead Cascade operational and generating product assay in a range usable by commercial nuclear power plants
  
October 2007
 
October 2007
 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
  
November 2011
   
 Begin commercial American Centrifuge Plant operations
  
May 2014
   
 Commercial American Centrifuge Plant annual capacity at 1 million SWU per year
  
August 2015
   
 Commercial American Centrifuge Plant annual capacity of approximately 3.5 million SWU per year
  
September 2017
   

In February 2011, we and DOE amended the 2002 DOE-USEC Agreement to revise the remaining four milestones relating to the financing and operation of the ACP. The amendment extended the financing milestone by one year to November 2011 and adjusted the remaining three milestones. In addition, we and DOE agreed to discuss further adjustment of the remaining three milestones as may be appropriate based on a revised deployment plan to be submitted by us to DOE by January 30, 2012 following the completion of the November 2011 financing milestone. Due to DOE’s deferral of a decision on the loan guarantee until after completion of the RD&D program, we did not meet the November 2011 financing milestone or submit a revised deployment plan to DOE.  In connection with the RD&D program described above, we have been engaging in discussions with DOE regarding the modification of the remaining milestones and other provisions of the 2002 DOE-USEC Agreement. DOE has acknowledged that since DOE and we are working in good faith toward the RD&D program and the adjustment of the milestones in the 2002 DOE-USEC Agreement is currently a part of the proposed terms of the RD&D program, it does not see the need at the present time for us to present our position on the missed November 2011 milestone to DOE or to provide a revised deployment plan by the specified time. However, we have no assurances that the RD&D program will move forward and/or that DOE will agree to an adjustment of the milestones or other provisions of the 2002 DOE-USEC Agreement.

 
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DOE has full remedies under the 2002 DOE-USEC Agreement if we fail to meet a milestone that would materially impact our ability to begin commercial operations of the American Centrifuge Plant on schedule and such delay was within our control or was due to our fault or negligence. To our knowledge, DOE has not taken any action to assert its remedies under the 2002 DOE-USEC Agreement. These remedies include terminating the 2002 DOE-USEC Agreement, revoking our access to DOE’s U.S. centrifuge technology that we require for the success of the American Centrifuge project and requiring us to transfer certain of our rights in the American Centrifuge technology and facilities to DOE, and requiring us to reimburse DOE for certain costs associated with the American Centrifuge project. DOE could also recommend that we be removed as the sole U.S. Executive Agent under the Megatons to Megawatts program. Any of these actions could have a material adverse impact on our business and prospects. The 2002 DOE-USEC Agreement provides that once the financing milestone is met, DOE’s remedies are limited to those circumstances where our gross negligence in project planning and execution is responsible for schedule delays or in the circumstance where we constructively or formally abandon the project or fail to diligently pursue the financing commitment(s). Uncertainty surrounding the milestones under the 2002 DOE-USEC Agreement or the initiation by DOE of any action or proceeding under the 2002 DOE-USEC Agreement could adversely affect our ability to obtain financing for the American Centrifuge project or to consummate the remaining transactions with Toshiba and B&W.

Corporate Structure

In September 2008, we created four wholly owned subsidiaries to carry out future commercial activities related to the American Centrifuge project. We anticipate that these subsidiaries will own the American Centrifuge Plant and equipment, provide operations and maintenance services, manufacture centrifuge machines and conduct ongoing centrifuge research and development. See the discussion above regarding the American Centrifuge Manufacturing joint venture. Subject to regulatory approvals, this corporate structure will separate ownership and control of centrifuge technology from ownership of the enrichment plant and also establish a separate operations subsidiary. This structure will facilitate DOE loan guarantee financing and potential third-party investment, while also facilitating any future plant expansion. By order dated February 2011, the NRC approved the transfer of the licenses for the Lead Cascade and the ACP to one of these wholly owned subsidiaries. We have requested and received from the NRC two extensions to the period to implement the transfer, most recently through February 8, 2013.
 
NRC Operating Licenses
 
On May 20, 2011, we submitted to the NRC a request to extend our operating license for the lead cascade, which was scheduled to expire on August 23, 2011. On July 15, 2011, the NRC concluded that our application was complete, but deferred conducting a review of our application unless we request to continue lead cascade operations beyond the summer of 2012. If we proceed with the RD&D program, lead cascade operations would be expected to continue for approximately two years. Under applicable law, our license will not expire pending NRC's review of a complete application.

In April 2007, the NRC issued a license to construct and operate the American Centrifuge Plant, and we began construction of the American Centrifuge Plant in May 2007. Our construction and operating license is for a term of 30 years and includes authorization to enrich uranium to a U235 assay of up to 10%. Our license is based on a plant designed with an initial annual production capacity of 3.8 million SWU. Although we will need an amendment to our NRC license for any significant expansion of the American Centrifuge Plant, the environmental report submitted with our license application and the environmental impact statement issued by the NRC contemplated the potential expansion of the plant to approximately double the initially designed capacity.
 
 
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American Centrifuge Plant Lease
 
We lease the facilities in Piketon for the American Centrifuge Plant from DOE. The process buildings that will house the cascades of centrifuges encompass more than 14 acres under roof. The lease for these facilities and other support facilities is a stand-alone amendment to our lease with DOE for the gaseous diffusion plant facilities in Piketon and in Paducah. The current five-year lease term is through June 2014. We have the option to extend the lease term for additional five-year terms up to 2043. We must provide notice to DOE by June 2012 in order to extend the lease for the next five-year term. Our notice must also include certification that certain conditions have been met, including certifying compliance with the 2002 DOE-USEC Agreement and compliance with the terms of the lease. Depending on the outcome of discussions with DOE, including discussions regarding the 2002 DOE-USEC Agreement described above under “Project Milestones under the 2002 DOE-USEC Agreement,” we may be unable to make this certification. The lease also provides DOE with the right to terminate the lease in the event we fail to operate the ACP at an annual average rate of 1 million SWU. The requirement to operate is measured over a two-year period commencing in April 2011. Based on delays in deploying the American Centrifuge project, we do not expect to be in a position to operate the ACP at this rate during this timeframe. Accordingly, there can be no assurance that we will be able to meet the conditions for renewal or that DOE will not exercise its right to terminate the lease.  If the lease is renewed, we also have the right to extend the lease for up to an additional 20 years, through 2063, if we agree to demolish the existing buildings leased to us after the lease term expires. We have the option, with DOE’s consent, to expand the leased property to meet our needs until the earlier of September 30, 2013 or the expiration or termination of the GDP lease. Rent is based on the cost of lease administration and regulatory oversight in Piketon and is approximately $1.5 million per year, including estimates for additional charges by DOE for its subcontractors that may be allocated to the ACP. We may terminate the lease upon three years’ notice. DOE may terminate for default, including if DOE is able to exercise its remedies with respect to ACP under the 2002 DOE-USEC Agreement.

Financial Assurance for Decontamination and Decommissioning
 
We own all capital improvements at the American Centrifuge Plant and, unless otherwise consented to by DOE, must remove them by the conclusion of the lease term. This provision is unlike the lease for the gaseous diffusion plants where we may leave the property in an “as is” condition at termination of the lease. DOE generally only remains responsible for pre-existing conditions of the American Centrifuge leased facilities. At the conclusion of the lease, we are obligated to return these leased facilities to DOE in a condition that meets NRC requirements and in the same condition as the facilities were in when they were leased to us (other than due to normal wear and tear).

We are required to provide financial assurance to the NRC for the decontamination and decommissioning (“D&D”) of the American Centrifuge Plant. The amount of financial assurance is dependent on construction progress and D&D cost projections. We are also required to provide financial assurance to DOE in an amount equal to our current estimate of costs to comply with lease turnover requirements, less the amount of financial assurance required of us by the NRC for D&D. As of December 31, 2011, we have provided financial assurance to the NRC and DOE in the form of surety bonds totaling $22.2 million that supports construction progress. The surety bonds are partially collateralized with interest-earning cash deposits.

If construction is resumed, the financial assurance requirements will increase each year commensurate with the status of facility construction and operations. As part of our license to operate the American Centrifuge Plant, we provide the NRC with a projection of the total D&D cost. The total D&D cost related to the NRC and the incremental lease turnover cost related to DOE is uncertain at this time and is dependent on many factors including the size of the plant. Financial assurance will also be required for the disposition of depleted uranium generated from future commercial centrifuge operations. Since we operate the lead cascade in recycle mode, depleted uranium is not generated from lead cascade operations.

 
23

 
DOE Technology License
 
In December 2006, USEC and DOE signed an agreement licensing U.S. gas centrifuge technology to USEC for use in building new domestic uranium enrichment capacity. We will pay royalties to the U.S. government on annual revenues from sales of LEU produced in the American Centrifuge Plant. The royalty ranges from 1% to 2% of annual gross revenue from these sales and provide for a minimum payment of $100,000 per year. Payments are capped at $100 million over the life of the technology license. DOE may terminate the license if DOE is able to exercise its remedies with respect to ACP under the 2002 DOE-USEC Agreement.

Risks and Uncertainties

The successful deployment, construction and operation of the American Centrifuge Plant is dependent upon a number of factors, including the availability and timing of financing, performance of the American Centrifuge technology, overall cost and schedule, and the achievement of milestones under the 2002 DOE-USEC Agreement. Risks and uncertainties related to the American Centrifuge Plant are described in further detail in Item 1A, Risk Factors.

Nuclear Regulatory Commission — Regulation
 
Our operations are subject to regulation by the NRC. The Paducah GDP is required to be recertified by the NRC every five years and is currently certified through December 2013. The certificate of compliance represents NRC’s determination that the GDP is in compliance with NRC safety, safeguards and security regulations. On September 30, 2011, our contracts for maintaining the former Portsmouth GDP facilities and performing services for DOE at Portsmouth expired and we completed the transition of facilities to a new contractor. As part of the transition, at our request, NRC terminated our certificate of compliance for the former Portsmouth GDP facilities. We will continue to provide some limited services to DOE and its contractors at the Portsmouth site related to facilities we continue to lease for the American Centrifuge project.  The NRC regulates our operation of the American Centrifuge Demonstration Facility and the construction of the American Centrifuge Plant.

The NRC has the authority to issue notices of violation for violations of the Atomic Energy Act of 1954, NRC regulations, and conditions of licenses, certificates of compliance, or orders. The NRC has the authority to impose civil penalties for certain violations of its regulations. We have received notices of violation from NRC for violations of these regulations and certificate conditions. However, in each case, we took corrective action to bring the facilities into compliance with NRC regulations. As described above under “The American Centrifuge Plant,” the NRC is currently conducting a review of a June 11, 2011 event in the lead cascade of the American Centrifuge Demonstration Facility and could issue a notice of violation related to this event. We do not expect that any proposed notices of violation we have received or anticipate receiving as a result of the June 11 event will have a material adverse effect on our financial position or results of operations.
 
Our operations require that we maintain security clearances that are overseen by the NRC and DOE. These security clearances could be suspended or revoked if we are determined by the NRC to be subject to foreign ownership, control or influence. In addition, statute and NRC regulations prohibit the NRC from issuing any license or certificate to us if it determines that we are owned, controlled or dominated by an alien, a foreign corporation, or a foreign government. 


 
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Environmental Compliance
 
 
Our operations are subject to various federal, state and local requirements regulating the discharge of materials into the environment or otherwise relating to the protection of the environment. Our operations generate low-level radioactive waste that is stored on-site at the Paducah GDP or is shipped off-site for disposal at commercial facilities. In addition, our operations generate hazardous waste and mixed waste (i.e., waste having both a radioactive and hazardous component), most of which is shipped off-site for treatment and disposal. In connection with the return of the Portsmouth facilities described above, DOE has agreed to accept ownership and possession of all nuclear material at the site, including waste requiring processing and disposal. USEC has agreed to pay DOE its cost of disposing of such wastes which was estimated to be $7.8 million and is recorded as a current liability.

Our operations generate depleted uranium that is stored at the Paducah GDP. Depleted uranium is a result of the uranium enrichment process where the concentration of the U 235 isotope in depleted uranium is less than the concentration of .711% found in natural uranium. All liabilities arising out of the disposal of depleted uranium generated before July 28, 1998 are direct liabilities of DOE. The USEC Privatization Act requires DOE, upon our request, to accept for disposal the depleted uranium generated after the July 28, 1998 privatization date provided we reimburse DOE for its costs.

The Paducah GDP was operated by agencies of the U.S. government for approximately 40 years prior to July 28, 1998. As a result of such operation, there is contamination and other potential environmental liabilities associated with the plant. The Paducah site has been designated as a Superfund site under CERCLA and is undergoing investigations under the Resource Conservation and Recovery Act. Environmental liabilities associated with plant operations prior to July 28, 1998 are the responsibility of the U.S. government. The USEC Privatization Act and the lease for the plant provide that DOE remains responsible for decontamination and decommissioning of the Paducah site.
 
As described above under “Business and Properties – The American Centrifuge Plant – Financial Assurance for Decontamination and Decommissioning”, we will be responsible for the decontamination and decommissioning of the American Centrifuge Plant.

Occupational Safety and Health
 
Our operations are subject to regulations of the Occupational Safety and Health Administration governing worker health and safety. We maintain a comprehensive worker safety program that establishes high standards for worker safety, directly involves our employees and monitors key performance indicators in the workplace environment.
 
Competition and Foreign Trade

The highly competitive global uranium enrichment industry has four major producers of LEU:
 
     
 
 • 
USEC,
   
 
 • 
Urenco, a consortium of companies owned or controlled by the British and Dutch governments and by two German utilities,
   
 
 • 
a multinational consortium controlled by Areva, a company approximately 90% owned by the French government, and
   
 
 • 
the Russian government’s State Atomic Energy Corporation (“Rosatom”), which sells LEU through TENEX, a Russian government-owned entity.
 

 
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Two of our three major competitors, Urenco and Areva, own a joint venture called the Enrichment Technology Company (“ETC”), which develops and manufactures centrifuge machines for both owners.

There are also smaller producers of LEU in China, Japan and Brazil that primarily serve a portion of their respective domestic markets. However, China is emerging as a growing producer and has begun to supply LEU to a limited foreign market. China has existing centrifuge production capacity that it purchased from Russia and is also developing its own centrifuge enrichment technology, which could be used for China's domestic needs or to export for sale in foreign markets. Depending on the rate of their development of centrifuge technology or other expansion and their plans for this supply, this could be a source of significant long-term competition.
 
Global LEU suppliers compete primarily in terms of price and secondarily on reliability of supply and customer service. We believe that customers are attracted to our reputation as a reliable long-term supplier of enriched uranium.

USEC and Areva currently use the gaseous diffusion process to produce LEU. Areva has begun initial operations of a centrifuge enrichment plant to replace their gaseous diffusion production. Urenco and Rosatom already use centrifuge technology. Gaseous diffusion plants generally have significantly higher operating costs than gas centrifuge plants due to the significant amounts of electric power required by the gaseous diffusion process.

We estimate that the enrichment industry market is currently about 50 million SWU per year. In the past five years, we have delivered LEU containing 9 to 13 million SWU per year, of which approximately 5.5 million SWU per year was obtained by us under the Russian Contract.

Urenco reported that total annual capacity of its European and U.S. enrichment facilities was 14.6 million SWU at the end of 2011. Urenco USA, a group controlled by Urenco, began operations of its gas centrifuge uranium enrichment plant in New Mexico in June 2010 and is increasing capacity although it has not yet shipped product from that facility. Urenco’s announced plans call for total capacity, including Urenco USA, of 18 million SWU by the end of 2015.
 
Areva’s new gas centrifuge enrichment plant in France (“Georges Besse II”) began commercial operations in 2011 with full capacity of 7.5 million SWU per year expected by 2016. Areva has announced that it plans to cease operating the Georges Besse gaseous diffusion plant in France by mid-2012. In addition, Areva announced in 2010 that it had received a conditional commitment for a DOE loan guarantee to build its proposed Eagle Rock centrifuge uranium enrichment plant near Idaho Falls, Idaho. In October 2011, the NRC awarded an operating license for the Eagle Rock plant. Areva’s original plan called for initial production in 2014 with a targeted production rate of 3.3 million SWU per year reached by 2018. In December 2011, Areva suspended plans for the Eagle Rock plant as part of an announced strategic overhaul to reduce Areva’s overall debt. While the project has been put on hold, Areva did not exclude the possibility that the Eagle Rock project could proceed under new partnerships. Furthermore, under the new strategic plan, Areva has suspended any planned capacity expansions for Georges Besse II beyond the 7.5 million SWU.

Areva and Urenco’s European centrifuge enrichment facilities, as well as their plants under construction or proposed in the U.S., use or will use centrifuge machines manufactured in Europe by ETC.


 
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Rosatom/TENEX also uses centrifuge technology. The World Nuclear Association (“WNA”) estimates its production capacity to be approximately 25 million SWU per year, with the expansion to approximately 30 million SWU by 2015. However, not all of this capacity is currently available to the market since a portion of Russian capacity is used for downblending highly enriched uranium.  However, this program ends in 2013 and that portion of Russian capacity would then be available to the market. Imports of LEU and other uranium products produced in the Russian Federation are subject to the restrictions described below under “Limitations on Imports of LEU from Russia.”
    
All of our current competitors are owned or controlled, in whole or in part, by foreign governments. These competitors may make business decisions in both domestic and international markets that are influenced by political or economic policy considerations rather than exclusively by commercial considerations.
 
In addition, GE Hitachi Global Laser Enrichment (“GLE”) has an agreement with Silex Systems Limited, an Australian company, to license Silex’s laser enrichment technology. USEC funded research and development of the Silex technology for several years but terminated the arrangement in April 2003 to focus on the American Centrifuge technology. Since 2008, GLE has taken a phased development process with the goal of constructing a commercial enrichment plant in Wilmington, North Carolina with a target capacity of between 3 and 6 million SWU per year. GLE’s NRC license application remains under review by the NRC. GLE is operating a test loop facility to determine performance and reliability data, which could be used to make a decision on whether or not to proceed with the construction of a commercial plant. GLE officials have said in published reports that such a decision will come after years of further testing is completed, regulatory approval is achieved, and analysis of market conditions is finalized.

In addition to enrichment, LEU may be produced by downblending government stockpiles of highly enriched uranium. Governments control the timing and availability of highly enriched uranium released for this purpose, and the release of this material to the market could impact market conditions. In the past, we have been the primary supplier of downblended highly enriched uranium made available by the U.S. and Russian governments. To the extent LEU from downblended highly enriched uranium is released into the market in future years for sale by others, these quantities would represent a source of competition. In December 2008, DOE published a plan for the multi-year disposition of its excess uranium inventories, stating its intention to minimize any material adverse impacts on the domestic uranium mining, conversion and enrichment industries. As part of this plan, DOE awarded a three-year contract in 2009 to Nuclear Fuel Services and WesDyne International to downblend 12.1 metric tons of highly enriched uranium to produce about 220 metric tons of LEU (containing roughly 1.5 million SWU). As payment, the contractors will receive a portion of the resulting LEU. The remainder will be stored for DOE at a U.S. nuclear fuel fabricator to provide fuel supply assurance for utilities that participate in the DOE's mixed oxide program for disposition of surplus weapons plutonium.
 
LEU that we supply to foreign customers is exported under the terms of international agreements governing nuclear cooperation between the United States and the country of destination or other entities. For example, exports to countries comprising the European Union take place within the framework of an agreement for cooperation (the “Euratom Agreement”) between the United States and the European Atomic Energy Community, which, among other things, permits LEU to be exported from the United States to the European Union for as long as the Euratom Agreement is in effect. The Euratom Agreement also provides that nuclear equipment and material imported from Euratom countries cannot be used by the United States for defense purposes. This limitation will apply to centrifuges imported for the Urenco USA and Areva Eagle Rock plants.  It does not apply to enrichment equipment produced in the United States using U.S. technology, such as the American Centrifuge technology.
 

 
27

 

Limitations on Imports of LEU from Russia

Imports of LEU and other uranium products produced in the Russian Federation (other than LEU imported under the Russian Contract) into the U.S. are subject to quotas imposed under legislation enacted into law in September 2008 and under the 1992 Russian Suspension Agreement, as amended.  The September 2008 legislation provides that it supersedes the Russian Suspension Agreement in cases where they conflict.

The September 2008 legislation imposes annual quotas on imports of Russian LEU through 2020. From 2008-2011, the quotas only permitted a small amount of LEU to be imported. The quotas increase moderately in 2012 and 2013, and then from 2014-2020 are set at an amount equal to approximately 20% of projected annual U.S. consumption of LEU. These import quotas are substantially similar to the export quotas established under the Russian Suspension Agreement discussed below. However, the legislation also includes the possibility of expanded quotas of up to an additional 5% of the domestic market annually beginning in 2014 if the Russian Federation continues to downblend highly enriched uranium after the Russian Contract is complete. As with the Russian Suspension Agreement, the legislation also permits unlimited imports of Russian LEU for use in initial cores for any new U.S. nuclear reactor.

As amended in February 2008, the Russian Suspension Agreement permits the Russian government to sell a stockpile of LEU containing about 400,000 SWU located in the United States, and establishes annual export quotas for the sale of Russian uranium products to U.S. utilities substantially similar to those in the September 2008 legislation. It also permits unlimited exports to the United States of Russian LEU for use in initial cores for any U.S. nuclear reactors entering service for the first time.  In 2021, the suspended investigation (and the Russian Suspension Agreement) will be terminated and the export quotas will no longer apply.

Both the Russian Suspension Agreement and the September 2008 legislation permit the Secretary of Commerce to increase the quotas for Russian LEU in situations where supply is insufficient to meet U.S. demand for LEU.


 
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Employees

 A summary of our employees by location follows:
   
No. of Employees
 
   
at December 31,
 
Location
 
2011
   
2010
 
Paducah, KY
    1,194       1,185  
Piketon, OH
    335       1,411  
Oak Ridge, TN
    190       192  
Norcross, GA
    68       60  
Bethesda, MD
    98       101  
Total Employees
    1,885       2,949  
 
As discussed in “Contract Services Segment”, the transition of Portsmouth site contract services workers located in Piketon, Ohio from USEC to the new D&D contractor began in the first quarter of 2011 and was completed on September 30, 2011.

The United Steelworkers (“USW”) and the Security, Police, Fire Professionals of America (“SPFPA”) represented 653 employees at the Paducah GDP as follows:

   
Number of Employees
 
Contract
Term
  USW Local 5-550                                                    
    570  
July 2016
SPFPA Local 111                                                   
    83  
March 2014

As discussed in “Business and Properties – The American Centrifuge Plant”, on September 30, 2011 we sent Worker Adjustment and Retraining Notification (“WARN”) Act notices to approximately 450 American Centrifuge workers located in Piketon, Ohio, Oak Ridge, Tennessee and Bethesda, Maryland, informing them of potential future layoffs.  An updated WARN Act notice was sent to these workers in November 2011.  In January 2012, we executed a reduction in force of 20 employees in Oak Ridge. The WARN Act notices have now expired. In the event we demobilize the project, we may need to issue new notices under the WARN Act.

Available Information
 
 Our Internet website is www.usec.com. We make available on our website, or upon request, without charge, access to our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed with, or furnished to, the Securities and Exchange Commission, pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the Securities and Exchange Commission.
 
Our code of business conduct provides a brief summary of the standards of conduct that are at the foundation of our business operations. The code of business conduct states that we conduct our business in strict compliance with all applicable laws. Each employee must read the code of business conduct and sign a form stating that he or she has read, understands and agrees to comply with the code of business conduct. A copy of the code of business conduct is available on our website or upon request without charge. We will disclose on the website any amendments to, or waivers from, the code of business conduct that are required to be publicly disclosed.
 
 We also make available on our website or upon request, free of charge, our Board of Directors Governance Guidelines and our Board committee charters.



 
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Item 1A.  Risk Factors

Investors should carefully consider the risk factors below, in addition to the other information in this Annual Report on Form 10-K.

The effects of the March 11, 2011 earthquake and tsunami in Japan could materially and adversely affect our business, results of operations and prospects.

The earthquake and tsunami in Japan on March 11, 2011 caused significant damage to a multi-unit nuclear power station at Fukushima operated by The Tokyo Electric Power Company of Japan, Inc. (“TEPCO”). At least four of the six reactors at the Fukushima plant are not expected to reopen. Japan has categorized the severity level of the Fukushima nuclear crisis at the maximum level 7 on the International Nuclear Event Scale (“INES”), which is the level of the Chernobyl, Ukraine accident in 1986.  The long-term impact of the March 11 events on the nuclear fuel market is uncertain and subject to changes in the energy strategies of individual countries. However, the events have created significant uncertainty and our business, results of operations and prospects could be materially and adversely affected.

We have long been a leading supplier of low enriched uranium (“LEU”) to Japan. Over the last three years, sales to Japan have accounted for approximately 10% to 15% of our revenue. TEPCO has historically been one of our largest customers. We had already delivered the LEU to fuel fabricators expected to be used in 2011 for refueling of reactors by utility customers most directly affected by the earthquake. However, as of early 2012, nearly all of Japan’s reactors are shut down for maintenance and inspection outages and the timing of their return to service is uncertain. Our backlog during the years 2012-2013 includes sales to Japanese utility customers of approximately $300 million. A portion of these contracts are requirements contracts and therefore sales to Japanese utility customers with such contracts could be delayed or ultimately canceled depending on how quickly their reactors return to service. As of December 31, 2011, estimated future revenue from Japanese utilities under contracts in our backlog during the period 2012 through 2020 is expected to be approximately 20% of the total backlog for that period. The shutdown of the Japanese reactors and the shutdown of reactors in other countries due to concerns raised by March 11 events have affected supply and demand for LEU over the next 2-4 years. This impact could grow more significant over time depending on the length and severity of delays or cancellations of deliveries. Prior to the events in Japan, Japanese demand was approximately 6 million SWU annually. The longer that this demand is reduced or absent from the market, the greater the cumulative impact on the market. Suppliers whose deliveries are cancelled or delayed due to shutdown reactors or delays in reactor refuelings could seek to sell that excess supply in the market. This could adversely affect our success in selling our LEU, including sales of output from the Paducah plant that are needed in order to support an extension of Paducah operations beyond May 2012 as described in the risk factor “We do not currently believe the factors are in place to support continued Paducah GDP enrichment operations beyond May 2012” below. These actions could have an adverse effect on our cash flow and results of operations.

The effects of the March 2011 earthquake and tsunami in Japan could also have an adverse impact on our ability to successfully finance and deploy the American Centrifuge project. In addition to the potential impact on cash flow discussed above, the Japanese situation could have an adverse impact on our success in obtaining third party financing in the timeframe needed. We are currently in discussions with DOE regarding a research, development and demonstration (“RD&D”) program to reduce the technology and financial risk of commercializing the American Centrifuge technology. We will continue to seek a loan guarantee conditional commitment from DOE following the RD&D program. However, the loan guarantee process has taken longer than anticipated and additional delays due to political or other concerns regarding nuclear power in light of the events in Japan could adversely affect our ability to successfully deploy the ACP. While we have had discussions with Japanese export credit agencies regarding financing $1 billion of the cost of completing the ACP, these discussions could also be adversely affected by the impacts of the events in Japan.  We also have no assurance that the Japanese export credit agencies will not shift their priorities in the future or otherwise be unable to provide financing in the amount we need. If our ability to obtain Japanese export credit agency financing were adversely affected, this would also adversely affect our ability to obtain a DOE loan guarantee and complete the American Centrifuge project.

 
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The March 2011 events in Japan could also have a material and adverse impact on the nuclear energy industry in the long term. The impact of the events could harm the public’s perception of nuclear power and could raise public opposition to the planned future construction of nuclear plants.  Some countries may delay or abandon deployment of nuclear power as a result of the events in Japan. For example, Germany has shut down 8 of its reactors and announced that it will be phasing out all of its 17 nuclear reactors by 2022. Although we do not serve any of the German reactors, our European competitors that serve the German reactors will now have excess nuclear fuel available to sell. In addition, Italy has renewed its moratorium on nuclear power and other European Union countries are reviewing their future plans for nuclear power. Countries have begun new safety evaluations of their plants and how well they operate in situations involving earthquakes and other natural disasters and other situations involving the loss of power. Demand for nuclear fuel could be negatively affected by such actions, which could have a material adverse effect on our results of operations and prospects.  The events at Fukushima and its aftermath have negatively affected the balance of supply and demand for LEU over the next 2-4 years, as reflected in lower nuclear fuel prices in recent months. If deliveries under requirements contracts included in our backlog are significantly delayed, modified or canceled, or if our backlog of contracts is otherwise negatively affected, our future revenues and earnings may be materially and adversely impacted.

Any resulting increased public opposition to nuclear power could lead to political opposition and could slow the pace of global licensing and construction of new or planned nuclear power facilities or negatively impact existing facilities’ efforts to extend their operating licenses. The events could also result in additional permitting requirements and burdensome regulations that increase costs or have other negative impacts. As events at the Japanese nuclear facilities continue to develop, they could raise concerns regarding potential risks associated with certain reactor designs or nuclear power production. The events in Japan have also raised concerns regarding how to deal with spent fuel, which could result in additional burdensome regulations or costs to the nuclear industry which could potentially impact demand for LEU. These events could adversely affect our business, results of operations and prospects.

We do not currently believe the factors are in place to support continued Paducah GDP enrichment operations beyond May 2012.

A decision regarding whether or not to extend enrichment operations at the Paducah GDP beyond May 2012 must be made in the next few months. Although our goal is to extend enrichment operations at the Paducah GDP, we do not currently believe the factors are in place to support continued enrichment operations.  In order to continue enrichment beyond May 2012, we will need to be successful in the near term in the following three areas, none of which has been achieved to date, and all of which are subject to significant uncertainty:
 
·  
identifying additional demand for LEU needed to support continued Paducah enrichment operations at the production level necessary to make the plant economic;
 
·  
obtaining a contract with DOE for programs such as enriching a portion of the DOE’s depleted uranium (“tails”) stockpile on satisfactory terms and in sufficient amount to maintain plant production capacity at an economic level; and
 
·  
negotiating an acceptable power arrangement with TVA or other suppliers of power who have sufficient transmission capacity to supply the plant.
 


 
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The supply needs of our traditional utility customers appear to be largely satisfied over the next several years. In addition, there is significant excess supply in the market due to the impacts of the Fukushima accident and the amount of excess supply in the market is increasing the longer that the majority of Japanese reactors are out of service. Based upon our current outlook for demand and discussions with utility customers, we do not believe there is sufficient demand to support a Paducah extension even with an agreement with DOE for tails re-enrichment to absorb a significant portion of the plant production capacity. Therefore, at some point in the next 18 months we expect to cease commercial enrichment at the Paducah GDP but the facility may remain operational to meet other requirements.

We also have no assurance that we will be successful in obtaining a contract with DOE for programs such as enriching a portion of the DOE’s depleted uranium stockpile on satisfactory terms, in sufficient amount, or at all. Although we believe a tails re-enrichment program can be implemented without an adverse material impact on the domestic uranium mining industry and will provide substantial value for the U.S. government, we face opposition to such an arrangement and are reliant on DOE to make a decision to go forward with such a program. We have been pursuing a tails re-enrichment program with DOE for several years and have not been successful to date.  While we believe that DOE has the authority to proceed with a tails re-enrichment program under existing law, legislation that we support regarding tails re-enrichment to confirm DOE authority and to direct the initiation of a pilot enrichment program has been introduced in Congress. However, we have no assurance that any legislation will be enacted, the timing of any legislation, or that if legislation is enacted that we will be selected to carry out any tails re-enrichment program.  We could face competition for any tails re-enrichment program that DOE may pursue.  The amount of revenue generated for the federal government from any tails re-enrichment program is dependent on the market value of uranium. Changes in uranium prices could adversely affect the perceived benefits of this arrangement to DOE, which would further reduce the prospects that DOE would proceed with this program. As an alternative, we have recently been in discussions regarding the potential for the Bonneville Power Administration (“BPA”), a federal agency within the DOE, to purchase a sufficient amount of SWU to support a potential one-year extension of Paducah enrichment operations.  Under this arrangement, DOE would transfer some of its depleted uranium to BPA to be used as the feed material for the LEU produced under such an arrangement and BPA would pay us for the SWU component of the LEU produced. However, we have no assurances that we will reach an agreement regarding such an arrangement on acceptable terms or at all.

We also have no assurance that we will be successful in negotiating an acceptable power arrangement with TVA or other suppliers of power and delays in making a decision as to whether to extend Paducah enrichment operations makes this more difficult. Our power supply contract with TVA expires May 31, 2012 and we are evaluating additional power purchases from TVA and other sources.  However, we have not been willing to commit to additional power purchases until we have greater certainty with respect to the other factors needed to support extended Paducah plant enrichment operations. Because of these delays, suppliers other than TVA who may be able to offer us power at more competitive rates or for a fixed price may not have sufficient available power or transmission capacity to meet all our significant power needs. Our perceived credit risk could also adversely affect the terms that we are able to negotiate with power suppliers, including additional requirements for financial assurance.

The Paducah GDP operates most efficiently in the range of 5 to 6 million SWU per year.  Operating the Paducah GDP at levels below 5 million SWU would have a negative impact on plant economics. In addition, under the 2002 DOE-USEC Agreement, enrichment at the Paducah GDP may not be reduced below a minimum of 3.5 million SWU per year until six months before we have completed an enrichment facility using advanced technology such as centrifuge technology capable of producing LEU containing 3.5 million SWU per year. If the Paducah GDP is operated at less than the specified 3.5 million SWU in any given fiscal year, we may cure the defect by increasing enrichment operations to the 3.5 million SWU level in the next fiscal year. However, we may only use the right to cure once in each six-year lease period. If we do not maintain the requisite level of operations at the Paducah GDP and have not cured the deficiency, we are required to waive our exclusive right to lease the facility. Under the 2002 DOE-USEC Agreement, if we believe the enrichment market is otherwise stable and viable but that a significant change has taken place in the domestic or international enrichment markets such that continued operation of the Paducah GDP at or above the 3.5 million SWU per year level is commercially impractical, we have the right under the 2002 DOE-USEC Agreement to present our position to DOE. However, we have no assurances that DOE will agree with our position or agree to amend the 2002 DOE-USEC Agreement.

 
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In addition to the requirements to produce LEU containing 3.5 million SWU per year described above, if we “cease operations” at the Paducah GDP or lose our certification from the NRC, DOE may take actions it deems necessary to transition operation of the plant from us to ensure the continuity of domestic enrichment operations and the fulfillment of supply contracts. We will be deemed to have “ceased operations” at the Paducah GDP if we (1) make a determination to cease enrichment at the plant, (2) produce less than 1 million SWU per year or (3) fail to meet specific maintenance and operational criteria established in the 2002 DOE-USEC Agreement.  As part of transitioning operations under the 2002 DOE-USEC Agreement, (1) DOE may designate an alternate operator, (2) DOE may terminate all or any portion of leasehold or require return of leased facilities in good and operable condition, (3) we would be obligated to waive our right to lease the GDP, and (4) we would be obligated to not oppose legislation sought by DOE to permit implementation of DOE’s rights under the 2002 DOE-USEC Agreement.

A decision to cease enrichment operations at the Paducah GDP could have a material adverse effect on our business and prospects.

Delays in financing construction of the American Centrifuge Plant have made continued efficient operation of our current enrichment plant an important element of our business as we transition to centrifuge production. Without enrichment operations at Paducah beyond May 2012, we would cease commercial enrichment of uranium during this transition period. Absent a definitive timeline for ACP deployment, this could adversely affect our efforts to pursue the American Centrifuge project, to implement the commercial agreement we entered into in March 2011 for the supply of commercial Russian LEU (the “Russian Supply Agreement”) or to pursue other options, and could threaten our overall viability.

The shutdown of Paducah enrichment operations could also adversely affect our relationships with customers. Customers could ask us to provide additional financial or other assurances of our ability to deliver under existing contracts that could adversely affect our business. A decision to shut down Paducah enrichment operations could also adversely affect our ability to enter into new contracts with customers, including our ability to contract for the output of the American Centrifuge Plant and for the material we purchase under the Russian Supply Agreement. We maintain substantial inventories of SWU that we carefully monitor to ensure we can meet our commitments. Our ability to maintain inventories and to monetize these inventories in order to meet our liquidity requirements could be adversely affected if we lost our right to lease the portions of the Paducah GDP where the inventories are held and could not find alternative space where inventories could be kept.

If we make a decision to not continue enrichment operations at the Paducah GDP beyond May 2012 or to continue for only a short period of time, we could accelerate expenses for certain assets such as previously capitalized leasehold improvements and machinery and equipment related to the Paducah GDP. As of December 31, 2011, net book value of property, plant and equipment included in our consolidated balance sheet was $66.8 million related to Paducah operations. These assets are being depreciated over their estimated life based on the current lease term through 2016. We have accrued liabilities for lease turnover costs related to the Paducah GDP, included in our other long-term liabilities, of $42.6 million at December 31, 2011 that could be accelerated from a cash standpoint and considered as current liabilities if we were to terminate the lease prior to the current expiration date.

 
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We would also expect to incur significant costs in connection with a decision to shut down Paducah enrichment operations, including potential severance costs and curtailment charges related to our defined benefit pension plan and postretirement health and life benefit plans. We could also incur potential liability under ERISA Section 4062(e) as described below under “We could be required to accelerate the funding of our defined benefit pension plans that could adversely affect our liquidity.”

If a decision is made to shut down Paducah enrichment operations, we would expect to de-lease the Paducah GDP except for certain facilities used for shipping and handling, inventory management and site services that are needed for our ongoing operations, including deliveries to customers of our inventory of LEU and handling of Russian material through 2013 under the Russian Contract or beyond under the Russian Supply Agreement. However, we have no assurance that DOE would accept facilities that we wish to de-lease in the timeframe desired, which could result in additional costs.

We also have no assurance that DOE would allow us to continue to lease portions of the Paducah GDP. Under the 2002 DOE-USEC Agreement, DOE can assume operations of Paducah in the event we cease enrichment operations.  There can be no assurance that DOE will not exercise this right.  If DOE decides to exercise its right to assume operation of Paducah under the 2002 DOE-USEC Agreement, there is no assurance that their exercise of their rights will not result in additional adverse impacts to us, including interfering with our deliveries to customers, interfering with our ability to sell our inventory and impacting our ability to make sales.  All of these factors could have a significant adverse effect on our results of operations and financial condition.

The ongoing economics of the Paducah GDP are being increasingly challenged. Our inventories of SWU and uranium are valued at the lower of cost or market. Production costs are added to inventory using the monthly moving average cost method. We compare our inventory cost against market prices and if our inventory costs were to exceed market prices, we could be required to take an inventory impairment. A decision to shorten Paducah’s plant life could also adversely increase our cost of sales.

Alternatively, in lieu of a decision to cease Paducah enrichment operations, we could pursue reduced operating scenarios or take actions to reduce fixed costs at the Paducah plant, which could have negative consequences on our results of operations and financial condition.

A decision to continue enrichment operations at the Paducah GDP beyond May 2012 could have a material adverse effect on our results of operations and financial condition.

We will soon make a decision on extending enrichment operations at the Paducah GDP beyond May 2012. That decision will include assumptions regarding additional sales, prospects of reaching a contract with DOE for programs such as enriching a portion of DOE’s tails stockpile, power prices, and other factors, which may not be achieved.

New sales may not be achieved in a timeframe needed to support extended enrichment operations, or if achieved, may not be at a price needed to support continued economic plant operations. Assumptions regarding a contract with DOE may not materialize as planned or in the timeframe needed. We could also continue to be at risk for fuel cost adjustments in any power contract that we enter into for purchases beyond May 2012. We may also make assumptions that may not be achieved, including regarding the market price for power, or underfeeding based on expected uranium prices. We may also base a decision to continue enrichment operations of the Paducah GDP on an expectation for actions to reduce our fixed costs which may not be achieved in the timeframe or amount expected, or at all.

 
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In addition, we could make a decision to continue enrichment operations of the Paducah GDP for considerations other than the plant economics. We could continue enrichment operations of the Paducah GDP in order to preserve certain rights under the 2002 DOE-USEC Agreement, which could have a material adverse effect on our results of operations and financial condition. As described above under “We do not currently believe  the factors are in place to support continued Paducah GDP enrichment operations beyond May 2012,” under the 2002 DOE-USEC Agreement, in the event we do not meet the requisite level of operations, DOE may take actions that DOE deems necessary to transition operations away from USEC. We could also continue operations of the Paducah GDP for some limited period of time to limit or delay certain costs associated with ceasing operations or transitioning the facility to DOE or to avoid other negative consequences of ceasing operations, which could have an adverse impact on our results of operations and financial condition, as described in the risk factor above.

There are potential demands on our liquidity that could cause us to restructure our business and our capital structure.

Although the recent renewal of our credit facility significantly improved our liquidity view for 2012, we expect maintenance of adequate liquidity for our operations will be challenging in 2012. Key factors that can affect liquidity requirements for our existing operations include the timing and amount of customer sales, power purchases, and purchases under the Russian Contract. In addition, we expect to make a number of decisions during 2012 that could have significant consequences for our business, including whether to continue enrichment operations at the Paducah plant beyond May 2012 and the potential to demobilize the American Centrifuge project if DOE funding is not obtained for the RD&D program. These decisions, as well as actions that may be taken by vendors, customers, creditors and other third parties in response to our decisions or based on their view of our financial strengths and future business prospects, could give rise to events that individually, or in the aggregate, are likely to impose significant demands upon our liquidity. Among the events that could arise are:

·  
Unwillingness of customers to advance additional orders that may be needed to manage our liquidity and working capital; 
 
·  
Costs that could be incurred in connection with a decision to cease Paducah commercial operations, including potential severance costs and curtailment charges related to our defined benefit pension plans and postretirement health and life benefit plans;
 
·  
Our inability to monetize our inventory as a result of actions DOE may take under the 2002 DOE-USEC Agreement to assume operations of the Paducah GDP and limit our rights to use portions of the Paducah GDP if we cease operations at the Paducah GDP, as described in the risk factor above “A decision to cease enrichment operations at the Paducah GDP could have a material adverse effect on our business and prospects;
 
·  
Requests by customers that we provide additional financial or other assurance of our ability to deliver under existing contracts, or the potential of our customers to seek to modify or terminate our existing contractual arrangements;
 
·  
The outcome of any discussions with the PBGC that results in a requirement by the PBGC that we accelerate the funding of our defined benefit pension plans due to the transition of our Portsmouth site or due to potential future decisions to discontinue enrichment at Paducah or to demobilize the American Centrifuge project, as described in the risk factor below “We could be required to accelerate the funding of our defined benefit pension plans that could adversely affect our liquidity”; and
 
·  
Requirements that we provide additional collateral or financial assurance for the disposition of our depleted uranium and stored wastes or for the decontamination and decommissioning (“D&D”) of the American Centrifuge Plant as a result of (1) new information becoming available that increases the estimate of the liability, (2) requirements by the NRC or DOE; or (3) requirements of our surety bond providers to provide additional collateral as a result of concerns regarding our financial condition or other factors such as a decision to cease Paducah enrichment or to demobilize the American Centrifuge project (as of December 31, 2011 we had cash collateral deposits of $151.3 million for surety bonds of $257.8 million) as described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Financial Assurance and Related Liabilities”; and
 
 
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·  
Our ability to renew or replace our new credit facility (which expires in May 2013) in the timeframe and amount needed to provide liquidity for our ongoing operations, and restrictions in our new credit facility that may limit our flexibility, as described in the risk factor below “The rights of our creditors under the documents governing our indebtedness may limit our operating and financial flexibility and increase the difficulty of complying with the obligations governing our indebtedness.”

In light of these factors and our desire to improve our credit profile, we may pursue discussions with creditors and key stakeholders regarding the restructuring of our business and our capital structure. If one or more of these events arise, including as a result of our decision to cease enrichment operations at Paducah or demobilize the American Centrifuge project, any material demands upon our liquidity could limit our ability to pursue these restructuring alternatives. There can be no assurance that we will be successful in these efforts and if we are not successful, we could file for bankruptcy protection.

We could be required to accelerate the funding of our defined benefit pension plans that could adversely affect our liquidity.
 
We maintain qualified defined benefit pension plans covering approximately 7,200 current and former employees and retirees, including approximately 1,630 active employees. These pension plans are guaranteed by the Pension Benefit Guaranty Corporation (“PBGC”), a wholly owned U.S. government corporation that was created by the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). At December 31, 2011, these plans were underfunded (based on generally accepted accounting principles (“GAAP”)) by approximately $260.0 million.

As described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Contract Services Segment—Portsmouth Site Transition”, on September 30, 2011, we completed the de-lease of the Portsmouth gaseous diffusion facilities and transition of employees performing government services work to DOE’s new decontamination and decommissioning (D&D) contractor.  We notified the PBGC of this occurrence.  Pursuant to ERISA Section 4062(e), if an employer ceases operations at a facility in any location and, as a result, more than 20% of the employer’s employees who are participants in a PBGC-covered pension plan established and maintained by the employer are separated, the PBGC has the right to require the employer to place an amount in escrow or furnish a bond to the PBGC to provide protection in the event the plan terminates within five years in an underfunded state.  Alternatively, the employer and the PBGC may enter into an alternative arrangement with respect to any such requirement, such as accelerated funding of the plan or the granting of a security interest. The PBGC could also elect not to require any further action by the employer. The PBGC has informally advised us of its preliminary view that the Portsmouth site transition is a cessation of operations that triggers liability under ERISA Section 4062(e) and that its preliminary estimate is that the ERISA Section 4062(e) liability (computed taking into account the plan’s underfunding on a “termination basis”, which amount differs from that computed for GAAP purposes) for the Portsmouth site transition could exceed $100 million. We have informed the PBGC that we do not agree that the de-lease of the Portsmouth gaseous diffusion facilities and transition of employees constituted a cessation of operations that triggered liability under ERISA Section 4062(e). We also dispute the amount of the preliminary PBGC calculation of the potential ERISA Section 4062(e) liability. However, there can be no assurance that the PBGC will agree with us, in which case, the PBGC could seek to require us to place an amount in escrow or furnish a bond to the PBGC or to negotiate with us to enter into an alternative arrangement, such as a requirement to accelerate funding or provide security. If we are not successful in reaching a resolution with PBGC or defending against any pursuit by PBGC of a requirement for a bond or escrow, in light of the current demands on our liquidity, depending on the timing and amount of such requirement, we might not have the cash needed to satisfy such requirement, which could have a material adverse effect on our liquidity and prospects.

 
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As we discuss elsewhere, we are facing a near term decision regarding the continuation of enrichment at the Paducah gaseous diffusion plant beyond May 2012. In addition, to date, we have not been able to obtain from DOE a conditional commitment for a $2 billion loan guarantee for the American Centrifuge project and there remains uncertainty regarding our prospects for DOE funding of the RD&D program. Therefore, we continue to plan for a potential demobilization of the American Centrifuge project. The PBGC could take the position that a future decision to discontinue enrichment at Paducah, or to demobilize the American Centrifuge program, or both, could create additional potential liabilities under Section 4062(e) of ERISA. We would also seek to defend against this position based on the facts and circumstances at the time.  However, given the significant number of current active employees at Paducah, the amount of any potential liability related to a future decision to discontinue enrichment at Paducah could be more significant than the potential liability in connection with the Portsmouth site transition. In the event that either the discontinuation of enrichment at Paducah, or the demobilization of the American Centrifuge program constitutes a cessation of operations that triggers liability under ERISA Section 4062(e), the potential amount of any liability would depend on various factors, including the amount of any future underfunding under each of our defined benefit pension plans (also computed based on the plan’s underfunding on a “termination basis”), taking into account plan asset performance and changes in interest rates used to value liabilities, as well as the number of employees who are participants in the affected plan prior to any covered event and the number of such employees who leave the plan as a result of any such event, and whether the pension obligations are transferred to a subsequent employer on the site.  In light of current demands on our liquidity, depending on the timing and amount of any requirement to satisfy any such liability, we might not have the cash needed to do so, which could have a material adverse effect on our liquidity and prospects.

 Our new credit facility contains limitations on our ability to invest in the American Centrifuge project, which could adversely affect our ability to deploy the American Centrifuge Plant.

Under the terms of our credit facility entered into on March 13, 2012, we are subject to significant restrictions on our ability to spend on the American Centrifuge project. During March, April and May 2012, the credit facility restricts our spending on the American Centrifuge project to $15 million per month. Unless we enter into an agreement with DOE for the RD&D program, our credit facility restricts our spending on the American Centrifuge project beyond May 2012 to $1 million per month (except for spending needed to carry out a project demobilization or to maintain compliance with legal and regulatory requirements under certain circumstances, as described below). If we are unable to timely enter into the RD&D program with DOE, or if we experience delays in receiving government funding under the RD&D program, this will significantly limit our ability to spend on the project and could force us to demobilize the project even with an expectation of receipt of RD&D funding in the future.

Provisions in our credit facility relating to spending on the American Centrifuge project during the term of the credit facility were based on our view of the expected terms of any agreement we would enter into with DOE for the RD&D program, which requires agent approval. If the terms that we ultimately reach with DOE for the RD&D program are materially different, that could cause lender consent to be more difficult or costly to obtain, or could restrict our ability to implement the RD&D program.


 
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If we enter into an agreement with DOE for the RD&D program, we are permitted to spend our 20% share of the costs under the RD&D program (up to $75 million) as long as the amount we have spent that is due to be reimbursed to us under the RD&D program does not exceed $50 million. Delays in reimbursement from DOE could limit our ability to spend on the American Centrifuge project even with an agreement for the RD&D program.

If we demobilize the American Centrifuge project, the credit facility permits us to pay the costs and expenses of a demobilization in accordance with a plan previously submitted to the agent for the lenders. This would restrict our ability to pay for demobilization expenses that are greater than anticipated at the time of entering into the credit facility without the approval of the administrative agent under the credit facility, which could be difficult or costly to obtain. If, as part of the exercise of DOE’s remedies under the RD&D program, we are required to transfer the American Centrifuge project or the RD&D program assets to DOE or its designee, the credit facility also permits us to spend as needed to maintain compliance with legal and regulatory requirements. However, this is limited under the credit facility to up to $5 million of proceeds of the revolving loans on such expenses. We may not spend any proceeds of revolving loans on American Centrifuge expenses if a default or event of default has occurred under the credit facility. These restrictions on spending could significantly restrict our flexibility and ability to implement the RD&D program and deploy the American Centrifuge project.

The rights of our creditors under the documents governing our indebtedness may limit our operating and financial flexibility and increase the difficulty of complying with the obligations governing our indebtedness.

Our new credit facility entered into on March 13, 2012 includes various operating and financial covenants that restrict our ability, and the ability of our subsidiaries, to, among other things, incur or prepay other indebtedness, grant liens, sell assets, make investments and acquisitions, consummate certain mergers and other fundamental changes, make certain capital expenditures and declare or pay dividends or other distributions. Most of these covenants are more restrictive than the corresponding covenants under our prior credit facility. The more restrictive nature of the covenants, combined with the smaller size of the credit facility from our prior 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. For example, as described in the risk factor above, these covenants limit the amount we can invest in the American Centrifuge project. In addition, the covenants do not permit us to enter into arrangements with DOE in which we barter SWU for non-cash consideration, such as uranium, without lender approval. Depending on how an agreement with DOE was structured, we could need lender consent in order to enter into an agreement with DOE for the re-enrichment of DOE tails at the Paducah GDP.

The credit agreement also requires that we maintain a minimum level of available borrowings and contains reserve provisions that may periodically reduce the available borrowings under the credit facility. In addition, beginning in December 2012, the aggregate revolving commitments and term loan will be reduced by $5.0 million per month through the expiration of the credit facility. In addition, certain proceeds (including from sales of assets resulting from the cessation of operations at the Paducah GDP or a demobilization of the American Centrifuge project), will permanently reduce the revolving loan commitments and prepay the term loan.  Both the revolving credit facility and the term loan must be fully prepaid prior to any redemption of the Company’s Series B-1 preferred stock.

The new credit facility also contains higher fees and interest than our previous credit facility, which increases the overall cost of the credit facility. In addition, depending upon the amount of borrowings, these higher fees could have an adverse effect on our results of operations.


 
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Most material modifications under the new credit facility require the consent of a majority of both the revolving credit facility lenders and the term loan lenders as a separate class.  This could make any consent we may need, in particular in light of the significant uncertainties facing our business, difficult or costly to obtain.

Our failure to comply with obligations under the credit facility or other agreements such as the indenture governing our outstanding convertible notes, and surety bonds, or the occurrence of a “fundamental change” as defined in the indenture governing our outstanding convertible notes or the occurrence of a “material adverse effect” as defined in our credit facility, could result in an event of default under one or more of the documents governing our indebtedness. We cannot provide assurances that we would be able to cure any default and, in certain cases, the applicable documents governing our indebtedness may not provide us the opportunity to cure a default. A default, if not cured or waived, could result in the acceleration of our indebtedness and, in the case of the credit facility, could require us to fully cash collateralize all outstanding letters of credit. In addition, a default under one of the documents governing our indebtedness, such as our credit facility, could constitute a default under another document governing our indebtedness, such as the indenture governing our outstanding convertible notes. If, as a result of a default, our indebtedness is accelerated, we cannot be certain that we will have funds available to pay the accelerated indebtedness or that we will have the ability to refinance the accelerated indebtedness on terms favorable to us or at all. Further, even if we are able to pay or refinance the accelerated indebtedness, we may not be able to remedy the consequence of a default under the documents governing our other indebtedness or obligations, including the indenture governing our outstanding convertible notes.

The long-term viability of our business depends on our ability to replace our current enrichment facility with competitive gas centrifuge enrichment technology.
 
We currently use a gaseous diffusion uranium enrichment technology at the Paducah GDP for approximately one-half of the LEU that we need to meet our delivery obligations to our customers and to generate uranium through underfeeding to satisfy our obligations under the Russian Contract. However, our competitors utilize or are transitioning to centrifuge uranium enrichment technology. Centrifuge technology is more efficient and operationally cost-effective than gaseous diffusion technology, which requires substantial amounts of electric power to enrich uranium. We must transition to a lower operating cost technology in order to remain competitive in the long term and one that is less dependent on volatile energy markets.

We are working to deploy an advanced uranium enrichment centrifuge technology, which we refer to as the American Centrifuge technology, as a replacement for our gaseous diffusion technology. The construction and deployment of the American Centrifuge Plant (“ACP”) is a large and capital-intensive undertaking that is subject to significant risks and uncertainties.

If we are unable to successfully and timely deploy the ACP or an alternative enrichment technology on a cost-effective basis, due to the risks and uncertainties described in this section or for any other reasons, our gross profit margins, cash flows, liquidity and results of operations would be materially and adversely affected and our business likely would not remain viable over the long term.

We have not yet reached an agreement with DOE regarding the RD&D program and without funding for such a program or other source of funding, we will likely need to begin demobilizing the American Centrifuge project in the near term.

We are engaged in discussions with DOE regarding a RD&D program to reduce the technology and financial risk of commercializing the American Centrifuge technology. The RD&D program being discussed with DOE is currently anticipated to include up to $300 million of total U.S. government funding. The RD&D program is expected to be a two-year program implemented through a cost-sharing arrangement whereby DOE would initially provide up to 80% of the costs of the program. DOE has proposed funding one half of its $300 million contribution in government fiscal year 2012, with the remainder in government fiscal year 2013. We have been working with DOE and Congress to secure DOE funding for the RD&D program.  However, DOE’s share of funding for the program has not yet been provided and the source for such funding is uncertain. The current political environment in Washington has significantly slowed the legislative process. The two houses of Congress are each held by a different political party and in an election year the necessary bipartisan support will be difficult to achieve.

 
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Due to constraints on our ability to continue to spend on the project, on March 13, 2012, we entered into an agreement with DOE that enables us to provide interim funding of $44 million. Under the agreement, we transferred a quantity of our depleted uranium (“tails”) to DOE, which enabled us to release encumbered funds of approximately $44 million that were previously provided as financial assurance for the disposition of such depleted uranium.  In consideration for accepting title to the tails quantity, we transferred to DOE title to LEU containing SWU of equal value.  We expect that this LEU could be returned to us as part of DOE’s cost share under the RD&D program if government funding is provided for the RD&D program (this $44 million would then be part of the $150 million that DOE is seeking to fund in fiscal year 2012).  However, if the RD&D program does not move forward, the LEU would not be returned to us, and DOE would not reimburse these ACP costs. The $44 million of funding is expected to enable us to fund the ACP program activities through the end of March 2012 while we continue to work with DOE and Congress to secure funding for the RD&D program. However, this funding may not be sufficient to fund our efforts through the timeframe needed to secure DOE funding, including in the event of continuing delays with respect to our efforts to seek funding for the RD&D program.  In addition, if we determine that DOE funding for the RD&D program is not likely to be achieved in the timeframe needed, we may determine not to continue spending on the project.

Even if DOE funding were provided for the RD&D program for government fiscal year 2012, funding for the RD&D program beyond government fiscal year 2012 would be subject to future appropriations, which is subject to significant uncertainty. We have no assurance that we will be able to reach agreement with DOE regarding any phase of the RD&D program or that any funding will be provided or that the LEU will be returned.

Our ability to provide funding for the project beyond the $44 million is significantly limited. It is currently anticipated that USEC’s 20% contribution during the initial phase of the RD&D program could include credit for certain expenditures previously made by USEC for ongoing demonstration activities. However, we have no assurances that we will be allowed a credit for these expenditures.

Even if we are successful in obtaining funding for the RD&D program, we will still need to reach agreement on the terms of the RD&D program.  We would need to agree on the scope, schedule, cost, and funding sources for the RD&D program, and finalize financial conditions and technical milestones for the RD&D program. Any agreement for the RD&D program would likely require restructuring of the project and of our investment. We would also anticipate working with our strategic investors Toshiba Corporation (“Toshiba”) and Babcock & Wilcox Investment Company (“B&W”) to determine how best to structure ongoing investment in the project and move forward with this RD&D program and future commercialization. The RD&D program being discussed with DOE involves the manufacturing of additional production design centrifuge machines and constructing and operating at least one complete demonstration cascade of commercial centrifuge machines so that key systems associated with cascade operations of the American Centrifuge technology can be tested as they would actually operate at the scale necessary for full commercialization. However, an agreement has not been reached on the specific scope of the program, including the actual number of machines to be built, and the technical milestones for the RD&D program.  The technical milestones that DOE requires could be substantial and could be difficult to achieve in light of the cap on the U.S. government funding of $300 million and limitations on our ability to continue to spend on the project. If the project is unable to satisfy, on the agreed schedule, any technical or other milestones that are negotiated, this could give DOE certain rights to terminate the RD&D program and to exercise certain remedies, which could materially impair our ability to deploy the project.
 

 
 
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If we move forward with the RD&D program, we will be working with our strategic investors and with other potential third parties regarding the form and structure of further investment in the ACP and achievement of any financial conditions that may be required by DOE.  However, we have no assurance that we will reach agreement with our strategic investors or any other potential third parties and that such parties will be willing to provide funding for the project and on what terms.

No decision has yet been made regarding the RD&D program and there are no assurances that we or DOE will elect to move forward with the RD&D program and on what terms. If we elect not to go forward with the RD&D program, our alternatives for the deployment of the American Centrifuge project would be very limited. In addition, DOE may seek to exercise remedies under the 2002 DOE-USEC Agreement described below.

We have reduced spending on the American Centrifuge project and actions we have taken or may take to reduce spending may have adverse consequences on the American Centrifuge project.

Beginning in October 2011, we reduced our monthly spending on the American Centrifuge project by approximately 30% (as compared to the average monthly rate of spending in the prior months of 2011) and also suspended a number of contracts with suppliers and contractors involved in the American Centrifuge. We sent Worker Adjustment and Retraining Notification (“WARN”) Act notices to all of the approximately 450 USEC American Centrifuge workers informing them of potential future layoffs. In connection with the decision to curtail spending, we also suspended a number of contracts with suppliers and contractors involved in the American Centrifuge project and advised them that we may demobilize the project. As discussed above, we are currently in discussions with DOE regarding a RD&D program and on March 13, 2012, we entered into an agreement with DOE that enables us to fund the project at a reduced level of spending through the end of March 2012.  However, additional spending reductions may be needed to keep spending within available funding going forward.  We also have no assurance that any additional funding for the American Centrifuge project will be made available.

Reductions in spending on the American Centrifuge project could:

 
 • 
adversely affect our ability to execute the RD&D program if an agreement is reached;
 
 
 
• 
cause us to need to continue to suspend or possibly to terminate contracts with suppliers and contractors involved in the American Centrifuge project and make it more difficult for us to maintain key suppliers for the ACP and the manufacturing infrastructure developed over the last several years;
 
 • 
cause us to implement worker layoffs and potentially lose key skilled personnel, some of whom have security clearances, which could be difficult to re-hire or replace, and incur severance and other termination costs;
 
 • 
delay our efforts to reduce the centrifuge machine cost through value engineering; and
 
 • 
delay our deployment of the American Centrifuge project and increase the overall cost of the project, which could adversely affect the overall economics of the project.   


 
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We are heavily dependent on U.S. Government funding of $300 million for the RD&D program. Delays in the budget process or the lack of approved funding for our project will adversely affect our ability to implement the RD&D program.

We are working with DOE and Congress to obtain $150 million in funding for the RD&D program for government fiscal year 2012. DOE has been seeking legislation to provide transfer authority to DOE in order to provide this funding for government fiscal year 2012. However, this transfer authority has not yet been provided by Congress. The current political environment in Washington has significantly slowed the legislative process. The two houses of Congress are each held by a different political party and in an election year the necessary bipartisan support will be difficult to achieve.  Legislative vehicles that will be enacted in the necessary timeframe in 2012 are limited and it will be challenging to include provisions in any vehicle that will be acted upon to provide RD&D funding for the balance of government fiscal year 2012. Absent legislative action, DOE would have to take steps to accept tails liabilities to release USEC’s encumbered funds or reprogram some of its existing budget allocations to fund the RD&D program after March 31 for the balance of government fiscal year 2012. Congressional support for these steps is also needed, and we have no assurance that such support will be provided or that DOE will take these steps.

Even if DOE funding were provided for the RD&D program for government fiscal year 2012, funding for the RD&D program beyond government fiscal year 2012 would be subject to future appropriations. The President’s Fiscal Year 2013 budget includes $150 million for the RD&D program within the DOE budget.  The President’s budget is currently being considered by Congress and we have no assurances that Congress will fund the RD&D program in the fiscal year 2013 appropriations legislation. In recent years, the U.S. government does not complete its budget process before the end of its fiscal year (September 30), and government operations typically are funded through a continuing resolution that authorizes agencies of the U.S. government to continue to operate. If the fiscal year 2013 appropriation for DOE is not signed into law prior to September 30, 2012 and the U.S. government operates under a continuing resolution for government fiscal year 2013, or a portion of fiscal year 2013, we could experience delays or an interruption in funding for the RD&D program, which would adversely affect the project. In light of our liquidity constraints and restrictions under our credit facility, we will not be able to continue RD&D program spending without U.S. government or other third party funding as the use of our own funds, would be limited.

Even if we obtain the RD&D program and funding, we may not obtain a loan guarantee from DOE and other financing needed for the project and could demobilize or terminate the project.

We have been working with DOE since October 2010 on the terms of a conditional commitment for a $2 billion loan guarantee. However, we have not yet been able to obtain a conditional commitment. In April 2011, the DOE Loan Guarantee Program Office substantially completed the due diligence and negotiation stage of the application process, including a draft term sheet, and advanced the ACP application to the next phase for review in parallel by DOE’s credit group and by the Office of Management and Budget, the Department of the Treasury and the National Economic Council. This review included the establishment of an estimated range of credit subsidy cost. As part of this review, DOE indicated that it believed that we needed to further improve our financial and project execution depth to achieve a manageable credit subsidy cost estimate and to proceed with the DOE loan guarantee.

Despite our continued efforts through most of 2011 to obtain a conditional commitment for a loan guarantee from DOE, we were not successful during 2011 in satisfying DOE’s concerns regarding the financial and project execution depth of the American Centrifuge project. Instead of moving forward with a conditional commitment for a loan guarantee, DOE proposed the RD&D program, and we are focused on addressing DOE’s remaining concerns through the RD&D program in order to move forward on the American Centrifuge project and to obtain a conditional commitment and DOE loan guarantee. However, we have no assurances that we will be able to address DOE’s concerns to DOE’s satisfaction or that additional concerns will not be raised that we will be required to address to DOE’s satisfaction in order to obtain a loan guarantee.  There is also ongoing uncertainty regarding the DOE loan guarantee program as a result of high-profile defaults under the program and related investigations.

 
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We have no assurances that we will be successful in obtaining a loan guarantee and the timing thereof, that the terms we previously negotiated with the DOE Loan Guarantee Program Office will be approved or that the credit subsidy cost will be reasonable. A high credit subsidy cost could result in a potential capital shortfall, which would require new sources of capital to close. New sources of capital could be difficult to obtain and result in additional delays.

We also cannot give any assurances that we will be able to demonstrate to DOE that we can obtain the capital needed to complete the project following the delays in our obtaining a loan guarantee, including any delays created by the pendency of our application during the RD&D program. Additional capital beyond the $2 billion of DOE loan guarantee funding that we have applied for and our internally generated cash flow will be required to complete the project. We have had discussions with Japanese export credit agencies regarding financing up to $1 billion of the cost of completing the ACP. However we have no assurances that we will be successful in obtaining this financing and that the delays we have experienced will not adversely affect these efforts.

The amount of additional capital that we will need will depend on a variety of factors, including our estimate of the total cost to complete the project, the input we receive from our suppliers as part of our negotiations, the amount of contingency or other capital DOE may require, the amount of the DOE credit subsidy cost we would be required to pay, the length of the demobilization period, and efficiencies and other cost savings that we are able to achieve. In order to obtain a DOE loan guarantee, we will have to demonstrate that sufficient capital is available to complete the project.

The second closing of the strategic investment by Toshiba and B&W is conditioned on our obtaining a conditional commitment for a loan guarantee of not less than $2 billion from DOE. The securities purchase agreement governing the transactions with Toshiba and B&W provided that it may be terminated if the second closing did not occur by June 30, 2011, and the second closing did not occur. During 2011 we entered into a standstill agreement with Toshiba and B&W pursuant to which each party agreed not to exercise its right to terminate the securities purchase agreement for a limited period of time. However, that time period has expired and USEC and each of the strategic investors (as to such investor’s obligations) currently have the right to terminate the securities purchase agreement. If either Toshiba or B&W were to terminate the securities purchase agreement, that could have a significant adverse impact on our ability to deploy ACP and on our business and prospects. Our loan guarantee application includes the $200 million investment as part of the sources of funds for the American Centrifuge project.  If the remaining two phases of the investment were not consummated, this would adversely affect our ability to obtain a loan guarantee.  In addition, our ability to obtain Japanese export credit agency financing is highly dependent on the strategic investment by Toshiba. If our ability to obtain Japanese export credit agency financing were adversely affected, this would also adversely affect our ability to obtain a DOE loan guarantee and complete the American Centrifuge project. In the event the securities purchase agreement governing the Toshiba and B&W investment is terminated, each of Toshiba and B&W must elect to either convert its shares of preferred stock into a new class of common stock (or a new class of preferred stock) or to sell its shares of preferred stock pursuant to an orderly sale arrangement. As a result of certain NYSE limitations on our issuance of common stock, depending on the share price at the time of termination, some of Toshiba and B&W's preferred stock may not be able to be converted or sold and would remain outstanding. We could be required to redeem such shares for cash or SWU, at our election, at August 31, 2012, which could harm our financial condition. However, our ability to redeem may be limited by Delaware law, and if not limited may result in mandatory prepayment of our credit facility.

 
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In light of our inability to obtain a conditional commitment for a DOE loan guarantee to date, and given the significant uncertainty surrounding our prospects for finalizing an agreement and obtaining funding from DOE for an RD&D program and the timing thereof, we continue to evaluate our options concerning the American Centrifuge project. Our evaluation of these options is ongoing and a decision could be made at any time. We may also take actions in the future if we determine at any time that we do not see a path forward to the receipt of loan guarantee conditional commitment or if we see further delay or increased uncertainty with respect to our prospects for obtaining a loan guarantee, or for other reasons, including as needed to preserve our liquidity. Further cuts in project spending and staffing could make it even more difficult to remobilize the project and could lead to more significant delays and increased costs and potentially make the project uneconomic. Termination of the ACP could have a material adverse impact on our business and prospects because we believe the long-term competitive position of our enrichment business depends on the successful deployment of competitive gas centrifuge enrichment technology.

Our failure to meet milestones under the 2002 DOE-USEC Agreement could result in DOE exercising one or more remedies under the 2002 DOE-USEC Agreement.
 
The 2002 DOE-USEC Agreement contains specific project milestones relating to the American Centrifuge Plant. As amended most recently in February 2011, the following four milestones remain under the 2002 DOE-USEC Agreement:
 
·  
November 2011 – 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;
 
·  
May 2014 – begin commercial American Centrifuge Plant operations;
 
·  
August 2015 – commercial American Centrifuge Plant annual capacity at 1 million SWU per year; and
 
·  
September 2017 – commercial American Centrifuge Plant annual capacity of approximately 3.5 million SWU per year.

In February 2011, DOE and we amended the 2002 DOE-USEC Agreement to revise the remaining four milestones relating to the financing and operation of the ACP. The amendment extended the financing milestone by one year to November 2011 and adjusted the remaining three milestones. In addition, we and DOE agreed to discuss further adjustment of the remaining three milestones as may be appropriate based on a revised deployment plan to be submitted by us to DOE by January 30, 2012 following the completion of the November 2011 financing milestone. Due to DOE’s deferral of a decision on the loan guarantee until after completion of the RD&D program, we did not meet the November 2011 financing milestone or submit a revised deployment plan to DOE.  In connection with the RD&D program described above, we have engaged in discussions with DOE regarding the modification of the remaining milestones and other provisions of the 2002 DOE-USEC Agreement.  DOE has acknowledged that since DOE and we are working in good faith toward the RD&D program and the adjustment of the milestones in the 2002 DOE-USEC Agreement is currently a part of the proposed terms of the RD&D program, it does not see the need at the present time for us to present our position on the missed November 2011 milestone to DOE or to provide a revised deployment plan by the specified time. However, we have no assurances that the RD&D program will move forward or that DOE will agree to an adjustment of the milestones or other provisions of the 2002 DOE-USEC Agreement.

 
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DOE has full remedies under the 2002 DOE-USEC Agreement if we fail to meet a milestone that would materially impact our ability to begin commercial operations of the American Centrifuge Plant on schedule and such delay was within our control or was due to our fault or negligence. These remedies include terminating the 2002 DOE-USEC Agreement, revoking our access to DOE’s U.S. centrifuge technology that we require for the success of the American Centrifuge project and requiring us to transfer certain of our rights in the American Centrifuge technology and facilities to DOE, and requiring us to reimburse DOE for certain costs associated with the American Centrifuge project. DOE could also recommend that we be removed as the sole U.S. Executive Agent under the Megatons to Megawatts program. The appointment of a substitute or additional executive agent pursuant to the U.S. government’s compliance with the terms of the Executive Agent agreement under which USEC is designated the U.S. Executive Agent would require that all or part of the fixed quantity of LEU available each year under the Russian Contract be provided to the substitute or additional executive agent. This would not only reduce our access to LEU under the Russian Contract, but would also create a significant new competitor, which could impair our ability to meet our existing delivery commitments while reducing our ability to bid for new sales. Reduced access to LEU under the Russian Contract could also increase our costs and reduce our gross profit margins. However, under the 1997 memorandum of agreement, USEC has the right and obligation to pay for and take delivery of LEU that is to be delivered in the year of the date of termination and in the following year if USEC and TENEX have agreed on a price and quantity. USEC and TENEX have agreed on price and quantity for 2012. 

Any of these actions could have a material adverse impact on our business and prospects. Uncertainty surrounding the milestones under the 2002 DOE-USEC Agreement or the initiation by DOE of any action or proceeding under the 2002 DOE-USEC Agreement could adversely affect our ability to obtain financing for the American Centrifuge project or to consummate the remaining transactions with Toshiba and B&W.

Increased costs and cost uncertainty could adversely affect our ability to finance and deploy the American Centrifuge Plant.

We expect that if we move forward with the RD&D program, we will be reevaluating the deployment approach to the project, including the development of a comprehensive revised cost estimate and schedule for the project. Based on our previous cost estimate of $2.8 billion to complete the American Centrifuge project from the point of closing on financing, we continue to expect the funding needed to complete the project to be substantial.  Our previous cost estimate was the basis of the update to our loan guarantee application submitted in July 2010.  The estimate was a go-forward cost estimate and did not include our investment to date, spending from then until financial closing, overall project contingency, financing costs or financial assurance. There are significant carrying costs associated with the project and maintaining the manufacturing infrastructure. These costs could be substantial and, depending on the length of the RD&D program or any demobilization period, could threaten the overall economics of the project.  In addition, continued delays in the project have made discussions with suppliers very challenging.  We are not currently negotiating with suppliers regarding the transition to fixed cost or maximum cost contracts and these efforts would have to be re-commenced in connection with any revised deployment plan that is developed during the RD&D program.

Any cost estimate and schedule for the project would depend on a large variety of factors, including how we ultimately deploy the project, the outcome of future discussions with suppliers, changes in commodity and other costs, the outcome of the RD&D program, and the ability to develop and implement cost savings and value engineering actions.

Increases in the cost of the ACP increase the amount of external capital we must raise and could threaten our ability to successfully finance and deploy the ACP. We are seeking to fund the costs to complete the American Centrifuge project, including additional amounts that are needed to cover overall project contingency, financing costs and financial assurance through a combination of funding under the RD&D program, the $2 billion of loan guarantee funding for which we have applied, the proceeds from the remaining $125 million investment from Toshiba and B&W, additional funding of up to $1 billion from Japanese export credit agencies or other third parties, cash on hand and prospective cash flow from existing USEC operations, and prospective reinvested project cash. Many of these sources of capital are inter-related. For example, the third phase of the investment by 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. However, we have no assurance that we will be successful in raising this capital. Our ability to fund the ACP from cash flow from existing operations will be significantly reduced given delays in the deployment of the American Centrifuge project, including the two year delay related to the RD&D program.

 
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The amount of additional capital that we will need will depend on a variety of factors, including the amount of any revised cost estimate and schedule for the project, the amount of contingency or other capital DOE may require as part of a loan guarantee, and the amount of the DOE credit subsidy cost we would be required to pay in connection with a loan guarantee.

We cannot assure investors that, if remobilized, the costs associated with the ACP will not be materially higher than anticipated or that efforts that we take to mitigate or minimize cost increases will be successful or sufficient. Our cost estimates and budget for the ACP have been, and will continue to be, based on many assumptions that are subject to change as new information becomes available or as events occur. Regardless of our success in obtaining and implementing the RD&D program, uncertainty surrounding our ability to accurately estimate costs or to limit potential cost increases could jeopardize our ability to successfully finance and deploy the ACP. Inability to finance and deploy the ACP could have a material adverse impact on our business and prospects because we believe the long-term competitive position of our enrichment business depends on the successful deployment of competitive gas centrifuge enrichment technology.

The centrifuge machines and supporting equipment that we deploy in the American Centrifuge Plant may not meet our performance or availability targets over the life of the project, which would adversely affect the overall economics of the ACP.
 
The target output for the ACP is based on assumptions regarding performance and availability of centrifuge machines and related equipment and actual performance may be different than we expect. Factors that can influence performance include:

·  
the performance and reliability of individual centrifuge components built by our strategic suppliers;
 
·  
the availability and performance of plant support systems;

·  
the operable lives of individual components and the level of maintenance required to sustain overall plant availability;
 
·  
our ability to acquire or manufacture replacement parts for centrifuges or plant support systems when needed; and
 
·  
differences in actual commercial plant conditions from the conditions used to establish and test our design criteria.

The AC100 machines we build as part of the RD&D program are expected to operate at our targeted performance level of 350 SWU per machine, per year over their 30-year lifetimes. We have achieved the 350 SWU performance target with the most recent AC100 centrifuges we have built and tested at Piketon.  However, additional run time is required to confirm the reliability of centrifuge components, our ability to operate in a 120-centrifuge commercial plant cascade, and our ability to sustain production over an extended period of time. Our failure to achieve targeted performance could affect our ability to successfully complete milestones that are established as part of the RD&D program, the overall economics of the ACP and our ability to finance and successfully deploy the project.  This could have a material adverse impact on our business and prospects.

 
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We rely on third-party suppliers for key components for our AC100 machine for the RD&D program and for the American Centrifuge Plant.

We rely on third-party suppliers for key American Centrifuge components. Although spending on the American Centrifuge project has been reduced, we continue to purchase from suppliers key components for the AC100 machines that we are assembling and that will be built as part of the RD&D program. In the event we ramp up the project, our dependence on key suppliers will increase. The failure of any of our suppliers to provide their respective components as scheduled or at all or of the quality and the precise specifications we need could result in substantial delays in, or otherwise materially hamper, the deployment of the ACP.

There are a limited number of potential suppliers for these key components and finding alternate suppliers could be difficult, time consuming and costly. Because of this, our ability to obtain favorable contractual terms with these suppliers is limited. We may also have issues with respect to the retention of key suppliers as a result of our reduced spending, which could adversely affect our ability to remobilize.

We could face challenges with ensuring the ability and willingness of our strategic suppliers to continue at low rates of production for a prolonged period of time absent greater certainty on timing for financing and a definitive timeline for full remobilization. While executing the RD&D program, we expect to continue our current agreements with suppliers in which we bear certain cost, schedule and performance risk. Although we will seek to manage these risks, we cannot provide any assurance that we will be able to do so. This could result in cost increases and unanticipated delays. Our inability to effectively integrate these suppliers and other key third-party suppliers could also result in delays and otherwise increase our costs. Delays could also occur if we decide to search for alternate suppliers or to self-perform certain items that we previously anticipated outsourcing to third-party suppliers.
 
We have capitalized significant amounts related to the ACP and if these amounts were no longer able to be capitalized and were charged to expense, our results of operations would be adversely affected. 

Additional delays in financing for the ACP, including delays in obtaining funding for the project as part of the RD&D program being discussed with DOE, or potential termination of the ACP could cause us to be required to charge to expense amounts previously capitalized related to the ACP.  Capital expenditures related to the ACP totaled approximately $1.1 billion at December 31, 2011, including capitalized interest of $105.4 million, prepayments to suppliers under existing agreements for materials and services not yet provided of $21.1 million, and $6.7 million for deferred financing costs related to the DOE Loan Guarantee Program, such as loan guarantee application fees paid to DOE and third-party costs. During the second and fourth quarters of 2011, we expensed previously capitalized costs related to the ACP totaling $146.6 million. This had a significant adverse impact on our results of operations for 2011.

Beginning with the start of the fourth quarter of 2011, all project costs incurred have been expensed, including interest expense that previously would have been capitalized. Capitalization of expenditures related to the ACP has ceased until commercial plant deployment resumes.  If conditions change, including if the current path to commercial deployment were no longer probable or our anticipated role in the project were changed, we could expense up to the full amount of previously capitalized costs related to the ACP of up to $1.1 billion as early as the first quarter of 2012, which would adversely affect our results of operations. Events that could impact our views as to the probability of deployment or our projections include a failure to successfully enter into an agreement with DOE to provide funding for the project as part of the RD&D program. Refer to “Critical Accounting Estimates” in Part II, Item 7 for a discussion of assumptions, estimates and judgments related to our accounting for American Centrifuge technology costs. 

 
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We have entered into a securities purchase agreement with two investors, Toshiba Corporation and Babcock & Wilcox Investment Company, pursuant to which the investors will make a strategic investment in USEC of $200 million in three phases. If we fail to consummate the remaining two phases of the transactions contemplated by the securities purchase agreement, we may be unable to raise capital from alternative sources, and our business and prospects may be substantially harmed.

On May 25, 2010, we entered into a securities purchase agreement with Toshiba and B&W, pursuant to which they agreed to purchase, in three phases and for an aggregate amount of $200 million, shares of a newly created series of preferred stock and warrants to purchase shares of a newly created series of preferred stock or class of common stock (the “Transactions”).  On September 2, 2010, the first closing of $75.0 million occurred under the securities purchase agreement. The remaining two phases of the Transactions ($125.0 million) are subject to significant closing conditions, including the conditions listed in the risk factor below. 

If the remaining Transactions are not completed, our ongoing business and financial results may be adversely affected and we would be subject to a number of risks, including the following:

·  
Matters relating to the Transactions require substantial commitments of time and resources by our management, whether or not the remaining Transactions are completed, which could otherwise have been devoted to other opportunities that may have been beneficial to us, including pursuing other strategic options or sources of capital;
 
·  
The second closing of the Transactions is conditioned on our obtaining a conditional commitment for a loan guarantee of not less than $2 billion from DOE. If the second closing continues to be delayed because of continued delays in our obtaining a conditional commitment for a loan guarantee or is not consummated, including as a result of an investor exercising its right to terminate the securities purchase agreement (as to such investor’s obligations), our ability to continue to spend on the American Centrifuge could be affected; 
 
·  
Our loan guarantee application includes the $200 million investment as part of the sources of funds for the American Centrifuge project.  The strategic investment was also intended in part to address financial concerns of DOE with respect to the ability of the American Centrifuge project to mitigate cost and other risk.  If the remaining Transactions are not consummated or are delayed significantly, this would adversely affect our ability to obtain a loan guarantee (which is a condition to the third closing);
 
·  
We need significant additional financing to complete construction of the American Centrifuge Plant beyond the DOE loan guarantee and the proceeds of the Transactions, and we will need to demonstrate the availability of that funding in order to obtain the DOE loan guarantee (which is a condition of the third closing).  We have initiated discussions with Japanese export credit agencies (“ECAs”) for additional financing of up to $1 billion.  Our ability to obtain Japanese ECA financing is highly dependent on the strategic investment by Toshiba. If the remaining Transactions are not consummated or are delayed significantly and our ability to obtain Japanese ECA financing is adversely affected, this would subsequently adversely affect our ability to obtain a DOE loan guarantee, consummate the third closing and complete the American Centrifuge project; and
 
·  
If the remaining Transactions are not consummated, we may be unable to raise capital from alternative sources on terms favorable to us, if at all.  If the remaining Transactions are not consummated or are delayed significantly and we are unable to raise capital from alternative sources, our business and prospects (including the American Centrifuge project) may be substantially harmed and our stock price may decline.


 
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We cannot provide any assurance that the remaining Transactions will be completed, that there will not be significant additional delay in the completion of the remaining Transactions or that all or any of the anticipated benefits of the Transactions will be achieved. In the event the remaining Transactions are materially delayed for any reason, our business and prospects may be substantially harmed.

Completion of the remaining Transactions is subject to significant closing conditions, including governmental approvals and other conditions that may be difficult to obtain and are outside of our control.

The completion of the remaining Transactions is subject to significant closing conditions, many of which may be difficult to obtain and are outside our control.

The Transactions are subject to significant conditions tied to our progress in obtaining a DOE loan guarantee for the American Centrifuge project.  The obligations of the investors at the second closing of the Transactions is conditioned upon USEC having entered into a loan guarantee conditional commitment in an amount not less than $2 billion for the American Centrifuge project with DOE.  The obligations of the investors at the third closing of the Transactions is conditioned upon USEC achieving closing on a DOE loan guarantee in an amount not less than $2 billion for the American Centrifuge project. Our ability to satisfy these conditions and to obtain a loan guarantee is subject to significant uncertainty as described in the risk factor “Even if we obtain the RD&D program and funding, we may not obtain a loan guarantee from DOE and other financing needed for the project and could demobilize or terminate the project.”  In order to obtain a loan guarantee, we will have to demonstrate that any additional capital needed to complete the American Centrifuge project is available.

The obligations of the investors at the third closing are subject to the approval by our shareholders of (1) the amendment of our certificate of incorporation to create a new class of common stock and to increase our authorized shares of common stock and (2) the issuance of shares of common stock in the Transactions in excess of the threshold for requiring shareholder approval under the New York Stock Exchange listing requirements. We have no assurance that our shareholders will approve these matters. If we do not obtain shareholder approval, we could be required to redeem the investors’ shares for cash or separative work units (“SWU”), which could harm our financial condition.

The third closing is subject to the receipt of governmental approvals and determinations from the U.S. Nuclear Regulatory Commission (“NRC”), DOE and other relevant authorities related to foreign ownership, control, or influence (“FOCI”) and other matters. We have received confirmation from the NRC that NRC consent is not required for the second and third closings based on their review of the transaction and the current information concerning the parties. We cannot assure you that subsequent events will not occur that could cause NRC and DOE to re-evaluate their determinations, which could have the effect of preventing or delaying completion of the Transactions or imposing additional costs on us.

The Transactions may also be subject to the notification requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976. Under this statute, parties are required to make notification filings and to await the expiration of the statutory waiting period prior to completing certain types of transactions. Based on the Transactions and current regulations and guidance, Toshiba and B&W have informed us that the Federal Trade Commission has advised them that such notification is not required. If the facts and circumstances or regulations change or if the federal antitrust authorities otherwise revisit or modify their advice or otherwise challenge the Transactions, such notification filings may be required or the federal antitrust authorities could seek to enjoin the Transactions, impose conditions on the completion of the Transactions, or require changes to the terms of the Transactions. This could have the effect of preventing or delaying completion of the Transactions or imposing additional costs on us.

 
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The second and third closings are also subject to other customary conditions to closing, including compliance with covenants, the accuracy of representations and warranties in the securities purchase agreement (including the absence of any action or proceeding by DOE under the 2002 DOE-USEC Agreement that has resulted or reasonably could be expected to result in a recommendation to exercise remedies), and that no material adverse effect shall have occurred with respect to USEC.

There were outside dates tied to the satisfaction of these conditions of June 30, 2011 for the second closing and December 31, 2011 (subject to a one year extension in certain circumstances) for the third closing. USEC and each of the strategic investors (as to such investor’s obligations) currently have the right to terminate the securities purchase agreement. If either Toshiba or B&W were to terminate the securities purchase agreement, that could have a significant adverse impact on our business and prospects.

If the securities purchase agreement governing the Transactions is terminated, each of Toshiba and B&W must elect to either convert its shares of preferred stock into a new class of common stock (or a new class of preferred stock) or to sell its shares of preferred stock pursuant to an orderly sale arrangement. As a result of certain NYSE limitations on our issuance of common stock, depending on the share price at the time of termination, some of Toshiba and B&W's preferred stock may not be able to be converted or sold and would remain outstanding. We could be required to redeem such shares for cash or SWU, at our election, at August 31, 2012, which could harm our financial condition. However, our ability to redeem may be limited by Delaware law, and if not limited may result in mandatory prepayment of our credit facility.

If Toshiba or B&W convert or sell their preferred shares or exercise their warrants, our stockholders will be diluted and our stock price may be negatively impacted. 

Following the first closing of the Transactions, Toshiba and B&W now hold shares of newly created preferred stock and warrants to purchase shares of a newly created series of preferred stock or class of common stock. Such shares are convertible into a newly created class of common stock (or a new class of preferred stock) at the market price at the time of conversion at the election of the holder at any time following a termination of the securities purchase agreement described above. Any remaining shares of preferred stock outstanding on December 31, 2016 will be automatically converted into the new class of common stock (or a new class of preferred stock) at the market price. The conversion of preferred stock or exercise of warrants may result in substantial dilution to our existing stockholders. Additionally, any sales by the investors could adversely affect prevailing market prices of our common stock.  The potential for such dilution or adverse stock price impact may encourage short selling by market participants. Additional information about the Transactions and the conversion and other rights related to the preferred stock and warrants to be issued in the Transactions can be found in the Current Reports on Form 8-K filed by us on May 25, 2010 and September 2, 2010.

We may not realize the expected benefits of any strategic relationships with Toshiba or B&W.
 
In connection with the Transactions, we entered into a strategic relationship agreement with Toshiba and B&W that provides a process for us to explore potential business opportunities throughout the nuclear fuel cycle.  However, the realization of the expected benefits of these strategic relationships is subject to a number of risks, including:
 
·  
success in potential efforts to sell our low enriched uranium in connection with Toshiba’s nuclear power plant proposals, including Toshiba’s success in nuclear reactor sales;
 
·  
success of efforts to identify potential opportunities in our contract services segment;
 
·  
success in achieving cost savings and other benefits through the manufacturing joint venture with B&W; and
 
·  
success in strengthening American Centrifuge project execution depth through our relationship with Toshiba and B&W. 
 
 
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We may not achieve the perceived benefits of the strategic relationships as rapidly or to the extent anticipated which could have an adverse impact on the perceived benefits of the Transactions and our prospects.
  
Apart from a DOE loan guarantee and the strategic investment by Toshiba and B&W, deployment of the American Centrifuge technology will require additional external financial and other support that may be difficult to secure.

We may not be able to attract the financing we need to complete the American Centrifuge project in a timely manner or at all. We have had discussions with Japanese export credit agencies (“ECAs”) regarding financing up to $1 billion of the cost of completing the ACP.  Any Japanese ECA financing will be subject to the terms and conditions negotiated with the lenders and we will need to satisfy any technical, financial and other conditions to funding in order to close on the financing. We are dependent on Toshiba's support for these discussions. In addition, our ability to obtain Japanese ECA financing is also dependent upon our success in obtaining a DOE loan guarantee. Therefore, we have no assurances that we will obtain this financing.
 
Factors that could affect our ability to obtain Japanese ECA financing or other financing needed to complete the ACP or the cost of such financing include:
 
·  
our ability to get loan guarantees or other support from the U.S. government,
 
·  
our ability to complete the remaining two phases of the $200 million strategic transaction with Toshiba and B&W and to otherwise address the financial concerns identified by DOE,
 
·  
potential shifts in the priorities of Japanese ECAs as a result of the March 2011 events in Japan or other factors outside of our control,
 
·  
our ability to satisfy DOE that efforts we have taken, including with respect to the RD&D program and efforts to reduce risk have addressed their concerns,
 
·  
the estimated costs, efficiency, timing and return on investment of the deployment of the American Centrifuge Plant,
 
·  
our ability to secure and maintain a sufficient number of long-term SWU purchase commitments from customers on satisfactory terms, including adequate prices,
 
·  
the level of success of our current operations,
 
·  
SWU prices,
 
·  
USEC’s perceived competitive position and investor confidence in our industry and in us,
 
·  
projected costs for the disposal of depleted uranium and the decontamination and decommissioning of the American Centrifuge Plant, and the impact of related financial assurance requirements,
 
·  
additional downgrades in our credit rating,
 
·  
market price and volatility of our common stock,
 
·  
general economic and capital market conditions,
 
·  
the continuing impact of the March 2011 events in Japan,
 
·  
conditions in energy markets,
 
·  
regulatory developments, including changes in laws and regulations,
 
·  
our reliance on LEU delivered to us under the Russian supply contracts and uncertainty regarding deliveries and market based components of prices under the Russian supply contracts, and
 
·  
restrictive covenants in the agreements governing our credit facility and in our outstanding notes and any future financing arrangements that limit our operating and financial flexibility.
 

 
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Restrictions on U.S. imports of LEU could adversely affect our ability to sell commercial Russian LEU that we purchase under the supply agreement with Joint Stock Company Techsnabexport (“TENEX”).

On March 23, 2011 we entered into the Russian Supply Agreement with TENEX for the supply by TENEX of commercial Russian LEU to us over a 10-year period with deliveries that begin in 2013. We may not achieve the anticipated benefits from the Russian Supply Agreement because of restrictions on U.S. imports of LEU and other uranium products produced in the Russian Federation.  These imports (other than LEU imported under the Russian Contract under the Megatons to Megawatts program) are subject to quotas imposed under legislation enacted into law in September 2008 and under the 1992 Russian Suspension Agreement, as amended. Under the new Russian Supply Agreement, we have the right to use a portion of the import quotas to support our sales in the United States of SWU purchased under the Russian Supply Agreement beginning in 2014. These quotas are subject to timely completion of the Megatons to Megawatts program by the end of 2013.  Further, prior to the expiration of the quotas at the end of 2020, we will not be able to import for consumption in the United States LEU delivered to us under the Russian Supply Agreement in excess of the portion of the quotas available to us.  This restriction does not apply to imports that are not subject to the quotas (e.g., for use in initial fuel cores for any U.S. nuclear reactors entering service for the first time). The LEU that we cannot sell for consumption in the United States will have to be sold for consumption by utilities outside the United States, but our ability to sell to those utilities may be limited by policies of foreign governments or regional institutions that seek to restrict the amount of Russian LEU purchased by utilities under their jurisdiction.  Accordingly, we have no assurance that we will be successful in our efforts to sell this LEU in the United States or outside of the United States.

Our efforts to explore the possible deployment of an enrichment plant in the United States employing Russian technology may not yield results.

TENEX and we have agreed to conduct a feasibility study to explore the possible deployment of an enrichment plant in the United States employing Russian centrifuge technology. However, we cannot give any assurance that we will proceed with such a plant.  As part of the feasibility study, Rosatom, TENEX and USEC will review international agreements, government approvals, licensing, financing, market demand, and commercial arrangements.  Any decision to proceed with such a plant would depend on the results of the feasibility study and would be subject to further agreement between the parties and their respective governments, the timing and prospects of which are significantly uncertain.
  
For as long as we continue to operate the Paducah GDP, we are at risk for power price volatility, which could increase our cost of sales to a level above the average prices we bill our customers.
 
Electric power constitutes approximately 70% of the production cost at the Paducah GDP. We currently purchase most of our electric power for the Paducah GDP from the Tennessee Valley Authority (“TVA”) under a multi-year power contract with TVA that expires in May 2012.  Power costs under the contract are subject to monthly adjustments to account for changes in TVA’s fuel costs, purchased-power costs, and related costs, which means that our actual power costs can be greater than we anticipate. The impact of the fuel cost adjustment has been negative for USEC, imposing an average increase over base contract prices of about 12% in 2011. The fuel cost adjustment under the TVA contract for the remainder of the term through May 2012 could be greater than we experienced in the past, and could also be very volatile. Factors that could affect TVA’s fuel and purchased-power costs and the amount of the fuel cost adjustment include coal and gas prices, purchased-power costs and hydroelectric power generation. In accordance with the TVA power contract, we provide financial assurance to support our payment obligations to TVA, including providing an irrevocable letter of credit and making weekly prepayments based on TVA’s estimate of the price and our usage of power. A significant increase in the price we pay for power could increase the amount of this financial assurance, which could adversely affect our liquidity and reduce capital resources otherwise available to fund our operations.

 
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Higher costs for power put significant pressure on our business and the economics of continued Paducah operations as described in the Risk Factor above “We do not currently believe the factors are in place to support continued Paducah GDP enrichment operations beyond May 2012.” Increases in our power costs also reduce the value to us of underfeeding. If we want to purchase power to operate the Paducah GDP beyond May 2012, we may be unable to reach an acceptable agreement with TVA or other suppliers of power and we are at risk for additional power cost increases in the future.  Some of our sales contracts (particularly older contracts) do not include provisions that permit us to pass through increases in power prices to our customers. As a result, our profit margins and cash flows under these older sales contracts are significantly reduced by higher power costs. Additionally, profit margins under sales contracts with power price adjusters may be similarly impacted to the extent the adjustments in the power cost index in those contracts are not sufficient to account for increases in our power costs.

Some form of additional government regulation may be forthcoming with respect to greenhouse gas emissions (including carbon dioxide) and such regulation could result in the creation of substantial additional costs for power suppliers in the form of taxes or emission allowances or other increased operating or capital costs.  Most of these additional costs would likely be passed through to electricity consumers, in which case our power costs could increase in the future. In 2011, approximately half of TVA’s electricity was generated by coal-fired power plants, which are producers of carbon dioxide and so would likely be affected by any regulation.

Deliveries of LEU under the Russian Contract currently account for approximately one-half of our supply mix and a significant delay or stoppage of deliveries could affect our ability to meet customer orders and could pose a significant risk to our continued operations and profitability.
 
A significant delay in, or stoppage or termination of, deliveries of LEU from Russia under the Russian Contract or a failure of the LEU to meet the Russian Contract’s quality specifications, could adversely affect our ability to make deliveries to our customers. A delay, stoppage or termination could occur due to a number of factors, including logistical or technical problems with shipments, commercial or political disputes between the parties or their governments, or a failure or inability by either party to meet the terms of the Russian Contract.  Because our annual LEU production capacity is less than our total delivery commitments to customers, an interruption of deliveries under the Russian Contract could, depending on the length of such an interruption, threaten our ability to fulfill these delivery commitments with adverse effects on our reputation, costs, results of operations, cash flows and long-term viability. Depending upon the reasons for the interruption and subject to limitations of liability and force majeure terms under our sales contracts, we could be required to compensate customers for a failure or delay in delivery.
 

 
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Our Paducah operations currently provide approximately one-half of our LEU supply and significant or extended unscheduled interruptions in production could affect our ability to meet customer orders and pose a significant risk to, or could significantly limit, our continued operations and profitability.
 
Our annual imports of Russian LEU under the Russian Contract account for approximately one-half of the total amount of LEU that we need to meet our delivery obligations to customers. In addition, some customers do not permit us to deliver Russian LEU to them under their contracts with us. Accordingly, our production at the Paducah GDP through May 2012 is needed to meet our annual delivery commitments. An interruption of production at the Paducah GDP would result in a drawdown of our inventories of LEU.  Depending on the length and severity of the production interruption, we could be unable to meet our annual delivery commitments, with adverse effects on our reputation, costs, results of operations, and cash flows. Depending upon the reasons for the interruption and subject to limitations on our liability and force majeure terms under our sales contracts, we also could be required to compensate customers for a failure or delay in delivery.
 
Production interruptions at the Paducah GDP could be caused by a variety of factors, such as:
 
·  
equipment breakdowns,
 
·  
interruptions of electric power, including those interruptions permitted under the TVA power agreement, or an inability to purchase electric power at an acceptable price,
 
·  
regulatory enforcement actions,
 
·  
labor disruptions,
 
·  
unavailability or inadequate supply of uranium feedstock,
 
·  
extreme weather conditions,
 
·  
natural or other disasters, including seismic activity in the vicinity of the Paducah GDP, which is located near the New Madrid fault line, or
 
·  
accidents or other incidents.
 
The U.S. government owns the Paducah GDP. Our rights to the plant are defined under a lease agreement with DOE and the law that the lease agreement implements. Under the 2002 DOE-USEC Agreement, we could lose our right to extend the lease of the Paducah GDP and could be required to waive our exclusive right to lease the facility if we fail on more than one occasion within specified periods to meet certain production thresholds and fail to cure the deficiency. In addition, DOE could assume responsibility for operation of the Paducah GDP if we cease enrichment operations at the Paducah GDP and fail to recommence such operations within time periods specified in the 2002 DOE-USEC Agreement. Without the Paducah GDP enrichment operations through May 2012 or other sources of supply, we could be unable to meet our annual delivery commitments to customers once our available inventories were exhausted or due to limitations on delivery of Russian LEU in particular contracts.
 
Our ability to retain key personnel is critical to the success of our business.
 
The success of our business depends on our key executives, managers and other skilled personnel. Our ability to retain these key personnel may be difficult in light of the uncertainties currently facing our business and changes we may make to our organizational structure to adjust to changing circumstances. We may need to enter into retention or other arrangements that could be costly to maintain. We do not have employment agreements with our corporate executives or other key personnel nor do we have key man life insurance policies for them. If our executives, managers or other key personnel resign, retire or are terminated, or their service is otherwise interrupted, we may not be able to replace them in a timely manner and we could experience significant declines in productivity. In addition, some of our key personnel are involved in the development of our American Centrifuge technology and many of them have security clearances. The loss of these key personnel could result in delays in the deployment of our American Centrifuge project. Given the proprietary nature of our American Centrifuge technology, we are also at risk as to our intellectual property if key American Centrifuge employees resign to work for a competitor.

 
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Changes in the price for SWU or uranium could affect our gross profit margins and ability to service our indebtedness and finance the American Centrifuge project.
 
The March 2011 event in Japan and the related shutdown of nuclear reactors have affected supply and demand for LEU over the next 2-4 years. This has negatively affected SWU prices in the market and this impact could grow more significant over time depending on the length and severity of delays in the restart of reactors in Japan or cancellations of deliveries. Changes in the price for SWU and uranium are also influenced by numerous other factors, such as:
 
     
 
 • 
LEU and uranium production levels and costs in the industry,
   
   
 
 • 
actions taken by governments to regulate, protect or promote trade in nuclear material, including the continuation of existing restrictions on unfairly priced imports,
   
 
 • 
actions taken by governments to narrow, reduce or eliminate limits on trade in nuclear material, including the decrease or elimination of existing restrictions on unfairly priced imports,
 
 • 
actions of competitors,
   
 
 • 
exchange rates,
   
 
 • 
availability and cost of alternate fuels, and
   
 
 • 
inflation.
 
The long-term nature of our contracts with customers delays the impact of any material change in market prices and may prolong any adverse impact of low market prices on our gross profit margins. For example, even as prices increase and we secure new higher-priced contracts, we are contractually obligated to deliver LEU and uranium at lower prices under contracts signed prior to the increase. A decrease in the price for SWU could also affect our future ability to service our indebtedness and finance the American Centrifuge project.

Additionally, an increase in the price for SWU could result in an increase in the price that we pay for the SWU component of Russian LEU. The price we are charged for the SWU component of Russian LEU under the Russian supply contracts is determined by a formula that combines a mix of price points and other pricing elements. A multi-year retrospective view of market-based price points in the formula is used to minimize the disruptive effect of short-term swings in these price points. However, increases in market prices will increase the prices Russia charges us and can substantially increase our costs of sales and inventories. This increase, if not offset by increases in our sales prices, would adversely affect our cash flows and results of operations. In addition, while declines in market prices will tend to reduce the price we pay for the SWU component of the Russian LEU, floor prices applicable to the calculation of the price for such SWU could offset the impact of declining market prices on the prices we pay.

The long-term nature of our customer contracts could adversely affect our results of operations in current and future years.
 
As is typically the case in our industry, we sell nearly all of our LEU under long-term contracts. The prices that we charge under many of our existing contracts (particularly those reflecting terms agreed to prior to 2006) only increase based on an agreed upon inflation index. Therefore, prices under older contracts will not increase with changes that result in increases in our actual costs, such as increased power costs or increases in the prices we pay under the Russian Contract, and do not permit us to take advantage of market increases in the price of SWU. Many newer contracts use changes in market price indexes and power price indexes as components of the price, but do not directly pass through to customers the actual increases in our costs. These limitations, combined with our cost structure and our sensitivity to increased power costs due to the power-intensive gaseous diffusion technology that we currently depend on, could reduce our ability to cover our cost of sales with revenues earned under our customer contracts and could materially and adversely impact our gross profit margins and cash flows in current and future periods.
 
 
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In addition, our older contracts give customers the flexibility to determine the amounts of natural uranium that they deliver to us, which can result in our receiving less uranium from customers than we transfer from our inventory to TENEX under the Russian Contract. Over time, to the extent our inventory, including uranium generated through underfeeding, is insufficient to absorb the difference, we could be required to purchase uranium to continue to meet our obligations under the Russian Contract. Depending on the market price of uranium, this could have an adverse impact on our gross profit margins, cash flows, results of operations and liquidity.
 
We face significant competition from three major producers who may be less cost sensitive or may be favored due to national loyalties and from emerging competitors in the domestic market.
 
We compete with three major producers of LEU, all of which are wholly or substantially owned by governments: Areva (France), Rosatom/TENEX (Russia) and Urenco (Germany, Netherlands and the United Kingdom). Currently, these competitors utilize or are in the process of transitioning to more efficient and cost-effective technology to enrich uranium than we use at the Paducah GDP. In addition, all of these suppliers are currently expanding their centrifuge production capacity.

There is also the potential that any of these suppliers will further increase their expansion rates from what they have announced. All of these represent competition in our efforts to sell SWU, including output from the ACP. We also face competition from China and others. Additional details regarding competitors are provided in Parts 1 and 2, “Business and Properties – Competition and Foreign Trade.”

Our competitors may have greater financial resources than we do, including access to below-market financing terms. Our foreign competitors enjoy support from their government owners, which may enable them to be less cost- or profit-sensitive than we are. In addition, decisions by our foreign competitors may be influenced by political and economic policy considerations rather than commercial considerations. For example, our foreign competitors may elect to increase their production or exports of LEU, even when not justified by market conditions, thereby depressing prices and reducing demand for our LEU, which could adversely affect our revenues, cash flows and results of operations. Similarly, the elimination or weakening of existing restrictions on imports from our foreign competitors could adversely affect our revenues, cash flows and results of operations.

Imports of LEU and other uranium products produced in the Russian Federation are subject to quotas through 2020 imposed under legislation enacted into law in September 2008 and under the Russian Suspension Agreement.  Although we believe these limitations will preserve a stable U.S. market, this belief may prove to be wrong, and the quantity of Russian uranium products permitted under the limitations may depress market prices and result in reduced sales by us and reduced revenues. 

The release of excess government stockpiles of natural uranium and LEU into the market could depress market prices and reduce demand for natural uranium and LEU.
 
The U.S. and foreign governments have stockpiles of natural uranium and LEU that they could sell in the market. In addition, LEU may be produced by downblending stockpiles of highly enriched uranium owned by the U.S. and foreign governments. Although the USEC Privatization Act of 1992 requires the Secretary of Energy to make a determination that there is no material impact on the domestic uranium mining, conversion or enrichment industry prior to the sale of its stockpiles of natural uranium or LEU, the market impact of any sale could be more significant than they anticipate. The release of these stockpiles into the market in levels in excess of market demand can depress prices and reduce demand for natural uranium and LEU from us, which could adversely affect our revenues, cash flows and results of operations.
 
 
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Our dependence on our largest customers could adversely affect us.
 
Our 10 largest customers in our LEU segment represented 55% of our total revenue in 2011, and our three largest customers in our LEU segment represented 26% of our total revenue in 2011. To the extent our existing contracts with these customers include prices that are greater than the prices at which we could sell to others, a reduction in purchases from these customers, whether due to their decision not to purchase optional quantities or for other reasons, including a disruption in their operations that reduces their need for LEU from us, could adversely affect our business and results of operations. Conversely, to the extent that our contracts with these customers include prices that are lower than the prices at which we could sell to others, a decision by these customers to exercise options under these contracts to purchase more from us also could adversely affect our business and results of operations.
 
The current excess SWU supply in the market as a result of the March 2011 earthquake and tsunami in Japan has put significant downward pressure on SWU prices.  Because price is a significant factor in a customer’s choice of a supplier of LEU, when contracts come up for renewal, customers may reduce their purchases from us if we are not able to compete on price, resulting in the loss of new sales contracts. Our ability to compete on price is limited by our higher operating costs at the Paducah GDP than our competitors who operate centrifuge facilities. Moreover, once lost, customers may be difficult to regain because they typically purchase LEU under long-term contracts. Therefore, given the need to maintain existing customer relationships, particularly with our largest customers, our ability to raise prices in order to respond to increases in costs or other developments may be limited. In addition, because we have a fixed commitment through 2013 to order LEU derived from at least 30 metric tons of highly enriched uranium each year under the Russian Contract and to purchase the approximately 5.5 million SWU deemed to be contained in such material, any reduction in purchases from us by our customers below the level required for us to resell both our own production and the Russian material could adversely affect our revenues, cash flows and results of operations.
 
Our ability to compete in certain foreign markets may be limited for political, legal and economic reasons.
 
Agreements for cooperation between the U.S. government and various foreign governments or governmental agencies control the export of nuclear materials from the United States. If any of the agreements governing exports to countries in which our customers are located were to lapse, terminate or be amended, it is possible we would not be able to make sales or deliver LEU to customers in those countries. This could adversely affect our results of operations.
 
Purchases of LEU by customers in the European Union are subject to a policy of the Euratom Supply Agency that seeks to limit foreign enriched uranium to no more than 20% of European Union consumption per year. Application of this policy to consumption in the European Union of the LEU that we produce or the LEU that we purchase can significantly limit our ability to make sales to European customers.

Certain emerging markets lack a comprehensive nuclear liability law that protects suppliers by channeling liability for injury and property damage suffered by third persons from nuclear incidents at a nuclear facility to the facility’s operator. To the extent a country does not have such a law and has not otherwise provided nuclear liability protection for suppliers to the projects to which we are supplying SWU, we intend to negotiate terms in our customer contracts that we believe will adequately protect us in a manner consistent with this channeling principle. However, if a customer is unwilling to agree to such contract terms, the lack of clear protection for suppliers in the national laws of these countries could adversely affect our ability to compete for sales to meet the growing demand for LEU in these markets and our prospects for future revenue from such sales.

 
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Our future prospects are tied directly to the nuclear energy industry worldwide.
 
Potential events that could affect either nuclear reactors under contract with us or the nuclear industry as a whole, include:
 
  
   
 
 • 
accidents, terrorism or other incidents at nuclear facilities or involving shipments of nuclear materials,
   
 
 • 
regulatory actions or changes in regulations by nuclear regulatory bodies, or decisions by agencies, courts or other bodies that limit our ability to seek relief under applicable trade laws to offset unfair competition or pricing by foreign competitors,
   
 
 • 
disruptions in other areas of the nuclear fuel cycle, such as uranium supplies or conversion,
   
 
 • 
civic opposition to, or changes in government policies regarding, nuclear operations,
   
 
 • 
business decisions concerning reactors or reactor operations,
   
 
 • 
the need for generating capacity, or
   
 
 • 
consolidation within the electric power industry.
 
These events could adversely affect us to the extent they result in a reduction or elimination of customers’ contractual requirements to purchase from us, the suspension or reduction of nuclear reactor operations, the reduction of supplies of raw materials, lower demand, burdensome regulation, disruptions of shipments or production, increased competition from third parties, increased operational costs or difficulties or increased liability for actual or threatened property damage or personal injury.

Our subsidiary NAC International may not perform as expected, which could adversely affect our results of operations for our contract services segment.

Beginning in 2012, our contract services revenues will be comprised primarily of revenues from our subsidiary NAC International. While we believe that NAC is well positioned to continue to participate in the growing spent fuel market worldwide, NAC may not perform as we expect, which could adversely affect our results of operations for our contract services segment. Factors that could affect the performance of NAC include:

·  
Competition to win new orders is challenging, as several larger companies with large global market shares compete in this growing market and are seeking to improve their technology;
 
·  
Uncertainty regarding the extent of growth of the spent fuel market worldwide, including timing and cost uncertainty for nuclear capacity growth and the time lag between new reactor operations and the need for dry storage, in particular as a result of the events at Fukushima and uncertainty regarding potential regulatory-driven mandates for dry storage;
 
·  
Uncertainty regarding NAC’s ability to meet its contractual performance and delivery obligations, which could result in liquidated damages, forfeiture of letters of credit and/or termination;
 
·  
NAC’s ability to expand globally, including in non-traditional markets; and
 
·  
NAC’s ability to expand domestically, including whether or not opportunities for NAC emerge from the recommendations of the Secretary of Energy’s Blue Ribbon Commission on America’s Nuclear Future regarding spent fuel storage, which included a recommendation for consolidated interim storage facilities, and uncertainty regarding the timing for any increase in near-term demand and NAC’s ability to capture that demand.
 
 
 
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Changes to, or termination of, any of our agreements with the U.S. government, or deterioration in our relationship with the U.S. government, could adversely affect our results of operations.
 
We, or our subsidiaries, are a party to a number of agreements and arrangements with the U.S. government that are important to our business, including:
 
     
 
 • 
leases for the Paducah gaseous diffusion plant and American Centrifuge facilities,
   
 
 • 
the Executive Agent agreement under which we are designated the U.S. Executive Agent and purchase the SWU component of LEU under the Russian Contract,
   
 
 • 
the 2002 DOE-USEC Agreement and other agreements that address issues relating to the domestic uranium enrichment industry and the American Centrifuge technology,
   
 
 • 
electric power purchase agreements with the Tennessee Valley Authority,
   
 
 • 
contract work for DOE and DOE contractors at the Paducah GDP, and
   
 
 • 
NAC consulting and spent fuel storage and transportation activities.

We are also in discussion with DOE regarding the RD&D program described above under “We have not yet reached an agreement with DOE regarding the research, development and demonstration (“RD&D”) program and without funding for such a program or other source of funding, we will likely need to begin demobilizing the American Centrifuge project in the near term.”

Termination or expiration of one or more of these agreements, without replacement with an equivalent agreement or arrangement that accomplishes the same objectives as the terminated or expired agreement(s), could adversely affect our results of operations. In addition, deterioration in our relationship with the U.S. agencies that are parties to these agreements could impair or impede our ability to successfully implement these agreements, which could adversely affect our results of operations.

We could incur additional unanticipated contract closeout related charges as a result of the transition of our government services work at the Portsmouth site that could adversely impact our results of operations and cash flow.

On September 30, 2011, contracts for maintaining the Portsmouth facilities and performing services for DOE at Portsmouth expired and we completed the transition of facilities to the decontamination and decommissioning (“D&D”) contractor selected by DOE for the site. Consequently, we ceased providing government contract services at Portsmouth on September 30, 2011. Contract closeout related costs, as defined by applicable federal acquisition regulations and government cost accounting standards, are anticipated to be billed to DOE and recorded as revenue when contract closeout occurs and amounts are deemed probable of recovery. Our current estimate for these billable costs is approximately $35 million, which includes an estimate to complete outstanding DOE audits within a reasonable period of time. This estimate does not include ongoing cost reimbursable work being performed and amounts already included in our receivable balances. These contract closeout costs to be billed to DOE include DOE’s share of costs for our defined benefit pension plan, our postretirement health and life benefit plans, DOE’s share of severance, and other miscellaneous costs. The actual amounts are subject to a number of factors and therefore subject to significant uncertainty, including uncertainty concerning the amount that may be reimbursable under contracts with DOE.
 
 
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We may not be successful in collecting amounts due to us from DOE related to U.S. government contracts work at Portsmouth, including amounts related to contract closeout.

Termination of U.S. government contract work at the Portsmouth site could impact our ability to collect unpaid receivables from DOE for work performed at the site and amounts related to contract closeout described above.  Our consolidated balance sheet includes receivables, net of valuation allowances, from DOE or DOE contractors of $37.8 million as of December 31, 2011. Of the $37.8 million, $19.0 million represents revenue recorded for amounts not yet billed due to the absence of approved billing rates referenced below (referred to as unbilled receivables). Past due receivables from DOE or DOE contractors increased from $10.9 million at December 31, 2010 to $20.1 million at December 31, 2011, of which $11.2 million is related to the 2002 through 2009 historical periods.

On December 2, 2011, we submitted a certified claim for $11.2 million under the Contract Disputes Act (“CDA”) for payment of breach-of-contract amounts equaling unreimbursed costs for the periods through December 31, 2009. In a letter response dated January 31, 2012, DOE informed us that it will provide a written decision on or before June 2, 2012 related to the claim. In addition, we submitted a second certified claim for $9.0 million under the CDA related to the 2010 historical period on February 16, 2012. We believe DOE has breached its agreement by failing to establish appropriate provisional billing and final indirect cost rates on a timely basis. We have requested a contracting officer’s written final decision, as required by the CDA, before proceeding with any further action. We have no assurance that we will be successful in this claim or recover any amounts for these past due receivables.

Revenue from U.S. government contract work is subject to audit and costs may be revised or disallowed.  Billing rates are subject to audit and revision by DOE, which may delay payment of costs.

Revenue from U.S. government contract work is based on cost accounting standards and allowable costs that are subject to audit by the Defense Contract Audit Agency (“DCAA”) or such other entity that DOE authorizes to conduct the audit. Our billing rates are also subject to audit and must be approved by DOE. Allowable costs include direct costs as well as allocations of indirect plant and corporate overhead costs. We have 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, 2009 and 2010. DCAA historically has not completed their audits of our Incurred Cost Submissions in a timely manner. DCAA has been periodically working on audits for the six months ended December 31, 2002 and the year ended December 31, 2003 since May 2008. In June 2011, a new DOE contractor began an audit for the year ended December 31, 2004. Audit adjustments, unilateral rate disallowances by DOE or delays by DOE in approving rate increases could reduce the amounts we are allowed to bill for DOE contract work, require us to refund to DOE a portion of amounts already billed, or delay us in receiving timely recovery of costs, which could adversely affect liquidity, cash flows and results of operations. Also refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview–Contract Services Segment.”
 
Our operations are highly regulated by the NRC and DOE.
 
The NRC regulates our operations, including the Paducah GDP and NAC. In addition, the American Centrifuge Demonstration Facility and the construction and operation of the American Centrifuge Plant are licensed by the NRC, which regulates our activities at those facilities.
 
 
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The Paducah GDP is required to be recertified every five years and the term of the current certification expires on December 31, 2013. The NRC could refuse to renew the certificate if it determines that: (1) we are foreign owned, controlled or dominated; (2) the issuance of a renewed certificate would be inimical to the maintenance of a reliable and economic domestic source of enrichment; (3) the issuance of a renewed certificate would be adverse to U.S. defense or security objectives; or (4) the issuance of a renewed certificate is otherwise not consistent with applicable laws or regulations in effect at the time of renewal. The same requirements apply to NRC’s issuance of the 30-year license for the American Centrifuge Plant. If the certificate for the Paducah GDP were not renewed, we could no longer produce LEU at the Paducah GDP, which would have the impacts described in the Risk Factor “A decision to cease operations at the Paducah GDP could have a material adverse effect on our business and prospects.”
 
The NRC has the authority to issue notices of violation for violations of the Atomic Energy Act of 1954, NRC regulations and conditions of licenses, certificates of compliance, or orders. The NRC has the authority to impose civil penalties or additional requirements and to order cessation of operations for violations of its regulations. Penalties under NRC regulations could include substantial fines, imposition of additional requirements or withdrawal or suspension of licenses or certificates. NRC is currently reviewing an event that occurred in June 2011 in the lead cascade of the American Centrifuge Demonstration Facility and could issue a violation and fine in the near future. Any penalties imposed on us could adversely affect our results of operations. The NRC also has the authority to issue new regulatory requirements or to change existing requirements. Changes to the regulatory requirements could also adversely affect our results of operations.
 
Our American Centrifuge development and manufacturing facilities in Oak Ridge and certain of our operations at our other facilities are subject to regulation by DOE. DOE has the authority to impose civil penalties and additional requirements, which could adversely affect our results of operations.

Our operations require that we maintain security clearances that are overseen by the NRC and DOE in accordance with the National Industrial Security Program Operating Manual. These security clearances could be suspended or revoked if we are determined by the NRC to be subject to foreign ownership, control or influence. In addition, statute and NRC regulations prohibit the NRC from issuing any license or certificate to us if it determines that we are owned, controlled or dominated by an alien, a foreign corporation, or a foreign government. 

Failures or security breaches of our information technology (IT) systems could have an adverse effect on our business.

Our business requires us to use and protect classified and other protected information.  Our computer networks and other IT systems are designed to protect this information through the use of classified networks and other procedures.  A material network breach in the security of our IT systems could include the theft of our intellectual property.  To the extent any security breach results in a loss or damage to our data, or in inappropriate disclosure of classified or other protected information, it could cause grave damage to the country’s national security and to our business.  One of the biggest threats to classified information we protect comes from the insider threat – an employee with legitimate access who engages in misconduct.  Transitions in our business, in particular the potential for employee layoffs and other transitions, can increase the risk that an insider with access could steal our intellectual property.

Our operations are subject to numerous federal, state and local environmental protection laws and regulations.
 
We incur substantial costs for compliance with environmental laws and regulations, including the handling, treatment and disposal of hazardous, low-level radioactive and mixed wastes generated as a result of our operations. Unanticipated events or regulatory developments, however, could cause the amount and timing of future environmental expenditures to vary substantially from those expected.

 
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Pursuant to numerous federal, state and local environmental laws and regulations, we are required to hold multiple permits. Some permits require periodic renewal or review of their conditions, and we cannot predict whether we will be able to renew such permits or whether material changes in permit conditions will be imposed. Changes in permits could increase costs of producing LEU and reduce our profitability. An inability to secure or renew permits could prevent us from producing LEU needed to meet our delivery obligations to customers, which would threaten our ability to make deliveries to customers and meet the minimum production requirements under the 2002 DOE-USEC Agreement, adversely affect our reputation, costs, cash flows, results of operations and long-term viability, and subject us to various penalties under our customer contracts and the 2002 DOE-USEC Agreement.
 
Our operations involve the use, transportation and disposal of toxic, hazardous and/or radioactive materials and could result in liability without regard to our fault or negligence.
 
Our plant operations involve the use of toxic, hazardous and radioactive materials. A release of these materials could pose a health risk to humans or animals. If an accident were to occur, its severity would depend on the volume of the release and the speed of corrective action taken by plant emergency response personnel, as well as other factors beyond our control, such as weather and wind conditions. Actions taken in response to an actual or suspected release of these materials, including a precautionary evacuation, could result in significant costs for which we could be legally responsible. In addition to health risks, a release of these materials may cause damage to, or the loss of, property and may adversely affect property values.

We lease facilities from DOE at the Paducah GDP and the American Centrifuge Plant and centrifuge test facilities in Piketon, Ohio and Oak Ridge, Tennessee. Pursuant to the Price-Anderson Act, DOE has indemnified us against claims for public liability (as defined in the Atomic Energy Act of 1954, as amended) arising out of or in connection with activities under those leases resulting from a nuclear incident or precautionary evacuation. If an incident or evacuation is not covered under the DOE indemnification, we could be financially liable for damages arising from such incident or evacuation, which could have an adverse effect on our results of operations and financial condition. The DOE indemnification does not apply to incidents outside the United States, including in connection with international transportation of LEU.
 
While DOE has provided indemnification pursuant to the Price-Anderson Act, there could be delays in obtaining reimbursement for costs from DOE and DOE may determine that some or all costs are not reimbursable under the indemnification.
 
We do not maintain any nuclear liability insurance for our operations at the Paducah GDP. Further, American Nuclear Insurers, the only provider of nuclear liability insurance, has declined to provide nuclear liability insurance to the American Centrifuge Plant due to past and present DOE operations on the site. In addition, the Price-Anderson Act indemnification does not cover loss or damage to property located on our facilities due to a nuclear incident.
 
NAC’s business involves providing products and services for the storage and transportation of toxic, hazardous and radioactive materials, which, if released or mishandled, could cause personal injury and property damage (including environmental contamination) or loss and could adversely affect property values. NAC does not own or produce such materials in its business, but obtains nuclear liability insurance and indemnification coverage from its customers for protection against third-party liability resulting from a nuclear incident. However, this coverage contains exclusions and limits and this insurance would not cover all potential liabilities.  In addition, NAC maintains its own Nuclear Suppliers and Transportation policy to provide secondary insurance coverage.


 
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In our contracts, we seek to protect ourselves from liability, but there is no assurance that such contractual limitations on liability will be effective in all cases or that, in the case of NAC’s contracts, NAC’s insurance and financial protection will cover all the liabilities NAC has assumed under those contracts. The costs of defending against a claim arising out of a nuclear incident or precautionary evacuation, and any damages awarded as a result of such a claim, could adversely affect our results of operations and financial condition.
 
The dollar amount of our sales backlog, as stated at any given time, is not necessarily indicative of our future sales revenues.
 
Backlog is the estimated aggregate dollar amount of SWU and uranium sales that we expect to recognize as revenue in future periods under contracts with customers. At December 31, 2011, we had contracts with customers aggregating an estimated $5.8 billion, including $1.5 billion that we expect to deliver in 2012 and $3.5 billion through 2015. There can be no assurance that the revenues projected in our backlog will be realized, or, if realized, will result in profits. Backlog is partially based on customers’ estimates of their fuel requirements and certain other assumptions including our estimates of selling prices, which are subject to change. Depending on the terms of specific contracts, prices may be adjusted based on published SWU or uranium market price indicators prevailing at the time of delivery. Other pricing elements may include escalation based on a general inflation index, a power price index or a multiplier of our actual unit power cost. We utilize external composite forecasts of future market prices and inflation rates in our pricing estimates. These forecasts may not be accurate, and therefore our estimates of future prices could be overstated. Any inaccuracy in our estimates of future prices would add to the imprecision of our backlog estimate.

For a variety of reasons, the amounts of SWU and uranium that we will sell in the future under our existing contracts, or the timing of customer purchases under those contracts, may differ from our estimates. Customers may not purchase as much as we predicted, nor at the times we anticipated, as a result of operational difficulties, changes in fuel requirements or other reasons. Reduced purchases would reduce the revenues we actually receive from contracts included in the backlog. For example, our revenue could be reduced by actions of the NRC or nuclear regulators in foreign countries issuing orders to delay, suspend or shut down nuclear reactor operations within their jurisdictions, or by an interruption of our production of LEU or deliveries of Russian LEU to us, that we need to meet our delivery commitments to customers. Efforts that we take to advance customer orders, including any discounts that are given, could also reduce the amount we receive under contracts in our backlog. Customers could also seek to modify or cancel orders in response to concerns regarding our financial strength or future business prospects, including as a result of decisions we may make regarding Paducah operations. Increases in our costs of production or other factors could cause sales included in our backlog to be at prices that are below our cost of sales, which could adversely affect our results of operations, and customers may purchase more under lower priced contracts than we predicted.
 
Certain customers have contracted with us on the expectation that we would obtain financing for, or deploy, the American Centrifuge plant by certain deadlines. If we fail to meet those deadlines, we may have to renegotiate one or more of the key business terms of those contracts, which could result in terms that are less favorable for USEC or in termination of all or part of certain contracts and a reduction in our backlog.  A loss of all or part of our existing backlog also could adversely affect our ability to secure new contracts for the American Centrifuge plant. A reduction in our existing backlog of contracts or diminished prospects for securing new contracts for that backlog, would adversely affect the likelihood that we will succeed in securing financing for, or deploying, the American Centrifuge plant.


 
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Deferral of revenue recognition could result in volatility in our quarterly and annual results.
 
We do not recognize revenue for uranium or SWU sales in our LEU segment until LEU is physically delivered. Consequently, in sales transactions where we have received payment and title has transferred to the customer but delivery has not occurred because the terms of the agreement require us to hold uranium to which the customer has title or because a customer encounters delays in taking delivery of LEU at our facilities, recognition of revenue is deferred until LEU is physically delivered. This deferral can potentially be over an indefinite period and is outside our control and can result in volatility in our quarterly and annual results. If, in a given period, a significant amount of revenue is deferred or a significant amount of previously deferred revenue is recognized, earnings in that period will be affected, which could result in volatility in our quarterly and annual results. Additional information on our deferred revenue is provided in note 6 to our consolidated financial statements.

Changes in accounting standards and subjective assumptions, estimates and judgments by management related to complex accounting matters could significantly affect our results of operations and financial condition.

Generally accepted accounting principles and related accounting pronouncements, implementation guidelines and interpretations with regard to a wide range of matters that are relevant to our business are complex and involve many subjective assumptions, estimates and judgments that are, by their nature, subject to substantial risks and uncertainties. For example, refer to “Critical Accounting Estimates” in Part II, Item 7 of this report for a discussion of assumptions, estimates and judgments related to our accounting for pension and postretirement health and life benefit cost obligations, costs for the future disposition of depleted uranium and GDP lease turnover costs, American Centrifuge technology costs and income taxes. Changes in accounting rules or their interpretation or changes in underlying assumptions, estimates or judgments could significantly affect our results of operations and financial condition.

Changes in federal, state, and local tax laws could significantly affect our results of operations and financial condition.

We recognize tax liabilities based on estimates of whether additional taxes and interest will be due consistent with legislation in place at that time. To the extent that the final tax outcome of these matters is different than the amounts that were initially recorded, such differences will impact the income tax provision in the period in which such determination is made. For example, the 2010 provision for income taxes included a one-time charge 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 Healthcare Act”) signed into law at the end of March 2010. Another example occurred in December 2010, when the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (collectively referred to as “the Tax Relief Act”) was signed into law which benefited us with federal research credits that had not been previously recorded since the prior statute had expired in December 2009.

Uncertainties related to changes in federal, state, and local tax regulation could also be compounded by governmental budget deficits, which could require various agencies to pass these budget shortfalls onto companies doing business in certain jurisdictions. This could also create a financial disadvantage to us compared to our competition.


 
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Our operating results may fluctuate significantly from quarter to quarter, and even year to year, which could have an adverse effect on our cash flows.
 
Under customer contracts with us for the supply of LEU to meet requirements for specific time periods or specific reactor refuelings, our customers order LEU from us based on their refueling schedules for nuclear reactors, which generally range from 12 to 18 months, or in some cases up to 24 months. Customer payments for the SWU component of such LEU typically average approximately $20 million per order. As a result, a relatively small change in the timing of customer orders due to a change in a customer’s refueling schedule may cause our operating results to be substantially above or below expectations, which could have an adverse effect on our cash flows.

The levels of returns on pension and postretirement benefit plan assets, changes in interest rates and other factors affecting the amounts we have to contribute to fund future pension and postretirement benefit liabilities could adversely affect our earnings and cash flows in future periods.

Our earnings may be positively or negatively impacted by the amount of expense we record for our employee benefit plans. This is particularly true with expense for our pension and postretirement benefit plans. Generally accepted accounting principles in the United States require that we calculate expense for the plans using actuarial valuations. These valuations are based on assumptions that we make relating to financial markets and other economic conditions. Changes in key economic indicators can result in changes in the assumptions we use. The key year-end assumptions used to estimate pension and postretirement benefit expenses for the following year are the discount rate, the expected rate of return on plan assets, healthcare cost trend rates and the rate of increase in future compensation levels. The rate of return on our pension assets and changes in interest rates affect funding requirements for our defined benefit pension plans.  The IRS and the Pension Protection Act of 2006 regulate the minimum amount we contribute to our pension plans. The amount we are required to contribute to our pension plans can have an adverse effect on our cash flows. For additional information and a discussion regarding how our financial statements are affected by pension and postretirement benefit plan accounting policies, see “Critical Accounting Estimates” in Part II, Item 7 of this report and note 10 to our consolidated financial statements. Under certain circumstances, we could also be required to calculate liabilities on a “termination basis” rather than based on GAAP, as described above under “We could be subject to liability under ERISA related to our defined benefit pension plans that could adversely affect our liquidity.”

An ownership change could impact our ability to fully utilize our tax benefits.

Our ability to utilize tax benefits, including those generated by net operating losses (“NOLs”), “net unrealized built-in losses” (“NUBILs”) and certain other tax attributes (collectively, the “Tax Benefits”) to offset our future taxable income and/or to recover previously paid taxes would be substantially limited if we were to experience an “ownership change” as defined under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”). In general, an “ownership change” would occur if there is a greater than 50-percentage point change in ownership of securities by stockholders owning (or deemed to own under Section 382 of the Code) five percent or more of a corporation’s securities over a rolling three-year period.

An ownership change under Section 382 of the Code would establish an annual limitation to the amount of NOLs and NUBILs we could utilize to offset our taxable income in any single year. The application of these limitations might prevent full utilization of the Tax Benefits. We do not believe we have experienced an ownership change as defined by Section 382 of the Code. To preserve our ability to utilize the Tax Benefits in the future without a Section 382 limitation, we adopted a tax benefit preservation plan, which is triggered upon certain acquisitions of our securities. Notwithstanding the foregoing measures, there can be no assurance that we will not experience an ownership change within the meaning of Section 382 of the Code. Our tax benefit preservation plan does not prevent the sale of our securities by our five percent stockholders and any such sale could have an impact on whether we experience an ownership change within the meaning of Section 382 of the Code.

 
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Our inability to fully utilize our Tax Benefits could have an adverse impact on our long-term financial position and results of operations.

Our certificate of incorporation gives us certain rights with respect to equity securities held (beneficially or of record) by foreign persons. If levels of foreign ownership set forth in our certificate of incorporation are exceeded, we have the right, among other things, to redeem or exchange common stock held by foreign persons, and in certain cases, the applicable redemption price or exchange value may be equal to the lower of fair market value or a foreign person’s purchase price.

Our certificate of incorporation gives us certain rights with respect to shares of our common stock held (beneficially or of record) by foreign persons.  Foreign persons are defined in our certificate of incorporation to include, among others, an individual who is not a U.S. citizen, an entity that is organized under the laws of a non-U.S. jurisdiction and an entity that is controlled by individuals who are not U.S. citizens or by entities that are organized under the laws of non-U.S. jurisdictions.

The occurrence of any one or more of the following events is a “foreign ownership review event” and triggers the board of directors’ right to take various actions under our certificate of incorporation: (1) the beneficial ownership by a foreign person of (a) 5% or more of the issued and outstanding shares of any class of our equity securities, (b) 5% or more in voting power of the issued and outstanding shares of all classes of our equity securities, or (c) less than 5% of the issued and outstanding shares of any class of our equity securities or less than 5% of the voting power of the issued and outstanding shares of all classes of our equity securities, if such foreign person is entitled to control the appointment and tenure of any of our management positions or any director; (2) the beneficial ownership of any shares of any class of our equity securities by or for the account of a foreign uranium enrichment provider or a foreign competitor (referred to as “contravening persons”); or (3) any ownership of, or exercise of rights with respect to, shares of any class of our equity securities or other exercise or attempt to exercise control of us that is inconsistent with, or in violation of, any regulatory restrictions, or that could jeopardize the continued operations of our facilities (an “adverse regulatory occurrence”).  These rights include requesting information from holders (or proposed holders) of our securities, refusing to permit the transfer of securities by such holders, suspending or limiting voting rights of such holders, redeeming or exchanging shares of our stock owned by such holders on terms set forth in our certificate of incorporation, and taking other actions that we deem necessary or appropriate to ensure compliance with the foreign ownership restrictions.

The terms and conditions of our rights with respect to our redemption or exchange right in respect of shares held by foreign persons or contravening persons are as follows:

 
 • 
Redemption price or exchange value:  Generally the redemption price or exchange value for any shares of our common stock redeemed or exchanged would be their fair market value. However, if we redeem or exchange shares held by foreign persons or contravening persons and our Board in good faith determines that such person knew or should have known that its ownership would constitute a foreign ownership review event (other than shares for which our Board determined at the time of the person’s purchase that the ownership of, or exercise of rights with respect to, such shares did not at such time constitute an adverse regulatory occurrence), the redemption price or exchange value is required to be the lesser of fair market value and the person’s purchase price for the shares redeemed or exchanged.
 
 • 
Form of payment:  Cash, securities or a combination, valued by our Board in good faith.
 
 • 
Notice:  At least 30 days’ notice of redemption is required; however, if we have deposited the cash or securities for the redemption or exchange in trust for the benefit of the relevant holders, we may redeem shares held by such holders on the same day that we provide notice.
 

 
 
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Accordingly, there are situations in which a foreign stockholder or contravening person could lose the right to vote its shares or in which we may redeem or exchange shares held by a foreign person or contravening person and in which such redemption or exchange could be at the lesser of fair market value and the person’s purchase price for the shares redeemed or exchanged, which could result in a significant loss for that person.

In connection with the investment by Toshiba and B&W and the issuance of certain preferred stock and warrants to Toshiba and B&W, our board of directors determined that the consummation of the investment transactions pursuant to the transaction documents will not constitute an "adverse regulatory occurrence" and that we will not request information from Toshiba or B&W under the provisions of our certificate of incorporation described above. Under the terms of the transaction documents, subject to certain limited exceptions, we have agreed not to take any action to revoke such determination or to amend or adopt any foreign ownership provisions in our certificate of incorporation or bylaws, in each case without the prior written consent of Toshiba or B&W. This board determination and these contractual provisions could limit the board’s flexibility in addressing foreign ownership issues and complying with regulatory requirements in connection with the Toshiba and B&W investment in the future in the event that the NRC or DOE re-evaluate their determinations relating to the absence of foreign ownership, control or influence.

Anti-takeover provisions in Delaware law and in our charter, bylaws and tax benefit preservation plan and in the indenture governing our convertible notes could delay or prevent an acquisition of us.

We are a Delaware corporation, and the anti-takeover provisions of Delaware law impose various impediments to the ability of a third-party to acquire control of our company, even if a change of control would be beneficial to our existing shareholders. Our certificate of incorporation, or charter, establishes restrictions on foreign ownership of our securities. Other provisions of our charter and bylaws may make it more difficult for a third-party to acquire control of us without the consent of our board of directors. We also have adopted a tax benefit preservation plan described above, which could increase the cost of, or prevent, a takeover attempt. These various restrictions could deprive shareholders of the opportunity to realize takeover premiums for their shares. Additionally, if a fundamental change occurs prior to the maturity date of our convertible notes, holders of the notes will have the right, at their option, to require us to repurchase all or a portion of their notes, and if a make-whole fundamental change occurs prior to the maturity date of our convertible notes, we will in some cases increase the conversion rate for a holder that elects to convert its notes in connection with such make-whole fundamental change. In addition, the indenture governing our convertible notes prohibits us from engaging in certain mergers or acquisitions unless, among other things, the surviving entity assumes our obligations under the notes. These and other provisions could prevent or deter a third party from acquiring us even where the acquisition could be beneficial to stockholders.



 
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Item 1B.  Unresolved Staff Comments

None.

Item 3.  Legal Proceedings

USEC is subject to various 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, cash flows or financial condition.

On June 27, 2011, a complaint was filed in the United States District Court for the Southern District of Ohio, Eastern Division, against USEC by a former Portsmouth GDP employee claiming that USEC owes severance benefits to him and other similarly situated employees that have transitioned or will transition to the DOE decontamination and decommissioning (“D&D”) contractor. The plaintiff amended its complaint on August 31, 2011 and February 10, 2012, among other things, to limit the purported class of similarly situated employees to salaried employees at the Portsmouth site who transitioned to the D&D contractor and are allegedly eligible for or owed benefits. USEC believes it has meritorious defenses against the suit and has not accrued any amounts for this matter. An estimate of the possible loss or range of loss from the litigation is difficult to make because, among other things, (i) the plaintiff has failed to state the amount of damages sought, (ii) the plaintiff purports to represent a class of claimants the size and composition of which remains unknown and (iii) the certification of the class is uncertain. However, USEC estimates that the total severance liability for the approximately 400 salaried employees at the Portsmouth site that transitioned to the DOE D&D contractor would have been approximately $14 million if severance was required to be paid to all of these employees. In such an event, DOE would have owed a portion of this amount, estimated at approximately $9 million, assuming DOE was responsible for periods both during which it operated the facility and under which we were a direct contractor to DOE.


Item 4.  Mine Safety Disclosures.

Not applicable.



 
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Executive Officers of the Company

Executive officers are elected by and serve at the discretion of the Board of Directors. Executive officers at March 14, 2012 follow:
 
Name
Age
Position
John K. Welch
62
President and Chief Executive Officer
John C. Barpoulis
47
Senior Vice President and Chief Financial Officer
Christine M. Ciccone
47
Senior Vice President, External Relations
Peter B. Saba
50
Senior Vice President, General Counsel and Secretary
Philip G. Sewell
65
Senior Vice President, American Centrifuge and Russian HEU
Robert Van Namen
50
Senior Vice President, Uranium Enrichment
W. Lance Wright
64
Senior Vice President, Human Resources and Administration
Marian K. Davis
52
Vice President and Chief Audit Executive
John M.A. Donelson
47
Vice President, Marketing, Sales and Power
Stephen S. Greene
54
Vice President, Finance and Treasurer
J. Tracy Mey
51
Vice President and Chief Accounting Officer
E. John Neumann
64
Vice President, Government Relations
Paul E. Sullivan
60
Vice President, American Centrifuge and Chief Engineer


John K. Welch has been President and Chief Executive Officer since October 2005.

John C. Barpoulis has been Senior Vice President and Chief Financial Officer since August 2006 and was Vice President and Treasurer from March 2005 to August 2006. Prior to joining USEC, Mr. Barpoulis was Vice President and Treasurer of National Energy & Gas Transmission, Inc. (formerly a subsidiary of PG&E Corporation) and certain of its subsidiaries from 2003 to March 2005 and was Vice President and Assistant Treasurer from 2000 to 2003. National Energy & Gas Transmission, Inc. and certain of its subsidiaries filed for protection under Chapter 11 of the United States Bankruptcy Code in July 2003.

Christine M. Ciccone has been Senior Vice President, External Relations since August 2009. Prior to joining USEC, Ms. Ciccone was Vice President of Government Relations for Honeywell International, Inc. from 2003 to 2008.

Peter B. Saba has been Senior Vice President, General Counsel and Secretary since February 2009 and was Vice President, General Counsel and Secretary from April 2008 to February 2009. Prior to joining USEC, Mr. Saba was of counsel in the global projects group at Paul, Hastings, Janofsky & Walker LLP from July 2005 to April 2008. 

Philip G. Sewell has been Senior Vice President, American Centrifuge and Russian HEU since September 2005. Mr. Sewell was Senior Vice President directing international activities and corporate development programs from August 2000 to September 2005 and assumed responsibility for the American Centrifuge program in April 2005. Prior to that, Mr. Sewell was Vice President, Corporate Development and International Trade from April 1998 to August 2000, and was Vice President, Corporate Development from 1993 to April 1998.

 
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Robert Van Namen has been Senior Vice President, Uranium Enrichment since September 2005. Mr. Van Namen was Senior Vice President directing marketing and sales activities from January 2004 to September 2005 and was Vice President, Marketing and Sales from January 1999 to January 2004.

W. Lance Wright has been Senior Vice President, Human Resources and Administration since February 2005, and was Vice President, Human Resources and Administration from August 2003 to February 2005.

Marian K. Davis has been Vice President and Chief Audit Executive since July 2011. Prior to joining USEC, Ms. Davis was Senior Vice President, Corporate Internal Audit for Sunrise Senior Living, Inc. from November 2003 to May 2010.

John M.A. Donelson has been Vice President, Marketing, Sales and Power since April 2011. He was previously Vice President, Marketing and Sales from December 2005 to April 2011, Director, North American and European Sales from June 2004 to December 2005, Director, North American Sales from August 2000 to June 2004 and Senior Sales Executive from July 1999 to August 2000.

Stephen S. Greene has been Vice President, Finance and Treasurer since February 2007. Prior to joining USEC, Mr. Greene was a Vice President and Executive Director of Pace Global Energy Services, an energy consulting firm, from January 2006 to January 2007.

J. Tracy Mey has been Vice President and Chief Accounting Officer since July 2010 and was previously Controller and Chief Accounting Officer from January 2007 to July 2010 and Controller from June 2005 to January 2007.

E. John Neumann has been Vice President, Government Relations since April 2004.

Paul E. Sullivan has been Vice President, American Centrifuge and Chief Engineer since June 2009 and was Vice President, Operations and Chief Engineer from February 2009 until June 2009. Prior to joining USEC, Mr. Sullivan served for 34 years in the U.S. Navy, retiring with the rank of Vice Admiral.

 
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PART II
 

 
Item 5.  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

USEC’s common stock trades on the New York Stock Exchange under the symbol “USU.”  High and low sales prices per share follow:
 
   
2011
   
2010
 
   
High
   
Low
   
High
   
Low
 
First Quarter ended March 31                                                       
  $ 6.35     $ 4.01     $ 6.00     $ 3.61  
Second Quarter ended June 30                                                       
    4.71       2.97       6.50       3.90  
Third Quarter ended September 30
    3.59       1.60       5.88       4.51  
Fourth Quarter ended December 31
    2.42       1.08       6.35       4.94  

 
No cash dividends were paid in 2010 or 2011, and we have no intention to pay cash dividends in the foreseeable future. Our credit facility also prohibits us from paying dividends as discussed in “Liquidity and Capital Resources – Capital Structure and Financial Resources.”

There are 250 million shares of common stock authorized. At March 2, 2012, there were 122,073,407 shares of common stock issued and outstanding and approximately 31,300 beneficial holders of common stock.

On September 30, 2011, the Board of Directors adopted a tax benefit preservation plan to help preserve the value of certain deferred tax benefits, including those generated by net operating losses and net unrealized built-in losses, as described in the Company’s current report on Form 8-K filed on September 30, 2011. USEC’s ability to use these tax benefits would be substantially limited if it were to experience an “ownership change” as defined under Section 382 of the Internal Revenue Code  Holders of our common stock of record on October 10, 2011 received rights that initially trade together with our common stock and are not exercisable.

Effective September 30, 2011, the plan, subject to limited exceptions, provides that any stockholder or group that acquires beneficial ownership of 4.9 percent or more of our securities without the approval of the Board of Directors would be subject to significant dilution of its holdings. In addition, subject to limited exceptions, any existing 4.9 percent or greater stockholder that acquires beneficial ownership of any additional shares of our securities without the approval of the Board of Directors would also be subject to dilution. In both cases, such person would be deemed to be an “acquiring person” for purposes of the tax plan. The dilution features of the tax plan are designed to reduce the likelihood that USEC experiences an ownership change by discouraging acquisitions that would impact the ownership change analysis for purposes of Section 382.

If a person becomes an acquiring person, then, subject to certain exceptions, the preferred stock purchase rights would separate from the common stock and common stock equivalents and become exercisable for our common stock or other securities or assets having a market value equal to twice the exercise price of the right. The Board of Directors has established procedures to consider requests to exempt certain acquisitions of our securities from the plan if the Board determines that doing so would not limit or impair the availability of the tax benefits or is otherwise in the best interests of the company.


 
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Fourth Quarter 2011 Issuer Purchases of Equity Securities
           
(c) Total Number
 
(d) Maximum Number
   
(a) Total
 
(b)
 
of Shares (or Units)
 
(or Approximate Dollar
   
Number of
 
Average
 
Purchased as Part
 
Value) of Shares (or
   
Shares (or
 
Price Paid
 
of Publicly
 
Units) that May Yet Be
   
Units)
 
Per Share
 
Announced Plans
 
Purchased Under the
 Period
 
Purchased(1)
 
(or Unit)
 
or Programs
 
Plans or Programs
                 
October 1 – October 31
 
-
 
-
 
-
 
-
November 1 – November 30
 
-
 
-
 
-
 
-
December 1 – December 31
 
4,025
 
$1.24
 
-
 
-
   Total
 
4,025
 
$1.24
 
-
 
-

(1)
These purchases were not made pursuant to a publicly announced repurchase plan or program. Represents 4,025 shares of common stock surrendered to USEC to pay withholding taxes on shares of restricted stock under the Company’s equity incentive plan.  


Matters Affecting our Foreign Stockholders
 
In order to aid in our compliance with certain regulatory requirements affecting us, which are described in “Business — Nuclear Regulatory Commission — Regulation”, our certificate of incorporation gives us certain rights with respect to shares of our common stock held (beneficially or of record) by foreign persons. Foreign persons are defined in our certificate of incorporation to include, among others, an individual who is not a U.S. citizen, an entity that is organized under the laws of a non-U.S. jurisdiction and an entity that is controlled by individuals who are not U.S. citizens or by entities that are organized under the laws of non-U.S. jurisdictions.

The occurrence of any one or more of the following events is a “foreign ownership review event” and triggers the board of directors’ right to take various actions under our certificate of incorporation: (1) the beneficial ownership by a foreign person of (a) 5% or more of the issued and outstanding shares of any class of our equity securities, (b) 5% or more in voting power of the issued and outstanding shares of all classes of our equity securities, or (c) less than 5% of the issued and outstanding shares of any class of our equity securities or less than 5% of the voting power of the issued and outstanding shares of all classes of our equity securities, if such foreign person is entitled to control the appointment and tenure of any of our management positions or any director; (2) the beneficial ownership of any shares of any class of our equity securities by or for the account of a foreign uranium enrichment provider or a foreign competitor (referred to as “contravening persons”); or (3) any ownership of, or exercise of rights with respect to, shares of any class of our equity securities or other exercise or attempt to exercise control of us that is inconsistent with, or in violation of, any regulatory restrictions, or that could jeopardize the continued operations of our facilities (an “adverse regulatory occurrence”).  These rights include requesting information from holders (or proposed holders) of our securities, refusing to permit the transfer of securities by such holders, suspending or limiting voting rights of such holders, redeeming or exchanging shares of our stock owned by such holders on terms set forth in our certificate of incorporation, and taking other actions that we deem necessary or appropriate to ensure compliance with the foreign ownership restrictions.

In connection with the investment by Toshiba and B&W and the issuance of certain preferred stock and warrants to Toshiba and B&W, our board of directors determined that the consummation of the investment transactions pursuant to the transaction documents will not constitute an “adverse regulatory occurrence” and that we will not request information from Toshiba or B&W under the provisions of our certificate of incorporation described above. Under the terms of the transaction documents, subject to certain limited exceptions, we have agreed not to take any action to revoke such determination or to amend or adopt any foreign ownership provisions in our certificate of incorporation or bylaws, in each case without the prior written consent of Toshiba or B&W.  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.

 
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For additional information regarding the foreign ownership restrictions set forth in our certificate of incorporation, please refer to “Risk Factors — Our certificate of incorporation gives us certain rights with respect to equity securities held (beneficially or of record) by foreign persons. If levels of foreign ownership set forth in our certificate of incorporation are exceeded, we have the right, among other things, to redeem or exchange common stock held by foreign persons, and in certain cases, the applicable redemption price or exchange value may be equal to the lower of fair market value or a foreign person’s purchase price.



 
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PERFORMANCE GRAPH
 
 The following graph shows a comparison of cumulative total returns for an investment in the common stock of USEC Inc., the S&P 500 Index, and a peer group of companies. USEC is the only U.S. owned company in the uranium enrichment industry. However, USEC has identified a peer group of companies that share similar business attributes with it. This group includes utilities with nuclear power generation capabilities, chemical processing companies, and aluminum companies. USEC supplies companies in the utility industry, and its business is similar to that of chemical processing companies. USEC shares characteristics with aluminum companies in that they are both large users of electric power. The graph reflects the investment of $100 on December 31, 2006 in the Company’s common stock, the S&P 500 Index and the peer group, and reflects the reinvestment of dividends.
 
 
 
                                     
  
  
  
 December 31,
  
  
 December 31,
  
  
 December 31,
  
  
 December 31,
  
  
 December 31,
  
  
 December 31,
  
  
  
 2006
  
  
 2007
  
  
 2008
  
  
 2009
  
  
 2010
  
  
 2011
  USEC Inc. 
  
  
 $100.00
  
  
$70.75
  
  
$35.30
  
  
$30.27
  
  
$47.33
  
  
$8.96
  S&P 500 Index
  
  
 $100.00
  
  
$105.50
  
  
$66.47
  
  
$84.06
  
  
$96.72
  
  
$98.76
  Peer Group Index1
  
  
 $100.00
  
  
$124.46
  
  
$82.91
  
  
$96.67
  
  
$105.79
  
  
$121.13
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  

 
(1)
 
The Peer Group consists of: Air Products and Chemicals, Inc., Albemarle Corporation, Alcoa Inc., Constellation Energy Group, Inc., Dominion Resources, Inc., Duke Energy Corporation, Eastman Chemical Company, Exelon Corporation, Georgia Gulf Corporation, NL Industries, Inc., PPL Corporation, Praxair, Inc., Progress Energy, Inc., The Southern Company, and XCEL Energy Inc. In accordance with SEC requirements, the return for each issuer has been weighted according to the respective issuer’s stock market capitalization at the beginning of each year for which a return is indicated.

 
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Item 6.  Selected Financial Data

Selected financial data 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.  Selected financial data have been derived from audited consolidated financial statements.

   
Years Ended December 31,
 
   
2011
   
2010
   
2009
   
2008
   
2007
 
   
(millions, except per share data)
 
Revenue:
                             
Separative work units
  $ 1,330.9     $ 1,521.4     $ 1,647.0     $ 1,175.5     $ 1,570.5  
Uranium
    131.8       236.1       180.7       217.1       163.5  
Contract services
    209.1       277.9       209.1       222.0       194.0  
Total revenue
    1,671.8       2,035.4       2,036.8       1,614.6       1,928.0  
Cost of sales:
                                       
Separative work units and uranium
    1,391.1       1,623.2       1,640.3       1,202.2       1,473.6  
Contract services
    196.5       253.8       191.8       183.6       166.9  
Total cost of sales
    1,587.6       1,877.0       1,832.1       1,385.8       1,640.5  
Gross profit
    84.2       158.4       204.7       228.8       287.5  
Special charges
    -       -       4.1   (4)     -       -  
Advanced technology costs
    273.2   (1)     110.2       118.4       110.2       127.3  
Selling, general and administrative
    62.1       58.9       58.8       54.3       45.3  
Other (income)
    (3.7 ) (2)     (44.4 ) (2)     (70.7 ) (5)      -        -  
Operating income (loss)
    (247.4 )     33.7       94.1       64.3       114.9  
Preferred stock issuance costs
    -       6.6   (3)     -       -       -  
Interest expense
    11.6       0.6       1.2       17.3       16.9  
Interest (income)
    (0.5 )     (0.4 )     (1.3 )     (24.7 )     (33.8 )
Income (loss) before income taxes
    (258.5 )     26.9       94.2       71.7       131.8  
Provision for income taxes
    282.2       19.4       35.7       23.0       35.2  
Net income (loss)
  $ (540.7 )   $ 7.5     $ 58.5     $ 48.7     $ 96.6  
Net income (loss) per share –
                                       
Basic
  $ (4.48 )   $ .07     $ .53     $ .44     $ 1.04  
Diluted
  $ (4.48 )   $ .05     $ .37     $ .35     $ .94  


 
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December 31,
 
   
2011
   
2010
   
2009
   
2008
   
2007
 
               
(millions)
             
Balance Sheet Data
                             
Cash and cash equivalents
  $ 37.6     $ 151.0     $ 131.3     $ 248.5     $ 886.1  
Inventories             
    1,752.0       1,522.5       1,301.2       1,231.9       1,153.4  
Property, plant and equipment, net
    1,187.1 (1)     1,231.4       1,115.1       736.1       292.2  
Total assets
    3,549.3       3,848.2       3,532.1       3,055.3       3,087.8  
Current debt
    85.0       -       -       95.7       -  
Convertible preferred stock, current
    88.6 (3)     -       -       -       -  
Convertible preferred stock, non-current
    -       78.2 (3)     -       -       -  
Long-term debt
    530.0       660.0       575.0       575.0       725.0  
Other long-term liabilities
    691.0 (6)     527.7       598.9       601.5 (6)     337.5  
Stockholders’ equity
    752.4 (6)     1,313.8       1,275.6       1,162.4 (6)     1,309.5  



(1)  
In 2011, we expensed $146.6 million of previously capitalized construction work in progress related to damaged centrifuge machines, earlier machines that were determined to no longer be compatible with the commercial plant design for the American Centrifuge Plant (“ACP”), and previously capitalized amounts related to prepayments made to a supplier for the ACP.
 
(2)  
Other income in 2010 and 2011 includes pro-rata cost sharing support from DOE of $45 million for partial funding of American Centrifuge activities.
 
(3)  
In September 2010, the first closing of $75 million occurred under a planned $200 million investment by Toshiba and B&W. Balances as of December 31, 2011 and December 31, 2010 include paid or accrued dividends paid-in-kind.
 
(4)  
A significant reduction in American Centrifuge project activities due to project funding uncertainty resulted in special charges of $2.5 million for one-time termination benefits consisting of severance payments and short-term health care coverage and $1.6 million for various contract terminations.
 
(5)  
Other income in 2009 consists of distributions paid to USEC of custom duties collected by the U.S. government as a result of trade actions.
 
(6)  
Retiree benefit plan actuarial losses increased and asset values declined significantly in 2011 and 2008 which contributed to the increases in other long-term liabilities and decreases in stockholders’ equity.
 



 
76

 

Item 7.  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 financial statements and related notes appearing elsewhere in this report.

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;
 
·  
enrich uranium at the Paducah gaseous diffusion plant (“GDP”) that we lease from the U.S. Department of Energy (“DOE”);
 
·  
are the exclusive executive agent for the U.S. government under a nuclear nonproliferation program with Russia, known as Megatons to Megawatts;
 
·  
are working to deploy what we believe is the world’s most advanced uranium enrichment technology, known as the American Centrifuge;
 
·  
provide transportation and storage systems for spent nuclear fuel and provide nuclear and energy consulting services; and
 
·  
perform limited contract work for DOE and its contractors at the Paducah and Portsmouth sites.
 

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 currently produce or acquire LEU from two principal sources. We produce about half of our supply of LEU at the Paducah GDP in Paducah, Kentucky, and we acquire the other portion under a contract with Russia (the “Russian Contract”) under the Megatons to Megawatts program. Under the Russian Contract, we purchase the SWU component of LEU derived from dismantled nuclear weapons from the former Soviet Union for use as fuel in commercial nuclear power plants.

Our business is in a state of significant transition. Managing this transition has been made more challenging by the events of 2011. In March 2011, an earthquake, tsunami and its aftermath caused irreparable damage to four reactors in Japan and subsequently resulted in more than 50 reactors in Japan and Germany being off-line at the start of 2012. The shutdown of these reactors has affected supply and demand for LEU and this impact could grow more significant over time depending on the length and severity of delays or cancellations of deliveries. In particular, based on current market conditions, we do not see any significant uncommitted demand for LEU over the next two to four years. During 2011, we also experienced further delays in our efforts to finance a next generation uranium enrichment plant, the American Centrifuge project. As described below, we have significant decisions to make in 2012 regarding major aspects of our business.  We also must continue to manage events that occur that are outside of our control, including actions that may be taken by vendors, customers and other third parties in response to our decisions or based on their view of our financial strength and future business prospects. Events that unfold in 2012 will define our business into the future. For a discussion of the potential risks and uncertainties facing our business, see Item 1A, Risk Factors.

 
77

 
During 2011 we completed the transition of our Portsmouth contract services business. In September 2011 we transitioned facilities at the former Portsmouth gaseous diffusion plant that we were maintaining for DOE to the DOE decontamination and decommissioning (“D&D”) contractor for the site. This was work we had been doing since the Portsmouth GDP ceased enrichment operations in 2001 and represented the bulk of our contract services work. Going forward, revenue from this segment will be substantially lower and will be derived primarily from our wholly owned subsidiary, NAC International. We believe NAC is well positioned to participate in the growing spent fuel market worldwide. .

In early 2012, we expect to make an important decision regarding the continued operation of the Paducah GDP, which could result in our ceasing, for at least a period of time, to commercially enrich uranium. Although we are working hard to identify a way to keep this plant open, we do not currently believe the factors are in place to support continued operation.  In order to continue to operate beyond May 2012, we will need a combination of additional demand for LEU, an agreement with DOE for programs such as enriching a portion of DOE’s depleted uranium (“tails”) stockpile, and an acceptable power supply arrangement to support the plant production needed to operate the plant in an economic manner.  We have viewed continued Paducah operations as a bridge to our ultimate deployment of the American Centrifuge technology, and a decision to shut down the Paducah GDP before we have established a definitive timeline for future deployment of the American Centrifuge Plant could significantly impact our competitive position. For a discussion of the potential implications of a decision to shut down Paducah operations and the risks of continued Paducah operations, see Item 1A, Risk Factors.

We are in a period of significant uncertainty regarding the American Centrifuge project. We cannot continue to fund the project on our own and we are working to secure funding for a two-year cost-sharing research, development and demonstration (“RD&D”) program with DOE to enable us to continue spending and determine our ability to successfully deploy the American Centrifuge project. Under the cost-sharing arrangement, DOE’s total contribution would be capped at $300 million. In parallel, we are also making preparations for a potential demobilization of the project if DOE funding is not obtained for the RD&D program. We expect that any deployment will likely require restructuring of the project and our investment.

We are in the last two years of the 20-year contract implementing the Megatons to Megawatts program. In March 2011, we signed a commercial agreement with Russia that provides continued access to this important source of supply following the conclusion of the Megatons to Megawatts program. We have also agreed to conduct a feasibility study to explore the possible deployment of an enrichment plant in the United States employing Russian centrifuge technology.

Our View of the Business Today

Events that unfolded in 2011 as a result of the March 2011 Fukushima earthquake and tsunami in Japan have affected our view of the business today. Although long-term forecasts continue to suggest growth in uranium enrichment demand, the impact of Fukushima has resulted in excess supply. This is a significant challenge as we face near-term decision points in our business and transition our supply sources. We continue to believe that nuclear power is an essential component of the world’s electricity generation mix. There is a global fleet of approximately 430 nuclear reactors that provide about 14% of the world’s electricity. The United States has the largest number of reactors with 104 operating units that provide approximately 20% of the nation’s electricity. The World Nuclear Association reports that more than 60 reactors are currently under construction and another 500 are ordered, planned or proposed to be in operation by 2030. In China, two dozen new units are being built and another 50 reactors are in the planning stage. However, the March 2011 events in Japan and the action of some governments to limit the use of nuclear power has resulted in near-term reduction in the number of reactors operating and uncertainty regarding the long-term impact of the events in Japan.

 
78

 
Aftermath of Japanese Earthquake and Tsunami

The Fukushima Daiichi plant’s six reactors are now shut down and at least four of the six are not expected to reopen. Approximately 50 reactors in Japan were not damaged by the earthquake but were shut down for periodic maintenance and refueling. They have remained off line as part of extended governmental inspections and local government reviews. As of December 31, 2011, only six of Japan’s nuclear reactors were in service. Stress tests on all Japanese reactors were ordered by the government. These stress tests are underway but it could be several months into 2012 before reactor restarts are approved.  These prolonged outages have resulted in excess SWU supply in the market. We have long been a leading supplier of LEU to Japan. Over the last three years, sales to Japan have accounted for approximately 10% to 15% of our revenue. We believe Japan still requires the carbon-free, base load electricity that these reactors generate to meet industrial, business and residential demand. During the summer of 2011, about half of the power reactors were on line and Japan suffered through electricity shortfalls during peak periods. Without nuclear power, the summer power shortages are expected to increase in 2012, with resulting anticipated adverse impacts on Japan’s economy and its trade deficits.

Following the events at Fukushima, some European governments took actions to limit the use of nuclear power in their nations. For example, Germany has shut down eight of its reactors and announced that it will be phasing out all 17 nuclear reactors by 2022. Although we do not serve any of the German reactors, our European competitors that serve the German reactors now have excess nuclear fuel available to sell, further adding to the excess supply in the market. The events at Fukushima and its aftermath have negatively affected the balance of supply and demand of LEU for the next 2-4 years, as reflected in lower uranium and nuclear fuel prices in recent months.

We believe the longer term effect of the events in Japan on the nuclear fuel market is uncertain and subject to changes the energy strategies of individual countries. We see continued growth in the number of nuclear power reactors internationally, but that growth may be at a slower pace than previously anticipated or may be concentrated more in emerging markets that may be more difficult for us to enter. We estimate that the enrichment industry market is currently about 50 million SWU per year. In the past five years, we have delivered LEU containing 9 to 13 million SWU per year. The approximately 60 reactors currently under construction will likely be finished, adding about 6 million SWU of annual demand. China has outlined an ambitious schedule for building new reactors that is unlikely to be significantly reduced, although a transition to the inherently safer Generation III reactors in China may lengthen plant construction timelines. China is also expanding its own enrichment capacity.

Nuclear Outlook

We believe the economic fundamentals for building additional U.S.-based uranium enrichment capacity are still in place: the successful Megatons to Megawatts program will come to an end in 2013; the gaseous diffusion plants operating in the United States and France will likely be closed in the near term; and new reactors are being built to meet growing demand for electricity. Western uranium enrichers have been entering into contract terms of a decade or longer with utility customers, assuring that uranium enrichment capacity expansion is tied directly to existing reactors or ones under construction. However, all of our competitors are owned or controlled, in whole or in part, by foreign governments. These competitors may make business decisions in both domestic and international markets that are influenced by political or economic policy considerations rather than exclusively by commercial considerations.


 
79

 

Balanced against this positive outlook is a slower growth forecast for electric power demand due to worldwide recessionary conditions and lower prices for alternative fuels, specifically natural gas in the United States, which is at its lowest price levels in a decade due to new supplies. This could slow the need for new base load nuclear power capacity. In addition, cost estimates for building new reactors have increased substantially over the last several years. Nonetheless, population growth, increasing per capita demand for electric power, particularly in emerging markets, and government actions to reduce carbon emissions provide a strong foundation for a strengthening in demand for nuclear fuel.

Our competitors are building new or expanded facilities in the United States and their home countries. Urenco is expanding its European capacity and is increasing capacity of its gas centrifuge enrichment plant in New Mexico, although it has not yet shipped product from that facility. Areva, the French-government owned enricher, has commenced commercial operations of a centrifuge plant in France that it is building to replace its gaseous diffusion plant. Areva also received a construction and operating license from the NRC in 2011 for a centrifuge enrichment plant in Idaho, but subsequently announced a delay in starting construction due to a need to reduce capital spending under a new strategic plan.  Furthermore, under this strategic plan, Areva has suspended any planned capacity expansions for Georges Besse II plant located in France beyond 7.5 million SWU. Russia has the largest enrichment capacity and plans to expand that capacity. Rosatom/TENEX also uses centrifuge technology.

Although the announced enrichment capacity additions by the world’s four major uranium enrichers are not sufficient to meet the expected demand for LEU by 2030, centrifuge enrichment technology used by the industry is modular and can be expanded to meet emerging demand. In addition, China is emerging as a growing producer of low enriched uranium and has begun to supply a limited foreign market.

Russian Supply Transition

The 20-year Russian Contract implementing the Megatons to Megawatts program is expected to be completed in 2013. After that time, the limited quotas imposed under terms of a treaty and law will increase so that Russia will be able to sell LEU directly into the United States equal to approximately 20% of the U.S. demand, or about 3 million SWU per year, from 2014 through 2020, with additional quantities eligible to be imported for use in the initial fueling of new U.S. reactors.

On March 23, 2011, USEC signed an agreement with TENEX for the 10-year supply of Russian LEU, which became effective in December 2011. Unlike the Megatons to Megawatts program, the quantities supplied under the new agreement will come from Russia’s commercial enrichment activities rather than from downblending of excess Russian weapons material. Under the terms of the new agreement, the supply of LEU to USEC will begin in 2013 and increase until it reaches a level in 2015 that includes a quantity of SWU equal to approximately one-half the level currently supplied by TENEX to USEC under the Megatons to Megawatts program. Beginning in 2015, TENEX and USEC also may mutually agree to increase the purchases and sales of SWU by certain additional optional quantities of SWU up to an amount equal to the amount USEC now purchases each year under the Megatons to Megawatts program. The LEU that USEC obtains from TENEX under the new agreement will be subject to quotas and other restrictions applicable to commercial Russian LEU that do not apply to LEU supplied to USEC under the Megatons to Megawatts program, which could adversely affect our ability to sell the commercial Russian LEU that we purchase under the new agreement. Deliveries under the new supply agreement are expected to continue through 2022.  USEC will purchase the SWU component of the LEU and deliver natural uranium to TENEX for the LEU’s uranium component. The pricing terms for SWU under the agreement are based on a mix of market-related price points and other factors. 


 
80

 

The new supply agreement provides USEC continued access to an important part of its existing supply mix. As we continue to work towards building an American Centrifuge Plant, we continue to review structuring options and strategic alternatives to realize long-term shareholder value. In that context, USEC and TENEX have agreed to conduct a feasibility study to explore the possible deployment of an enrichment plant in the United States employing Russian centrifuge technology. Any decision to proceed with such a project would depend on the results of the feasibility study and would be subject to further agreement between the parties and their respective governments.

American Centrifuge Plant Transition
 
We continue to believe that the best path to maximizing long-term shareholder value is to maintain a viable path to the deployment of the American Centrifuge Plant and that a DOE loan guarantee is critical to financing the American Centrifuge Plant. Despite our continued efforts through most of 2011 to obtain a conditional commitment for a loan guarantee from DOE, we were not successful during 2011 in satisfying DOE’s concerns regarding the financial and project execution depth of the American Centrifuge project. Instead of moving forward with a conditional commitment for a loan guarantee, in the fall of 2011, DOE proposed a two-year cost share research, development and demonstration (“RD&D”) program for the project to enhance the technical and financial readiness of the centrifuge technology for commercialization. Under the cost-sharing arrangement, DOE’s total contribution would be capped at $300 million. DOE indicated that our application for a DOE loan guarantee would remain pending during the RD&D program but has given us no assurance that a successful RD&D program will result in a loan guarantee. DOE’s Loan Guarantee Program came under significant scrutiny during 2011 due to the bankruptcy of solar energy company Solyndra and other loan guarantee recipients, which may adversely impact the future of the program or make obtaining a loan guarantee even more challenging in the future.

Despite the lack of a conditional commitment for a loan guarantee, DOE’s proposal to cost-share the RD&D program reflects the importance the U.S. government places on having a source of domestic uranium enrichment. We have begun work on the RD&D program and we have funded it through March 31, 2012. The effort to fund the program for a longer period has involved Congress and despite extensive efforts, we have not yet finalized an agreement and obtained federal funding for the program. The current political environment in Washington has significantly slowed the legislative process. The two houses of Congress are each held by a different political party and in an election year the necessary bipartisan support will be difficult to achieve. Moreover any agreement would likely also require restructuring of the project and of our investment. In light of our inability to reach a conditional commitment for a DOE loan guarantee to date, and given the significant uncertainty surrounding our prospects for finalizing an agreement and obtaining funding from DOE for an RD&D program and the timing thereof, we currently are evaluating our options concerning the American Centrifuge project, including whether to further reduce our spending on the project or begin a demobilization of the project. Our evaluation of these options is ongoing. See Part I, Items 1 and 2, Business and Properties – American Centrifuge Plant and Item 1A, Risk Factors.

Paducah Gaseous Diffusion Plant Transition

We are also facing a near-term decision regarding the continuation of operations at the Paducah gaseous diffusion plant beyond May 2012. Our production facility in Paducah, Kentucky is leased from the U.S. government and was built in the 1950s for defense purposes. Although the plant continues to operate at a very high level of efficiency, the technology uses significant amounts of electric power that is increasingly putting us at a competitive disadvantage compared to our foreign-owned competitors who operate gas centrifuge plants. Although our goal is to extend operations at the Paducah GDP, we do not currently believe the factors are in place to support continued operation.  In order to continue to operate beyond May 2012, we will need to be successful in the near term in the following three areas, none of which have been achieved to date and all of which are subject to significant uncertainty: identifying additional demand for LEU needed to support continued Paducah production at the production level necessary to make the plant economic; obtaining a contract with DOE for programs such as enriching a portion of the DOE’s depleted uranium (“tails”) stockpile on satisfactory terms and in sufficient amount to maintain plant production capacity at an economic level; and negotiating an acceptable power arrangement with TVA or other suppliers of power who have sufficient transmission capacity to supply the plant. In the past, the Paducah GDP has been needed to meet market demand for SWU, but the Fukushima event and subsequent responses have reduced the uncommitted demand in the market over the next two to four years and the market may not support continued operation of the Paducah GDP.

 
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We have proposed a program to DOE to re-enrich a portion of DOE’s stored depleted uranium. Such a program would reduce DOE’s costs of ultimately disposing of the depleted uranium. Depleted uranium re-enrichment would create a valuable uranium asset that could help fund DOE programs while providing production load to our enrichment operations at the Paducah GDP. In June 2011, the Government Accountability Office estimated the value of DOE’s depleted uranium to the government was $4.2 billion. Legislation requiring DOE to enter into such a program has been introduced in Congress, but enactment of such legislation and timing is uncertain. Based upon our current outlook for demand and discussions with customers, we do not believe there is sufficient demand to support a Paducah extension even with an agreement with DOE for tails re-enrichment to absorb a portion of the plant production capacity. As an alternative, we have recently been in discussions regarding the potential for the Bonneville Power Administration (“BPA”), a federal agency within the DOE, to purchase a sufficient amount of SWU to support a potential one-year extension of Paducah enrichment operations.  Under this arrangement, DOE would transfer some of its depleted uranium to BPA to be used as the feed material for the LEU produced under such an arrangement and BPA would pay us for the SWU component of the LEU produced. However, we have no assurances that we will reach an agreement regarding such an arrangement on acceptable terms or at all.

Because approximately 70% of our cost of production is electricity, we are sharply focused on the price we pay for power at Paducah. Our power supply contract with TVA expires May 31, 2012 and we are evaluating additional power purchases from TVA and other sources. A lack of high-voltage transmission capacity in that region may effectively limit our alternatives to TVA. We expect to make decisions regarding an extension of Paducah GDP operations in the next few months. A decision to cease operations at the Paducah GDP could have a material adverse effect on our business and prospects. Without operations at Paducah beyond May 2012, we would cease commercial enrichment of uranium during any transition period to centrifuge technology. This could have an adverse impact on our relationships with customers and the U.S. government. See Item 1A, Risk Factors, “A decision to cease enrichment operations at the Paducah GDP could have a material adverse effect on our business and prospects.”

Contract Services Transition

With the conclusion of our Portsmouth site services contracts in September 2011, our contract services work will be primarily derived from our subsidiary NAC. One area of industry focus coming out of the events at Fukushima has been the amount of spent nuclear fuel stored underwater in pools at nuclear facilities around the world. In the United States alone, there are tens of thousands of spent fuel assemblies being stored in large pools in protected areas at the power plants. The federal government had focused on Yucca Mountain as the nation's spent fuel repository site and Congress confirmed DOE's selection of the site in 2002. However, DOE is seeking to halt the repository and its future is highly uncertain. Regulators in the United States have continued to assert the safety of both wet and dry storage of spent nuclear fuel. However, in this operating environment, plant operators may increasingly turn to dry cask storage technology to off-load older and cooler nuclear fuel assemblies from their spent fuel pools. This may increase near-term demand for dry cask storage systems. The report of the Secretary of Energy’s Blue Ribbon Commission on America’s Nuclear Future, issued on January 26, 2012, contains several recommendations related to spent fuel storage, which could, if implemented by the executive and legislative branch, have future impact on NAC’s spent fuel storage and transportation business. Specifically, the report recommended the authorization of consolidated interim storage facilities. This may increase the demand for spent fuel transportation casks to transport spent fuel canisters and the need for new storage modules at the consolidated interim storage facilities. Our subsidiary NAC has a full range of dry cask storage systems, including the MAGNASTOR® System, which has among the largest storage capacities of any cask system approved to date.

 
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In the United States, NAC competes with two companies and has a market share that is roughly 30% of installed, multi-purpose canister concrete storage systems. We estimate the accessible and uncommitted global market over the next 10 years for spent fuel storage systems to be roughly $1.5 billion, and this market could increase if utilities’ spent fuel storage plans are revised to transfer more fuel stored in pools into dry storage casks to reduce pool heat loads.  NAC is well prepared to support the market if there is expanded interest from utilities seeking to proactively move additional spent fuel out of storage pools or if there are regulatory-driven mandates.

Summary

2011 was a challenging year and we will continue to be under significant competitive and cost pressures in 2012 and beyond. However we believe we have a strong base from which to transition and build. We have a decades-long reputation with our customers around the world for meeting their nuclear fuel requirements in-spec, delivered on time, every time. We have a highly efficient centrifuge machine that can substantially reduce our power requirements and make us a low-cost producer. We believe American Centrifuge could provide exceptional optionality to investors as it has the potential to dramatically change our cost structure. We expect to reduce the project risk of building a new enrichment plant populated with this AC100 machine through a research, development and demonstration program. This two-year program will also provide time for impact of the current market disruption due to the aftermath of the Japanese earthquake and tsunami to be more fully developed and understood.

During 2012 we will make important decisions regarding the future of the Paducah GDP. Based on our current view of the market, we do not see sufficient near-term demand to support production of low enriched uranium for our utility customers. Therefore, at some point in the next 18 months we expect to cease commercial enrichment at the Paducah GDP but the facility may remain operational to meet other requirements. As a result, we expect to be a smaller company going forward. We have already transitioned much of our contract services infrastructure at Piketon and anticipate ongoing reductions as we align our staff with the work to be accomplished going forward. In early 2012, we initiated an internal review of our organizational structure and engaged a management consulting firm to support this review. We expect this review will result in a significantly smaller workforce over time. We could announce actions affecting employees in the second quarter of 2012.

LEU Segment

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 23% of revenue from our LEU segment in 2011. 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.

 
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Backlog is the estimated aggregate dollar amount of SWU and uranium sales that we expect to recognize as revenue in future periods under contracts with customers. At December 31, 2011, we had contracts with customers aggregating an estimated $5.8 billion, including $1.5 billion expected to be delivered in 2012 and $3.5 billion through 2015. Backlog was $6.7 billion at December 31, 2010 and $8.0 billion at December 31, 2009. Backlog is partially based on customers’ estimates of their fuel requirements and certain other assumptions including our estimates of selling prices, which are subject to change. Depending on the terms of specific contracts, prices may be adjusted based on published SWU or uranium market price indicators prevailing at the time of delivery. Other pricing elements may include escalation based on a general inflation index, a power price index or a multiplier of our actual unit power cost. We utilize external composite forecasts of future market prices and inflation rates in our pricing estimates. Pricing elements included in our SWU contracts are intended to correlate with our sources for enrichment supply. Current sources consist of our production from the Paducah GDP and purchases under the Russian Contract. Purchases under the Russian Contract will cease at the end of 2013 and reduced purchases from Russia will commence under a commercial contract. We are evaluating whether to extend Paducah GDP enrichment operations beyond the expiration of our power contract in May 2012 and our potential future production from deployment of the ACP is uncertain. Our business is in transition and our future backlog will reflect our changing sources of supply. Additional details are provided in Part I, Item 1A, Risk Factors, including “The dollar amount of our sales backlog, as stated at any given time, is not necessarily indicative of our future sales revenues” and “Our inability to secure a loan guarantee on a timely basis may adversely affect our backlog of contracts for the output of the American Centrifuge project, and may result in diminished prospects for securing financing for the plant.”

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 $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 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. 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, including in response to the March 2011 events in Japan.

In order to enhance our liquidity and manage our working capital in light of anticipated sales and inventory levels and to respond to customer-driven changes, we have been working with customers regarding the timing of their orders, in particular the advancement of those orders. Rather than selling material into the limited spot market for enrichment, USEC has advanced orders from 2011 into 2010 and orders from 2012 into 2011. Based on our outlook for demand and our anticipated liquidity and working capital needs, we are continuing to seek to work with customers to advance orders into 2012. 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 is recorded in an earlier than originally anticipated period. The advancement of orders has 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. As a result of the lack of near term demand due to the impacts of the events in Japan on the market, we have not been able to replace many of the order advancements that we have done in the past with additional sales, which has had the effect of reducing our backlog as of December 31, 2011. Delays in decisions with respect to the extension of Paducah plant operations and delays in the deployment of the American Centrifuge project have also had a negative effect on our backlog as our sales are a function of our future supply, including potential supply from Paducah plant operations and from the American Centrifuge Plant. Looking out beyond the next 2-4 years, we expect an increase in uncommitted demand that could provide the opportunity to make additional sales to supplement our backlog and thus decrease the need to advance orders in the future. However, the amount of any demand and our ability to capture that demand is uncertain. Our ability to advance orders depends on the willingness of our customers to agree to advancement on terms that we find acceptable. In light of the order advancements that we have done in the past, additional order advancements are challenging.

 
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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 UF6, as calculated using indicators published in Nuclear Market Review, and TradeTech’s spot price indicator for UF6:
   
December 31,
 
   
2011
   
2010
   
2009
   
2008
   
2007
 
Long-term SWU price indicator ($/SWU)
  $ 148.00     $ 158.00     $ 165.00     $ 159.00     $ 143.00  
UF6:
                                       
Long-term price composite ($/KgU)
    176.13       190.07       167.77       195.15       260.47  
Spot price indicator ($/KgU)
    143.25       173.00       120.00       140.00       241.00  

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. Most of our inventories of uranium available for sale have been sold as reflected in the reduced revenue from uranium in 2011 as compared to 2010.  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 may 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. We expect uranium sales to have less of an impact on earnings going forward compared to prior years, in particular if a decision is made to cease enrichment operations at Paducah that will also affect our ability to generate uranium by underfeeding. Our average unit cost for uranium inventory has risen over the past several years as production costs are allocated to uranium from underfeeding based on its net realizable value. 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.

In a number of sales transactions, title to uranium or LEU is transferred to the customer and USEC receives payment under normal credit terms without physically delivering the uranium or LEU to the customer. This may occur because the terms of the agreement require USEC to hold the uranium to which the customer has title, or because the customer encounters brief delays in taking delivery of LEU at USEC’s facilities. In such cases, recognition of revenue does not occur at the time title to uranium or LEU transfers to the customer but instead is deferred until LEU to which the customer has title is physically delivered. The proportion of uranium sales to SWU sales comprising the deferred revenue balance has declined as uranium sales are declining.

 
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Our contracts with customers are denominated in U.S. dollars, and although revenue has not been directly affected by changes in the foreign exchange rate of the U.S. dollar, we may have a competitive price advantage or disadvantage obtaining new contracts in a competitive bidding process depending upon the weakness or strength of the U.S. dollar. Costs of our primary competitors are denominated in the major European currencies.

Cost of Sales for SWU and Uranium

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. 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 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.

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. In 2011, the power load at the Paducah GDP averaged 1,376 megawatts, compared to 1,555 megawatts in 2010 and 1,645 megawatts in 2009. We purchase most of the electric power for the Paducah GDP from TVA under a power purchase agreement that expires May 31, 2012. The base price under the TVA power contract increased moderately during the term 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 imposed an average increase over base contract prices of about 12% in 2011, 10% in 2010, and 6% in 2009. The average fuel cost adjustment in 2011 was affected by TVA’s temporary power generating capacity losses during April and May which were caused by severe tornado and thunderstorm damage, necessitating the purchase of significant volumes of higher cost replacement power. 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. We expect the fuel cost adjustment to continue to cause our purchase cost to remain above base contract prices for the remainder of the power contract through May 2012.
 
The monthly quantities of power purchased by USEC under the TVA power contract are fixed. Under the terms of the agreement, beginning September 1, 2010, we began to buy 1,650 megawatts instead of the 2,000 megawatts we had been purchasing in non-summer months since 2007. This reduction was included in the contract to provide a transition for the TVA power system for the end of the power contract in 2012. In addition, as a result of flood conditions near the Paducah plant, we coordinated with TVA to ramp down power purchases in 2011 to summer operation levels earlier than planned. Some of this power that was deferred in 2011 due to the flood conditions was purchased by us as supplemental power in February 2012. In the summer months (June – August), we supplemented the 300 megawatts we buy under the TVA contract with additional power purchased at market-based prices. As discussed above, as part of our transition planning, we are evaluating possible sources of power for delivery after May 31, 2012 if a decision is made to continue Paducah operations beyond May 2012.   We have been in discussions with TVA and potential alternate sources of electricity. However, we have not been willing to commit to any power purchases until we believe the plant economics can support a decision to extend Paducah production. Without extended operations, we would require significantly less power as we gradually transition down to a level where we would maintain the facility at an electricity load that is 2% to 3% of our current power purchase.

 
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We are required to provide financial assurance to support our payment obligations to TVA. These include a letter of credit and weekly prepayments based on TVA’s estimate of the price and our usage of power.

We purchase about one-half of our SWU supply under the Russian Contract. Prices under the contract are determined using a discount from an index of published 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 pricing and minimize the disruptive effect of short-term market price swings. The price per SWU under the Russian Contract for 2011 was 3% higher compared to 2010.

Paducah GDP Transition

As described above under “Our View of the Business Today – Paducah Gaseous Diffusion Plant Transition,” we are facing a near-term decision regarding the continuation of operations at the Paducah gaseous diffusion plant beyond May 2012. The current lease for the Paducah GDP expires in 2016. However, under the terms of the lease, we can terminate the lease prior to expiration upon two year’s prior notice. We can also de-lease portions of the property under lease to meet our changing requirements upon 60 days prior notice with DOE’s consent, which cannot be unreasonably withheld. If we make a decision to not continue to operate the plant beyond May 2012 or to continue for only a short period of time, we could accelerate expenses for certain assets such as previously capitalized leasehold improvements and machinery and equipment related to the Paducah GDP. As of December 31, 2011, net book value of property, plant and equipment included in our consolidated balance sheet was $66.8 million related to Paducah operations. These assets are being depreciated over their estimated life based on the current lease term through 2016. We have accrued liabilities for lease turnover costs related to the Paducah GDP, included in our other long-term liabilities, of $42.6 million at December 31, 2011 that could be accelerated from a cash standpoint and considered as current liabilities if we were to terminate the lease prior to the current expiration date.  

We would also expect to incur significant costs in connection with a decision to shut down Paducah operations, including potential severance costs and curtailment charges related to our defined benefit pension plan and postretirement health and life benefit plans. If a decision is made to shut down Paducah operations, we would expect to de-lease the Paducah GDP except for certain facilities used for shipping and handling, inventory management and site services that are needed for our ongoing operations, including deliveries to customers of our inventory of LEU and handling of Russian material through 2013 under the Russian Contract, or beyond under the Russian Supply Agreement. However, we have no assurance that DOE would accept facilities that we wish to de-lease in the timeframe desired, which could result in additional costs. 

The ongoing economics of the Paducah GDP are being increasingly challenged.  Our inventories of SWU and uranium are valued at the lower of cost or market. Production costs are added to inventory using the monthly moving average cost method. We compare our inventory cost against market prices and if our inventory costs were to exceed market prices, we could be required to take an inventory impairment. A decision to shorten Paducah’s plant life could also adversely increase our cost of sales.


 
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Contract Services Segment

Revenue from Contract Services

We perform services and earn revenue from contract work through our subsidiary NAC and from contract work for DOE and DOE contractors at the Paducah GDP and the Portsmouth site. USEC ceased uranium enrichment at the Portsmouth GDP, located in Piketon, Ohio, in 2001. Over the past decade, we maintained the Portsmouth site and performed services under contract with DOE. On September 30, 2011, contracts for maintaining the Portsmouth facilities and performing services for DOE at Portsmouth expired and we completed the transition of facilities to the decontamination and decommissioning (“D&D”) contractor selected by DOE for the site. Consequently, we ceased providing government contract services at Portsmouth on September 30, 2011. We will continue to provide some limited services to DOE and its contractors at the Paducah site and at the Portsmouth site related to facilities we continue to lease for the American Centrifuge Plant. Revenue from our contract services segment, however, will decrease significantly going forward compared to prior periods and will be comprised primarily of revenue generated by NAC. Revenue from Portsmouth’s government contract services activities comprised approximately 80% of the total revenue for the contract services segment in 2010 and 59% in 2011. See “– Portsmouth Site Transition” below.

Revenue from U.S. government contracts is based on allowable costs for work performed in accordance with government cost accounting standards (“CAS”). 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”), or such other entity that DOE authorizes to conduct the audit. As a part of performing contract work for DOE, certain contractual issues, scope of work uncertainties, and various disputes 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.

DOE funded a portion of the work at Portsmouth through an arrangement whereby DOE transferred uranium to us which we immediately sold. We completed six competitive sales of uranium between the fourth quarter of 2009 and the first quarter of 2011. Our receipt of the uranium was not considered a purchase by us and no revenue or cost of sales was recorded upon its sale. This is because we had no significant risks or rewards of ownership and no potential profit or loss related to the uranium sale. The value of the contract work is based on the cash proceeds from the uranium sales less our selling and handling costs. The net cash proceeds from the uranium sales were recorded as deferred revenue, and revenue was recognized in our contract services segment as services were provided.

Contract Services Receivables

Payment for our contract work performed for DOE is subject to DOE funding availability and Congressional appropriations. DOE historically has not approved our provisional billing rates in a timely manner. DOE has approved provisional billing rates for 2004, 2006 and 2010 based on preliminary budgeted estimates even though updated provisional rates had been submitted based on more current information. In addition, we have finalized and submitted to DOE the Incurred Cost Submissions for Portsmouth and Paducah contract work for the six months ended December 31, 2002 and the years ended December 31, 2003, 2004, 2005, 2006, 2007, 2008, 2009 and 2010 . DCAA historically has not completed their audits of our Incurred Cost Submissions in a timely manner. DCAA has been periodically working on audits for the six months ended December 31, 2002 and the year ended December 31, 2003 since May 2008. In June 2011, a new DOE contractor began an audit for the year ended December 31, 2004. There is the potential for additional revenue to be recognized based on our final billing rates pending the outcome of audits and DOE reviews. However, because these periods have not been audited, uncertainty exists and we have not yet recognized this additional revenue.

 
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Our consolidated balance sheet includes receivables, net of valuation allowances, from DOE or DOE contractors of $37.8 million as of December 31, 2011. Of the $37.8 million, $19.0 million represents revenue recorded for amounts not yet billed due to the absence of approved billing rates referenced above (referred to as unbilled receivables). Past due receivables from DOE or DOE contractors increased from $10.9 million at December 31, 2010 to $20.1 million at December 31, 2011, of which $11.2 million is related to the 2002 through 2009 historical periods. On December 2, 2011, we submitted a certified claim for $11.2 million under the Contract Disputes Act (“CDA”) for payment of breach-of-contract amounts equaling unreimbursed costs for the periods through December 31, 2009. We believe DOE has breached its agreement by failing to establish appropriate provisional billing and final indirect cost rates on a timely basis. In a letter response dated January 31, 2012, DOE informed us that it will provide a written decision on or before June 2, 2012 related to the claim. In addition, we submitted a second certified claim for $9.0 million under the CDA related to the 2010 historical period on February 16, 2012.

Portsmouth Site Transition

As mentioned above, on September 30, 2011, we completed the transition of Portsmouth site facilities to the D&D contractor. As part of the transition, at our request, the NRC terminated our certificate of compliance for the Portsmouth site. We continue to lease facilities used for the ACP and administrative purposes in Piketon, Ohio. DOE has agreed to provide infrastructure services in support of the construction and operation of the ACP. USEC is permitted to re-lease certain facilities in the event they are needed to provide utility services to the ACP and DOE or its contractors are not continuing such services.

Under our lease agreement with DOE, ownership of capital improvements related to the transitioned Portsmouth site facilities that we left behind as well as responsibility for D&D of such improvements transferred to DOE. In addition, we elected in 2010 to leave certain impaired inventory at the Portsmouth site and charged $1.5 million to cost of sales. The turnover requirements of the lease required us to remove USEC-generated waste. In connection with the return of facilities, DOE agreed to accept ownership of all nuclear material at the site, some of which required processing for waste disposal. USEC agreed to pay DOE its cost of disposing of such wastes which was estimated to be $7.8 million and is recorded as a current liability.

The transition of Portsmouth site contract services workers from USEC to the D&D contractor began in the first quarter of 2011 and was completed on September 30, 2011. We paid severance pay in the fourth quarter of 2011 totaling less than $1 million for those workers not offered employment by the D&D contractor, with DOE owing a portion of this amount related to contract closeout.

The cessation of certain U.S. government contract activities and the transfer of employees in Portsmouth triggered certain curtailment charges related to our defined benefit pension plan and postretirement health and life benefit plans. Since a substantial number of employees were expected to be leaving USEC as a result of the transitioning of our government services work to the D&D contractor, we recognized approximately $0.4 million in our cost of sales in December 2010 related to unamortized prior service costs based on our employee population at Portsmouth. Additionally, we recognized $5.1 million in cost of sales in 2011 for curtailment charges related to the pension plan and postretirement benefit plans based on additional information and clarification on the timing and number of employees leaving USEC and refined actuarial estimates. Our curtailment charges for both the pension and postretirement health and life benefit plans reflects terminations for all employees transitioning at the Portsmouth site to the D&D contractor.

Contract closeout related costs, as defined by applicable federal acquisition regulations and government cost accounting standards, are anticipated to be billed to DOE and recorded as revenue when contract closeout occurs and amounts are deemed probable of recovery. Our current estimate for these billable costs is approximately $35 million which includes an estimate to complete outstanding DOE audits within a reasonable period of time. This estimate does not include ongoing cost reimbursable work being performed and amounts already included in our receivable balances. These contract closeout costs to be billed to DOE include DOE’s share of costs for our defined benefit pension plan, our postretirement health and life benefit plans, DOE’s share of severance, and other miscellaneous costs. The actual amounts are subject to a number of factors and therefore subject to significant uncertainty including uncertainty concerning the amount that may be reimbursable under contracts with DOE.

 
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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. For further details, refer to “– Critical Accounting Estimates – Advanced Technology Costs.” Expenditures related to American Centrifuge technology for the years ended December 31, 2011, 2010, and 2009, as well as cumulative expenditures as of December 31, 2011, follow (in millions):
 
   
2011
   
2010
   
2009
   
Cumulative as of December 31, 2011
 
Amount capitalized (A)
  $ 108.5     $ 129.9     $ 379.3     $ 1,286.7  
Less: Expense of previously capitalized amounts (B)
    (146.6 )     -       -       (146.6 )
Net amount capitalized
    (38.1 )     129.9       379.3       1,140.1  
Amount expensed (B)
    271.6       107.8       117.5       1,039.0  
Total ACP expenditures, including accruals (C)
  $ 233.5     $ 237.7     $ 496.8     $ 2,179.1  
                                 
(A)Amounts capitalized as part of property, plant and equipment (primarily as part of construction work in progress) total $1,119.0 million as of December 31, 2011, including capitalized interest of $105.4 million. Annual capitalized interest was $33.4 million in 2011, $31.6 million in 2010, and $22.9 million in 2009. Prepayments to suppliers for services not yet performed totaled $21.1 million as of December 31, 2011.
 
(B)Expense included as part of Advanced Technology Costs. See discussion below on the expense of previous capitalized costs during 2011.
 
(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 accruals of $11.0 million at December 31, 2011 and $14.5 million at December 31, 2010.
 
 
 
In addition to the capitalized costs illustrated above, we have deferred financing costs of approximately $6.7 million for costs related to the ACP project, 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.

During the second quarter of 2011, we expensed $9.6 million of previously capitalized construction work in progress costs. This expense was charged to advanced technology costs on the consolidated statement of operations and relates to a number of centrifuge machines and the related capitalized interest allocated to the centrifuge machines. The centrifuge machines expensed are no longer considered to have future economic benefit because they were irreparably damaged during lead cascade operations. There is no machine technology, machine design or machine manufacturing issue associated with this expense.

 
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During the fourth quarter of 2011, we expensed $127.1 million of previously capitalized work in progress costs related to a number of earlier AC100 centrifuge machines. These centrifuges were replaced in the lead cascade in 2011 to make room for testing of a new group of AC100 centrifuge machines. Costs related to the initial set of AC100 machines that were removed from the lead cascade were expensed since these machines are no longer compatible with the current design and we do not expect them to be used in a future commercial plant.

Also during the fourth quarter of 2011, we expensed $9.9 million of previously capitalized amounts related to prepayments made to a supplier for the American Centrifuge Plant. Our contract with this supplier could not be extended and this amount represents the remaining balance for prepayments for materials that we will not purchase under the contract. Under the terms of the contract, the prepayment is credited against a portion of the purchase price for the materials and we do not plan on purchasing sufficient material to recoup the full credit prior to expiration of the contract.

Beginning with the start of the fourth quarter of 2011, all project costs incurred have been expensed, including interest expense that previously would have been capitalized. Spending at the reduced levels relates primarily to development and maintenance activities rather than capital asset creation. We also expect to expense costs under the RD&D program as incurred. Capitalization of expenditures related to ACP has ceased until commercial plant deployment resumes.  We continue to believe that future cash flows generated by the ACP will exceed our capital investment and our capital investment is more likely than not to be fully recoverable. We will continue to evaluate this assessment as conditions change, including as a result of activities conducted as part of the research, development and demonstration (“RD&D”) program being pursued. If conditions change, including if the current path to commercial deployment were no longer probable or our anticipated role in the project were changed, we could expense up to the full amount of previously capitalized costs related to the ACP of up to $1.1 billion as early as the first quarter of 2012. Events that could impact our views as to the probability of deployment or our projections include a failure to successfully enter into an agreement with DOE to provide funding for the project as part of the RD&D program or an unfavorable determination in any phase of the RD&D program regarding the restructuring of the project.

For further details regarding the American Centrifuge project, see “Business and Properties – The American Centrifuge Plant.”  Risks and uncertainties related to the financing, construction and deployment of the American Centrifuge Plant are described in Item 1A, Risk Factors.

MAGNASTOR®

Advanced technology costs also include research and development efforts undertaken by NAC, relating primarily to its new generation MAGNASTOR dual-purpose concrete dry storage system for spent fuel. In February 2009, the MAGNASTOR System was added to the NRC’s list of dry storage casks certified for use under a general license. MAGNASTOR has among the largest storage capacities of any cask system approved to date. NAC continues to seek license amendments for the expanded use of the technology and submitted a license application to the NRC for certification of the MAGNASTOR transportation cask system, the MAGNATRAN, in January 2011. Subsequently, the NRC requested supplemental information from NAC regarding the MAGNATRAN license application and NAC is in the process of responding to this NRC request.


 
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Critical Accounting Estimates

Our significant accounting policies are summarized in note 1 to our consolidated financial statements, which were prepared in accordance with generally accepted accounting principles. Included within these policies are certain policies that require critical accounting estimates and judgments. Critical accounting estimates are those that require management to make assumptions about matters that are uncertain at the time the estimate is made and for which different estimates, often based on complex judgments, probabilities and assumptions that we believe to be reasonable, but are inherently uncertain and unpredictable, could have a material impact on our operating results and financial condition. It is also possible that other professionals, applying their own judgment to the same facts and circumstances, could develop and support a range of alternative estimated amounts. We are also subject to risks and uncertainties that may cause actual results to differ from estimated amounts, such as the healthcare environment, legislation and regulation.

The sensitivity analyses used below are not intended to provide a reader with our predictions of the variability of the estimates used. Rather, the sensitivities used are included to allow the reader to understand a general cause and effect of changes in estimates.

We have identified the following to be our critical accounting estimates:

Pension and Postretirement Health and Life Benefit Costs and Obligations

We provide retirement benefits under defined benefit pension plans and postretirement health and life benefit plans. The valuation of benefit obligations and costs is based on provisions of the plans and actuarial assumptions that involve judgments and estimates. Changes in actuarial assumptions could impact the measurement of benefit obligations and benefit costs, as follows:

 
·
The weighted average expected return on benefit plan assets was 7.5% for 2010 and 2011 and is 7.25% for 2012.  The expected return is based on historical returns and expectations of future returns for the composition of the plans’ equity and debt securities. A 0.5% decrease in the expected return on plan assets would increase annual pension costs by $3.6 million and postretirement health and life costs by $0.2 million.

 
The differences between the actual return on plan assets and expected return on plan assets are accumulated in Net Actuarial Gains and (Losses), which are recognized as an increase or decrease to benefit costs over a number of years based on the employees’ average future service lives, provided such amounts exceed certain thresholds which are based upon the obligation or the value of plan assets, as provided by accounting standards. This difference is recognized in other comprehensive income.

 
·
A weighted average discount rate of 4.9% was used at December 31, 2011 to calculate the net present value of benefit obligations. The discount rate is the estimated rate at which the benefit obligations could be effectively settled on the measurement date and is based on yields of high quality fixed income investments whose cash flows match the timing and amount of expected benefit payments of the plans. A 0.5% reduction in the discount rate would increase the valuation of pension benefit obligations by $61.6 million and postretirement health and life benefit obligations by $11.5 million, and the resulting changes in the valuations would increase annual pension costs by $5.6 million and postretirement health and life benefit costs by $0.8 million.

 
The reduction in the weighted average discount rate of 5.7% used at December 31, 2010 compared to the 4.9% used at December 31, 2011 increased our accumulated Net Actuarial  (Losses), which are recognized as an increase to benefit costs over a number of years based on the employees’ average future service lives. This change is recognized in other comprehensive income.

 
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·
The healthcare costs trend rates are 8% projected in 2012 reducing to a final trend rate of 5.0% by 2018. The healthcare costs trend rate represents our estimate of the annual rate of increase in the gross cost of providing benefits. The trend rate is a reflection of health care inflation assumptions, changes in healthcare utilization and delivery patterns, technological advances, and changes in the health status of our plan participants. A 1% increase in the healthcare cost trend rates would increase postretirement health benefit obligations by about $8.5 million and would increase costs by about $1.0 million.

Costs for the Future Disposition of Depleted Uranium and GDP Lease Turnover Costs

The accounting for SWU and uranium inventories includes estimates and judgments. Inventories of SWU and uranium are valued at the lower of cost or market. Market is based on the terms of long-term contracts with customers, and, for uranium not under contract, market is based primarily on published spot price indicators at the balance sheet date. SWU and uranium inventory costs are determined using the monthly moving average cost method. Production costs are allocated to the uranium earned based on the net realizable value of the uranium, and the remainder of production costs is allocated to SWU inventory costs. Production costs include estimates of future expenditures for the conversion, transportation and disposition of depleted uranium, the treatment and disposal of hazardous, low-level radioactive and mixed wastes, and GDP lease turnover costs. An increase or decrease in production costs has an effect on inventory costs and cost of sales over current and future periods.

We store depleted uranium generated from our operations at the Paducah GDP 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 will continue to explore alternatives. DOE has constructed new facilities at Paducah and Portsmouth to process large quantities of depleted uranium owned by DOE. Test operations at these DOE facilities have been completed and preliminary operations have begun. 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 depending on plant availability. The method and timing of the disposal of our depleted uranium has not been determined. DOE has taken from USEC the disposal obligation for specific quantities of depleted uranium in past years, most recently through a cooperative agreement signed in March 2010 that provided for pro-rata cost sharing support for the funding of certain American Centrifuge activities in 2010 and through the March 13, 2012 agreement we entered into with DOE in which DOE accepted the disposal obligation for a specific quantity of depleted uranium in exchange for our transfer to DOE of title to LEU. Our long-term liability for depleted uranium disposition is dependent upon the volume of depleted uranium that we generate, projected methods of disposition and estimated disposition costs. Our estimates of processing, transportation and disposal costs are 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 (refer to “Liquidity and Capital Resources – Financial Assurance and Related Liabilities”). 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.