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Fair Value Measurements
 12 Months Ended
Dec. 31, 2011
Fair Value  
Fair Value Measurements

9. FAIR VALUE MEASUREMENTS

The accounting guidance for fair value measurement requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard establishes a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A financial instrument's categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is as follows:

•
Level 1 – quoted prices in active markets for identical assets or liabilities.
•
Level 2 – inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.
•
Level 3 – unobservable inputs in which little or no market data exists.


The following financial instruments are recorded at fair value (in millions):
 
   
December 31, 2011
    
December 31, 2010
  
   
Level 1
    
Level 2
    
Level 3
    
Total
    
Level 1
    
Level 2
    
Level 3
    
Total
  
Assets:
                                                
Deferred compensation asset (a)
     -     $ 2.3       -     $ 2.3       -     $ 1.8       -     $ 1.8  
                                                                 
Liabilities:
                                                                
Deferred compensation obligation (a)
     -       2.6       -       2.6       -       2.0       -       2.0  
Convertible preferred stock, long-term (b)
     -       -       -       -       -       -       78.2       78.2  
 
 
 
(a) The deferred compensation obligation represents the balance of deferred compensation plus net investment earnings. The deferred compensation plan is informally funded through a rabbi trust using variable universal life insurance. The cash surrender value of the life insurance policies is designed to track the deemed investments of the plan participants. Investment crediting options consist of institutional and retail investment funds. The deemed investments are classified within level 2 of the valuation hierarchy because of  (i) the indirect method of investing and (ii) unit prices of institutional funds are not quoted in active markets; however, the unit prices are based on the underlying investments which are traded in active markets.
 
 
(b) The estimated fair value of the convertible preferred stock is based on a market approach using a discount rate of 12.75%, which is unobservable (Level 3) since the instruments do not trade. Dividends on the convertible preferred stock are paid or accrued as additional shares of convertible preferred stock on a quarterly basis at an annual rate of 12.75%, which is consistent with current market prices and other market benchmarks. The estimated fair value equals the redemption value of $1,000 per share.
 

 
The following is a reconciliation of the beginning and ending balances for items measured at fair value using significant unobservable inputs (Level 3). As of December 31, 2011, the convertible preferred stock can be converted or sold at the holder's option and is classified as a current liability at the redemption value.
 
   
Years Ended
December 31,
  
   
2011
    
2010
  
   
(millions)
  
Convertible preferred stock, long-term:
            
Beginning balance
  $ 78.2     $ -  
Issuances
    -       75.0  
Paid-in-kind dividends issued
    10.1       0.8  
Less: paid-in-kind dividends payable, beginning balance
     (2.4 )     -  
Paid-in-kind dividends payable
    2.7       2.4  
Total gains or losses (realized/unrealized)
    -       -  
Transfer out of Level 3 (see Note 8)
    (88.6 )     -  
Ending balance
  $ -     $ 78.2  


The balance sheet carrying amounts and estimated fair values of USEC's debt follow (in millions):
 
   
December 31, 2011
   
December 31, 2010
 
   
Carrying Value
    
Fair
Value
    
Carrying Value
    
Fair
Value
  
Credit facility term loan, due May 31, 2012
  $ 85.0     $ 72.8     $ 85.0     $ 85.6  
3.0% convertible senior notes, due October 1, 2014
     530.0       246.1       575.0       517.9  

The estimated fair value of the term loan is based on the change in market value of an index of loans of similar credit quality based on published credit ratings. The estimated fair value of the convertible notes is based on the trading price as of the balance sheet date.