A balancing act with nuclear weapons29 December 2001
USEC came through a controversial privatisation to face a market in turmoil. How does it keep holding on the HEU programme?
Since 1993, USEC has been the US government’s executive agent for the US-Russian Megatons to Megawatts Agreement. It began receiving Russian shipments of nuclear fuel that has been derived from dismantled nuclear warheads two years later.
During the last six years, nearly 100t of Russian warhead HEU have been converted to LEU fuel for use by USEC’s electric utility customers. This is the equivalent of about 4,000 nuclear warheads, and places USEC ahead of its original 20-year schedule to convert a total of 500t of HEU (the equivalent of 20,000 nuclear warheads).
In 1996, the US government’s decision to privatise USEC was widely criticised because it was believed to compromise national security, but commercial reality triumphed over political considerations. The privatisation process took three years of due diligence before it was authorised and accomplished, and involved an exhaustive analysis of factors and issues by more than a dozen agencies.
Once privatised, USEC took a number of hits. A declining world market combined with soaring deregulated power costs and ageing technology to pose significant challenges to the newly commercial company. These developments culminated in the cancellation of AVLIS.
USEC was suddenly faced with:
•A 15% drop in forecast global enrichment market prices;
•An 18% drop in available global enrichment demand:
•A 32% drop in uranium market prices; and
•An 18% drop in available global uranium demand).
The new company soon found itself selling new Russian material at below the price it has agreed to pay for it. As the losses grew, USEC tried to get the US government to pay for a portion of the difference, but even though the sale of USEC had raised some $3 billion, no help materialised.
USEC sought to renegotiate its deal with the Russians, aiming to replace the previous fixed price agreement with a market-based pricing arrangement. An agreement-in-principle along these lines was reached in May 1999 by both parties and their respective governments. USEC worked closely with the administration’s Enrichment Oversight Committee in order to reach its proposal. If the US government approves it, the new terms will become effective in 2002. They will ensure that the remaining 13 years of purchases will be based on a flexible, commercial formula consistent with the original goal of the agreement – that the programme be self-sustaining.
While these negotiations were going on, USEC set about reducing its operating costs. This involved the decision to close its Portsmouth, Ohio plant in June 2001. Although faced with substantial opposition as the plant has been a significant employer in the Portsmouth area for 50 years, USEC says that it cannot continue to operate it at a fraction of its capacity. The government is obliged by law to clean up the site, and may re-employ the affected workers for this purpose.
The Paducah facility in Kentucky has also been affected, with significant consolidation taking place. In all, the company has reduced its workforce by 25%.
Other cost-cutting measures have included securing a ten-year power contract to provide the Paducah facility with cheaper electricity. USEC has also pursued three new enrichment options: US centrifuge, foreign centrifuge and Silex laser technology. The company will decide which technology to develop during the next 12-18 months.
Although these rationalisation measures have been controversial, USEC maintains that they would have been far more difficult to make if it was still a government body. It points out that taxpayers would have been denied $3 billion of privatisation proceeds, and would in fact be subsidising the operation of unneeded resources at a cost of hundreds of millions of dollars. There would also have been uncertainty about the availability of the required public funds to keep the HEU transaction going.
Today nearly half of USEC’s customer requirements are being supplied through the Megatons to Megawatts agreement. The company has:
•73% of the US fuel enrichment market.
•36% of the world fuel enrichment market.
•Annual sales of $1.5 billion.
•A sales backlog of $6 billion.
•Total assets of over $2 billion.
In addition it is still trying to improve the efficiency of its production operations and pursuing new opportunities. The company has recently announced the joint venture with Enron that will give utility customers an opportunity to pay for their enrichment purchases with electricity. The company’s remaining challenge is to retain its business freedom while working cooperatively with the government on matters like the HEU transaction and the transition of employees for decommissioning and decontamination of the Portsmouth plant. A healthy USEC will will provide a reasonable return to shareholders while completing the objectives of completing the Russian HEU programme, and doing so at no cost to the government and no interruption to performance.
“With the magnitude of the Russian material coming into the market, for its own self-interest, USEC needs to both perform well and to retain as executive agent. The US needs a healthy USEC to most efficiently meet its nuclear non- proliferation objectives,” says William Timbers, president and CEO of USEC.
“A healthy, investor-owned USEC – like all other private sector companies – must be free to pursue the commercial decisions required to cut coss and improve efficiencies. And, we must be free to do so in the face of difficult market conditions and intense competition, even while we are working cooperatively with government on matters of mutual interest,” he adds.