Long contract may save plant
By Joe Walker
USEC Inc. is expected to announce in late summer that it will close one of its two gaseous diffusion plants, and the shutdown will be completed by July 1, 2001, according to a new report from Bank of New York Capital Markets in analyzing the firm's bonded debt.
The report, written by analyst Richard Rossi, assumes that financially troubled USEC will close either the Paducah Gaseous Diffusion Plant or its sister plant near Portsmouth, Ohio, to save $65 million a year in power and labor costs.
It does not speculate which plant will close but says the ultimate key will be which one gets a multiyear contract to buy electricity. Each facility uses enough power to run a major city, and electricity accounts for about 57 percent of production costs.
"It's a very clear sign," Rossi said in an interview. "They're not going to sign a multiyear contract at the plant they're going to close."
Within a month, USEC is expected to announce the signing of a power contract at Portsmouth, but for only one year, the report says. Neither Rossi nor USEC spokeswoman Elizabeth Stuckle would say if that is a good or bad sign for Paducah, where USEC is spending more than $20 million to make the plant more earthquake resistant and able to supply customers with enriched uranium independently of Portsmouth. USEC is aggressively negotiating power contracts, Stuckle said.
Rossi said he has briefed 1st District U.S. Rep. Ed Whitfield, R-Hopkinsville, but declined to testify in a House subcommittee hearing scheduled for Thursday over which Whitfield will preside. Whitfield is concerned because USEC's credit rating has dropped to junk-bond status, and that provides a legal loophole that allows the company to close a plant before 2005 without violating a congressional mandate.
According to USEC's privatization agreement, it may close a plant if its long-term credit rating drops below investment grade. Without government intervention, that situation is unlikely to improve during the next year, the BNY Capital report says.
Ironically, the worst news for plant workers is the best news for bonded debt investors.
Plant shutdown is among several assumptions made by BNY Capital in saying that USEC's $500 million debt — incurred when it sold stock to become publicly traded in July 1998 — is a good investment for bond buyers. Other "best-case" assumptions are the completion of 850 announced job cuts at the plants, improved power contracts and a renegotiated deal to save money on enriched uranium bought from Russia.
"It is our understanding that the rating agencies want to see USEC operate as a viable business by lowering production costs, renegotiating the Russian (uranium) agreement and closing a plant," the report says. It adds that the developments are expected to improve USEC's near-term credit profile and generate more cash.
BNY Capital recommends that investors buy USEC bonds because they will probably yield 5 percent more than comparable Treasury notes, or better than 11 percent. The bonds are a good risk because, even if USEC goes bankrupt, the government would be "highly motivated" to intervene because of national security, job and uranium-supply issues, the report says.
Rossi also points to claims by the atomic workers' union that USEC has taken "bad faith" steps to justify closing a plant by seeing that its credit rating dropped.
"Union representatives are currently lobbying Capitol Hill to take USEC back as a government entity, an obvious positive event for bondholders," he wrote. "Any government concerns with regard to the closing of a plant should be viewed as a positive event for the credit and increases the likelihood of government involvement."
USEC is buying about 92 million units of enriched uranium from Russia in a nuclear disarmament deal worth about $8 billion over 20 years. Blended from material in dismantled nuclear warheads, the uranium equals the approximate production of one of the plants. That means that USEC needs to run each plant at only 25 percent capacity, according to BNY Capital.
USEC is paying Russia, a competitor, more per unit of enriched uranium than the cost for which Paducah and Portsmouth can enrich it. The flood of uranium will increase USEC's production costs from $93 per unit this year to more than $110 next year, compared with the spot market price of about $80, the report says.
But the report says USEC should reach a new contract in 30 to 90 days to buy Russian uranium for less than $80, partly because Russia badly needs the deal to prop up its economy.
USEC Chief Executive Officer William "Nick" Timbers has been in routine telephone contact with Russian officials and hopes to visit them soon, Stuckle said.
Rossi's report says USEC's financial outlook is helped because it is selling its natural uranium inventory — some at contracts above the market price — for about $750 million through 2006. The money will help buy back 30 million shares of stock for about $200 million and eliminate short-term debt, the report says, noting that "it is our belief the rating agencies would have preferred the company find a better use of discretionary cash flow."
USEC has $6.5 billion in long-term contracts to supply enriched uranium to nuclear power plants through 2010. But running two plants "will remain uneconomic" as uranium prices drop because of a glutted worldwide market, the report says.
"In the highly unlikely scenario of a USEC bankruptcy filing, we believe bondholders would seek to seize control of the enriched uranium and natural uranium inventory and backlog order book," Rossi wrote, and th