Liquidity and Capital Resources

At the end of 2014, we had cash and short-term investments of $567 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. However, we expect our cash balances and operating cash flows will meet our anticipated 2015 capital requirements without the need for significant additional funding.

We have an ongoing dispute with CRA regarding our offshore marketing company structure and related transfer pricing arrangements. See Transfer pricing disputes for more information. Until this dispute is settled, we expect to make remittances 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 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, 2014:

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 8% lower than in 2013 mainly due to higher payments related to our CRA litigation, offset by working capital requirements and higher profits in the uranium business. Not including working capital requirements, our operating cash flows in the year were down $96 million. See note 25 to the financial statements.

Investing activities

Cash used in investing includes acquisitions and capital spending.

Acquisitions and divestitures

On January 30, 2014, we signed an agreement with BPC Generation Infrastructure Trust to sell our 31.6% limited partnership interest in BPLP and related entities for $450 million. The effective date for the sale is January 1, 2014. We have realized an after tax gain of $127 million on this divestiture.

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 23% in 2015.

Major sustaining, capacity replacement and growth expenditures in 2015 include:

• McArthur River/Key Lake – At McArthur River, the largest projects are the upgrade of the electrical infrastructure, the expansion of freeze capacity and mine development. Other projects include site facility and equipment purchases. At Key Lake, work will be completed on the calciner.
• 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. Work on various mill facility and equipment replacements will also continue.
• Cigar Lake – Underground mine development 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 $400 million and $450 million in 2015, and between $500 million and $550 million in 2016. We now expect to spend $370 million in 2015 and between $300 million and $350 million in 2016. The change is due to the removal of our fixed production target and the decrease in spending on the related projects. As the market begins to signal new production is needed, we plan to increase our capital expenditures to allow us to be among the first to respond to the growth we see coming.

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 $99 million at December 31, 2014. Certain of the contractual commitments may contain cancellation clauses; however, we disclose the commitments based on management’s intent to fulfill the contracts. The majority of the $99 million is expected to be incurred in 2015.

We have unsecured lines of credit of about $2.4 billion, which include the following:

• A $1.25 billion unsecured revolving credit facility that matures November 1, 2018. 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, 2014, there were no amounts outstanding under this facility.
• Approximately $951 million in short-term borrowing and 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, and as overdraft protection. At December 31, 2014, we had approximately $942 million outstanding in letters of credit.

In the second quarter of 2014, we issued $500 million in Series G debentures bearing interest at 4.19% per year, maturing on June 24, 2024. On July 16, 2014, we redeemed Series C debentures in aggregate principal amount of $300 million.

In total, considering the early redemption of the Series C debentures, 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

The $73 million (US) promissory note we issued to GLE to support future development of its business has been fully drawn and no obligation is outstanding.

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, 2014, we complied with all covenants, and we expect to continue to comply in 2015.

Nukem financing arrangement

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 note 9 and note 17 to the financial statements for more information). In some of the arrangements, NUKEM is also required to pledge the underlying inventory as security against these performance obligations. As of December 31, 2014, NUKEM had $64.7 million (US) of inventory pledged as security under financing arrangements, compared with $31.8 million (US) at December 31, 2013.

Off-balance sheet arrangements

We had two kinds of off-balance sheet arrangements at the end of 2013:

• purchase commitments
• financial assurances

Purchase commitments

The table below is based on our purchase commitments at December 31, 2014. These commitments include a mix of fixed price and market-related contracts. 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 2014, we had committed to $2.2 billion (Cdn) for the following:

• approximately 35 million pounds of U₃O₈ equivalent from 2015 to 2028
• approximately 4 million kgU as UF₆ in conversion services from 2015 to 2018
• 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. We are required to provide letters of credit to various regulatory agencies until decommissioning and reclamation activities are complete. Letters of credit are issued by financial institutions for a one-year term. At December 31, 2014 our financial assurances totaled $942 million compared to $849 million at December 31, 2013. The increase is mainly due to increased requirements for decommissioning letters of credit for Rabbit Lake and McArthur River, and exchange rate fluctuations. The increases were partially offset by the sale of BPLP, which eliminated our commitment for financial guarantees on its behalf. These guarantees were estimated at $58 million at the end of 2013.

Balance sheet

Total product inventories decreased by 1% to $902 million this year due to lower levels of inventory for uranium and fuel services, where the quantities sold were higher than the quantities produced and purchased for the year, partially offset by higher inventories in our NUKEM segment. In 2014, total volume of product inventories decreased by 24%; however, the average cost of uranium was higher as the cost of material produced and purchased during the year was higher than the average cost of inventory at the beginning of the year. At December 31, 2014, our average cost for uranium was $32.00 per pound, up from $29.15 per pound at December 31, 2013.

At the end of 2014, our total assets amounted to $8.5 billion, an increase of $0.5 billion compared to 2013 primarily due to higher deferred tax assets and an increase in long term receivables related to our CRA litigation. In 2013, the total asset balance increased by $0.6 billion compared to 2012 primarily due to the acquisition of NUKEM in that year.

The major components of long-term financial liabilities are long-term debt, the provision for reclamation, deferred sales and financial derivatives. 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. In 2013, our balance did not change significantly.