What is Going On With USEC, the DOE, and the American Centrifuge?

The continuing saga of the USEC project to build a new enrichment facility at the Piketon, Ohio facility using a recently developed and tested technology called the American Centrifuge is getting more intriguing each day. On July 28, 2009, publications specializing in stock market reporting contained blurbs explaining the activity in USEC stock on July 27 similar to the following from the Wall Street Journal’s Hot Stocks.

USEC Inc. (USU, $4.05, -$2.14, -34.57%) said the U.S. Department of Energy denied the energy company’s application for a loan guarantee to complete construction of the American Centrifuge Plant in Piketon, Ohio. The company said it’s starting steps to demobilize the project. Jefferies cut its rating on the company to hold from buy.

In other words, the market perception of the value of the company, still a major source of enriched nuclear fuel for US nuclear power plant operators, fell by nearly 35% in a single day. On the surface, it appeared that market move was based solely on a bureaucratic decision from the Department of Energy on whether or not to guarantee a loan to build a new facility.

That intrigued me, so I did some additional digging and found out that USEC leaders have to be considered partially responsible for the market activity since they have been engaging in brinkmanship, telling investors and commentators that the project is completely dependent upon whether or not they get approved for the guarantee. For example, here is a July 7, 2009 quote from a Nuclear Engineering International article titled Usec’s enrichment plant depends on DoE loan guarantee decision

In a statement Philip Sewell, vice president of American Centrifuge and Russian HEU said a DoE decision is expected by early August.

“As we have stated in the past, a DoE loan guarantee is our path forward for financing the American Centrifuge Plant. Therefore, we are making contingency plans for project demobilization should we not receive a conditional commitment or should a decision on a conditional commitment be further delayed, Sewell said.

With that kind of corporate communication as a background, it is not surprising that the market players reacted the way that they did to the news that the DOE had denied the loan guarantee application. USEC had been setting expectations for investors that the application was essentially predetermined because of the way that they were interpreting a campaign communication by then Senator Obama:

“We are shocked and disappointed by DOE’s decision,” USEC chief executive John K. Welch said in a statement. “President Obama promised to support the loan guarantee for the American Centrifuge Plant while he campaigned in Ohio. We are disappointed that campaign commitment has not been met.”

It turns out that the blurb summaries of the situation published by the financial press were not entirely accurate; the DOE has not yet officially denied USEC’s loan guarantee application. Instead, the DOE has requested the company to withdraw the application, do more research, development and testing for the next 12-18 months (with about $45 million in funding from the DOE) and resubmit the application. So far, USEC has not agreed to withdraw their application, stating that the technology has been well tested and is ready for commercial operation as long as they can obtain financing to build out the 11,000 centrifuges that they will need. The company wants the DOE to reconsider, and it is taking its case to the Secretary of Energy’s boss through all available means.

Republican Congresswoman Jean Schmidt, whose district includes the Piketon facility, said she has asked Obama in a letter to overturn the DOE decision and encourages everyone from the governor to community residents to call the White House.
“He is our only hope at this point,” Schmidt said.

The federal government is also trying to ease the pain of the decision for Ohio workers (and the anger of Ohio voters), saying that it will provide an extra $150 million or so for increased clean-up efforts at the Piketon facility, in addition to the $45 million for further research and development on the American Centrifuges. These efforts seem like consolation prizes because they will not result in permanent employment for the craftsmen and plant operators whose skills have been languishing with make-work clean up and administrative efforts since USEC shut down the Portsmouth Gaseous Diffusion Plant in 2001.

Waiting in the wings are Areva and GE, who have both announced plans to build new enrichment facilities. Dan Yurman at Idaho Samizdat has reported that Areva applied for the “winner take all” $2 billion DOE loan guarantee in 2008 for its planned Eagle Rock Enrichment Facility near Idaho Falls, Idaho and is now a bit more confident that its application will receive a favorable response. So far, GE has not applied for a DOE loan guarantee, but has indicated that it might consider doing so in the future for its laser enrichment facility planned for a location near Wilmington, North Carolina.

LES, a consortium that includes URENCO and several US nuclear utilities, is already building an enrichment plant just outside Eunice, New Mexico near the Texas border. That plant was the first major new nuclear facility to be licensed under the combined construction and operating license process implemented by the NRC in recent years. If other facilities have difficulty getting financed, there may be more opportunity for LES to expand its productive capacity.

Then there are the Russians and other Europeans. One of the reasons there is so much recent and current interest in building new uranium enrichment facilities in the US is that the Megatons to Megawatts program that has supplied about 50% of the market for enriched nuclear fuel in the US for the past 16 years is scheduled to expire in 2014. The contract for that project may be expiring, but there is no indication that the source for the uranium is drying up. Under current economic conditions, it would not be at all surprising if there was interest in Russia to continue selling enriched nuclear fuel to US utilities. Other European enrichment suppliers may want to get part of the action. It is, after all, a pretty good business that provides a good return on investment now with excellent prospects for growth in the not too distant future.

Update: (Posted at 0330 on August 1, 2009) The political discussion about the impact of the DOE’s decision not to co-sign a loan for USEC continues in the local news media. From the NewsDemocrat.com (The newspaper of record for Brown County, Ohio) – Officials clash over potential job losses at Piketon plant dated August 1, 2009.