USEC is in the process of developing an updated plan for the financing and commercialization of the American Centrifuge project. Factors that can affect this plan include key variables related to project cost, schedule, market demand and market prices for low enriched uranium, financing costs and other financing terms. USEC has experienced cost pressures due to delays in deployment of the project. The economics of the project are also being increasingly challenged by the current supply/demand imbalance in the market for low enriched uranium and related downward pressure on market prices. USEC does not currently have the remaining government cost-share funding in place for the last three months of the calendar year needed to complete the research, development and demonstration (RD&D) program or any financing in place for the project following the completion of the current RD&D program and will need significant additional financing in order to complete the American Centrifuge Plant.
Despite the technical progress being made by the RD&D program, if financing is not in place at the end of the RD&D program, USEC could demobilize or terminate the project in order to preserve its liquidity. USEC could also make a decision at any time to demobilize or terminate the project based on the timing and likelihood of successful commercialization of the American Centrifuge project taking into account the factors above. In the event of a demobilization or termination of the American Centrifuge project, USEC could incur significant costs that could put significant demands on its liquidity.
USEC believes a loan guarantee under the Department of Energy (DOE) Loan Guarantee Program, which was established by the Energy Policy Act of 2005, or other government support is critical to obtaining the funding needed to complete the American Centrifuge Plant. In July 2008, USEC applied under the DOE Loan Guarantee Program for $2 billion in U.S. government guaranteed debt financing for the ACP. Instead of moving forward with a conditional commitment for a loan guarantee, in the fall of 2011, DOE proposed a two-year RD&D program for the project. DOE indicated that USEC's application for a DOE loan guarantee would remain pending during the RD&D program but has given USEC no assurance that a successful RD&D program will result in a loan guarantee. In order to obtain a loan guarantee, USEC will need to demonstrate a viable commercialization plan which is dependent on the factors described above.
Additional capital beyond the $2 billion of DOE loan guarantee funding that USEC has applied for and USEC's internally generated cash flow will be required to complete the project. USEC has had discussions with Japanese export credit agencies regarding financing up to $1 billion of the cost of completing the ACP, with such potential financing predicated on USEC receiving a DOE loan guarantee.
USEC also expects to need at least $1 billion of capital for the project in addition to the DOE loan guarantee and the Japanese export credit agency funding discussed above. The amount of additional capital includes contributions from USEC and 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. USEC currently anticipates the sources for this capital to include cash generated by the project during startup, available USEC cash flow from operations and additional third-party capital. USEC expects the additional third-party capital would be raised at the project level, including through the issuance of additional equity participation.
However, in order to successfully raise this capital, USEC needs to develop and validate a viable business plan that supports loan repayment and provides potential investors with an attractive return on investment based on the project's risk profile. The economics of the American Centrifuge project are increasingly challenged under current enrichment market conditions, which have continued to decline during 2013. USEC has no assurances that it will be successful in obtaining this financing and that the delays and cost increases the Company has experienced and market conditions will not adversely affect these efforts. USEC is working to identify cost mitigation actions; however USEC has no assurance that it will be successful. USEC also is uncertain regarding the amount of internally generated cash flow from operations that USEC will have available to finance the project in light of the delays in deployment of the project, reduced cash flow from operations as a result of ceasing enrichment at the Paducah GDP and potential requirements for USEC's internally generated cash flow to satisfy its pension and postretirement benefit and other obligations. The amount of capital that USEC is able to contribute to the project going forward will also impact USEC's share of the ultimate ownership of the project, which would be reduced as a result of raising equity and other capital to deploy the project.
Given the current enrichment market conditions and the challenges these conditions present for obtaining the capital necessary for American Centrifuge Plant commercialization, USEC is evaluating and pursuing the feasibility of alternatives and the actions necessary to proceed with the commercial deployment of the American Centrifuge technology, including the availability of additional government support. USEC has no assurance that it will be successful in achieving any of these measures, including obtaining additional government support that may be necessary to successful commercial deployment, or the timing thereof. Therefore, USEC continues to evaluate its options concerning the American Centrifuge project including its ability to continue the project prior to or upon completion of the RD&D program, further demobilization of or delays in the commercial deployment of the project, and termination of the project. Any such actions may have a material adverse impact on USEC's ability to deploy the American Centrifuge technology, on its liquidity and on the long-term viability of its enrichment business.
In order to address the October 1, 2014 maturity of its $530 million of convertible senior notes and increase the likelihood of a successful financing and deployment of the American Centrifuge project and USEC's participation in such project, USEC is engaged with its advisors and certain stakeholders on alternatives for a possible restructuring of its balance sheet. A restructuring of USEC's balance sheet could adversely affect the holders of USEC common stock through dilution or loss in value. However, USEC has no assurance regarding the outcome of any discussions USEC pursues with creditors or other key stakeholders.
RD&D Program Funding
USEC is conducting a RD&D program for the American Centrifuge technology with cost share funding from DOE. The objectives of the RD&D program are to demonstrate the American Centrifuge technology through the construction and operation of a commercial demonstration cascade of 120 centrifuge machines and sustain the domestic U.S. centrifuge technical and industrial base for national security purposes and potential commercialization of the American Centrifuge technology. This includes activities to reduce the technical risks and improve the future prospects of deployment of the American Centrifuge technology. The June 2012 cooperative agreement with DOE, as most recently amended on July 24, 2013, defines the scope, funding and technical goals for the RD&D program. The program schedule runs from June 1, 2012 through December 31, 2013. The total investment in the program will be up to $350 million, with DOE providing 80%, and USEC providing 20% of the total. DOE’s total contribution would be up to $280 million and USEC’s contribution would be up to $70 million. The cooperative agreement is being incrementally funded, and $227.7 million of DOE funding has been provided as follows, which is expected to fund the RD&D program through September 30, 2013:
- $87.7 million of funding was provided by DOE accepting title to quantities of depleted uranium that enabled USEC to release encumbered funds that were providing financial assurance for the disposition of this depleted uranium;
- $45.7 million of funding was provided pursuant to the six-month continuing appropriations resolution passed by Congress and signed by the President on September 28, 2012;
- $44.4 million of funding was provided in March 2013 by DOE transferring the separative work unit ("SWU") component of LEU that DOE previously acquired from USEC in exchange for the transfer of quantities of USEC’s depleted uranium to DOE; and
- $49.9 million of funding was provided pursuant to the FY2013 continuing appropriations resolution, through amendments to the cooperative agreement on June 13, 2013 and July 24, 2013.
As of June 30, 2013, USEC has made cumulative qualifying American Centrifuge expenditures of $225.5 million. DOE’s pro-rata share is 80% or $180.4 million. Of the $180.4 million, $156.2 million has been received by USEC and DOE’s remaining funding share of $24.2 million is included in current accounts receivable as of June 30, 2013. Additionally, advances from customers as of June 30, 2013 include a balance of funding provided by DOE of $21.7 million.
In the three and six months ended June 30, 2013, USEC made qualifying American Centrifuge expenditures of $50.9 million and $110.4 million, respectively. DOE’s pro-rata share of 80%, or $40.7 million and $88.3 million, is recognized as other income in the three and six months ended June 30, 2013, respectively.
The July 24, 2013 amendment to the cooperative agreement provided funding through September 30, 2013. DOE's remaining cost share under the RD&D program of up to $52.3 million is conditioned upon USEC continuing to meet all milestones and deliverables on schedule, USEC continuing to demonstrate to DOE's satisfaction its ability to meet future milestones, and the availability of appropriations or other sources of consideration. USEC is continuing to work with Congress and the Administration to obtain funding for the remaining DOE cost-share needed to fund the RD&D program through December 2013. The Administration has included a request for transfer authority of $48 million in the President's Government Fiscal Year 2014 budget to fund the RD&D program, and the same level of funding is in the FY 2014 Energy and Water Appropriations bill approved by the House of Representatives on July 10, 2013 and in the Senate version of the bill reported to the Senate by the Senate Appropriations Committee on June 27, 2013. USEC believes that this level of funding, if provided, would be sufficient to complete the program. However, there is no assurance that this additional funding will be made available.