USEC Inc., a company that once turned scrapped Russian atomic warheads into fuel for nuclear reactors, is presenting its bankruptcy plan for approval just as the market for uranium is set to climb out of its slump.
Founded in 1992 as a government-owned company, the uranium processor was later privatized and continued its work of converting Cold War arsenals to civilian purposes.
A glut of uranium and the shutdown of reactors in Japan and Germany drove down the price of nuclear fuel, forcing Bethesda, Maryland-based USEC to seek bankruptcy protection in March with a reorganization plan already worked out among key creditors.
U.S. Bankruptcy Judge Christopher Sontchi is to hold a hearing today in Wilmington, Delaware, to consider USEC’s plan. Early in the case, he questioned the wisdom of reorganizing the company when there’s still the possibility it could be forced to shut down. He was skeptical about keeping USEC “on life support for the next six to 10 years.”
“What’s the point?” he asked.
Since then, circumstances have changed. Uranium is poised to enter a bull market amid tightening supply as producers shut mines and delay projects, more than three years after the Fukushima nuclear disaster in Japan sent prices lower.
The atomic fuel has advanced as much as 18 percent from a May 20 low of $28 a pound, according to data from Ux Consulting Co. in Roswell, Georgia, which provides research on the nuclear industry. Prices closed 0.5 percent higher at $32.65 yesterday and have averaged $31.80 in 2014.
Complicating matters is the crisis in Ukraine, which has triggered trade sanctions involving Russia. For a decade, USEC bought nuclear material from Russia, helping to convert the equivalent of 20,000 nuclear warheads under the now-discontinued “Megatons to Megawatts” nonproliferation program, according to court papers. A new contract to obtain Russian material runs through 2022.
USEC said in a regulatory filing Aug. 13 that since January it has paid its Russian supplier a balance of $340.7 million for uranium but is concerned about making future purchases under the 10-year contract.
Payments to Russia’s Techsnabexport JSC, known as Tenex, for low enriched uranium, or LEU, were “a significant use of cash flow in the six months ended June 30, 2014,” USEC said in its latest quarterly report filed with the U.S. Securities and Exchange Commission.
LEU is a critical component in the production of nuclear fuel for reactors that make electricity. Dependence on deliveries of LEU from Russia “and actions that may be taken by the U.S. government, the Russian government, or other governments” pose risks for sales, USEC said in the filing.
So far, no sanctions have affected relations with Tenex, Paul Jacobson, a USEC spokesman, said in an e-mailed statement
“There have been no activity or claims related to that agreement in the bankruptcy case,” he said.
The nuclear fuel cycle market is so specific and important to “strengthening the global nuclear non-proliferation regime and the energy security, that politically driven disruptions on this market are viewed as the last thing to even consider,” Moscow-based Tenex said in an e-mailed statement.
“As of today no sanctions are imposed on the trade of nuclear materials either by the U.S. or other countries and, to the best of our knowledge, sanctions in this very sensitive area are not on the political agenda today,” the company said in the statement.
Still, USEC said in a July 11 court filing that it may not be able to sell all the Russian material it buys because of the fuel’s above-market price. Also, it said some potential customers “are unable or unwilling” to accept a Russian product, according to the court filing.
U.S. Energy Department officials declined to immediately comment on possible sanction effects.
While USEC has stopped enriching LEU, it is continuing operations as a supplier, relying on inventories and imports from Russia until production can begin in Ohio.
The company is working with the U.S. government to build the American Centrifuge Project in Ohio, which will replace a facility in Kentucky. USEC posted net losses in the past two years on costs to end enrichment at the Kentucky plant and return the site to the Energy Department.
Construction of the centrifuge has been delayed by funding difficulties and a global oversupply of nuclear fuel following the tsunami that damaged Japan’s Fukushima reactors in 2011 and led to reactor shutdowns in Germany, USEC said.
Given the current low demand, the Ohio centrifuge project can’t go forward without government support, the company said. USEC has spent $2.5 billion on plant development, and the U.S. Energy Department has spent $3 billion. The company needs $4 billion more, according to court papers.
The proposed reorganization would cut the company’s $1.07 billion in debt by hundreds of millions. Shareholders would get 5 percent of USEC’s new stock. Goldman Sachs Group Inc. is USEC’s biggest holder of common stock, with about 10.5 percent, followed by Tradewinds Global Investors LLC, with 3.7 percent, and Global X Management Co. with 3.6 percent, according to data compiled by Bloomberg.
The restructuring is supported by holders of USEC’s debt and preferred shareholders Toshiba Corp. (6502) and Babcock & Wilcox (BWC) Co., the company said. The convertible notes and all of USEC’s preferred and common shares would be swapped for $240.4 million in new debt and new common stock, according to a company statement.
Holders of the convertible notes overwhelmingly endorsed the plan during a monthlong voting period that ended Aug. 11. More than 99 percent in both the number of votes cast and the value of the notes voted in favor.
Noteholders would receive $200 million of the new debt and 79 percent of the new equity. Toshiba and Babcock & Wilcox would each get $20.2 million of the new debt and about 8 percent of the new stock. The noteholders will recover 39 percent and the preferred shareholders 35 percent from the new debt, USEC said, adding that the new stock is too speculative to be valued.