USEC Inc. Speech

Remarks by John K. Welch,
President and Chief Executive Officer

Annual Shareholders' Meeting of USEC Inc.
Bethesda, MD
April 26, 2007

Good morning to you all. I want to add my appreciation to our shareholders who came out this morning. We never forget that USEC is owned by more than 37,000 shareholders, and we’re happy to have this opportunity to speak with you.

I think it is traditional to start off with a few words about the prior year’s financial performance. In 2006, USEC earned $106 million on revenue of more than $1.8 billion. That was our best annual revenue ever and the best net income since 1999. Our operations at Paducah were outstanding as we had the highest number of production cells on line in some 25 years and we were very efficient in our use of electric power compared to prior years.

That’s the good news. On the other side of the ledger, we saw our electric power costs go up by 50 percent. Those higher power costs will work through our inventory during 2007, significantly reducing our gross profit margin this year and into the future. Those higher power costs are a key driver for why we must move to a new technology – the American Centrifuge.

This morning I want to provide an update on several strategic initiatives that are the focus of the management team. These are the areas that will have the most impact on how successful USEC can be over the next several years.

They can be summed up in a relatively few words:

• We are working to mitigate the impact of higher power prices at our Paducah plant and reduce future price uncertainty.
• We are focused on starting up the Lead Cascade of American centrifuges at our Piketon, Ohio facility, with operation scheduled for mid-year.
• We are value engineering the American Centrifuge project to reduce the cost of individual machines to meet our target cost estimate for building the commercial plant.
• And, we are working to obtain assistance from third parties and/or the U.S. government to attract capital for our new American Centrifuge Plant.

If that sounds like we have our work cut out for us, that’s how it looks to me as well.

Fortunately, I strongly believe that we are up to the task and that the improving fundamentals of the nuclear power industry will reward our efforts. The signs of revival for the industry are all around us.

Let me touch on just a few:

• The United States and much of the developing world must build new electric generating plants to keep up with growing demand and to replace aging, dirty and inefficient plants. World demand for electricity is expected to double by 2030.
• American utilities appear to be ready to build new nuclear power plants in the United States. The U.S. Nuclear Regulatory Commission is expecting to receive applications for as many as 30 new reactors over the next several years.
• Much of the existing fleet of 103 U.S. reactors have, or will have, their operating licenses extended for 20 years. And the U.S. fleet will grow by one in the next month when TVA’s Browns Ferry plant restarts after a total refurbishment.
• The emerging economic powers of Asia have announced plans for at least two dozen new reactors between now and 2020.
• And nuclear is being recognized as a zero-emissions technology that does not add greenhouse gases to the environment and does not contribute to global warming. We believe this attribute will become increasingly important over the coming decades.

Let me address our cost of power first. We are in negotiations with our electricity supplier, Tennessee Valley Authority for a new power contract. As I mentioned, our electric power costs went up 50 percent in mid-2006, and we are negotiating hard to scale back that increase and extend the length of the contract term. We expect to reach a new accord very soon. The new terms will be very important to our cash flow from operations over the next several years.

Those who have been in meetings with me know that I sometimes refer to building the American Centrifuge Plant as building a bridge – a bridge to the future. On the other side of the river is a revived nuclear power industry with an increasing demand for our low enriched uranium product. We’ve already seen the demand for enrichment picking up, and the long-term price has improved in recent months. The market fundamentals look very attractive on the other side of the river.

To take the analogy a little further, the new bridge will improve the efficiency of getting to the other side. The American Centrifuge is expected to use 95 percent less electric power to produce the same amount of enrichment, and will require about half as many people to operate the plant. So, if we can build the plant for close to our target cost estimate of 2.3 billion dollars, we think USEC will be very cost competitive.

Lowering our cost of production and mitigating a variable we cannot control today – the cost of electricity – combined with improved pricing, means that building the bridge to the other side of the river should put USEC in position to prosper. With that said, I can’t over-emphasize the challenges we have before us as we take the American Centrifuge technology from demonstrating individual machines to full-scale operations.

The United States is poised to begin a major construction cycle of building new nuclear power plants. The Energy Policy Act of 2005 made nuclear power a clear priority for this country, providing financial incentives for utilities to be among the first to break ground.

We believe the government also has a strategic interest in assuring that there is a reliable, domestic source of enriched uranium fuel for America’s fleet of nuclear reactors. We are encouraging the Department of Energy to take a broader view of rebuilding the nuclear power infrastructure.

How can the government help? We are focusing our efforts on two areas:

First, we would like to reach agreement with the Department of Energy to re-enrich cylinders of depleted uranium stored at the plants in Paducah and Piketon. This material – referred to as high assay tails – contains economic quantities of the fissile isotope U 235.

With the recent upturn in uranium prices and a shortage of uranium in the marketplace, it now makes economic sense to reclaim the remaining U 235.

This is clearly a win-win situation for all involved.

The additional uranium would provide our customers with needed supply today, and also assure utilities planning to build reactors that there will be sufficient uranium to fuel new reactors.

The government would benefit from a smaller disposal liability for the thousands of tails cylinders now being stored and the ability to create a strategic inventory of uranium.

And re-enriching the tails would provide USEC with an additional revenue stream that can help to offset the impact of higher electric power costs and improve our financial performance.

All of this can be accomplished from stacks of tails cylinders long considered to be a liability. And, importantly, at no cost to the U.S. taxpayer.

Second, we are seeking loan guarantees for debt we’ll need to build the American Centrifuge Plant. Under this program, the government would not be loaning us the funds directly. Instead, if our project is approved, our debt would have government backing, which would reduce the perceived risk in the financial markets for this unique project.

Every cent of any government-backed loan would be repaid and these loan guarantees should cost the U.S. taxpayers nothing.

We have made a “pre-application” to the DOE for their loan guarantee program but it is unclear when a decision on which projects to fund will be made. We have also been making our case on Capitol Hill regarding the uranium tails material. We hope to see an agreement some time later this year. We’ll keep you abreast of our progress as events unfold.

Our fourth strategic initiative involves actually building the plant. About two weeks ago, the Nuclear Regulatory Commission issued USEC a license to build and operate the American Centrifuge Plant. This regulatory process took over 30 months as the NRC looked at the site and the proposed operation in great detail. With this license in hand, we can now begin plant construction.

We are currently assembling and installing centrifuge machines for the Lead Cascade, which we expect to operate in mid-2007. When the Lead Cascade is operating in a few months, it will provide important confirmation of our expectations for performance of the machines.

You may recall that we planned to have the Lead Cascade operating last summer but opted to spend additional months optimizing the centrifuges for improved performance. When we froze the design in December for the Lead Cascade, our team at Oak Ridge had achieved a 10 percent improvement. Clearly, that was time well spent.

During 2007, we expect to begin work on the balance-of-plant infrastructure at the American Centrifuge Plant. It comes as a surprise to some people to learn that many of our commercial plant facilities already exist. The DOE built an impressive facility, with an area of some 25 football fields under roof, specifically for centrifuges in the 1980s. So when we say we are building the American Centrifuge Plant, what we really mean is that we are building approximately 11,500 centrifuge machines and installing the related support systems.

Our target estimate of 2.3 billion dollars to build the plant maintains an ambitious schedule for demonstration and deployment activities. We are pursuing cost mitigation approaches involving value engineering, high volume manufacturing efficiencies and potential refurbishment of certain systems rather than replacement to help hit our target estimate. We are also working with our project participants to ramp up the manufacturing facilities needed to produce the parts for these machines. These parts will be shipped to Piketon and the centrifuges assembled at the plant.

I don’t want to downplay the difficulty in the task before us. These are complex machines built to fine tolerances and balanced precisely. When you look at our schedule, once we get into full swing of building and installing the machines, we’ll need to build about a dozen machines a day. That’s a significant challenge and one where quality assurance will be critical.

We also have a significant challenge in financing the project. As we told the market and investors in February, given the declining level of cash generated by our existing operations due to power cost increases, we will need some form of investment or participation by a third party and/or the U.S. government. We’ve said that we expect to spend about 340 million dollars this year and roughly double that rate next year. So we will need this capital sooner rather than later in order to complete the project on our deployment schedule.

We have been exploring such investment or other participation with companies that might have a strategic interest in the nuclear fuel business and with the U.S. government. We have also been exploring ways that our project participants and customers could support the financing.

To summarize, these are very busy times at USEC and the steps we are taking are likely to affect our company’s performance over the longer term.

• We are seeking to improve our cost structure by negotiating the best price we can for electricity and to lock that price in for the next several years;
• We are working to value engineer the centrifuge machines to lower the unit cost to meet our target estimate of 2.3 billion dollars for the commercial plant;
• We are actively seeking support for investment in the American Centrifuge Plant; and,
• We are gearing up to build thousands of complex and classified machines that will require a high level of quality assurance.

Your management team is excited about the future, and about building a bridge to what we believe will be a bright future for our company. On behalf of the 2700 employees of USEC, we thank you for your continued support as we work to power the next generation of nuclear energy.Text