USEC Inc.
Two Democracy Center
6903 Rockledge Drive
Bethesda, Maryland 20817

 

March 18, 2008

 

Dear Shareholder:

 

You are cordially invited to attend our annual meeting of shareholders to be held on Thursday, April 24, 2008, at 10:00 a.m., Eastern Daylight Time, at the Marriott Bethesda North Hotel and Conference Center, 5701 Marinelli Road, North Bethesda, Maryland.

 

Matters scheduled for consideration at this meeting are (1) the election of ten directors, (2) the approval of a proposed amendment to the Company’s certificate of incorporation relating to the Company’s rights with respect to common stock held by foreign persons, (3) the approval of a proposed amendment to the USEC Inc. 1999 Employee Stock Purchase Plan, and (4) the ratification of the appointment of the Company’s independent auditors. The meeting will also provide an opportunity to review with you USEC’s business during the year ended December 31, 2007.

 

Your vote is important no matter how many shares you own. We encourage you to vote your shares today. You may vote by completing and returning the enclosed proxy card in the postage-paid envelope provided or by using telephone or Internet voting systems. If you do attend the meeting and desire to vote in person, you may do so even though you have previously submitted your proxy.

 

We appreciate your continued confidence in the Company and look forward to seeing you at the annual meeting.

Sincerely,

 

 

 

USEC Inc.
Two Democracy Center
6903 Rockledge Drive
Bethesda, Maryland 20817

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To Be Held April 24, 2008

 

The Annual Meeting of Shareholders of USEC Inc. will be held on Thursday, April 24, 2008, at 10:00 a.m., Eastern Daylight Time, at the Marriott Bethesda North Hotel and Conference Center,
5701 Marinelli Road, North Bethesda, Maryland, for the purpose of considering and voting upon:

 

1. The election of ten directors for a term of one year;

 

2. The approval of a proposed amendment to the Company’s certificate of incorporation relating to the Company’s rights with respect to common stock held by foreign persons;

 

3. The approval of a proposed amendment to the USEC Inc. 1999 Employee Stock Purchase Plan

 

4. The ratification of the appointment of PricewaterhouseCoopers LLP as USEC’s independent auditors for 2008; and

 

5. Such other business as may properly come before the meeting or any adjournments thereof.

 

We are enclosing a copy of the Company’s Annual Report for the year ended December 31, 2007 with this Notice and Proxy Statement.

 

The record date for determining shareholders entitled to notice of, and to vote at, the meeting was the close of business on February 28, 2008. Please complete and return the enclosed proxy card in the postage-paid envelope provided at your earliest convenience, or use telephone or Internet voting systems to vote your shares.

 

By Order of the Board of Directors,

 

Allen L. Lear

Interim General Counsel and Secretary

 

Bethesda, Maryland

March 18, 2008

2008 PROXY STATEMENT

 

 

TABLE OF CONTENTS

 

USEC Inc.
Two Democracy Center
6903 Rockledge Drive
Bethesda, Maryland 20817

 

Important Notice Regarding the Availability of Proxy Materials
for the Shareholder Meeting to Be Held on April 24, 2008

 

This proxy statement and our Annual Report for
the year ended December 31, 2007 are available at www.edocumentview.com/USU.

 

PROXY STATEMENT

 

We are providing these proxy materials in connection with the solicitation by the Board of Directors of USEC Inc. of proxies to be voted at USEC Inc.’s (“USEC,” the “Company,” “we,” “us,” or “our”) 2008 Annual Meeting of Shareholders. The meeting will be held at the Marriott Bethesda North Hotel and Conference Center, 5701 Marinelli Road, North Bethesda, Maryland, on April 24, 2008, beginning at 10:00 a.m., Eastern Daylight Time. The proxies also may be voted at any adjournments or postponements of the meeting.

 

This Proxy Statement, proxy card and our Annual Report for the year ended December 31, 2007 are being mailed starting March 18, 2008.

 

Who may vote at the meeting?

 

The Board set February 28, 2008 as the record date for the meeting. If you were the owner of USEC Inc. common stock at the close of business on February 28, 2008, you may vote at the meeting. You are entitled to one vote for each share of common stock you held on the record date, including shares:

 

 

How many shares must be present to hold the meeting?

 

A majority of USEC’s outstanding shares of common stock as of the record date, February 28, 2008, must be present at the meeting in order to hold the meeting and conduct business. This is called a quorum. On the record date, there were 110,492,445 shares of USEC common stock outstanding, each entitled to one vote. Your shares are counted as present at the meeting if you:

 

 

Abstentions and “broker non-votes” are counted as present and entitled to vote for purposes of determining a quorum. A “broker non-vote” occurs when a bank, broker or nominee holding shares for a beneficial owner does not vote on a particular matter because it does not have discretionary voting power for that particular matter and has not received voting instructions from the beneficial owner. If you are a beneficial owner, your bank, broker or other nominee is permitted to vote your shares on the election of directors and the ratification of the appointment of PricewaterhouseCoopers LLP as our independent auditors even if the nominee does not receive voting instructions from you, as these matters are deemed to be routine in nature. Your broker does not have discretionary voting power with respect to the proposal to amend our certificate of

incorporation relating to the Company’s rights with respect to common stock held by foreign persons or on the proposal to amend the USEC Inc. 1999 Employee Stock Purchase Plan, as these matters are deemed to be non-routine.

 

How do I vote my shares?

 

You may vote using any of the following methods:

 

By Mail

 

If you are a shareholder of record or hold shares through a USEC stock ownership plan, be sure to complete, sign and date the proxy card accompanying this Proxy Statement and return it in the prepaid envelope. You should sign your name exactly as it appears on the proxy card. If you are signing in a representative capacity (for example as guardian, executor, trustee, custodian, attorney or officer of a corporation), you should indicate your name and title or capacity. If you are a shareholder of record and you return your signed proxy card but do not indicate your voting preferences, the persons named as proxies in the proxy card will vote the shares represented by that proxy as recommended by the Board of Directors.

 

If you are a beneficial owner whose shares are held of record by a bank, broker or other nominee, be sure to complete, sign and return the voting instruction card received from your nominee.

 

By Telephone or on the Internet

 

The telephone and Internet voting procedures established by USEC for shareholders of record are designed to authenticate your identity, allow you to give your voting instructions and confirm that those instructions have been properly recorded.

 

You can vote by calling the toll-free telephone number on your proxy card and following the voice prompts that you hear during the call. By following the voice prompts, you may vote your shares and confirm that your instructions have been properly recorded.

 

The website for Internet voting is www.envisionreports.com/USU. As with telephone voting, you can confirm that your instructions have been properly recorded.

 

Telephone and Internet voting facilities for shareholders of record will be available 24 hours a day. Proxies submitted by telephone or the Internet must be received by 10:00 a.m. Eastern Daylight Time on April 24, 2008.

 

The availability of telephone and Internet voting for beneficial owners will depend on the voting processes of your broker, bank or other nominee. Therefore, we recommend that you follow the voting instructions in the materials you receive.

 

If you vote by telephone or on the Internet, you should not separately return your proxy card or voting instruction card.

 

In Person at the Annual Meeting

 

Even if you plan to attend the meeting, we encourage you to vote by completing, signing, dating, and returning the enclosed proxy card or by voting using the Internet or telephone so your vote will be counted if you later decide not to attend the meeting. If you decide to change your vote at the meeting, you may do so by voting in person at the meeting. If you choose to vote at the Annual Meeting:

 

 

 

What are my voting choices when voting for director nominees (Item 1), and what vote is needed to elect directors?

 

In the vote on the election of ten directors to serve until the 2009 Annual Meeting of Shareholders, shareholders may:

 

 

Directors will be elected by a plurality of the votes cast. This means that the ten nominees who receive the largest number of “FOR” votes cast will be elected as directors. If you “WITHHOLD” authority to vote with respect to any director nominee, your shares will be counted for purposes of establishing a quorum, but will have no effect on the election of that nominee.

 

The Board of Directors recommends that you vote “FOR” each of the director nominees.

 

What are my voting choices when voting on the proposal to amend the Company’s certificate of incorporation relating to the Company’s rights with respect to common stock held by foreign persons (Item 2)?

 

In the vote on the proposal to amend the Company’s certificate of incorporation relating to the Company’s rights with respect to common stock held by foreign persons, shareholders may:

 

 

The approval of the proposed amendment to the Company’s certificate of incorporation requires the “FOR” vote of the holders of at least two-thirds of the outstanding common stock of the Company. Abstentions will have the same effect as a vote “AGAINST” the approval of the proposed amendment to the Company’s certificate of incorporation.

 

The Board of Directors recommends that you vote “FOR” the approval of the proposed amendment to the Company’s certificate of incorporation.

 

What are my voting choices when voting on the proposal to amend the USEC Inc. 1999 Employee Stock Purchase Plan (Item 3)?

 

In the vote on the proposal to amend the USEC Inc. 1999 Employee Stock Purchase Plan, shareholders may:

 

 

 

 

The approval of the proposed amendment to the USEC Inc. 1999 Employee Stock Purchase Plan requires the “FOR” vote of a majority of the shares present in person or by proxy at the meeting and entitled to vote on that proposal. Abstentions will have the same effect as a vote “AGAINST” the approval of the proposed amendment to the USEC Inc. 1999 Employee Stock Purchase Plan.

 

The Board of Directors recommends that you vote “FOR” the approval of the proposed amendment to the USEC Inc. 1999 Employee Stock Purchase Plan.

 

What are my voting choices when voting on the ratification of the appointment of PricewaterhouseCoopers LLP as the Company’s independent auditors (Item 4), and what vote is needed to ratify their appointment?

 

In the vote on the ratification of the appointment of PricewaterhouseCoopers LLP as our independent auditors for 2008, shareholders may:

 

 

The ratification of the appointment of the independent auditors requires the “FOR” vote of a majority of the shares present in person or by proxy at the meeting and entitled to vote on that proposal. Abstentions will have the same effect as a vote “AGAINST” the ratification of the appointment of the independent auditors.

 

The Board of Directors recommends that you vote “FOR” the ratification of the appointment of PricewaterhouseCoopers LLP as independent auditors.

 

What if I do not specify a choice for a matter when returning a proxy?

 

Shareholders should specify their choice for each matter on the enclosed proxy card. If you just sign and submit your proxy card without marking your vote, your shares will be voted:

 

 

 

 

 

May I revoke my proxy and change my vote?

 

You may revoke your proxy at any time before it is voted at the meeting by:

 

 

How are proxies solicited and what is the cost?

 

We have hired Morrow & Co., Inc. to assist us in soliciting proxies from banks, brokers, and nominees and we will pay Morrow & Co., Inc. a fee of approximately $10,000, plus expenses, for these services. We will reimburse banks, brokerage houses, and other institutions, custodians, nominees, and fiduciaries for reasonable expenses in forwarding proxy material to their principals.

 

Our directors, officers, and employees may also solicit proxies by mail, e-mail, telephone or personal contact. They will not receive additional compensation for these activities.

 

What is householding?

 

If you and other residents at your mailing address own shares of USEC stock in “street name,” your broker or bank or other nominee may have notified you that your household will receive only one annual report, proxy statement and Notice of Internet Availability of Proxy Materials for each company in which you

hold stock through that broker or bank or other nominee. This practice is known as “householding.” Unless you responded that you did not want to participate in “householding,” you were deemed to have consented to the process. Your broker or bank or other nominee will send one copy of our annual report, proxy statement and Notice of Internet Availability of Proxy Materials to your address. Each shareholder will continue to receive a separate proxy card or voting instruction card.

 

If you would like to receive your own set of USEC’s future annual report, proxy statement and Notice of Internet Availability of Proxy Materials or if you share an address with another USEC shareholder and together both of you would like to receive only a single set of USEC annual disclosure documents, please contact Broadridge Financial Solutions, Householding Department, 51 Mercedes Way, Edgewood, New York 11717 or call them at (800) 542-1061. Be sure to indicate your name, the name of your brokerage firm or bank or other nominee, and your account number. Any revocation of your consent to householding will be effective 30 days following its receipt.

 

If you did not receive an individual copy of this year’s proxy statement, our annual report, or the Notice of Internet Availability of Proxy Materials, we will promptly send a copy to you if you address a written request to USEC Inc., Two Democracy Center, 6903 Rockledge Drive, Bethesda, Maryland 20817, Attention: Investor Relations or call (301) 564-3238.

 

On the nomination of our Board of Directors, James R. Mellor, Michael H. Armacost, Joyce F. Brown, Joseph T. Doyle, H. William Habermeyer, John R. Hall, William J. Madia, W. Henson Moore, Joseph F. Paquette, Jr., and John K. Welch will stand for election at the meeting, each to hold office until the next Annual Meeting of Shareholders and until his or her successor is elected and qualified. Each of the nominees presently is a member of our Board.

 

Unless otherwise directed, shares represented by proxies solicited on behalf of the Board of Directors will be voted for the nominees listed below. All nominees have consented to serve if elected, but if any nominee becomes unavailable to serve, the persons named as proxies may exercise their discretion to vote for a substitute nominee.

 

The principal occupations of and certain other information about the nominees are set forth on the following pages.

 

The Board recommends a vote FOR the election of these nominees as directors.

 

NOMINEES FOR DIRECTORS

 

 

Governance Information

 

The Board of Directors recognizes that good corporate governance is an important means of protecting the interests of USEC’s shareholders, employees, customers, and the community. We have adopted Governance Guidelines, which serve as principles addressing the role of the Board of Directors in the areas of fiduciary oversight, independence, evaluation of the chief executive officer, and succession planning. The Governance Guidelines also set standards relating to the composition and operation of the Board of Directors and its committees, including standards relating to the selection and qualification of directors, evaluation of the Board and its committees, and director education. The Governance Guidelines are administered by the Board’s Nominating and Governance Committee, which regularly reviews director criteria and qualifications, and leads the performance assessments of the Board and its Committees. The Board annually assesses the adequacy and effectiveness of its Governance Guidelines. Copies of the current Governance Guidelines are available on our website at www.usec.com or upon written request, addressed to the Secretary, USEC Inc. at Two Democracy Center, 6903 Rockledge Drive, Bethesda, Maryland 20817.

 

Our Governance Guidelines contemplate that non-management directors meet regularly in executive session. During 2007, the non-management directors met without management at regularly scheduled executive sessions, and Michael Armacost, Chairman of the Nominating and Governance Committee, presided at these executive sessions.

 

The Board has an established process to receive communications from shareholders and other interested parties. This process has been approved by a majority of the independent directors. Shareholders and other interested parties may contact the Board, the presiding director for executive sessions of the non-management directors, or the non-management directors as a group, by mail or electronically. To communicate with the Board of Directors, the presiding director for executive sessions of the non-management directors, or the non- management directors as a group, correspondence should be addressed to such recipient or recipients in care of USEC’s Secretary at the following address: c/o Secretary, USEC Inc., Two Democracy Center, 6903 Rockledge Drive, Bethesda, Maryland 20817.

 

To communicate electronically with the Board, the presiding director for executive sessions of the non-management directors, or the non-management directors as a group, shareholders should go to our website at www.usec.com. Under the Corporate Governance section, you will find a link to the e-mail address for writing an electronic message to the Board, the presiding director for executive sessions of the non-management directors, or the non-management directors as a group.

 

The New York Stock Exchange (“NYSE”) listing standards require that the boards of listed companies have a majority of independent directors and that audit, nominating and governance, and compensation committee members must all be independent as affirmatively determined by the Board. At its February 2008 meeting, after reviewing the NYSE standards of independence, the Board of Directors affirmatively determined that the following seven directors were independent: Mr. Armacost, Dr. Brown, Mr. Doyle, Mr. Habermeyer, Mr. Hall, Mr. Moore and Mr. Paquette. The basis for these determinations was that each of these seven directors (other than Mr. Habermeyer) had no relationships with the Company other than being a director and/or shareholder of the Company. The Board determined that Mr. Habermeyer had no material relationships with the Company, taking into consideration his service on the board of directors of Southern Company, a customer of USEC. All of the members of the Company’s Audit, Finance and Corporate Responsibility, Nominating and Governance, and Compensation committees are independent. James D. Woods, who retired from the Company’s Board in April 2007, was also independent.

 

The Nominating and Governance Committee believes that the minimum qualifications for serving as a director of the Company are that a nominee demonstrate, by significant accomplishment in his or her field, an ability to make a meaningful contribution to the Board’s oversight of the business and affairs of the Company. This assessment includes the consideration of each director’s, or each nominee’s, business background, experience and capabilities complementary to other directors’ experience and capabilities, financial acumen, experience with government, willingness and ability to devote adequate time to the Company, integrity, and any other factor deemed appropriate, all in the context of an assessment of the perceived needs of the Board at that point in time. In addition, the Board considers the diversity of its members when considering a candidate.

 

The Nominating and Governance Committee identifies potential nominees by asking current directors to notify the Committee if they become aware of persons meeting the criteria described above, who might be available to serve on the Board. The Nominating and Governance Committee also, from time to time, may engage firms that specialize in identifying director candidates. As described below, the Committee will also consider candidates recommended by shareholders.

 

Once a person has been identified by the Nominating and Governance Committee as a potential candidate, the Committee may collect and review publicly available information regarding the person to assess whether the person should be considered further. If the Nominating and Governance Committee determines that the candidate warrants further consideration, the Chairman or another member of the Committee contacts the person. Generally, if the person expresses a willingness to be considered and to serve on the Board, the Nominating and Governance Committee requests information from the candidate, reviews the person’s accomplishments and qualifications, including in light of any other candidates that the Committee might be considering, and conducts one or more interviews with the candidate. In certain instances, Committee members may contact one or more references provided by the candidate or may contact other members of the business community or other persons that may have greater first-hand knowledge of the candidate’s accomplishments. The Committee’s evaluation process does not vary based on whether or not a candidate is recommended by a shareholder.

 

Mr. Habermeyer and Dr. Madia, who were appointed directors by the Board in February 2008 and are nominated for election at the 2008 Annual Meeting of Shareholders, were identified by the Nominating and Governance Committee in consultation with a third-party search firm engaged by the Nominating and Governance Committee to assist in a director search.

 

The Nominating and Governance Committee will consider director candidates recommended by shareholders. In considering candidates submitted by shareholders, the Nominating and Governance Committee will take into consideration the needs of the Board and the qualifications of the candidate. To have a candidate considered by the Nominating and Governance Committee, a shareholder must comply with notification requirements in USEC’s bylaws. The bylaws require, among other things, that a shareholder must submit the recommendation in writing and must include the following information:

 

 

Under our bylaws, a shareholder’s nomination for director must be delivered to the Company’s Secretary not less than 90 days nor more than 120 days prior to the anniversary date of the previous year’s annual meeting, unless the date of the next annual meeting is more than 30 days before or more than 60 days after such anniversary date, in which case notice must be received not later than the tenth day following the day on which notice of the meeting is mailed or public disclosure of the date of the annual meeting is made. Accordingly, shareholder nominations for director must be received by the Company between December 25, 2008 and January 24, 2009, in order to be considered timely, unless the Company gives notice that the date of the annual meeting is more than 30 days before, or more than 60 days after, April 24, 2009.

 

USEC has a Code of Business Conduct, applicable to all of our directors, officers and employees, that provides a summary of the standards of conduct that are at the foundation of our business operations. The code of business conduct states that we conduct our business in strict compliance with all applicable laws and addresses other important matters such as conflicts of interest and how violations of the code may be reported and will be handled. Each director, officer and employee must read the code of business conduct and sign a form stating that he or she has read, understands and agrees to comply with the code of business conduct. Our Business Conduct Committee is responsible for monitoring performance under the code of business conduct and for addressing any issues that arise with respect to the code. A copy of the code of business conduct is available on our website at www.usec.com or upon written request, addressed to the Secretary, USEC Inc. at Two Democracy Center, 6903 Rockledge Drive, Bethesda, Maryland 20817.

 

The Board has adopted a policy and procedures for review, approval or ratification of transactions involving the Company and “related persons” (the Company’s directors and executive officers and shareholders owning five percent or greater of the Company’s outstanding stock, or their immediate family members). The policy covers any related person transaction that meets the minimum threshold for disclosure under the relevant SEC rules or that is otherwise referred to the Board for review. This generally includes transactions involving amounts exceeding $120,000 in which a related person has a direct or indirect material interest. Under this policy, related person transactions must be approved by the Nominating and Governance Committee, although the Chairman of the Board may direct that the full Board review specific transactions. The transaction must be approved in advance whenever feasible and, if not feasible, must be ratified at the Nominating and Governance Committee’s next meeting. In determining whether to approve or ratify a related person transaction, the Nominating and Governance Committee will take into account all factors it deems appropriate, including: whether the subject matter of the transaction is available from other non-affiliated sources; whether the transaction is on terms no less favorable to the Company than terms generally available from an unaffiliated third party; the extent of the related person’s interest in the transaction; and whether the transaction is in the best interests of the Company.

 

Management is responsible for the development and implementation of processes and controls to ensure that related person transactions are identified and that disclosure is made as required by law. To that end, currently we annually require each of our directors and executive officers to complete a directors’ and officers’ questionnaire that elicits information about related person transactions.

 

USEC is party to a Cooperative Research and Development Agreement (“CRADA”), dated June 30, 2000, as amended, with UT-Battelle, LLC, under its contract with the U.S. Department of Energy (“DOE”) to manage DOE’s Oak Ridge National Laboratory. UT-Battelle, LLC is a joint venture between the Battelle Memorial Institute and the University of Tennessee. During 2007, William J. Madia was Executive Vice President of Laboratory Operations of the Battelle Memorial Institute and was on the Board of Governors of UT-Battelle, LLC. In 2007, USEC made payments to UT-Battelle, LLC under the CRADA totaling approximately $10 million, for USEC-funded work at the Oak Ridge National Laboratory relating to centrifuge technology. The Nominating & Governance Committee reviewed and approved this relationship in connection with Dr. Madia’s appointment to the Board in February 2008.

 

Shareholders will find information about our corporate governance practices on our website at www.usec.com. Our website contains information about our Board of Directors, Board committees, current copies of our bylaws and charter, committee charters, Code of Business Conduct and Governance Guidelines. Shareholders may obtain, without charge, hard copies of the above documents by writing to the Secretary, USEC Inc. at Two Democracy Center, 6903 Rockledge Drive, Bethesda, Maryland 20817.

 

Pursuant to the Delaware General Corporation Law, under which USEC is organized, our business, property, and affairs are managed under the direction of our Board of Directors. Members of the Board are kept informed of our business through discussions with the Chief Executive Officer and other officers, by reviewing materials prepared for them by management, by participating in meetings of the Board and its committees and by other means.

 

It is the Board’s policy that all directors attend the annual meeting. We had eight directors at the time of the 2007 Annual Meeting, all of whom attended the 2007 Annual Meeting.

 

During 2007, the Board of Directors held 8 regular meetings and no special meetings. All directors attended 75% or more of the Board of Directors’ meetings and meetings of the committees on which they served. The average attendance of all directors at all Board and committee meetings in 2007 was 96%.

 

During 2007, the Board had designated four committees, each identified in the table below. All four committees are composed entirely of non-employee directors. The Board has adopted a written charter for each of these committees. The full text of each charter is available on the Company’s website located at www.usec.com.

 

In February 2008, the Board created a new Technology and Competition Committee.

 

The table below sets forth the membership of these committees as of February 28, 2008 and the number of meetings held in 2007:

 

 

 

 

The functions performed by our five standing committees are described below. USEC also had a pricing committee that met two times in 2007 in connection with the Company’s securities offering. The members of the pricing committee were Mr. Doyle, Mr. Paquette, and Mr. Welch.

 

The Audit, Finance and Corporate Responsibility Committee represents and assists the Board with the oversight of: the integrity of the Company’s financial statements and internal controls, the Company’s compliance with legal and regulatory requirements, the independent auditor’s qualifications and independence, the performance of the Company’s internal audit function, and the performance of the independent auditors. In addition, the Committee is responsible for appointing, overseeing and terminating the Company’s independent auditors, and reviewing the Company’s accounting processes, financial controls, reporting systems, and the scope of the audits to be conducted. The Committee is also responsible for advising the Board regarding significant financial matters. The Committee meets regularly in executive session with the Company’s independent auditors and with the Company’s internal auditors.

 

The Board has determined that each member of the Audit, Finance and Corporate Responsibility Committee is an “independent director” in accordance with NYSE listing standards. Under the NYSE listing standards, all audit committee members must be “financially literate,” as that term is determined by the Board in its business judgment. Further, under the Securities and Exchange Commission’s (the “SEC”) rules, the Board must determine whether at least one member of the audit committee is an “audit committee financial expert,” as defined by the SEC’s rules. The Board has determined that all members of the Audit, Finance and Corporate Responsibility Committee are financially literate and that Mr. Paquette and Mr. Doyle qualify as “audit committee financial experts.”

 

The Compensation Committee’s responsibilities include annually reviewing the performance of the Chief Executive Officer and other senior management; overseeing and administering the Company’s executive compensation program and advising and making recommendations to the Board with respect thereto; and reviewing, overseeing and evaluating overall compensation programs and policies for the Company and its employees and making recommendations to the Board. The Compensation Committee is also responsible for periodically reviewing compensation for non-employee directors and making recommendations to the Board. The Compensation Committee also establishes annual performance objectives under the Company’s incentive programs and oversees administration of employee benefit plans. Additional information on the processes and procedures for consideration of executive and director compensation are addressed in the Compensation Discussion and Analysis.

 

The Board has determined that each member of the Compensation Committee is an “independent director” in accordance with NYSE listing standards.

 

The functions of the Nominating and Governance Committee include the following: identifying and recommending to the Board individuals qualified to serve as directors of the Company; recommending to the Board directors to serve on committees of the Board; advising the Board with respect to matters of Board composition and procedures; developing and recommending to the Board a set of corporate governance principles applicable to the Company and overseeing corporate governance matters generally; and overseeing the annual evaluations of the Chief Executive Officer, the Board and its committees. The Nominating and Governance Committee will consider director candidates recommended by shareholders in accordance with the procedures previously described under “Governance Information — Director Nominations by Shareholders.” In addition, the Nominating and Governance Committee is responsible for reviewing the Company’s Code of Business Conduct and overseeing the Company’s processes for monitoring compliance, and for reviewing and approving all transactions between the Company and any related person under the Company’s related person transaction policy described above.

 

The Board has determined that each member of the Nominating and Governance Committee is an “independent director” in accordance with NYSE listing standards.

 

The Regulatory and Government Affairs Committee’s responsibilities include monitoring the Company’s compliance with regulatory requirements, overseeing the Company’s initiatives with and involving various agencies of the United States government and applicable State governments, and advising the Board on regulatory and other governmental considerations in the Board’s deliberations and decision-making processes.

 

The newly established Technology and Competition Committee’s responsibilities are expected to include providing oversight and guidance to management with respect to the Company’s technology initiatives (other than relating to American Centrifuge technology), informing the Board of significant energy policy and developments in enrichment technology, monitoring competition in the enrichment industry, and monitoring the Company’s intellectual property and information technology.

 

Annual compensation for non-employee directors covers service for the one-year term commencing at the annual meeting. The compensation was revised effective for the 2007 — 2008 term commencing at the 2007 annual meeting held on April 26, 2007 and is unchanged for the 2008 — 2009 term. Mr. Welch, President and Chief Executive Officer, did not receive separate compensation for his Board activities in 2007.

 

During the 2007 — 2008 term and in future years, non-employee directors receive an annual retainer of $180,000, consisting of $80,000 in cash and restricted stock units with a value of $100,000 under the USEC Inc. 1999 Equity Incentive Plan. These restricted stock units will vest on the first to occur of: (1) one year from the date of grant; (2) termination of the director’s service by reason of retirement, death or disability; or (3) change in control. No separate meeting fees are paid. The chairman of the Audit, Finance and Corporate Responsibility Committee receives an annual chairman’s fee of $20,000 in cash, the chairman of the Compensation Committee receives an annual chairman’s fee of $10,000 in cash, and the chairman of each other committee receives an annual chairman’s fee of $7,500 in cash. Directors have the option to receive their cash fees in restricted stock units. A director who elects to receive their cash fees in restricted stock units will receive an incentive payment of restricted stock units equal to 20% of the portion of the cash fees that the director elects to take in restricted stock units in lieu of cash. These incentive restricted stock units will vest on the first to occur of: (1) three years from the date of grant; (2) termination of the director’s service by reason of retirement, death or disability; or (3) change in control. All fees are payable at the beginning of the term. All non-employee directors are reimbursed for any reasonable expenses incurred in connection with their duties as directors of the Company.

 

During the 2006 — 2007 term, non-employee directors received an annual retainer of $65,000, consisting of $32,500 in cash and restricted stock units with a value of $32,500. Directors who had satisfied their stock ownership guidelines (described below) were eligible to receive the entire annual retainer in cash. Directors also received a grant of restricted stock units valued at $30,000 and a grant of 3,500 stock options. The chairman of the Audit, Finance and Corporate Responsibility Committee received an annual chairman’s fee of $20,000 in cash, the chairman of the Compensation Committee received an annual chairman’s fee of $10,000 in cash, and the chairman of each other committee received an annual chairman’s fee of $7,500 in cash. Meeting fees of $2,000 were paid for each Board meeting attended and $1,500 were paid for each committee meeting attended. A director who elected to receive their cash fees in restricted stock units received an incentive payment of restricted stock units equal to 20% of the portion of the cash fees that the director elected to take in restricted stock units in lieu of cash.

 

Amounts listed in the Director Compensation in Fiscal Year 2007 table include amounts paid during both the 2006 — 2007 and 2007 — 2008 terms. Except for the meeting fees paid in 2007 and the incentive restricted stock units paid on any meeting fees taken in restricted stock units in lieu of cash, all other amounts for the 2006 — 2007 term were paid in 2006.

 

Beginning in 2008, directors also have the option to defer all or a portion of their cash fees into the USEC Inc. Director Deferred Compensation Plan. This plan is intended to be a non-qualified deferred compensation plan that complies with the regulations of Section 409A of the Internal Revenue Code of 1986, as amended. Participants in the plan may defer up to a maximum of 100% and a minimum of 5% of cash director fees. A director may receive a distribution from the plan upon a qualifying distribution event such as a separation from service, disability, death, or in-service distribution, change in control or an unforeseeable emergency all as defined in the plan. Distributions from the plan will be made in cash in a lump sum, annual installments, or a combination of both, in the manner elected by the director and provided for in the plan. During 2008, no directors have elected to participate in the plan.

Arrangements with James R. Mellor

 

James R. Mellor, Chairman of the Board, receives an annual chairman’s fee of $100,000 in connection with his duties as Chairman of the Board. This is in addition to the annual compensation payable to all USEC non-employee directors.

 

Prior to February 1, 2007, the Company and Mr. Mellor were parties to an agreement under which Mr. Mellor provided counsel to the Chief Executive Officer and other assistance with the Company’s policies, commercial practices, external affairs and strategic planning, as well as fulfilled his duties as Chairman of the Board. Mr. Mellor was paid an annual fee of $400,000 and was expected to spend an average of 20 hours per week devoted to USEC matters. This fee was in addition to the annual compensation payable to all USEC non-employee directors. In addition, the Company agreed to reimburse Mr. Mellor for reasonable and necessary travel and living expenses incurred in the performance of his duties. This agreement became effective December 3, 2005 following completion of Mr. Mellor’s transition from his role as interim President and Chief Executive Officer and ended February 1, 2007.

 

In order to more closely align directors’ interests with the interests of shareholders, directors are required to hold 25,000 shares of Company common stock. As an incentive to take more of their compensation in the form of Company stock, directors are eligible to receive incentive restricted stock units described above under “Standard Non-Employee Director Compensation Arrangement.”

 

 

 

 

 

The amount shown in this column for Mr. Mellor includes one twelfth of his annual fee of $400,000 for the month of January 2007, described above under “Arrangements with James R. Mellor.” Mr. Woods retired effective April 26, 2007 and so the amount shown in this column for Mr. Woods includes cash paid in lieu of accrued meeting fees and incentive restricted stock units that would have been granted to him in May 2007.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The following table sets forth, as of February 20, 2008, the beneficial ownership of the Company’s common stock for the following persons: (a) all shareholders known by the Company to beneficially own more than 5% of the common stock; (b) each of the Company’s directors; (c) the Company’s Chief Executive Officer, Chief Financial Officer, and the three other most highly paid executive officers of the Company serving as executive officers at December 31, 2007; and (d) all of the Company’s directors and executive officers as a group. Unless otherwise indicated in the table, each person has the sole power to vote and dispose of the shares reported as beneficially owned by such person. Certain information in the table is based on information contained in filings made by the beneficial owner with the SEC.

 

 

 

 

Section 16(a) of the Securities Exchange Act of 1934 requires our executive officers, directors, and persons who own more than 10% of our common stock to file reports of beneficial ownership and changes in beneficial ownership with the SEC and to furnish us with copies of the reports. We received written representations from each such person who did not file an annual report with the SEC on Form 5 that no Form 5 was due. Based on our review of the reports and representations, except as follows, we believe that all required Section 16(a) reports were timely filed in 2007: Stephen S. Greene, an executive officer, filed an amended Form 3 on February 26, 2007 which included the late reporting of shares of common stock which had been omitted from his Form 3 filed on February 15, 2007. J. Tracy Mey, an executive officer, filed an amended Form 3 on March 13, 2007 which included the late reporting of shares of common stock which had been omitted from his Form 3 filed on January 29, 2007. John M.A. Donelson, Stephen S. Greene, Victor N. Lopiano, E. John Neumann, Russell B. Starkey, Jr., John K. Welch and W. Lance Wright, executive officers, each filed an amended Form 4 on March 30, 2007 which corrected the number of shares of restricted stock and/or stock options granted to them that was reported on their Form 4 filed on March 7, 2007. Russell B. Starkey, Jr., an executive officer, filed a Form 4 on August 6, 2007 which included the late reporting of shares of common stock surrendered by him to the Company on July 20, 2007 to satisfy his tax withholding obligation on shares of restricted stock.

 

Compensation Discussion and Analysis

 

The following discussion and analysis contains statements regarding future individual and company performance targets and goals. These targets and goals are disclosed in the limited context of USEC’s executive compensation programs and should not be understood to be statements of management’s expectations or estimates of results or other guidance. USEC specifically cautions investors not to apply these statements to other contexts.

 

Executive Summary

 

USEC is a global energy company that currently operates the only uranium enrichment plant in the United States. We are entering a critical transition period for our enrichment business as we move from the older gaseous diffusion enrichment technology to the advanced technology of the American Centrifuge through our deployment of the American Centrifuge Plant. The transition period has several challenges and opportunities and during this period our ability to attract, motivate and retain employees and executives with the requisite skills and experience to meet these challenges is essential to our success and to the creation of long-term value for our shareholders.

 

We began 2007 with a business plan focused on retiring or mitigating a number of key risks that faced the business and getting us to the next step with respect to the American Centrifuge program. At the beginning of 2007, when the annual performance goals were set, the financial outlook for 2007 included a projected net loss for the year in a range of $10 to $20 million combined with projected negative cash flows from operations for the year of negative $65 to $75 million. As reported in our Annual Report on Form 10-K/A for the year ended December 31, 2007, we ended 2007 with net income of approximately $97 million and cash flow from operations of approximately $109 million, a substantial improvement over our initial outlook. We also achieved a number of key business objectives in 2007, including (1) negotiating a five-year power contract that helps to manage our power costs and gave us access to additional power purchases that enable us to optimize operations; (2) initiating our Lead Cascade test program that involved the first group of American Centrifuge prototype machines operating in a closed-loop cascade configuration and producing nuclear fuel at commercial plant assay levels; and (3) raising net proceeds of approximately $775 million in the capital markets to fund our American Centrifuge program.

 

The Compensation Committee credited the contributions of management and other key employees for many of these achievements and value creation during 2007 and as a result the five executives named in the Summary Compensation Table that follows this discussion (whom we refer to as our named executive officers) were awarded annual incentive awards that were above target for 2007. Performance during 2007 will also be reflected in the three-year performance component of the Long-Term Incentive Program described below under Long-Term Incentive Compensation — Executive Incentive Plan, which covers the performance period March 1, 2006 through December 31, 2008.

 

Looking ahead toward 2008 and beyond, the Compensation Committee is particularly focused on retention of key executives and employees during this critical transition period and made several changes to the Company’s compensation program designed to achieve that objective while still maintaining a focus on pay-for-performance.

 

Compensation Philosophy and Objectives

 

The Compensation Committee oversees an executive compensation program designed to enable USEC to attract highly talented individuals and to reflect the Company’s philosophy that the majority of an executive’s compensation be based on his or her overall contribution to the success of the Company and the creation of long-term value for our shareholders. This pay-for-performance philosophy is the basis for the development of

the Company’s executive compensation program. In keeping with this philosophy, the Compensation Committee has established the following objectives for the Company’s executive compensation program:

 

 

The elements of direct compensation for the named executive officers are base salary, cash and restricted stock awards under the Company’s annual incentive program, and long-term incentive awards. The long-term awards include restricted stock, non-qualified stock options and a three-year performance component. Named executive officers are also eligible for other elements of indirect compensation, including retirement benefits and certain limited perquisites. In setting the terms of executive compensation, the Compensation Committee considers all elements of compensation, both direct and indirect. In addition, the Compensation Committee has instituted stock ownership guidelines for all executives providing an additional alignment between the interests of executives and shareholders.

 

Director compensation is established by the board of directors upon the recommendation of the Compensation Committee. In recommending director compensation, the Compensation Committee consults with Watson Wyatt Worldwide (“Watson Wyatt”), an independent compensation consultant. Watson Wyatt utilizes compensation information from a peer group of companies with board members with comparable experience to the Company’s Board. Watson Wyatt’s role is more fully described under “Setting Executive Compensation.”

 

Role of Executive Officers in Compensation Decisions

 

The Compensation Committee believes that input from management provides useful information and points of view to assist the Compensation Committee. The Chief Executive Officer and the Senior Vice President of Human Resources and Administration provide support to the Compensation Committee. The Chief Executive Officer gives the Compensation Committee performance assessments and compensation recommendations for each of the other named executive officers. Those recommendations are considered by the Compensation Committee with the assistance of the compensation consultant. The Chief Executive Officer and the Senior Vice President of Human Resources and Administration generally attend Compensation Committee meetings but are not present for the executive sessions or for any discussion of their own compensation. The Chief Financial Officer also attends Compensation Committee meetings as needed to report on financial items. Each Compensation Committee meeting usually includes an executive session without members of management present.

Setting Executive Compensation

 

Based on the foregoing objectives, the Compensation Committee has structured the Company’s executive compensation program to motivate executives to achieve the business goals set by the Company and to reward executives for achieving these goals.

 

In furtherance of this, the Compensation Committee has retained the services of Watson Wyatt. Watson Wyatt provides the Compensation Committee with independent compensation data, analysis and advice. Watson Wyatt reports to the Compensation Committee and under the Compensation Committee’s charter, the Compensation Committee has sole authority to retain and terminate the compensation consultant and to approve the consultant’s fees and other retention terms. Watson Wyatt does not do any work for USEC other than work performed for the Compensation Committee. Throughout 2007, Watson Wyatt worked closely with the Compensation Committee and attended all Compensation Committee meetings. Examples of projects assigned to Watson Wyatt included a market study of executive pay, an analysis of director compensation, and a review of the value of Company equity owned by officers.

 

Watson Wyatt utilizes compensation information from (1) a “Peer Group” of companies in specific industries in which we compete for executive talent, through a review of their proxy statements; and (2) general industry companies with revenues comparable to USEC’s through the pooled survey data described below.

 

Currently, as the only uranium enrichment company in the United States, USEC does not have direct publicly traded U.S. peers. Therefore, the Peer Group was selected by the Compensation Committee on the recommendation of Watson Wyatt and includes energy/utility and processing-oriented companies similar in size to the Company. The selected companies in the Peer Group are companies that fall within a reasonable range of comparison factors such as revenue and market capitalization, and/or that we may compete with for executive talent. The Peer Group was not picked on the basis of executive compensation levels. The Peer Group is different from the peer group index utilized in the performance graph included in our annual report on Form 10-K, which is more focused on companies with similar business attributes such as utilities with nuclear power generation capabilities, chemical processing companies, and aluminum companies (that are also large users of electric power).

 

The Peer Group is comprised of the following 15 companies:

 

Peer Group compensation data is limited to publicly available information and therefore does not provide precise comparisons by position as offered by more comprehensive survey data. As a result, our Compensation Committee uses Peer Group data on a limited basis to analyze the competitiveness of our target compensation and our general compensation philosophy.

 

Because the Peer Group data is limited, our Compensation Committee also used commercially available survey data provided to it by Watson Wyatt to identify market-median and other market elements related to our 2007 compensation program. This survey data included the 2006/2007 Watson Wyatt Data Services Top Management Report, the 2007 Mercer Executive Compensation Survey, and a proprietary Watson Wyatt large company compensation survey. This survey data includes pooled compensation data from many companies and the findings are segregated by, for example, revenue level, number of employees, and industry. Using survey cuts of durable goods manufacturing organizations and general manufacturing organizations with comparable annual revenues, the Compensation Committee reviewed pooled compensation data for positions similar to those held by each named executive officer. In the case of Messrs. Welch and Barpoulis, the Compensation Committee also used a survey cut of metals and mining organizations with comparable annual revenues. The Compensation Committee is not provided with the names of the companies making up these surveys and is only privy to the statistical summaries provided in these surveys.

 

Based on the objectives outlined above, the Compensation Committee strives to set target opportunity compensation levels to be competitive with the market in which the Company competes for executive talent. Actual compensation may be above or below targets based on both the performance of the Company and of the individual. Executives may realize compensation above opportunity levels based on achieving outstanding results. This approach is intended to ensure that there is a direct relationship between the Company’s overall performance in the achievement of its financial, operational and strategic goals and each individual executive’s total compensation. In making its decisions on an individual’s compensation, the Compensation Committee considers the nature and scope of all elements of an executive’s total compensation package, the executive’s responsibilities and his or her effectiveness in supporting Company performance.

 

The Compensation Committee strives to align each component of the executive’s compensation as well as the total compensation opportunity with the competitive market and the Company’s objectives. Generally, as employees move to higher levels of responsibility with greater ability to influence the Company’s results, a greater proportion of pay will be “at risk” and dependent on Company performance. The Compensation Committee’s goal is to strike the appropriate balance among base salary, annual, and long-term incentives, and it may adjust the allocation of pay to best meet the Company’s objectives or maintain compensation equity with the competitive market in which the Company competes for executive talent.

 

The Compensation Committee believes that an understanding by executives of the philosophy and objectives described above and the total award opportunity is an essential aspect of the compensation program. The Compensation Committee supports initiatives that educate the executives about the total compensation program and reinforce how the program supports the Company’s compensation philosophy and objectives.

Elements of Executive Compensation

 

TOTAL DIRECT COMPENSATION

 

For 2007, total direct compensation for the named executive officers consisted of three key elements: base salary, performance-based annual incentive, and performance-based and time-based long-term incentive compensation. The chart below shows the relative proportion of each program (based on target levels):

 

Information Related to the CEO
Base Salary: $830,000
Target Annual Incentive: $830,000 (1X or 100% of base salary)
Target Long-Term Incentive: $1,660,000 (2X or 200% of base salary)

 

 

Information Related to the Other Named Executive Officers
Base Salary: $320,000 — $425,000 (Range)
Target Annual Incentive: $224,000 — $297,500 (.7X or 70% of base salary)
Target Long-Term Incentive: $416,000 — $552,500 (1.3X or 130% of base salary)

 

 

Observations Regarding Mix of Total Direct Compensation

 

 

Each year, using the resources and services of its compensation consultant, the Compensation Committee evaluates compensation levels for each of the executive officers of the Company. In setting compensation for 2007, the Compensation Committee reviewed and considered total compensation for each named executive officer, including a review of tally sheets that provide the value of (1) historic and current elements of each officer’s compensation (including savings plans, pension plans, health and welfare benefits and perquisites); (2) stock, stock options and restricted stock units held by the executive at year-end in the Company’s incentive

and benefits plans; and (3) a review of compensation that would be paid upon termination of employment under various scenarios.

 

Base Salary

 

The base salary element of compensation is intended to provide a stable annual salary at a level consistent with individual contributions. The Compensation Committee recommends base salary levels for executive officers to the Board of Directors for its approval. The Compensation Committee consults with the Chief Executive Officer with respect to the recommended base salaries for the other officers.

 

In setting base salaries for the named executive officers for 2007, the Compensation Committee aimed to position base salaries within plus or minus 10% of the 50th percentile of the market, as determined using the market data provided to the Compensation Committee by Watson Wyatt, which includes a combination of commercially available pooled survey data and Peer Group data. Watson Wyatt averages the data from the Peer Group with the survey data to create the market data reviewed by the Compensation Committee. In setting individual base salaries, consideration was given to (1) the performance of the Company; (2) the individual performance of each executive; (3) the executive’s scope of responsibility in relation to other officers and key executives within the Company; and (4) any retention issues. In evaluating performance, the Compensation Committee considers the recommendations of the Chief Executive Officer with respect to the performance and contribution of individual named executive officers and also considers the performance measures under the Annual Incentive Program. Base salaries are set at the beginning of the year at the same time that annual incentive awards for the prior year are made under the Annual Incentive Program.

 

During 2007, the following adjustments were made to the base salaries for the named executive officers. Following these adjustments, the base salaries of the named executive officers were between approximately 94% and 110% of the 50th percentile of the market as determined by the compensation consultant. The Chief Executive Officer’s base salary was increased to 100% of the 50th percentile of the market.

 

 

USEC is engaged in a complicated, unique and technologically sophisticated business, whose success will have a major impact on the nation’s energy independence. The success of our business depends on our ability to retain key executives, managers and other skilled personnel, some of whom have been involved in the development of centrifuge technology since the early 1980s and whose experience is virtually irreplaceable. In light of the unique qualifications and experience of our key executives and the importance of retaining these executives during the Company’s critical transition period, following a review of executive pay and consultation with its compensation consultant, the Compensation Committee determined to reposition 2008 base salaries to within plus or minus 10% of the 75th percentile of the market, as determined using market data provided to the Compensation Committee by Watson Wyatt. Accordingly, the following adjustments were made to the 2008 base salaries for the named executive officers. Following these adjustments, the base salaries of the named executive officers were between approximately 95% and 108% of the 75th percentile of the market as determined by the compensation consultant. The Chief Executive Officer’s base salary was increased to approximately 100% of the 75th percentile of the market.

 

 

Increases in base salaries have the effect of increasing other elements of total compensation, including annual incentives, long-term incentives, and retirement benefits. In setting base salaries for the named executive officers, the Compensation Committee considers the effects of such increases on other elements of total compensation.

 

Annual Incentive

 

The Company has established an Annual Incentive Program to reward the achievement of critical annual financial and operational performance goals. Under the Annual Incentive Program, executive officers and certain other key employees have the opportunity to earn an annual incentive based on the achievement of pre-determined annual performance objectives. Executive officers may earn between 0% and 150% of their target annual incentive based on a combination of Company financial and individual performance measures described below. The Annual Incentive Program is a subset of the Company’s 1999 Equity Incentive Plan, a shareholder approved plan adopted in 1999.

 

Form of Awards.  Annual incentives are paid 65% in cash and 35% in restricted stock. The restricted stock portion of the award vests one year from the date of grant. The Compensation Committee determined that including a restricted stock component in the annual incentive provides the executive with an additional incentive to maintain shareholder value, further links Company management and shareholders, promotes executive ownership and acts as a management retention vehicle. As an incentive to take more annual incentive in the form of Company equity and to encourage significant ownership by management, if the executive chooses to take an additional portion of his annual incentive in restricted stock (that portion above the required 35% level), the executive will receive an incentive payment of restricted stock having a value equal to 20% of the portion of his annual incentive that he elects to take in restricted stock in lieu of cash. Of the named executive officers, Messrs. Welch, Barpoulis and Wright chose to take additional restricted stock in lieu of cash for their annual incentive awards for 2007.

 

If a named executive officer has met his stock ownership guidelines, he is viewed as having already built a significant ownership stake in the Company and is entitled to elect to receive all of his annual incentive in cash. If the named executive officer elects to receive any of his annual incentive in restricted stock, he would receive the 20% incentive payment on any portion of the annual incentive he elects to take in restricted stock in lieu of cash. If an executive falls behind in progress toward achieving his stock ownership guideline, the Compensation Committee may direct a portion of his annual incentive that would be otherwise provided in the form of cash into restricted stock. For 2007, Messrs. Sewell and Van Namen had satisfied their stock ownership guidelines and elected to receive their entire annual incentive awards in cash.

 

Target Levels.  Target annual incentive levels are set by the Compensation Committee in consultation with its compensation consultant. The Compensation Committee uses commercially available survey data

(previously described) and analysis by its compensation consultant to compare annual incentive payments to the market. For 2007, target levels were set based on a percentage of the executive’s base salary, as follows:

 

 

Performance Measures.  For 2007 annual incentive awards, our Compensation Committee set the performance measures as described in the table below:

 

 

Each corporate financial performance measure, or “corporate quantitative goal”, comprises threshold, target and maximum performance levels, which, if achieved, results in payments of 0%, 100% and 150% of that target financial performance measure component, respectively. Proportional payments are made for achievement between threshold, target and maximum performance levels. If the threshold corporate financial performance is not achieved, no amount is paid for that financial performance measure component. The threshold levels were set based on the Company’s budget for 2007 and the target and maximum levels were set based on stretch targets taking into account potential opportunities for management to effect positive impacts. The table below describes the corporate quantitative goal target and achievement levels for 2007.

 

 

 

 

For 2007, the Compensation Committee set specific individual performance measures for our Chief Executive Officer and adopted specific individual performance measures recommended by the Chief Executive Officer for our remaining named executive officers (which flow down from the key performance objectives established for the Chief Executive Officer). The 2007 key performance objectives for the Chief Executive Officer and the other named executive officers included objectives aimed at the following six objectives. As detailed in the table below, the 2007 key performance objectives were all designed to achieve the Company’s strategic business plan and accordingly were designed to be achievable, but to require a substantial effort and initiative on the part of the individual named executive officers.

 

 

For individual named executive officers (other than the Chief Executive Officer), their particular objectives were a more detailed subset of these six objectives with a focus on such named executive officer’s functional area. For example, Mr. Barpoulis’ specific objectives as Chief Financial Officer generally related to financial and accounting matters; Mr. Sewell’s specific objectives as Senior Vice President American Centrifuge and Russian HEU generally related to operations and program management matters; Mr. Van Namen’s specific objectives as Senior Vice President, Uranium Enrichment generally related to uranium enrichment operations and marketing and sales matters; and Mr. Wright’s specific objectives as Senior Vice President, Human Resources and Administration generally related to functions providing centralized IT, human resources and security support to the Company. There are no individual performance factors in addition to, and separate from, the six factors listed in the table above and each of the named executive officers’ key performance objectives were designed to be difficult to achieve and to challenge the executive as set forth in the table above.

 

The Compensation Committee reviews and certifies the achievement level and incentive payment for each named executive officer under the Annual Incentive Program. The achievement levels and incentive payments

approved by the Compensation Committee for the named executive officers for 2007 are summarized in the table below:

 

 

The Annual Incentive Program permits the Compensation Committee to adjust performance based criteria or awards in recognition of unusual or non-recurring events affecting the Company; however, in 2007 no adjustments were made.

 

Long-Term Incentive Compensation

 

The Compensation Committee is committed to long-term equity incentive programs for executives that promote the long-term growth and success of the Company. The long-term incentive compensation is designed to ensure that the executive decision-making process maintains a balanced focus on both immediate measures of success and on the effective growth and development of the business three to five years in the future. The Long- Term Incentive Program under the shareholder-approved 1999 Equity Incentive Plan permits the Compensation Committee to grant a variety of stock-based awards, including restricted stock, stock options and restricted stock units (RSUs).

 

Long-term incentives are designed to more closely align executive officers’ and other employees’ interests with those of the shareholders and are a key element and significant component of market-competitive total compensation. The Long-Term Incentive Program is designed to make annual grants of restricted stock and non-qualified stock options with vesting periods of three years to executive officers and other program participants. The Long-Term Incentive Program also includes a three-year performance component. In consultation with its compensation consultant, the Compensation Committee established stock option and restricted stock award levels that are designed to provide the executive with total direct compensation (base salary, annual incentives and long-term incentives) at a competitive level.

 

Annualized target award levels for named executive officers under the Long-Term Incentive Program for 2007 ranged from 130% to 200% of base salary depending on the executive’s position, and were comprised of the following (as more fully described below):

 

 

As previously described, in light of the unique qualifications and experience of our key executives and the importance of retaining these executives during the Company’s critical transition period, the Compensation Committee determined during 2008 to make certain changes to the Company’s compensation program. The Compensation Committee determined to reposition overall total direct compensation for the named executive officers and certain other executives to within plus or minus 10% of the 75th percentile of the market, as determined using market data provided to the Compensation Committee by Watson Wyatt. Accordingly, adjustments were made to the annualized target levels of restricted stock and nonqualified stock options granted to the named executive officers. These changes are described below.

Restricted Stock Awards.  Executive officers (and other program participants) receive an annual grant of restricted stock as a part of their long-term incentive. The value of the grant is equal to a percentage of the named executive officer’s base salary as follows:

 

 

These shares are granted by the Compensation Committee at fair market value and vest ratably over three years. This grant of restricted stock has no performance component associated with it. It is a time-based award designed as a retention-based component in achieving market-based total direct compensation for the executive. It is also designed to help increase share ownership by the executive officers. It is the Compensation Committee’s belief that stock awards combined with the Company’s requirement for executive officers to hold significant levels of Company stock provide a direct incentive to achieve the longer-term performance goals for the Company.

 

Stock Option Awards.  Executive officers (and other program participants) also receive an annual grant of non-qualified stock options. The value of the grant is equal to a percentage of the named executive officers’ base salary as follows:

 

 

Stock options are valued using the Black-Scholes methodology and are calculated with the assistance of the compensation consultant. It is the Company’s policy that stock option grants are made seven days after the release of the Company’s earnings and are awarded at the New York Stock Exchange’s closing price of the Company’s common stock on the date of grant. Stock option grants vest ratably over three years and expire five years after grant. Each executive officer’s 2007 grant of stock options is detailed on the Grants of Plan-Based Awards in Fiscal Year 2007 table. While a number of organizations have recently eliminated or significantly reduced stock option grants to executives, the Compensation Committee believes that stock options are a highly effective way to focus executives on ensuring the long-term performance of the Company. In addition, the Compensation Committee believes they are a highly effective tool in aligning the interests of the executive officers and shareholders toward sustained, long-term stock performance. Consequently, they remain a significant component of the incentive mix.

 

Executive Incentive Plan.  In April 2006, the Compensation Committee approved a new three-year performance component of the Company’s long-term incentive program (the “Executive Incentive Plan”) under the USEC Inc. 1999 Equity Incentive Plan, effective March 1, 2006. Each of the named executive officers participates in the Executive Incentive Plan. The Compensation Committee, in consultation with its compensation consultant, identified the need for a focused long-term program with measurable performance goals. The Executive Incentive Plan is designed to focus rewards on a limited number of highly important objective targets that if completed will significantly add to the long-term value of the business.

 

The Executive Incentive Plan is an objective, performance-based program which rewards participants for successful performance against financial and business strategy-based targets over a three-year period. The current performance period runs from March 1, 2006 through December 31, 2008 (the initial program reflects a shortened performance period due to implementation in the first quarter of 2006). Under the Executive

Incentive Plan, the Company’s named executive officers are awarded the right to earn shares of the Company’s common stock (or an equivalent amount of cash or restricted stock units settleable for cash).

 

Each participant’s target award is based on an annual percentage of his base salary at the start of the performance period as follows:

 

 

For this initial period, the annual target percentages were set based on the degree to which an individual’s efforts influence the Company’s long-term performance. In setting the award levels for the Executive Incentive Plan, the Compensation Committee worked closely with its compensation consultant. The consultant analyzed the three-year award opportunity both as a stand-alone award and as a part of the executive officers’ overall total compensation. Using both commercially available survey data and Peer Group data (as previously discussed), the Compensation Committee determined that these award levels were consistent with the market for similar-sized companies and that executive officers were receiving market competitive total compensation.

 

Actual payouts of these awards, if any, will be determined by performance of the Company during the period March 1, 2006 through December 31, 2008 against three pre-determined performance goals. Participants may receive from 80% (threshold) to 120% (maximum) of their target award based on performance, with performance below the 80% (threshold) level resulting in no award.

 

 

If USEC’s performance against these goals is below the threshold level, then no payout will be made. Amounts will be paid at target in the event of a change in control, regardless of the Company’s performance, and prorated amounts will be paid in accordance with performance in the event of certain qualifying terminations of service prior to the end of the performance period. Performance on all program targets must be approved and certified by the Compensation Committee prior to any award being paid.

The Compensation Committee believes that placing a significant portion of executive officer compensation opportunity in equity sends a clear message that a primary role of the executive officer is in building the long-term value of the Company, and that his own long-term wealth is tied to the long-term success of the Company.

 

INDIRECT COMPENSATION

 

Retirement Plans

 

The Company provides its executive officers with benefits that are described below and that are intended to be a part of a competitive compensation package that provides health, welfare and retirement programs comparable to those provided to employees and executives at other companies in similar industries. All employees of USEC Inc., including the named executive officers, are eligible to participate in the USEC Savings Program and the Employees’ Retirement Plan of USEC Inc. (other than certain American Centrifuge employees). In addition, named executive officers and other executives designated by the Company are entitled to participate in the 401(k) Restoration Plan and the Pension Restoration Plan. Effective January 1, 2008, the 401(k) Restoration Plan has been replaced with the USEC Inc. Executive Deferred Compensation Plan. Each of the named executive officers also participates in a supplemental executive retirement plan. The benefit plan descriptions here and in the Pension Benefits in Fiscal Year 2007 table provide an explanation of the major features of these benefit plans.

 

Savings Plan.  Named executive officers have the opportunity to participate in two defined contribution savings plans: The USEC Savings Program and the 401(k) Restoration Plan. Effective January 1, 2008, the 401(k) Restoration Plan has been replaced with the USEC Inc. Executive Deferred Compensation Plan.

 

The USEC Savings Program is a tax-qualified broad-based 401(k) employee savings plan. USEC Inc. employees, including the named executive officers, are able to contribute the lesser of up to 50% of their annual base salary or dollar limits established annually by the Internal Revenue Service (“IRS”). The Company will match 100% of the first 3% of pay that is contributed to the USEC Savings Program and 50% on the next 2% of pay contributed. Employee contributions are fully vested upon contribution and Company match contributions vest 50% after two years of service and 100% after three years of service.

 

In addition to the USEC Savings Program, during 2007 executives designated by the Company, including the named executive officers, could participate in the 401(k) Restoration Plan, which is a non-qualified deferred compensation plan. A participant was eligible to contribute to the 401(k) Restoration Plan only if the participant was contributing the maximum allowable by the IRS to the USEC Savings Program. Employee contributions were permitted up to 15% of taxable compensation, reduced by amounts contributed to the USEC Savings Program. The Company matched employee contributions at the rate that would apply if they had been contributed to the USEC Savings Program, reduced by Company matching contributions to the USEC Savings Program.

 

On October 31, 2007, the Board approved the USEC Inc. Executive Deferred Compensation Plan (the “Deferred Compensation Plan”), effective beginning January 1, 2008. The Deferred Compensation Plan is intended to be a non-qualified deferred compensation plan that complies with the regulations of Section 409A of the Internal Revenue Code of 1986, as amended. The Deferred Compensation Plan replaces the 401(k) Restoration Plan. Account balances under the 401(k) Restoration Plan were transferred to the Deferred Compensation Plan. Participation in the Deferred Compensation Plan is not limited to the Company’s officers but also includes a select group of management and highly compensated employees. Participants in the Deferred Compensation Plan may defer up to a maximum of 90% and a minimum of 5% of base salary and a maximum of 100% and a minimum of 5% of cash bonus amounts received through the Company’s incentive compensation programs. The Company matches participant contributions under the Deferred Compensation Plan at the rate that would apply if they had been contributed to the USEC Savings Program without regard for any statutory limitations, reduced by amounts contributed to the USEC Savings Program. A participant may receive a distribution from the Deferred Compensation Plan upon a qualifying distribution event such as a separation from service, disability, death, or in-service distribution on a specified date, change in control or an unforeseeable emergency all as defined in the plan. Distributions from the Deferred Compensation Plan will

be made in cash in a lump sum, annual installments, or a combination of both, in the manner elected by the participant and provided for in the plan.

 

Participants in the USEC Savings Program direct the investment of their account balances among various funds available under the plan. Deferred Compensation Plan accounts are deemed to be invested in a number of mutual funds made available for designation by the participant.

 

Pension Plans.  Named executive officers have the opportunity to participate in a qualified pension plan, a pension restoration plan and one of two supplemental executive retirement plans (each, a “SERP”).

 

The Employees’ Retirement Plan of USEC Inc. is a broad based, tax-qualified pension plan whose maximum benefits are limited by legislation, while the USEC Inc. Pension Restoration Plan is a non-qualified supplemental pension benefit that is designed to continue the accrual of pension benefits that exceed the legislated limits under the Employees’ Retirement Plan of USEC Inc. All officers, including the named executive officers, whose compensation exceeds the qualified plan limits are automatically enrolled in the USEC Inc. Pension Restoration Plan. Information regarding the calculation of benefits under the Employees’ Retirement Plan of USEC Inc. and the USEC Inc. Pension Restoration Plan can be found in the narrative accompanying the Pension Benefits in Fiscal Year 2007 table.

 

The Company also maintains two SERPs. The USEC Inc. 1999 Supplemental Executive Retirement Plan (the “1999 SERP”) was approved by the Compensation Committee in 1999 and Mr. Sewell is the only active participant. The Compensation Committee decided not to add any additional participants after 2001. The 1999 SERP provides Mr. Sewell with an annual benefit in the form of a monthly annuity equal to 55% of his final average compensation, with offsets for benefits received under the Company’s retirement programs and any U.S. government retirement program to which the Company contributed, and social security benefits. More information regarding the calculation of benefits payable to Mr. Sewell under the 1999 SERP can be found in the narrative accompanying the Pension Benefits in Fiscal Year 2007 table.

 

The USEC Inc. 2006 Supplemental Executive Retirement Plan (the “2006 SERP”) was approved by the Compensation Committee effective April 24, 2006. Messrs. Welch, Barpoulis, Van Namen and Wright are participants in the 2006 SERP. In early 2006, following a review of the Company’s executive retirement benefits by the compensation consultant, the Compensation Committee determined that the retirement benefit provided to senior executive officers under the Company’s retirement plans (other than Mr. Sewell, who was covered by the 1999 SERP) was not competitive with the market. Given the importance of each of these senior executives to the Company achieving its strategic and operating objectives, retention and motivation of these executives over the long-term is critical. Consequently, the Compensation Committee determined to implement a new SERP which rewards long-term service with enhanced retirement benefits.

 

As applicable to Mr. Welch, the 2006 SERP incorporates the terms of a SERP agreed to by the Company in September 2005 in connection with setting Mr. Welch’s initial terms of employment. At such time, the Compensation Committee determined, in consultation with its compensation consultant, that it was appropriate to offer a new, less expensive than the 1999 SERP, SERP to Mr. Welch in order to offer him a competitive total compensation package. The Company agreed to provide Mr. Welch with a SERP that generally provided for a benefit equal to 30% of final average pay with five years of service, increasing to 50% with ten or more years of service, with offsets for benefits received under the Company’s other retirement programs and social security benefits.

 

As applicable to other participants, the 2006 SERP provides for a monthly supplemental retirement benefit equal to 2.5% of final average pay, to a maximum benefit of 50% after 20 years of service, with offsets for benefits received under the Company’s other retirement programs and social security benefits. The Compensation Committee worked with its compensation consultant to determine the appropriate level of benefits to provide for participants under the 2006 SERP, which benefits are different than those provided to Mr. Welch. In determining to implement the 2006 SERP and determining the level of benefits to be provided, the Compensation Committee reviewed tally sheets that showed the value of total compensation paid to executives. More information regarding the calculation of benefits under the 2006 SERP can be found in the narrative accompanying the Pension Benefits in Fiscal Year 2007 table.

Participation in the 2006 SERP is contingent on the participant’s agreeing to comply with certain restrictive covenants relating to confidentiality, non-competition and non-solicitation of Company employees for a period of time following his termination of employment.

 

Severance Arrangements

 

Executive Severance Policy.  The Compensation Committee believes that in the absence of employment agreements between the Company and its key employees, it is appropriate to have a reasonable severance policy in place in order to attenuate concerns about short-term continuity of income and allow executives to focus on the Company’s business. Payment and benefit levels under the executive severance policy were set when this plan was put into place and were based on an assessment by the Compensation Committee of what was competitive and reasonable with respect to the intent of the program. The Compensation Committee periodically reviews the payment and benefit level under this plan.

 

Under its severance policy for executive officers, if an executive officer is terminated by the Company without cause, he is eligible to receive his current base salary and a prorated share of his current annual incentive (at target) up to the date of termination. In addition, as a severance payment he would receive a cash payment equal to one year’s base salary at his current rate and an amount equal to the average of his last three year’s annual incentive awards (both cash and restricted stock). He would also receive continuation of medical and dental coverage as well as life insurance paid for by the Company for one year after termination (or until he received similar coverage from a subsequent employer, whichever occurs first). Severance benefits are contingent upon the executive executing a release and agreeing to comply with certain restrictive covenants relating to confidentiality, non-competition and non-solicitation of Company employees for a period of time (generally 2.5 years) following his termination of employment. No severance is paid to an employee who is terminated for cause or who resigns voluntarily.

 

In addition, under the terms of the 1999 Equity Incentive Plan, if an employee is terminated by the Company other than for cause, all unvested restricted stock and stock options would vest and the employee would have up to one year to exercise all vested stock options. Awards under the Executive Incentive Plan would be pro-rated based on the period of time in which the participant was in the plan and would be paid out at the end of the three-year performance period.

 

Change in Control Agreements.  The Compensation Committee believes that change in control agreements are an important tool for executive retention and the retention of other key employees. The Company has entered into change in control agreements with each of the named executive officers. These agreements have an initial term of three years, which is automatically extended for additional one-year periods unless the Board of Directors has given notice of non-renewal. Upon a change in control, the agreements will expire no earlier than three years following the date that the change in control occurs. A change in control is generally defined as the acquisition by a person of 30% or more of the voting power of the Company, a change in the majority of the Company’s Board, the consummation of certain mergers or consolidations involving the Company, a sale or disposition of all or substantially all of the Company’s assets, or a liquidation of the Company.

 

Payment and benefit levels under the change in control agreements were set when these agreements were put into place and were based on an assessment by the Compensation Committee of what was competitive and reasonable with respect to the intent of the program. The Compensation Committee periodically reviews the payment and benefit level under these agreements.

 

The change in control agreements provide each named executive officer with certain benefits if there is a change in control of the Company and within three years after that change in control the Company terminates his employment for any reason other than cause, or the executive terminates his employment for “good reason” (as defined in the agreement). The Compensation Committee believes this “double trigger” is appropriate because the purpose of the change in control agreements is to provide enhanced severance protection and not to provide a windfall upon the change in control. These benefits are in lieu of any severance benefits the named executive officer would otherwise be eligible to receive under the Company’s severance policy. In order to receive these benefits, the named executive officer must comply with the non-competition,

non-solicitation, and confidentiality provisions of the change in control agreement during the term of the agreement and for 2.5 years thereafter (five years in the case of the confidentiality provision).

 

Under the terms of each named executive officer’s change in control agreement, if within three years after a change in control he is terminated other than for cause or terminates his employment for “good reason”, he would receive a cash payment of his unpaid base salary through the date of termination plus all other amounts to which he was entitled under any compensation or benefit plan of the Company under the terms of such plans. In addition, as a change in control payment, he would receive a cash lump sum payment equal to 2.5 times the sum of his final base salary and his final average bonus (generally the average of his last three years’ annual incentive awards). In addition, under the terms of each agreement, the Company would provide him and his dependents with continuation of medical and similar benefits for 2.5 years following the occurrence of the change in control or, if sooner, until he is covered by comparable programs of a subsequent employer (and reduced to the extent he receives comparable benefits). In addition, the executive will receive 2.5 additional years of service for purposes of retirement plan benefits under the non-qualified pension plans. If the executive receives payments, whether or not under his or her agreement that would subject him to any federal excise tax due under section 4999 of the Internal Revenue Code, the executive will also receive a cash payment equal to the amount of such excise tax.

 

In addition, under the terms the 1999 Equity Incentive Plan, if an employee is terminated by the Company other than for cause or the employee terminates employment for “good reason,” all unvested restricted stock and stock options would vest and the employee would have up to one year to exercise all vested stock options. Awards under the Executive Incentive Plan would be paid out in full based on the target award on such a termination.

 

For details of payments under the above arrangements, see the Potential Payments Upon Termination or Change in Control table.

 

Perquisites

 

The Company maintains a limited number of perquisites for senior executive officers. These include an annual financial counseling allowance of $7,500 ($15,000 for the Chief Executive Officer) and an annual executive physical valued at approximately $4,000. In addition, the Company reimburses the Chief Executive Officer for annual dues for up to two business or golf organizations or clubs. Perquisites do not represent a significant compensation element for any of the named executive officers and the Company is not currently considering the addition of any additional perquisites in the near future.

 

Tax and Accounting Treatments of Elements of Compensation

 

In its deliberations, the Compensation Committee considers the potential impact of IRC Section 162(m). IRC Section 162(m) currently disallows a tax deduction for the Company for individual executive compensation exceeding $1 million in any taxable year for the Chief Executive Officer and the other three highest compensated officers (other than the Chief Financial Officer), other than compensation that is performance-based under a plan that is approved by the shareholders of the Company and that meets certain other technical requirements. Annual incentive awards and awards under the Executive Incentive Plan are intended to meet the performance-based compensation requirements, while base salary, long-term incentive awards of restricted stock and stock options and perquisites are not.

 

While the Compensation Committee designs certain components of executive compensation to preserve deductibility, it believes that shareholder interests are best served by not restricting the Compensation Committee’s discretion and flexibility in crafting compensation programs, even though such programs may result in certain non-deductible compensation expenses. Accordingly, the Compensation Committee may from time to time approve compensation arrangements for certain officers that are not fully deductible. Further, because of ambiguities and uncertainties as to the application and interpretation of IRC Section 162(m) and the regulations issued thereunder, no assurance can be given, notwithstanding the Company’s efforts, that compensation intended by the Company to satisfy the requirements for deductibility under IRC Section 162(m) does in fact do so.

In addition, in structuring compensation arrangements, the Compensation Committee intends to permit participants to avoid potential tax penalties under IRC Section 409A. During 2007, the Compensation Committee and the Board approved a number of technical changes to the Company’s compensation arrangements for executive officers in order to facilitate compliance with IRC Section 409A. The Compensation Committee also takes into account the impact of potential gross-up payments by the Company to cover federal excise taxes due under section 4999 of the Internal Revenue Code.

 

The Compensation Committee considers the accounting and dilution impact of equity awards made to executive officers. We account for our equity incentive grants under SFAS No. 123(R) and use the Black-Scholes option pricing formula for determining the fair value of our stock option grants.

 

Stock Ownership Guidelines

 

Every executive officer and certain other employees must hold an ownership stake in the Company that is significant in comparison to their base salary. The Compensation Committee has established stock ownership guidelines which apply to all executive officers and certain other employees. The amount required to be retained varies depending on the executive’s position. These guidelines must generally be achieved within five years after the person becomes subject to the guidelines. The stock ownership guidelines that apply to each of the named executive officers as well as their achievement as of December 31, 2007 are shown in the table below:

 

 

The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K (Section 229.402(b)) with management. Based on this review and discussions, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this proxy statement.

 

Compensation Committee

 

John R. Hall, Chairman

Joyce F. Brown

Joseph T. Doyle

H. William Habermeyer

 

The following table sets forth information regarding the compensation of the Chief Executive Officer, the Chief Financial Officer, and the three other most highly paid executive officers of the Company serving as executive officers at December 31, 2007 (collectively, the “named executive officers”), for the years ended December 31, 2006 and 2007.

 

 

 

 

 

 

The following table sets forth information concerning each grant of an award to a named executive officer in the year ended December 31, 2007 under any plan.

 

 

 

 

 

 

The following table sets forth information regarding unexercised options, stock that has not vested, and outstanding equity incentive plan awards as of the year ended December 31, 2007 for each of the named executive officers.