Last year, the federal government sold off to investors a company it had created to process uranium on the theory that the new firm, Bethesda-based USEC Inc., would thrive in the competitive marketplace. But now USEC, its stock price under assault, is making the rounds of Washington with its hand out, seeking as much as $200 million in relief from the Clinton administration and Congress.
Already, USEC has spent about $100 million this year buying back shares in a battle to prop up its stock price. It also pays a relatively high dividend to its investors--about $100 million a year, or more than its profit.
But according to sources who have heard the pitch, USEC--which is a key player in reducing the number of stockpiled nuclear weapons in Russia--is warning that it could lose $200 million to $300 million over the next two years because of a deal that requires the company to buy processed uranium from Russia.
Sources said the company has proposed several forms of relief, including tax credits for utility companies that buy the Russian uranium, relief from potential environmental liability, help in renegotiating the last two years of the contract with the Russians or even flat-out appropriations.
So far, according to Secretary of Energy Bill Richardson and Capitol Hill sources close to the discussions, the company hasn't won key backing in either the Clinton administration or Congress. But neither has aid for USEC been ruled out.
Richardson said the administration wants to protect the agreement with the Russians that DOE negotiated, but he first wants to see "justification for the $200 million." Richardson said that no decision has been made, but that--in addition to more data and justification of the request--the DOE needs "to be convinced that [USEC] will continue to operate" the company's two U.S. plants "without disruptions or layoffs."
USEC officials declined to comment.
The company, once under the umbrella of the Department of Energy, went public on July 28, 1998, at $14.50 a share, bringing in a total of $1.9 billion to the federal government. Since then the stock price has declined, closing at $9.25 a share yesterday.
USEC investors collect a dividend that is high even by the standards of the utility industry, which historically has paid higher dividends than other industries. Based on the current stock price, USEC investors receive a yield of more than 12 percent, compared with an average for the utility industry of 4.9 percent.
Both the dividends and increases in management compensation since the privatization have provoked questions by the union that represents USEC workers, and others, about why the company needs federal relief.
"These guys are trying to jam the administration, and it's not going to happen," said one high-level Clinton administration official who asked not to be identified by name.
When it was privatized, USEC inherited a deal with Russia that was part of a historic agreement to help rid the world of nuclear weapons. So far, USEC has converted the equivalent of more than 3,000 Russian nuclear warheads into fuel under the program.
Under the Russian agreement, USEC is the federal government's executive agent responsible for carrying out a 1993 accord between the Russian and U.S. governments to convert highly enriched uranium (HEU) from dismantled Soviet nuclear warheads into low-enriched uranium to be used as fuel in nuclear power plants.
"Congress required the administration to proceed with the USEC privatization in a manner that preserved national security, kept both uranium enrichment plants open and maintained a reliable enrichment supply," said Rep. Thomas J. Bliley Jr. (R-Va.), chairman of the House Commerce Committee, which is investigating the USEC privatization.
"But it appears the administration didn't do its homework," Bliley said. "Just 15 months after the Clinton administration proceeded with the USEC privatization, the historic U.S.-Russian HEU agreement may be in jeopardy, and now the livelihood of thousands of USEC employees is on the line."
During the first years of the agreement, USEC made money under its terms, but since then the market price for low-enriched uranium has fallen. In addition, according to USEC, the price it pays the Russians is "substantially" higher than the cost of processing uranium in its two U.S. plants. (One of the two plants is in Paducah, Ky., where a Washington Post investigation found that thousands of uranium workers were exposed to radioactive materials without their knowledge. However, USEC is exempt from liability on claims arising from when the plants were government-owned.)
USEC says it is under increasing pressure because long-term contracts with utilities to provide them with uranium are expiring and being replaced with shorter contracts at lower prices.
"The average price of separative work units [the measure of the processing] in our backlog of contracts exceeds the price we pay under the Russian Contract," the company said in an August filing with the Securities and Exchange Commission. But "the current trend is for such average price to decline as our contract backlog becomes more heavily weighted with newer, lower-priced contracts."
The company also noted that it has operated its own plants less because of the Russian contracts, thereby spreading fixed costs over less output. In talks with members of Congress and others, the company has raised the prospect that it might have to either walk away from its role as executive agent or close one of its plants, sources said. Those arguments have considerable sway with some members of Congress.
The company has taken several steps to reduce costs since privatization, including reducing its costs for electric power, one of its major expenditures, and taking over direct operation of its production plants from Lockheed Martin Corp. USEC also scuttled plans to develop a new uranium enrichment technology, saying that it didn't appear to be commercially viable.
Despite those steps, Standard & Poor's downgraded USEC's corporate-credit, senior-unsecured and bank-loan ratings in August from triple-B-plus to triple B with a negative outlook. Last week, USEC reported earnings for the three months ended Sept. 30 of $16.1 million (16 cents per share), compared with net income (minus a special tax benefit) of $8.6 million (9 cents) the previous year.
While this year's earnings represent an improvement, the company isn't earning as much per share on a quarterly basis as it is paying out in dividends, said Richard Miller, a policy analyst with the Paper, Allied-Industrial Chemical & Energy Workers International Union, which represents USEC workers. The union has been critical of the privatization of USEC because of its concerns that it might result in the shutdown of one of the company's two plants.
"I think they are probably looking for ways the government can step in and bail them out of a bad situation," said Rep. Ted Strickland (D-Ohio), whose district includes USEC's Portsmouth plant. As USEC was being privatized, Strickland raised questions about the tension between the company's national security role and its imperative as a private company to maximize returns. "If I was a less gracious person, I would say I told you so," he said. Strickland said that his goal is to ensure that there is a domestic benefit--such as additional assurances about the continuing operation of the plants--if USEC receives federal aid.
"People do sign contracts with prices in them and sometimes it turns out later they may not have been as smart as they thought they were, and that's too bad," said Thomas L. Neff, a senior member of the Center for International Studies at the Massachusetts Institute of Technology. Neff was one of the architects of the original deal with Russia.
"The question is, does it create an impossible situation for the performance of the Russian deal?" he said. "Given that they paid dividends, bought back stock and have made other expenditures, what evidence is there of a financial crisis?"