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Commitments and Contingencies
9 Months Ended
Sep. 30, 2011
Commitments and Contingencies 
Commitments and Contingencies
12. COMMITMENTS AND CONTINGENCIES

American Centrifuge Plant

Project Funding

USEC needs significant additional financing in order to complete the American Centrifuge Plant ("ACP"). USEC believes a loan guarantee under the DOE Loan Guarantee Program, which was established by the Energy Policy Act of 2005, is essential to obtaining the funding needed to complete the ACP. In July 2008, USEC applied under the DOE Loan Guarantee Program for $2 billion in U.S. government guaranteed debt financing for the ACP.

During the third quarter of 2011, USEC reached a critical point regarding continued funding for the American Centrifuge project.  On September 30, 2011, USEC announced that in order to prudently manage its resources it would be reducing its spending on the American Centrifuge project during October 2011 by approximately 30% (as compared to the average monthly rate of spending in the prior months of 2011) as USEC continued working with DOE to achieve a conditional commitment for a DOE loan guarantee for the American Centrifuge project by November 1, 2011. USEC also sent Worker Adjustment and Retraining Notification ("WARN") Act notices to all of the approximately 450 American Centrifuge workers informing them of potential future layoffs.  In connection with the decision to curtail spending, USEC also suspended a number of contracts with suppliers and contractors involved in the American Centrifuge project and advised them that USEC may demobilize the project in November 2011.

Subsequent to that action, USEC and DOE engaged in intense discussions throughout October and discussions are ongoing regarding a research, development and demonstration ("RD&D") program to reduce the technology and financial risk of commercializing the American Centrifuge technology.  USEC's application for a DOE loan guarantee would remain pending during the RD&D program. The RD&D program being discussed is expected to involve the manufacturing of additional production design centrifuge machines and construction and operation of at least one complete commercial cascade of machines so that key systems associated with cascade operations of the American Centrifuge technology can be tested as they would actually operate at the scale necessary for full commercialization.

As a first step in the RD&D program, USEC and DOE are in discussions regarding a cooperative agreement to provide immediate funding to continue American Centrifuge RD&D activities over the next couple of months and to develop the scope for execution of the enhanced RD&D program. However, we have not reached an agreement with DOE regarding the cooperative agreement. USEC is evaluating its spending on a day-to-day basis and could make a decision at any time to further reduce spending and begin demobilizing the project based on the timing and likelihood of an agreement with DOE and any government funding. Continuation of the RD&D program in the government fiscal year 2012 beyond any initial scoping phase will require action by Congress to provide funding or from funds released from the transfer of additional quantities of depleted uranium from us to DOE. Funding for the RD&D program beyond government fiscal year 2012 would be subject to future appropriations. USEC has no assurance that it will be able to reach agreement with DOE regarding any phase of the RD&D program or that any funding will be provided. USEC also has no assurances that it will ultimately be able to obtain a loan guarantee and the timing thereof.

On June 30, 2011, USEC entered into a standstill agreement with its strategic investors Toshiba Corporation ("Toshiba") and Babcock & Wilcox Investment Company ("B&W") pursuant to which each party agreed not to exercise its right to terminate the securities purchase agreement governing Toshiba and B&W's investment prior to August 15, 2011. The securities purchase agreement provided that it may be terminated by USEC or each of the strategic investors (as to such investor's obligations) if the second closing did not occur by June 30, 2011.  On August 15, 2011, the parties further extended this period of time through September 30, 2011 and then again to October 31, 2011. As of October 31, 2011, the parties have agreed in principle to further extend the standstill agreement through January 15, 2012 if DOE and USEC reach agreement on the framework for the RD&D program. However, since no agreement has been reached with DOE, the standstill agreement is not effective and USEC and each of the strategic investors (as to such investor's obligations) currently have the right to terminate the securities purchase agreement.

If conditions change and deployment was no longer probable or was delayed significantly from USEC's current projections, USEC could expense up to the full amount of previously capitalized costs related to the ACP of up to $1.3 billion as early as the fourth quarter of 2011. Events that could impact USEC's views as to the probability of deployment or USEC's projections include a failure to successfully enter into an agreement with DOE for the RD&D program, including the failure to timely enter into a cooperative agreement with DOE to provide immediate funding for the project, or an unfavorable determination in any initial scoping phase of the RD&D program regarding the restructuring of the project.

Milestones under the 2002 DOE-USEC Agreement

In 2002, USEC and DOE signed an agreement (such agreement, as amended, the "2002 DOE-USEC Agreement") in which USEC and DOE made long-term commitments directed at resolving issues related to the stability and security of the domestic uranium enrichment industry. The 2002 DOE-USEC Agreement contains specific project milestones relating to the ACP. In February 2011, USEC and DOE amended the 2002 DOE-USEC Agreement to revise the remaining four milestones relating to the financing and operation of the ACP. The amendment extended by one year to November 2011 the financing milestone that required that USEC secure firm financing commitment(s) for the construction of the commercial American Centrifuge Plant with an annual capacity of approximately 3.5 million SWU per year. The remaining three milestones were also adjusted by the February 2011 amendment. In addition, DOE and USEC agreed to discuss adjustment of the remaining three milestones as may be appropriate based on a revised deployment plan to be submitted to DOE by USEC by January 30, 2012 following the completion of the November 2011 financing milestone. In connection with discussions regarding the RD&D program described above, USEC anticipates that it will be engaging in discussions with DOE regarding modification of the remaining milestones and other provisions of the 2002 DOE-USEC Agreement.  However, we have no assurances that the RD&D program will move forward and/or that DOE will agree to an adjustment of the milestones or other provisions of the 2002 DOE-USEC Agreement. 

The 2002 DOE-USEC Agreement provides DOE with specific remedies if USEC fails to meet a milestone that would materially impact USEC's ability to begin commercial operations of the American Centrifuge Plant on schedule and such delay was within USEC's control or was due to USEC's fault or negligence. These remedies could include terminating the 2002 DOE-USEC Agreement, revoking USEC's access to DOE's U.S. centrifuge technology that USEC requires for the success of the American Centrifuge project and requiring USEC to transfer certain of its rights in the American Centrifuge technology and facilities to DOE, and to reimburse DOE for certain costs associated with the American Centrifuge project. DOE could also recommend that USEC be removed as the sole U.S. Executive Agent under the nonproliferation program between the United States and the Russian Federation known as "Megatons to Megawatts". As the U.S. Executive Agent, USEC signed the Russian Contract to implement the program. USEC currently purchases about one-half of its SWU supply from Russia under the Russian Contract. The 20-year Russian Contract expires at the end of 2013. Under the terms of a 1997 memorandum of agreement between USEC and the U.S. government, USEC can be terminated, or resign as the U.S. Executive Agent, or one or more additional executive agents may be named. If USEC were removed as the sole U.S. Executive Agent, it could reduce or terminate USEC's access to Russian LEU under the Megatons to Megawatts program in 2013. However, under the 1997 memorandum of agreement, USEC has the right and obligation to pay for and take delivery of LEU that is to be delivered in the year of the date of termination and in the following year if USEC and TENEX have agreed on a price and quantity. USEC and TENEX have agreed on price and quantity for 2012. Any of these remedies under the 2002 DOE-USEC Agreement could have a material adverse impact on USEC's business.

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

USEC's right to continue operating the Paducah GDP under its lease with DOE is not subject to meeting the ACP milestones. In addition, the new Russian Supply Agreement described below is not subject to any of the remedies related to the ACP under the 2002 DOE-USEC Agreement.
 
Russian Supply Agreement

On March 23, 2011, USEC signed a contract with TENEX for the 10-year supply of Russian LEU. Under the terms of the contract, the supply of LEU to USEC could begin as soon as 2013 and increase until it reaches a level in 2015 that includes a quantity of SWU equal to approximately one-half the level currently supplied by TENEX to USEC under the Megatons to Megawatts program. TENEX and USEC also may mutually agree to increase the purchases and sales of SWU by certain additional optional quantities of SWU up to an amount beginning in 2015 equal to the amount USEC now purchases each year under the Megatons to Megawatts program. Unlike the Megatons to Megawatts program, the quantities supplied under the new contract will come from Russia's commercial enrichment activities rather than from downblending of excess Russian weapons material. As this new agreement is separate from the Megatons to Megawatts program, remedies provided to DOE under the 2002 DOE-USEC Agreement related to USEC's role under the Megatons to Megawatts program do not apply to the new purchase agreement. However, the LEU USEC obtains from TENEX under the new agreement will be subject to quotas and other restrictions applicable to commercial Russian LEU that do not apply to LEU supplied to USEC under the Megatons to Megawatts program.
 
Deliveries under the new supply contract are expected to continue through 2022.  USEC will purchase the SWU component of the LEU and deliver natural uranium to TENEX for the LEU's uranium component. The pricing terms for SWU under the contract are based on a mix of market-related price points and other factors. 

The new supply contract between TENEX and USEC was approved by the Russian State Atomic Energy Corporation ("Rosatom") on May 11, 2011.  The effectiveness of the new contract is subject to completion of administrative arrangements between the U.S. and Russian governments under the agreement for cooperation in nuclear energy between the United States and the Russian Federation which, among other things, provides the framework for the return to Russia of natural uranium delivered by USEC to TENEX. If these approvals are not obtained by December 31, 2011, USEC has the right to not make any purchases in 2013.

Legal Matters

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

In June 2011, a complaint was filed in Federal court against USEC by a Portsmouth GDP employee claiming that USEC owes or will owe severance benefits to him and other similarly situated employees that have transitioned or will transition to the DOE decontamination and decommissioning ("D&D") contractor. The plaintiff amended its complaint in August 2011, among other things, to limit the purported class of similarly situated employees to salaried employees at the Portsmouth site. USEC believes it has meritorious defenses against the suit and has not accrued any amounts for this matter. An estimate of the possible loss or range of loss from the litigation cannot be made because, among other things, (i) the plaintiff has failed to state the amount of damages sought, (ii) the plaintiff purports to represent a class of claimants the size and composition of which remains unknown and (iii) the certification of the class is uncertain. As disclosed in its Annual Report on Form 10-K for the year ended December 31, 2010,  USEC's severance liability could have been up to $25 million if severance was required to be paid to all employees (both salaried and hourly employees) ceasing employment with USEC as a result of the transition to the DOE D&D contractor.  In such an event, DOE would have owed a portion of this amount, estimated at $18.5 million. The potential severance liability associated with the transition of services at the Portsmouth site has decreased as workers accepted equivalent positions with the D&D contractor. Severance liabilities associated with the employee transition at the Portsmouth site for those workers not offered employment by the D&D contractor is less than $1 million, with DOE owing a portion of this amount related to contract closeout, and is recorded as a current liability as of September 30, 2011. Severance amounts are expected to be paid in the fourth quarter of 2011.