Why USEC is Worth Betting On

StatueOne of the most important swing states in American politics is Ohio.  It’s been almost half a century—when John F. Kennedy was elected in 1960—since anyone became President of the United States without winning the vote in the Buckeye State. 1  In the 2008 election, Ohio cast 20 electoral votes, the seventh highest number of electoral votes among the fifty states. 2  Barack Obama won Ohio with just 51.48% of the vote over John McCain’s 46.94% share, a 4.54% margin of victory. 3

What does all this have to do with a uranium enrichment company headquartered in Bethesda, Maryland?

USEC (USU), the parent company of United States Enrichment Corporation, which came into being in its current form when the U.S. Government privatized its uranium enrichment operations in 1998, currently operates the only uranium enrichment plant in the United States in Paducah, Kentucky.   But it’s working on a next-generation facility in Piketon, Ohio.  In order to complete the Piketon facility, dubbed the “American Centrifuge Plant,” USEC needs money.  That’s where the politics comes in.

On July 27, 2009, the Department of Energy denied USEC’s longstanding loan application for the Ohio project.  Two days later, USEC CEO John Welsh wrote President Obama, quoting a September 2008 letter that then candidate Obama had apparently sent to Ohio Governor Ted Strickland promising support for the program:

Under my administration, energy programs that promote safe and environmentally-sound technologies and are domestically produced, such as the enrichment facility in Ohio, will have my full support. I will work with the Department of Energy to help make loan guarantees available for this and other advanced energy programs that reduce carbon dioxide emissions and break the tie to high cost, foreign energy sources.4

Welsh also pointed out in his letter that the American Centrifuge Plant will ultimately support about 8,000 jobs.5

Taking a step back to look at the big picture, nuclear energy in the United States may be on the cusp of a revival.  The need for environmentally friendly domestic energy sources, along with 1) technical advancements that make nuclear energy safer, and 2) the passage of time since the Three Mile Island (1979) and Chernobyl (1986) meltdowns, has opened the door for a wave of new nuclear power plants. 6  The last new plant in the U.S. began operation in 1996—it was already under construction in 1979 when the Three Mile Island incident vilified the industry—and the recent credit crunch has likely had some effect on the new projects.7   However, whether the current recession will dim the industry’s long-term prospects is far from certain.  There are currently a full slate of new construction applications pending before the U.S. Nuclear Regulatory Commission (NRC),8 and since anything in nuclear power construction seems to move at glacial speed several economic cycles may pass before most new U.S. plants go online anyway.

This new activity may also be spilling over to the enrichment side of the industry.  General Electric (GE) is operating a test facility using a laser-based technology in North Carolina that it hopes will eventually be a massive plant. 9  Urenco, which is jointly owned by the British and Dutch governments and German utilities, 10 is also building a centrifuge plant in New Mexico that should go into production soon. 11

All this comes back to the politics surrounding USEC’s loan application.  When the application was originally denied, USEC issued a strongly worded statement saying that they would begin to demobilize the project. 12  An Energy Department press release followed a week later on August 4 reporting that the final decision on the application had been delayed, that “both DOE and USEC recognize that meeting these criteria will likely take six months or more,” and that $45 million in funding would be provided to USEC for eighteen months while the company worked to meet technical milestones to beef up its loan guarantee application. 13

There is no reason to doubt that the Department of Energy, headed by Nobel prize wining physicist Steven Chu, had legitimate cause to delay the application, and will only give it the go ahead if USEC gets its act together.  However, given the political stakes of denying the loan—which are further increased because Ohio Governor Strickland, a Democrat, faces a tough election in 2010—it’s also reasonable to expect that nothing will stop USEC from getting a fair shot to make its case.  Another aspect of the situation is that USEC’s chief competitor for the loan money is AREVA (ARVCY, AREVA IC),14, which is 93% owned by the government of France.15.  If USEC lost the loan to a foreign competitor, no less one backed by a foreign government, the political fallout could be even greater.

This is not to say that investing in USEC is a slam-dunk.  Much of what will happen is shrouded in the rarefied world of nuclear technology, and if USEC fails to meet the requirements for the loan it will be denied.  USEC’s credit rating has also taken a beating, and there are concerns that the Kentucky plant will not be profitable after its electrical contract expires in 2012. 16 But if USEC gets its act together there is every reason to believe they will get the loan guarantee, or something like it.  With the stock hovering around $4 a share ($4.07 as of market close on December 21), the risk that the company will falter has been priced in, and with 12.89% short interest (as of December 21) at the already depressed share price quite a few people have already bet on USEC’s demise.  But the political advantages on USEC’s side have not been fully appreciated by the market (see my posts on investing by arbitraging Wall Street’s misunderstanding of public policy), and if the company gets the financing its share price could jump as the shorts scramble to cover themselves.   The window formed by the timelines discussed in the Energy Department’s August 4 statement—six to eighteen months from then—opens on February 4, so those who want to ride the USEC train should board soon.

Disclosure:  The author is long on USEC (USU) and General Electric (GE) as of the original publication date of this post.  The author does not hold a securities position in AREVA.

  1. See “Ohio’s Presidential Election History,” The Plain Dealer, http://www.cleveland.com/open/presidentialelections/. []
  2. See “Distribution of 2008 Electoral Votes, National Archives and Records Administration, http://www.archives.gov/federal-register/electoral-college/2008/allocation.html. []
  3. See 2008 Presidential Election:  Popular Vote Totals, National Archives and Records Administration, http://www.archives.gov/federal-register/electoral-college/2008/popular-vote.html. []
  4. Letter from John K. Welsh to President Barack Obama (hereinafter “Welsh Letter”, July 29, 2009, available at http://blogs.knoxnews.com/munger/obama.pdf []
  5. See Welsh Letter, available at http://blogs.knoxnews.com/munger/obama.pdf. []
  6. See Rebecca Smith, “The New Nukes,” Wall Street Journal, September 8, 2009, R1 & R3. []
  7. See Bernie Woodall & Scott DiSavino, Economic Woes Delay U.S. Nuclear Power Expansion,” Reuters, March 17, 2009, http://www.reuters.com/article/idUSTRE52G4UF20090317. []
  8. See Combined License Applications for New Reactors, U.S. Nuclear Regulatory Commission, http://www.nrc.gov/reactors/new-reactors/col.html []
  9. See Jonathan Fahey, “Riches in Enrichment,” Forbes, November 16, 2009, p. 50 & 52. []
  10. See http://www.urenco.com/Content/3/Investors.aspx []
  11. See http://www.urenco.com/content/33/LES.aspx. []
  12. “Department of Energy Denies USEC’s Loan Guarantee Application, Company begins demobilization of American Centrifuge Plant,” USEC Press Release, July 28, 2009, http://www.usec.com/NewsRoom/NewsReleases/USECInc/2009/2009-07-28-Department-Of-Energy-Denies.htm. []
  13. Department of Energy and USEC Announce Decision to Delay USEC Loan Guarantee Application Final Review, Department of Energy Press Release, August 4, 2009, http://www.usec.com/NewsRoom/NewsReleases/USECInc/2009/2009-08-04-DOE-And-USEC-Announce.pdf. []
  14. “U.S. DOE Cancels Loan Guarantees for USEC Uranium Enrichment Plant,” OilandGasEurasia.com, July 29, 2009, http://www.oilandgaseurasia.com/news/p/0/news/5344/ []
  15. Reuters, ANALYSIS-France faces tough choices on Areva T&D sale, Forbes, November 20, 2009, http://www.forbes.com/feeds/reuters/2009/11/20/2009-11-20T123044Z_01_LK630671_RTRIDST_0_AREVA-FRANCE-ANALYSIS.html. []
  16. See Associated Press, “Moody’s Downgrades USEC Ratings,” available at http://www.thestreet.com/story/10649787/1/moodys-downgrades-usec-ratings.html; Jonathan Fahey, “Riches in Enrichment,” Forbes, November 16, 2009, at p. 52. []

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  4 comments for “Why USEC is Worth Betting On

  1. February 18, 2010 at 3:55 am

    I have been a reader for a long while, but this is my first time as a commenter. I just wanted to let you know that this has been / is my favorite post of yours! Keep up the good work and I’ll keep on checking back. If you’d be interested in swapping blogroll links with me, my website is Best Self Tanning Lotion.

  2. February 18, 2010 at 6:49 am

    Thanks for the encouragement, Dallas. TWT

  3. May 11, 2010 at 12:03 am

    Decent article. I merely discovered your blog and wanted to say that we have really enjoyed reading your opinions. In whatever way I’ll be subscribing for a feed and I really hope you post again soon.

  4. May 13, 2010 at 10:03 pm

    Thanks for your encouragement, Kim! TWT

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