USEC gets two new investors

CEO John Welch says the firm will re-submit its application for a $2 billion DOE loan guarantee

This blog post is an edited version of an article published May 27, 2010, in Fuel Cycle Week V9:N378 by International Nuclear Associates, Washington, DC.

May 25^th was a red letter day for USEC (NYSE:USU) CEO John Welch. He's had more than his share of bad news about the prospects for construction of the $3 billion American Centrifuge uranium enrichment plant in Piketon, OH. Last August the Department of Energy deferred making a decision on the firm's application for a $2 billion loan guarantee because the centrifuge technology wasn't working to DOE's satisfaction and because the firm lacked the financial horsepower to build the plant.

Now two of the nuclear industry's central players have stepped up to the plate with joint investments of $100 million each to provide financial confidence and support for USEC in its quest to submit a revised application to DOE for the loan guarantees. Toshiba and Babcock & Wilcox are each investing $100 million, for a total of $200 million, in the project. In return they will receive shares of preferred stock and, if all goes well with the loan guarantee, have the right to convert it to common stock and equity positions based on the stock price at the time.

FCW talks with CEO John Welch

Welch told FCW in an exclusive interview these two investments are the only equity deals the firm will make for the American Centrifuge Plant. He said the money from the two firms is not for R&D.

"The design is frozen," he said. "We are planning to install 11,520 centrifuges based on the design at the Piketon plant."

Once operational, the plant will eventually produce 3.5-3.8 million SWU/year. Welch said customers are lining up for the enriched uranium to be made into fuel for their reactors.

"We have 60% of the plant under long-term contracts. As far as future sales are concerned, a lot depends on new reactors. It's a big market and we will make product for the global industry."

The $200 million will come in three phases. The first phase for $75 million. The second phase for $50 million will occur if the Department of Energy issues a conditional commitment to USEC for a $2 billion loan guarantee.

USEC will re-submit its application for a loan guarantee

Welch said USEC will update its application for the $2 billion loan guarantee this summer. He did not give a date when it would be submitted and declined to speculate on when DOE might make a decision. He did say the agency "has been supportive" on learning about the $200 million investment. However, Welch also said "the agency has its own process to go through so that's still ahead of us."

Welch also declined to cite a cost for construction of the American Centrifuge Plant. "We'll be re-calculating it as part of our revised loan guarantee application," he said.

DOE Energy Secretary Steven Chu has said he has the authority to issue the commitment in addition to the $ 2 billion loan guarantee conditional commitment he made to Areva last week for its Eagle Rock Enrichment Facility.

The third phase for $75 million will execute if the first two phases go as planned and DOE gives final approval for the loan guarantee. Shareholder approval is also needed for phase three since it would convert the preferred stock to commons stock and equity positions for the two firms.

At market close May 25 USEC's stock stood at $5.26/share against a 52-week range of $3.22-$6.52, up from $4.37/share on May 20. USEC has 114 million shares outstanding and a market cap of approximately $600 million. A $100 million investment would buy about 19 million shares or about a 16% position if the preferred shares were converted to common shares at today's closing price. With two firms investing $100 million each, their stake would amount to just under a third of the firm.

Welch said the conversion from preferred stock to common stock would take place at "a strike price" on the date of conversion. The actual equity position would be based on total shares outstanding and their price.

Update May 31 – Noble House Ltd buys shares

Reuters reported May 31 Noble Group Limited announced acquisition of 5,848,940 shares in USEC, Inc., representing 5.13% of common stock of USEC.

The NYSE was closed Monday May 31. At market close Friday May 28, USEC's stock traded at $5.28/share making the position worth an estimated $31 million.

Noble Group Limited (SGX: N21) is a global commodities trading/supply chain manager of agricultural, industrial and energy products.

Other uranium enrichment equity investments

Other uranium enrichment plants are also selling equity shares of their operations. Areva has sold minority interests to investors for the George Besse II plant in France. GE-Hitachi sold a 24% stake in its new laser enrichment process to Cameco two years ago for $125 million. Areva has not disclosed any equity investments in the Eagle Rock facility.

In a statement about the decision to invest $100 million in USEC, Toshiba's Yasuharu Igarashi said the investment will enhance its presence on the front end of the nuclear fuel cycle. In a previous deal in 2007 Toshiba sold a 10% share of its stake in Westinghouse, worth nearly half a billion, to Kazakhstan in return for access to uranium supplies.

Welch told FCW Toshiba's intent is to bundle fuel with reactor deals. He said he expects fuel processed for Toshiba will be used in ABWR reactors including NRG's twin reactors once they are built in Texas.

B&W said its investment represents an opportunity to partner with Toshiba and USEC including the fact that B&W will manufacture the centrifuges for the USEC plant.