URANIUM ENRICHMENT ACTIVITY NOTES TO FINANCIAL STATEMENTS I. Description of Entity and Significant Accounting A. Description of Entity. Uranium Enrichment B. Pricing Policy. The pricing methodology arrives at a charge that will recover the cost over the 10-year pricing period. This methodology will result in losses in some years and profits in other years. In order to ensure compliance with the law, whenever an operating loss occurs, future charges include this loss as a cost. Conversely, whenever a profit is realized, the amount of the profit is included as a negative cost in future charges. As of September 30, 1985, and 1984, amounts to be carried over for future pricing are approximately a $295 million loss to be charged and a $525 million profit to be credited, respectively. These amounts are a function of the pricing pol icy and are not specifically identified in the Statement of Operations. DOE has determined that capital investment of $2.9 billion in FY 1985 and $1.2 billion in FY 1984 is not recoverable and is therefore excluded from the pricing calculation. While the exclusion of these costs has been challenged as being inconsistent with the Atomic Energy Act. DOE management believes these exclusions are proper and consistent with the UEA criteria and the Atomic Energy Act. C. Related Parties. UEA sells separative work to UEA receives annual congressional appropria The year-end fund balance in the U.S. Treasury. D. Inventories. UEA inventories consist of the following: 1. Separative work units (SWU) are a measure Customer-owned normal assay uranium is delivered to UEA enrichment facilities where it is processed (enriched). Unit costs of SWU in inventory and cost of sales are determined based on average costs. 2. A change in SWU measurement was effected In order to implement the new inventory 3. Uranium includes amounts required to sup port the continuity of the enrichment process and preproduced enriched product. Also included are customer-provided uranium and DOE uranium required to supplement the customers' uranium in production at tails assays higher than that selected by the cus tomer. Government-owned uranium available to UEA from the DOE stockpile may be utilized to produce enriched uranium at tails assays higher than contracted for by the customer. The Government-owned uranium utilized in this manner is referred to as "supplemental feed." During FY 1985, all uranium included in product deliveries to customers was supplied by the customers, and during FY 1984, supplemental feed revenues amounted to $27 million and related costs amounted to $19 million. On February 6, 1985, the Secretary of Energy approved a policy, effective October 1, 1984, whereby 50 percent of the Government-owned uranium inventory will be reserved for defense needs. As a result, 26,500 metric tons of uranium with a cost of $689 million, less FY 1985 defense program deliveries of $44 million, are included in the inventory and classified as a liability on the Balance Sheet (Exhibit (). Government-owned uranium of $1.1 billion in FY 1985 and $1.0 billion in FY 1984, in excess of current production needs but stockpiled at the UEA facilities for future use, is reported as an "Other Asset" on the Balance Sheet (Exhibit I). UEA's Balance Sheet also includes customer-supplied uranium valued at $1.2 billion in FY 1985 and $1.0 billion in FY 1984. UEA is committed to return equivalent material to its trade cus tomers after enrichment services are performed. 4. Production stores and process spare parts consist of items normally required to operate and maintain a large industrial complex. Process spare parts are those items which are unique, require long lead times for reorder, and are critical to the continuity of plant operations. A reserve for obsolescence is established, and the costs of these items are charged to operations over a period representing the useful life of the process. E. Plant and Equipment. 1. Gas centrifuge technology was discontinued Statement of Operations (Exhibit II), includ ing $300 million cost for contract termina tions. 2. A loss on capital investment of $1.2 billion was recognized in FY 1984. Because of the international forces of supply and demand, DOE determined that it could not sell enriching services at a price which would recover the total remaining net investment in the enriching facilities and the associated imputed interest. Accordingly, a reserve for unrecoverable capital cost was established during FY 1984 as a reduction in plant and capital investment. Effective April 1, 1984, a portion of depreciation expense determined to be representive of the unrecoverable costs was charged to the reserve and is, therefore, not included in the operating results for the period as presented on the Statement of Operations. For FY 1985 and FY 1984, these allocations were $50 million and $27 million, respectively. In FY 1985, the reserve balance of $1,123 million was reclas. sified to accumulated depreciation to decrease the net book value of the gaseous diffusion plants. On June 5, 1985, the Secretary of Energy announced major decisions about the UEA's future, including placing the Oak Ridge Gaseous Diffusion Plant (ORGDP) in a standby status prior to the end of FY 1985. ORGDP's production ended in July 1985. Also, current operating plans show that only partial capacity utilization will continue at the Paducah and Portsmouth Gaseous Diffusion Plants through FY 2005, when new technologies are scheduled to begin produc tion. The accounting for these activities is a part of the $1.2 billion described in the preceding paragraph. F. Depreciation. Depreciation expense is calculated on a straight-line basis in accordance with estab lished standard service lives. Buildings have service lives of 10 to 50 years, and equipment has service lives of 5 to 40 years. Economic service lives for the diffusion production facilities do not extend beyond the year 2005 when other technologies are scheduled to begin pro duction. G. Advances from Customers. Under the terms of toll enriching contracts, customers are required to make a part of the SWU payment in advance |