Hi JL,
Used up as energy, E=mc2

? Seriously, though, the usage of fat and formation/increase of muscle mass are two independent systems. When one says "converting fat to muscle" what is really meant is that loss of fat through exercise and increase in muscle mass through, presumably, but not exclusively a different kind of exercise.
First, lets talk about fat and its metabolism. You ingest carbs, proteins, fats, the extra dietary fat is converted into free fatty acids (FFAs) and deposited nicely around your body in the fatty tissue. Now, when you exercise... Lets say you do some wind sprints, 40 yard dashes, and do just a couple. Burn much fat? Not really--fast movements, or short burst types of exercise tend to rely on the carbohydrates you have available already. The carbos are stored as glycogen in muscle tissue and glucose in your blood. These are relied upon first, including say, when I start off my morning run.
After a few minutes of sustained exercise, your body starts needing to draw upon its reserves to keep the muscles going. This is where you get into fat metabolism. You will see some posts where DonutsnCoffee mentions the targeted or best fat burning zone, and for most people, this occurs between 68% and 85% of their calculated max heart rate. (The actual experiments were done in VO2, but its easier for us to rely on our heart rates). This is why you will see those posts in here that support a low intensity sustained exercise (like running) with heart rates in these ranges.
Anyway, I should get back to the question you asked, and finish up the "fat" part. In extreme cases, when carbos and fats are severely depleted, yes, protein can be drawn upon for energy by the body. However, the body's least preferred pathway for energy is the breakdown of proteins into its constituent amino acids. The proteins are mainly used for increased muscle size (as bodybuilders well know) and the repair of muscle tissue.
Anyway, what I tried to do here was explain (hopefully it made sense?) the fat burning part, and that its separate from the muscle building process.