TEXT-S&P cuts USEC corporate credit rating to 'CCC'

Wed Aug 15, 2012 10:06pm IST

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Overview
     -- Near-term industry fundamentals are making it highly uncertain if 
U.S.-based USEC Inc. will be able to continue its current enrichment 
operations after it completes its multiparty arrangement due to expire in May 
2013.
     -- We have lowered our ratings on USEC Inc, including the corporate 
credit rating, to 'CCC' from 'CCC+' and removed all ratings from CreditWatch.
     -- At the same time, we are lowering the issue-level rating on the senior 
convertible notes to 'CC' from 'CCC-' and maintaining the recovery rating at 
'6'.
     -- The outlook is negative, reflecting our view that near-term industry 
fundamentals will continue to affect operating performance as USEC faces 
competitive pressures with an oversupplied market and the continued delay of 
the Department of Energy loan guarantee.

Rating Action
On Aug. 15, 2012, Standard & Poor's Ratings Services lowered its ratings on 
Bethesda, Md.-based USEC Inc., including the corporate credit rating to
'CCC' from 'CCC+'. The outlook is negative.

We also lowered our issue-level rating on the senior convertible notes due 
October 2014 to 'CC' from 'CCC-'. The recovery rating remains '6', indicating 
our expectation for negligible (0%-10%) recovery in the event of a payment 
default. 

At the same time, we removed all of the USEC-related ratings from CreditWatch, 
where we placed them with negative implications on May 15, 2012, to reflect 
the continued uncertainty regarding whether USEC Inc. can secure the second 
phase of funding for a research, development, and demonstration program prior 
to a conditional commitment for a loan guarantee.

Rationale
The downgrade reflects our assessment of USEC's long-term viability after the 
company publicly stated that it will be difficult to continue enrichment 
operations at the Paducah Gaseous Diffusion Plant (GDP) after a one-year 
multiparty agreement to extend operations expires in May 2013. This reflects 
the near-term supply and demand imbalance related to the 2011 earthquake and 
tsunami that severely damaged four nuclear reactors in Fukushima, Japan. The 
company has also publicly stated that it may pursue discussions with certain 
creditors and key stakeholders regarding ways to improve its capital 
structure, including the potential restructuring of its balance sheet.

In addition, USEC is working with customers to advance sales orders to 
accelerate the receipt of cash and enhance its liquidity position, which we 
consider to be "less than adequate." The advancement of orders effectively 
accelerates receipt of cash from such advanced sales, although the amount of 
cash and profit received from such sales may be reduced because of the terms 
it agreed upon with customers in connection with advancement. However, due to 
the increase of supply from the Japanese incident, USEC has not been able to 
replace many of the order advancements with additional sales. This has reduced 
its sales backlog, which we expect will negatively affect future sales.

The downgrade also reflects our assessment of the delay and uncertainty 
surrounding the approval of the company's U.S. Department of Energy's (DOE's) 
loan guarantee application, which is affecting the company's ability to fund a 
new, more cost-effective technology (the American Centrifuge Plant {ACP}). 
Instead of moving forward with a conditional commitment for a loan guarantee, 
the DOE proposed a $350 million two-year cost share research, development, and 
demonstration (RD&D) program for the project to enhance the technical and 
financial readiness of the centrifuge technology for commercialization. The 
DOE has not yet authorized the remaining funding of $192.3 million and is 
subject to the availability of congressional appropriations. Even if funding 
for the RD&D program is included in fiscal 2013 appropriations legislation, 
USEC will need additional funding to complete the RD&D program. If USEC is 
unable to secure funding for the RD&D program beyond November 2012, we would 
expect USEC to begin demobilizing the project.

The rating on USEC reflects the combination of what Standard & Poor's 
considers to be USEC's "highly leveraged" financial risk profile and 
"vulnerable" business risk profile. These assessments incorporate the 
challenges that the company faces from an intensely competitive market for 
uranium enrichment; the uncertainty regarding the success of financing the 
RD&D program to enhance the technical and financial readiness of the 
centrifuge technology for commercialization; limited operating diversity, 
given that half of its supply comes from its single-site uranium enrichment 
operating facility; and "less-than-adequate" liquidity. Still, USEC benefits 
from its position as the U.S. government's executive agent for the Megatons to 
Megawatts program, a 20-year $8 billion commercially funded nuclear 
nonproliferation initiative of the U.S. and Russian governments. The rating 
and outlook reflect our assessment regarding the long-term viability of USEC's 
enrichment operations and the approval of USEC's loan guarantee application 
with the U.S. DOE. 

In the aftermath of the March 2011 earthquake and tsunami in Japan, the 
process of restarting the reactors has taken longer than expected. In fact, 
more than 50 reactors were off line in Japan and Germany during the second 
quarter. According to USEC, this has resulted in excess SWU supply in the 
market, and the supply and demand imbalance for low enriched uranium (LEU) 
could increase over time depending on the length and severity of delays or 
cancellations of deliveries. Based on the current lack of near-term demand, 
excess supply in the market and uncertainty regarding the pace of restarting 
reactors in Japan, USEC believes there will be an unfavorable imbalance 
between supply and demand for LEU until at least the second half of the 
decade. These market conditions have challenged USEC's efforts to continue 
enrichment operations at the Paducah GDP. On May 15, 2012, the company entered 
a multiparty arrangement with Energy Northwest, the Bonneville Power 
Administration, the Tennessee Valley Authority, and DOE to support a one-year 
extension of enrichment operations at the Paducah plant through May 31, 2013.

Uranium enrichment is a highly competitive and concentrated industry 
comprising four major producers, including USEC, which accounts for about 90% 
of the global market. Under the Megatons to Megawatts agreement, USEC 
purchases enriched uranium recovered from dismantled Russian nuclear weapons 
for resale in the U.S. However, we expect USEC's purchases under the 20-year 
Megatons to Megawatts program to be completed in 2013. After that time, the 
limited quotas imposed under terms of a treaty and law will increase so that 
Russia will be able to sell LEU directly into the U.S. equal to approximately 
20% of the U.S. demand from 2014 through 2020, with additional quantities 
eligible to be imported for use in the initial fueling of new U.S. reactors, 
providing a low cost direct competitor to USEC.

We believe USEC has a very high-cost position (electric power accounts for 
about 70% of overall production costs) due to its older, less-efficient 
enrichment technology, which requires substantially more energy than the 
centrifuge enrichment technology used by most competitors. USEC faces 
additional competition from Urenco Ltd. and AREVA, both of which are in 
various stages of developing new uranium enrichment facilities. Completion of 
the new facilities poses a significant threat to USEC's competitive market 
position because both facilities plan to use lower-cost centrifuge technology, 
and both have applied to double the capacity of their U.S.-based facilities 
from initial requirements. 

On May 8, 2012, USEC received notice from the NYSE that the average closing 
price of its common stock was below the NYSE's continued listing criteria 
relating to minimum share price. Even if USEC meets the numerical listing 
standards, the NYSE reserves the right to assess the suitability of the 
continued listing of a company on a case-by-case basis. In accordance with the 
NYSE's rules, on May 14, 2012, USEC provided written notice to the NYSE of its 
intent to cure this deficiency. USEC has six months from receipt of the notice 
to regain compliance with the NYSE's price criteria (or by no later than 
USEC's next annual meeting of shareholders, April 2013, if shareholder 
approval is required).

Liquidity
In our view, USEC's liquidity is "less than adequate." Total liquidity was 
about $324 million as of June 30, 2012, and consisted of about $230 million in 
cash on hand and about $94 million in availability under its $235 million 
credit facility due May 2013 (after accounting for about $11 million of 
letters of credit). We expect an additional $85 million cash inflow in 2012 
related to the return of cash collateral and removal of depleted uranium 
disposal obligations, all related to the RD&D program. 

Our view of the company's liquidity profile incorporates the following 
expectations:
     -- Liquidity sources (including cash and internally generated cash flow) 
will exceed uses by more than 1.2x over the next 12 months; and
     -- The company likely would not be able to absorb high-impact, low 
probability events.

Free operating cash flow was negative $151 million for the 12 months ended 
June 30, 2012, mainly as a result of recent weak operating performance and the 
expensing of all project costs related to the development of ACP. Based on the 
current rate of project spending and other anticipated cash needs--and without 
a DOE loan guarantee or other financing--USEC expects cash, internally 
generated cash flow from operations, and available borrowings under the 
revolving credit facility to be sufficient for at least the next 12 months. 
This assumes it repays the $85 million term loan portion of the credit 
facility when it matures in May 2013. The company also has $530 million 3% 
convertible senior notes due in October 2014. The notes were not eligible for 
conversion to common stock on June 30, 2012, or Dec. 31, 2011.

With limited allowances, the credit facility includes a requirement that the 
company maintain a ratio of 1.75x of certain eligible collateral (less 
reserves) to the amount of the credit facility. As of June 30, 2012, this 
ratio was 1.71x. However, the credit agreement allows USEC to dip below the 
1.75x ratio (but yet still above 1.5x) one time in 2012 and three times in 
2013. We expect USEC to remain in compliance in the near term based on the 
timing of inventory receipts from the Megatons to Megawatts program.

Recovery analysis
For the complete recovery analysis, please see our forthcoming recovery report 
on USEC, to be published over the next few weeks on RatingsDirect on the 
Global Credit Portal.
Outlook
The negative outlook reflects our view that near-term industry fundamentals 
will continue to affect operating performance as USEC faces competitive 
pressures with an oversupplied market and the continued delay of the DOE loan 
guarantee, calling into question USEC's long-term viability as a going concern.

We could lower the rating on the company if USEC is unsuccessful in securing 
the necessary capital to complete the RD&D program for the American Centrifuge 
technology, if the NYSE delists the stock, or if there is a significant 
deterioration in its credit facility availability such that availability 
declines below $45 million or its borrowing base collateral declines below 
$350 million and is maintained below this level.

We could raise the rating if USEC is approved for the DOE loan guarantee 
program and the company obtains additional financial support via strategic 
alternatives.
Related Criteria And Research
     -- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, 
May 27, 2009
     -- Our Rating Process, April 15, 2008

Ratings List
Downgraded; Off CreditWatch/Outlook Negative
                             To                From

USEC Inc.
 Corporate Credit Rating     CCC/Negative/--   CCC+/Watch Neg/--
 Senior Unsecured            CC                CCC-/Watch Neg
  Recovery Rating            6                 6




Complete ratings information is available to subscribers of RatingsDirect on 
the Global Credit Portal at www.globalcreditportal.com. All ratings affected 
by this rating action can be found on Standard & Poor's public Web site at 
www.standardandpoors.com. Use the Ratings search box located in the left 
column.
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