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Remarks by John K. Welch,
President and Chief Executive Officer
Annual Shareholders' Meeting of USEC Inc.
Bethesda, MD
April 24, 2008
Let me add my thanks and appreciation to our shareholders who have taken the time to attend today’s meeting. This is my third shareholder meeting as the president of the company, and I enjoy having the opportunity to meet and talk with you, the owners of USEC. Although large institutions hold most of USEC’s common shares, we have many individual holders as well. In fact, this year we have 20,000 more shareholders than last year, for a total of 57,000 shareholder accounts.
Since this is an annual meeting, I think it would be appropriate to begin my remarks with a little color about our financial results for last year. When I addressed this meeting a year ago, we expected a small loss and negative cash flow for the year, based on a 50 percent jump in our energy costs. Thanks to a lot of hard work by our 28 hundred employees and a new electricity supply contract that provides additional power, the results were quite different.
Instead of a loss for the year, USEC reported:
We laid out several strategic initiatives that your management team focused on during 2007. At the top of that list was finding ways to mitigate the impact of higher energy prices. By working closely with our power supplier, Tennessee Valley Authority, we concluded a contract that works in both of our interests. We are, after all, TVA’s largest industrial customer and TVA is a top 10 customer for USEC. We found a middle ground that provides us with 25 percent more electricity in the first three years of the contract and provides TVA with a five-year power commitment from USEC.
The additional power provides us flexibility in our Paducah operations. We can produce more low enriched uranium or use the additional power to obtain uranium by underfeeding the enrichment process. Because uranium prices are well above market prices seen several years ago, we can opportunistically sell the uranium obtained from underfeeding to improve our profit margins.
This is a good example of a management team thinking beyond the obvious. It may not appear logical on its surface that buying additional power could make USEC more profitable, but that was a key for turning around our financial results in 2007. And it will be a key to our strategy for the interim period between now and when the American Centrifuge Plant makes a substantial impact on our financial results.
The second area of strategic focus was the American Centrifuge project. During 2007 and early 2008, we recorded a number of major project achievements, including several milestones in our agreement with the U.S. Department of Energy:
Each achievement required the efforts of hundreds of USEC employees and contractors, millions of dollars in spending invested by our shareholders, and a great deal of the management team’s time and attention. Given the importance of American Centrifuge to this company’s long-term success, I believe those resources were well spent.
Let me shift gears to give you an update on what we are focused on in 2008 to move this vital project forward. Our confidence in the performance and reliability of the machines has increased as the demonstration of the technology through the Lead Cascade testing program has continued over these past eight months. At the end of March, we finalized the initial design for the AC100 machines. We have released 75 percent of the design drawings to our strategic suppliers to initiate manufacturing of components for the AC100 machines. After a couple more months of focused component validation testing, we expect to release the remainder of the design drawings by June 30th.
Our strategic suppliers – Alliant Techsystems, Babcock & Wilcox Company, Fluor Corporation, Honeywell International and Major Tool and Machine – are preparing manufacturing capacity to begin building machines later this year. We will build an additional cascade of 40 to 50 machines based on the AC100 design that we expect to be operational in the spring of 2009. In addition, we will be incrementally adding improved AC100 components and design features into the current cascade throughout the rest of this year.
Being a catalyst for the rebuilding of this manufacturing base in the United States has been a remarkable experience. While there has been an upfront cost to this rebuilding process, we believe that over time this manufacturing base will give USEC a competitive advantage over other uranium enrichers.
Future expansions of the American Centrifuge Plant will not be encumbered with these startup and demonstration costs. We expect to drive down costs as we move along the learning curve, and this should dramatically reduce the future capital cost of our centrifuge machine.
We are in the midst of creating a technology and manufacturing center in Oak Ridge, Tennessee. We’ve purchased a building there from the Boeing Company that was built specifically for centrifuge manufacturing in the 80’s.
We are installing 50 million dollars worth of state-of-the-art equipment, including: production machining equipment, robotics, and computer controls and test systems that will support manufacturing of centrifuge components.
We have contracted with Babcock & Wilcox for centrifuge machine manufacturing, balancing and testing work at this facility. It’s safe to say there is a great deal of energy and excitement in Oak Ridge about initial centrifuge production.
When you see a company of our size taking on a complex and expensive project like the American Centrifuge, one very understandable reaction by investors is to focus on short-term accomplishments.
We are keeping a close eye on our fundamentals and near-term goals. But the full competitive advantage of our highly productive AC100 centrifuge machine will be realized as we look to expand ACP to meet industry demand. Our vision for this modular technology is to:
It is this bright future for nuclear power, and for those who fuel the power reactors, that some traders on Wall Street are missing, in my opinion. We are very excited about our future business prospects and the potential long-term value we can generate for our shareholders.
In late February, we provided an update on the American Centrifuge Plant construction. We were in the midst of a bottom-up review of the cost to build the plant, and we are still working with our suppliers on their estimates. We provided a snapshot of where we were in the process.
Last week, we provided an additional update on the project status. We said that while we are still developing this project budget, we continue to expect the cost of the plant to be about $3.5 billion. That amount includes spending to date, but does not include costs for financing or financial assurance. We expect to complete our budget work on the project in June.
As I’m sure you are aware, the price of USEC shares has been down more than the rest of the market in recent weeks. The Board of Directors and the management team are substantial shareholders, and the downturn in our share price has been extremely painful.
To put it succinctly, we aren’t happy with our stock price and we are working diligently to make the American Centrifuge Plant a success, which we believe will translate into value for our shareholders.
We are committed to continuing to keep investors and the market advised of the steps we are taking to improve our business. Over time, as we deliver on the promise of the American Centrifuge, we believe Wall Street will recognize the value we are creating.
Looking forward, our preferred path to finance the remaining cost of the American Centrifuge Plant is the Department of Energy loan guarantee program. This program was created in the 2005 Energy Policy Act, and Congress authorized up to $38.5 billion in loan guarantees for energy projects this past December. This set of authorizations includes up to $2 billion for advanced nuclear facilities for the “front-end” of the nuclear fuel cycle -- and that includes our American Centrifuge Plant.
Based on recent statements, DOE expects to solicit proposals for projects about mid-year and we will be prepared to submit an application shortly thereafter. What is unclear at this point is how long the review process will take. Because reviving nuclear power has been a centerpiece of this administration’s energy policy, we believe there will be a departmental push within DOE to demonstrate progress on the loan guarantee program before the current administration leaves office in January 2009.
Our submission truly offers DOE the opportunity to move forward quickly to review and approve a project that is in close alignment with the selection criteria. The American Centrifuge Plant has a license from the NRC and is well underway.
This is an important project that will enhance energy security, promote innovation and help restore the United States to its leadership role in the nuclear fuel cycle. When it is complete, American Centrifuge will provide utilities with the assurance of a reliable supply of nuclear fuel for decades to come.
We believe the future of our industry is bright and that our shareholders will benefit from the nuclear renaissance. Some three dozen plants are under construction worldwide and for the first time in decades, new plants are being proposed in the United States. High growth markets like China must turn to nuclear power or face significant pollution problems.
USEC is rebuilding a manufacturing infrastructure in the United States for our piece of the nuclear fuel cycle, setting the stage for improving profit margins and better returns on capital for our shareholders.
We are entering a transition period for USEC. We will continue to operate the Paducah plant in a cost-effective manner as we build out the American Centrifuge Plant. We will look for additional opportunities to translate Paducah’s unique characteristics and resources into shareholder value.
Our sharpest focus, however, will remain on financing and completing the American Centrifuge Plant at the lowest capital cost possible. This is a particularly tough construction environment for large energy projects, but I think we have the right team of suppliers and USEC managers to get the job done. We also see great potential in our technology to be even more productive as we expand the plant to meet a growing demand for nuclear fuel.
In summary, American Centrifuge is our platform for growth as we continue to be a reliable and competitive source of nuclear fuel for a growing fleet of nuclear power reactors. We believe this position in the nuclear fuel cycle will deliver outstanding value for our shareholders.