Sunday, March 16, 2014

USEC Bankruptcy Prism for Government-Corporate Monstrosity

Bloomberg reported:

USEC Inc. (USU), a producer of enriched uranium for nuclear power plants that was sold by the U.S. government in 1998, sought bankruptcy protection with a plan to hand control to noteholders after an oversupply of the fuel hurt its business. The shares fell as much as 29 percent. 

The Bethesda, Maryland-based company, which buys some uranium from Russia under a 10-year contract, listed assets of $70 million and debt of $1.07 billion in Chapter 11 papers filed today in U.S. Bankruptcy Court in Wilmington, Delaware. USEC said in December that it would file bankruptcy to replace $530 million in senior convertible notes coming due in October. 
Interestingly, the bankruptcy will have no effect on Uncle Sam's plans to fund USEC's new production facility in Ohio.  The Energy Department is paying the lion's share of the new facility's cost, currently pegged at $241.3 million.

On April 26, 1996 Bill Clinton signed into law the USEC Privatization Act.

A walk back in time shows President Bill Clinton appointing a 44 year old Connecticut based investment banker as President of USEC.  This is from USEC's first 10-K report as a public company:

William H. Timbers, Jr. has been President and Chief Executive Officer of the Company since 1994. He was appointed USEC Transition Manager in March 1993 by President Clinton. Prior to this appointment, Mr. Timbers was President of The Timbers Corporation, an investment banking firm based in Stamford, Connecticut, from 1991 to 1993. Before that, he was a Managing Director of the investment banking firm of Smith Barney, Harris Upham & Co., Inc. in New York and San Francisco. 

USEC's 1998 filing showed no interest expense and current assets of $2.7 billion.

By the end of 2003 long term debt had grown to $500 million and annual interest expense was $38.4 million.  $350 million of the total debt was due in 2006 and $150 million in 2009.  USEC's total debt-to-capitalization ratio was 36% at December 31, 2003.

In September 2007, USEC issued $575.0 million in convertible notes. The notes bear interest at a rate of 3.0% per annum payable semi-annually in arrears on April 1 and October 1 of each year, beginning on April 1, 2008. 

At the end of 2008 USEC's $575 million in 3.0% convertible senior notes due October 1, 2014 had a fair value of $207 million or 36 cents on the dollar.  That was the midst of the financial crisis when the big money boys didn't trust one another to make good on their debts.

Oddly, USEC's bankruptcy will pay noteholders more than 36 cents on the dollar.

The 3 percent notes traded at 39.5 cents on the dollar at 9:49 a.m. in New York, up from 39 cents yesterday, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
The noteholders will have a recovery of 39 percent and the preferred shareholders 35 percent from the new debt, USEC said.

In 2008 USEC had $242 million in revenue from Japan.  That was roughly 15% of revenue.  The uranium enrichment business in Japan dried up with the post-tsunami nuclear disaster at Fukushima Daiichi.  Below is the strategic context from the company's 2013 10-K.

USEC is a business undergoing a strategic transition as we seek to re-position our enrichment business for long-term success. Going forward, we are preparing for the transition of the Paducah GDP, with the current arrangement that extended commercial enrichment at Paducah expected to end during 2013 and the expected de-lease of the site back to DOE in 2014. We are preparing to be a significantly smaller company with lower revenues as we transition from having two sources of supply that provide approximately 10 to 12 million separative work units (“SWU”) per year to making sales from our existing inventory and from future purchases of LEU from Russia at lower quantities. In addition, we continue to pursue commercialization of the American Centrifuge technology, which we believe is the best path to remaining a competitive producer of LEU in the long-term and to maximize value for all stakeholders. We are seeking to position the American Centrifuge project technically through a cooperative cost-sharing research, development and demonstration (“RD&D”) program with DOE. We are also in parallel working to position USEC financially to move forward as a stronger sponsor of the American Centrifuge project. USEC expects to face a period of several years while we are continuing to work to deploy the American Centrifuge project where our sole sources of supply will be our existing inventory and purchases of Russian LEU. The strategic transition is occurring in a very complex economic and political environment and in a nuclear fuel market that continues to be negatively impacted by the incident at the Fukushima Daiichi nuclear power plant in Japan in March 2011, with more than 50 reactors in Japan and Germany remaining offline at the start of 2013. Given our desire to improve USEC’s credit profile so we can successfully finance, deploy and retain maximum value in the ACP, we are engaged with advisors and certain stakeholders on alternatives for a possible restructuring of our balance sheet.

Thus, the bankruptcy.  The current environment may be the perfect storm for USEC.  How long will Russia deliver low enriched uranium to USEC as rhetoric heats up over Ukraine and Crimea?

The American Centrifuge project is on schedule and under budget, according to a Nov. 4 company release.  The Energy Department is covering 80 percent of the cost and USEC the remainder under a June 2012 agreement.

It's interesting to see the huge commitment Uncle Sam has made to USEC.  How many businesses can get a monstrous nondebt, nonequity capital injection that essentially funds the company's future?   This is but one face of the Government-Corporate Monstrosity, Eisenhower's Military-Industrial Complex on trillions in federal steroids.  It has both a Blue (Clinton) and Red (Bush) face.