Liquidity and Capital Resources

At the end of 2015, we had cash and short-term investments of $459 million in a mix of short-term deposits and treasury bills, while our total debt amounted to $1.5 billion.

We have large, creditworthy customers that continue to need uranium even during weak economic conditions, and we expect the uranium contract portfolio we have built to provide a solid revenue stream for years to come.

We expect to continue investing in maintaining and prudently expanding our production capacity over the next several years. We have a number of alternatives to fund future capital requirements, including using our current cash balances, drawing on our existing credit facilities, entering new credit facilities, using our operating cash flow, and raising additional capital through debt or equity financings. We are always considering our financing options so we can take advantage of favourable market conditions when they arise. Due to the cyclical nature of our business, we may need to temporarily draw on other short-term liquidity during the course of the year. However, apart from these short-term fluctuations, we expect our cash balances and operating cash flows will meet our capital requirements during 2016, without the need for significant additional funding.

We have an ongoing dispute with CRA, see Transfer pricing disputes for more information. Until this dispute is settled, we expect to pay cash or provide security in the form of letters of credit for future amounts owing to the Government of Canada for 50% of the cash taxes payable and the related interest and penalties. We have provided an estimate of the amount and timing of the expected cash taxes and transfer pricing penalties paid, secured or owing here.

Financial condition

Credit ratings

The credit ratings assigned to our securities by external ratings agencies are important to our ability to raise capital at competitive pricing to support our business operations. Our investment grade credit ratings reflect the current financial strength of our company.

Third-party ratings for our commercial paper and senior debt as of December 31, 2015:

DBRS provides guidance for the outlook of the assigned rating using the rating trend. The rating trend represents their assessment of the likelihood and direction that the rating could change in the future, should present tendencies continue, or in some cases, if challenges are not overcome.

S&P uses rating outlooks to assess the potential direction of a long-term credit rating over the intermediate term. Their outlook indicates the likelihood that the rating could change in the future.

The rating agencies may revise or withdraw these ratings if they believe circumstances warrant. A change in our credit ratings could affect our cost of funding and our access to capital through the capital markets.

Liquidity

Cash from continuing operations

Cash from continuing operations was 6% lower than in 2014. This was primarily due to the settlement and rollover of contracts in our hedge portfolio which required more cash during 2015 compared to 2014, largely due to the weakening Canadian dollar, offset by higher profits in all of our segments. Not including working capital requirements, our operating cash flows in the year were down $46 million. See note 24 to the financial statements.

Investing activities

Cash used in investing includes acquisitions and capital spending.

Capital spending

We classify capital spending as sustaining, capacity replacement or growth. As a mining company, sustaining capital is the money we spend to keep our facilities running in their present state, which would follow a gradually decreasing production curve, while capacity replacement capital is spent to maintain current production levels at those operations. Growth capital is money we invest to generate incremental production, and for business development.

Outlook for investing activities

We expect total capital expenditures for uranium and fuel services to decrease by about 11% in 2016.

Major sustaining, capacity replacement and growth expenditures in 2016 include:

• McArthur River/Key Lake – At McArthur River, the largest projects are the expansion of freeze capacity and mine development. Other projects include site facility and equipment purchases. At Key Lake, work will be done to expand capacity in the solvent extraction and crystallization circuits of the mill.
• US in situ recovery (ISR) – wellfield construction represents the largest portion of our expenditures in the US.
• Rabbit Lake – At Eagle Point, the largest component is mine development, along with mine equipment upgrades and purchases. At the mill, we plan to optimize tailings capacity and work on various mill facility and equipment replacements.
• Cigar Lake – Work to expand freezing capacity makes up the largest portion of capital at the Cigar Lake site. We are also paying our share of the costs to modify and expand the McClean Lake mill.

We previously expected to spend between $350 million and $400 million in 2017. We now expect to spend between $300 million and $350 million in 2017. Due to the continued market uncertainty, we have reduced growth capital to focus on our tier-one properties.

This information regarding currently expected capital expenditures for future periods is forward-looking information, and is based upon the assumptions and subject to the material risks discussed here. Our actual capital expenditures for future periods may be significantly different.

Financing activities

Cash from financing includes borrowing and repaying debt, and other financial transactions including paying dividends and providing financial assurance.

Long-term contractual obligations

We have contractual capital commitments of approximately $55 million at December 31, 2015. Certain of the contractual commitments may contain cancellation clauses; however, we disclose the commitments based on management’s intent to fulfil the contracts.

We have unsecured lines of credit of about $2.7 billion, which include the following:

• A $1.25 billion unsecured revolving credit facility that matures November 1, 2019. Each year on the anniversary date, and upon mutual agreement, the facility can be extended for an additional year. In addition to borrowing directly from this facility, we can use up to $100 million of it to issue letters of credit and we may use it to provide liquidity for our commercial paper program, as necessary. We may increase the revolving credit facility above $1.25 billion, by increments of no less than $50 million, up to a total of $1.75 billion. The facility ranks equally with all of our other senior debt. At December 31, 2015, there were no amounts outstanding under this facility.
• Approximately $1.4 billion in letters of credit provided by various financial institutions. We use these facilities mainly to provide financial assurance for future decommissioning and reclamation of our operating sites, for our obligations relating to the CRA dispute, and as overdraft protection. At December 31, 2015, we had approximately $1.4 billion outstanding in letters of credit. In total we have $1.5 billion in senior unsecured debentures outstanding:
• $500 million bearing interest at 5.67% per year, maturing on September 2, 2019
• $400 million bearing interest at 3.75% per year, maturing on November 14, 2022
• $500 million bearing interest at 4.19% per year, maturing on June 24, 2024
• $100 million bearing interest at 5.09% per year, maturing on November 14, 2042

Debt covenants

Our revolving credit facility includes the following financial covenants:

• our funded debt to tangible net worth ratio must be 1:1 or less
• other customary covenants and events of default

Funded debt is total consolidated debt less the following: non-recourse debt, $100 million in letters of credit, cash and short-term investments.

Not complying with any of these covenants could result in accelerated payment and termination of our revolving credit facility. At December 31, 2015, we complied with all covenants, and we expect to continue to comply in 2016.

NUKEM financing arrangements

NUKEM enters into financing arrangements with third parties where future receivables arising from certain sales contracts are sold to financial institutions in exchange for cash. These arrangements require NUKEM to satisfy its delivery obligations under the sales contracts, which are recognized as deferred sales (see notes 8 and 16 to the financial statements for more information). In addition, NUKEM is required to pledge the underlying inventory as security against these performance obligations. As of December 31, 2015, we had $97.9 million ($70.8 million (US)) of inventory pledged as security under financing arrangements, compared with $94.4 million ($81.4 million (US)) at December 31, 2014.

Off-balance sheet arrangements

We had three kinds of off-balance sheet arrangements at the end of 2015:

• purchase commitments
• financial assurances
• other arrangements

Purchase commitments

The table below is based on our purchase commitments at December 31, 2015. These commitments include a mix of fixed price and market-related contracts, and are with entities that buy and sell uranium and uranium-related products. Actual payments will be different as a result of changes to our purchase commitments and, in the case of contracts with market-related pricing, the market prices in effect at the time of purchase. We will update this table as required in our MD&A to reflect changes to our purchase commitments and changes in the prices used to estimate our commitments under market-related contracts.

At the end of 2015, we had committed to $2.7 billion (Cdn) for the following:

• approximately 38 million pounds of U₃O₈ equivalent from 2016 to 2028
• approximately 4 million kgU as UF₆ in conversion services from 2016 to 2019
• about 1 million Separative Work Units (SWU) of enrichment services to meet existing forward sales commitments under agreements with a non-Western supplier

The suppliers do not have the right to terminate agreements other than pursuant to customary events of default provisions.

Financial assurances

Standby letters of credit mainly provide financial assurance for the decommissioning and reclamation of our mining and conversion facilities as well as for our obligations relating to the CRA dispute. We are required to provide letters of credit to various regulatory agencies until decommissioning and reclamation activities are complete. We are also planning to provide letters of credit until the CRA dispute is resolved. Letters of credit are issued by financial institutions for a one-year term. At December 31, 2015 our financial assurances totaled $1.4 billion compared to $0.9 billion at December 31, 2014. The increase is mainly due to:

• increased requirements for decommissioning letters of credit for Key Lake ($80 million)
• obligations relating to the CRA dispute ($332 million)
• exchange rate fluctuations ($65 million)

Other arrangements

We entered into a factoring arrangement where receivables arising from certain sales contracts are sold to a financial institution. Upon the sale, we assign the rights to the accounts receivable to the financial institution without recourse. This arrangement provides immediate access to cash and requires we collect payment from our customers and remit the payments to the financial institution. Expenses incurred under the arrangement are recognized within finance costs in the consolidated statement of earnings.

In addition, NUKEM enters into arrangements with third parties where receivables arising from certain sales contracts are sold to financial institutions in exchange for cash. Upon the sale, NUKEM assigns the rights to the accounts receivable to the financial institution without recourse. These arrangements require NUKEM to satisfy its delivery obligations under the sales contracts; however, the customer is responsible for making payment directly to the financial institution. The discount at which the financial institution purchases the receivable is offset against the revenue NUKEM records on delivery of the product to the customer.

Balance sheet

Total product inventories increased by 42% to $1.3 billion this year due to higher levels of inventory for our uranium segment, where the quantities sold were lower than the quantities produced and purchased for the year. In 2015, total volume of product inventories for our uranium segment increased by 54%. During the year, we had the opportunity to purchase material at favourable prices, which added to our inventory position. In addition, the average cost of inventory increased by 15% due to the high cost of Cigar Lake production as it ramps up and the cost of material purchased during the year that was higher than the average cost of inventory at the beginning of the year. At December 31, 2015, our average cost for uranium was $36.72 per pound, up from $32.00 per pound at December 31, 2014.

At the end of 2015, our total assets amounted to $8.8 billion, an increase of $0.3 billion compared to 2014, primarily due to higher inventory and an increase in our deferred tax assets. In 2014, the total asset balance increased by $0.4 billion compared to 2013, primarily due to higher deferred tax assets and an increase in long-term receivables related to our CRA litigation.

The major components of long-term financial liabilities are long-term debt, the provision for reclamation, deferred sales and financial derivatives. In 2015, our balance did not change significantly. In 2014, our balance increased by $0.5 billion due to the early redemption of our Series C debentures and the issuance of the Series G debentures, as well as an increase in deferred sales.