Lead Cascade testing program of commercial AC100 centrifuges providing technology assurance as machine run time increases; Growing number of nuclear reactors under construction globally provide solid business case for additional uranium enrichment capacity - Edited by Stephen Heiser -
USEC Inc. has reported to its shareholders on the significant progress since last summer in demonstrating the American Centrifuge technology at the annual meeting of USEC Inc. shareholders.
John Welch, USEC president and chief executive officer, said the approximately two dozen AC100 centrifuge machines currently in the Lead Cascade testing program have operated well since the machines went into the commercial cascade configuration in March.
“This is an important event for the program and our efforts to address DOE’s concerns because these are production-ready machines.”
“Our immediate objective is to accumulate significant cascade run-time while we continue to manufacture and install additional AC100 machines,” he said.
Welch also noted that the prospects for the nuclear power industry are improving as 57 reactors are currently under construction worldwide.
During the meeting, shareholders voted to reelect nine directors for a one-year term. Director Joseph F. Paquette, Jr. retired from the Board and did not stand for reelection. On behalf of the Board and shareholders, Chairman James R. Mellor thanked Paquette for his service and counsel to the Board since 2001. Shareholders also ratified the appointment of the Company’s independent auditors, PricewaterhouseCoopers LLP.
USEC Inc., a global energy company, is a leading supplier of enriched uranium fuel for commercial nuclear power plants.
Welch’s complete remarks are printed below.
Remarks to Shareholders Remarks by John K. Welch,President and Chief Executive Officer
Annual Shareholders' Meeting of USEC Inc.
Please allow me to add my thanks to you for coming out this morning. We have over 40,000 shareholder accounts, so you are representing a substantial group. The management team and your Board of Directors are also shareholders, so our purposes are very much aligned.
I look forward to these meetings because it allows me the opportunity to share our team’s vision for USEC with you. Over the next few minutes, I’d like to provide a short overview of recent accomplishments, and the challenges still facing us as we strive to create shareholder value.
First, however, I want to spend a minute providing some perspective on our financial results for 2009.
For the first time in the company’s history, we reported revenue of more than $2 billion, based on strong sales of low enriched uranium. And importantly, our core business generated cash flow from operations of $443 million dollars. Net income was $58.5 million, which is after our advanced technology expense for the American Centrifuge project of $118 million.
That’s the good news. Balanced against these positives were rising costs that affected our 2009 results. These cost pressures will continue to negatively affect results over the near term and squeeze profit margins.
This is a perfect example of why we are so intently focused on deploying the American Centrifuge technology. Electricity represents about 70 percent of our production cost at the Paducah Plant. The American Centrifuge technology requires 95 percent less power to accomplish the same amount of uranium enrichment. That should bring lower costs, better profit margins and ultimately better earnings.
I want to spend much of my time this morning discussing our investment in American Centrifuge, decisions made last summer, and what we are doing now to address the DOE Loan Guarantee Office requirements. Over the course of the last several years, we’ve consistently said that our path for financing the American Centrifuge Plant is the DOE Loan Guarantee Program. We believe that’s still the best path to complete the plant.
Based on the strong need for a U.S. owned and operated uranium enrichment plant and our confidence in the technology, we took many steps to prepare for plant construction and high-volume manufacturing of the centrifuge machines. We began long-lead time construction activities and worked with our strategic suppliers to create the manufacturing infrastructure to build the AC100 centrifuge machines.
We also took prudent steps to manage our cash in early 2009 while continuing a series of activities intended to allow us to quickly ramp up the project once a conditional commitment for a loan guarantee was issued.
However, in late July we learned that DOE wanted certain technical and financial concerns addressed before completing their review of our application. We subsequently reached an agreement to postpone a final review until 2010 while we worked to address DOE’s concerns.
The delay in a final review of our application caused us to look very critically at our strategy. Within days we had set in motion a number of actions, including:
Demobilizing plant construction; Laying off hundreds of workers; and, Beginning a wide-ranging review of our strategic alternatives that included a look at our corporate capital structure. Importantly, the senior management team also recognized that although we were disappointed with DOE’s decision, we must address their concerns. And that’s what we’ve done.
In addition, last fall we instituted a quality stand down and conducted a top to bottom review of our quality assurance and quality control procedures and practices. We tightened procedures to ensure that these complex machines are assembled correctly.
Our strategic suppliers built additional, updated machine components, then we assembled and installed about two dozen AC100 centrifuge machines in our demonstration facility in Piketon, Ohio.
In March, we began Lead Cascade testing operations with the AC100 machines. This was an important event for the program and our efforts to address DOE’s concerns because these are production-ready machines. The cascade has been operating successfully since it came on line and our immediate objective is to accumulate significant cascade run-time.
After Energy Secretary Steven Chu toured our Technology and Manufacturing Center in Oak Ridge in late March, DOE announced that it would fulfill its pledge to provide $45 million of cost-sharing assistance for the continued demonstration of the technology.
Under the terms of our cooperative agreement with DOE, this cost sharing will support over 350 jobs in the continued operation of the Lead Cascade, manufacturing additional AC100 machines, and preparation for high-volume production of centrifuges.
Under Dr. Chu’s direction, DOE also sent a notice to Congress on March 25th that it intends to reprogram $2 billion from an earlier loan guarantee appropriation for the front end of the nuclear fuel cycle. Clearly, that is good news for the funding we seek to build the plant.
We are committed to meeting all of DOE’s concerns. We’ve come a long way towards meeting the technical concerns with the operation of the Lead Cascade of AC100 machines. We are also making headway on DOE’s financial related concerns. An improved financial position for the project will be part of any update to our loan guarantee application. In addition, we have secured $3.1 billion in committed sales from our nuclear utility customers for the output of the plant. These commitments will help provide assurance to DOE that any debt being guaranteed will be repaid.
We have said that we are evaluating our strategic alternatives with the assistance of an outside advisor. We’ve had discussions with third parties and the process continues. I’m sure you can understand that from a confidentiality standpoint, we cannot say more than that. But let me assure you that we remain absolutely focused on delivering value to shareholders in all these efforts.
We are encouraged by the performance of the Lead Cascade testing program and our progress on the financial front. We are not yet where we want to be, but we’ve come a long way over the last nine months and I think we have reason to be optimistic looking ahead.
Another reason for our optimism is that we see a very bright future for the nuclear fuel market. There are approximately 440 reactors operating today and another 57 are under construction around the world at this time. Nineteen of these are expected to begin generating power in 2010 and 2011. The World Nuclear Association reports that 143 reactors are on order or planned, and another 344 reactors have been proposed worldwide. The prospects for our industry look better today than at any time since the 1970s.
I want to spend a few minutes providing an update on our government services segment, which includes our subsidiary NAC International, and our core enrichment operations.
For many years, we have provided services at the two gaseous diffusion plants, such as security, fire protection and laboratory analysis. In more recent years, these services have expanded to keeping the Ohio plant in a cold standby condition. The scope of work there has temporarily expanded as we prepare the facility for a prime contractor that specializes in nuclear decommissioning projects.
Because of our experience at the plant and our highly skilled work force there, we are positioning USEC to perform additional work over the next several years as a subcontractor.
In 2009, our subsidiary, NAC International, received a license from the Nuclear Regulatory Commission for Magnastor, its revolutionary storage solution for used nuclear fuel. Given the uncertainty surrounding Yucca Mountain, utilities need an interim storage solution today. We have seen strong customer interest in Magnastor and have recently sold several storage systems.
Another area of NAC expertise is the transportation of highly enriched uranium and other radioactive material. You may have read recently in Time magazine about a DOE-led mission to remove highly enriched uranium from a Chilean research reactor that was interrupted by a massive earthquake. Quietly and behind the scenes, NAC is helping the US government achieve its nonproliferation goals.
Our plant in Paducah is nearly 60 years old and energy intensive. Nonetheless, our employees in Paducah there accomplish remarkable results. Operations have been fine tuned to the point where the plant is processing uranium at some of its highest efficiency levels ever.
The issue with Paducah is not the efficiency of our people or their ability to safely operate the plant. Instead, it is the amount and cost of the electric power needed by gaseous diffusion. Electricity is responsible for more than 70 percent of the cost of production at Paducah. Our contract with the Tennessee Valley Authority runs through mid 2012. The negotiations that we’ve begun with TVA are very important as the cost of power post 2012 will be the key factor for determining whether Paducah can remain competitive.
A moment ago I mentioned our role in nonproliferation efforts for the US government. We are justifiably proud of our part in eliminating and recycling nuclear material from the former Soviet Union equivalent to more than 15,000 nuclear warheads since the inception of Megatons to Megawatts in 1994. Today, and for the last decade, approximately 10 percent of all the electricity generated in the United States comes from these former nuclear weapons. We believe the Megatons to Megawatts program is the world’s most successful nonproliferation program.
That’s where we are today. Strong and safe core operations, but with cost pressures that are pinching our gross profit margins. We are in a highly competitive market that is going through an upheaval as new enrichment capacity is brought on line.
So how do we grow our business and increase returns to shareholders? We believe that can best be accomplished by deploying the American Centrifuge technology. This highly efficient technology will fundamentally reduce our production cost structure and provide us with the flexibility to add capacity in close alignment with future long-term contracts.
The driving force behind what we do and why we do it is quite simple. USEC is committed to delivering proven nuclear fuel and technology solutions to meet the growing demand for dependable, clean energy and to enhance America’s energy supply.
So, in conclusion, let me emphasize two things:
First, we have a clear, go forward strategy for the American Centrifuge project. We are making progress on addressing DOE’s concerns, and we are working to update our application. We see signs of growing support for the project and for nuclear power. And second, we never lose sight of who we are working for each day. Every member of the board, every member of management and the 3,000 dedicated employees of USEC are working to deliver long-term shareholder value.