FROM THE OFFICE OF PUBLIC AFFAIRS

Mr. Chairman and members of the Subcommittee, I appreciate the opportunity to testify on the privatization of the United States Enrichment Corporation ("USEC"). The privatization of USEC was the culmination of a process mandated by Congress through the enactment of the Energy Policy Act of 1992 and the 1996 USEC Privatization Act. Throughout the entire privatization process, we followed the statutory framework provided by Congress very closely, thoroughly, and conscientiously.

I will divide my remarks into five parts: first, a general discussion of the statutory framework on which the privatization process was based; second, a discussion of the privatization decision of the USEC board of directors (the "USEC Board"); third, a summary of the governmental review of the USEC Board's decision and reasons the government agencies approved the public stock offering as the best means of achieving privatization; fourth, the measures taken by the federal government relating to USEC's conduct during and after the privatization; and fifth, Treasury's involvement in USEC-related matters following privatization.

The process that culminated in the privatization of USEC was begun by Congress in 1992, when it enacted the Energy Policy Act. That legislation established USEC as a government corporation and gave it a mandate to develop a strategic plan for privatization. The 1992 Act set up a board of directors that was composed of members appointed by the President and confirmed by the Senate.

The 1992 Act authorized USEC to implement its privatization plan upon the occurrence of two events. First, the President had to approve the plan. Second, the USEC Board had to determine, in consultation with appropriate agencies of the United States, that privatization would satisfy four statutory criteria: a return to the United States at least equal to the net present value of USEC as a government corporation; protection against foreign ownership, control, or domination of USEC; protection of public health and safety and common defense and security; and a reasonable assurance of adequate enrichment capacity to meet the demand of the domestic electric utility industry.

In 1996, before the President had approved USEC's privatization plan, Congress again passed legislation aimed at prompting the sale of USEC. The USEC Privatization Act established additional requirements for the certification and licensing of USEC's uranium enrichment activities by the Nuclear Regulatory Commission ("NRC") and contained provisions to clarify the allocation of assets and liabilities between the government and a privatized USEC, including a section that provided for the transfer of substantial quantities of natural and enriched uranium from the Department of Energy ("DOE") to USEC. The 1996 Act also enacted protections for USEC's workers, including a requirement that DOE provide benefits to certain USEC workers in the event of a plant closing or mass layoff.

Finally, the 1996 Act directed USEC to privatize, with the approval of the Secretary of the Treasury, in a manner that satisfied the additional statutory criteria of providing for: the long-term viability of USEC, the continued operation of the gaseous diffusion plants that USEC leases from DOE, and the maintenance of a reliable and economical domestic source of uranium mining, enrichment, and conversion; and, to the extent not inconsistent with these three criteria, obtaining the maximum proceeds for the United States.

In 1995, USEC submitted its plan for privatization to the President and Congress. The plan accomplished the statutory requirement to evaluate alternative means of privatization by establishing a "dual-path" process, in which USEC simultaneously prepared for an initial public offering of stock and a negotiated sale to a third party. The plan concluded that such a dual-path process would allow decision-makers to select the best means of privatization on the basis of concrete information about the relative merits of specific transaction alternatives. In July 1997, the President approved the privatization plan subject to the development of an adequate post-privatization oversight process.

To initiate the negotiated third-party sale path of the dual-path process, USEC's transaction manager distributed over 50 preliminary information packages to industrial, utility and financial firms. USEC received expressions of interest from five parties. The USEC Board reviewed these submissions and consulted with the appropriate federal agencies for national security clearance of the interested parties. Based on its review, the USEC Board invited three of the parties to conduct due diligence at USEC's facilities. After extensive due diligence by the interested parties, USEC received two firm proposals for the acquisition of USEC through a negotiated third-party sale. Interested parties were directed to submit an extensive package of information, including a firm, all-cash proposal; a definitive mark-up of a draft merger agreement; binding financial arrangements; strategic business plans for the privatized corporation; comprehensive disclosure on their consortium arrangements, including charter documents and shareholder agreements; regulatory information; and information on how the interested party would satisfy the statutory criteria of the privatization legislation.

Simultaneous with the third-party sale path, the USEC Board and USEC's management worked with their financial and legal advisors to prepare for a possible public stock offering. The involvement of private sector financial and legal advisors in transactions of this nature is necessary and standard, and we believe their involvement contributed greatly to the decision-making process. Once the USEC Board procured the services of these advisors, USEC worked with them to prepare the necessary Securities and Exchange Commission registration statement. The advisors also provided advice on the timing of a stock offering and valuation range, and coordinated appropriate marketing efforts, including road shows.

In addition, USEC's advisors each provided independent advice on the appropriate levels of debt that USEC should incur to maximize value for the federal government. These financial advisors concluded that incurring a reasonable amount of debt prior to an offering would increase the gross proceeds to the federal government, reduce the aggregate amount of fees paid to financial advisors, and reduce the amount of proceeds subject to market risk. The inclusion of debt in connection with an initial public offering is a standard financing practice that is utilized in privatizations around the world. Upon review of those analyses, Treasury and OMB agreed that the USEC financing structure, in the event of a public stock offering, should include net debt of $500 million. The financial advisors advised Treasury that this net debt would not affect the long-term viability of the privatized corporation.

The USEC Board considered third-party sale proposals from two potential buyers. The most attractive proposal (the "Carlyle proposal") was a leveraged buy-out that offered $1.9 billion for the acquisition of USEC, subject to a number of conditions. The second third-party sale proposal was also a leveraged buy-out, but it offered less attractive terms than either the Carlyle proposal or the public stock offering proposal.

On June 11, 1998, the USEC Board determined that both the Carlyle proposal and the public stock offering proposal satisfied the statutory requirements, but that the offering provided the superior method of addressing the special areas of concern identified in the two privatization statutes. The USEC Board unanimously approved privatization through the public stock offering.

Governmental Review Process

During the entire privatization process, judgments were made collectively by the appropriate agencies of the Administration. Treasury coordinated this inter-agency process. To ensure that the views of the appropriate agencies were taken into account, during the entire dual-path process Treasury consulted extensively with such agencies as the Council of Economic Advisors ("CEA"), the Central Intelligence Agency ("CIA"), the Department of Commerce ("DOC"), the Department of Defense ("DOD"), DOE, the Department of Justice ("DOJ"), the Department of State ("DOS"), the National Economic Council ("NEC"), NRC, the National Security Council ("NSC"), and the Office of Management and Budget ("OMB"). All of the essential decisions made during the privatization process reflected the collective judgment of these government agencies.

As part of our review of the USEC Board's decision to approve the public stock offering as the method of privatizing the corporation, we sought and obtained advice from federal agencies having expertise relevant to the statutory criteria specified by Congress in the two privatization statutes. Specifically, we obtained advice in writing from: (1) DOE on the satisfaction of the statutory criteria related to long-term viability, continued operation of the enrichment facilities, and a reliable and economical domestic source of uranium mining, enrichment and conversion services; (2) DOC and NRC on the satisfaction of the statutory criterion related to reliable and economical domestic source of uranium mining, enrichment and conversion services; and (3) OMB on the satisfaction of the statutory criterion related to securing maximized proceeds to the United States. The consultative process included extensive discussions with senior representatives from DOE and OMB.

In addition, Treasury asked the CIA, DOD, DOE, DOS, the Federal Bureau of Investigation, NRC, NSC, and OMB to provide any information about the members of the parties (and their affiliates) that submitted final third-party sale proposals that might, in the view of these agencies, have a material effect on the government's review of the proposals. None of these agencies informed Treasury of any information on this subject. Finally, the NSC was fully involved throughout the privatization process and chaired a number of meetings on national security-related matters. The NSC, in consultation with appropriate national security agencies, determined that the privatization plan was consistent with the national security requirements of the statutes.

In addition, staffs from Treasury and other agencies undertook an extensive review of the available information, including the following: (1) written materials and oral presentations provided by USEC's management on the Corporation, its strategic plans, and the uranium enrichment industry; (2) proposals received from the parties interested in the acquisition of USEC through a negotiated third-party sale; (3) written materials from, presentations by, and discussions with USEC's financial and legal advisors, including a formal written opinion from its financial advisor; (4) four meetings of the USEC Board on the method and manner of sale (which included meetings with each of the parties interested in a negotiated third-party sale, union representatives, and a Congressional representative); (5) discussions with the leading candidate for a negotiated third-party sale regarding its proposal; (6) "bring-down" discussions and presentations by the financial advisors; and (7) discussions with the Oil, Chemical, and Atomic Workers Union.

Treasury determined that both the public stock offering and the Carlyle proposal met the statutory criteria for privatization, but that the offering was the superior method of addressing the special concerns identified in the privatization legislation. The primary reasons for our determination were a lower expected level of debt, higher expected levels of employment, higher expected proceeds, unresolved contract points with Carlyle, and lower expected market and financing risks.

The debt level under the Carlyle proposal would have been $1.2 billion, as compared with $500 million under the stock offering. In addition, the Carlyle proposal included about $355 million in preferred stock, which would have been a fixed-rate obligation. The actual credit rating under the public stock offering proposal was BBB+. This was higher than the expected credit rating under the Carlyle approach (BBB). The credit rating under the stock offering was also higher than the minimum level deemed acceptable by the USEC Board (BBB) for its statutory determinations. Also, as I will discuss later in this testimony, the credit rating under the stock offering was higher than the credit rating suggested by NRC as the minimum threshold for transfer of the certificate to the privatized corporation without further review of USEC's financial structure (BBB-). The reduced debt level and higher credit rating under the stock offering were key factors supporting the determination that privatization provided for the long-term viability of USEC.

The Carlyle proposal included large, rapid reductions in employment at the two gaseous diffusion plants within the first two years of over 1,700 jobs (gross figure). The reduction would have been partially offset by plant reconfiguration and other activities, but the net decrease in employment over two years would have been about 1,400 jobs. In contrast, the public stock offering proposal included job reductions within the first two years of about 500, plus normal attrition.

The mid-point of the expected range of the estimated net proceeds from the public stock offering was approximately $40 million greater than the estimated net proceeds from the Carlyle proposal. Moreover, the estimated difference between the two approaches might have been even greater because the Carlyle proposal included the establishment of an escrow account of $100 million, which would be held aside for up to six years to indemnify Carlyle against certain contingencies. The escrow proposal created uncertainty as to the ultimate amount of net proceeds that would result from the Carlyle proposal. Carlyle also conditioned its proposal upon the issuance of a favorable determination from the Internal Revenue Service concerning the tax treatment of the proposed transaction.

USEC's transaction manager advised the government that, although there would be market exposure for the public stock offering during the marketing period of three to four weeks, the market risk was low. The Carlyle proposal, on the other hand, involved certain financing risks, as the commitment letters were subject to material market changes, equity investments by members of the Carlyle Consortium, due diligence, and other factors.

During the privatization process, Treasury required that USEC take certain actions to protect the integrity of the process. Treasury insisted that the pre-privatization members of the USEC Board not continue with the privatized corporation and that the transaction manager be precluded from representing USEC for a period of two years after privatization. Treasury also insisted that only one member of USEC's current management serve on the board of directors of the privatized corporation, and not initially as the chairman, and that the privatized corporation's charter documents not contain "anti-takeover" provisions that might entrench management.

The federal government negotiated a number of contracts with USEC and established standards that would govern the corporation's conduct after privatization to address special areas of concern reflected in the privatization statutes.

Since 1993, USEC had served as the United States Government's Executive Agent under the agreement between the United States and the Russian Federation concerning the disposition of highly enriched uranium extracted from nuclear weapons (the "Russian HEU Agreement"). In anticipation of the possibility of USEC's privatization, the President in 1998 established, by executive order, a federal inter-agency Enrichment Oversight Committee to be chaired by the NSC. Among other functions, this committee coordinates the government's monitoring of the privatized corporation's implementation of the Russian HEU Agreement.

Shortly before the privatization, USEC entered into an agreement with DOE under which USEC agreed that the privatized corporation would supply periodic information reports to DOE to support the functions of the Enrichment Oversight Committee. The privatized corporation has succeeded to USEC's rights and responsibilities under the agreement among DOS, DOE, and USEC guiding USEC's performance as the United States Government's Executive Agent under the Russian HEU Agreement. At DOS's request, Treasury also obtained a written statement from USEC indicating its intent to limit the amount of natural uranium that it would sell into the marketplace.

The National Industrial Security Program, which is administered by DOE and NRC, restricts foreign involvement in entities that require access to classified information. Because enrichment operations require access to classified information, the privatized successor to USEC must meet the requirements of this program. The program requires annual re-certification that the privatized corporation is free from foreign ownership, control, or influence that may result in the compromise of classified information. In addition, the privatized corporation has an ongoing responsibility under the program to report any changes in the nature or extent of foreign ownership, control, or influence.

In the USEC Privatization Act, Congress gave the NRC ongoing authority to review USEC's compliance with three of the privatization criteria in connection with periodic NRC certification proceedings. Specifically, NRC must determine that (1) USEC is not subject to foreign ownership, control, or domination, (2) the certification of USEC would not be inimical to the common defense and security, and (3) the certification of USEC would not be inimical to the maintenance of a reliable and economical domestic source of enrichment services. NRC certification also focuses on health, safety, and environmental concerns. Under the statute, USEC or any successor corporation must apply for certification at least every five years.

To assist in implementing this provision, NRC staff prepared a standard review plan that described information to be examined and factors that it would consider in applying the three statutory criteria. For the criterion relating to a reliable and economical domestic source of enrichment services, the review plan provides that approval should be automatic if USEC or a successor corporation has an investment grade credit rating. An investment grade rating is generally considered to mean at least a BBB- rating. The NRC review plan also provides, however, that an applicant with a lower credit rating, or no credit rating at all, may receive certification if other factors support a favorable determination.

USEC entered into two agreements with DOE to ameliorate the effect of job reductions resulting from the privatization. USEC agreed with DOE in the first agreement that the privatized corporation would provide certain worker transition assistance benefits using an agreed-upon amount of USEC's pre-privatization funds. Under the second agreement, USEC agreed to pay DOE a certain amount of USEC's pre-privatization funds for DOE to assume responsibility for a certain amount of depleted uranium produced by the privatized corporation, and DOE agreed to apply these funds in ways aimed at creating new jobs or giving hiring preferences to qualified laid-off workers.

With respect to environmental matters, USEC entered into an agreement with OMB allocating costs between the privatized corporation and the federal government for certain environmental liabilities.

In addition to the agreements concerning post-privatization conduct, the privatized corporation is subject to the Occupational Safety and Health Review Commission's worker health and safety regulations and the Environmental Protection Agency's environmental regulations.

Treasury also entered into a separate agreement with USEC a few days before privatization that limited the corporation's conduct after privatization. This agreement, entitled the Agreement Regarding Post-Closing Conduct (the "Post-Closing Agreement"), was not explicitly required by the statutes. Treasury felt, however, that this agreement was the best way to address special areas of concern identified in the privatization.

The Post-Closing Agreement imposed four main limitations on the corporation's conduct after privatization: first, restrictions on executive compensation; second, a two-year restriction on layoffs; third, a three-year restriction on a sale of all or substantially all of USEC's assets; and fourth, a restriction on plant closings until January 1, 2005.

On the subject of executive compensation, Treasury obtained USEC's agreement that the privatized corporation's executive officers would not receive any increase in salary for at least 180 days after the privatization and would not receive any stock options unless the plans under which they were granted were approved by the new shareholders. Treasury sought these agreements to protect the integrity of the privatization process.

On the subject of employment, Treasury obtained USEC's agreement that layoffs at the gaseous diffusion plants through the privatized corporation's fiscal year 2000 would not exceed 500, and that they would be conducted in substantially equal parts in fiscal years 1999 and 2000.

On the subject of asset sales, Treasury obtained USEC's agreement that the privatized corporation would not sell all or substantially all of its uranium enrichment assets or operations for a three-year period after the closing of the privatization. This provision in the Post-Closing Agreement was designed to complement a provision in the 1996 Act, in which Congress restricted any person from acquiring more than 10% of USEC's stock during the three-year period after privatization. The provision in the Post-Closing agreement was also designed to ensure that USEC's operations could not be sold off piecemeal by USEC during the period immediately after privatization.

On the subject of continuous operation of the plants, Treasury obtained USEC's agreement that the privatized corporation would continue to operate the gaseous diffusion plants until January 1, 2005, unless a "Significant Event" (as defined in the Post-Closing Agreement) occurs that could threaten the corporation's viability or the maintenance of a reliable domestic enrichment industry.

Treasury has vigorously enforced the restrictions contained in the Post-Closing Agreement. For example, subsequent to privatization, USEC attempted to renegotiate the restriction on layoffs. Treasury, however, refused to allow USEC to deviate from its obligations under the Post-Closing Agreement.

In addition, earlier this year, Treasury sent a letter to the Chairman of USEC stating that we had been informed that the Board was about to consider the closure of a plant. In that letter, we referred USEC to the plant closing restrictions in the Post-Closing Agreement. We also stated that, as a party to the Post-Closing Agreement, Treasury has an interest in receiving information concerning proposed plant closings. Accordingly, we said that we would like to review and comment on the legal justification for any proposed plant closing prior to any meeting of USEC's Board of Directors which may consider such a closing.

Further, we requested that USEC notify Treasury immediately if it is considering a closing based on the occurrence of one or more Significant Events and that USEC provide the factual basis for concluding that a Significant Event has occurred or is likely to occur in the near future. We explained that it is important that Treasury has ample time to evaluate independently the merits of such a plan, so that we may verify USEC's adherence to the requirements of the Post-Closing Agreement. USEC has not so notified us.

Senior Treasury officials have met with members of Congress and their staffs to discuss USEC. Treasury has also attended meetings of the Enrichment Oversight Committee since privatization. The meetings have focused on energy and national security issues. As a result, our participation in the meetings has been limited.

There is no statutory basis for ongoing Treasury oversight of USEC -- which is now a private corporation -- other than the Post-Closing Agreement. In addition, although USEC's operations involve important issues in the areas of national security, labor, and energy, these topics are outside of Treasury's area of expertise. Despite our limited role since privatization, however, we are committed to being as responsive as possible to concerns raised by Congress and others.

Mr. Chairman, we went to great lengths to fulfill the statutory direction for privatization in a manner consistent with the special areas of concern identified by Congress. Decisions at every juncture were the result of a careful, collective determination by the many federal agencies and organizations involved in the process. In entering into the Post-Closing Agreement, we believe we even went beyond the express requirements of the privatization statutes.

It's been almost two years since the privatization occurred. During such a timeframe, markets can change dramatically. Global and domestic economic conditions can shift considerably. Private sector firms must continually make business decisions in order to compete in a changing market environment.

At the time of the privatization, the appropriate federal agencies made the best decisions possible given the information we had at our disposal. We believed the decisions were the most judicious ones possible at the time and the most likely means of achieving the purposes of the statutes.

We believe that Congress provided a clear process for the government agencies to follow in accomplishing the privatization. The legislation set up a deliberation process that started with a Senate-confirmed board of directors outside of executive departments. The legislation also developed a rigorous process through which national security, labor, environmental, and post-closing conduct issues were collectively addressed by appropriate federal agencies. We believe Treasury and the other federal agencies involved in the process accomplished the objectives of the legislation in the most prudent manner possible at the time.

This concludes my written remarks. I will be happy to answer any questions you may have.