Consultant: USEC status 'grave'
By Joe Walker
A former undersecretary of energy who encouraged turning the Paducah Gaseous Diffusion Plant over to a private company says USEC Inc. is dying and dramatic measures are needed to save America's uranium enrichment enterprise.
"I'm just astonished," said Shelby Brewer, who led revamping of the enrichment business during President Ronald Reagan's administration. "It is grave when you consider that USEC's stock price has fallen 70 percent since privatization (in July 1998). USEC is simply not competing."
Brewer, now a nuclear industry consultant, said he will testify Thursday in a House subcommittee hearing on USEC's financial outlook.
Another consultant, speaking on condition of anonymity, predicted USEC will be out of business by 2002 even if it decides to close the Paducah plant or its sister plant near Portsmouth, Ohio. A report provided to his clients says it would take several "near miracles" to save the firm, which has no proven advanced technology to replace expensive, outdated gaseous diffusion.
The consultant said his clients that are utilities worry whether USEC will remain solvent and can supply their contracts for the next five to 10 years.
"We think Congress needs to allow someone else to buy USEC and put it under new management," he said. "It should never have been privatized. It should have stayed a government entity."
On Friday, Brewer briefed 1st District U.S. Rep. Ed Whitfield, R-Hopkinsville, who will preside at the hearing. Witnesses are expected to include USEC Chief Executive Officer William "Nick" Timbers; financial analysts; top officials of the departments of energy and treasury, and the Nuclear Regulatory Commission; and atomic workers' union leaders.
Whitfield is worried about the future of the Paducah plant because USEC is eliminating 425 jobs, has cut its dividend in half, is buying back 30 million shares and projects much lower earnings for fiscal 2001, which starts July 1. Earnings are forecast at $35 million to $45 million, compared with $48.7 million for the first half of fiscal 2000.
USEC's credit rating has been lowered to junk bond status, which is among several privatization loopholes allowing the firm to close a plant before 2005. Also, the NRC has asked USEC to prove that it has the financial resources to adequately enrich uranium as required by the plant's certificate of operation.
Scheduled hearing witness Richard Miller, analyst for the atomic workers' union who is based in Washington, accuses the USEC board and management of "bad faith conduct" in triggering the credit downgrade as justification to close a plant. Treasury officials have refused Miller's demands to intervene.
Brewer, who as assistant secretary of energy helped return profitability to enrichment, was among the first to recommend it be privatized. But since USEC was formed in 1992 by an act of Congress, it has been mismanaged, he said.
When DOE's 10-year contracts were up for renewal in 1992, USEC "gouged" customers by selling units of enriched uranium for $125 (about $50 above production costs), Brewer said.
After that, the firm inexplicably sold uranium for $85 per unit, which eventually dropped below rising production costs, he said.
A chart prepared by the other consultant shows USEC's recent sales have been about $82 per unit, whereas production costs approach $100. By 2005, "USEC likely will have sold most of its inventories, and thus will have little flexibility to compensate for operating losses," an accompanying report says.
Besides a huge drop in stock value and credit rating, USEC's market value is now only a fourth of the $1.6 billion it purported to have when it became a publicly traded firm two years ago, Brewer said.
"When stock goes from $1.6 billion to $400 million, they ought to send for the guy with the net," he said. "I cannot imagine a management team surviving this. I mean, if they worked for me, they'd be out the door by the end of the day."
USEC's initial public offering was careless and "overhyped," he said, notably by inflating the value of USEC's stockpile of uranium at $900 million. If that amount of uranium had to be sold quickly, it would "destroy" an already glutted market, Brewer said.
In addition, USEC has $500 million in bonded debt due in about five years as a result of the stock sale.
Elizabeth Stuckle, USEC spokeswoman, declined to respond to Brewer's claims but said the firm has every intention of supplying enriched uranium for many years. She said layoffs and many other cost-cutting measures show USEC's resolve.
The company and its three foreign competitors are vying for sales in a world market that is flat because few power plants are being built. Brewer said he helped construct four plants in Korea while he was president and chief executive officer of Combustion Engineering from 1985 to 1995.
USEC's problem is worsened because gaseous diffusion is 50 years old, uses huge amounts of electricity and has no apparent replacement now that a promising laser-based technology called AVLIS has been scrapped, he said.
Brewer led what he described as "harsh decisions" in the mid-1980s to close a third gaseous diffusion plant, in Oak Ridge, Tenn., and abandon a $1.5 billion gas centrifuge operation at Portsmouth just as it was ready to open.
He said the centrifuge facility was mothballed because it was no more cost-efficient than gaseous diffusion and DOE decided to aggressively pursue AVLIS research. Today two USEC competitors in Europe use centrifuge, Brewer said.
Although USEC is considering a pilot centrifuge plant at Portsmouth, "I don't see a new technology in play unless we want to buy centrifuges from Europe," he said.
Another huge detriment is that USEC is buying $8 billion in enriched uranium from Russia during the next 20 years in a nuclear disarmament deal. Blended down from material in dismantled nuclear warheads, the uranium roughly equals the production of one of the plants.
Moreover, USEC is paying Russia, a competitor, about $20 more per unit of enriched uranium than Paducah's and Portsmouth's production costs. Brewer said he warned USEC management about that in 1994 and now thinks the government should subsidize the firm's losses in the deal.
Brewer said he doubts that USEC would be in much better shape if it weren't saddled with the Russian uranium. As for a solution, Brewer said he hopes to come up with suggestions in time for the hearing.
"I'm struggling with where they go from here," he said.