June 30, 1998

Government Planning to Privatize Uranium Enrichment Operations

By MATTHEW L. WALD

ASHINGTON -- The federal government's uranium enrichment business, rooted in the development of the atomic bomb more than a half-century ago, is expected to go on sale in the stock market soon.

Federal officials said Monday that they would try to privatize the United States Enrichment Corp., which provides most of the nuclear fuel used in this country.

The decision to sell shares in the company, known as an initial public offering, came after the government failed to get an acceptable bid from any other private company to buy United States Enrichment, which is widely viewed as an inefficient manufacturer with antiquated technology, in a business suffering declining demand.

Although it's unclear whether investors will want to own a business that couldn't find a buyer, the stock offering is expected to raise as much as $1.65 billion.

The government has never attempting anything quite like this before. In the short history of privatization in this country the only sale remotely similar was that of Conrail, a collection of failing Northeast railroads phe government took over and subsequently sold in a 1987 stock offering for $1.65 billion. The biggest-ever privatization was the sale of the Elk Hills petroleum reserve in California to Occidental Petroleum Co. last October.

United States Enrichment operates aging factories in Piketon, Ohio, and Paducah, Ky., which employ about 5,500 people and had 1997 sales of $1.6 billion. It is also developing a laser-based enrichment system at laboratories of the Energy Department, of which it was once a part.

USEC, with headquarters in Bethesda, Md., has a board comprised of five directors appointed by the president and confirmed by the senate. It is being advised by J.P. Morgan Securities, Inc. Its privatization plans were approved by the Treasury.

Two groups had made offers to acquire the business. One included Lockheed Martin, which currently operates the Piketon and Paducah plants under contract, BWX Techhologies, formerly Babcock & Wilcox, and the Carlyle Group, an investment firm. The second included General Atomics, a San Diego company that has been in the reactor and fuel-fabrication business, and Texas Pacific Group, a leveraged buyout firm.

The initial public offering's lead manager will be Morgan Stanley Dean Witter, USEC said in an announcement Monday, and Merrill Lynch & Co. is the co-lead manager.

People involved in the deal were generally reticent to speak about it because of the Securities and Exchange Commission rules limiting what can be said about business offered through stock sales, but some pointed out that the authorizing legislation, passed by Congress in 1992 and 1996, sets a variety of requirements beyond price, including protecting public health and natural security, and assuring a continued domestic enrichment industry.

But some people in the industry said that the Treasury's asking price was very high for an industry with uncertain prospects, and for an old industrial complex poorly positioned to compete in that industry. Demand for nuclear reactor fuel is lower than had been expected, because fewer nuclear plants have been built than the industry once expected, and because of a surplus of enriched uranium because some weapons fuel, which is highly enriched, is being diluted for reactor use.

"The market is characterized by oversupply," said James Cornell, president of Nukem, a German-owned company that is involved in uranium enrichment, fuel fabrication and trading. "The million-dollar question is whether USEC will be able to raise the kind of money they are looking for."

The Treasury believes underwriters can sell 100 million shares at $13.50 to $16.50 a share, and that USEC will be able to borrow $550 million more from banks, of which $500 million would go to the Treasury, for a total sale value in the range of $1.356 billion to $1.65 billion. The Treasury could cancel the sale if the shares cannot be sold at $13.50 or could accept a lower price, but doing so would likely result in a challenge from the rejected corporate bidders.

Another potential problem with the privatization is that some critics say it will jeopardize a deal made during the Bush administration for the United States to buy surplus Russian weapons fuel. As part of that agreement, United States Enrichment said it would buy the fuel from the Russians for $110 to $120 per unit, but those units how have a market price in the $80 range. Keeping the contract would guarantee a loss of money, a major concern for investors.

Sen. Pete Domenici, R-N.M., complained in a letter on Friday to Sandy Berger, the president's national security advisor, that it might be time to reconsider the deal because of the contracts with the Russians.

But Robert Rubin and Federico Pena, the Treasury and Energy secretaries, said in a letter to Sen. John Glenn, D-Ohio, made public Monday, that "We expect USEC to continue meeting its contractual oblgations after privatization" and that if it did not, the part of the Energy Department that is not being privatized could step in and buy the enriched uranium. The sale would be "one of the largest privatizations in U.S. history," they wrote, and would preserve more jobs than if the government continued to operate the company.

Some opponents have been struggling for months against the privatization because of the potential job impact. Rep. Ted Strickland, D-Ohio, whose district includes Piketon, argues that the Treasury and the Energy departments have not adequately explained how the privatization will maintain a viable domestic enrichment industry.

The factories are confronting a number of problems. One is that they use the oldest and most energy-intensive technology to enrich uranium, gaseous diffusion. Newer competitors abroad use centrifuges, which is less expensive.

United States Enrichment once held 90 percent of the world market, aggressive competitors abroad have taken a larger share, leaving it with 40 percent of the world marked, though that includes about 75 percent of the North American market.

In addition, the long-term prospect is that demand would decline as the reactor population dwindles.

USEC's hope is a new technology, called Atomic Vapor Laser Isotope Separation, allows enrichment with one-tenth as much electricity. But it has not been commercialized and some people doubt it will be, even though the government has invested $2 billion in the technique.