The Paducah Sun

February 5, 2000

Stock downgrade may be loophole

By Joe Walker
Sun Business Editor

A downgrading of USEC Inc. stock below investment grade appears more than coincidental and could signal the shutdown of a uranium enrichment plant, says a union official who has been closely tracking USEC since well before it became a publicly traded company two years ago.

On Friday, Standard & Poor's dropped USEC stock to a below-investment grade of BB+, which signals analysts' serious concerns over the future of the financially troubled company. The drop came a day after the USEC board of directors announced major cost-cutting moves - eliminating 850 jobs at plants in Paducah and near Portsmouth, Ohio; buying back 20 million shares of stock; cutting USEC's dividend in half; and drastically lowering earnings projections.

Richard Miller, Washington-based policy analyst for the plants' atomic workers' union, said the rating devaluation gives USEC a loophole to shut down one of the plants without violating a federal mandate. When USEC was privatized in July 1998, it signed an agreement with the U.S. Treasury to keep the plants running until 2005 unless certain "significant events" occurred.

One loophole is that the long-term corporate credit rating of the firm "is or is reasonably expected in the next 12 months to be downgraded below an investment grade rating," the agreement says.

"That would remove them from the obligation to run both plants," Miller said. "It looks to me like an immediate and calculated effort, based on my conversations with people before and after the board meeting."

Miller, who declined to reveal his sources, said they told him to watch for certain financial developments.

"They (USEC executives) knew before they took this action what the credit rating was going to be," he said. "It looks to me like a calculated effort on their part to provide themselves with additional flexibility from a management point of view by seeking to remove the obligations of the Treasury agreement."

USEC spokeswoman Elizabeth Stuckle acknowledged that the rating had dipped below investment grade, but would not respond directly to Miller's allegations or plant-closure speculation.

"We're focused on implementing the initiatives we announced (Thursday)," she said. "We're analyzing the Standard & Poor's downgrade."

Stuckle said after the board action Thursday that no decision had been reached to close a plant and none of the significant events had taken place.

The company blames low prices for enriched uranium, declining sales and higher production costs stemming from a glut of Russian enriched uranium. As a federally mandated agent, USEC is paying more for the Russian material - $8 billion worth blended down from dismantled nuclear warheads - than the Paducah and Portsmouth plants can produce it for.

To balance production with anticipated purchases of Russian uranium, USEC will decrease output to about a quarter of each plant's capacity in the next fiscal year, starting Oct. 1. The firm says the resulting job cuts will save about $39 million annually amid growing global oversupply of enriched uranium and strong foreign competition.

USEC said it will cut its $1.10 annual dividend in half as of March 15 and buy back 20 million additional shares (for nearly $120 million at today's prices) by June 2001. Last year, USEC authorized buying back 10 million shares. Its stock has plummeted from $14.25 a share in July 1998 to less than $6, but its dividend has been much higher than other firms in the utilities industry.

USEC hopes that eliminating jobs, buying back stock, and negotiating for lower Russian uranium and plant power costs will help improve its sagging economic situation. It earned $32.6 million during the last quarter, an increase of $1.5 million, but predicts "substantially lower earnings next year compared with the current fiscal year."

Miller said USEC wants help from the Department of Energy and labor unions to help prop up the sagging company and ease the effects of job cuts. There is much blue-collar skepticism because of the huge salaries that USEC senior managers are earning (Chief Executive Officer William H. "Nick" Timbers Jr. earned $2.4 million in salary and stock last year and will be paid $1.2 million this year) and no specific commitment by USEC to cut jobs at its Bethesda, Md., headquarters, he said.

"I suppose we will help," he said. "But the general reaction I'm getting is we're prepared to do that as long as Nick Timbers is the first person to get a pink slip."