• 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
The long-term outlook for the nuclear industry continues to strengthen as environmental concerns about climate change and volatility in the price of fossil fuels have encouraged utilities to increase the generation of nuclear power. There are approximately 440 nuclear power reactors worldwide 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. U.S. utilities have filed 17 applications for construction and operating licenses for 26 new reactors with the U.S. Nuclear Regulatory Commission ("NRC").

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.
We believe the growth in potential demand for nuclear fuel over the next two decades provides a strong foundation for our substantial investment in the American Centrifuge Plant ("ACP"). Nonetheless, we face significant challenges in 2009 as we seek additional financing needed to continue the ACP, and over the next several years as we transition our sources of LEU supply.
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, we produce about half of our supply of low enriched uranium at the Paducah GDP and purchase half from Russia under a highly successful, nonproliferation program known as "Megatons to Megawatts." Over the next several years we expect to transition the source of our LEU supply to production from the ACP.
Our Paducah plant requires a large amount of electric power, and prices for electricity and related fuel have been very volatile during the past year. During non-summer months of 2009, we expect to purchase 2,000 megawatts of power from TVA. 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 lowered recent weekly power invoices compared to 2008 and market prices for electric power for the summer of 2009 are lower than last summer. Volatility in power prices and TVA's cost of fuel continue, which results in uncertainty in our financial projections.
American Centrifuge Plant Update
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 being built in Piketon, Ohio. Since August 2007 we have operated a cascade of prototype machines in our Lead Cascade test program that has provided valuable data on operational characteristics of the machine, aided in developing improvements to the design of the commercial production machines and given staff operational experience.
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. Within this overall AC100 design, we have finalized two design releases. The first was released to our strategic suppliers in 2008 in preparation for installing a test cascade of these AC100 series machines in Piketon in 2009. In late March 2009, we completed a second design release for the AC100 series machines, which we refer to as the AC100 Mod 1 machine. We are continuing to value engineer the centrifuge design to reduce the cost of manufacturing the machine and simplify subsystems, which will result in future versions of the AC100 series.
The American Centrifuge uranium enrichment technology has demonstrated performance above our current target of 350 SWU per machine, per year. Our plan is to seek sustained improvement in centrifuge design that will be integrated into the commercial plant over time. Before a new version of the machine is introduced into the ACP, a design review board will determine through a disciplined process if the improvements provide sufficient cost and performance improvement to implement.

At our state-of-the-art test facilities in Oak Ridge, Tennessee we have been testing individual centrifuge machines with improved operating characteristics and a lower cost to manufacture. We intend to integrate these improvements in future versions of the AC100. We have several test stands operating now with AC100 centrifuges. We believe these facilities provide the environment for testing future, improved versions of the machine.
Our strategic suppliers have been manufacturing parts for the initial AC100 machines since 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. We are working with leading companies to create a world-class industrial infrastructure needed to build components for the AC100 machines and supporting equipment. The 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.
A cascade of initial AC100 machines is expected to be operational early in the third quarter of 2009. This cascade will be in a closed-loop configuration as required under our demonstration license from the NRC but will otherwise operate under commercial plant conditions. During this continuation of our Lead Cascade testing program we expect to obtain data on machine-to-machine interactions, plant design, subsystem performance, various support systems such as the service module, and cascade electronic control systems. Many of the initial machines for this cascade have been assembled, are operating and are being conditioned with uranium hexafluoride gas in preparation for cascade operations. Additional machines will be added during the summer until we reach 40 to 50 AC100 machines in Lead Cascade testing. These 40 to 50 machines are expected to operate into 2010.
We expect 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. However, we remain 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 the first quarter of 2009, we announced that we began taking steps to conserve cash and reduce the planned escalation of project construction and machine manufacturing activities until we gain greater certainty on potential funding for the project through the DOE Loan Guarantee Program. However, we continue to invest as planned in engineering design, machine value engineering and the initial AC100 series cascade deployment.
The reduction in the planned escalation principally affected construction of the plant's interior infrastructure that had been expected to ramp up significantly in 2009. Construction of the ACP includes various systems including electric, telecommunications, cooling, and water distribution. Although plant construction has slowed to conserve cash, we have continued with engineering and design for the commercial plant by Fluor Corporation. The design is approximately 75% complete. The two existing production buildings have space for approximately 11,500 centrifuges. The availability of machine mounts that anchor the centrifuges in place is complete in one production building and about 90% complete in the second building. Work continues on the total refurbishment of the feed and withdrawal facility, and installation of the piping between this facility and the production buildings is expected to begin in the third quarter. Other activities include refurbishing the machine assembly area, constructing a new boiler building and related equipment, and building a monorail system in the machine assembly building during the second half of 2009.

Our decision to slow spending until a decision is made by the DOE Loan Guarantee Program will increase costs and extend the schedule for the completion of the project. We are currently engaged with our strategic suppliers in assessing the potential impact on cost and schedule and the potential impact will depend on the length and severity of our spending slowdown. We expect to provide an update as we gain greater certainty on potential funding through the DOE Loan Guarantee Program.
Our Marketing and Sales department continues to meet with customers to sell ACP output, which is important to our financing efforts for ACP. 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. Leading nuclear utilities in the United States, Europe and Asia have committed to purchase a substantial portion of the plant's output through both accepted offers and signed contracts for terms of varying lengths extending as far as 2026. At the end of the first quarter of 2009, we announced that we have commitments from 10 customers to purchase more than half of the planned, initial sales of the ACP. These commitments are valued at $3.3 billion.
We continue to anticipate a 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.
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 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 when its reactor has requirements. The timing of requirements is associated with reactor refueling outages. Our agreements for uranium sales are generally shorter-term, fixed-commitment contracts.
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 and uranium. 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 uranium hexafluoride ("UF6"), as calculated using indicators published in Nuclear Market Review, and the spot price indicator for UF6:

                                              March 31,     December 31,     March 31,
                                                2009            2008           2008
     Long-term SWU price indicator ($/SWU)    $ 161.00      $    159.00      $ 145.00
     UF6:
     Long-term price composite ($/KgU)          192.54           195.15        260.47
     Spot price indicator ($/KgU)               121.00           140.00        195.00

A substantial portion of our earnings and cash flows in recent years has been derived from sales of uranium, including uranium generated 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. Spot market prices for uranium declined in the past year while electric power costs generally 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.
Under the terms of many uranium sale agreements, title to uranium is transferred to the customer and we receive payment under normal credit terms without physically delivering the uranium to the customer. The recognition of revenue and earnings for such uranium sales is deferred until LEU associated with such uranium is physically delivered to the customer rather than at the time title to uranium transfers to the customer. The timing of revenue recognition for uranium sales is uncertain.
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 June 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 10 to the consolidated condensed 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. 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. 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. There were no deliveries under the Russian Contract in the three months ended March 31, 2009. In April 2009, deliveries resumed after the Russian government approved the price for 2009. The purchase cost per SWU for 2009 is expected to be 11% higher compared to 2008.
The pricing methodology under the Russian Contract for deliveries in 2010 through 2013 was amended in February 2009. The U.S. government has approved the amendment and approval by the Russian government is pending. 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. We purchase most of the electric power for the Paducah GDP under a power purchase agreement with TVA that expires May 31, 2012. The base price under the TVA power contract increases moderately based on a fixed, annual schedule, and is 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 the impact is uncertain given volatile energy prices.

Advanced Technology Costs
Costs relating to the American Centrifuge technology are charged to expense or capitalized based on the nature of the activities and estimates and judgments involving the completion of project milestones. Costs relating to the demonstration of American Centrifuge technology are charged to expense as incurred. Demonstration costs historically have included NRC licensing of the American Centrifuge Demonstration Facility in Piketon, Ohio, engineering activities, and assembling and testing of centrifuge machines and equipment at centrifuge test facilities located in Oak Ridge, Tennessee and at the American Centrifuge Demonstration Facility.
Capitalized costs relating to the American Centrifuge technology include NRC licensing of the American Centrifuge Plant in Piketon, Ohio, engineering activities, construction of centrifuge machines and equipment, leasehold improvements and other costs directly associated with the commercial plant. Capitalized centrifuge costs are recorded in property, plant and equipment as part of construction work in progress. The continued capitalization of such costs is subject to ongoing review and successful project completion. During the second half of 2007, we moved from a demonstration phase to a commercial plant phase in which significant expenditures are capitalized based on management's judgment that the technology has a high probability of commercial success and meets internal targets related to physical control, technical achievement and economic viability. If conditions change and deployment were no longer probable, costs that were previously capitalized would be charged to expense.
Expenditures related to American Centrifuge technology for the three months ended March 31, 2009 and 2008, as well as cumulative expenditures as of March 31, 2009, follow (in millions):

                                                                                           Cumulative
                                                            Three Months Ended               as of
                                                                March 31,                  March 31,
                                                           2009             2008              2009
Amount expensed as part of advanced technology
costs                                                   $     31.4         $  23.5        $      573.5
Amount capitalized as part of property, plant and
equipment (A)                                                130.2           110.3               774.5
Prepayments to suppliers for services not yet
performed                                                      0.1             4.7                24.8


Total ACP expenditures, including accruals (B)          $    161.7         $ 138.5        $    1,372.8

(A) Cumulative
capitalized
costs as of
March 31, 2009
include
interest of
$30.7 million.

(B) Total
expenditures
are all
American
Centrifuge
costs
including, but
not limited
to,
demonstration
facility,
licensing
activities,
commercial
plant
facility,
program
management,
interest
related costs
and accrued
asset
retirement
obligations
capitalized.
This includes
$43.5 million
of accruals at
March 31,
2009.

For discussions of the financing plan for the American Centrifuge project, see "Management's Discussion and Analysis - Liquidity and Capital Resources." Risks and uncertainties related to the financing, construction and deployment of the American Centrifuge Plant are described in Item 1A, "Risk Factors" of our 2008 Annual Report on Form 10-K.
Advanced technology costs also include research and development efforts . . .