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,

1

diesel or jet fuel and other industrial and agricultural chemicals are used in vast quantities in the US and abroad. Their legitimate uses extend from the chemical synthesis of fertilizers to the treatment of water in backyard swimming pools.

The globalization of industry and the widespread dissemination of information technologies will pose significant challenges to any controls on chemical warfare technology. Globalization poses problems when the equipment and technological expertise necessary for developing chemical WMD is available in many of the countries where a multi-national corporation has research and manufacturing capabilities. In addition, the Internet currently details on the synthesis of chemical weapons, and this observation extends to the biological, nuclear and radiological weapons that will be discussed below. (http://www.chm.bris.ac.uk/webprojects2001/sharp/new_page_4.html and http://www.chm.bris.ac.uk/motm/sarin/synthesis.html)

Biological Weapons

The threat of biological agents has been driven to the forefront of national security considerations following the recent anthrax attacks in Florida, New York and Washington D.C. It is now clear that the technical and operational challenges to developing or acquiring anthrax weapons have been overcome. The current anthrax attacks may warrant a reexamination of the terminology to include "weapons of mass disruption" or "weapons of mass exposure" rather than the conventional idea of biological WMD that could cause 1,000 or more casualties. So far, the number of individuals infected with anthrax is well below any accepted threshold for casualties in a true WMD attack, and yet the impact on the public health and law enforcement infrastructure in at least three metropolitan areas has been substantial.

One reasonable concern is that the emphasis on anthrax may obscure attention to other biological agents that have been considered or actually developed as agents of biological warfare and bioterrorism. Other credible bioterrorism agents that affect human health include smallpox, Q fever, plague and tularemia. A much less publicized but equally significant threat involves bioterrorism attacks against our national agriculture industry, also called agroterrorism. Examples of agroterrorism include the intentional release of biological agents that infect livestock, such as foot and mouth disease, as well as agents that cause various crop diseases.

Bioterrorism is of particular concern because of the potential for clandestine distribution of infectious biological agents, as well as the potential for epidemic disease outbreak following the distribution of infectious agents. Fortunately, neither of these factors have been crucial in the recent anthrax attacks, which were "well announced" in the sense that some of the letters carrying anthrax spores were clearly identified as such. Because anthrax is not a transmissible disease, experts do not currently believe that it has significantly spread beyond the paths of the contaminated letters. The recent infection of a woman in New York who had no obvious contact with mail facilities is causing a reevaluation of the possible modes of anthrax transmission in the current attacks. A bioterrorism scenario with smallpox or plague might develop very differently due to the transmissible nature of those diseases. An attack with plague bacteria would be spread by contagious transmission, but it could also be controlled, due to our ability to treat this

2

disease with antibiotics. Antibiotic treatment is not possible for smallpox, which is caused by a virus. Vaccination is the only valid protection against viral diseases such as smallpox or influenza. A significant population of the American population is not vaccinated against smallpox.

Bioterrorism could extend to the use of biological toxins, especially the botulism toxin and ricin, which is purified from castor beans. The potential for creating mass casualties by environmental distribution of biological toxins is probably low due to technological challenges, but these agents might be effective for contaminating a food supply.

Genetic modifications of existing biological warfare agents are perhaps the most peobable scenario for future developments in biological WMD. The most likely genetic modifications would involve antibiotic resistance genes that would protect the biological agents from treatment with standard antibiotics. There are no indications that the anthrax strains in the mail attacks were engineered with antibiotic resistance genes. Unfortunately, genetic manipulations techniques may represent the most difficult proliferation issue from an export control standpoint, because virtually the entire basis for genetic manipulation of bacteria and viruses is a matter of open record in scientific journals.

Nuclear/Radiological

The threats posed from nuclear proliferation to terrorist groups mainly involve the material and knowledge required for the creation of a nuclear weapon. The spread of nuclear material and expertise from the former Soviet Union remains a top concern that many believe increases the likelihood of a terrorist group obtaining a nuclear weapon. The key obstacle to building a nuclear weapon is acquiring a sufficient quantity of fissile material, either plutonium or highly enriched uranium. Most nuclear experts conclude that there is no evidence to suggest that terrorist groups have obtained the material necessary for the development of a nuclear weapon. Nevertheless, many experts fear the misuse of lost or stolen nuclear material, especially from states in the former Soviet Union.

The International Atomic Energy Agency (IAEA) recently warned that terrorist attacks involving nuclear material are more likely than before the September 11 attacks. The agency specifically cites the possible threats from radiological weapons or dirty bombs. While it would be difficult to make a dirty bomb lethal over a large geographic area, such a weapon would have the effect of creating public fear and prolonged health problems for those exposed to the radioactive fallout. A terrorist organization would not face serious technological barriers in creating a radiological weapon. Such weapons use conventional explosives to disperse nuclear waste material, nuclear fuel or other radiological material. The material required for a radiological weapon is easier to acquire and less expensive than the fissile materials needed to develop nuclear weapons.

Another radiological threat is the sabotage or suicide attack on a nuclear power reactor. A large airplane suicide attack could destroy the containment dome of a reactor and potentially create a

3