In 1994, a commercial implementing contract was signed by the United States Enrichment Corporation (USEC), acting as the executive agent for the U.S. government, and Techsnabexport (Tenex), executive agent for the Russian Federation. The national security objectives of the Megatons to Megawatts program are clear-eliminate Russian nuclear warhead material equivalent to 20,000 nuclear warheads, assist in their nuclear housekeeping functions and do so without taxpayer funds. The business objectives are equally clear-purchase fuel derived from warheads from Russia and sell that fuel to customers. This is a symbiotic relationship-one cannot exist without the other. Profits from the sales of this warhead-derived fuel make it possible to achieve the national security goals without taxpayer funding. The ongoing success of the Megatons to Megawatts program demonstrates that national security objectives can be consistent with commercial business objectives. As you would expect of such a unique, immense undertaking, there have been occasional challenges, differences of opinion, and temporary obstacles to overcome. Yet, all of these matters were addressed and resolved through flexibility, ingenuity and accommodation by both partners who were, and remain, steadfastly committed to the long-term success of this landmark undertaking. Several examples exemplify this point: • Both parties worked together in 1994 to resolve technical problems to assure that the weapons-derived LEU could meet commercial nuclear fuel specifications and thereby be sold at a fair market value. · Over the past seven years, USEC has made advanced and early payments to • Despite four separate interruptions in deliveries, USEC used its production and inventory resources to ensure customer sales were met and both parties cooperated on the resumption of deliveries to continue the implementation of this important national security program. USEC and Tenex have established a strong, productive and mutually beneficial partnership. And that partnership has achieved an impressive track record consistent with the objectives and mutual interests of their respective governments. Megatons to Megawatts Results to Date The results achieved by this seven-year partnership between USEC and Tenex confirms that the deal is working very effectively. As of today: 1. Approximately 137 metric tons of Russian warhead HEU have been converted in Russia into LEU fuel and purchased by USEC for use by its electric utility customers. 2. The 137 metric tons of HEU eliminated is the estimated equivalent of 5,481 nuclear warheads-enough nuclear explosives to destroy every city in the world. The peaceful utilization of 137 metric tons of HEU to LEU fuel will produce electricity to power a city the size of Boston for nearly 200 years or meet the entire electric power demand of America for half a year. 3. The executive agents are 40% ahead of the original 1993, 20-year schedule for conversion of a total of 500 metric tons of HEU into fuel-the equivalent of an estimated 20,000 nuclear warheads. 4. USEC has paid Russia approximately $2.3 billion for purchases of this weapons-derived fuel to date. No taxpayer funds have been spent on these purchases. 5. As the global leader in uranium enrichment, USEC has integrated this The 1996 contract amendment that provides for five-year fixed terms on price and quantities will expire at the end of next month. USEC and Tenex negotiated proposed new contract amendment terms in May 2000 that were intended to go into effect January 1, 2002. The new terms adopt market-based pricing for the remainder of the contract as well as other terms that are mutually acceptable to the parties. Approval of these terms by the Administration is still pending. Our Russian partner has also informed us that further delay on terms that would allow us to continue deliveries in 2002 and beyond will decrease the amount of nuclear weapons HEU conversion. Accordingly, we believe there is an urgent need for the Administration to approve the proposed new terms so the executive agents can continue their work of converting weapons material into fuel-on time and at levels that will optimize market stability and product value. USEC has negotiated a revised pricing arrangement that is fair, equitable and ready to be executed--and when executed, it will ensure the continued success of the HEU contract through the permanent disposal of another 15,000 nuclear warheads by 2013. Considerable attention has been given to the potential for increasing the conversion of nuclear warhead HEU and plutonium into power plant fuel. While the conversion of nuclear warhead materials into fuel for power plants has provided a unique opportunity to support nonproliferation efforts, there are practical limitations as to how much of this weapons-derived material can be absorbed in the commercial market place. For example, without an increase in the number of nuclear power plants, there is a limit to the amount of weapons-derived fuel that can be introduced into the marketplace without having an effect upon global production of nuclear fuel. If and when the renewed interest in nuclear power results in widespread resumption of nuclear power plant construction and operations, the benefits would be considerable. In addition to environmental benefits and reduction of global climate change, expansion of nuclear power plant operations would offer additional opportunities for consumption of Megatons to Megawatts fuel. There is no shortage of creativity among those in the non-proliferation community. A number of innovative concepts have been proposed to advance the objectives of reducing the potential risks of diversion or theft of weapons-grade fissionable materials. These range from dilution and storage of weapons-grade fissionable material in Russia to the conversion of weapons-grade material to fuel and the creation of a strategic enrichment reserve in the United States. These and other concepts add to the choices of policy makers, and all will require substantial government funding to implement. In conclusion, during the past seven years, USEC and its Russian counterpart, Tenex, have forged a strong, cooperative partnership with mutual interest in making the HEU deal work. In terms of actual performance, USEC has met the objectives of the U.S.-Russian HEU Purchase Agreement ahead of schedule and at no cost to the taxpayer. Finally, USEC has submitted a pricing amendment for approval by the U.S. Government that will ensure this success continues over the next 13 years. Given recent events and possible future threats to our national security, it is likely that an increased urgency and emphasis will be placed on nuclear weapons material management and protection. Effective and timely implementation of the Megatons to Megawatts program becomes even more important in this context. Concern is growing about the risks of proliferation of nuclear weapons and the threat of weapons of mass destruction. The Megatons to Megawatts program is one successful effort to minimize those risks. USEC is committed to the continued success of this program. ### Current and Future Weapons of Mass Destruction (WMD) Proliferation Threats I. Threat Assessment This assessment provides an objective consideration of the probabilities of chemical, biological, nuclear and radiological threats in order to assign export control policy priorities that address the proliferation of WMD. At least 25 countries are suspected of having or seeking to develop nuclear, biological or chemical weapons. As many as 28 countries have pursued and probably developed chemical and biological weapons programs. These countries include the former and current WMD programs of many close US allies, as well as current or suspected programs in rogue states. A smaller number of nations have pursued research and development programs for nuclear weapons. The proliferation of WMD extends beyond states because some terrorist groups currently have the resources and sophistication to develop or otherwise obtain these weapons. However, states and terrorist groups should not be considered separately because both may work in tandem to obtain, develop and use WMD. Chemical, biological, nuclear and radiological WMD do have distinctions in how proliferation threats are posed. A fundamental factor in chemical and biological proliferation threats is the assumption that many types of legitimate technologies could be modified for use or used directly in the manufacture and distribution of WMD. Nuclear proliferation is largely concerned with controlling nuclear material and expertise from the former Soviet Union and other states with nuclear weapons programs. Radiological threats are related to the security of radiological sites including nuclear power plants and medical facilities. Chemical Weapons The most common chemical agents for warfare and terrorism fall into two broad categories: 1) blister agents such as the mustard gas used in the trenches during the First World War, and 2) nerve agents such as the sarin gas used by the Aum Shinrikyo cult in the Tokyo subway attacks. Many of the precursor chemicals that are key ingredients in blister and nerve agents are already controlled, which may limit their threat for proliferation. An additional source of concern invokes a more shadowy set of compounds described as "binary" nerve agents, which may have been developed by researchers in the former Soviet Union. In binary agents, two relatively non-toxic or commonplace chemicals are combined at the moment of weapon deployment to create a compound that could be 5 to 10 times more deadly than ordinary nerve agents. Whether these binary compounds pose a realistic threat is a matter of dispute. Many unsophisticated, minimally-regulated and readily-available chemical compounds pose an additional threat as crude chemical warfare agents. This may be more relevant to the issue of WMD terrorism by non-state actors. Chlorine gas, anhydrous ammonia, phosphate compounds, |