Whether plant is in Paducah or Ohio, USEC will need cash: analyst
By Joe Walker firstname.lastname@example.org
"There's reasonably a 50-50 chance at best that USEC will ever build a plant," said Longenecker, now a California-based consultant for nuclear firms that buy enriched uranium from USEC and other suppliers. His work includes research to give clients a better feel for the financial future of the Bethesda, Md., firm.
USEC's annual earnings have dropped from $78 million to less than $12 million in two years.
USEC is trying to resurrect gas centrifuge, a process used in Europe for decades, as a replacement for power-intensive, outdated gaseous diffusion, the process used at Paducah's enrichment plant. Longenecker led the gas centrifuge program in 1985 when DOE aborted plans to commercialize a new centrifuge plant at Piketon, near Portsmouth, because it was too costly.
"At that time, if the plant had been completed, the cost was going to be 30 percent higher than to keep running the gaseous diffusion plants," he said. "We didn't have $8 billion to finish the plant ... It was all about keeping the price down."
USEC is expected to announce early this month that it will build a 50-job test centrifuge plant at either Paducah or Piketon and has said the winner will have an advantage in getting a $1.5 billion, 500-job commercial plant by the end of 2010. The commercial plant would eventually replace the Paducah Gaseous Diffusion Plant, which will pare its work force to about 1,250 next year.
Having an existing complex and not being in a major earthquake zone give Piketon roughly a $450 million leg up on Paducah in recruiting the gas centrifuge plant, Longenecker said.
"If it were my choice, I'd want to do it in Paducah because of the people and quality of the work force," he said. "But the stone-cold numbers say USEC saves $250 million by going to Portsmouth for the building and facilities."
USEC probably would have to spend as much as $200 million in seismic upgrades if it built a centrifuge plant in Paducah, which is in the New Madrid Fault earthquake zone, he said. Piketon does not have that problem.
Financing the centrifuge plant is the bigger issue, Longenecker said, because USEC does not have the inventory or assets to borrow $1.5 billion while still owing $500 million in bonds outstanding from its 1998 privatization.
That means merging with another firm or finding a partner, probably within the nuclear industry, he said. But the nation's three largest nuclear power firms — Duke Power, Exelon and Entergy, all USEC customers — are partners with USEC's European competitor Urenco in a venture to build a centrifuge plant in the United States before USEC does.
The consortium, Louisiana Energy Services, announced plans in September to have a plant running 40 miles northeast of Nashville, Tenn., by 2007, at least two years earlier than USEC. If L.E.S. succeeds, it could capture the USEC market and force closure of the Paducah plant by 2010 to 2012, Longenecker said. If not, the Paducah plant might run until 2015, he said.
In September, Dennis Spurgeon, USEC executive vice president and chief operating officer, told members of the World Nuclear Association in London that the test plant will showcase improvements in centrifuge technology. USEC is spending $150 million during the next five years on the plant, using as many as 240 machines that previous performance shows will be the most economical in the world, he said.
"We are confident that successful demonstration of the (test plant) will attract partners and/or investors for the construction of the commercial enrichment plant," Spurgeon said.
Soon after that, the USEC board met at the Paducah plant. During an interview then, USEC Chief Executive Officer Nick Timbers would not speculate if the shrinking enrichment market could support USEC and L.E.S., but said he favors "free and open thinking" among USEC, Urenco and the two other major enrichment suppliers worldwide.
He said the $1.5 billion may come in a variety of forms, including partnerships. Whether a partner is needed will depend on results of the test plant, market conditions and USEC's financial status, he said.
Longenecker said USEC will have to seek public support if it can't find private financiers. "We think all roads lead to USEC's acquiring government-backed financing," he said, adding that the Energy Department may be restricted from helping because of federal belt-tightening and its massive environmental cleanup responsibilities nationwide.
Even if USEC finds the money, there is a "high probability" of lengthy delays in proving centrifuge can enrich uranium at competitive prices and in getting licensed by the Nuclear Regulatory Commission, he said.
Richard Miller, Washington-based policy analyst for the Government Accountability Project, said competitive pricing is a big problem because most of the high-value USEC contracts are ending. That leaves newer contracts at near market prices and far less profit margin, he said.
Adding to the trouble is that USEC's already-low credit rating was downgraded again recently, said Miller, who spent years following USEC while representing the atomic workers' union.
"I would expect USEC to run to Congress for money if it runs out of (centrifuge) research and development funds, but USEC is not making the case for a federal bailout," paying $42 million in dividends and big bonuses to corporate leaders, Miller said.