Revenue has dropped and the future of the new enrichment plant isn't on a firm financial footing
This blog post is an expanded version of my coverage published in Fuel Cycle Week V10:N408 January 20, 2011, by International Nuclear Associates, Washington, DC.
USEC (NYSE:USU) announced Jan 11 it plans to extend the operation of the Paducah, KY, Gaseous Diffusion uranium enrichment plant beyond May 2012. The firm said it would make a final decision to go forward by May 2011. The future operation of the plant would use depleted uranium (UF6) inventory from the Department of Energy.
USEC has turned a few heads with this move which took place without a parallel announcement from the Department of Energy. The outdated plant, which devours electricity from the Tennessee Valley Authority, has long been something of a white elephant, especially considering USEC’s ongoing financial struggles.
But in a unique twist, USEC said it was exploring a proposal to re-enrich UF6 from Department of Energy’s excess uranium inventory. Because the material, which DOE stores in cylinders on USEC’s Paducah and Piketon sites, has no market value in its current form, DOE could part with it at no cost, and after re-enriching it USEC could sell it at a significant profit. This, USEC said, could help make the plant more economic.
No comment from DOE
The Department of Energy told FCW through a spokesperson, "DOE has not yet received a specific proposal from USEC, but will give due consideration to any proposal we receive in the future."
The Piketon, OH, plant has 169,000 metric tons of depleted UF6. The Paducah, KY, plant has 330,000 metric tons depleted UF6.
USEC said in a statement the amount of natural uranium that would be sold from extending operations at Paducah, would be equivalent to 2.5% of global demand. According to the OECD, global production of uranium in 2010 was estimated to be 55,000 tonnes.
A 2.5% slice of global production in 2010 would be equal to 1,375 tonnes or 3.08 million pounds. At the current $62/lb spot price that 2.5% slice could potentially be worth $191 million in new revenue for USEC. Over four years, with an assumption of steady increases in spot prices, the production could be worth in the range of $800 million-$1 billion.
A grim financial reality for USEC is the expected end in 2013 of the Megatons-to-Megawatts program to process Russian HEU blended down into LEU for use as nuclear fuel for the U.S. fleet of 104 nuclear reactors. Approximately 40% of all fuel used in U.S. reactors comes from the Russian program according to the Energy Information Administration.
The Russians are not waiting for the end of the program to ink new reactor fuel deals with U.S. utilities. In August 2009 Exelon, Constellation Energy, Pacific Gas & Electric Co., AmerenUE; and Luminant signed a $2 billion package of contracts with Russia's Techsnabexport (Tenex) for delivery between 2011 and 2020.
Revenue and profits down in 2010
It follows the reason USEC is planning to extend operations of the Paducah plant is to boost revenue and not just for the bottom line. It must show DOE, which is conducting a due diligence review of USEC's finances, that its balance sheet is on a firm footing.
The problem is the firm's 10-Q form, filed with the Securities & Exchange Commission for the nine month period ending September 30, 2010, shows a steep drop in revenue and profits compared to the same nine month period ending September 30, 2009.
USEC Gross Revenue and Profits
All figures in $ millions
| Source: USEC 10-Q Nov 2010 | Nine months ending 09/30/10 | Nine months ending 9/30/09 |
| | Revenue | |
| SWU | $1,002 | $1,266 |
| Uranium | $164 | $150 |
| Government | $203 | $153 |
| | Profits | |
| | $109 | $159 |
According to these numbers, USEC's revenues came in $200 million lower for the first nine months of 2010 than for the similar period in 2009. Gross profits were down $50 million. The company recorded a $1.5 million net loss for the 2010 period compared to $9 million in net profits for the same period in 2009.
Some of the reasons for the changes include a $41 million increase in the cost of performing on government contracts. Another factor is that payables under the Russian contract increased by $63 million. Despite producing uranium for sale to be used as commercial nuclear fuel worth $1.473 billion, the firm still had $885 million, or 60% of the inventory, sitting unsold on September 30, 2010.
Success in passing DOE due diligence depends on good numbers
The issues of revenue and cash flow are crucial to USEC's negotiations with the U.S. Department of Energy (DOE) for a $2 billion loan guarantee for the new American Centrifuge Facility (ACF) USEC is building in Piketon, OH. In late October 2010, DOE provided USEC a draft term sheet for a conditional commitment for the loan guarantee. The action followed a technical review of progress on maturing USEC's centrifuge technologies.
DOE must now complete a due diligence review of USEC's financial prospects and negotiate terms and conditions for the loan guarantee. There are big stakes riding on the decision by DOE to issue a conditional commitment for the $2 billion in federal insurance for current and future investors in the ACF.
In May 2010 two leading nuclear manufacturing firms, Toshiba and Babcock & Wilcox, made parallel $100 million investments which, when they mature, will give these firms a one-third stake in USEC. The $200 million in funds from these two investors are being released in three tranches.
The first for $75 million was provided on the execution of the initial agreement. The next two cash distributions require progress in getting a conditional and a final commitment from DOE for the loan guarantee. Even with a $2 billion loan guarantee, and early stage financing from high quality investors, USEC still needs to attract more investors to build the ACF which is estimated to cost $3 billion.
Paul Jacobson, USEC VP for Public Affairs, told FCW if all goes well obtaining the loan guarantee and lining up new investors, the plant could be at full capacity by 2013 producing 5.2 million pounds U3O8 equivalent a year. When complete, the ACF will house 11,000 gas centrifuges.
Jacobson said getting investors lined up is a key success factor for DOE's due diligence process and whether it will decide to issue the loan guarantee.
"In order to obtain a DOE loan guarantee, we will need to demonstrate that sufficient capital is available to complete the project. We have initiated discussions with Japanese export credit agencies regarding financing a portion of the cost of building the plant. Their willingness to provide financing is closely tied with our obtaining a DOE loan guarantee.”
Does USEC have an edge in Washington?
In years gone by USEC has relied on influence in Washington to make the case for continued support for its operations. Until recently, USEC relied on the influence of Ohio's now former senior Senator George Voinovitch who was during his time in the Senate an advocate for USEC and nuclear energy in general.
Ohio democratic Senator Sherrod Brown serves on the powerful Senate Appropriations Committee and, more importantly, on its subcommittee on Energy & Water Development. It could be an advantage for USEC to have advocacy for its projects from Brown with a Democrat in the White House and Democrats controlling the Senate.
Ohio's new republican senator Rob Portman is at the bottom of the seniority list for committee assignments. He was named in late January to the Senate Energy & Natural Resources Committee which has the lead policy role for DOE programs. However, he told Ohio news media his priority in the Senate is on tax and budget issues.
According to the campaign finance tracking organization Open Secrets, in 2010 USEC's political action committee gave $5,000 to Portman and $2,500 to Sherrod Brown. Additional smaller contributions were made to so-called "soft money" organizations. These reports may be incomplete so it isn't clear how much USEC bet on one party or another or simply split the difference.
Environmental groups question USEC finances
Not everyone is convinced of the likelihood of USEC's rosy scenario for a path to award of a loan guarantee. The Ohio Sierra Club raised questions in early January about the financial viability of USEC's plans to build the ACF. In a public meeting called by the NRC in response to comments filed by the Sierra Club, the group asked what would happen to the ACF, and the uranium in it, if USEC failed to close on financing to build the new plant.
Angie Dudit, a spokesperson for USEC, responded that decommissioning funds are set aside for this purpose.
Another environmental group attending the meeting questioned whether USEC will be able to compete for global business with the new enrichment plant. A check of an update on the ACF posted on USEC's web site said " USEC has secured $3.1 billion in committed sales for the output of the ACP."
USEC also said on the same web site it has "worked under a March 2010 cooperative agreement with DOE for pro-rata cost sharing support for continued American Centrifuge activities with a total estimated cost of $90 million. The work scope covers continued operation of the AC100 cascade, manufacturing of additional AC100 centrifuge machines, and refinement to the rotor tube manufacturing process in preparation for full production."
USEC continues to wax optimistically about the future of the plant. Spokesman Jacobson told FCW:
“With respect to schedule, we anticipate it will require 18 to 24 months to begin initial commercial operations upon receiving financing to complete the plant. We also anticipate that it will require 30 to 36 months to complete the plant after initial commercial operations. We continue to work with our EPC contractor and suppliers to reduce the deployment schedule for the ACP.”
Back to Paducah
Another factor affecting the financial viability of extending operations at Paducah is the cost of electricity. The gaseous diffusion plant gobbles juice from TVA that spins the billing meters at a fearsome pace making USEC one of TVA's top customers. The current power agreement with TVA expires in 2012 which sets up negotiations for a new one as a critical success factor to keep the Paducah plant in operation.
A third factor is how uranium producers in the U.S. will react to USEC's announcement. There is some history in this area. In August 2009 an announcement by DOE Secretary Steven Chu that the agency planned to sell $150-200 million a year in re-enriched uranium for four years produced howls of protests from uranium producers.
USEC's target of "2.5% of global supply" puts the $191 million in estimated revenue from that production right in the middle of the August 2009 target issued by Sec. Chu. At that time the spot price was hovering at $40/lb.
Now 18 months later the response from uranium producers is more muted. Paul Goranson, CEO of Cameco U.S., who also leads the Uranium Producers of America (UPA), told FCW he is "not thrilled with DOE's inventory being used at anyone's discretion."
Goranson said he is not opposed in principle to re-enrichment of the depleted uranium. However, he said it could "be a real problem" if the sales of re-enriched uranium start to impact the spot price.
Goranson added that some activity by USEC might be good to help DOE lower its holdings of aging UF6 canisters which would reduce the environmental liabilities associated with them.
On that point the UPA and USEC seem to be in agreement.
"DOE has a unique opportunity while the plant is still operating that would be a win-win for everyone,” said Steve Penrod, Paducah plant general manager and USEC vice president.
“Re-enrichment would reduce DOE’s decontamination and decommissioning costs while generating revenue for the federal government and maintaining 1,200 good, local jobs. From the American taxpayers’ standpoint, it makes a lot of sense to extract the valuable uranium; and the time to act is now while Paducah’s capacity is available and uranium prices are strong.”
Impact on DOE deconversion operations
On Dec 8, DOE awarded a $428 million, five-year contract to Babcock & Wilcox, for operation of the Depleted Uranium Hexafluoride (DUF6) facilities at DOE sites in Paducah, KY, and Piketon, OH. The facilities are designed to covert 700,000 metric tonnes of DUF6 into stable chemical form for disposition or re-use. The contract also calls for disposing of 62,000 cylinders.
A DOE official told FCW on background the agency has no assessment of what, if any, impact USEC's plans to re-enrich DUF6 at Paducah would have on the deconversion contract. The official said any plan by USEC to re-enrich depleted uranium would require DOE approval. Until USEC submits a specific proposal, DOE said it couldn't comment any further on the company's plans or potential impacts on other DOE contracts.
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