CENTRUS ENERGY CORP - Annual Report: 2010 (Form 10-K)

---

---

 

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

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

 

 

 

 

 

 

 

 

_________________

 

•

supply LEU to both domestic and international utilities for use in about 150 nuclear reactors worldwide;

 

•

are deploying what we believe is the world’s most advanced uranium enrichment technology, known as the American Centrifuge;

 

•

enrich uranium at the Paducah gaseous diffusion plant (“GDP”) that we lease from the U.S. Department of Energy (“DOE”);

 

•

are the exclusive executive agent for the U.S. government under a nuclear nonproliferation program with Russia, known as Megatons to Megawatts;

 

•

provide transportation and storage systems for spent nuclear fuel and provide nuclear and energy consulting services; and

 

•

perform contract work for DOE and its contractors at the Paducah and Portsmouth sites.

 

 

 

 

 

 

 

 

•

design, fabrication and implementation of spent nuclear fuel technologies including the high capacity MAGNASTOR™ system,

	•	except as provided in the 2002 DOE-USEC Agreement (described under “Business and Properties – 2002 DOE-USEC Agreement and Related Agreements with DOE”), we have the right to renew the lease at either plant indefinitely in six-year increments and can adjust the property under lease to meet our changing requirements. The current lease term expires in 2016;
	•	we may leave the property in an “as is” condition at termination of the lease, but must remove wastes we generate and must place the plants in a safe shutdown condition;
	•	the U.S. government is responsible for environmental liabilities associated with plant operations prior to July 28, 1998 except for liabilities relating to the disposal of some identified wastes generated by USEC and stored at the plants;
	•	DOE is responsible for the costs of decontamination and decommissioning of the plants;
	•	title to capital improvements not removed by us will transfer to DOE at the end of the lease term, and if we elect to remove any capital improvements, we are required to pay any increases in DOE’s decontamination and decommissioning costs that are a result of our removing the capital improvements;
	•	DOE must indemnify us for costs and expenses related to claims asserted against us or incurred by us arising out of the U.S. government’s operation, occupation, or use of the plants prior to July 28, 1998; and
	•	DOE must indemnify us against claims for public liability (as defined in the Atomic Energy Act of 1954, as amended) from a nuclear incident or precautionary evacuation in connection with activities under the lease. Under the Price-Anderson Act, DOE’s financial obligations under the indemnity are capped at $12.6 billion for each nuclear incident or precautionary evacuation occurring inside the United States to which the indemnity applies.

 

·	Operated our lead cascade of production-ready AC100 machines in a commercial plant cascade configuration and accumulated significant runtime;

 

·	Demonstrated that the cascade operates as designed and that a range of commercial product assays can be produced for our customers;

 

·	Executed an agreement with Toshiba Corporation (“Toshiba”) and Babcock & Wilcox Investment Company (“B&W”) for a $200 million strategic investment and closed on the first phase of funding totaling $75 million;

 

·	Initiated discussions with Japanese export credit agencies regarding financing up to $1 billion of the cost of completing the ACP;

 

·	Completed a March 2010 cooperative Research, Development and Demonstration Agreement with DOE for pro-rata cost sharing support for continued American Centrifuge activities with a total cost of $90 million;

 

·	Produced detailed updates to project scope, cost and schedule based on close collaboration with our suppliers;

 

·	Restarted limited engineering work on portions of the physical plant infrastructure related to feeding and withdrawing uranium to facilitate the ramp up of construction activities in the future;

 

·	Continued machine technology development in Oak Ridge in support of lead cascade testing, value engineering and increasing machine reliability and productivity; and

 

·	Submitted a comprehensive update to our DOE loan guarantee application in July 2010.

 

 

 

Milestones under 2002 DOE-USEC Agreement		Milestone Date				Achievement Date
Begin refurbishment of K-1600 centrifuge testing facility in Oak Ridge, Tennessee		December 2002				December 2002
Build and begin testing a centrifuge end cap		January 2003				January 2003
Submit license application for Lead Cascade to NRC		April 2003				February 2003
NRC dockets Lead Cascade application		June 2003				March 2003
First rotor tube manufactured		November 2003				September 2003
Centrifuge testing begins		January 2005				January 2005
Submit license application for commercial plant to NRC		March 2005				August 2004
NRC dockets commercial plant application		May 2005				October 2004
Begin Lead Cascade centrifuge manufacturing		June 2005				April 2005
Begin commercial plant construction and refurbishment		June 2007				May 2007
Lead Cascade operational and generating product assay in a range usable by commercial nuclear power plants		October 2007				October 2007
Secure firm financing commitment(s) for the construction of the commercial American Centrifuge Plant with an annual capacity of approximately 3.5 million SWU per year		November 2011
Begin commercial American Centrifuge Plant operations		May 2014*
Commercial American Centrifuge Plant annual capacity at 1 million SWU per year		August 2015*
Commercial American Centrifuge Plant annual capacity of approximately 3.5 million SWU per year		September 2017*

* USEC and DOE have agreed to discuss adjustment of this milestone as may be appropriate based on a revised deployment plan to be provided to DOE by January 30, 2012 following completion of the November 2011 financing milestone.

 

 

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

			No. of Employees
			at December 31,
Location			2010				2009
Paducah GDP	Paducah, KY			1,185				1,210
Portsmouth site	Piketon, OH			1,157				1,106
American Centrifuge	Primarily Oak Ridge, TN and Piketon, OH			453				442
NAC	Primarily Norcross, GA			60				57
Headquarters	Bethesda, MD			94				93
	Total Employees			2,949				2,908

	Number of Employees	Contract Term
Paducah GDP:
USW Local 5-550	574	July 2016
SPFPA Local 111	85	March 2012
Portsmouth site:
USW Local 5-689	522	May 2015
SPFPA Local 66	95	August 2012

 

 

·

Matters relating to the Transactions require substantial commitments of time and resources by our management, whether or not the remaining Transactions are completed, which could otherwise have been devoted to other opportunities that may have been beneficial to us, including pursuing other strategic options or sources of capital;

 

·

The second closing of the Transactions is conditioned on our obtaining a conditional commitment for a loan guarantee of not less than $2 billion from DOE.  The securities purchase agreement may be terminated by any party if the second closing does not occur by June 30, 2011.  If the second closing is not consummated, our ability to continue to spend on the American Centrifuge project would be limited and our anticipated sources of near term liquidity could be affected;

 

·

Our loan guarantee application includes the $200 million investment as part of the sources of funds for the American Centrifuge project.  The strategic investment was also intended in part to address financial concerns of DOE with respect to the ability of the American Centrifuge project to mitigate cost and other risk.  If the remaining Transactions are not consummated or are delayed significantly, this would adversely affect our ability to obtain a loan guarantee (which is a condition to the third closing);

 

·

We need significant additional financing to complete construction of the American Centrifuge Plant beyond the DOE loan guarantee and the proceeds of the Transactions, and we will need to demonstrate the availability of that funding in order to obtain the DOE loan guarantee (which is a condition of the third closing).  We have initiated discussions with Japanese export credit agencies (“ECAs”) for additional financing of up to $1 billion.  Our ability to obtain Japanese ECA financing is highly dependent on the strategic investment by Toshiba. If the remaining Transactions are not consummated or are delayed significantly and our ability to obtain Japanese ECA financing is adversely affected, this would subsequently adversely affect our ability to obtain a DOE loan guarantee, consummate the third closing and complete the American Centrifuge project; and

 

·

If the remaining Transactions are not consummated, we may be unable to raise capital from alternative sources on terms favorable to us, if at all.  If the remaining Transactions are not consummated or are delayed significantly and we are unable to raise capital from alternative sources, our business and prospects (including the American Centrifuge project) may be substantially harmed and our stock price may decline.

 

·	Success in potential efforts to sell our low enriched uranium in connection with Toshiba’s nuclear power plant proposals, including Toshiba’s success in nuclear reactor sales;

 

·	Success of efforts to identify potential opportunities in our contract services segment; and

 

·	Our success in achieving cost savings and other benefits through the manufacturing joint venture with B&W.

 

 

·	our ability to get loan guarantees or other support from the U.S. government,

 

·	our ability to meet the closing conditions of the second and third phases of the $200 million strategic transaction with Toshiba and B&W and to otherwise address the financial concerns identified by DOE,

 

·	our ability to satisfy DOE that efforts we have taken, including with respect to lead cascade operations and efforts to reduce risk have addressed their concerns,

 

·	the estimated costs, efficiency, timing and return on investment of the deployment of the American Centrifuge Plant (described below),

 

·	our ability to secure and maintain a sufficient number of long-term SWU purchase commitments from customers on satisfactory terms, including adequate prices,

 

·	the level of success of our current operations,

 

·	SWU prices,

 

·	USEC’s perceived competitive position and investor confidence in our industry and in us,

 

·	projected costs for the disposal of depleted uranium and the decontamination and decommissioning of the American Centrifuge Plant, and the impact of related financial assurance requirements,

 

·	additional downgrades in our credit rating,

 

·	market price and volatility of our common stock,

 

·	general economic and capital market conditions,

 

·	conditions in energy markets,

 

·	regulatory developments, including changes in laws and regulations, and

 

·

our reliance on LEU delivered to us under the Russian Contract and uncertainty regarding deliveries and market based components of prices under the Russian Contract, and restrictive covenants in the agreements governing our credit facility and in our outstanding notes and any future financing arrangements that limit our operating and financial flexibility.

 

 

 

·	November 2011 – Secure firm financing commitment(s) for the construction of the commercial American Centrifuge Plant with an annual capacity of approximately 3.5 million SWU per year;

 

·	May 2014 – begin commercial American Centrifuge Plant operations;

 

·	August 2015 – commercial American Centrifuge Plant annual capacity at 1 million SWU per year; and

 

·	September 2017 – commercial American Centrifuge Plant annual capacity of approximately 3.5 million SWU per year.

 

	•	increase our costs for the project, both on an overall basis and in terms of the incremental costs we must incur to recover from delays;
	•	cause us to fail to meet one or more milestones under the 2002 DOE-USEC Agreement (including any potential adjustments to the remaining three milestones that we may agree to with DOE following satisfaction of the November 2011 financing milestone), which could cause DOE to exercise the remedies described in the risk factor relating to the 2002 DOE-USEC Agreement;
	•	make it more difficult for us to attract and retain customers and adversely affect our ability to compete with other enrichment plants being built in the U.S.;
	•	make it more difficult for us to maintain key suppliers for the ACP and the manufacturing infrastructure developed over the last several years; and
	•	extend the time under which we are contractually or otherwise required to continue to operate our high-cost Paducah GDP.

·	The success of our efforts to optimize the machine we expect to deploy in the ACP;

 

·	The performance and reliability of individual components built by our strategic suppliers;

 

·	Issues with respect to the performance of our strategic suppliers; and

 

·	Differences in actual commercial plant conditions from the conditions used to generate our test data.

 

 

·	Our ability to negotiate an acceptable power arrangement with TVA or other suppliers of power;

 

·	Our success in obtaining a contract with DOE for enriching a portion of the DOE’s depleted uranium stockpile on satisfactory terms, in sufficient amount, or at all; and

 

·	SWU supply and demand and the outcome of discussions with customers about their near term SWU supply needs.

 

·	equipment breakdowns,

 

·	interruptions of electric power, including those interruptions permitted under the TVA power agreement, or an inability to purchase electric power at an acceptable price,

 

·	regulatory enforcement actions,

 

·	labor disruptions,

 

·	unavailability or inadequate supply of uranium feedstock,

 

·	extreme weather conditions,

 

·	natural or other disasters, including seismic activity in the vicinity of the Paducah GDP, which is located near the New Madrid fault line, or

 

·	accidents or other incidents.

	•	LEU and uranium production levels and costs in the industry,
	•	supply and demand shifts,
	•	actions taken by governments to regulate, protect or promote trade in nuclear material, including the continuation of existing restrictions on unfairly priced imports,
	•	actions taken by governments to narrow, reduce or eliminate limits on trade in nuclear material, including the decrease or elimination of existing restrictions on unfairly priced imports,
	•	actions of competitors,
	•	exchange rates,
	•	availability and cost of alternate fuels, and
	•	inflation.

 

	•	accidents, terrorism or other incidents at nuclear facilities or involving shipments of nuclear materials,
	•	regulatory actions or changes in regulations by nuclear regulatory bodies, or decisions by agencies, courts or other bodies that limit our ability to seek relief under applicable trade laws to offset unfair competition or pricing by foreign competitors,
	•	disruptions in other areas of the nuclear fuel cycle, such as uranium supplies or conversion,
	•	civic opposition to, or changes in government policies regarding, nuclear operations,
	•	business decisions concerning reactors or reactor operations,
	•	the need for generating capacity, or
	•	consolidation within the electric power industry.

 

	•	leases for the gaseous diffusion plants and American Centrifuge facilities,
	•	the Executive Agent agreement under which we are designated the U.S. Executive Agent and purchase the SWU component of LEU under the Russian Contract,
	•	the 2002 DOE-USEC Agreement and other agreements that address issues relating to the domestic uranium enrichment industry and the American Centrifuge technology,
	•	electric power purchase agreements with the Tennessee Valley Authority,
	•	contract work for DOE and DOE contractors at the Portsmouth site and Paducah GDP, which work at the Portsmouth site is currently in transition as described below, and
	•	NAC consulting and spent fuel storage and transportation activities.

 

·

The potential impact on USEC employees and potential severance and other costs to USEC.  We have approximately 1,100 employees working at the Portsmouth site supporting DOE, its activities and the cold shutdown contract. As discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Contract Services Segment,” our severance liability could be up to approximately $25 million with DOE owing a portion of this amount, estimated at $18.5 million. We are currently in discussions with DOE and the D&D contractor concerning strategies to avoid or lessen these potential severance payments, however, we may not be successful in mitigating these payments and the amount of our severance obligations could be material and could adversely affect our results of operations and financial condition;

 

·

The potential pension and post retirement benefits costs to USEC. The cessation of our contract services activities in Portsmouth will trigger closing adjustments to our pension and postretirement benefit. As a result, certain costs may be accelerated. Although we believe a portion of such costs would be recoverable from DOE under our contract and applicable cost accounting standards, we may not be able to recover those costs in the amounts we anticipate or at all. As discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Contract Services Segment,” we recognized approximately $0.4 million in our cost of sales for December 2010 related to unamortized prior service costs based on our employee population at Portsmouth. As we receive additional information on the timing and number of employees leaving USEC, we may need to recognize significant additional costs, which could adversely affect our results of operations and financial condition. Closing adjustments from our pension plan could be up to approximately $32 million and for our postretirement benefit plan up to approximately $15 million, before cost recoveries from DOE. We are currently in discussions with DOE and the D&D contractor concerning strategies to avoid or lessen these potential closing adjustments from our pension and postretirement benefit plans, however, we may not be successful in mitigating these costs and these costs could adversely affect our results of operations and financial condition;

 

·	The potential impact of the loss of employees on work we perform to comply with requirements of our certificate with the NRC for the Portsmouth facility;

 

·

As discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Contract Services Segment,” we have property, plant and equipment at the Portsmouth site of approximately $14.6 million, net of accumulated depreciation, remaining on our consolidated balance sheet as of December 31, 2010. These assets are depreciated over their remaining useful life and, based on current events, depreciation of these assets has been accelerated to comply with DOE and the D&D contractors tentative de-lease schedule. This impact will be more significant if we are not able to obtain work as a subcontractor and extend work we currently perform providing infrastructure and support services to the site tenants;

 

·

The potential impact of our de-lease of facilities at Portsmouth on our activities with respect to the American Centrifuge plant, including, but not limited to, potential reduction in flexibility with respect to the storage of materials, potential increased costs of site services and use of site facilities, potential increased interferences with our activities on site and potential increased difficulties in obtaining services;

 

·

The potential impact on our ability to collect unbilled amounts from DOE. As a part of performing contract work for DOE, certain contractual issues, scope of work uncertainties, and various disputes arise from time to time. As discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Contract Services Segment,” we believe that as of December 31, 2010 additional amounts can be billed to DOE and revenue of approximately $3 million may be recognizable. There is also the potential for additional revenue to be recognized related to our valuation allowances pending the outcome of Defense Contract Audit Agency (“DCAA”) audits and DOE reviews. In addition, $77.3 million of receivables related directly to DOE or DOE contractors remain on our consolidated balance sheet as of December 31, 2010, including $10.9 million of past due receivables and $27.7 million of unbilled receivables where revenue has been previously recorded, and the timing and amount of recovery are uncertain. The termination of the cold shutdown contract could adversely affect our ability to timely recover these or other amounts we may be owed from DOE; and

 

·

The potential impact on the cost of remaining services and activities. The reduction of the scope of work performed by USEC for DOE and the transition of the work to the D&D contractor could adversely impact the costs to us at the Portsmouth site and throughout the rest of the company. Costs of work self-performed by us could increase due to the increased allocation of overhead and other costs to such work.  Costs of contracting with the D&D contractor to perform work previously performed by us could be higher than current costs.

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

 

Name	Age	Position
John K. Welch	60	President and Chief Executive Officer
John C. Barpoulis	46	Senior Vice President and Chief Financial Officer
Christine M. Ciccone	46	Senior Vice President, External Relations
Peter B. Saba	49	Senior Vice President, General Counsel and Secretary
Philip G. Sewell	64	Senior Vice President, American Centrifuge and Russian HEU
Robert Van Namen	49	Senior Vice President, Uranium Enrichment
W. Lance Wright	63	Senior Vice President, Human Resources and Administration
John M.A. Donelson	46	Vice President, Marketing and Sales
Stephen S. Greene	53	Vice President, Finance and Treasurer
J. Tracy Mey	50	Vice President and Chief Accounting Officer
E. John Neumann	63	Vice President, Government Relations
Paul E. Sullivan	58	Vice President, American Centrifuge and Chief Engineer

 

 

		2010								2009
		High				Low				High				Low
First Quarter ended March 31		$	6.00			$	3.61			$	6.00			$	3.26
Second Quarter ended June 30			6.50				3.90				7.24				4.31
Third Quarter ended September 30			5.88				4.51				6.52				3.22
Fourth Quarter ended December 31			6.35				4.94				4.98				3.50

 

 

Plan category		Number of securities to be issued upon exercise of outstanding options, warrants and rights				Weighted-average exercise price of outstanding options, warrants and rights				Number of securities remaining available for future issuance under equity compensation plans
Equity compensation plans approved by security holders			3,552,378			$	6.20				2,686,786	(1)
Equity compensation plans not approved by security holders			-				-				-
Total			3,552,378								2,686,786

(1)

Includes approximately 1,745,576 shares with respect to which awards are available for issuance under the USEC Inc. 2009 Equity Incentive Plan (net of awards which terminate or are cancelled without being exercised or that are settled for cash) and approximately 941,210 shares available for issuance under the Employee Stock Purchase Plan.

 

		December 31,				December 31,				December 31,				December 31,				December 31,				December 31,
		2005				2006				2007				2008				2009				2010
USEC Inc.		$	100.00			$	106.44			$	75.31			$	37.57			$	32.22			$	50.38
S&P 500 Index		$	100.00			$	115.79			$	122.16			$	76.96			$	97.33			$	111.99
Peer Group Index1		$	100.00			$	117.29			$	145.97			$	97.24			$	113.39			$	124.07

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

 

 

		December 31,
		2010				2009				2008				2007				2006
										(millions)
Balance Sheet Data
Cash and cash equivalents		$	151.0			$	131.3			$	248.5			$	886.1	(6)		$	171.4
Inventories			1,522.5				1,301.2				1,231.9				1,153.4				924.2
Property, plant and equipment, net			1,231.4				1,115.1				736.1				292.2				189.9
Total assets			3,848.2				3,532.1				3,055.3				3,087.8				1,861.4
Current portion of long-term debt			-				-				95.7				-				-
Long-term debt			660.0				575.0				575.0				725.0	(6)			150.0
Convertible preferred stock			78.2	(5)			-				-				-				-
Other long-term liabilities			527.7				598.9				601.5	(7)			337.5				300.3
Stockholders’ equity			1,313.8				1,275.6				1,162.4	(7)			1,309.5	(6)			986.0

(1)	The demobilization of the American Centrifuge project resulted in special charges of $2.5 million for one-time termination benefits consisting of severance payments and short-term health care coverage and $1.6 million for various contract terminations.

(2)

Special charges of $3.9 million in 2006 include a $2.6 million impairment of an intangible asset established in 2004 relating to the acquisition of NAC, $1.5 million related to consolidation of office space in connection with the 2005 restructuring plan, and special credits totaling $0.2 million representing changes in estimate of costs for termination benefits charged in 2005.

(3)	Other income in 2010 consists of pro-rata cost sharing support from DOE for continued funding of American Centrifuge activities.

(4)	Other income in 2009 consists of distributions paid to USEC of custom duties collected by the U.S. government as a result of trade actions.

(5)	In September 2010, the first closing of $75 million occurred under a planned $200 million investment by Toshiba and B&W. The balance of $78.2 million as of December 31, 2010 includes $3.2 million of paid or accrued paid-in-kind dividends.

(6)	In September 2007, we raised net proceeds, after underwriter commissions and offering expenses, of approximately $775 million through the concurrent issuance of 23 million shares of common stock and $575 million in aggregate principal amount of convertible notes.

(7)

Retiree benefit plan asset values declined in 2008 which contributed to the increase in other long-term liabilities and the decrease in stockholders’ equity.  Subsequently in 2009, retiree benefit asset values increased as financial markets improved. See Note 12 to the consolidated financial statements.

 

·	supply LEU to both domestic and international utilities for use in about 150 nuclear reactors worldwide;

 

·	are deploying what we believe is the world’s most advanced uranium enrichment technology, known as the American Centrifuge;

 

·	enrich uranium at the Paducah gaseous diffusion plant (“GDP”) that we lease from the U.S. Department of Energy (“DOE”);