e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934 |
For the quarter ended September 30, 2006
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934 |
Commission file number 1-14287
USEC Inc.
(Exact name of registrant as specified in its charter)
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Delaware
(State of incorporation)
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52-2107911
(I.R.S. Employer Identification No.) |
2 Democracy Center
6903 Rockledge Drive
Bethesda, Maryland 20817
(301) 564-3200
Indicate by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Securities Exchange Act of 1934). Yes o No þ
As of October 31, 2006, there were 87,117,000 shares of Common Stock issued and outstanding.
TABLE OF CONTENTS
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Page |
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PART I FINANCIAL INFORMATION |
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Item 1. Financial Statements: |
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Consolidated Condensed Balance Sheets at September 30, 2006 and
December 31, 2005 (Unaudited) |
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3 |
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Consolidated Condensed Statements of Income (Loss) for the Three and
Nine Months Ended September 30, 2006 and 2005 (Unaudited) |
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4 |
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Consolidated Condensed Statements of Cash Flows for the Nine Months
Ended September 30, 2006 and 2005 (Unaudited) |
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5 |
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Notes to Consolidated Condensed Financial Statements (Unaudited) |
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6 |
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Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations |
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20 |
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Item 3. Quantitative and Qualitative Disclosures about Market Risk |
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38 |
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Item 4. Controls and Procedures |
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38 |
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PART II OTHER INFORMATION |
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Item 1. Legal Proceedings |
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39 |
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Item 1A. Risk Factors |
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39 |
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
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44 |
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Item 6. Exhibits |
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45 |
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Signature |
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46 |
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Exhibit Index |
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47 |
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This document contains forward-looking statements that is, statements related to future
events. In this context, forward-looking statements may address our expected future business and
financial performance, and often contain words such as expects, anticipates, intends,
plans, believes, will and other words of similar meaning. Forward-looking statements by their
nature address matters that are, to different degrees, uncertain. For USEC, particular risks and
uncertainties that could cause our actual future results to differ materially from those expressed
in our forward-looking statements include, but are not limited to: the cost of electric power used
at our gaseous diffusion plant; our dependence on deliveries under the Russian Contract and on a
single production facility; the success and timing of the demonstration and deployment of the
American Centrifuge technology and the costs to develop that technology; difficulties in obtaining
financing; changes in existing restrictions on imports of Russian enriched uranium, including the
imposition of duties on imports of enriched uranium under the Russian Contract; the elimination of
duties charged on imports of foreign-produced low enriched uranium; pricing trends in the uranium
and enrichment markets; changes to, or termination of, our contracts with the U.S. government and
changes in U.S. government priorities and the availability of government funding; the impact of
government regulation; the outcome of legal proceedings and other contingencies (including
lawsuits, government investigations or audits and government/regulatory and environmental
remediation efforts); the competitive environment for our products and services; changes in the
nuclear energy industry; and other risks and uncertainties discussed in this and our other filings
with the Securities and Exchange Commission, including our Annual Report on Form 10-K. We do not
undertake to update our forward-looking statements except as required by law.
2
USEC Inc.
CONSOLIDATED CONDENSED BALANCE SHEETS (Unaudited)
(millions)
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September 30, |
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December 31, |
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2006 |
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2005 |
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ASSETS |
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Current Assets |
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Cash and cash equivalents |
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$ |
96.3 |
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$ |
259.1 |
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Restricted short-term investments |
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17.8 |
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Accounts receivable trade |
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191.5 |
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256.7 |
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Inventories |
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1,024.4 |
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974.3 |
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Deferred income taxes |
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34.1 |
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39.1 |
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Other current assets |
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106.5 |
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68.7 |
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Total Current Assets |
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1,452.8 |
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1,615.7 |
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Property, Plant and Equipment, net |
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174.6 |
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171.2 |
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Other Long-Term Assets |
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Deferred income taxes |
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114.3 |
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100.6 |
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Deposits for surety bonds |
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27.8 |
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24.6 |
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Prepaid pension benefit costs |
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86.2 |
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86.2 |
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Inventories |
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24.8 |
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71.4 |
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Goodwill |
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7.4 |
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7.5 |
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Intangibles |
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3.3 |
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3.6 |
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Total Other Long-Term Assets |
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263.8 |
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293.9 |
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Total Assets |
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$ |
1,891.2 |
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$ |
2,080.8 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current Liabilities |
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Current portion of long-term debt |
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$ |
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$ |
288.8 |
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Accounts payable and accrued liabilities |
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144.9 |
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217.4 |
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Payables under Russian Contract |
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120.7 |
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111.6 |
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Inventories owed to customers and suppliers |
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89.8 |
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2.3 |
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Deferred revenue and advances from customers |
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120.8 |
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132.9 |
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Total Current Liabilities |
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476.2 |
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753.0 |
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Long-Term Debt |
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150.0 |
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150.0 |
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Other Long-Term Liabilities |
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Depleted uranium disposition |
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66.3 |
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47.0 |
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Postretirement health and life benefit obligations |
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148.4 |
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153.9 |
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Other liabilities |
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71.2 |
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69.3 |
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Total Other Long-Term Liabilities |
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285.9 |
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270.2 |
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Commitments and Contingencies (Note 6)
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Stockholders Equity |
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979.1 |
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907.6 |
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Total Liabilities and Stockholders Equity |
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$ |
1,891.2 |
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$ |
2,080.8 |
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See notes to consolidated condensed financial statements.
3
USEC Inc.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (LOSS) (Unaudited)
(millions, except per share data)
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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2006 |
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2005 |
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2006 |
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2005 |
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Revenue: |
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Separative work units |
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$ |
336.6 |
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$ |
306.2 |
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$ |
974.9 |
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$ |
713.8 |
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Uranium |
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34.4 |
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60.2 |
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181.2 |
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139.7 |
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U.S. government contracts and other |
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46.8 |
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54.6 |
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148.3 |
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156.1 |
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Total revenue |
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417.8 |
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421.0 |
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1,304.4 |
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1,009.6 |
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Cost of sales: |
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Separative work units and uranium |
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326.7 |
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337.6 |
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956.9 |
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747.9 |
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U.S. government contracts and other |
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39.0 |
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46.9 |
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123.8 |
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135.3 |
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Total cost of sales |
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365.7 |
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384.5 |
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1,080.7 |
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883.2 |
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Gross profit |
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52.1 |
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36.5 |
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223.7 |
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126.4 |
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Special charge (credit) for organizational
restructuring |
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(0.1 |
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4.5 |
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1.4 |
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4.5 |
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Advanced technology costs |
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23.9 |
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20.5 |
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71.0 |
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67.1 |
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Selling, general and administrative |
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10.9 |
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12.3 |
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36.7 |
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41.5 |
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Operating income (loss) |
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17.4 |
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(.8 |
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114.6 |
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13.3 |
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Interest expense |
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3.2 |
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9.0 |
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11.4 |
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26.8 |
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Interest (income) |
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(1.7 |
) |
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(2.3 |
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(4.0 |
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(7.4 |
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Income (loss) before income taxes |
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15.9 |
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(7.5 |
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107.2 |
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(6.1 |
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Provision (credit) for income taxes |
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6.0 |
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(2.3 |
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41.1 |
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1.2 |
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Net income (loss) |
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$ |
9.9 |
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$ |
(5.2 |
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$ |
66.1 |
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$ |
(7.3 |
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Net income (loss) per share basic and diluted |
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$ |
.11 |
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$ |
(.06 |
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$ |
.76 |
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$ |
(.08 |
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Dividends per share |
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$ |
.1375 |
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$ |
.4125 |
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Weighted-average number of shares outstanding: |
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Basic |
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86.7 |
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86.3 |
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86.5 |
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86.0 |
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Diluted |
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86.9 |
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86.3 |
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86.8 |
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86.0 |
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See notes to consolidated condensed financial statements.
4
USEC Inc.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
(millions)
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Nine Months Ended |
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September 30, |
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2006 |
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2005 |
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Cash Flows from Operating Activities |
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Net income (loss) |
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$ |
66.1 |
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$ |
(7.3 |
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Adjustments to reconcile net income (loss) to net cash provided by
operating activities: |
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Depreciation and amortization |
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26.5 |
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25.9 |
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Deferred income taxes |
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(8.6 |
) |
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(25.8 |
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Depleted uranium disposition |
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16.1 |
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16.3 |
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Changes in operating assets and liabilities: |
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Accounts receivable (increase) decrease |
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65.2 |
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(39.0 |
) |
Inventories net (increase) decrease |
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84.0 |
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(63.2 |
) |
Payables under Russian Contract increase |
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9.1 |
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45.7 |
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Deferred revenue, net of deferred costs increase (decrease) |
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(16.8 |
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56.0 |
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Accounts payable and other liabilities increase (decrease) |
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(76.2 |
) |
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8.4 |
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Other, net |
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(12.4 |
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3.2 |
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Net Cash Provided by Operating Activities |
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153.0 |
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20.2 |
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Cash Flows Used in Investing Activities |
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Capital expenditures |
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(29.6 |
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(20.6 |
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Net Cash (Used in) Investing Activities |
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(29.6 |
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(20.6 |
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Cash Flows Used in Financing Activities |
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Borrowings under credit facility |
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133.3 |
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Repayments under credit facility |
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(133.3 |
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Repayment of senior notes |
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(288.8 |
) |
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Tax benefit related to stock-based compensation |
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.4 |
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Dividends paid to stockholders |
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(35.4 |
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Common stock issued |
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2.2 |
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8.3 |
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Net Cash (Used in) Financing Activities |
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(286.2 |
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(27.1 |
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Net (Decrease) |
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(162.8 |
) |
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(27.5 |
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Cash and Cash Equivalents at Beginning of Period |
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259.1 |
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|
174.8 |
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Cash and Cash Equivalents at End of Period |
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$ |
96.3 |
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$ |
147.3 |
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Supplemental Cash Flow Information: |
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Interest paid |
|
$ |
19.7 |
|
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$ |
31.8 |
|
Income taxes paid |
|
|
72.6 |
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|
15.8 |
|
See notes to consolidated condensed financial statements.
5
USEC Inc.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
1. BASIS OF PRESENTATION
The unaudited consolidated condensed financial statements as of and for the three and nine
months ended September 30, 2006 and 2005 have been prepared pursuant to the rules and regulations
of the Securities and Exchange Commission (SEC). The unaudited consolidated condensed financial
statements reflect all adjustments which are, in the opinion of management, necessary for a fair
statement of the financial results for the interim period. Certain information and notes normally
included in financial statements prepared in accordance with generally accepted accounting
principles in the United States have been omitted pursuant to such rules and regulations.
Operating results for the three and nine months ended September 30, 2006 are not necessarily
indicative of the results that may be expected for the year ending December 31, 2006. The unaudited
consolidated condensed financial statements should be read in conjunction with the consolidated
financial statements and related notes and managements discussion and analysis of financial
condition and results of operations, included in the annual report on Form 10-K for the year ended
December 31, 2005.
Certain amounts in the consolidated condensed financial statements have been reclassified to
conform with the current presentation.
New Accounting Standards
Effective January 1, 2006, USEC adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 123 Revised 2004, Share-Based Payment (SFAS No. 123(R)), requiring
that compensation cost relating to share-based payments be recognized in the financial statements.
The cost is measured based on the fair value of the award, and is recognized over the vesting
period. Under the modified prospective transition method, prior periods have not been revised for
comparative purposes. See Note 8 for further information regarding stock-based compensation.
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No.
48, Accounting for Uncertainty in Income Taxes, clarifying the accounting for uncertain tax
positions. The interpretation prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or expected to be taken in
a tax return. This interpretation is effective for fiscal years beginning after December 15, 2006.
We are evaluating the interpretation and have not determined whether or not it will have a material
effect on our financial position or results of operations.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This statement
clarifies the definition of fair value, establishes a framework for measuring fair value when
required or permitted under other accounting pronouncements, and expands the disclosures on fair
value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007.
We are evaluating the statement and have not determined whether or not it will have a material
effect on our financial position or results of operations.
In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit
Pension and Other Postretirement Plans, requiring the recognition in the balance sheet of the
overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability,
and an offsetting adjustment to accumulated other comprehensive income (loss), a component of
6
stockholders equity. SFAS No. 158 requires prospective application, and is effective
beginning with USECs financial statements for December 31, 2006. SFAS No. 158 requires balance
sheet recognition of net actuarial losses and prior service costs and benefits (items that are
deferred and recognized as net periodic benefit costs in the statement of income over time). For
USECs defined benefit pension plans, the adoption of SFAS No. 158 is expected to have two impacts
on the balance sheet at December 31, 2006. USEC expects (1) the elimination of the existing prepaid
pension benefit costs asset of approximately $86 million, and (2) a liability for benefit
obligations of approximately $26 million, based on the actuarial valuation as of December 31, 2005
as updated for expected 2006 activity. As a result, the net balance sheet change for benefit
obligations under the defined benefit pension plans is expected to be approximately $112 million at
year-end. The liability for benefit obligations under the postretirement health and life benefit
plans is expected to decrease by approximately $23 million under SFAS No. 158. These changes to the
benefit obligation liabilities will be recognized through other comprehensive income (loss), net of
tax, and deferred income taxes. Other changes are expected in the quarter ending December 31, 2006
in the normal course of events culminating with the year-end actuarial valuation.
SFAS No. 158 requires that plan assets and benefit obligations be measured at the year-end
balance sheet date, which is consistent with USECs practice. SFAS No. 158 does not impact the
measurement of plan assets and benefit obligations, nor the determination of the amount of net
periodic benefit cost in the statement of income. Disclosure requirements are expanded under SFAS
No. 158 to provide additional information about the effects of delayed recognition of actuarial
gains and losses and prior service costs and benefits.
2. INVENTORIES
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|
|
|
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|
|
September 30, |
|
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December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(millions) |
|
Current assets: |
|
|
|
|
|
|
|
|
Separative work units |
|
$ |
786.2 |
|
|
$ |
790.3 |
|
Uranium |
|
|
227.7 |
|
|
|
171.3 |
|
Materials and supplies |
|
|
10.5 |
|
|
|
12.7 |
|
|
|
|
|
|
|
|
|
|
|
1,024.4 |
|
|
|
974.3 |
|
|
|
|
|
|
|
|
Long-term assets: |
|
|
|
|
|
|
|
|
Uranium |
|
|
22.8 |
|
|
|
|
|
Out-of-specification uranium |
|
|
2.0 |
|
|
|
37.6 |
|
Highly enriched uranium from DOE |
|
|
|
|
|
|
33.8 |
|
|
|
|
|
|
|
|
|
|
|
24.8 |
|
|
|
71.4 |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Inventories owed to customers and suppliers |
|
|
(89.8 |
) |
|
|
(2.3 |
) |
|
|
|
|
|
|
|
Inventories, net |
|
$ |
959.4 |
|
|
$ |
1,043.4 |
|
|
|
|
|
|
|
|
Inventories Owed to Customers and Suppliers
Generally, title to uranium provided by customers as part of their enrichment contracts does
not pass to USEC until delivery of low enriched uranium (LEU). In limited cases, however, title
to the uranium passes to USEC immediately upon delivery of the uranium by the customer. Uranium
provided by customers for which title passed to USEC is recorded on the balance sheet at estimated
fair values of $3.3 million at September 30, 2006 and $2.3 million at December 31, 2005.
7
Additionally, USEC owed SWU and uranium inventories to fabricators with a cost totaling $86.5
million at September 30, 2006. Fabricators process LEU into fuel for use in nuclear reactors. Under
inventory optimization arrangements between USEC and domestic fabricators, fabricators order bulk
quantities of LEU from USEC based on scheduled or anticipated orders from utility customers
for deliveries in future periods. As delivery obligations under actual customer orders arise, USEC
satisfies these obligations by arranging for the transfer to the customer of title to the specified
quantity of LEU on the fabricators books. Fabricators have other inventory supplies and, where a
fabricator has elected to order less material from USEC than USEC is required to deliver to its
customers at the fabricator, the fabricator will use these other inventories to satisfy USECs
customer order obligations on USECs behalf. In such cases, the transfer of title of LEU from USEC
to the customer results in quantities of SWU and uranium owed by USEC to the fabricator. The
amounts of SWU and uranium owed to fabricators are satisfied as future bulk deliveries are made.
Uranium Provided by Customers and Suppliers
USEC held uranium with estimated fair values of approximately $3.8 billion at September 30,
2006, and $2.3 billion at December 31, 2005, to which title was held by customers and suppliers and
for which no assets or liabilities were recorded on the balance sheet. Utility customers provide
uranium to USEC as part of their enrichment contracts. Title to uranium provided by customers
remains with the customer until delivery of LEU at which time title to LEU is transferred to the
customer, and title to uranium is transferred to USEC.
Remediating or Replacing Out-of-Specification Uranium
USEC has been working with the U.S. Department of Energy (DOE) to replace or remediate 9,550
metric tons of natural uranium transferred to USEC from DOE prior to privatization which contained
elevated levels of technetium that put the uranium out-of-specification for commercial use.
Out-of-specification means that the uranium would not meet the industry standard as defined in the
American Society for Testing and Materials specification Standard Specification for Uranium
Hexafluoride for Enrichment. Under an agreement signed with DOE in June 2002 (DOE-USEC
Agreement), DOE was obligated to replace or remediate the affected uranium inventory. USEC has
been operating facilities at the Portsmouth plant in Piketon, Ohio under contract with DOE to
process and remove contaminants from the out-of-specification uranium. As of September 30, 2006,
9,495 metric tons (or 99%) of USECs out-of-specification uranium had been replaced or remediated.
In October 2006, the remaining 55 metric tons was processed and the remediation project for
USEC-owned uranium was completed.
USEC has also been processing and removing contaminants from out-of-specification uranium
owned by DOE under an agreement with DOE entered into in December 2004. These efforts are expected
to continue through September 2008, but are subject to additional funding from DOE.
DOE provided uranium that met specification to USEC in February 2005 and March 2006, and the
proceeds from USECs sales of such uranium were used to reimburse USEC for costs incurred in
remediating both USEC and DOE-owned out-of-specification uranium. Proceeds from these sales of
uranium, pending payment to USEC for processing costs, were invested for DOE and reported as
restricted short-term investments, and were expended by July 2006. The balance sheet carrying
amount of $17.8 million at December 31, 2005 is stated at fair value. Following the use of the
proceeds from the sales of uranium transferred by DOE, DOE agreed to make direct payment for USECs
processing costs up to a total allowable amount. This allowable amount was increased in September
2006 to enable USEC to continue remediation efforts and will need to be increased again to enable
USEC to continue remediation of DOE-owned out-of-specification uranium beyond November 2006.
Revenue and costs related to the processing of DOE and USEC out-of-specification uranium are
recognized in the U.S. government contracts segment.
8
3. DEBT
Revolving Credit Facility
In August 2005, USEC entered into a five-year, syndicated bank credit facility, providing up
to $400.0 million in revolving credit commitments, including up to $300.0 million in letters of
credit, secured by assets of USEC Inc. and its subsidiaries. Effective July 20, 2006, available
credit (availability) under the credit facility was reduced by $150.0 million because of a
reserve referred to in the agreement as the senior note reserve tied to the aggregate amount of
proceeds received by USEC from any future debt or equity offerings. Effective October 16, 2006, the
credit agreement was amended to modify the treatment of this reserve. Following the amendment, the
senior note reserve will now be treated as a reduction to USECs qualifying assets (such as
eligible inventory and accounts receivable) that establish the borrowing base, rather than directly
reducing availability. The senior note reserve will now reduce availability under the credit
facility only at such time and to the extent that USEC does not have sufficient qualifying assets
available to cover the reserve and USECs other reserves. USECs other reserves against its
qualifying assets currently consist primarily of a reserve for future obligations to DOE with
respect to the turnover of the gaseous diffusion plants to them at the end of the term of the lease
of these facilities. Immediately following the amendment, availability was restored by $150
million.
There were no short-term borrowings under the revolving credit facility at September 30, 2006
or at December 31, 2005. During the nine months ended September 30, 2006, aggregate borrowings and
repayments amounted to $133.3 million, and the peak amount outstanding was $78.5 million. Letters
of credit issued under the facility amounted to $36.0 million at September 30, 2006 and $25.0
million at December 31, 2005. Availability under the credit facility was $214.0 million at
September 30, 2006 and $375.0 million at December 31, 2005.
Senior Notes
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(millions) |
|
6.625% senior notes, due January 20, 2006 |
|
$ |
|
|
|
$ |
288.8 |
|
6.750% senior notes, due January 20, 2009 |
|
|
150.0 |
|
|
|
150.0 |
|
|
|
|
|
|
|
|
|
|
$ |
150.0 |
|
|
$ |
438.8 |
|
|
|
|
|
|
|
|
USEC repaid the remaining balance of the 6.625% senior notes amounting to $288.8
million on the scheduled maturity date of January 20, 2006.
The 6.750% senior notes are unsecured obligations and rank on a parity with all other
unsecured and unsubordinated indebtedness of USEC Inc. The senior notes are not subject to any
sinking fund requirements. Interest is paid every six months on January 20 and July 20. The senior
notes may be redeemed by USEC at any time at a redemption price equal to the principal amount plus
any accrued interest up to the redemption date plus a make-whole premium.
At September 30, 2006, the fair value of the senior notes calculated based on a
credit-adjusted spread over U.S. Treasury securities with similar maturities was $141.0 million,
compared with the balance sheet carrying amount of $150.0 million.
9
4. DEFERRED REVENUE AND ADVANCES FROM CUSTOMERS
Deferred revenue and advances from customers were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Deferred revenue |
|
$ |
118.3 |
|
|
$ |
106.8 |
|
Advances from utility customers |
|
|
2.5 |
|
|
|
8.3 |
|
Proceeds from sales of DOE uranium |
|
|
|
|
|
|
17.8 |
|
|
|
|
|
|
|
|
|
|
$ |
120.8 |
|
|
$ |
132.9 |
|
|
|
|
|
|
|
|
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 USECs facilities. In such cases, recognition of revenue is deferred
until uranium or LEU to which the customer has title is physically delivered rather than at the
time title transfers to the customer. Related costs associated with deferred revenue, reported in
other current assets, totaled $78.2 million at September 30, 2006 and $55.7 million at December 31,
2005.
Deferred revenue and advances from customers at December 31, 2005 included proceeds from sales
of DOE uranium that were pending payment to USEC as reimbursement for USECs costs in processing
out-of-specification uranium.
5. ORGANIZATIONAL RESTRUCTURING
In September 2005, USEC announced a restructuring of the Companys organization. This included
the implementation of an involuntary reduction of 38 employees in the headquarters operations
located in Bethesda, Maryland, including the elimination of some senior positions and the
realignment of responsibilities under a smaller senior management team. The workforce reductions
resulted in special charges for termination benefits of $4.5 million, of which $2.7 million was
paid or utilized during 2005 and $1.8 million in 2006. Additionally, facility related charges of
$1.5 million related to efforts undertaken to consolidate office space at the headquarters location
were accrued during the first quarter of 2006 and utilized during the second quarter of 2006.
In October 2005, USEC continued its restructuring efforts, announcing voluntary and
involuntary staff reductions at its field organizations. This resulted in the reduction of 151
employees and special charges for termination benefits of $2.8 million consisting principally of
severance benefits. Of these termination charges, $1.5 million was paid or utilized during 2005 and
$1.1 million in the first quarter of 2006. A credit of $0.1 million was recorded in the third
quarter of 2006 representing a change in estimate of costs for termination benefits, and the
remaining $0.1 million is anticipated to be utilized in the fourth quarter of 2006.
10
A summary of special charges for organizational restructuring and the related balance sheet
account information follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid |
|
|
Balance |
|
|
|
|
|
|
Paid |
|
|
Balance |
|
|
|
Special |
|
|
and |
|
|
Dec. 31, |
|
|
Special |
|
|
and |
|
|
Mar. 31, |
|
|
|
Charge |
|
|
Utilized |
|
|
2005 |
|
|
Charge |
|
|
Utilized |
|
|
2006 |
|
Workforce reductions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate |
|
$ |
4.5 |
|
|
$ |
(2.7 |
) |
|
$ |
1.8 |
|
|
$ |
|
|
|
$ |
(1.3 |
) |
|
$ |
0.5 |
|
Field operations |
|
|
2.8 |
|
|
|
(1.5 |
) |
|
|
1.3 |
|
|
|
|
|
|
|
(1.1 |
) |
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facility related charges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.5 |
|
|
|
|
|
|
|
1.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
7.3 |
|
|
$ |
(4.2 |
) |
|
$ |
3.1 |
|
|
$ |
1.5 |
|
|
$ |
(2.4 |
) |
|
$ |
2.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance |
|
|
Paid |
|
|
Balance |
|
|
|
|
|
|
Paid |
|
|
Balance |
|
|
|
Mar. 31, |
|
|
and |
|
|
June 30, |
|
|
Special |
|
|
and |
|
|
Sep. 30, |
|
|
|
2006 |
|
|
Utilized |
|
|
2006 |
|
|
(Credit) |
|
|
Utilized |
|
|
2006 |
|
Workforce reductions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate |
|
$ |
0.5 |
|
|
$ |
(0.4 |
) |
|
$ |
0.1 |
|
|
$ |
|
|
|
$ |
(0.1 |
) |
|
$ |
|
|
Field operations |
|
|
0.2 |
|
|
|
|
|
|
|
0.2 |
|
|
|
(0.1 |
) |
|
|
|
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facility related charges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate |
|
|
1.5 |
|
|
|
(1.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2.2 |
|
|
$ |
(1.9 |
) |
|
$ |
0.3 |
|
|
$ |
(0.1 |
) |
|
$ |
(0.1 |
) |
|
$ |
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Organizational restructuring costs are not classified by segment as USEC utilizes gross
profit as its segment measure.
6. COMMITMENTS AND CONTINGENCIES
Power Contracts and Commitments
The gaseous diffusion process uses significant amounts of electric power to enrich uranium.
USEC purchases electric power for the Paducah plant under a power purchase agreement signed with
the Tennessee Valley Authority (TVA) in 2000, and amended in April 2006. Capacity under the TVA
agreement is fixed through May 2007, and prices are subject to monthly fuel cost adjustments to
reflect changes in TVAs fuel costs, purchased power costs, and related costs. As of September 30,
2006, USEC is obligated, whether or not it takes delivery of electric power, to make minimum
payments for the purchase of electric power of approximately $300 million for the period October
2006 through May 2007.
American Centrifuge Technology
USEC is working to develop and deploy the American Centrifuge technology as a replacement for
the gaseous diffusion technology used at the Paducah plant. USEC is in the process of demonstrating
the American Centrifuge technology and is working toward meeting a target schedule for construction
of the American Centrifuge Plant. USECs near term schedule for American Centrifuge has been
impacted by delays resulting from the failure of certain materials to meet specifications,
performance issues related to certain centrifuge components and compliance with new regulatory
requirements, and USEC is evaluating the impact of these delays on its overall schedule.
11
The DOE-USEC Agreement contains specific project milestones relating to the American
Centrifuge plant. Under the DOE-USEC Agreement, if, for reasons within USECs control, USEC fails
to meet these or any other milestone and the resulting delay would materially impact USECs ability
to begin commercial operations on schedule, DOE could take a number of actions that could have an
adverse impact on USECs business and prospects and USECs ability to succeed in the deployment of
the American Centrifuge. These actions include terminating the DOE-USEC Agreement, recommending a
reduction or termination of USECs access to Russian LEU or the Paducah plant, revoking USECs
access to DOEs U.S. centrifuge technology that USEC requires for the success of the American
Centrifuge project and requiring us to transfer our rights in centrifuge technology and facilities
to DOE, or supporting competing projects for production of LEU.
Discussions have begun with DOE regarding the October 2006 project milestone under the
DOE-USEC Agreement of obtaining satisfactory reliability and performance data from Lead Cascade
operations. USEC has made substantial progress towards meeting this milestone, having obtained
substantial satisfactory performance and reliability data with respect to centrifuges and related
systems. However, this data is principally from testing at Oak Ridge rather than from Lead Cascade
operations.
USEC will also be discussing with DOE the January 2007 milestone under the DOE-USEC Agreement
that requires USEC to have secured a financing commitment for a 1 million SWU centrifuge plant.
USEC believes that more attractive financing terms are likely to become available after performance
of the Lead Cascade has been verified in 2007, the projected costs and schedule have been updated,
and USEC obtains more definitive feedback from its customers to proposed pricing of SWU from the
American Centrifuge. While USEC believes that this financing milestone could be met, we do not
believe that a full financing commitment is needed in January 2007 or that it would be prudent to
pursue such financing at this time. Given the progress in the American Centrifuge program and the
continuing strong commitment to the project, USEC anticipates reaching a mutually acceptable
agreement with DOE regarding the October 2006 and January 2007 milestones. However, USEC cannot
provide any assurances that it will reach an agreement.
Lease Commitments
In July 2006, USEC amended the lease on its corporate headquarters, effective June 1, 2006.
The amendment includes a termination of a portion of the space and extends the lease on the
remaining space through November 2016. Future estimated minimum lease payments under leases with
DOE for the Paducah, Piketon, and Oak Ridge facilities, and leases for office space and equipment
follow (in millions):
|
|
|
|
|
Fourth quarter 2006 |
|
$ |
1.6 |
|
2007 |
|
|
6.1 |
|
2008 |
|
|
5.2 |
|
2009 |
|
|
4.4 |
|
2010 |
|
|
3.2 |
|
Thereafter |
|
|
11.7 |
|
|
|
|
|
|
|
$ |
32.2 |
|
|
|
|
|
DOE Contract Services Matter
The U.S. Department of Justice (DOJ) asserted in a letter to USEC dated July 10, 2006 that
DOE may have sustained damages in an amount that exceeds $6.9 million under USECs contract with
DOE for the supply of cold standby services at the Portsmouth plant. DOJ indicated that it was
assessing possible violations of the Civil False Claims Act (FCA) and related claims in
connection with invoices submitted under that contract. USEC has responded to DOJs letter and has
been
12
cooperating with DOJ and the DOE Office of Investigations with respect to their inquiries into
this matter. USEC continues to believe that the government does not have any legitimate bases for
asserting any FCA or related claims under the cold standby contract, and intends to defend
vigorously any such claim that might be asserted against it.
Other Legal Matters
USEC is subject to various other legal proceedings and claims, either asserted or unasserted,
which arise in the ordinary course of business. While the outcome of these claims cannot be
predicted with certainty, USEC does not believe that the outcome of any of these legal matters will
have a material adverse effect on our results of operations or financial condition.
7. PENSION AND POSTRETIREMENT HEALTH AND LIFE BENEFITS
The components of net benefit costs (income) for pension and postretirement health and life
benefit plans were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined Benefit Pension Plans |
|
|
Postretirement Health and Life Benefits Plans |
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Service costs |
|
$ |
4.2 |
|
|
$ |
4.2 |
|
|
$ |
12.8 |
|
|
$ |
12.2 |
|
|
$ |
1.2 |
|
|
$ |
1.3 |
|
|
$ |
3.6 |
|
|
$ |
5.4 |
|
Interest costs |
|
|
10.0 |
|
|
|
9.7 |
|
|
|
30.1 |
|
|
|
29.3 |
|
|
|
2.7 |
|
|
|
3.4 |
|
|
|
8.2 |
|
|
|
10.8 |
|
Expected return on plan assets
(gains) |
|
|
(13.4 |
) |
|
|
(13.7 |
) |
|
|
(40.4 |
) |
|
|
(41.1 |
) |
|
|
(1.3 |
) |
|
|
(1.3 |
) |
|
|
(4.1 |
) |
|
|
(4.1 |
) |
Amortization of prior service
costs (credit) |
|
|
.4 |
|
|
|
.4 |
|
|
|
1.2 |
|
|
|
1.2 |
|
|
|
(3.6 |
) |
|
|
(.3 |
) |
|
|
(10.8 |
) |
|
|
(.7 |
) |
Amortization of actuarial losses |
|
|
1.2 |
|
|
|
.3 |
|
|
|
3.5 |
|
|
|
1.6 |
|
|
|
.6 |
|
|
|
|
|
|
|
1.9 |
|
|
|
1.1 |
|
Curtailment losses |
|
|
|
|
|
|
.1 |
|
|
|
|
|
|
|
.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net benefit costs (income) |
|
$ |
2.4 |
|
|
$ |
1.0 |
|
|
$ |
7.2 |
|
|
$ |
3.3 |
|
|
$ |
(.4 |
) |
|
$ |
3.1 |
|
|
$ |
(1.2 |
) |
|
$ |
12.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service credit for the postretirement health and life benefit
plans in the three and nine months ended September 30, 2006 reflects the institution of a lifetime
cap on claims after age 65 for medical and drug coverage. The credit is amortized over the average
remaining years of service until full eligibility.
USEC expects total cash contributions to the plans in 2006 will be as follows: $10.8 million
for the defined benefit pension plans and $4.8 million for the postretirement health and life
benefit plans. Of those amounts, contributions made as of September 30, 2006 were $9.0 million and
$3.8 million related to the defined benefit pension plans and postretirement health and life
benefit plans, respectively.
At December 31, 2005, projected pension benefit obligations were 94% funded and postretirement
health and life benefit obligations, typically funded on a pay-as-you-go basis, were 34% funded.
Reference is made to New Accounting Standards in note 1 for information concerning SFAS No.
158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans, issued by
the FASB in September 2006 and effective beginning with USECs financial statements for December
31, 2006.
13
8. STOCK-BASED COMPENSATION
USEC has stock-based compensation plans available to grant non-qualified stock options,
restricted stock, restricted stock units, performance awards and other stock-based awards to key
employees and non-employee directors. In February 1999 and in April 2004, stockholders approved an
aggregate amount of 14.1 million shares of common stock for issuance under the USEC Inc. 1999
Equity Incentive Plan over a 10-year period. There were 7,846,000 shares available for future
awards under the plan at December 31, 2005 (excluding outstanding awards which terminate or are
cancelled without being exercised or that are settled for cash), including 5,201,000 shares
available for grants of stock options and 2,645,000 shares available for restricted stock or stock
units, performance awards and other stock-based awards. USECs practice is to issue shares under
stock-based compensation plans from treasury stock.
Effective January 1, 2006, USEC adopted the provisions of SFAS No. 123(R), Share-Based
Payment, whereby compensation cost relating to share-based payments is recognized in the financial
statements. Accordingly, stock-based compensation cost is measured at the grant date, based on the
fair value of the award, and is recognized over the requisite service period, which is either
immediate recognition if the employee is eligible to retire, or on a straight-line basis until the
earlier of either the date of retirement eligibility or the end of the nominal vesting period.
Prior to January 1, 2006, USEC accounted for share-based compensation in accordance with APB
Opinion No. 25, Accounting for Stock Issued to Employees, with pro forma disclosures in
accordance with SFAS No. 123, Accounting for Stock-Based Compensation as amended by SFAS No. 148,
Accounting for Stock-Based Compensation Transition and Disclosure. Under APB No. 25, USEC
recognized expense for restricted stock and restricted stock units in the income statement and
disclosed the fair value of compensation related to stock options and the employee stock purchase
plan. SFAS No. 123(R) requires USEC to expense of all stock-based compensation, including
restricted stock, restricted stock units, stock options and costs associated with the employee
stock purchase plan.
Prior to adoption of SFAS No. 123(R), USEC used a straight-line amortization of stock-based
compensation over the nominal vesting period. Under SFAS No. 123(R), compensation cost for
stock-based awards granted after the adoption is recognized over the requisite service period. USEC
has determined that application of the nominal vesting period approach to the unvested outstanding
awards at the end of 2005 and application of the requisite service period approach to stock-based
compensation awarded beginning in 2006 did not have a material impact on the consolidated financial
statements for the three months or nine months ended September 30, 2006.
Under the modified prospective transition method, prior periods have not been revised for
comparative purposes. The valuation provisions of SFAS No. 123(R) apply to new grants and to grants
that were outstanding as of the effective date and are subsequently modified. Estimated
compensation for grants that were outstanding as of the effective date will be recognized over the
remaining service period using the compensation cost estimated for the pro forma disclosures under
SFAS No. 123.
Stock Options
The intrinsic value of an option, if any, represents the excess of the fair value of the
common stock over the exercise price. The determination of the fair value of stock option awards is
affected by our stock price and a number of complex and subjective variables. Fair value is
estimated using the Black-Scholes option pricing model, which includes a number of assumptions
including our estimates of stock price volatility, employee stock option exercise behaviors, future
forfeitures, future dividend payments, and risk-free interest rates.
14
The expected term of options granted is estimated as the average of the vesting term and the
contractual term of the option, as illustrated in SEC Staff Accounting Bulletin No. 107,
Share-Based Payment. Future stock price volatility is estimated based on historical volatility
for the recent period equal to the expected term of the options. The risk-free interest rate for
the expected option term is based on the U.S. Treasury yield curve in effect at the time of grant.
No cash dividends are expected in the foreseeable future and therefore an expected dividend yield
of zero is used in the option valuation model. Historical data are used to estimate pre-vesting
option forfeitures at the time of grant. Estimates for option forfeitures are revised in subsequent
periods if actual forfeitures differ from those estimates. The requirements of SFAS No. 123(R)
result in the recognition of compensation expense for stock option awards that are expected to
vest. USEC recognized expense of $0.1 million for the three months and $0.4 million for the nine
months ended September 30, 2006 related to stock options granted.
The assumptions used to value option grants for the three and nine months ended September 30,
2006 and September 30, 2005 follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
Risk-free interest rate |
|
|
5.0 |
% |
|
|
|
|
|
|
4.6 |
% |
|
|
4.0 |
% |
Expected dividend yield |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.4 |
% |
Expected volatility |
|
|
41 |
% |
|
|
|
|
|
|
41 |
% |
|
|
42 |
% |
Expected option life |
|
3.2 years |
|
|
|
|
|
3.4 years |
|
3.5 years |
Weighted-average grant date fair value |
|
$ |
2.65 |
|
|
|
|
|
|
$ |
4.20 |
|
|
$ |
4.62 |
|
Stock options vest or become exercisable in equal annual installments over a one to
three year period and expire 5 or 10 years from the date of grant. A summary of stock option
activity for the nine months ended September 30, 2006 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
|
|
|
|
|
Stock |
|
|
Weighted- |
|
|
Remaining |
|
|
Aggregate |
|
|
|
Options |
|
|
Average |
|
|
Contractual |
|
|
Intrinsic Value |
|
|
|
(thousands) |
|
|
Exercise Price |
|
|
Term (years) |
|
|
(millions) |
|
Outstanding at December 31, 2005 |
|
|
1,355 |
|
|
$ |
8.97 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
287 |
|
|
|
12.28 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(286 |
) |
|
|
7.33 |
|
|
|
|
|
|
|
|
|
Forfeited or expired |
|
|
(139 |
) |
|
|
15.10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2006 |
|
|
1,217 |
|
|
$ |
9.44 |
|
|
|
4.5 |
|
|
$ |
1.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2006 |
|
|
795 |
|
|
$ |
8.27 |
|
|
|
4.7 |
|
|
$ |
1.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total intrinsic value of options exercised was $0.2 million and $0.9 million during
the three months ended September 30, 2006 and 2005, respectively, and $1.3 million and $4.6 million
during the nine months ended September 30, 2006 and 2005, respectively. Cash received from the
exercise of stock options during the nine months ended September 30, 2006 and 2005 was $2.1 million
and $5.1 million, respectively.
15
Stock options outstanding and options exercisable at September 30, 2006, follow (options in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
Remaining |
|
|
Stock Exercise |
|
Options |
|
Contractual |
|
Options |
Price |
|
Outstanding |
|
Life in Years |
|
Exercisable |
$3.63 to $6.97 |
|
|
163 |
|
|
|
4.3 |
|
|
|
163 |
|
7.00 |
|
|
107 |
|
|
|
6.8 |
|
|
|
107 |
|
7.02 to 7.13 |
|
|
193 |
|
|
|
5.4 |
|
|
|
193 |
|
8.05 |
|
|
104 |
|
|
|
2.4 |
|
|
|
70 |
|
8.50 |
|
|
142 |
|
|
|
4.8 |
|
|
|
142 |
|
10.44 to 11.88 |
|
|
103 |
|
|
|
4.0 |
|
|
|
2 |
|
12.09 |
|
|
262 |
|
|
|
4.5 |
|
|
|
|
|
12.19 to 14.28 |
|
|
56 |
|
|
|
4.0 |
|
|
|
31 |
|
16.90 |
|
|
87 |
|
|
|
3.5 |
|
|
|
87 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,217 |
|
|
|
4.5 |
|
|
|
795 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock and Restricted Stock Units
Compensation costs for grants of restricted stock and restricted stock units were recognized
in the financial statements under APB Opinion No. 25 and continue to be recognized under SFAS No.
123(R). USEC recognized expense of $0.9 million for the three months and $2.1 million for the nine
months ended September 30, 2006 related to these plans as compared to $1.2 million for the three
months and $3.7 million for the nine months ended September 30, 2005. A new long-term incentive
program was established April 24, 2006, effective March 1, 2006. Under the new plan, the target
award denominated in shares of USEC stock is determined based on the average closing price of
USECs common stock in the calendar month prior to the beginning of the performance period. The
awards are then marked to market each period, with 80% of the adjustment based on the ending price
of USECs common stock. The remaining 20% is based on a market condition and is valued using a
Monte Carlo model. Compensation cost for these awards is generally recognized over a three-year
service period. The awards under the long-term incentive plan can be settled in cash or USEC stock,
or can be deferred for future settlement at the employees discretion. Since there is the potential
for cash settlement, the awards are classified as a liability. Non-employee directors are granted
restricted stock units as part of their compensation for serving on the Board of Directors. The
restricted stock units vest over one or three years.
The fair value of restricted stock is determined based on the closing price of USECs common
stock on the grant date. Compensation cost for restricted stock is amortized to expense on a
straight-line basis over the vesting period, which, depending on the grant, is amortized ratably
over a three-year period or at the end of either a one-year or five-year period. Sale of such
shares is restricted prior to the date of vesting. A summary of restricted shares activity for the
nine months ended September 30, 2006 follows (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
|
|
|
|
|
|
Grant-Date |
|
|
|
Shares |
|
|
Fair Value |
|
Restricted Shares at December 31, 2005 |
|
|
721 |
|
|
$ |
10.44 |
|
Granted |
|
|
249 |
|
|
|
12.25 |
|
Vested |
|
|
(103 |
) |
|
|
14.46 |
|
Forfeited |
|
|
(44 |
) |
|
|
13.23 |
|
|
|
|
|
|
|
|
|
Restricted Shares at September 30, 2006 |
|
|
823 |
|
|
$ |
10.33 |
|
|
|
|
|
|
|
|
|
16
Employee Stock Purchase Plan
In February 1999, stockholders approved the USEC Inc. 1999 Employee Stock Purchase Plan under
which 2.5 million shares of common stock can be purchased over a 10-year period by participating
employees at 85% of the lower of the market price at the beginning or the end of each six-month
offer period. This plan was amended in 2005 to provide that the purchase price is 85% of the market
price at the end of the six-month offer period and to institute a minimum holding period of one
year. Employees can elect to designate up to 10% of their compensation to purchase common stock
under the plan. The requirements of SFAS No. 123(R) result in the recognition of compensation costs
for the discounts provided under the Employee Stock Purchase Plan. USEC recognized expense of less
than $0.1 million for the three months and $0.1 million for the nine months ended September 30,
2006 related to this plan. At December 31, 2005, there were 204,000 remaining shares available for
purchase under the plan.
Total Stock-based Compensation
Total stock-based compensation resulted in an expense of $1.0 million, or $0.6 million after
tax, in the three months and $2.6 million, or $1.6 million after tax, in the nine months ended
September 30, 2006. Stock-based compensation costs capitalized as part of the cost of inventory
amounted to $0.1 million in the three months and $0.2 million in the nine months ended September
30, 2006.
The following table illustrates the effect on net income for the three and nine months ended
September 30, 2005 under the pro forma disclosure requirements of SFAS No. 123 (in millions, except
per share data):
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Nine Months |
|
|
|
Ended |
|
|
Ended |
|
|
|
September 30, 2005 |
|
|
September 30, 2005 |
|
Net (loss), as reported |
|
$ |
(5.2 |
) |
|
$ |
(7.3 |
) |
Add Stock-based compensation expense
included in reported results, net of tax |
|
|
0.6 |
|
|
|
1.8 |
|
Deduct Stock-based compensation
expense determined under the fair-value
method, net of tax |
|
|
(1.3 |
) |
|
|
(4.2 |
) |
|
|
|
|
|
|
|
Pro forma net (loss) |
|
$ |
(5.9 |
) |
|
$ |
(9.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) per share basic and diluted: |
|
|
|
|
|
|
|
|
As reported |
|
$ |
(.06 |
) |
|
$ |
(.08 |
) |
Pro forma |
|
|
(.07 |
) |
|
|
(.11 |
) |
As of September 30, 2006, there was $6.8 million of unrecognized compensation cost,
adjusted for estimated forfeitures, related to non-vested stock-based payments granted, of which
$5.8 million relates to restricted shares and restricted stock units, and $1.0 million relates to
stock options. That cost is expected to be recognized over a weighted-average period of 2.2 years.
Tax Effect
Prior to the effective date of SFAS No. 123(R), the benefits of tax deductions in excess of
recognized compensation expense related to the exercise of stock options and disqualifying
dispositions are presented as operating cash flows on USECs consolidated statement of cash flows.
Effective January 1, 2006, in accordance with SFAS No. 123(R), the tax benefits are classified as
financing cash flows, and amounted to $0.4 million for the nine months ended September 30, 2006.
17
9. STOCKHOLDERS EQUITY
Changes in stockholders equity were as follows (in millions, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock, |
|
|
Excess of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
Par Value |
|
|
Capital |
|
|
|
|
|
|
|
|
|
|
Deferred |
|
|
Other |
|
|
Total |
|
|
|
$.10 per |
|
|
over |
|
|
Retained |
|
|
Treasury |
|
|
Comp- |
|
|
Comprehensive |
|
|
Stockholders |
|
|
|
Share |
|
|
Par Value |
|
|
Earnings |
|
|
Stock |
|
|
ensation |
|
|
Income (Loss) |
|
|
Equity |
|
Balance at December 31, 2005 |
|
$ |
10.0 |
|
|
$ |
970.6 |
|
|
$ |
31.3 |
|
|
$ |
(99.5 |
) |
|
$ |
(2.7 |
) |
|
$ |
(2.1 |
) |
|
$ |
907.6 |
|
Common stock issued: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from the exercise of
stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.1 |
|
|
|
|
|
|
|
|
|
|
|
2.1 |
|
Restricted and other stock issued |
|
|
|
|
|
|
1.6 |
|
|
|
|
|
|
|
1.7 |
|
|
|
|
|
|
|
|
|
|
|
3.3 |
|
Eliminate deferred compensation
under SFAS No. 123(R) |
|
|
|
|
|
|
(2.7 |
) |
|
|
|
|
|
|
|
|
|
|
2.7 |
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
66.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2006 |
|
$ |
10.0 |
|
|
$ |
969.5 |
|
|
$ |
97.4 |
|
|
$ |
(95.7 |
) |
|
$ |
|
|
|
$ |
(2.1 |
) |
|
$ |
979.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In February 2006, the Board of Directors voted to discontinue paying a common stock
dividend.
10. NET INCOME PER SHARE
Basic net income per share is calculated by dividing net income by the weighted average number
of shares of common stock outstanding during the period. Diluted net income per share is
calculated by increasing the weighted average number of shares by the assumed conversion of
potentially dilutive stock compensation awards.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
|
(in millions) |
|
Weighted
average number of
shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
86.7 |
|
|
|
86.3 |
|
|
|
86.5 |
|
|
|
86.0 |
|
Dilutive effect
of stock
compensation
awards (1) |
|
|
.2 |
|
|
|
|
|
|
|
.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
86.9 |
|
|
|
86.3 |
|
|
|
86.8 |
|
|
|
86.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
No dilutive effect of stock compensation awards is recognized in those
periods in which a net loss has occurred. Potential shares totaling 0.3 million for
the three months and 0.4 million for the nine months ended September 30, 2005 would be
antidilutive, and in those periods diluted earnings per share is the same as basic
earnings per share. |
Other options to purchase shares of common stock having an exercise price greater than
the average share market price are also excluded from the calculation of diluted earnings per
share.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
Options
excluded from
diluted earnings
per share
calculation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options to
purchase
common stock
(in millions) |
|
|
.5 |
|
|
|
.2 |
|
|
|
.4 |
|
|
|
.2 |
|
Exercise price |
|
$ |
10.44 to $16.90 |
|
|
$ |
13.25 to $16.90 |
|
|
$ |
11.88 to $16.90 |
|
|
$ |
13.98 to $16.90 |
|
18
11. SEGMENT INFORMATION
USEC has two reportable segments: the LEU segment with two components, separative work units
(SWU) and uranium, and the U.S. government contracts segment. The LEU segment is USECs primary
business focus and includes sales of the SWU component of LEU, sales of both the SWU and uranium
components of LEU, and sales of uranium. The U.S. government contracts segment includes work
performed for DOE and DOE contractors at the Portsmouth and Paducah plants, as well as nuclear
energy solutions provided by NAC International Inc. Gross profit is USECs measure for segment
reporting. Intersegment sales between the reportable segments amounted to less than $0.1 million in
the three months and nine months ended September 30, 2006 and have been eliminated in
consolidation. There were no intersegment sales in the three and nine months ended September 30,
2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
|
(millions) |
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LEU segment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Separative work units |
|
$ |
336.6 |
|
|
$ |
306.2 |
|
|
$ |
974.9 |
|
|
$ |
713.8 |
|
Uranium |
|
|
34.4 |
|
|
|
60.2 |
|
|
|
181.2 |
|
|
|
139.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
371.0 |
|
|
|
366.4 |
|
|
|
1,156.1 |
|
|
|
853.5 |
|
U.S. government contracts segment |
|
|
46.8 |
|
|
|
54.6 |
|
|
|
148.3 |
|
|
|
156.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
417.8 |
|
|
$ |
421.0 |
|
|
$ |
1,304.4 |
|
|
$ |
1,009.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Gross Profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LEU segment |
|
$ |
44.3 |
|
|
$ |
28.8 |
|
|
$ |
199.2 |
|
|
$ |
105.6 |
|
U.S. government contracts segment |
|
|
7.8 |
|
|
|
7.7 |
|
|
|
24.5 |
|
|
|
20.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
52.1 |
|
|
|
36.5 |
|
|
|
223.7 |
|
|
|
126.4 |
|
Special charge (credit) for
organizational restructuring |
|
|
(0.1 |
) |
|
|
4.5 |
|
|
|
1.4 |
|
|
|
4.5 |
|
Advanced technology costs |
|
|
23.9 |
|
|
|
20.5 |
|
|
|
71.0 |
|
|
|
67.1 |
|
Selling, general, and administrative |
|
|
10.9 |
|
|
|
12.3 |
|
|
|
36.7 |
|
|
|
41.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
17.4 |
|
|
|
(.8 |
) |
|
|
114.6 |
|
|
|
13.3 |
|
Interest expense, net of interest income |
|
|
1.5 |
|
|
|
6.7 |
|
|
|
7.4 |
|
|
|
19.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
$ |
15.9 |
|
|
$ |
(7.5 |
) |
|
$ |
107.2 |
|
|
$ |
(6.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
19
Item 2. Managements 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 set forth in Part I, Item
1 of this report as well as the risks and uncertainties included in the annual report on Form 10-K
for the year ended December 31, 2005, as such risks have been updated in Part II, Item 1A of this
report.
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, either directly or through our subsidiaries United States
Enrichment Corporation and NAC International Inc. (NAC):
|
|
|
supply LEU to both domestic and international utilities for use in about 150 nuclear
reactors worldwide, |
|
|
|
|
are the exclusive executive agent for the U.S. government under a nuclear
nonproliferation program with Russia, known as Megatons to Megawatts, |
|
|
|
|
are in the process of demonstrating, and plan to deploy, what we expect to be the
worlds most efficient uranium enrichment technology, known as the American Centrifuge, |
|
|
|
|
perform contract work for the U.S. Department of Energy (DOE) and DOE contractors at
the Paducah and Portsmouth plants, and |
|
|
|
|
provide transportation and storage systems for spent nuclear fuel and provide nuclear
and energy consulting services, including nuclear materials tracking. |
LEU is sold and measured by 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 contained in LEU under this formula is commonly referred to as
the SWU component.
We produce or acquire LEU from two principal sources. We produce LEU at the gaseous diffusion
plant in Paducah, Kentucky, and we acquire LEU from Russia under a contract (the Russian
Contract) to purchase the SWU component of LEU recovered from dismantled nuclear weapons from the
former Soviet Union for use as fuel in commercial nuclear power plants.
Our View of the Business Today
There are a number of positive factors in the enrichment business right now, both in terms of
short-term pricing trends and long-term prospects for the overall nuclear power industry. We are
looking to these positive factors to help us through some fairly significant challenges over the
next few years as we are faced with the need to replace our existing aging and high operating cost
enrichment technology with the American Centrifuge technology in order to remain competitive. This
strategic initiative is something we are intently focused on and that we believe is critical to our
future viability.
Our primary business has benefited in recent years from rising SWU and uranium market prices,
which have translated into higher gross profit margins included in the nine months ended September
30, 2006. We have announced that we expect to see a sharp decline in our gross profit margin in
2007 due to the impact on our operating costs of higher electricity prices that went into effect in
June 2006 and an expected decline in 2007 in higher margin uranium sales as our uranium inventory
is depleted. However, we are encouraged by the continuing upward price pressure we are seeing in
the
20
enrichment market. As we sign more contracts at higher prices and our older, lower priced
contracts expire, the increased revenues earned under these higher priced contracts will help to
mitigate some of the impact of higher power prices. Higher SWU prices are also helpful in the long
term in demonstrating a strong enrichment market that will be critical to successfully financing
and deploying the American Centrifuge.
Also critical to our current operations and to successfully financing and deploying the
American Centrifuge is a stable domestic enrichment market. The Russian government continues to
pursue greater access to the U.S. market and has recently been in discussions with the U.S.
government over possible additional controlled access. In the past, unrestrained Russian imports
have undermined stability in the market. In fact, earlier this year, the U.S. International Trade
Commission found that elimination of existing restrictions on Russian imports would be likely to
result in material injury to the U.S. uranium industry, including USEC. Given the growing
importance of nuclear power as a source of energy for the U.S. economy, we believe the U.S.
government will seek to ensure that any opening to increased imports of Russian material will
sustain a stable domestic enrichment market and investment in new enrichment technology.
We have been taking advantage of positive market trends in new sales contracts entered into
with customers at current market prices. In the third quarter we added future sales to our backlog,
including a contract valued at more than $200 million with Taiwan Power Company to supply SWU to
the utilitys eight nuclear power reactors. This contract runs from 2009 through 2013. We are
working to negotiate terms in our new contracts that allow us to pass through potential future
increases in electricity prices to customers, that provide for more fixed quantities being
purchased, and that otherwise reduce our potential economic risks. This will be increasingly
important as we begin to look beyond 2013 to contract for output from the American Centrifuge plant
on terms that solidify a strong economic model that can provide the basis for external financing
for construction of the American Centrifuge plant.
Financing a project of the size of the American Centrifuge will be a major undertaking for our
company. We have been financing this project for several years through internal cash generation. As
this project moves closer to commercial deployment, a significantly larger amount of capital will
be required and we will need significant amounts of external financing in addition to internally
generated cash. While we have been evaluating our financing options for some time, we still do not
have all the performance, cost and schedule data we need to best align our financing activities
with our specific cash needs. In order to give us additional flexibility as we continue to gather
this data, in October we amended our $400 million revolving credit facility to modify the treatment
of a reserve in the credit agreement that otherwise would have significantly reduced funds
available for borrowing under the credit facility until we issued new debt or equity. We expect
that this amendment will give us greater ability to supplement our internal cash with borrowings
under the credit facility to continue to finance the American Centrifuge until we are able to raise
external capital. See Managements Discussion and Analysis Liquidity and Capital Resources
Capital Structure and Financial Resources below.
We are in the process of resetting our estimate of the cost and deployment schedule for the
American Centrifuge project. Although we do not expect to complete this effort until the end of the
year or early 2007, we are already seeing a number of upward cost pressures and we expect that
these cost pressures, combined with the cost effect of our previously announced one year delay for
the operation of the Lead Cascade of the American Centrifuge Demonstration Facility, will
significantly increase the cost of the project from our prior estimate of $1.7 billion. We are
working to identify ways to lower our expected costs. We are also aggressively pursuing ways to
optimize the American Centrifuge machine as performance gains can offset cost increases and improve
the overall economics of the project. In April 2006, we achieved performance essentially at our
target level of about 320 SWUs per year per machine in tests under sub-optimal operating
conditions. Recently, our
21
project team tested a centrifuge machine under more optimal conditions that demonstrated
performance of about 350 SWUs per year per machine. This performance level has been reaffirmed in
subsequent testing. Our efforts to optimize the American Centrifuge machine further will continue
as we try to achieve the lowest possible centrifuge unit costs for the future commercial plant. See
Managements Discussion and Analysis Overview American Centrifuge Technology below.
Revenue from Sales of SWU and Uranium
The majority of our customers are domestic and international utilities that operate nuclear
power plants. Revenue 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. |
Our agreements with electric utility customers are primarily long-term contracts under which
they are obligated to purchase a specified quantity of SWU or uranium or a percentage of their
annual SWU or uranium requirements. Under requirements contracts, our customers are not obligated
to make purchases if they do not have requirements.
Our revenues and operating results can fluctuate significantly from quarter to quarter, and in
some cases, year to year. Customer requirements are determined by refueling schedules for nuclear
reactors, which are affected by, among other things, the seasonal nature of electricity demand,
reactor maintenance, and reactors beginning or terminating operations. Our revenue could be
adversely affected by actions of the U.S. Nuclear Regulatory Commission (NRC) or nuclear
regulators in foreign countries issuing orders to delay, suspend or shut down nuclear reactor
operations within their jurisdictions.
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 $12 million per order. 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 financial performance over time can be significantly affected by changes in prices for
SWU. The SWU price indicator for new long-term contracts, as published by TradeTech in Nuclear
Market Review, was $135 per SWU on September 30, 2006, an increase of $22 (or 19%) from $113 per
SWU on December 31, 2005 and an increase of $25 (or 23%) from $110 per SWU on September 30, 2005.
Increases in the price indicator are representative of base year price improvements under new
long-term enrichment contracts in our primary markets. Given that contracts are signed one to two
years in advance of the first delivery, and that our backlog includes contracts awarded to us when
prices were lower, there is a lag between increases in market prices and increases in our average
SWU price billed to customers.
The spot price indicator for uranium hexafluoride, published in Nuclear Market Review, was
$157 per kilogram of uranium on September 30, 2006, an increase of $51 (or 48%) from $106 on
December 31, 2005 and an increase of $62.25 (or 66%) from $94.75 on September 30, 2005. The
long-term price for uranium hexafluoride, as calculated using indicators published in Nuclear
Market Review, was $155.96 per kilogram of uranium on September 30, 2006, an increase of $49.90 (or
47%) from $106.06 per kilogram on December 31, 2005, and an increase of $60.35 (or 63%) from $95.61
per kilogram on September 30, 2005. However, most of our uranium inventory has been committed
under sales contracts with utility customers signed in earlier periods, and the positive
impact of higher prices is limited to more recent sales and to sales under contracts with
prices determined at the time of delivery.
22
A substantial portion of our earnings and cash flows is currently derived from sales of
uranium. Revenue from uranium sales, and related earnings and cash flows, will decrease as our
inventory of uranium is depleted. We expect the volume of uranium sold to be about 10-15% lower in
2006 compared to 2005, and to decrease by approximately one-half in 2007 reflecting the substantial
completion of sales of our uranium inventory as this inventory is depleted.
We will continue to supplement our supply of uranium by underfeeding the production process at
the Paducah plant, as long as it continues to be economical, and by purchasing uranium from
suppliers. Underfeeding is a mode of operation that uses or feeds less uranium but requires more
SWU in the enrichment process, which requires more electric power. In producing the same amount of
LEU, we vary our production process to underfeed uranium based on the economics of the cost of
electric power relative to the price of uranium. Although rising uranium prices in the market may
continue to make underfeeding economical, increases in power costs reduce the benefits to us of
underfeeding.
We also use our uranium inventories (including uranium generated by underfeeding) to supply
uranium to the Russian Federation for the LEU we receive under the Russian Contract. We replenish
this uranium with uranium supplied by customers under our contracts for the sale of SWU. SWU
quantities in the LEU we order from Russia under the Russian Contract are calculated based on a
fixed U235 assay of depleted uranium (tails assay) of 0.3%. However, due to the high
market price of uranium, many of our customers are currently exercising rights under their
contracts to order LEU based on a tails assay of less than 0.3%, which means that more SWU, but
less uranium, is associated with the LEU we deliver to these customers than would be the case if
the customers ordered LEU at a tails assay of 0.3%. While our new sales contracts require customers
to deliver amounts of natural uranium that are closer to the amounts we deliver under the Russian
Contract based on the 0.3% tails assay, customers who receive Russian LEU under older contracts
that include the right to select a tails assay lower than 0.3% deliver to us less uranium than we
deliver to the Russian Federation for that LEU. We can make up some of this shortfall through
underfeeding, but over time underfeeding may not produce sufficient uranium to account for the full
amount of the shortfall. If this happens, we will have to purchase uranium to deliver to Russia.
Given the substantial increase in market prices for uranium, this will increase our cost of sales,
although the increase will be partially offset by higher revenues on the sale of the increased
quantity of SWU associated with LEU ordered by customers at tails assays lower than 0.3%.
Revenue from U.S. Government Contracts
We perform and earn revenue from contract work for DOE and DOE contractors at the Paducah and
Portsmouth plants, including contracts for cold standby and processing out-of-specification uranium
at the Portsmouth plant. The cold standby program has been extended through January 2007, and
modified to include actions necessary to transition to a preliminary decontamination and
decommissioning program (cold shutdown). While efforts to process USEC-owned out-of-specification
uranium for DOE were completed in October 2006, we expect that the processing of DOE-owned
out-of-specification uranium for DOE will continue through September 2008. However, continuation of
U.S. government contracts is subject to DOE funding and Congressional appropriations and additional
funding would be needed to enable USEC to continue remediation of DOE-owned out-of-specification
uranium beyond November 2006. Revenue from U.S. government contracts is based on allowable costs
determined under government cost accounting standards. Allowable costs include direct costs as well
as allocations of indirect plant and corporate overhead costs and are subject to audit by the
Defense Contract Audit Agency. Revenue from U.S. government contracts includes revenue from NAC.
23
Cost of Sales
Cost of sales for SWU and uranium is based on the amount of SWU and uranium sold during the
period and is determined by a combination of inventory levels and costs, production costs, and
purchase costs. 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. Under the monthly moving average inventory cost method coupled with
our inventories of SWU and uranium, 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 have agreed to purchase approximately 5.5 million SWU each calendar year for the remaining
term of the Russian Contract through 2013. Over the life of the 20-year Russian Contract, we expect
to purchase about 92 million SWU contained in LEU derived from 500 metric tons of highly enriched
uranium, and as of September 30, 2006, we had purchased 52 million SWU contained in LEU derived
from 285 metric tons of highly enriched uranium. Purchases under the Russian Contract approximate
50% of our supply mix. Prices are determined using a discount from an index of international and
U.S. price points, including both long-term and spot prices. A multi-year retrospective of the
index is used to minimize the disruptive effect of short-term market price swings. Increases in
these price points in recent years have resulted, and likely will continue to result, in increases
to the index used to determine prices under the Russian Contract. Officials of the Russian
government have announced that Russia will not extend the Russian Contract or the
government-to-government agreement it implements, beyond 2013. Accordingly, we do not anticipate
that we will purchase significant quantities of Russian SWU after 2013.
The gaseous diffusion process uses significant amounts of electric power to enrich uranium.
In 2005, the power load at the Paducah plant averaged 1,320 megawatts and costs for electric power
represented 60% of production costs at the Paducah plant. USEC anticipates Paducahs average power
load for 2006 will be at least equal to the 2005 level and that costs for electric power will
increase to approximately 70% of production costs at the Paducah plant. This increase is due to
higher power prices that went into effect on June 1, 2006.
During 2005, we purchased 87% of the electric power for the Paducah plant at fixed,
below-market prices as part of a multiyear power contract signed with TVA in 2000. Pricing under
the 2000 TVA power contract expired at the end of May 2006 and a new one-year pricing agreement
went into effect on June 1, 2006. The new pricing, which consists of a summer and a non-summer
power price, is about 50% higher than the previous pricing and also is now subject to a fuel cost
adjustment to reflect changes in TVAs fuel costs, purchased power costs, and related costs. For
power purchases through September 2006, fuel cost adjustments equaled an average 8% increase over
base prices under the new one-year pricing agreement, and we expect that fuel cost adjustments will
continue to have a negative impact on us over the term of the one-year contract. The increase in
electric power costs has significantly increased overall SWU production costs, and has begun to
negatively impact our gross margin and cash flow.
The quantity of power purchases under the one-year agreement ranges from 300 megawatts at all
hours in the summer months (June August) to 1,600 megawatts at all hours in the non-summer
months. In addition, we can request additional power supply from TVA at market-based prices.
Consistent with past practice, TVA made available and we purchased, at market-based prices, an
additional 600 megawatts of power at all hours during the summer months of 2006. As of September
30, 2006, we are obligated, whether or not we take delivery of electric power, to make minimum
payments for the purchase of electric power of approximately $300 million for the period October
2006 through May 2007. Negotiations with TVA for the quantity and prices of power after June 1,
2007 are underway.
24
We provide financial assurances to support our payment obligations to TVA, including an
irrevocable letter of credit and weekly prepayments based on the price and our usage of power.
We store depleted uranium at the Paducah and Portsmouth plants and accrue estimated costs for
its future disposition. We anticipate that we will send most or all of our depleted uranium to DOE
for disposition unless a more economic disposal option becomes available. DOE is constructing
facilities at the Paducah and Portsmouth plants to process large quantities of depleted uranium
owned by DOE. Under federal law, DOE would also process our depleted uranium if we provided it to
DOE. If we were to dispose of our uranium in this way, we would be required to reimburse DOE for
the related costs of disposing our depleted uranium, including our pro rata share of DOEs capital
costs. Processing DOEs depleted uranium is expected to take about 25 years. The timing of the
disposal of our depleted uranium has not been determined. The long-term liability for our depleted
uranium disposition is dependent upon the volume of the depleted uranium that we generate and
estimated processing, transportation and disposal costs. The liability for depleted uranium
disposition, based on current-dollar cost estimates, is $66.3 million at September 30, 2006, and
could increase by an estimated $20 to $25 million per year depending on production volumes until a
disposal agreement or methodology is determined. In addition, changes in the accrued liability
resulting from changes in the estimated unit cost affect results of operations for accumulated
depleted uranium, and production costs for depleted uranium generated thereafter. Our estimate of
the unit cost is based primarily on estimated cost data obtained from DOE without consideration
given to contingencies or reserves, and was increased by 2% in the second quarter of 2006.
The NRC requires that we guarantee the disposition of our depleted uranium with financial
assurances. We are in the process of increasing our financial assurances for additional
contingencies and other potential costs to meet NRC requirements (refer to Liquidity and Capital
Resources Capital Structure and Financial Resources). Our estimate of the unit disposition cost
for accrual purposes is approximately 35% less than the unit disposition cost being implemented 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 assurances we provide for
the disposition of depleted uranium, are subject to change as additional information becomes
available.
Coolant
The Paducah plant 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. Freon leaks
from pipe joints, sight glasses, valves, coolers and condensers at the Paducah plant. In August
2006, we exhausted our existing inventory of Freon at the Paducah plant and began using 400,000
pounds of Freon that had been moved from the Piketon plant. This Freon is part of a supply of about
4 million pounds of Freon located at the Piketon plant that we have asserted that we have the right
to use under our lease with DOE. We expect to continue to use this Freon and we have been in
communication with DOE regarding its use. Based on our continued maintenance efforts to minimize
leakage, we expect the 400,000 pounds of Freon already transferred to the Paducah plant will be
adequate through late 2007. The entire 4 million pounds of Freon would provide at least 10 years
of Freon to our operations.
American Centrifuge Technology
We continue our substantial efforts at developing and deploying the American Centrifuge
technology as a replacement for the gaseous diffusion technology used at our Paducah plant. Since
early 2005, we have been manufacturing and testing prototype parts, components, subassemblies and
full centrifuges in order to finalize the design and gather reliability data for the machine that
we anticipate will be operated in the Lead Cascade in the American Centrifuge Demonstration
Facility in
25
Piketon, Ohio. As part of this process, individual parts, subassemblies and individual
machines are put through a series of mechanical tests to determine operating parameters and
performance capability. These initial tests are run with the centrifuges empty. Subsequently,
machines are tested with uranium hexafluoride (UF6) gas to measure separation
performance under plant-like conditions. This testing takes place at our leased facilities in Oak
Ridge, Tennessee. Once optimized performance of our prototype machines is achieved, our plan is to
assemble a group of these machines in what we call a Lead Cascade, that is, the first cascade in
our American Centrifuge Demonstration Facility.
In April 2006, an individual machine achieved performance essentially at our target level of
about 320 SWUs per year per machine in testing at Oak Ridge under sub-optimal operating conditions.
Recently, the USEC project team at the Oak Ridge facilities tested a centrifuge machine under more
optimal conditions that demonstrated performance of about 350 SWUs per year per machine. This
performance level has been reaffirmed in subsequent testing. Our efforts to optimize the American
Centrifuge machine further will continue during the fourth quarter of 2006 with a goal of freezing
the design before the end of 2006 of the centrifuge that will be used in the initial Lead Cascade
in the American Centrifuge Demonstration Facility.
In August, the NRC assumed oversight of the American Centrifuge Demonstration Facility from
the DOE. This regulatory transition allows us to begin operating centrifuge machines with uranium
hexafluoride gas. We have a small number of machines installed at the American Centrifuge
Demonstration Facility that will help verify cascade configuration and support system
functionality. We expect to begin testing of the centrifuge machines and related systems at Piketon
with uranium hexafluoride gas in November 2006.
We expect to have this Lead Cascade installed and operating by mid-2007, which will provide
additional performance data to help confirm the economics of the American Centrifuge program. At
the same time, we will also continue with further performance optimization and value engineering
demonstrations at Oak Ridge with the goal of achieving lower centrifuge unit costs for the actual
centrifuge machines that will be used in the commercial plant.
We have begun discussions with DOE regarding the October 2006 project milestone under the 2002
DOE-USEC Agreement of obtaining satisfactory reliability and performance data from Lead Cascade
operations. We have made substantial progress towards meeting this milestone, having obtained
substantial satisfactory performance and reliability data with respect to centrifuges and related
systems. However, this data is principally from testing at Oak Ridge rather than from Lead Cascade
operations.
We will also be discussing with DOE the January 2007 milestone under the 2002 DOE-USEC
Agreement that requires us to have secured a financing commitment for a 1 million SWU centrifuge
plant. We believe that more attractive financing terms are likely to become available after
performance of the Lead Cascade has been verified in 2007, the projected costs and schedule have
been updated, and we have obtained more definitive feedback from our customers to proposed pricing
of SWU from the American Centrifuge. While we believe that this financing milestone could be met,
we do not believe that a full financing commitment is needed in January 2007 or that it would be
prudent to pursue such financing at this time. As described in Item 1A, Risk Factors, a failure
to meet one or more milestones that would materially impact our ability to begin commercial
operations on schedule could result in DOE actions that could adversely impact our business.
Given our progress in the American Centrifuge program and our continuing strong commitment to
the project, we anticipate that we will reach a mutually acceptable agreement with DOE regarding
the October 2006 and January 2007 milestones.
26
In response to delays over the past year, we previously adjusted our schedule for initial
operation of the Lead Cascade and are evaluating the impact of this delay on our overall schedule.
Our ability to meet the schedule will depend, among other factors described in Item 1A, Risk
Factors, on the costs of meeting the schedule and the degree of risk we are willing to take on.
For example, short term delays may cause us to take more steps concurrently in order to keep on
schedule, which has associated risks. As with any large scale development-to-commercialization
project, over the course of the project we are likely to encounter additional challenges and
possible unexpected delays. We continue to have every confidence in the technology and our
well-qualified program team.
We also continue to update our cost estimate for deployment of the American Centrifuge.
Increases in the cost of key materials for the centrifuges, increased costs of commodities that
will be used in construction of the balance of the plant and initial vendor estimates that have not
yet been able to reflect completed designs or manufacturing experience represent strong upward cost
pressures. When combined with the cost effect of the one year delay in having the Lead Cascade
fully operational, the total impact of these circumstances will significantly increase our
previously stated estimate of $1.7 billion, excluding capitalized interest and financing-related
costs, to deploy a 3.5 million SWU commercial production plant. As part of our continuing effort to
update our cost estimate, we are also evaluating cost mitigation approaches involving value
engineering, high volume manufacturing efficiencies and system/component refurbishment versus
replacement. In addition, based on our performance optimization activities, we expect to see an
increase in the planned plant production output, which we expect will help to offset some of these
projected cost increases. We expect to complete the current effort to reset our estimate of cost
and deployment schedule by years end or early 2007. For a more detailed discussion of the overall
costs and financing plan for the American Centrifuge program, see Managements Discussion and
Analysis Liquidity and Capital Resources Potential Impacts to Liquidity American Centrifuge.
The process of obtaining an operating license from the NRC for the American Centrifuge Plant
continues to move forward. In May 2006, the NRC issued the final environmental impact statement
(EIS), and in September 2006, the NRC issued its final safety evaluation report (SER). The NRC
held a public hearing in October 2006 in Piketon for comment on the SER and the EIS, and a site
visit by the Atomic Safety and Licensing Board is expected in December 2006. We expect to receive
the operating license in early 2007.
27
Results of Operations Three and Nine Months Ended September 30, 2006 and 2005
The following tables show for the three and nine months ended September 30, 2006 and 2005,
certain items from the accompanying Consolidated Condensed Statements of Income (Loss) detailed by
reportable segments and in total.
Segment Information
We have two reportable segments measured and presented through the gross profit line of
our income statement: the low enriched uranium (LEU) segment with two components, separative work
units (SWU) and uranium, and the U.S. government contracts segment. The LEU segment is our
primary business focus and includes sales of the SWU component of LEU, sales of both SWU and
uranium components of LEU, and sales of uranium. The U.S. government contracts segment includes
work performed for DOE and DOE contractors at the Portsmouth and Paducah plants as well as nuclear
energy solutions provided by NAC. Intersegment sales between the reportable segments were less than
$0.1 million in the three and nine months ended September 30, 2006 and have been eliminated in
consolidation. There were no intersegment sales in the three and nine months ended September 30,
2005. Segment information is discussed following this table (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government |
|
|
|
|
|
|
LEU Segment |
|
|
Contracts Segment |
|
|
Total |
|
Three Months Ended September 30, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
371.0 |
|
|
$ |
46.8 |
|
|
$ |
417.8 |
|
Cost of sales |
|
|
326.7 |
|
|
|
39.0 |
|
|
|
365.7 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
$ |
44.3 |
|
|
$ |
7.8 |
|
|
$ |
52.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
1,156.1 |
|
|
$ |
148.3 |
|
|
$ |
1,304.4 |
|
Cost of sales |
|
|
956.9 |
|
|
|
123.8 |
|
|
|
1,080.7 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
$ |
199.2 |
|
|
$ |
24.5 |
|
|
$ |
223.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government |
|
|
|
|
|
|
LEU Segment |
|
|
Contracts Segment |
|
|
Total |
|
Three Months Ended September 30, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
366.4 |
|
|
$ |
54.6 |
|
|
$ |
421.0 |
|
Cost of sales |
|
|
337.6 |
|
|
|
46.9 |
|
|
|
384.5 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
$ |
28.8 |
|
|
$ |
7.7 |
|
|
$ |
36.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
853.5 |
|
|
$ |
156.1 |
|
|
$ |
1,009.6 |
|
Cost of sales |
|
|
747.9 |
|
|
|
135.3 |
|
|
|
883.2 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
$ |
105.6 |
|
|
$ |
20.8 |
|
|
$ |
126.4 |
|
|
|
|
|
|
|
|
|
|
|
28
Revenue
Total revenue declined $3.2 million (or 1%) in the three months ended September 30,
2006, compared to the corresponding period in 2005. Total revenue increased $294.8 million (or
29%) in the nine months ended September 30, 2006, compared to the corresponding period in 2005, due
to increases in the LEU segment. Revenues from the LEU segment are presented in the following table
(in millions, except percentage change):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
SWU |
|
|
Uranium |
|
|
LEU |
|
|
|
Revenue |
|
|
Revenue |
|
|
Revenue |
|
Three months ended September 30, 2006 |
|
$ |
336.6 |
|
|
$ |
34.4 |
|
|
$ |
371.0 |
|
Three months ended September 30, 2005 |
|
|
306.2 |
|
|
|
60.2 |
|
|
|
366.4 |
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) from 2005 to 2006 |
|
$ |
30.4 |
|
|
$ |
(25.8 |
) |
|
$ |
4.6 |
|
|
|
|
|
|
|
|
|
|
|
Percentage Change |
|
|
10 |
% |
|
|
(43 |
)% |
|
|
1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
SWU |
|
|
Uranium |
|
|
LEU |
|
|
|
Revenue |
|
|
Revenue |
|
|
Revenue |
|
Nine months ended
September 30, 2006 |
|
$ |
974.9 |
|
|
$ |
181.2 |
|
|
$ |
1,156.1 |
|
Nine months ended
September 30, 2005 |
|
|
713.8 |
|
|
|
139.7 |
|
|
|
853.5 |
|
|
|
|
|
|
|
|
|
|
|
Increase from 2005 to 2006 |
|
$ |
261.1 |
|
|
$ |
41.5 |
|
|
$ |
302.6 |
|
|
|
|
|
|
|
|
|
|
|
Percentage Change |
|
|
37 |
% |
|
|
30 |
% |
|
|
35 |
% |
Revenue from sales of SWU increased $30.4 million in the three months and $261.1
million in the nine months ended September 30, 2006, compared to the corresponding periods in 2005,
reflecting increases in the volume of SWU sold and prices billed to customers. Volume of SWU sales
increased 3% in the three months and 28% in the nine months ended September 30, 2006, compared to
the corresponding periods in 2005, due to net increases in purchases by customers and the timing of
utility customer refuelings. We estimate the volume of SWU sales in 2006 will be about 20% higher
than in 2005. The average SWU price billed to customers increased 7% in the three and nine months
ended September 30, 2006, compared to the corresponding periods in 2005, reflecting higher prices
charged to customers under contracts signed in recent years, price increases from contractual
provisions for inflation, and the customer mix. We estimate the average SWU price billed to
customers in 2006 will be about 4% higher than in 2005.
Revenue from sales of uranium declined $25.8 million in the three months and increased $41.5
million in the nine months ended September 30, 2006, compared to the corresponding periods in 2005.
The average price for uranium delivered increased by 38% in the three-month period and 39% in the
nine-month period, relative to the prior year, reflecting higher prices charged to customers under
contracts signed in recent years. The volume of uranium sold declined 58% in the three months and
6% in the nine months ended September 30, 2006, reflecting the timing of customer orders and a
reduction in uranium inventories available for sale. We expect the volume of uranium sold to be
about 10-15% lower in 2006 compared to 2005, and to decrease by approximately one-half in 2007
reflecting the substantial completion of sales of our uranium inventory as this inventory is
depleted.
Revenue from the U.S. government contracts segment declined $7.8 million (or 14%) in the three
months ended September 30, 2006 and $7.8 million (or 5%) for the nine months ended September 30,
2006, compared to the corresponding periods in 2005. The decline in the three and nine months is
primarily attributable to declines in DOE and other contract work at the Portsmouth and Paducah
plants.
29
Cost of Sales
Cost of sales for SWU and uranium declined $10.9 million (or 3%) in the three months ended
September 30, 2006, compared to the corresponding period in 2005 due to the decline in uranium
sales volume, partly offset by increases in SWU and uranium unit costs. In the nine-month period,
cost of sales for SWU and uranium increased $209.0 million (or 28%) compared to the prior year,
reflecting a 28% increase in SWU sales volume. Cost of sales per SWU was 2% higher in the three
and nine months ended September 30, 2006, compared to the corresponding periods in 2005,
reflecting increases in the monthly moving average inventory costs. Under the monthly moving
average inventory cost method we use to value our SWU and uranium inventories, an increase or
decrease in production or purchase costs has an effect on inventory costs and cost of sales over
current and future periods. For example, unit production costs increased 7% in 2005, contributing
to the higher cost of sales per SWU in the three and nine months ended September 30, 2006.
Production costs increased $26.3 million (or 17%) in the three months ended September 30,
2006, compared to the corresponding period in 2005, reflecting an 18% increase in production volume
and a 1% decline in unit production costs. Production costs increased $21.2 million (or 5%) in the
nine months ended September 30, 2006, compared to the corresponding period in 2005, reflecting a 2%
increase in production volume and a 3% increase in unit production costs.
The cost for electric power increased $28.2 million in the three months ended September 30,
2006, compared to the corresponding period in 2005, reflecting an increase in megawatt hours
purchased and an increase in the average cost per megawatt hour. The cost for electric power
increased $25.5 million in the nine months ended September 30, 2006, compared to the corresponding
period in 2005, primarily due to the higher average cost per megawatt hour. The effect of higher
power costs on the unit production cost was partially offset by decreases in labor and benefits
costs resulting from the 2005 organizational restructuring. In the three-month period, the effect
of higher power costs on the unit production cost was mitigated by the increase in production.
We purchase approximately 5.5 million SWU per year under the Russian Contract. Purchase costs
for the SWU component of LEU under the Russian Contract declined $14.7 million in the three months
ended September 30, 2006, compared to the corresponding period in 2005, due to decreased volume
based on the timing of deliveries, partly offset by increases in the market-based purchase cost per
SWU under the Russian Contract. Purchase costs increased $14.1 million in the nine month period
relative to the prior year, reflecting increased volume based on the timing of deliveries and, to a
lesser extent, increases in the market-based purchase cost.
Cost of sales for the U.S. government contracts segment declined $7.9 million (or 17%) in the
three months and $11.5 million (or 9%) in the nine months ended September 30, 2006 compared to the
corresponding periods in 2005. The decline in the three and nine months is primarily attributable
to a general decline in costs at both the Portsmouth and Paducah plants and is reflective of the
reduced scope of DOE contract work and our field operations staffing reductions implemented at the
end of 2005.
Gross Profit
Our gross profit margin was 12.5% in the three months ended September 30, 2006, compared to
8.7% in the corresponding period in 2005, and was 17.1% in the nine months ended September 30,
2006, compared to 12.5% in the corresponding period in 2005. Higher margins in the LEU business
segment resulted from higher average prices for SWU and uranium. We estimate our gross profit
margin for the full year will be approximately 16% in 2006, compared to 15% in 2005, reflecting
higher average prices for SWU and uranium, partly offset by an increase in power costs in the
second half of 2006.
30
Gross profit for SWU and uranium increased $15.5 million (or 54%) in the three months and
$93.6 million (or 89%) in the nine months ended September 30, 2006, compared to the corresponding
periods in 2005, reflecting higher average prices for SWU and uranium, and higher volumes of SWU
sold, partly offset by higher unit cost of sales for SWU and uranium. The uranium component of LEU
is generating a higher gross profit margin.
Gross profit for the U.S. government contracts segment increased $0.1 million (or 1%) in the
three months and $3.7 million (or 18%) in the nine months ended September 30, 2006, compared to the
corresponding periods in 2005. In the nine months ended September 30, 2005, USEC earned $2.3
million in nonrecurring income after resolving a number of outstanding issues and recovering past
due billings to a DOE contractor. The 2006 increase in gross profit as compared to 2005 is
indicative of allowable benefit costs billed at U.S. government contract rates.
Non-Segment Information
The following table presents elements of the accompanying Consolidated Condensed
Statements of Income (Loss) that are not categorized by segment (amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Gross profit |
|
$ |
52.1 |
|
|
$ |
36.5 |
|
|
$ |
223.7 |
|
|
$ |
126.4 |
|
Special charge (credit) for organizational restructuring |
|
|
(0.1 |
) |
|
|
4.5 |
|
|
|
1.4 |
|
|
|
4.5 |
|
Advanced technology costs |
|
|
23.9 |
|
|
|
20.5 |
|
|
|
71.0 |
|
|
|
67.1 |
|
Selling, general and administrative |
|
|
10.9 |
|
|
|
12.3 |
|
|
|
36.7 |
|
|
|
41.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
17.4 |
|
|
|
(.8 |
) |
|
|
114.6 |
|
|
|
13.3 |
|
Interest expense |
|
|
3.2 |
|
|
|
9.0 |
|
|
|
11.4 |
|
|
|
26.8 |
|
Interest (income) |
|
|
(1.7 |
) |
|
|
(2.3 |
) |
|
|
(4.0 |
) |
|
|
(7.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
15.9 |
|
|
|
(7.5 |
) |
|
|
107.2 |
|
|
|
(6.1 |
) |
Provision (credit) for income taxes |
|
|
6.0 |
|
|
|
(2.3 |
) |
|
|
41.1 |
|
|
|
1.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
9.9 |
|
|
$ |
(5.2 |
) |
|
$ |
66.1 |
|
|
$ |
(7.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Special Charge (Credit) for Organizational Restructuring
In connection with our organizational restructuring announced in September 2005, we accrued
facility-related charges of $1.5 million during the first quarter of 2006 related to efforts
undertaken to consolidate office space at the headquarters location in Bethesda, Maryland. We
ceased use of a portion of the headquarters office space by the end of the first quarter of 2006
leading to the facility related charge. We recorded a credit of $0.1 million in the third quarter
of 2006 representing a change in estimate of costs for termination benefits recorded as a special
charge in the fourth quarter of 2005 related to staff reductions at our field organizations.
Advanced Technology Costs
Advanced technology costs increased $3.4 million (or 17%) in the three months and $3.9 million
(or 6%) in the nine months ended September 30, 2006, compared to the corresponding periods in
2005, reflecting increased demonstration costs for the American Centrifuge technology.
Advanced technology costs also include research and development efforts undertaken for NAC,
relating
31
primarily to its new generation MAGNASTOR storage system. NAC-related advanced technology
costs are $0.4 million and $1.3 million for the three and nine months ended September 30, 2006, as
compared to $0.5 million and $1.5 million during the three and nine months ended September 30,
2005. We expect the storage license certification in the fourth quarter of 2006 or the first
quarter of 2007, and expect that the transportation license application will be submitted in the
first quarter of 2007. NAC will continue to incur additional costs for the certification, licensing
and prototyping phases through the remainder of 2006.
Selling, General and Administrative
Selling, general and administrative expenses declined $1.4 million (or 11%) in the three
months and $4.8 million (or 12%) in the nine months ended September 30, 2006, compared to the
corresponding periods in 2005, reflecting reductions in salaries and employee benefit expenses from
the organizational restructuring of headquarters that was announced in September 2005. In the
nine-month period, salaries and employee benefit expenses declined $4.1 million and office lease
expenses declined $0.6 million compared to the prior year.
Operating Income (Loss)
Operating income increased $18.2 million in the three months and $101.3 million in the nine
months ended September 30, 2006, compared to the corresponding periods in 2005, reflecting higher
gross profits principally in the LEU business segment.
Interest Expense and Interest Income
Interest expense declined $5.8 million (or 64%) in the three months and $15.4 million (or 57%)
in the nine months ended September 30, 2006, compared to the corresponding periods in 2005. The
decline resulted primarily from our repayment of $288.8 million of our 6.625% senior notes on the
scheduled maturity date in January 2006. Interest income declined $0.6 million (or 26%) in the
three months and $3.4 million (or 46%) in the nine months ended September 30, 2006, compared to the
corresponding periods in 2005, primarily due to reduced cash and investment balances following the
senior note repayment.
Provision (Credit) for Income Taxes
The provision for income taxes is $6.0 million in the three months ended September 30, 2006,
compared with a credit for income taxes of $2.3 million in the corresponding period in 2005. The
provision for income taxes is $41.1 million in the nine months ended September 30, 2006, compared
with a provision for income taxes of $1.2 million in the corresponding period in 2005. The overall
effective income tax rate for the nine months ended September 30, 2006 is 38%. We recorded negative
effects on deferred tax assets from reductions in the Kentucky and Ohio tax rates in the first and
second quarters of 2005, respectively. Excluding the effects of the Kentucky and Ohio deferred tax
asset reduction, our effective tax rate would have been 30% in the corresponding nine month period
in 2005. The most significant items in the remaining difference in the effective rates between 2006
and 2005 reflect accruals of a nontaxable Medicare subsidy, research and other tax credits, and
other nondeductible expenses.
Net Income (Loss)
Net income was $9.9 million (or $.11 per share) in the three months ended September 30, 2006,
compared with a net loss of $5.2 million (or $.06 per share) in the corresponding period in 2005.
Net
income was $66.1 million (or $.76 per share) in the nine months ended September 30, 2006, compared
with a net loss of $7.3 million (or $.08 per share) in the corresponding period in 2005. The
improvement of $15.1 million in the three-month period and $73.4 million in the nine-month period
reflects higher gross profits principally in the LEU business segment and decreases in interest
expense.
32
2006 Outlook
We have updated our 2006 earnings and cash flow guidance. We reiterate that we expect revenue
to be approximately $1.8 billion and that the gross profit margin for 2006 will be approximately 16
percent. Total spending on the American Centrifuge project for 2006 is expected to be approximately
$160 million, a decrease of $25 million from earlier guidance due to the delay in deploying the
Lead Cascade. We anticipate that this spending will be split approximately $110 million expensed
and $50 million capitalized, and this level of expensed spending impacts net income. USEC updates
its 2006 net income guidance to be in a range of $65 to $75 million, with the improvement over
earlier earnings guidance as a result of lower expenses for the American Centrifuge. Cash flow from
operations in 2006 is subject to timing risks but we expect to generate cash in a range of $150 to
$160 million.
Liquidity and Capital Resources
The change in cash and cash equivalents from our Consolidated Statements of Cash Flows are as
follows on a summarized basis (in millions):
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
Net Cash Provided by Operating Activities |
|
$ |
153.0 |
|
|
$ |
20.2 |
|
Net Cash (Used in) Investing Activities |
|
|
(29.6 |
) |
|
|
(20.6 |
) |
Net Cash (Used in) Financing Activities |
|
|
(286.2 |
) |
|
|
(27.1 |
) |
|
|
|
|
|
|
|
Net (Decrease) in Cash and Cash Equivalents |
|
$ |
(162.8 |
) |
|
$ |
(27.5 |
) |
|
|
|
|
|
|
|
Operating Activities
Cash flow from operating activities was $153.0 million in the nine months ended September 30,
2006, compared with $20.2 million in the corresponding period in 2005, or $132.8 million more cash
generated from operating activities period to period.
During the nine months ended September 30, 2006, results of operations contributed $66.1
million to cash flow along with a reduction in net inventory balances of $84.0 million period to
period, as we sold from existing inventories as well as from current production. Cash flow
benefited from a reduction of $65.2 million in accounts receivable from customer collections
following a high level of sales in the fourth quarter of 2005. Reductions in accounts payable and
other liabilities reduced cash flow from operations by $76.2 million during the period, principally
from tax payments, prepayment modifications under the amended TVA contract, and payments to our
former president and chief executive officer in settlement of his claims.
During the nine months ended September 30, 2005, cash flow from operations benefited from cash
received on sales of $56.0 million that were deferred for revenue recognition and an increase of
$45.7 million in payables under the Russian Contract due to the timing of purchases, partly offset
by a net inventory increase of $63.2 million.
33
Investing Activities
Capital expenditures amounted to $29.6 million in the nine months ended September 30, 2006,
compared with $20.6 million in the corresponding period in 2005. Capital expenditures include
capitalized costs associated with the American Centrifuge Plant, amounting to $21.5 million in the
nine months ended September 30, 2006, compared with $11.9 million in the corresponding period in
2005.
Financing Activities
The issuance of common stock, primarily from the exercise of stock options, and related tax
benefit provided cash flow from financing activities of $2.6 million in the nine months ended
September 30, 2006, compared with $8.3 million in the corresponding period in 2005. There were 87.1
million shares of common stock outstanding at September 30, 2006, compared with 86.6 million at
December 31, 2005, an increase of 0.5 million shares (or 0.6%). There were 86.5 million shares of
common stock outstanding at September 30, 2005, compared with 85.1 million at December 31, 2004, an
increase of 1.4 million shares (or 1.6%).
In February 2006, the Board of Directors voted to discontinue paying a common stock dividend
in order to redirect those funds to reduce the level of external financing needed for construction
of the American Centrifuge Plant. Dividends paid to stockholders amounted to $35.4 million (or a
quarterly rate of $0.1375 per share) in the nine months ended September 30, 2005.
We repaid the remaining principal balance of our 6.625% senior notes of $288.8 million on the
scheduled maturity date of January 20, 2006, using cash on hand and borrowing under our bank credit
facility of approximately $78.5 million. We repaid the $78.5 million borrowing with funds from
operations by the end of January 2006. During the nine months ended September 30, 2006, aggregate
borrowings and repayments amounted to $133.3 million and $133.3 million, respectively, and the peak
amount borrowed was the $78.5 million used to repay the senior notes described above. There were no
short-term borrowings under the revolving credit facility at September 30, 2006 or at December 31,
2005.
Working Capital
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(millions) |
|
Cash and cash equivalents |
|
$ |
96.3 |
|
|
$ |
259.1 |
|
Accounts receivable trade |
|
|
191.5 |
|
|
|
256.7 |
|
Inventories |
|
|
1,024.4 |
|
|
|
974.3 |
|
Current portion of long-term debt |
|
|
|
|
|
|
(288.8 |
) |
Other current assets and liabilities, net |
|
|
(335.6 |
) |
|
|
(338.6 |
) |
|
|
|
|
|
|
|
Working capital |
|
$ |
976.6 |
|
|
$ |
862.7 |
|
|
|
|
|
|
|
|
Capital Structure and Financial Resources
At September 30, 2006, our long-term debt consisted of $150.0 million of 6.750% senior notes
due January 20, 2009. The senior notes are unsecured obligations and rank on a parity with all of
our other unsecured and unsubordinated indebtedness. We repaid the remaining balance of our 6.625%
senior notes of $288.8 million on the scheduled maturity date of January 20, 2006. The total
debt-to-capitalization ratio was 13% at September 30, 2006 and 33% at December 31, 2005.
34
In August 2005, we entered into a five-year, syndicated bank credit facility, providing up to
$400.0 million in revolving credit commitments, including up to $300.0 million in letters of
credit, secured by assets of USEC Inc. and our subsidiaries. The credit facility is available to
finance working capital needs, refinance existing debt and fund capital programs, including the
American Centrifuge project. Borrowings under the facility are subject to limitations based on
established percentages of eligible accounts receivable and inventory.
Utilization of the revolving credit facility at September 30, 2006 and December 31, 2005
follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
December 31, |
|
|
2006 |
|
2005 |
|
|
(millions) |
Short-term borrowings |
|
$ |
|
|
|
$ |
|
|
Letters of credit |
|
|
36.0 |
|
|
|
25.0 |
|
Available credit |
|
|
214.0 |
|
|
|
375.0 |
|
Effective July 20, 2006, available credit (availability) under the credit facility
was reduced by $150.0 million because of a reserve referred to in the agreement as the senior note
reserve tied to the aggregate amount of proceeds received by us from any future debt or equity
offerings. Effective October 16, 2006, the credit agreement was amended to modify the treatment of
this reserve. Following the amendment, the senior note reserve will now be treated as a reduction
to our qualifying assets (such as eligible inventory and accounts receivable) that establish the
borrowing base, rather than directly reducing availability. This means that the senior note reserve
will now reduce availability under the credit facility only at such time and to the extent that we
do not have sufficient qualifying assets available to cover the reserve and our other reserves. Our
other reserves against our qualifying assets currently consist primarily of a reserve for future
obligations to DOE with respect to the turnover of the gaseous diffusion plants to them at the end
of the term of the lease of these facilities. Immediately following the amendment, availability was
restored by $150 million.
The revolving credit facility also contains various other reserve provisions that reduce
available borrowings under the facility periodically or restrict the use of borrowings, including
covenants that can periodically limit us to $50.0 million in capital expenditures based on
available liquidity levels. Other reserves under the revolving credit facility, such as
availability reserves and borrowing base reserves, are customary for credit facilities of this
type.
We expect that our cash, internally generated funds from operations and available
financing under the credit facility will be sufficient over the next 12 months to meet our cash
needs.
Outstanding borrowings under the facility bear interest at a variable rate equal to, based on
our election, either:
|
|
|
the sum of (1) the greater of the JPMorgan Chase Bank prime rate and the federal funds
rate
plus 1/2 of 1% plus (2) a margin ranging from 0.25% to 0.75% based upon collateral
availability, or |
|
|
|
|
the sum of LIBOR plus a margin ranging from 2.0% to 2.5% based on collateral
availability. |
The revolving credit facility includes various customary operating and financial covenants,
including restrictions on the incurrence and prepayment of other indebtedness, granting of liens,
sales of assets, making of investments, maintenance of a minimum amount of inventory, and payment
of dividends or other distributions. Failure to satisfy the covenants would constitute an event of
default under the revolving credit facility. As of September 30, 2006, we were in compliance with
all of the covenants.
35
In September 2006, Moodys announced the implementation of a new rating methodology for its
North American Metals & Mining sector and, as a result, lowered its credit ratings on USECs senior
notes ($150.0 million) to B3 from B2. Our current credit ratings are as follows:
|
|
|
|
|
|
|
Standard & Poors |
|
Moodys |
Corporate credit/family rating |
|
B- |
|
B1 |
Senior unsecured debt |
|
CCC |
|
B3 |
Outlook |
|
Negative |
|
Stable |
We do not have any debt obligations that are accelerated or in which interest rates increase
in the event of a credit rating downgrade, although reductions in our credit ratings may increase
the cost and reduce the availability of financing to us in the future.
Potential Impacts to Liquidity American Centrifuge
We will need a significant amount of capital over the next several years to continue our
substantial efforts at demonstrating and deploying the American Centrifuge technology as a
replacement for the gaseous diffusion technology used at our Paducah plant. Increases in the cost
of key materials for the centrifuges, increased costs of commodities that will be used in
construction of the balance of plant and initial vendor estimates that have not yet been able to
reflect completed designs or manufacturing experience represent strong upward cost pressures. When
combined with the cost effect of the one year delay in having the Lead Cascade fully operational,
the total impact of these circumstances will significantly increase our previously stated estimate
of $1.7 billion, excluding capitalized interest and financing-related costs, to deploy a 3.5
million SWU commercial production plant. As part of our continuing effort to update our cost
estimate, we are also evaluating cost mitigation approaches involving value engineering, high
volume manufacturing efficiencies and system/component refurbishment versus replacement. We expect
to complete the current effort to reset our estimate of cost and deployment schedule by years end
or early 2007.
We expect to spend approximately $160 million on the American Centrifuge project in 2006.
Total expenditures, including both expense and capital related to American Centrifuge technology
for the nine months ended September 30, 2006 and 2005 are as follows (in millions) :
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
September 30, |
|
|
2006 |
|
2005 |
Total expenditures (A) |
|
$ |
91.2 |
|
|
$ |
77.5 |
|
Amount expensed |
|
$ |
69.7 |
|
|
$ |
65.6 |
|
Amount capitalized (B) |
|
$ |
21.5 |
|
|
$ |
11.9 |
|
|
|
|
(A) |
|
Total expenditures are all American Centrifuge costs
including, but not limited to, demonstration facility, licensing
activities, commercial plant facility, program management and
interest related costs. |
|
(B) |
|
Cumulative capitalized costs as of September 30, 2006
are $43.6 million and include interest of $2.9 million. |
Initial funding for the American Centrifuge program has been through internally
generated cash and we expect to have sufficient internally generated cash and short-term borrowing
capacity under our credit facility to fund American Centrifuge costs for at least the next 12
months. The timing of our needs for external capital to fund American Centrifuge costs is
contingent upon the anticipated timing of expenditures for the American Centrifuge Plant. We expect
to have more information as to the timing of capital expenditures and our specific cash needs as we
complete our efforts to reset our overall cost estimates and deployment schedule. We continue to
evaluate various options for financing construction of the American Centrifuge Plant. Our ability
to secure financing will depend
in large part on the projects economics, our risk profile and projected revenues and
earnings, taking into account overall cost estimates, timing and market assumptions, including
assumptions with respect to SWU prices and continued restrictions on Russian LEU imports under the
Russian Suspension Agreement.
36
Potential Impacts to Liquidity Financial Assurances Required by NRC
The liability for the disposition of depleted uranium included in long-term liabilities
increased $19.3 million to $66.3 million at September 30, 2006, compared with December 31, 2005.
The increase reflects depleted uranium generated in the first nine months of 2006 and an increase
in the estimated unit disposition cost earlier in the year. The NRC requires that we guarantee the
disposition of our depleted uranium with financial assurances. The financial assurance requirement
is based on the quantity of depleted uranium at the beginning of the year plus expected depleted
uranium generated over the current year. Contingencies are added, in accordance with NRC
requirements, to the estimated unit disposition cost for purposes of the financial assurance
requirement. The financial assurance requirements for 2006, principally the amount associated with
disposition of the expected quantities of depleted uranium being generated, total $91.4 million,
and are covered by a combination of a $24.1 million letter of credit and a $67.3 million surety
bond. The surety bond is collateralized by cash deposits included in other long-term assets at
September 30, 2006.
The financial assurance requirements for 2007 are required to be in place by December 31,
2006, and we expect an increase of approximately $64 million for a total of approximately $155
million. The expected increase reflects an increase in the quantity of depleted uranium as well as
an increase in the unit disposition cost. The unit disposition cost for purposes of the financial
assurances requirement is being increased for additional contingencies and other potential costs to
meet NRC requirements. The increase to the financial assurance requirements is expected to be
covered with a corresponding increase in the surety bond, of which a portion will be cash
collateralized. Our estimated cost and accrued liability, as well as financial assurances we
provide for the disposition of depleted uranium, are subject to change as additional information
becomes available.
New Accounting Standards
Reference is made to New Accounting Standards in note 1 of the notes to the consolidated
condensed financial statements for information on new accounting standards.
37
Item 3. Quantitative and Qualitative Disclosures about Market Risk
At September 30, 2006, the balance sheet carrying amounts for cash and cash equivalents,
restricted short-term investments, accounts receivable, accounts payable and accrued liabilities,
and payables under the Russian Contract approximate fair value because of the short-term nature of
the instruments.
USEC has long-term debt consisting of $150.0 million in 6.750% senior notes scheduled to
mature January 20, 2009. At September 30, 2006, the fair value of the senior notes is $141.0
million and the balance sheet carrying amount is $150.0 million. The fair value is calculated based
on a credit-adjusted spread over U.S. Treasury securities with similar maturities. USEC has not
entered into financial instruments for trading purposes.
Reference is made to our disclosures in Item 7A of our 2005 Annual Report on Form 10-K and the
additional information reported in managements discussion and analysis of financial condition and
results of operations included herein for quantitative and qualitative disclosures relating to:
|
|
|
commodity price risk for electric power requirements for the Paducah plant (refer to
Overview Cost of Sales and Results of Operations Cost of Sales), and |
|
|
|
|
interest rate risk relating to any outstanding borrowings at variable interest rates
under the $400.0 million revolving credit agreement (refer to Liquidity and Capital
Resources Capital Structure and Financial Resources). |
Item 4. Controls and Procedures
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information
required to be disclosed by us in reports we file or submit under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported on a timely basis and that such information is
accumulated and communicated to management, including the Chief Executive Officer and the Chief
Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In
designing and evaluating the disclosure controls and procedures, management recognized that any
controls and procedures, no matter how well designed and operated, can provide only reasonable
assurance of achieving the desired control objectives, and management necessarily was required to
apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Our management, with the participation of the Chief Executive Officer and the Chief Financial
Officer, has performed an evaluation of the effectiveness of the design and operation of our
disclosure controls and procedures as of September 30, 2006. Based on this evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures
were effective at the reasonable assurance level as of September 30, 2006. There were no changes in
our internal control over financial reporting during the fiscal quarter to which this report
relates that have materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
38
USEC Inc.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to information regarding the U.S. Department of Justices investigation of a
possible claim relating to USECs contract with the U.S. Department of Energy for the supply of
cold standby services at the Portsmouth plant, reported in note 6 to the consolidated condensed
financial statements.
USEC is subject to various other legal proceedings and claims, either asserted or unasserted,
which arise in the ordinary course of business. While the outcome of these claims cannot be
predicted with certainty, we do not believe that the outcome of any of these legal matters will
have a material adverse effect on our results of operations or financial condition.
Item 1A. Risk Factors
Investors should carefully consider the updated risk factors below and the other risk factors
in our Annual Report on Form 10-K, in addition to the other information in our Annual Report and in
this quarterly report on Form 10-Q.
The future viability of our business depends on our ability to replace our enrichment
technology by deploying the American Centrifuge technology.
We currently depend on our gaseous diffusion facility in Paducah, Kentucky for approximately
one-half of the LEU that we need to meet our delivery obligations to our customers. The gaseous
diffusion technology that we use at the Paducah plant is an older, high-operating cost technology
that requires substantially greater amounts of electric power than the centrifuge technology used
by our competitors. Due to significant increases in our power costs, the possibility of additional
power cost increases in the future and the fact that our competitors use enrichment technologies
that enable them to produce LEU at a far lower operating cost, the production of LEU using gaseous
diffusion technology is becoming increasingly uneconomic. We are focused on developing and
deploying an advanced uranium enrichment centrifuge technology, which we refer to as American
Centrifuge technology, as a replacement for our gaseous diffusion technology. American Centrifuge
technology is more advanced and substantially more operationally cost-efficient than gaseous
diffusion. We are not currently pursuing any strategies to replace our gaseous diffusion plant at
Paducah with alternatives other than the American Centrifuge Plant. As a result, if we are unable
to successfully and timely demonstrate and deploy the American Centrifuge Plant and to do so on a
cost-effective basis due to the risks and uncertainties described in this Item or for any other
reasons, our gross margins, cash flows and results of operations could be materially and adversely
affected and our business may not remain viable.
We face a number of risks and uncertainties associated with the successful demonstration,
construction and deployment of the American Centrifuge technology.
American Centrifuge technology is expected to be more operationally cost-efficient than our
gaseous diffusion technology that we currently depend on for LEU production at our Paducah plant.
Nevertheless, the demonstration, construction and deployment of the American Centrifuge technology
is a large and capital-intensive undertaking that is subject to numerous risks and uncertainties.
39
We are in the process of demonstrating the American Centrifuge technology and are working
toward meeting a target schedule for construction of the American Centrifuge Plant. To date,
however, we have experienced delays in demonstrating the American Centrifuge technology that have
impacted our near term schedule. These delays resulted from the failure of certain materials to
meet specifications, performance issues related to certain centrifuge components and compliance
with new regulatory requirements, and we could experience additional delays in the future for these
and other reasons. We will be assessing the impact that delays over the past year have on our
overall schedule and costs for deployment of the American Centrifuge. A substantial change in our
overall schedule could have an adverse impact on our business and prospects.
To maintain a specific schedule we may need to take on additional risks which increase the
overall risk of the project. This includes risks associated with the possible need to make key
decisions (including decisions to expend or commit to large amounts of capital and resources)
before receipt of all relevant machine performance data and confirmation of the projects overall
viability. There are also risks associated with an accelerated ramp-up in supplier capacity and a
high production rate of installing centrifuge machines. Delays could also increase our costs for
the project, both on an overall basis and in terms of the incremental costs we must incur to
recover from delays and stay on schedule, which could jeopardize the overall economics and
viability of the project.
The 2002 DOE-USEC Agreement contains specific project milestones relating to the American
Centrifuge Plant. We have begun discussions with DOE regarding an October 2006 milestone and other
milestones under this agreement. We believe we will reach a mutually acceptable agreement with DOE
regarding these milestones; however, we cannot provide any assurances that we will reach an
agreement. Under the DOE-USEC Agreement, if, for reasons within our control, we fail to meet these
or any other milestone and the resulting delay would materially impact our ability to begin
commercial operations on schedule, DOE could take a number of actions that could have an adverse
impact on our business and prospects and our ability to succeed in the deployment of the American
Centrifuge. These actions include terminating the DOE-USEC Agreement, recommending a reduction or
termination of our access to Russian LEU or the Paducah plant, revoking our access to DOEs U.S.
centrifuge technology that we require for the success of the American Centrifuge project and
requiring us to transfer our rights in centrifuge technology and facilities to DOE, or supporting
competing projects for production of LEU.
In addition to the issues that could arise under the DOE-USEC Agreement, delays in the
demonstration and deployment of the American Centrifuge could make it more difficult for us to
attract and retain customers and could extend the time under which we are contractually required to
continue to operate our high-cost Paducah plant. These outcomes could substantially reduce our
revenues, gross margins and cash flows and reduce the likelihood of successful deployment of the
American Centrifuge.
We will require a significant amount of capital in order to achieve commercial deployment of
the American Centrifuge Plant. Higher power prices have reduced the amount of cash we expect to
have available to provide internal financing for the program. As a result, we expect to need a
greater amount of external financing. We cannot assure investors that we will be able to obtain
sufficient external financing and we cannot predict the cost or terms on which such financing will
be available, if at all. We are also evaluating other options to finance and deploy the program and
we cannot assure investors that, if necessary, we will be successful in these efforts. Factors that
could affect our ability to obtain financing and the cost of the financing or that could affect our
ability to successfully pursue other options could include:
|
|
|
the success of our demonstration of the American Centrifuge and its estimated costs,
efficiency, timing and return on investment; |
40
|
|
|
consequences of a failure to reach an agreement with DOE
regarding the October 2006 and other milestones under the 2002
DOE-USEC Agreement; |
|
|
|
|
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; |
|
|
|
|
the impact of reductions or changes in trade restrictions on imports of Russian and
other foreign LEU and related uncertainties; |
|
|
|
|
additional downgrades in our credit rating; |
|
|
|
|
market price and volatility of our common stock; |
|
|
|
|
general economic and capital market conditions; |
|
|
|
|
conditions in energy markets; |
|
|
|
|
regulatory developments; |
|
|
|
|
our ability to get loan guarantees or other support from the U.S. government; |
|
|
|
|
investor confidence in the industry and in us and any entity with whom we may partner; |
|
|
|
|
our perceived competitive position; |
|
|
|
|
SWU prices; |
|
|
|
|
our ability to secure long-term SWU purchase commitments from customers at adequate
prices; |
|
|
|
|
our reliance on LEU delivered to us under the Russian Contract; |
|
|
|
|
the level of success of our current operations; and |
|
|
|
|
restrictive covenants in the agreements governing our revolving credit facility and any
future financing arrangements that limit our operating and financial flexibility. |
We are currently in the process of developing a revised cost estimate for the American
Centrifuge Plant and we expect that this estimate will be significantly higher than our prior
estimate of $1.7 billion. These cost increases could make the project uneconomic. We cannot assure
investors that efforts that we take to mitigate cost increases will be successful or sufficient and
cost increases could jeopardize our ability to successfully finance and deploy the American
Centrifuge project.
Cost estimates for the American Centrifuge Plant are based on many assumptions that are
subject to change as new information becomes available or as unexpected events occur. Several of
these assumptions, such as the cost of raw materials to build the plant, are outside our control.
Accordingly, we cannot assure investors that costs associated with the American Centrifuge Plant
will not be materially higher than anticipated. Even if we are able to accurately estimate its cost
and obtain the external financing necessary for the American Centrifuge Plant, we cannot assure
investors that the benefits that we gain from the American Centrifuge Plant will be sufficient to
offset the costs of our investment.
In addition, certain actions by DOE are required for the American Centrifuge Plant to proceed,
including entering into a long-term lease agreement with DOE for the American Centrifuge
facilities, and agreeing with DOE on terms for our license of the intellectual property upon which
the American Centrifuge is based. If DOE fails to take appropriate and timely action, it could
delay or disrupt our ability to meet the milestones in the DOE-USEC Agreement, which could delay or
prevent successful demonstration or deployment of the American Centrifuge technology or affect our
ability to obtain necessary financing.
41
Because of its central importance to our business strategy and our current lack of
alternatives, if we are unable to successfully and timely demonstrate, construct and deploy the
American Centrifuge Plant, our gross margins, cash flows and results of operations could be
materially and adversely affected and our business may not remain viable.
Significant increases in the cost of the electric power supplied to our Paducah plant have
materially increased our overall production costs and may, in the future, increase our cost of
sales to a level above the prices we charge our customers.
Dramatically higher costs for power are putting significant pressure on our business and will
continue to do so unless and until we are able to deploy more efficient centrifuge technology. The
gaseous diffusion enrichment process that we use to produce LEU at our Paducah plant requires
significant amounts of electric power. Historically, electric power represented approximately 60%
of our production costs at the Paducah plant. However, with the one-year new pricing agreement
under our power contract with the Tennessee Valley Authority (TVA) that went into effect on June
1, 2006, we expect that power, as a percentage of our production costs, will increase to about 70%.
The new pricing is about 50% higher than the previous pricing and our power costs are also now
subject to monthly adjustments to account for TVAs fuel and purchased-power costs, which means
that our actual power costs could be even greater than we anticipate.
Although we are currently signing new contracts in which prices for future deliveries are
adjusted on the basis of changes in market prices for power, our sales contracts reflecting
agreements reached prior to 2006 do not include provisions that permit us to pass through increases
in power prices to our customers. As a result our gross margin and cash flow under these sales
contracts will be significantly reduced by the higher power costs under the amended TVA contract.
Additionally, if our power costs continue to rise, profit margins under new sales contracts that we
are entering into may be similarly impacted. Accordingly, if our power costs continue to rise and
mitigating steps are unavailable or insufficient, production at the Paducah plant will become
increasingly uneconomic at existing contract prices, which will adversely affect the long-term
viability of our business.
In addition, in accordance with the TVA power contract, we provide financial assurances to
support our payment obligations to TVA, including providing an irrevocable letter of credit and
making weekly prepayments based on the price and usage of power. A significant increase in the
price we pay for power could increase the amount of these financial assurances, which could
adversely affect our liquidity. For a further discussion of the amended TVA contract, see Part I,
Item 2, Managements Discussion and Analysis of Financial Condition and Results of
OperationsOverviewCost of Sales.
Capacity and prices under the TVA contract are only agreed upon through May 2007 and we have
not yet contracted for power for periods beyond that time. While we expect to reach an agreement
with TVA for power beyond May 2007, we may be unable to reach an acceptable agreement and we are at
risk for additional power increases in the future.
Changes in, or termination of, the Russian Suspension Agreement could lead to significantly
increased competition from Russian LEU or, if replaced with tariffs, could increase our costs under
the Russian Contract.
The Russian Suspension Agreement is a 1992 agreement between the United States and Russia that
today precludes Russian LEU from being sold for consumption in the United States except under the
Russian Contract. The agreement could be terminated (1) unilaterally by the Russian government upon
60 days notice or (2) as a result of periodic administrative procedures under U.S. international
trade laws. For example, a sunset review of the Russian Suspension Agreement is conducted every
five years by the Department of Commerce and the U.S. International Trade Commission. Final
determinations in the latest sunset review were made in May and July of 2006 and were in favor of
42
maintaining the existing suspension agreement. However, interested parties who participated in
the sunset review have appealed the decision of the Department of Commerce and can appeal the
decision of the U.S. International Trade Commission to the Court of International Trade and higher
Federal courts, which could reverse the decision and terminate the Russian Suspension Agreement.
Officials of the Russian and U.S. governments are currently engaged in discussions regarding a
possible amendment to the Russian Suspension Agreement that would permit Russia to sell SWU in the
United States in future years in addition to the sales currently made by Russia under the Russian
Contract. Russian government officials have indicated publicly that their objective is to secure
an amendment that would allow them to pursue up to 25% of the U.S. market by 2014. The details of
these intergovernmental discussions are confidential and it is unclear whether any relaxation of
restrictions will include measures to avoid an adverse impact on domestic enrichers, such as USEC,
or whether the Russians might take action to terminate the Russian Suspension Agreement if they are
dissatisfied with the results of these discussions.
Unless accompanied by equivalent limitations on imports or unless other steps are taken by the
U.S. government to limit the impact on USEC, a termination of the Russian Suspension Agreement, or
a modification of the terms or the scope of the Russian Suspension Agreement, could result in a
significant increase in sales of Russian-produced LEU in the U.S. This could depress prices and
undermine our ability to sell the large quantity of LEU that we are committed to purchase under the
Russian Contract. This could substantially alter the economics of the American Centrifuge project
and our ability to obtain financing for it, reduce our revenues, gross margins and cash flows, and
jeopardize our ability to secure the long-term sales contracts we need to continue operating our
existing enrichment plant and pursue the deployment of the American Centrifuge.
Alternatively, if the Russian Federation unilaterally terminated the Russian Suspension
Agreement, the Department of Commerce would recommence its antidumping investigation and would
require importers of Russian LEU, including us under the Russian Contract, to post bonds to cover
estimated duties on imports subject to that investigation that would likely exceed 100% of the
value of the imports. Further, if the investigation resulted in an antidumping order, we would have
to pay estimated duties on future imports of Russian LEU in cash. Because we have a fixed
commitment to purchase the Russian LEU under the Russian Contract and must continue to import the
Russian LEU in order to meet our obligations to customers, we may not have any alternative to
posting the bonds or paying these duties. Depending on the cost of the bonds and the magnitude of
the duties imposed, the increase in our costs could materially and adversely affect our gross
margins, cash flows, liquidity and results of operations and our business may not remain viable.
The long-term and fixed 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 SWU under long-term
contracts. The prices that we charge under our current contracts (particularly those reflecting
terms agreed to prior to 2006) are typically fixed or only increase with inflation. Therefore,
these contracts do not allow us to pass along increases in our costs, such as increased power costs
or increases in the prices we pay under the Russian Contract for SWU, or to take advantage of
market increases in the price of SWU. We anticipate that 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, will reduce our ability to cover our cost of
sales with revenues earned under our customer contracts and will materially and adversely impact
our gross margins and cash flows in current and future periods.
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 transferred from our inventory to the Russian Federation under the Russian
Contract. Over time,
to the extent our inventory is insufficient to absorb the difference, we could be required to
purchase uranium to continue to meet our obligations to the Russian Federation, which, depending on
the market price of uranium, could have an adverse impact on our gross margins, cash flows, results
of operations and liquidity.
43
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(c) Third Quarter 2006 Issuer Purchases of Equity Securities
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(c) Total Number |
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(d) Maximum Number |
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(a) Total |
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(b) |
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of Shares (or Units) |
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(or Approximate Dollar |
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Number of |
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Average |
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Purchased as Part |
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Value) of Shares (or |
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Shares (or |
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Price Paid |
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of Publicly |
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Units) that May Yet Be |
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Units) |
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Per Share |
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Announced Plans |
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Purchased Under the |
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Period |
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Purchased(1) |
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(or Unit) |
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or Programs |
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Plans or Programs |
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July 1 July 31 |
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August 1 August 31 |
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326 |
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$ |
10.33 |
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September 1 September 30 |
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Total |
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326 |
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$ |
10.33 |
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(1) |
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These purchases were not made pursuant to a publicly announced repurchase plan or
program. Represents 326 shares of common stock surrendered to USEC to pay withholding taxes
in connection with the vesting of restricted stock under the 1999 Equity Incentive Plan, as
amended. |
44
Item 6. Exhibits
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10.1 |
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Amendment No. 4 to the December 10, 2004 Memorandum of Agreement between the United
States Department of Energy and USEC Inc., dated September 18, 2006. |
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10.2 |
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Form of First Amendment to Change in Control Agreement with senior executive
officers. |
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10.3 |
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Form of First Amendment to Change in Control Agreement with executive officers. |
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10.4 |
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Summary of Employment Arrangement for Chief Financial Officer, incorporated by
reference to Exhibit 10.1 of the Current Report on Form 8-K/A filed on September 11, 2006
(Commission File Number 1-14287). |
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31.1 |
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Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a). |
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31.2 |
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Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a). |
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32 |
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Certification of CEO and CFO pursuant to 18 U.S.C. Section 1350. |
45
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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USEC Inc.
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November 3, 2006
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By /s/ John C. Barpoulis |
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John C. Barpoulis
Senior Vice President, Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer) |
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46
EXHIBIT INDEX
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Exhibit No. |
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Description |
10.1
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Amendment No. 4 to the December 10, 2004 Memorandum of Agreement between the United
States Department of Energy and USEC Inc., dated September 18, 2006. |
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10.2
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Form of First Amendment to Change in Control Agreement with senior executive officers. |
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10.3
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Form of First Amendment to Change in Control Agreement with executive officers. |
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10.4
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Summary of Employment Arrangement for Chief Financial Officer, incorporated by reference to
Exhibit 10.1 of the Current Report on Form 8-K/A filed on September 11, 2006 (Commission File
Number 1-14287). |
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31.1
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Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a). |
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31.2
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Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a). |
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32
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Certification of CEO and CFO pursuant to 18 U.S.C. Section 1350. |
47
exv10w1
Exhibit 10.1
AMENDMENT NO. 4 TO THE DECEMBER 10, 2004
MOA TO PROVIDE FOR THE
CONTINUED DIRECT PAYMENT OF
USEC ALLOWABLE COSTS
This Amendment No. 4 to the December 10, 2004 Memorandum of Agreement between the United
States Department of Energy (DOE) and USEC Inc, a Delaware Corporation headquartered at
6903 Rockledge Drive, Bethesda, MD. 20817 is entered into this 18th day of September,
2006 (the Amendment No. 4 Effective Date). USEC, Inc. and its wholly owned subsidiary,
United States Enrichment Corporation, are herein referred to as, USEC. DOE and USEC are
sometimes referred to herein as Parties.
WHEREAS, on December 10, 2004, the Parties entered into a Memorandum of Agreement for the
Continued Operation of the Portsmouth S&T Facilities for the Processing of Affected Inventory in
Fiscal Year 2005 and Thereafter (the MOA); and
WHEREAS, on May 16, 2005, the Parties entered into Amendment No. 1 to the MOA; and
WHEREAS, on February 9, 2006, the Parties entered into Amendment No. 2 to the MOA; and
WHEREAS, acting pursuant to Amendment No. 2 to the MOA, DOE transferred 200 MTU of Feed
Material (Supplemental Barter Material) to USEC; and
WHEREAS, acting pursuant to Amendment No. 2 to the MOA, USEC sold such Supplemental Barter
Material and received in return sales proceeds in the amount of $22.42 million; and
WHEREAS, such sales proceeds were used to compensate USEC for Allowable Costs incurred in
performing work under the MOA as amended; and
WHEREAS, on June 23, 2006 the Parties entered into Amendment No. 3 to the MOA and that
amendment provided for the direct payment of USEC Allowable Costs during the Direct
Compensation Period (as that term was defined in Amendment No. 3); and
WHEREAS, paragraph 2 of Amendment No. 3 provides, USEC shall not incur more than $11,918,671
in Allowable Costs during the Direct Compensation Period; and
WHEREAS, USEC anticipates that by on or about September 30, 2006, USEC Allowable Costs during
the Direct Compensation Period will reach $11,918,671; and
WHEREAS, the Parties wish to continue work under the MOA beyond September 30, 2006;
1
NOW, THEREFORE, the Parties hereby agree that:
1. USEC may incur up to $24,150,217 in Allowable Costs during the Direct Compensation Period.
2. Except as expressly set forth above, all provisions contained in the MOA, as amended by
Amendments 1, 2 and 3 are applicable to this Amendment No. 4. In the event there is a conflict
between this Amendment No. 4 and the MOA, as amended, this Amendment No. 4 shall be controlling.
IN WITNESS WHEREOF, The Parties, through their duly authorized representatives, have signed
this Amendment in two originals as of the Amendment No. 4 Effective Date listed
above.
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UNITED STATES DEPARTMENT OF ENERGY |
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USEC INC. |
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By:
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By: |
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William E. Murphie
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Philip G. Sewell |
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Title: Manager, PPPO |
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Title: Senior Vice President |
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Date: September 18, 2006 |
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Date: September 18, 2006 |
2
exv10w2
Exhibit 10.2
FIRST AMENDMENT TO CHANGE IN CONTROL AGREEMENT
Amendment (this Amendment) to the change in control agreement (the Agreement) dated as of
___, ___, by and between USEC Inc. (the Company) and ___(the Executive). This
Amendment is made as of ___, 2006.
The parties intending to be legally bound hereby agree as follows:
1. |
|
Section 4(b) of the Agreement is amended to read in its entirety as follows: |
(b) A cash lump sum payment (payable within ten days of the Date of Termination) equal to
two and one-half times the sum of the Final Salary and the Final Average Bonus. Final Salary
means the Executives annual base salary as in effect on the Date of Termination or, if higher, the
Executives annual base salary in effect immediately prior to the reduction giving rise (pursuant
to clause (iv) of the definition of Good Reason) to such termination. Final Average Bonus means
the average of the three most recent annual bonuses paid to Executive prior to the Date of
Termination, whether such annual bonuses are paid in the form of cash or in grants of restricted
common stock of the Company under the USEC Inc. Annual Incentive Program (which, under the USEC
Inc. Annual Incentive Program, generally vests one year after the date of grant); provided,
however, that (A) any annual bonus paid to Executive that was pro-rated or otherwise
adjusted because Executive was not employed by the Company during the entire period to which such
bonus related shall be annualized for purposes of the calculation of the Executives Final Average
Bonus; (B) if Executive has experienced a change in position that has affected Executives annual
bonus opportunity (whether or not such change in position is accompanied by a change in title), any
annual bonus paid to Executive with respect to a period prior to such change in position shall not
be include in the calculation of the Executives Final Average Bonus; (C) if Executive shall not
have been paid at least three annual bonuses prior to the Date of Termination that are includable
in the calculation of Executives Final Average Bonus, then Executives Final Average Bonus shall
be an amount equal to the average of such lesser number of annual bonuses (or, if just one annual
bonus, an amount equal to such bonus); and (D) if Executive shall not have been paid at least one
annual bonus prior to the Date of Termination that is includable in the calculation of Executives
Final Average Bonus, Executives Final Average Bonus shall be an amount equal to Executives annual
target bonus as in effect on the Date of Termination or, if higher, the Executives annual target
bonus in effect immediately prior to the reduction giving rise (pursuant to clause (iv) of the
definition of Good Reason) to such termination. Final Average Bonus shall not include any amount
of cash or equity paid or granted as part of any long term incentive plan or program that the
Company in its sole discretion may elect to maintain from time to time.
2. The Agreement, as amended by this Amendment, shall remain in full force and effect.
IN WITNESS WHEREOF, each of the parties hereto has caused this Amendment to be duly executed
and delivered as of the date first above written.
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USEC INC. |
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By: |
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Name: |
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Title: |
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AGREED AND ACCEPTED: |
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By: |
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exv10w3
Exhibit
10.3
FIRST AMENDMENT TO CHANGE IN CONTROL AGREEMENT
Amendment (this Amendment) to the change in control agreement (the Agreement) dated as of
___, ___, by and between USEC Inc. (the Company) and ___(the Executive). This
Amendment is made as of ___, 2006.
The parties intending to be legally bound hereby agree as follows:
1. |
|
Section 4(b) of the Agreement is amended to read in its entirety as follows: |
(b) A cash lump sum payment (payable within ten days of the Date of Termination) equal to
two times the sum of the Final Salary and the Final Average Bonus. Final Salary means the
Executives annual base salary as in effect on the Date of Termination or, if higher, the
Executives annual base salary in effect immediately prior to the reduction giving rise (pursuant
to clause (iv) of the definition of Good Reason) to such termination. Final Average Bonus means
the average of the three most recent annual bonuses paid to Executive prior to the Date of
Termination, whether such annual bonuses are paid in the form of cash or in grants of restricted
common stock of the Company under the USEC Inc. Annual Incentive Program (which, under the USEC
Inc. Annual Incentive Program, generally vests one year after the date of grant); provided,
however, that (A) any annual bonus paid to Executive that was pro-rated or otherwise
adjusted because Executive was not employed by the Company during the entire period to which such
bonus related shall be annualized for purposes of the calculation of the Executives Final Average
Bonus; (B) if Executive has experienced a change in position that has affected Executives annual
bonus opportunity (whether or not such change in position is accompanied by a change in title), any
annual bonus paid to Executive with respect to a period prior to such change in position shall not
be include in the calculation of the Executives Final Average Bonus; (C) if Executive shall not
have been paid at least three annual bonuses prior to the Date of Termination that are includable
in the calculation of Executives Final Average Bonus, then Executives Final Average Bonus shall
be an amount equal to the average of such lesser number of annual bonuses (or, if just one annual
bonus, an amount equal to such bonus); and (D) if Executive shall not have been paid at least one
annual bonus prior to the Date of Termination that is includable in the calculation of Executives
Final Average Bonus, Executives Final Average Bonus shall be an amount equal to Executives annual
target bonus as in effect on the Date of Termination or, if higher, the Executives annual target
bonus in effect immediately prior to the reduction giving rise (pursuant to clause (iv) of the
definition of Good Reason) to such termination. Final Average Bonus shall not include any amount
of cash or equity paid or granted as part of any long term incentive plan or program that the
Company in its sole discretion may elect to maintain from time to time.
2. The Agreement, as amended by this Amendment, shall remain in full force and effect.
IN WITNESS WHEREOF, each of the parties hereto has caused this Amendment to be duly executed
and delivered as of the date first above written.
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USEC INC. |
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By: |
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Name: |
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Title: |
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AGREED AND ACCEPTED: |
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exv31w1
EXHIBIT 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, John K. Welch, certify that:
1. |
|
I have reviewed this quarterly report on Form 10-Q of USEC Inc.; |
|
2. |
|
Based on my knowledge, this report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period
covered by this report; |
|
3. |
|
Based on my knowledge, the financial statements, and other financial information included in
this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this
report; |
|
4. |
|
The registrants other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
(a) |
|
Designed such disclosure controls and procedures, or caused such disclosure controls
and procedures to be designed under our supervision, to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being
prepared; |
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(b) |
|
Designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted
accounting principles; |
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(c) |
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Evaluated the effectiveness of the registrants disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this report based on such
evaluation; and |
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(d) |
|
Disclosed in this report any change in the registrants internal control over financial
reporting that occurred during the registrants most recent fiscal quarter (the
registrants fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrants internal control
over financial reporting; and |
5. |
|
The registrants other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrants auditors and the
audit committee of the registrants board of directors (or persons performing the equivalent
functions): |
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(a) |
|
All significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to adversely affect
the registrants ability to record, process, summarize and report financial information;
and |
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(b) |
|
Any fraud, whether or not material, that involves management or other employees who
have a significant role in the registrants internal control over financial reporting. |
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November 3, 2006
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/s/ John K. Welch
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John K. Welch |
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President and Chief Executive Officer |
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exv31w2
EXHIBIT 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, John C. Barpoulis, certify that:
1. |
|
I have reviewed this quarterly report on Form 10-Q of USEC Inc.; |
|
2. |
|
Based on my knowledge, this report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period
covered by this report; |
|
3. |
|
Based on my knowledge, the financial statements, and other financial information included in
this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this
report; |
|
4. |
|
The registrants other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have: |
|
(a) |
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Designed such disclosure controls and procedures, or caused such disclosure controls
and procedures to be designed under our supervision, to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being
prepared; |
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(b) |
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Designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted
accounting principles; |
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(c) |
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Evaluated the effectiveness of the registrants disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this report based on such
evaluation; and |
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(d) |
|
Disclosed in this report any change in the registrants internal control over financial
reporting that occurred during the registrants most recent fiscal quarter (the
registrants fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrants internal control
over financial reporting; and |
5. |
|
The registrants other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrants auditors and the
audit committee of the registrants board of directors (or persons performing the equivalent
functions): |
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(a) |
|
All significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to adversely affect
the registrants ability to record, process, summarize and report financial information;
and |
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(b) |
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Any fraud, whether or not material, that involves management or other employees who
have a significant role in the registrants internal control over financial reporting. |
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November 3, 2006
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/s/ John C. Barpoulis
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John C. Barpoulis |
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Senior Vice President, Chief Financial Officer and Treasurer |
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exv32
EXHIBIT 32
CERTIFICATION OF CEO AND CFO PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report on Form 10-Q of USEC Inc. for the quarter ended
September 30, 2006, as filed with the Securities and Exchange Commission on the date hereof (the
Report), pursuant to 18 U.S.C. § 1350, John K. Welch, President and Chief Executive Officer, and
John C. Barpoulis, Senior Vice President, Chief Financial Officer and Treasurer, each hereby
certifies, that, to his knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the
financial condition and results of operations of USEC Inc.
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November 3, 2006
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/s/ John K. Welch
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John K. Welch |
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President and Chief Executive Officer |
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November 3, 2006
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/s/ John C. Barpoulis |
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John C. Barpoulis |
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Senior Vice President, Chief Financial Officer and Treasurer |
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|