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Remarks by John K. Welch,
President and Chief Executive Officer
Annual Shareholders' Meeting of USEC Inc.
Bethesda, MD
April 30, 2009
Each year, I welcome the opportunity to meet and talk with our shareholders, the owners of USEC. We have more than 53,000 shareholder accounts, so you represent a large group of investors. Your management team is also made up of shareholders, and we always look forward to sharing our vision for USEC with you.
I’d like to provide a short overview of the activities we’ve undertaken in the past year and discuss what we see in the nuclear fuel market.
I’ll also give you an update on our efforts to secure funding for the American Centrifuge Plant through the Department of Energy’s Loan Guarantee Program.
But first, I’d like to spend a minute providing my perspective as CEO on our 2008 financial results, which we announced in late February.
When I addressed this meeting last April, I pointed out that our customers typically refuel their nuclear reactors every 18 to 24 months. That cyclicality would result in 2008 being a year with lower revenues and income following the strong revenues and SWU deliveries of 2007.
Ultimately, we reported:
Our guidance to investors for 2009 is for revenue of approximately $2 billion, with SWU revenue increasing by about 50 percent.
That’s the good news. On the other side of the ledger – our costs – we do have challenges.
For the second year in a row, we will be paying Russia about 11 percent more for SWU. In addition, the fuel cost adjustment paid to TVA above our base rate for electricity have increased our cost of production. Fuel costs have moderated in recent months, but taken together, these higher costs are expected to reduce our gross profit margin for the year.
This decline in profitability highlights why we are investing in the American Centrifuge. There are many good business reasons for transitioning our technology platform away from the gaseous diffusion technology employed today. Clearly, the number one reason is that gaseous diffusion is an energy intensive technology. Our primary production cost is electricity, and we can exert little management control over our power cost risk.
Today we are buying 2000 megawatts of electricity at a cost of nearly$700 million per year, which is about 75 percent of our cost of production.
In comparison, the American Centrifuge technology requires 95 percent less electricity to produce an equivalent amount of SWU. Those cost savings should expand our profit margins over time and generate substantial cash flow from operations.
Let me spend a moment reviewing operations and initiatives during the past year. While much of our effort and attention was spent moving the American Centrifuge project forward, the 1,200 men and women employed at the Paducah plant were working hard to keep our core business profitable during this transition period.
The Paducah plant’s efficiency, as measured by the number of production cells on-line and by how well we are using the electricity we’ve bought, continues to be at its highest level in decades. This may be a 55-year-old plant, but our folks are obtaining the most efficient operations possible, in a culture of safety first.
Our subsidiary, NAC, achieved a major milestone in February when the Nuclear Regulatory Commission licensed the Magnastor dry cask storage system for use in the United States.
This is NAC’s most advanced storage system and has the largest capacity for fuel assemblies of any multipurpose canister approved to date.
Given the dimming future for the Yucca Mountain long-term storage facility in Nevada, our Magnastor system will provide much needed interim, on-site storage for our customers.
We also had success on the legal and trade front. Over the last several years, USEC has been a party to a series of appeals regarding the interpretation of U.S. trade law.
Most people find trade law to be a pretty arcane subject, but the question ultimately boiled down to whether sales of French-produced SWU should be considered sales of a “good” or sales of a “service”. The French argued that their imports of low enriched uranium for SWU sales should be treated as service transactions, thus exempt from U.S. trade law.
This would have allowed them – and other foreign companies – to dump their products in the United States without restriction. While they initially prevailed with these arguments in the lower courts, the question was ultimately taken up by the U.S. Supreme Court in a case argued by the Solicitor General of the United States and lawyers representing USEC.
The briefs for the U.S. government were signed by the general counsel for the Departments of Commerce, Defense, Energy and State, which gives you a sense of the importance of this appeal.
In January, the Supreme Court ruled unanimously in our favor that imports of low enriched uranium are subject to trade law, regardless of the type of transaction that led to the import.
This decision was crucial for closing a potential gap in U.S. trade law that would have allowed unfairly priced imports to undermine our industry at a time when we are contracting for long-term deliveries from the American Centrifuge Plant. This ruling gives the Department of Commerce the ability to enforce anti-dumping rules for all foreign low-enriched uranium.
This year’s Supreme Court ruling, along with last year’s federal legislation and trade agreement with Russia regarding imports of Russian low enriched uranium, provides stability and predictability in the nuclear fuel market. That’s critical, both now and in the future.
With greater certainty about Russian LEU in the market, uranium enrichers can better plan investments to meet nuclear fuel requirements for a growing, worldwide fleet of reactors.
Importantly, these legal and diplomatic developments provide greater assurance that the deployment of new enrichment technology will not be threatened by dumped imports from foreign, government-owned enrichers.
This has also helped to level the playing field for our company’s negotiations with Russia and its executive agent, Tenex, regarding the purchase price of SWU bought from Russia.
As background, we purchase approximately 5.5 million SWU annually under a market-based pricing contract. We are very proud of our record of implementing this historic, non-proliferation treaty that has eliminated highly enriched uranium equivalent to more than 14,000 nuclear warheads.
In recent years, however, the pricing terms in the Russian contract have gotten out of synch with our average contract term with our customers.
In 2008, for example, we paid Russia 11 percent more than the year before but our average price billed to customers rose just 2 percent.
We recently renegotiated improved pricing terms under the Russian contract for deliveries in the final five years of the Megatons to Megawatts Program through 2013.
These revised terms are included in two amendments to the contract. The first covers deliveries for the current year, and has been approved by both the United States and Russian governments.
The second amendment addresses deliveries for the final four years. This amendment has been approved by the US government. On the Russian side, we expect approval in the near future once the routine, but lengthy, Russian approval process is complete.
This new pricing methodology is intended to enhance the stability of future pricing for both parties through a formula that combines a different mix of price points and other pricing elements.
The improved economics from these deliveries should improve USEC’s cash flow and enhance our ability to internally fund capital projects, like the American Centrifuge Plant.
Turning quickly to our competitive marketplace, we have all seen the price of many energy commodities plummet in recent months. Crude oil, gasoline and natural gas are all down by at least 50 percent compared to last summer.
The supply and demand fundamentals for nuclear power fuel, however, have not been as affected by the recession and SWU prices have been stable. Nuclear power has the lowest fuel cost, and so it’s the electricity that utilities dispatch first. So even though the economy is going through a substantial downturn, nuclear power has been relatively unaffected.
Published long-term price indicators for future deliveries have increased 16 percent over the last two years, but have been hovering near $160 per SWU since last summer.
Improved pricing compared to several years ago, and the steady pace of applications for new nuclear power plants now proceeding through the regulatory process, give us confidence that we are building the American Centrifuge Plant at exactly the right time to meet the needs of our customers for decades to come.
Baseload, cost-effective nuclear power generation should continue to be the preferred option in a carbon constrained environment.
I’ll turn next to our progress on the American Centrifuge Plant. As you know, we received our construction and operating license for the plant in April 2007 and started construction almost immediately. We have been preparing the facility in Piketon, Ohio to assemble, install and operate more than 11,000 machines over the next several years.
Let me tick through a few of the highlights:
Bottom line, we continue to make significant progress in deploying the American Centrifuge technology in a state-of-the-art commercial plant. The outstanding question is: “How do we fund the remaining construction?”
Allow me to spend a few minutes providing an update on where we are in our discussions with DOE.
As background, the Department of Energy’s Loan Guarantee Program was established by the Energy Policy Act of 2005. After many months of establishing program rules, DOE requested nuclear project applications for the Loan Guarantee Program at the end of June 2008.
The process required two applications, with the second due last December. We demonstrated our commitment to the program by submitting both applications by the end of August.
Unfortunately, a competitor that is overwhelmingly owned and controlled by the French government submitted an application at the deadline, a move that we believe has greatly affected the timing of the approval process.
While we were deeply disappointed that the Bush Administration did not complete their review of our application before leaving office in January, we have been pleased by the priority that the Obama Administration has placed on selecting and funding energy projects.
It takes time to get appointees ratified by the Senate, but they have gotten up to speed quickly. Energy Secretary Steven Chu is a vocal supporter of loan guarantees who has energized the program.
Nearly four years after the program was established by Congress, DOE announced its first loan guarantee commitment earlier this month for a solar energy company.
We take this as a very positive sign that the log jam may finally be breaking, and we continue to meet with program officials regarding our project.
We are committed to the project and have continued to move forward on critical path activities because we believe that ACP is our best vehicle for building shareholder value.
However, if we do not have a funding commitment in the near term or see a path towards obtaining that commitment, we must take additional steps to reduce the pace of spending on American Centrifuge.
We want to avoid that scenario if at all possible because the next steps will require layoffs and demobilization of portions of the project. That adds to the cost of the project and delays initial operations.
Such a decision will clearly not be taken lightly.
During a time of rising unemployment, we have a “shovel-ready” project that is creating approximately 8,000 jobs in the United States. But we cannot – and will not – spend our cash resources to the point where liquidity becomes a major concern.
To wrap up my remarks, we had a tremendous 2008 and made a lot of progress in our effort to deploy the most efficient uranium enrichment technology available today.
We are geared up to re-establish this critical manufacturing base in the United States, and to provide nuclear utilities with a stable, domestic source of fuel for both existing reactors and the expected wave of new reactors being built all over the world.
In addition to being the right thing to do for America’s energy security, the American Centrifuge holds great potential for our shareholders. We are working hard every day to make that potential a reality.
Thank you, and I’ll turn the podium back to Jim so that we can get to your questions.