With prices climbing steadily for oil, natural gas, and electricity, William H. "Nick" Timbers would love investors to consider USEC Inc. (USU ) as just another energy company.
Yet as the world's sole private source of the concentrated uranium used to power nuclear reactors, USEC is hardly your run-of-the-mill power player. Formerly known as U.S. Enrichment Corp., USEC traces its roots to the Manhattan Project, the World War II-era skunk works that built the first atomic bomb. In the decades that followed, the government built a network of industrial facilities to make tons of enriched uranium for the nation's fast-multiplying nuclear arsenal. As the arms race wound down, so did the need for weapons-grade uranium. So, by the 1980s, with the U.S. enriching uranium only to fuel the world's then- growing stock of commercial reactors, Washington decided it was time to privatize this function. USEC was fully spun out in 1998, when the company listed on the New York Stock Exchange.
Today, CEO and President Timbers faces extraordinary challenges, among them finding a way to pay for more productive technology. With revenues of $1.5 billion last year, USEC is working to finance a $1.5-billion upgrade of its aging enrichment systems with state-of-the-art centrifuges. Timbers is also charged with implementing a major national security program: Under a U.S.-Russian agreement known as Megatons to Megawatts, USEC gets half of its fuel from uranium stripped from Russian nuclear weapons. Timbers recently spoke with Industries Editor Adam Aston about balancing these responsibilities.
Has your recipe for nuclear fuel changed much since the birth of the atomic age?
No. We lease two processing sites from the U.S. government, one in Kentucky and the other in Ohio. Both were built in the early 1950s based on a method of enriching uranium by gaseous diffusion. The process involves taking a gaseous form of uranium hexafluoride and pumping it through minute barriers. These filter different isotopes of uranium: the lighter, fuel-grade U235 passes through the barriers faster, while the heavier U238 gas is slower. This requires tremendous compressors, which demand huge amounts of power. At the height of production, we used up to 3,500 megawatts of electricity, which made us -- at one time -- the largest industrial user of electricity in the country.
How can you cut these energy demands and improve your efficiency?
We're working on the next generation of enrichment technology, a process that involves higher up-front costs but lower operating costs. We're looking at what is probably the world's most efficient and cost-effective gas-centrifuge technology. It was developed by the Energy Dept. more than 20 years ago but was suspended in 1985 because of its expense and reduced capacity requirements.
How do the centrifuges work?
Instead of pumping the gas through barriers, the isotopes are separated by spinning the gas at ultrahigh speeds. The heavier U238 molecules migrate to the edge and bottom of the cylinder, while the U235 can be withdrawn from the top. We estimate that it will use about 5% of the power of our current process. We spend around $250 million a year for power -- that's my biggest operating cost. The new design will also cut our labor needs, which are our second-highest operating cost. We're aiming to start up the first units in 2005 and to complete the facility by 2010.
Is this technology unique to USEC?
There are three basic gas-centrifuge designs: Russian, European, and ours. The Russians use the smallest centrifuges -- about three feet high and less than a foot in diameter. These operate at very high speeds, and it takes tens of thousands of them to produce sufficient product. The European version is bigger -- somewhere from 10 to 15 feet high -- and proportionally wider. Our new U.S. design is about 40 feet tall and several feet across. The bigger the centrifuge, the larger the capacity -- you get more output per machine and cut your unit cost. With each machine doing more work, we'll need fewer.
If the new design was too expensive to build 20 years ago, what has changed?
The government spent over $3 billion to develop and operate the gas centrifuge. By applying 21st-century manufacturing techniques and using new materials, we believe we can commercially deploy it. For example, the original 1985 design used a top-secret material to achieve higher rotor speeds: carbon fiber. Once rare, it's now in tennis racquets, golf clubs, and bicycles.
Where does the uranium you enrich come from?
Much of the world's uranium ore comes from Canada. It's milled into a yellowcake and processed through a number of steps into uranium hexafluoride [UF6], a solid when it's cool and a gas when it's heated up. It's this UF6 gas that we enrich to increase the concentration of U235.
What about the rest of the fuel, from Russia?
The Megatons-to-Mega-watts program is the result of arms-reduction agreements that led to the dismantling of nuclear weapons in the U.S. and the former USSR. Those treaties were quite effective in lessening the threat of having nuclear weapons on alert, but they didn't address what to do with the resulting increased stores of nuclear-warhead material.
The Russians take highly enriched uranium out of the warheads. They then dilute it from over 90% U235 concentration to a level that we specify -- usually in the range of 4% to 5%.
If the goal is to eliminate Russian nukes, you should offer a high price. Yet for USEC to be profitable, you want to buy at a low price. Isn't this a conflict of goals?
For both governments, the goal is the dismantling of nuclear weapons in Russia and the dilution of those warheads into commercial-grade fuel so it can be sold in the marketplace. What we've found is that both the Russians and USEC have a genuine interest in making this program work. Each year, the Russians receive about $500 million for our purchases. This is one of the country's largest sources of hard currency, so they have a very significant interest in maintaining such a predictable flow of payments. And we have a reliable, competitively priced source for half of our fuel.
How do you safeguard the technology and nuclear materials you trade in?
That's a unique aspect of our business. On one hand, we have to operate as a publicly traded company, under the same rules and regulations as every other company on the NYSE. Yet we also play an important national security role in helping Russia eliminate much of its nuclear-warhead material.
U.S. advanced-enrichment technology is secret and very strictly controlled. And lately, the security concerns have intensified as it has become clear that foreign enrichment technology has been illegally transferred from Europe to Pakistan and then sold to states such as Iran, North Korea, and Libya.
Laws and regulations control our operations. We are licensed, regulated, and inspected by the Nuclear Regulatory Commission, and our Kentucky plant is restricted to enrich only up to 5.5%. We'd lose our license if we abrogated that restriction. Plus, enriching above that level is a highly complex, time-consuming process, so you can't just all of a sudden sneak that into your operations.
Still, Pakistan's sales of enrichment technology suggest the genie is out of the bottle.
The question is how much of the genie is out. I don't know the answer to that, but I think the steps that have been taken by the U.S. and Britain have been very effective in terms of addressing this issue with Pakistan and exposing the related black market. While the genie isn't back in the bottle, governments are working to control it.
Yet if nuclear power keeps growing -- in China, in particular -- won't this technology continue to spread?
Because of the environmental issues of greenhouse gases and global warming, it's reasonable to expect that scenario. Many countries and the International Atomic Energy Agency are thinking that nuclear power can be developed elsewhere, without those countries building their own enrichment facilities. That can be limited to existing players, who will guarantee a fuel supply at a reasonable price.