• are deploying what we anticipate will be the world's most advanced uranium enrichment technology, known as the American Centrifuge;

• are the exclusive executive agent for the U.S. government under a nuclear nonproliferation program with Russia, known as Megatons to Megawatts;

• perform contract work for the U.S. Department of Energy ("DOE") and its contractors at the Paducah and Portsmouth gaseous diffusion plants ("GDPs"); and

• provide transportation and storage systems for spent nuclear fuel and provide nuclear and energy consulting services.

Low Enriched Uranium
LEU consists of two components: separative work units ("SWU") and uranium. SWU is a standard unit of measurement that represents the effort required to transform a given amount of natural uranium into two components: enriched uranium having a higher percentage of U235 and depleted uranium having a lower percentage of U235. The SWU contained in LEU is calculated using an industry standard formula based on the physics of enrichment. The amount of enrichment deemed to be contained in LEU under this formula is commonly referred to as the SWU component and the quantity of natural uranium used in the production of LEU under this formula is referred to as its uranium component.
We produce or acquire LEU from two principal sources. We produce LEU at the Paducah GDP in Paducah, Kentucky. Under the Megatons to Megawatts program, we acquire LEU from Russia under a contract, which we refer to as the Russian Contract, to purchase the SWU component of LEU recovered from dismantled nuclear weapons from the former Soviet Union for use as fuel in commercial nuclear power plants.
Our View of the Business Today
There are approximately 440 nuclear power reactors in operation today, and international agencies report that more than 100 reactors are on order or planned to be built over the next two decades. In addition, approximately 260 more power reactors have been proposed. Many of these new reactors will be built in Asia. Approximately 40 plants are currently under construction worldwide in 12 countries. In addition, many reactors in the current fleet are being upgraded to produce more electricity or utilities are seeking to have their operating lives extended through equipment improvements and regulatory permission. Driving this expansion are environmental concerns and volatility in the price of fossil fuels.
U.S. utilities have filed 17 applications for construction and operating licenses for 26 new reactors with the U.S. Nuclear Regulatory Commission ("NRC"). The NRC has also indicated it expects license applications for 7 more reactors will be filed by 2011. Growing acceptance by the public, concerns about climate change and legislation that provided financial incentives have encouraged utilities to announce plans for new nuclear reactors in the United States. New reactors in the United States are facing cost and financing pressures and many of these U.S. utilities have applied for loan guarantees. DOE reported that it received 19 applications from U.S. utilities for loan guarantees to build 21 new reactors.

To fuel potential new reactors, uranium enrichment capacity will need to double by 2030, according to the World Nuclear Association. New uranium enrichment plants, including our American Centrifuge Plant and other competing projects in the United States and worldwide, are being proposed and built to meet this new demand and to replace remaining higher production cost gaseous diffusion plants. These new uranium enrichment plant projects are supported by improved fundamentals in the nuclear fuel industry, including increased market prices for SWU. Long-term SWU price indicators associated with sales for deliveries in future periods increased 11% to $159 per SWU during 2008, and increased 17% over the past two years. Looking forward, we believe market supply and demand fundamentals suggest that SWU prices should remain firm as new reactors are ordered and built in the markets we serve. Increased SWU demand, higher production costs for the remaining gaseous diffusion plants, and the need to cover capital investment for new enrichment capacity are three drivers for increased market prices for SWU. Because nuclear reactors provide base load electricity and the demand for nuclear fuel from existing nuclear reactors is inelastic, our industry is less affected than others by the global economic downturn.
As discussed in "Business and Properties - The American Centrifuge Plant," we have been developing and demonstrating a highly efficient uranium enrichment gas centrifuge technology that we call the American Centrifuge. We are deploying this technology in the American Centrifuge Plant ("ACP") being built in Piketon, Ohio. During 2008, we continued our efforts with respect to the centrifuge machine, with the continued operation of a cascade of prototype machines in our Lead Cascade test program, which has now operated for more than 150,000 total machine hours.
We refer to our production centrifuge machine design as the AC100 series centrifuge machine. The AC100 series machine is designed to produce 350 SWU per year, which output is substantially greater than our competitors' machines. During 2008, we released an initial design for the AC100 series machine to our strategic suppliers in preparation for installing a test cascade of these AC100 series machines in Piketon in 2009. We anticipate a design release for the initial AC100 series machines in late March 2009 that will be deployed in the commercial plant. The strategic suppliers have been manufacturing parts for the initial AC100 machines and the first components to build these machines were delivered in November 2008. In manufacturing parts for the AC100, suppliers must replicate on a commercial basis manufacturing that we previously self-performed in building our prototype machines. Start-up issues have arisen in this transfer of technology to our suppliers that have delayed our timetable for operation of the initial AC100 cascade. We expected to encounter start-up issues and the resolution of these issues at the outset will help to facilitate our transition to high volume manufacturing.
A five-stage cascade of AC100 machines is now expected to be operational early in the third quarter of 2009. This cascade will be in a commercial plant configuration and operate under commercial plant conditions. Additional machines will be added to the cascade until we reach a cascade of 40 to 50 machines, which is expected late in the third quarter of 2009. This cascade of 40 to 50 machines would operate for the rest of 2009.
We expect that the first machines in the initial AC100 series cascade will have a throughput somewhat less than 350 SWU per year as we continue to optimize the AC100 series machine. For the same reason, the machines deployed in the first commercial cascade of the ACP may not achieve 350 SWU per year. However, we continue to be confident that the AC100 series machines that are deployed in the commercial plant will achieve an average performance level of 350 SWU per year, supporting an annual SWU production capacity of the ACP of 3.8 million SWU.

During 2008, we also continued our construction efforts to build the ACP and to work with leading companies to create a world-class industrial infrastructure needed to build components for the highly sophisticated AC100 machines and supporting equipment. The highly specialized U.S. manufacturing base needed to build the AC100 did not exist but is being established with our leadership. Under contract arrangements with USEC, our suppliers are also helping to create the manufacturing base for a revitalized U.S. nuclear fuel industry in a dozen states. Construction of the ACP includes various systems including electric, telecommunications, cooling and water distribution. The two existing production buildings have space for approximately 11,500 centrifuges.
We must still raise the remainder of the capital needed to build the ACP, and we view the DOE Loan Guarantee Program as the path for obtaining the debt financing to complete the American Centrifuge project. Our baseline deployment schedule called for beginning initial commercial plant operations in 2010 and reaching an annual production capacity of the ACP of 3.8 million SWU per year at the end of 2012. However, we have initiated steps to conserve cash and reduce the planned escalation of project construction and machine manufacturing activities until we gain greater clarity on potential funding for the project through the DOE Loan Guarantee Program. In addition, on a parallel path, we continue to evaluate potential third-party investment.
Our decision to slow spending until a decision is made by the DOE Loan Guarantee Program will likely increase costs and extend the schedule for the project. As we gain greater clarity on potential funding through the DOE Loan Guarantee Program and plan and coordinate with our strategic suppliers, we will be better able to quantify changes to cost and schedule. We are currently engaged with suppliers in a bottom-up analysis and we do not expect to be in a position to provide an update on the potential impact on cost and schedule until after the first quarter of 2009. Further details are provided in "Business and Properties - The American Centrifuge Plant", "-Liquidity and Capital Resources" and "Item 1A-Risk Factors."
Our Marketing and Sales department continues to meet with customers to sell ACP output, which is important to our financing efforts for ACP. We have signed long-term contracts with customers and have received accepted offers from customers for additional commitments. Sales contracts for this initial output represent a strategic commitment by customers to ensure a reliable, U.S.-based source of nuclear fuel that will be available for decades to come.
Even as we build our new production facility, we have substantial current operations at the gaseous diffusion plant we lease from the U.S. government in Paducah, Kentucky. Today, our supply mix involves producing half of the low enriched uranium sold at the Paducah GDP and purchasing half under contract with Russia under a highly successful, nonproliferation program known as "Megatons to Megawatts." Over the next several years we expect to transition the source of all of our LEU supply to production from the ACP. During this transition period, we will seek to effectively manage the ramp up in ACP capacity, determine the end date for commercial production from the Paducah GDP and conclude the Megatons to Megawatts program in 2013. Our business and financial profile will reflect the combined characteristics of our sources of enrichment, particularly the gaseous diffusion and centrifuge operating environments. During this transition period, we will also be looking at the potential expansion of the ACP beyond the initial 3.8 million SWU plant, which could be done incrementally once the initial ACP construction phase is complete. The manufacturing infrastructure that we are putting into place to deploy the initial plant capacity will facilitate any future expansion. Because an expansion would not require creating this manufacturing infrastructure or another demonstration of the technology, the cost of any expansion is anticipated to be less than the initial project.

In 2008, we exercised our option to extend the lease with DOE for the Paducah GDP through June 2016, providing us with flexibility within our current enrichment process to help us through this critical transitional period. Although we have been operating the Paducah GDP at the highest efficiency in decades, the costs to operate the Paducah GDP have increased in the past several years because of increases in power costs. Our long-term plan for the Paducah GDP is dependent upon a number of factors, including the successful and timely startup of the ACP, the cost of electric power under our contract with the Tennessee Valley Authority ("TVA"), the availability and cost of electric power beyond the expiration of the TVA contract in May 2012, the demand for SWU and uranium, the cost to maintain the Paducah GDP, and the timing and nature of any potential tails re-enrichment program or other programs we may undertake.
During the non-summer months of 2009, we expect to purchase 2,000 megawatts of power from TVA, making USEC one of the largest industrial consumers of electric power in the United States. We have a fixed-price contract that sets the base price for most of the power we purchase, but our costs fluctuate above or below the base contract price based on fuel and purchased power costs experienced by TVA. In 2008, this fuel cost adjustment increased our power cost over the base contract price by about 15%, which had a significant effect on our net income and cash flow from operations. The impact of current economic conditions on energy prices has reduced recent weekly power invoices and has made forward cost projections from TVA very volatile, which results in uncertainty in our financial projections. We will also face uncertainty with respect to power costs as we look to purchase supplemental power starting in June 2010 when our purchases under the TVA contract are reduced from their current level of 2,000 megawatts to 1,650 megawatts and beyond the term of the current contract with TVA that expires in May 2012.
The manner in which Russian uranium products are introduced into the U.S. market in the next few years and after the Megatons to Megawatts program concludes in 2013 is significant to our transition and to our long-term success. Russia has a large, vertically integrated nuclear power industry with excess capacity to enrich uranium. In recent years, we have been engaged in international trade litigation to ensure that the U.S. market is protected from the dumping of unfairly priced foreign merchandise, and on January 26, 2009, the U.S. Supreme Court in a unanimous ruling overturned the decision of an appellate court that had called into question the enforceability of the application of U.S. trade laws to all imports of LEU. For more information, see "Business and Properties - Competition and Foreign Trade - Government Investigation of LEU Imports from France."
In addition, in September 2008, legislation was enacted that included a provision to ensure the implementation of the Megatons to Megawatts program through 2013 and imposed quotas on imports of Russian LEU through 2020 that are similar to the quotas agreed to with Russia earlier in 2008. This legislation significantly reduces the threat of injury from imports of dumped Russian LEU, but does not apply to imports from any other country. For more information, see "Business and Properties - Competition and Foreign Trade - Limitations on Imports of LEU from Russia."
Revenue from Sales of SWU and Uranium Revenue from our LEU segment is derived primarily from:
• sales of the SWU component of LEU,

• sales of both the SWU and uranium components of LEU, and

• sales of uranium.

The majority of our customers are domestic and international utilities that operate nuclear power plants, with international sales constituting approximately 30% of revenue from our LEU segment in 2008. Our agreements with electric utilities are primarily long-term, fixed-commitment contracts under which our customers are obligated to purchase a specified quantity of SWU or uranium from us or long-term requirements contracts under which our customers are obligated to purchase a percentage of their SWU requirements from us. Under requirements contracts, a customer only makes purchases if its reactor has requirements. The timing of requirements is associated with reactor refueling outages.

Backlog is the aggregate dollar amount of SWU and uranium that we expect to sell in future periods under contracts with customers. At December 31, 2008, we had contracts with customers aggregating an estimated $6.9 billion, including $1.7 billion expected to be delivered in 2009, compared with $6.5 billion at December 31, 2007. Backlog is partially based on customers' estimates of their fuel requirements and certain other assumptions including our estimates of selling prices, which are subject to change. Prices may be adjusted based on SWU or uranium market prices prevailing at the time of delivery. Pricing elements may include escalation based on a general inflation index or a power price index. We utilize external composite forecasts of future market prices and inflation rates in our pricing estimates.
Our revenues and operating results can fluctuate significantly from quarter to quarter, and in some cases, year to year. Customer demand is affected by, among other things, reactor operations, maintenance and the timing of refueling outages. Utilities typically schedule the shutdown of their reactors for refueling to coincide with the low electricity demand periods of spring and fall. Thus, some reactors are scheduled for annual or two-year refuelings in the spring or fall, or for 18-month cycles alternating between both seasons. Customer payments for the SWU component of LEU typically average approximately $15 million per order. As a result, a relatively small change in the timing of customer orders for LEU due to a change in a customer's refueling schedule may cause operating results to be substantially above or below expectations. Customer requirements and orders are more predictable over the longer term, and we believe our performance is best measured on an annual, or even longer, business cycle. Our revenue could be adversely affected by actions of the NRC or nuclear regulators in foreign countries issuing orders to modify, delay, suspend or shut down nuclear reactor operations within their jurisdictions.
Our financial performance over time can be significantly affected by changes in prices for SWU. The long-term SWU price indicator, as published by TradeTech, LLC in Nuclear Market Review, is an indication of base-year prices under new long-term enrichment contracts in our primary markets. Since our backlog includes contracts awarded to us in previous years, the average SWU price billed to customers typically lags behind the current price indicators. Following are the long-term SWU price indicator, the long-term price for UF6, as calculated using indicators published in Nuclear Market Review, and the spot price indicator for UF6:

                                                            December 31,
                                                   2008         2007         2006
        Long-term SWU price indicator ($/SWU)   $ 159.00     $ 143.00     $ 136.00
        UF6:
        Long-term price composite ($/KgU)         195.15       260.47       192.54
        Spot price indicator ($/KgU)              140.00       241.00       199.00

A substantial portion of our earnings and cash flows in recent years has been derived from sales of uranium. We expect to continue to supplement our supply of uranium by underfeeding the production process at the Paducah GDP. We may also purchase uranium from suppliers in connection with specific customer contracts, as we have in the past. Underfeeding is a mode of operation that uses or feeds less uranium but requires more SWU in the enrichment process, which requires more electric power. In producing the same amount of LEU, we vary our production process to underfeed uranium based on the economics of the cost of electric power relative to the prices of uranium and enrichment. As noted in the table above, spot market prices for uranium declined in 2008 while electric power costs increased, pressuring the economics of underfeeding the enrichment process to obtain uranium for resale. Given supply and demand conditions in the spot uranium market, we see fewer opportunities for near-term spot sales. We will continue to monitor and optimize the economics of our production based on the cost of power and market conditions for SWU and uranium.

We supply uranium to the Russian Federation for the LEU we receive under the Russian Contract. We replenish our uranium inventory with uranium supplied by customers under our contracts for the sale of SWU and through underfeeding our production process. Our older contracts give customers the flexibility to determine the amounts of natural uranium that they deliver to us, which can result in our receiving less uranium from customers than we transfer from our inventory to the Russian Federation under the Russian Contract. Our new SWU sales contracts and certain older contracts that we have renegotiated require customers to deliver a greater amount of natural uranium to us.
The recognition of revenue and earnings for uranium sales is deferred until LEU to which the customer has title is physically delivered rather than at the time title transfers to the customer. The timing of revenue recognition for uranium sales is uncertain.
Our contracts with customers are denominated in U.S. dollars, and although revenue has not been directly affected by changes in the foreign exchange rate of the U.S. dollar, we may have a competitive price advantage or disadvantage obtaining new contracts in a competitive bidding process depending upon the weakness or strength of the U.S. dollar. Costs of our primary competitors are denominated in the major European currencies.
Revenue from U.S. Government Contracts We perform and earn revenue from contract work for DOE and DOE contractors at the Paducah and Portsmouth GDPs, including a contract for maintenance of the Portsmouth GDP in cold shutdown. DOE and USEC have periodically extended the Portsmouth GDP cold shutdown contract, most recently through April 30, 2009. DOE has announced its intention to negotiate a sole-source extension of the cold shutdown contract through September 30, 2010. Continuation of U.S. government contracts is subject to DOE funding and Congressional appropriations. Revenue from U.S. government contracts is based on allowable costs determined under government cost accounting standards. Allowable costs include direct costs as well as allocations of indirect plant and corporate overhead costs and are subject to audit by the Defense Contract Audit Agency. Also refer to "DOE Contract Services Matter" in note 16 to the consolidated financial statements. Revenue from the U.S. government contracts segment includes revenue from our subsidiary NAC International Inc. ("NAC").
Cost of Sales
Cost of sales for SWU and uranium is based on the amount of SWU and uranium sold and delivered during the period and is determined by a combination of inventory levels and costs, production costs, and purchase costs. Production costs consist principally of electric power, labor and benefits, long-term depleted uranium disposition cost estimates, materials, depreciation and amortization, and maintenance and repairs. Under the monthly moving average inventory cost method that we use, coupled with our inventories of SWU and uranium, an increase or decrease in production or purchase costs will have an effect on inventory costs and cost of sales over current and future periods.

We have agreed to purchase approximately 5.5 million SWU each calendar year for the remaining term of the Russian Contract through 2013. Purchases under the Russian Contract are approximately one-half of our supply mix. Prices are determined using a discount from an index of international and U.S. price points, including both long-term and spot prices. A multi-year retrospective view of the index is used to minimize the disruptive effect of short-term market price swings. Increases in these price points in recent years have resulted in increases to the index used to determine prices under the Russian Contract. On February 13, 2009, we entered into an amendment to the Russian Contract to revise the pricing methodology for delivery in calendar years 2010 through 2013. Approval of both the U.S. government and the government of the Russian Federation is required for the amendment to become effective. The 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. We expect that prices paid under the Russian Contract, as amended, will continue to increase year over year, and that the total amount paid to the Russian Federation for the SWU component of the LEU delivered under the Russian Contract over the 20 year term of the contract will substantially exceed $8 billion by the time the contract is completed in 2013. Officials of the Russian government have announced that Russia will not extend the Russian Contract or the government-to-government agreement it implements, beyond 2013. Accordingly, we do not anticipate that we will purchase Russian SWU after 2013.
We provide for the remainder of our supply mix from the Paducah GDP. The gaseous diffusion process uses significant amounts of electric power to enrich uranium. Costs for electric power are approximately 70-75% of production costs at the Paducah GDP. In 2008, the power load at the Paducah GDP averaged 1,680 megawatts, an increase of 11% compared to 2007. Additional purchases of power allow us to underfeed the production process and increase our LEU production. The quantity of uranium that is added to uranium inventory from underfeeding is accounted for as a byproduct of the enrichment process. Production costs are allocated to the uranium added to inventory based on the net realizable value of the uranium, and the remainder of production costs is allocated to SWU inventory costs.
We purchase most of the electric power for the Paducah GDP under a power purchase agreement with TVA that expires May 31, 2012. Pricing under the TVA power contract consisted of a summer and a non-summer base energy price through May 31, 2008. Beginning June 1, 2008, the price consists of a year-round base energy price that increases moderately based on a fixed, annual schedule. All prices are subject to a fuel cost adjustment provision to reflect changes in TVA's fuel costs, purchased power costs, and related costs. The impact of the fuel cost adjustment has been negative for USEC, imposing an average increase over base contract prices of about 15% in 2008 and 8% in 2007. The impact of future fuel cost adjustments, which is substantially influenced by coal prices and hydroelectric power availability, is uncertain and our cost of power could fluctuate in the future above or below the agreed increases in the base energy price. We expect the fuel cost adjustment to continue to cause our purchase cost to remain above base contract prices, but is uncertain given volatile energy prices.
The quantity of power purchases under the TVA contract generally ranges from 300 megawatts in the summer months (June - August) to up to 2,000 megawatts in the non-summer months. We supplement the TVA contract during the summer months with additional power purchased at market-based prices. Beginning June 1, 2010 . . .