Sole U.S. uranium enricher struggles

The Baltimore Sun

WASHINGTON -- Seventy years after the United States invented uranium enrichment, the sole U.S. company in the business is struggling to survive, while nuclear power experts worry that its failure would leave the Russians dominant in the market for fuel processing.

USEC Inc. of Bethesda has liquidated some of its valuable uranium inventories to stay afloat, as its income has declined because of changing market conditions. But it also has maintained a high dividend, bought back its own stock and spent lavishly on severance payments after frequent purges in the executive suite. The company spent more than $100 million on two new technologies for enrichment before abandoning them and embarking on a third.

"USEC has been a four-letter word in some circles," said its chief executive, John K. Welch, who was hired in October 2005 to save the company. Though he has taken steps to strengthen USEC, he said the problem now is to find a way to finance its new technology and become competitive in the world market.

Enrichment means sorting two types of uranium to raise the proportion of uranium 235, a step essential for use in American nuclear reactors. The government is promoting nuclear as a step toward energy independence.

The United States invented the process to build the bomb that destroyed Hiroshima in August 1945. Later, the United States offered enriched uranium to civil nuclear programs worldwide.

In the 1990s, the government privatized its antiquated enrichment plants. USEC closed one, in Piketon, Ohio, and still runs the other, in Paducah, Ky.

But the Paducah plant is a heavy user of costly electricity, which now amounts to more than 70 percent of USEC's costs. Centrifuges, which are used by almost all other enrichment plants, use only 5 percent of the electricity used by the Paducah plant.

In February, USEC announced that the centrifuges it was developing would cost $2.3 billion, up from a previous estimate of $1.7 billion, and would take an extra year to deploy. The company has already spent about $400 million on the centrifuges and is looking for financing to complete the project, which it is trying to build in Piketon.

"Most people expect that $2.3 billion is going to go up," said Paul R. Clegg, a stock analyst at Natexis Bleichroeder Inc.

The company has been involved in merger talks with several companies in the nuclear business, and the trade press has carried reports of other negotiations. But two people with knowledge of the talks said that they did not appear to be leading anywhere.

In addition to USEC's Paducah plant and its planned centrifuge project, a European consortium is building a centrifuge plant in Hobbs, N.M., that it calls the National Enrichment Facility, and General Electric is trying to commercialize an Australian enrichment technology called Silex.

Despite the challenges, and the fact that Welch eliminated the dividend, the stock price is strong. Market analysts say one reason is that the price of virgin uranium is so high that customers are demanding more enrichment work, thus driving up the price of the service that USEC provides. Some investors also see the company as a takeover target, or a likely beneficiary of government help.

USEC would like to acquire uranium from the Energy Department on favorable terms, to help provide funds for its centrifuge project. But the Energy Department appears to want a signal from Congress.

The government still owns the Paducah plant, and could take it over and give it to a contractor to run. Or it could allow USEC to operate in bankruptcy, although that would probably eliminate the company's ability to build a more modern plant.

The assistant secretary of energy for nuclear energy, Dennis R. Spurgeon, was USEC's executive vice president and chief operating officer until he left in 2003, receiving a payment of more than $5 million, according to Securities and Exchange Commission filings. Spurgeon, through a spokesman, declined repeated requests for an interview.

According to people close to the company, Spurgeon had clashed with the chief executive, William H. Timbers, as had other top officials. Timbers left the company in December 2004, after disagreements with the board. In February 2006, USEC agreed to pay him $14.5 million, according to SEC filings.

Some Democrats in Congress are demanding a full explanation of the departures of Timbers and others before they proceed with a discussion about how to help the company.

USEC has other problems as well. It also takes in enriched uranium from Russia, left over from Moscow's nuclear weapons program, under a program called Megatons to Megawatts. USEC dilutes the material to reactor grade under an agreement in operation since the early 1990s.

Half of the enrichment that the company sells is done under the terms of that agreement, which were locked in years ago, and it provides a substantial profit to USEC. But the agreement ends in 2013, after which Russia's Rosatom wants to deal directly with the nuclear utilities. Those utilities would like to do the same.

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