Form 10-Q for USEC INC 1-Nov-2012 Quarterly
Post# of 34
Posted On: 11/24/2012 8:53:14 PM
Form 10-Q for USEC INC
1-Nov-2012
Quarterly Report
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with, and is qualified in its entirety by reference to, the consolidated condensed financial statements and related notes set forth in Part I, Item 1 of this report as well as the risks and uncertainties presented in Part II, Item 1A of this report and Part I, Item 1A of the annual report on Form 10-K for the year ended December 31, 2011.
Overview
USEC, a global energy company, is a leading supplier of low enriched uranium ("LEU") for commercial nuclear power plants. LEU is a critical component in the production of nuclear fuel for reactors to produce electricity. We:
? supply LEU to both domestic and international utilities for use in about 150 nuclear reactors worldwide;
? 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, and have a 10-year contract to buy LEU from Russia beginning in 2013;
? are working to deploy what we believe is the world's most advanced uranium enrichment technology, known as the American Centrifuge;
? provide transportation and storage systems for spent nuclear fuel and provide nuclear and energy consulting services; and
? perform limited contract work for DOE and its contractors at the Paducah and Portsmouth sites.
LEU consists of two components: separative work units ("SWU") and uranium. SWU is a standard unit of measurement that represents the effort required to transform a given amount of natural uranium into two components: enriched uranium having a higher percentage of U235 and depleted uranium having a lower percentage of U235. The SWU contained in LEU is calculated using an industry standard formula based on the physics of enrichment. The amount of enrichment deemed to be contained in LEU under this formula is commonly referred to as its SWU component and the quantity of natural uranium deemed to be used in the production of LEU under this formula is referred to as its uranium component.
We produce or acquire LEU from two principal sources. We produce about half of our supply of LEU at the Paducah GDP in Paducah, Kentucky, and we acquire the other portion under a contract with Russia (the "Russian Contract") under the Megatons to Megawatts program. Under the Russian Contract, we purchase the SWU component of LEU derived from dismantled nuclear weapons from the former Soviet Union for use as fuel in commercial nuclear power plants. By the end of 2013, we will be completing the highly successful 20-year Megatons to Megawatts program. In 2011, we entered into a 10-year contract (the "Russian Supply Agreement") to maintain access to Russian LEU supplies following the completion of the Russian Contract.
Our View of the Business Today
The nuclear fuel industry and USEC specifically continue to be affected by the aftermath of the March 2011 earthquake and tsunami in Japan that irreparably damaged four nuclear reactors at Fukushima. Long-term forecasts indicate growth in nuclear power reactors and thus an increase over time in uranium enrichment demand, but the impact of Fukushima has resulted in excess supply of low enriched uranium. Although two reactors were restarted in Japan during the third quarter, the regulatory process for restarting reactors has taken longer than expected and more than 50 reactors were off-line in Japan and Germany during 2012. The Japanese government has created the Nuclear Regulation Authority to oversee its nuclear power industry. New draft safety guidelines are expected in the first half of 2013 but Japanese officials have said additional reactor startups are not expected before next summer. These prolonged outages have resulted in excess SWU supply in the market, and this imbalance between supply and demand for LEU could increase over time depending on the length and severity of delays or cancellations of deliveries. In addition to the shutdown of reactors in Japan, following the events at Fukushima, Germany shut down eight of its reactors and announced that it will be phasing out all 17 nuclear reactors by 2022. Although we do not serve any of the German reactors, our European competitors that serve the German reactors now have excess nuclear fuel available to sell, further adding to the excess supply in the market. Published spot price indicators for SWU fell during the third quarter and are down 11% for the year through September 30, 2012. Based on the current lack of near-term demand, excess supply in the market and uncertainty regarding the pace of restarting reactors in Japan, we foresee an unfavorable imbalance between supply and demand for LEU until at least the second half of the decade.
These market conditions have challenged our business, including efforts to continue enrichment at the Paducah GDP. On May 15, 2012, we entered into a multi-party arrangement with Energy Northwest, the Bonneville Power Administration, the Tennessee Valley Authority and DOE to support a one-year extension of enrichment at the Paducah plant. Additional details are provided below under "Paducah Gaseous Diffusion Plant."
We believe that nuclear power is an essential component of the world's electricity generation mix. There is a global fleet of approximately 430 nuclear reactors that provide about 14% of the world's electricity. The United States has the largest number of reactors with 104 operating units that provide approximately 20% of the nation's electricity. We see continued growth in the number of nuclear power reactors internationally. According to the World Nuclear Association ("WNA"), 64 reactors are being built and several more are ready to begin construction. Twenty six units are expected to begin initial operations by the end of 2013. Completing all of the reactors currently under construction would add about 7 million SWU of annual demand, or a 14% increase to annual demand for enrichment. WNA currently estimates approximately 500 more reactors that have been proposed or planned will be built by 2030. In China alone, two dozen new units are being built and another 50 reactors are in the planning stage. However, our competitors have been expanding their enrichment capacity to meet this anticipated demand so we are facing an increasingly competitive enrichment market.
We have been working to deploy a highly efficient centrifuge plant in Piketon, Ohio to meet the global need for nuclear fuel, provide a path to long-term profitability for our shareholders and assure that the United States has a domestically owned and operated source of uranium enrichment. We are working on a research, development and demonstration ("RD&D") program for our American Centrifuge technology under a cost-sharing arrangement with DOE. On June 12, 2012, we finalized a cooperative agreement with DOE that provided the initial phase of cost-share funding for the program and, on September 30, 2012, the president signed legislation that includes additional funding for ongoing work on the RD&D program. We are building roughly 10 AC-100 centrifuge machines each month and the first two program milestones have been achieved. Additional details are provided below under "The American Centrifuge Plant."
By the end of 2013, we will also be completing the highly successful 20-year Megatons to Megawatts program which has provided half of our LEU supply in recent years. In 2011, we entered into a 10-year contract to maintain access to Russian LEU supplies and to assist in the transition from the Paducah GDP to the American Centrifuge Plant ("ACP"). Additional details are provided below under "Russian Supply Transition."
This period of transition from the gaseous diffusion technology used at the Paducah plant to the American Centrifuge technology will be challenging for USEC as we face significant competitive and cost pressures. We expect there to be a transition period of several years, until the ACP is in commercial operations, during which we are no longer enriching uranium but are making sales from our existing inventory and our future purchases under the Russian Supply Agreement. As we look to transition Paducah, we are seeking to minimize the period of transition until we have a new source of domestic U.S. enrichment production. We expect to continue discussions with customers regarding our existing backlog, which includes ACP sales agreements, some of which must be revised to reflect our anticipated supply sources during that transition period. We are also developing a commercialization plan for the ACP following the completion of the RD&D program.
As we prepare to cease enrichment at Paducah, we still need to attract and retain highly skilled workers to deploy the American Centrifuge technology. We are also addressing the size of our corporate support structure as we expect to sell significantly less SWU during this transition period and have taken initial steps to reduce costs. We are also evaluating how best to manage the potential costs associated with ceasing enrichment and ultimately transitioning out of Paducah, including how to address our pension and postretirement health and life benefit plan funding obligations and how to minimize other ongoing costs. In light of the uncertainties and challenges facing us and our desire to improve our credit profile and our ability to successfully finance the American Centrifuge project, we may pursue discussions with certain creditors and key stakeholders regarding ways to improve our capital structure. We are currently working with our advisors in developing options for a possible restructuring of our balance sheet.
Organizational Structure Review
During 2011, the company reduced the number of total employees by approximately one-third as we concluded much of the government contract services work being performed at the former Portsmouth gaseous diffusion plant and most of those employees transitioned to DOE's decontamination and decommissioning contractor at the site.
In early 2012, we initiated an internal review of our organizational structure and expect to reduce significantly the size of our workforce and corporate-wide organization costs over time. The reductions to-date involved approximately 50 employees including two senior corporate officers. Charges totaling $4.0 million were incurred in the first nine months of 2012 for one-time termination benefits including severance payments and short-term health care coverage.
Additional actions affecting employees to align the organization with our evolving business environment are expected, which could result in additional charges. We continue to evaluate opportunities to streamline corporate overhead and anticipate potential workforce reductions at our Paducah site as our operations transition over time. We will also be working to assure that the company has adequate resources to execute and complete the RD&D program and prepare for commercial deployment of our American Centrifuge technology.
Paducah Gaseous Diffusion Plant
Over the past decade, we have taken steps to improve operations at the Paducah GDP and the facility has been running at peak efficiency in recent years. These efforts, however, cannot overcome the inherent costs of substantial amounts of electricity required by the gaseous diffusion technology. Our competitors have all shifted to lower-cost centrifuge enrichment operations and the oversupply of LEU in the market makes continued commercial enrichment at the Paducah GDP difficult.
On May 15, 2012, pursuant to a multi-party arrangement with (1) Energy Northwest, a West Coast power supplier, (2) the Bonneville Power Administration ("BPA"), a federal agency within DOE, (3) the Tennessee Valley Authority ("TVA"), a federally owned corporation and supplier of power to the Paducah plant, and (4) DOE, we entered into an agreement to enrich depleted uranium at the Paducah GDP. The volume of enrichment under this arrangement is sufficient to support a one-year extension of enrichment at the Paducah GDP through May 31, 2013. Under the agreements that are part of this arrangement, DOE is providing high-assay depleted uranium hexafluoride, also known as tails, to Energy Northwest. Energy Northwest has contracted with USEC to enrich the tails into low enriched uranium. We have received approximately 90% of the tails at the Paducah GDP as of the end of September 2012. Energy Northwest will use a portion of the low enriched uranium for its Columbia Nuclear Generating Station and will sell the remainder of the U.S.-origin low enriched uranium to TVA. The fuel will be used in TVA's reactors, including reactors that are used to produce tritium, a vital component for maintaining the U.S. nuclear deterrent. TVA is supplying the power for the enrichment under a supplemental confirmation agreement pursuant to the existing USEC-TVA power contract.
We are engaged in ongoing discussions with DOE regarding the future of the Paducah GDP and the transition of Paducah. Although we will continue to look for ways to economically extend Paducah enrichment, our contract with Energy Northwest under the multi-party arrangement expires on May 31, 2013. As noted above, absent a significant increase in demand for low enriched uranium from the GDP, we believe it will be difficult to continue enrichment at the Paducah GDP beyond the term of this contract. We expect to continue to work with DOE to achieve an orderly transition of Paducah, as described below under "LEU Segment-Paducah GDP Transition".
We have already made regulatory submittals to the NRC to support the de-lease of a portion of the Paducah GDP and return of certain areas currently leased to DOE and expect to be taking additional actions over the next several months as our planning continues. Under our lease, DOE has the obligation for decontamination and decommissioning of the Paducah plant. Ceasing enrichment at the Paducah GDP could have a material adverse effect on our business and prospects. For a discussion of the potential implications of ceasing enrichment at Paducah, see Item 1A, "Risk Factors" of this report and our 2011 Annual Report on Form 10-K.
The American Centrifuge Plant
We are working to deploy the American Centrifuge technology, a highly efficient uranium enrichment gas centrifuge technology. The American Centrifuge technology requires 95% less electricity to produce low enriched uranium on a per SWU unit basis than our existing gaseous diffusion technology. The American Centrifuge technology is a disciplined evolution of classified U.S. centrifuge technology originally developed by DOE and successfully demonstrated during the 1980s. We are working to deploy the American Centrifuge technology at the ACP in Piketon, Ohio. This new facility would provide us with a long term competitive source of uranium enrichment.
As of September 30, 2012, we have invested approximately $2.3 billion in the American Centrifuge program, which includes $1.2 billion charged to expense over several years for technology development and demonstration. We began construction of the ACP in May 2007 after being issued a construction and operating license by the NRC. We have operated centrifuges as part of our lead cascade test program for more than 120 machine years since August 2007. Through the lead cascade test program, we demonstrate the performance of centrifuge machines, demonstrate the reliability of machine components, obtain data on machine-to-machine interactions, verify cascade performance models under a variety of operating conditions, and obtain operating experience for our plant operators and technicians. Data from this testing program has provided valuable assembly, operating and maintenance information, as well as operations experience for the American Centrifuge Plant staff. This experience gives us confidence in the performance of our technology, and provides operating data and expertise for future commercial deployment.
We need significant additional financing in order to complete the ACP. We applied for a $2 billion loan guarantee under the DOE Loan Guarantee Program in July 2008. Instead of moving forward with a conditional commitment for a loan guarantee, in the fall of 2011, DOE proposed a research, development and demonstration ("RD&D") program. DOE indicated that our application for a DOE loan guarantee would remain pending during the RD&D program but has given us no assurance that a successful RD&D program will result in a loan guarantee. Additional capital beyond the $2 billion of DOE loan guarantee funding that we have applied for and our internally generated cash flow will be required to complete the project. We have had discussions with Japanese export credit agencies regarding financing up to $1 billion of the cost of completing the ACP. Additional capital will also be needed and the amount of additional capital is dependent on a number of factors, including the amount of any revised cost estimate and schedule for the project, the amount of contingency or other capital DOE may require as part of a loan guarantee, and the amount of the DOE credit subsidy cost that would be required to be paid in connection with a loan guarantee. However, we have no assurances that we will be successful in obtaining this financing or that the delays we have experienced will not adversely affect these efforts.
The objectives of the RD&D program are (1) to demonstrate the American Centrifuge technology through the construction and operation of a cascade of 120 commercial centrifuge machines and (2) to sustain the domestic U.S. centrifuge technical and industrial base for national security purposes and potential commercialization of the American Centrifuge project. This includes activities to reduce the risks and improve the future prospects of deployment of the American Centrifuge technology. USEC intends to meet these objectives through the construction and operation of one complete demonstration cascade and supporting infrastructure. This will enable us to demonstrate redundancy of the primary cascade support systems for commercial plant operation and to complete integrated testing against operational requirements.
June 2012 Cooperative Agreement with DOE
We began funding the RD&D program in January 2012 and have been building machines and parts for the demonstration cascade. On June 12, 2012, we and DOE entered into a cooperative agreement to provide cost-share funding for the RD&D program. The agreement provides for 80% DOE and 20% USEC cost sharing for work performed during the period June 1, 2012 through December 31, 2013 having a total estimated cost of $350 million. DOE's total contribution would be up to $280 million and our contribution would be up to $70 million. The cooperative agreement will be incrementally funded. The June cooperative agreement provided initial DOE funding of $87.7 million and, on September 30, 2012, Congress passed and the president signed a six-month spending measure that contains additional funding for continued work on the RD&D program at an annual rate for operations of $100 million, which we expect to result in $45.72 million of additional funding for the program in the six-month period ending March 31, 2013. The remaining funding from DOE has not yet been authorized and is subject to Congressional appropriations, Congressional transfer or reprogramming authority to permit the use by DOE of funds previously appropriated for other programs, or other sources available to DOE. We will continue working with Congress and the administration to fully fund the RD&D program through December 2013, but there is no assurance that this additional funding will be made available.
DOE provided the initial $87.7 million of funding by accepting title to quantities of depleted uranium that enabled us to release encumbered funds. We received $55.6 million of the cash in the third quarter of 2012 as the surety bonds and related cash deposits providing the financial assurance for disposition of this depleted uranium were reduced. The remainder is expected to be received in the fourth quarter of 2012.
Under the cooperative agreement, we and our newly created subsidiary American Centrifuge Demonstration, LLC ("ACD") will carry out the RD&D program. ACD has put in place a program management and enhanced program execution structure as required by the cooperative agreement. On July 23, 2012, we entered into a limited liability company agreement for ACD which, among other things, established a board of managers in accordance with the enhanced program execution structure. The seven-person board is comprised of two independent managers, two managers appointed by USEC, and one manager appointed by each of Babcock & Wilcox Technical Services Group, Inc., Toshiba America Nuclear Energy Corporation and Exelon Generation Company, LLC.
The cooperative agreement also includes the following five technical milestones for the RD&D program:
? Milestone 1: DOE and USEC jointly agree upon a test program for the remaining milestones and for full system reliability and plant availability that takes into account human factors, upgraded Lower Suspension Drive Assembly ("LSDA") and overall AC100 reliability, and full cascade separative performance, so as to achieve an overall plant availability and confidence level needed to support commercial plant operations;
? Milestone 2: Confirm the reliability of the LSDA by accumulating 20 machine years of operation at target speed using AC100 centrifuges with upgraded LSDAs with no more than the projected number of LSDA failures;
? Milestone 3: Demonstrate AC100 manufacturing quality by operating the commercial demonstration cascade for a minimum of 20 machine years to provide the confidence level needed to support commercial plant operations;
? Milestone 4: Demonstrate AC100 reliability by accumulating 20 machine years at target speed and design condition with no more than the expected number of infant, steady-state and electronic recycles; and
? Milestone 5: Demonstrate sustained production from a commercially-staged, 120-centrifuge demonstration cascade configuration for 60 days (approximately 20 machine years) in cascade recycle mode with production availability needed during commercial plant operations using an average AC100 centrifuge production of 340 SWU per centrifuge year.
The first two technical milestones have been achieved and certified by DOE. The remaining three milestones above have a milestone date of December 31, 2013, tied to the completion of the RD&D program. In addition, the cooperative agreement also contains five non-binding performance indicators that are designed to be achieved throughout the RD&D program and ensure that the RD&D program is on track to achieve the remaining three milestones and other program objectives. As of September 30, 2012, we had manufactured a sufficient number of AC100 centrifuge machines and attained sufficient centrifuge machine run time to meet two of the performance indicator goals.
During the RD&D program we have built AC100 centrifuge machines and conditioned them with uranium gas in our existing lead cascade. Under the agreed upon test program referenced in the first milestone above, we expect to continue to operate AC100 machines in the lead cascade until construction activities for the new Demonstration Cascade require suspension of machine operations in the first half of 2013. This period will allow removal of existing cascade support equipment, construction of new infrastructure equipment and integrated systems testing. Manufacture and assembly of AC100 machines will also continue during this period and through the end of the program. Centrifuge operations and testing will continue at our test facility in Oak Ridge during this construction period. Once the new equipment is installed and tested, 120 AC100 machines will be installed and operated in a commercial plant configuration.
DOE has the right to terminate the Cooperative Agreement if any of these technical milestones are not met on or before the agreed date for such milestones. DOE also has the right to terminate the cooperative agreement if we materially fail to comply with the other terms and conditions of the cooperative agreement. Failure to meet the technical milestones under the cooperative agreement could provide a basis for DOE to exercise its remedies under the 2002 DOE-USEC Agreement (as defined below). Additional information regarding the remedies under the 2002 DOE-USEC Agreement can be found below and in the Company's Annual Report on Form 10-K for the year ended December 31, 2011.
On June 12, 2012, through our subsidiary ACD, we also entered into a contract with DOE to transfer to DOE title to the centrifuge machines and equipment produced or acquired under the RD&D program. The transferred property includes some existing machines and equipment and, at DOE's option, the machines and equipment produced or acquired under the cooperative agreement. DOE will make the transferred property available for no additional fee as leased personal property under the lease agreement between DOE and USEC for the facilities at Piketon, Ohio for the American Centrifuge Plant, and at financial closing on the financing for the construction of the American Centrifuge plant, title to the transferred property will transfer to the lessee under and in accordance with the terms of the lease agreement. If we abandon the centrifuge technology and return the premises leased under the DOE lease agreement, DOE will keep the transferred property and would be responsible for its disposal.
Amendment to the June 2002 DOE-USEC Agreement
On June 12, 2012 USEC and DOE entered into an amendment (the "2002 Agreement Amendment") to the Agreement dated June 17, 2002 between DOE and USEC, as amended (the "2002 DOE-USEC Agreement"). The 2002 DOE-USEC Agreement provides that we will develop, demonstrate and deploy advanced enrichment technology in accordance with milestones and provides for remedies in the event of a failure to meet a milestone under certain circumstances. The 2002 Agreement Amendment adds two new milestones and revises the remaining four milestones under the 2002 DOE-USEC Agreement relating to the financing and operation of the American Centrifuge Plant. These milestone dates are not intended to be representative of management's view of an updated schedule for deployment of the American Centrifuge plant but are a result of negotiations with DOE. During the RD&D program, we will be developing a comprehensive cost estimate and revised schedule for the American Centrifuge project that would form the basis for an update to our loan guarantee application to DOE. The 2002 Agreement Amendment provides that we will submit a revised plan to DOE covering the milestones after November 2014 on or before the date we submit a notice of commitment to proceed with commercial operations, and DOE and USEC will discuss adjustment of these remaining milestones as may be appropriate based on this revised plan.
? The following two new milestones were added:
May 2014 - Successful completion of the American Centrifuge Cascade Demonstration Test Program
June 2014 - Commitment to proceed with commercial operation
? The remaining milestones were extended as follows:
November 2014 - 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
. . .
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1-Nov-2012
Quarterly Report
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with, and is qualified in its entirety by reference to, the consolidated condensed financial statements and related notes set forth in Part I, Item 1 of this report as well as the risks and uncertainties presented in Part II, Item 1A of this report and Part I, Item 1A of the annual report on Form 10-K for the year ended December 31, 2011.
Overview
USEC, a global energy company, is a leading supplier of low enriched uranium ("LEU") for commercial nuclear power plants. LEU is a critical component in the production of nuclear fuel for reactors to produce electricity. We:
? supply LEU to both domestic and international utilities for use in about 150 nuclear reactors worldwide;
? 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, and have a 10-year contract to buy LEU from Russia beginning in 2013;
? are working to deploy what we believe is the world's most advanced uranium enrichment technology, known as the American Centrifuge;
? provide transportation and storage systems for spent nuclear fuel and provide nuclear and energy consulting services; and
? perform limited contract work for DOE and its contractors at the Paducah and Portsmouth sites.
LEU consists of two components: separative work units ("SWU") and uranium. SWU is a standard unit of measurement that represents the effort required to transform a given amount of natural uranium into two components: enriched uranium having a higher percentage of U235 and depleted uranium having a lower percentage of U235. The SWU contained in LEU is calculated using an industry standard formula based on the physics of enrichment. The amount of enrichment deemed to be contained in LEU under this formula is commonly referred to as its SWU component and the quantity of natural uranium deemed to be used in the production of LEU under this formula is referred to as its uranium component.
We produce or acquire LEU from two principal sources. We produce about half of our supply of LEU at the Paducah GDP in Paducah, Kentucky, and we acquire the other portion under a contract with Russia (the "Russian Contract") under the Megatons to Megawatts program. Under the Russian Contract, we purchase the SWU component of LEU derived from dismantled nuclear weapons from the former Soviet Union for use as fuel in commercial nuclear power plants. By the end of 2013, we will be completing the highly successful 20-year Megatons to Megawatts program. In 2011, we entered into a 10-year contract (the "Russian Supply Agreement") to maintain access to Russian LEU supplies following the completion of the Russian Contract.
Our View of the Business Today
The nuclear fuel industry and USEC specifically continue to be affected by the aftermath of the March 2011 earthquake and tsunami in Japan that irreparably damaged four nuclear reactors at Fukushima. Long-term forecasts indicate growth in nuclear power reactors and thus an increase over time in uranium enrichment demand, but the impact of Fukushima has resulted in excess supply of low enriched uranium. Although two reactors were restarted in Japan during the third quarter, the regulatory process for restarting reactors has taken longer than expected and more than 50 reactors were off-line in Japan and Germany during 2012. The Japanese government has created the Nuclear Regulation Authority to oversee its nuclear power industry. New draft safety guidelines are expected in the first half of 2013 but Japanese officials have said additional reactor startups are not expected before next summer. These prolonged outages have resulted in excess SWU supply in the market, and this imbalance between supply and demand for LEU could increase over time depending on the length and severity of delays or cancellations of deliveries. In addition to the shutdown of reactors in Japan, following the events at Fukushima, Germany shut down eight of its reactors and announced that it will be phasing out all 17 nuclear reactors by 2022. Although we do not serve any of the German reactors, our European competitors that serve the German reactors now have excess nuclear fuel available to sell, further adding to the excess supply in the market. Published spot price indicators for SWU fell during the third quarter and are down 11% for the year through September 30, 2012. Based on the current lack of near-term demand, excess supply in the market and uncertainty regarding the pace of restarting reactors in Japan, we foresee an unfavorable imbalance between supply and demand for LEU until at least the second half of the decade.
These market conditions have challenged our business, including efforts to continue enrichment at the Paducah GDP. On May 15, 2012, we entered into a multi-party arrangement with Energy Northwest, the Bonneville Power Administration, the Tennessee Valley Authority and DOE to support a one-year extension of enrichment at the Paducah plant. Additional details are provided below under "Paducah Gaseous Diffusion Plant."
We believe that nuclear power is an essential component of the world's electricity generation mix. There is a global fleet of approximately 430 nuclear reactors that provide about 14% of the world's electricity. The United States has the largest number of reactors with 104 operating units that provide approximately 20% of the nation's electricity. We see continued growth in the number of nuclear power reactors internationally. According to the World Nuclear Association ("WNA"), 64 reactors are being built and several more are ready to begin construction. Twenty six units are expected to begin initial operations by the end of 2013. Completing all of the reactors currently under construction would add about 7 million SWU of annual demand, or a 14% increase to annual demand for enrichment. WNA currently estimates approximately 500 more reactors that have been proposed or planned will be built by 2030. In China alone, two dozen new units are being built and another 50 reactors are in the planning stage. However, our competitors have been expanding their enrichment capacity to meet this anticipated demand so we are facing an increasingly competitive enrichment market.
We have been working to deploy a highly efficient centrifuge plant in Piketon, Ohio to meet the global need for nuclear fuel, provide a path to long-term profitability for our shareholders and assure that the United States has a domestically owned and operated source of uranium enrichment. We are working on a research, development and demonstration ("RD&D") program for our American Centrifuge technology under a cost-sharing arrangement with DOE. On June 12, 2012, we finalized a cooperative agreement with DOE that provided the initial phase of cost-share funding for the program and, on September 30, 2012, the president signed legislation that includes additional funding for ongoing work on the RD&D program. We are building roughly 10 AC-100 centrifuge machines each month and the first two program milestones have been achieved. Additional details are provided below under "The American Centrifuge Plant."
By the end of 2013, we will also be completing the highly successful 20-year Megatons to Megawatts program which has provided half of our LEU supply in recent years. In 2011, we entered into a 10-year contract to maintain access to Russian LEU supplies and to assist in the transition from the Paducah GDP to the American Centrifuge Plant ("ACP"). Additional details are provided below under "Russian Supply Transition."
This period of transition from the gaseous diffusion technology used at the Paducah plant to the American Centrifuge technology will be challenging for USEC as we face significant competitive and cost pressures. We expect there to be a transition period of several years, until the ACP is in commercial operations, during which we are no longer enriching uranium but are making sales from our existing inventory and our future purchases under the Russian Supply Agreement. As we look to transition Paducah, we are seeking to minimize the period of transition until we have a new source of domestic U.S. enrichment production. We expect to continue discussions with customers regarding our existing backlog, which includes ACP sales agreements, some of which must be revised to reflect our anticipated supply sources during that transition period. We are also developing a commercialization plan for the ACP following the completion of the RD&D program.
As we prepare to cease enrichment at Paducah, we still need to attract and retain highly skilled workers to deploy the American Centrifuge technology. We are also addressing the size of our corporate support structure as we expect to sell significantly less SWU during this transition period and have taken initial steps to reduce costs. We are also evaluating how best to manage the potential costs associated with ceasing enrichment and ultimately transitioning out of Paducah, including how to address our pension and postretirement health and life benefit plan funding obligations and how to minimize other ongoing costs. In light of the uncertainties and challenges facing us and our desire to improve our credit profile and our ability to successfully finance the American Centrifuge project, we may pursue discussions with certain creditors and key stakeholders regarding ways to improve our capital structure. We are currently working with our advisors in developing options for a possible restructuring of our balance sheet.
Organizational Structure Review
During 2011, the company reduced the number of total employees by approximately one-third as we concluded much of the government contract services work being performed at the former Portsmouth gaseous diffusion plant and most of those employees transitioned to DOE's decontamination and decommissioning contractor at the site.
In early 2012, we initiated an internal review of our organizational structure and expect to reduce significantly the size of our workforce and corporate-wide organization costs over time. The reductions to-date involved approximately 50 employees including two senior corporate officers. Charges totaling $4.0 million were incurred in the first nine months of 2012 for one-time termination benefits including severance payments and short-term health care coverage.
Additional actions affecting employees to align the organization with our evolving business environment are expected, which could result in additional charges. We continue to evaluate opportunities to streamline corporate overhead and anticipate potential workforce reductions at our Paducah site as our operations transition over time. We will also be working to assure that the company has adequate resources to execute and complete the RD&D program and prepare for commercial deployment of our American Centrifuge technology.
Paducah Gaseous Diffusion Plant
Over the past decade, we have taken steps to improve operations at the Paducah GDP and the facility has been running at peak efficiency in recent years. These efforts, however, cannot overcome the inherent costs of substantial amounts of electricity required by the gaseous diffusion technology. Our competitors have all shifted to lower-cost centrifuge enrichment operations and the oversupply of LEU in the market makes continued commercial enrichment at the Paducah GDP difficult.
On May 15, 2012, pursuant to a multi-party arrangement with (1) Energy Northwest, a West Coast power supplier, (2) the Bonneville Power Administration ("BPA"), a federal agency within DOE, (3) the Tennessee Valley Authority ("TVA"), a federally owned corporation and supplier of power to the Paducah plant, and (4) DOE, we entered into an agreement to enrich depleted uranium at the Paducah GDP. The volume of enrichment under this arrangement is sufficient to support a one-year extension of enrichment at the Paducah GDP through May 31, 2013. Under the agreements that are part of this arrangement, DOE is providing high-assay depleted uranium hexafluoride, also known as tails, to Energy Northwest. Energy Northwest has contracted with USEC to enrich the tails into low enriched uranium. We have received approximately 90% of the tails at the Paducah GDP as of the end of September 2012. Energy Northwest will use a portion of the low enriched uranium for its Columbia Nuclear Generating Station and will sell the remainder of the U.S.-origin low enriched uranium to TVA. The fuel will be used in TVA's reactors, including reactors that are used to produce tritium, a vital component for maintaining the U.S. nuclear deterrent. TVA is supplying the power for the enrichment under a supplemental confirmation agreement pursuant to the existing USEC-TVA power contract.
We are engaged in ongoing discussions with DOE regarding the future of the Paducah GDP and the transition of Paducah. Although we will continue to look for ways to economically extend Paducah enrichment, our contract with Energy Northwest under the multi-party arrangement expires on May 31, 2013. As noted above, absent a significant increase in demand for low enriched uranium from the GDP, we believe it will be difficult to continue enrichment at the Paducah GDP beyond the term of this contract. We expect to continue to work with DOE to achieve an orderly transition of Paducah, as described below under "LEU Segment-Paducah GDP Transition".
We have already made regulatory submittals to the NRC to support the de-lease of a portion of the Paducah GDP and return of certain areas currently leased to DOE and expect to be taking additional actions over the next several months as our planning continues. Under our lease, DOE has the obligation for decontamination and decommissioning of the Paducah plant. Ceasing enrichment at the Paducah GDP could have a material adverse effect on our business and prospects. For a discussion of the potential implications of ceasing enrichment at Paducah, see Item 1A, "Risk Factors" of this report and our 2011 Annual Report on Form 10-K.
The American Centrifuge Plant
We are working to deploy the American Centrifuge technology, a highly efficient uranium enrichment gas centrifuge technology. The American Centrifuge technology requires 95% less electricity to produce low enriched uranium on a per SWU unit basis than our existing gaseous diffusion technology. The American Centrifuge technology is a disciplined evolution of classified U.S. centrifuge technology originally developed by DOE and successfully demonstrated during the 1980s. We are working to deploy the American Centrifuge technology at the ACP in Piketon, Ohio. This new facility would provide us with a long term competitive source of uranium enrichment.
As of September 30, 2012, we have invested approximately $2.3 billion in the American Centrifuge program, which includes $1.2 billion charged to expense over several years for technology development and demonstration. We began construction of the ACP in May 2007 after being issued a construction and operating license by the NRC. We have operated centrifuges as part of our lead cascade test program for more than 120 machine years since August 2007. Through the lead cascade test program, we demonstrate the performance of centrifuge machines, demonstrate the reliability of machine components, obtain data on machine-to-machine interactions, verify cascade performance models under a variety of operating conditions, and obtain operating experience for our plant operators and technicians. Data from this testing program has provided valuable assembly, operating and maintenance information, as well as operations experience for the American Centrifuge Plant staff. This experience gives us confidence in the performance of our technology, and provides operating data and expertise for future commercial deployment.
We need significant additional financing in order to complete the ACP. We applied for a $2 billion loan guarantee under the DOE Loan Guarantee Program in July 2008. Instead of moving forward with a conditional commitment for a loan guarantee, in the fall of 2011, DOE proposed a research, development and demonstration ("RD&D") program. DOE indicated that our application for a DOE loan guarantee would remain pending during the RD&D program but has given us no assurance that a successful RD&D program will result in a loan guarantee. Additional capital beyond the $2 billion of DOE loan guarantee funding that we have applied for and our internally generated cash flow will be required to complete the project. We have had discussions with Japanese export credit agencies regarding financing up to $1 billion of the cost of completing the ACP. Additional capital will also be needed and the amount of additional capital is dependent on a number of factors, including the amount of any revised cost estimate and schedule for the project, the amount of contingency or other capital DOE may require as part of a loan guarantee, and the amount of the DOE credit subsidy cost that would be required to be paid in connection with a loan guarantee. However, we have no assurances that we will be successful in obtaining this financing or that the delays we have experienced will not adversely affect these efforts.
The objectives of the RD&D program are (1) to demonstrate the American Centrifuge technology through the construction and operation of a cascade of 120 commercial centrifuge machines and (2) to sustain the domestic U.S. centrifuge technical and industrial base for national security purposes and potential commercialization of the American Centrifuge project. This includes activities to reduce the risks and improve the future prospects of deployment of the American Centrifuge technology. USEC intends to meet these objectives through the construction and operation of one complete demonstration cascade and supporting infrastructure. This will enable us to demonstrate redundancy of the primary cascade support systems for commercial plant operation and to complete integrated testing against operational requirements.
June 2012 Cooperative Agreement with DOE
We began funding the RD&D program in January 2012 and have been building machines and parts for the demonstration cascade. On June 12, 2012, we and DOE entered into a cooperative agreement to provide cost-share funding for the RD&D program. The agreement provides for 80% DOE and 20% USEC cost sharing for work performed during the period June 1, 2012 through December 31, 2013 having a total estimated cost of $350 million. DOE's total contribution would be up to $280 million and our contribution would be up to $70 million. The cooperative agreement will be incrementally funded. The June cooperative agreement provided initial DOE funding of $87.7 million and, on September 30, 2012, Congress passed and the president signed a six-month spending measure that contains additional funding for continued work on the RD&D program at an annual rate for operations of $100 million, which we expect to result in $45.72 million of additional funding for the program in the six-month period ending March 31, 2013. The remaining funding from DOE has not yet been authorized and is subject to Congressional appropriations, Congressional transfer or reprogramming authority to permit the use by DOE of funds previously appropriated for other programs, or other sources available to DOE. We will continue working with Congress and the administration to fully fund the RD&D program through December 2013, but there is no assurance that this additional funding will be made available.
DOE provided the initial $87.7 million of funding by accepting title to quantities of depleted uranium that enabled us to release encumbered funds. We received $55.6 million of the cash in the third quarter of 2012 as the surety bonds and related cash deposits providing the financial assurance for disposition of this depleted uranium were reduced. The remainder is expected to be received in the fourth quarter of 2012.
Under the cooperative agreement, we and our newly created subsidiary American Centrifuge Demonstration, LLC ("ACD") will carry out the RD&D program. ACD has put in place a program management and enhanced program execution structure as required by the cooperative agreement. On July 23, 2012, we entered into a limited liability company agreement for ACD which, among other things, established a board of managers in accordance with the enhanced program execution structure. The seven-person board is comprised of two independent managers, two managers appointed by USEC, and one manager appointed by each of Babcock & Wilcox Technical Services Group, Inc., Toshiba America Nuclear Energy Corporation and Exelon Generation Company, LLC.
The cooperative agreement also includes the following five technical milestones for the RD&D program:
? Milestone 1: DOE and USEC jointly agree upon a test program for the remaining milestones and for full system reliability and plant availability that takes into account human factors, upgraded Lower Suspension Drive Assembly ("LSDA") and overall AC100 reliability, and full cascade separative performance, so as to achieve an overall plant availability and confidence level needed to support commercial plant operations;
? Milestone 2: Confirm the reliability of the LSDA by accumulating 20 machine years of operation at target speed using AC100 centrifuges with upgraded LSDAs with no more than the projected number of LSDA failures;
? Milestone 3: Demonstrate AC100 manufacturing quality by operating the commercial demonstration cascade for a minimum of 20 machine years to provide the confidence level needed to support commercial plant operations;
? Milestone 4: Demonstrate AC100 reliability by accumulating 20 machine years at target speed and design condition with no more than the expected number of infant, steady-state and electronic recycles; and
? Milestone 5: Demonstrate sustained production from a commercially-staged, 120-centrifuge demonstration cascade configuration for 60 days (approximately 20 machine years) in cascade recycle mode with production availability needed during commercial plant operations using an average AC100 centrifuge production of 340 SWU per centrifuge year.
The first two technical milestones have been achieved and certified by DOE. The remaining three milestones above have a milestone date of December 31, 2013, tied to the completion of the RD&D program. In addition, the cooperative agreement also contains five non-binding performance indicators that are designed to be achieved throughout the RD&D program and ensure that the RD&D program is on track to achieve the remaining three milestones and other program objectives. As of September 30, 2012, we had manufactured a sufficient number of AC100 centrifuge machines and attained sufficient centrifuge machine run time to meet two of the performance indicator goals.
During the RD&D program we have built AC100 centrifuge machines and conditioned them with uranium gas in our existing lead cascade. Under the agreed upon test program referenced in the first milestone above, we expect to continue to operate AC100 machines in the lead cascade until construction activities for the new Demonstration Cascade require suspension of machine operations in the first half of 2013. This period will allow removal of existing cascade support equipment, construction of new infrastructure equipment and integrated systems testing. Manufacture and assembly of AC100 machines will also continue during this period and through the end of the program. Centrifuge operations and testing will continue at our test facility in Oak Ridge during this construction period. Once the new equipment is installed and tested, 120 AC100 machines will be installed and operated in a commercial plant configuration.
DOE has the right to terminate the Cooperative Agreement if any of these technical milestones are not met on or before the agreed date for such milestones. DOE also has the right to terminate the cooperative agreement if we materially fail to comply with the other terms and conditions of the cooperative agreement. Failure to meet the technical milestones under the cooperative agreement could provide a basis for DOE to exercise its remedies under the 2002 DOE-USEC Agreement (as defined below). Additional information regarding the remedies under the 2002 DOE-USEC Agreement can be found below and in the Company's Annual Report on Form 10-K for the year ended December 31, 2011.
On June 12, 2012, through our subsidiary ACD, we also entered into a contract with DOE to transfer to DOE title to the centrifuge machines and equipment produced or acquired under the RD&D program. The transferred property includes some existing machines and equipment and, at DOE's option, the machines and equipment produced or acquired under the cooperative agreement. DOE will make the transferred property available for no additional fee as leased personal property under the lease agreement between DOE and USEC for the facilities at Piketon, Ohio for the American Centrifuge Plant, and at financial closing on the financing for the construction of the American Centrifuge plant, title to the transferred property will transfer to the lessee under and in accordance with the terms of the lease agreement. If we abandon the centrifuge technology and return the premises leased under the DOE lease agreement, DOE will keep the transferred property and would be responsible for its disposal.
Amendment to the June 2002 DOE-USEC Agreement
On June 12, 2012 USEC and DOE entered into an amendment (the "2002 Agreement Amendment") to the Agreement dated June 17, 2002 between DOE and USEC, as amended (the "2002 DOE-USEC Agreement"). The 2002 DOE-USEC Agreement provides that we will develop, demonstrate and deploy advanced enrichment technology in accordance with milestones and provides for remedies in the event of a failure to meet a milestone under certain circumstances. The 2002 Agreement Amendment adds two new milestones and revises the remaining four milestones under the 2002 DOE-USEC Agreement relating to the financing and operation of the American Centrifuge Plant. These milestone dates are not intended to be representative of management's view of an updated schedule for deployment of the American Centrifuge plant but are a result of negotiations with DOE. During the RD&D program, we will be developing a comprehensive cost estimate and revised schedule for the American Centrifuge project that would form the basis for an update to our loan guarantee application to DOE. The 2002 Agreement Amendment provides that we will submit a revised plan to DOE covering the milestones after November 2014 on or before the date we submit a notice of commitment to proceed with commercial operations, and DOE and USEC will discuss adjustment of these remaining milestones as may be appropriate based on this revised plan.
? The following two new milestones were added:
May 2014 - Successful completion of the American Centrifuge Cascade Demonstration Test Program
June 2014 - Commitment to proceed with commercial operation
? The remaining milestones were extended as follows:
November 2014 - 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
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