ML041530327
| ML041530327 | |
| Person / Time | |
|---|---|
| Site: | South Texas  (NPF-076, NPF-080) |
| Issue date: | 02/27/2004 |
| From: | Cameco Corp |
| To: | Office of Nuclear Reactor Regulation |
| References | |
| NOC-AE-04001712, STI: 31729711 | |
| Download: ML041530327 (90) | |
Text
Appendix "A" CAMECO CORPORATION 2003 CONSOLIDATED AUDITED FINANCIAL STATEMENTS 2003 Cameco Annual Information Form
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Report of Management s Accountability Auditors' Report The accompanying consolidated financial statements have been prepared by management in accordance with Canadian generally accepted accounting principles. Management is responsible for ensuring that these statements, which include amounts based upon estimates and judgment, are consistent with other information and operating data contained in the annual report and reflect the corporation's business transactions and financial position.
Management is also responsible for the information disclosed in the management's discussion and analysis including responsibility for the existence of appropriate information systems, procedures and controls to ensure that the information used internally by management and disclosed externally is complete and reliable in all material respects.
The integrity and reliability of Cameco's reporting systems are achieved through the use of formal policies and procedures, the carefuil selection of employees and appropriate delegation of authority and division of responsibilities. Internal accounting controls are monitored by the internal auditor. Cameco's code of ethics, which is communicated to all levels in the organization, requires employees to maintain high standards in their conduct of the corporation's affairs.
Our shareholders' independent auditors, KPMG LLP, whose report on their examination follows, have audited the consolidated financial statements in accordance with Canadian generally accepted auditing standards.
The board of directors annually appoints an audit committee comprised of directors who are not employees of the corporation.
This committee meets regularly with management, the internal auditor and the shareholders' auditors to review significant accounting, reporting and internal control matters. Both the internal and shareholders' auditors have unrestricted access to the audit committee. The audit committee reviews the financial statements, the report of the shareholders' auditors, and management's discussion and analysis and submits its report to the board of directors for formal approval.
To the Shareholders of Cameco Corporation We have audited the consolidated balance sheets of Cameco Corporation as at December 31, 2003 and 2002 and the consolidated statements of earnings, retained earnings and cash flows for each of the years in the three-year period ended December 31, 2003. These financial statements are the responsibility of the corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the corporation as at December 31, 2003 and 2002 and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2003 in accordance with Canadian generally accepted accounting principles.
Original signed by KPMGLLP Chartered Accountants Saskatoon, Canada January 26, 2004, except as to note 28(b) which is as of February 27, 2004 Original signed by David M. Petroff Senior Vice-President, Finance and Administration and Chief Financial Officer January 26, 2004, except as to note 28(b) which is as of February 27, 2004
Consolidated Balance Sheets As at December 3-Assets Current assets Cash
........ I............
Accounts receivable Inventories [note 31
.................... I
............................................ I..................................................I................................. I..................
Supplies and prepaid expenses Current portion of long-term receivables, investments and other [note 51 2003 200i2cd' 2002 il11
!,::'J,%
lse 84,069 181,337 316,435 41,571 54,866 678,278 58,096 186,369 339,684 45,731 20,163 650,043 Property, plant and equipment [note 4]
2,072,156 2,060,250 I..
........I.....
Long-term receivables, investments and other [note 5]
608,977 257,523 Total assets
$ 3,359,411
$ 2,967,816 Liabilities and Shareholders' Equity Current liabilities Accounts payable and accrued liabilities
$ 156,112
$ 131,932 Dividends payable 11,598 6,998 Current portion of long-term debt [note 6]
4,331 6,318 Current portion of other liabilities [note 8]
1,563 16,931 Future income taxes [note 15]
24,237 9,198 197,841 171,377 Long-term debt [note 6]
238,707 218,290 Provision for reclamation [note 7]
150,444 159,344 Other liabilities [note 81 36,196 9,523 Future income taxes [note 151 501,674 530,625 1,124,862 1,089,159 Minority interest 14,690 18,078
_y Shareholders' equity Preferred securities [note 9]
158,022 193,763 Convertible debentures [note 10]
Share capital [note 11]
...........-..............-. 1........
Contributed surplus
......-...................I..............
Retained earnings Cumulative translation account [note 12]
226,444 708,345 474,927 665,377 (13,256) 2,219,859
$ 3,359,411 680,934 472,488 494,341 19,053 1,860,579
$ 2,967,816 Total liabilities and shareholders' equity Commitments and contingencies [notes 6,7,18,19,24,25]
See accompanying notes to consolidated financial statements.
Approved by the board of directors 3
Consolidated Statements of Earnings For tile yen*s ended December, 32003 2002 2001 Revenue from Products and services
$ 826,946 748,334
$ 700,839 Expenses Products and scrvices sold 538,823 486,155 422,067 Depreciation, depletion and reclamation Administration Exploration Research and development Interest and other [note 13]
Gain on property interests [note 231
........I....
1.1-
-.--.......I....I.....
Earnings from operations Earnings from Bruce Power [note 19]
Other income (expenses) [note 14]
Earnings before income taxes and minority interest Income tax expense (recovery) [note 15]
Minority interest Net earnings Preferred securities charges, net of tax [note 91 124,489 47,011 21,923 1,717 4,737 738,700 88,246 107,921 429 196,596 (15,994)
(3,416) 216,006 9,030 116,958 41,693 21,532 2,257 (1,957)
(2,670) 663,968 84,366 15,769 (878) 99,257 47,265 (871) 52,863 9,340 129,298 36,644 18,203 2,097 (2,366) 605,943 94,896 12,167 590 107,653 42,241 65,412 9,325
-1.1
.I..
........... I................
.I.......
-.1
....I....
I...
-.1..............
Convertible debenture charges, nct of tax [note 10]
2,290 Net earnings attributable to common shares 204,686 43,523 56,087 Basic earnings per common share [note 26]
3.65 0.78 1.01 Diluted earnings per common share [note 26]
3.58 0.78 1.01 Consolidated Statements of Retained Earnings For the. year en~ded Derzen'ber 3.
2003 2002 2001 Retained earnings at beginning of year, As previously reported 483,658 465,420
$ 437,328 Change in accounting policy for reclamation [note 2]
10,683 13,280 13,089 As restated 494,341 478,700 450,417 Net earnings Dividends on common shares Preferred securities charges, net of tax [note 9]
Convertible debenture charges, net of tax [note 10]
Retained earnings at end of year 216,006 (33,650)
(9,030)
(2,290) 665,377 52,863 (27,882)
(9,340) 65,412 (27,804)
(9,325) 478,700 494,341 See accompanying notes to consolidated financial statements.
4
Consolidated Statements of Cash Flows Fo,-r the veai enided Decemiber 31 2003 2002 2001 Operating activities Nct earnings Items not requiring (providing) cash:
Depreciation, depletion and reclamation Provision for future taxes [note 15]
Deferred charges (revenue) recognized Earnings from Bruce Power [note 19 ]
Equity in (earnings) loss from associated companies [note 14]
Minority interest Gain on property interests [note 23]
Other operating items [note 1 6]
Cash provided by operations
$ 216,006 124,489 (26,213) 9,331 (107,921) 1,494 (3,416) 32,123 245,893 52,863 116,958 36,996 1,375 (15,769) 1,083 (871)
(2,670) 60,877 250,842 65,412
...I........
I--....
129,298 32,655 (10,373)
(12,167)
....I.....
(88,578) 116,247 Investing activities Additions to property, plant and equipment Increase...
in...--...long-term.........:........
re e va l s in e t e t and......
other.......
Decrease in long-term receivables, investments and other Proceeds on sale of property, plant and equipment Cash used in investing
.....11
...(159,570)
(288,259) 242 (447,587)
...I.............
(90,226)
- (42,597) 58,296 101 (74,426)
(5 8,2.5) 21,963 403 (130,717)
Financing activities Decrease in debt Increase in debt Restricted cash Issue of convertible debentures, net of issue costs Issue of shares Preferred securities charges Dividends Cash provided by (used in) financing Increase in cash during the year (25,848) 50,311 342 223,032 27,411 (15,306)
(32,275) 227,667 25,973 (130,295) 1,379 11,138 10,903 (17,238)
(27,944)
(152,057) 24,359 (25,485) 79,932 409 5,208 (17,268)
(27,720) 15,076 606 Cash at beginning of year
.58,096 33,737 33,131 Cash at end of year 84,069 58,096 33,737 Supplemental cash flow disclosure Interest paid 20,675 16,572 22,860 Income taxes paid 11,537 5,309 3.916 See accompanying notes to consolidated financial statements.
Notes to Consolidated Financial Statements For the years ended December 31, 2003, 2002 and 2001
- 1. Carneco Corporation Cameco Corporation is incorporated under the Canada Business Corporations Act. Cameco Corporation and its subsidiaries (collectively, "Cameco" or "the company") are primarily engaged in the exploration for and the development, mining, refining and conversion of uranium for sale as fuel for generating electricity in nuclear power reactors in Canada and other countries.
The company has an interest in the Bruce Power electrical generation plant in Ontario. Carneco is also involved in the exploration for and the development, mining and sale of gold.
- 2. Accounting Policies (a) Significant Accounting Policies A summary of significant accounting policies follows the notes to the consolidated financial statements.
(b) Changes in Accounting Policies (i) Stock-Based Compensation (note 21)
Cameco has adopted the fair value method of accounting for employee stock options with retroactive effect to January 1, 2003. Pursuant to new transitional rules related to accounting for stock-based compensation, Cameco chose to record compensation expense for all employee stock options granted on or after January 1, 2003 with a corresponding increase to contributed surplus. Compensation expense for options granted during 2003 is determined based on the estimated fair values at the rime of grant, the cost of which is recognized over the vesting periods of the respective options. This change in accounting policy has increased expenses by $2,439,000 in 2003.
(ii) Asset Retirement Obligations (note 7)
In March 2003, the CICA issued new accounting rules dealing with asset retirement obligations which come into effect for fiscal years beginning on or after January 1, 2004. Cameco chose to adopt the rules in 2003. This change in accounting policy was applied retroactively and, accordingly, the consolidated financial statements of prior periods were restated. This section addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The standard applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and use of the asset. The new rules require that the estimated cost of an asset retirement obligation be recognized as a liability in the period incurred. A corresponding amount is added to the carrying amount of the associated asset and depreciated over the asset's useful life. The liability is accreted over time through charges to earnings. This differs from the current practice which involves accruing for the estimated reclamation and closure liability through annual charges to earnings over the estimated life of the asset.
The cumulative effect of the change in policy on the balance sheet at December 31, 2002 is to increase property, plant and equipment by $23 million, future income taxes by $8 million, liabilities by $4 million and opening retained earnings by
$13 million. The effect of the change in policy on the statement of earnings for December 31, 2002 was a $3 million
($0.05 per share) reduction in earnings. For 2001, earnings were virtually unchanged.
(c) New Accounting Pronouncements Hedging Relationships Effective January 1, 2004, Cameco will be required to adopt the new Canadian Accounting Guideline, Hedging Relationships that establishes new criteria for hedging relationships in effect on or after January 1, 2004. To qualify for hedge accounting, the hedging relationship must be appropriately documented and there must be reasonable assurance, both at the inception and throughout the term of the hedge, that the hedging relationship will be effective. Effectiveness requires a high degree of correlation of changes in fair values or cash flows between the hedged item and the hedge.
Cameco does not anticipate that the adoption of this accounting guideline will have a material impact on its consolidated financial statements.
6
- 3. Inventories 2003 2002 (Thorisajds)
Uranium Concentrate
$ 260,211
$ 284,052 Broken ore 9,680 8,586 269,891 292,638 Conversion Gold Finished 44,472 297 1,775 2,072
$ 316,435 39,097 4,189 3,760 7,949
$ 339,684 Broken ore Total
- 4. Property, Plant and Equipment Accumulated Depreciation and Depletion 2003 Net (RCSmarcd) 2002 Net Cost ffhous.,ds)
Uranium Mining
$ 2,216,216 831,526
$ 1,384,690
$ 1,421,598 Development 355,806 355,806 349,281 Conversion 274,025 147,054 126,971 130,246 Gold Mining
-222,285 164,754 57,531 85,832~
Development
-127,682 127,682 57.919 Other Total 34,624 15,148 19,476 15,374
$ 3,230,638
$ 1,158,482
$ 2,072,156
$ 2,060,250 7
- 5. Long-Termn Receivables, Investments and Other 2003 2002 Bruce Power L.1 Interest in Bri Loan receivab Kumtor Gol~dC Subordinated Subordinated Restricted cas.
Investments in a Investnment in Investment in Portfolio investn Energy Resou (rThousaids)
[note 1 91 Lice Power L.P.
$ 456,520 130,218 lc 77,028 ompany loan - principal [note 18]
52,590 64,276 loan - interest 2,261 292 h -deb reserve 75 489
.soitdcompanies Technology Commercialization International, Inc.
4,889 4,017 UEX Corporation 3,791 3,455 rients tees of Australia Ltd (market $4,7)18,208 17,564 Genera Hydrogen Corporation Deferred charges Investment in Huron Wind L.P.
Advances receivable Accrued pension benefit asset [note 22]
Othr 6,323 5,958 2,725 16,693 10,630 6,152 663,843 (54,866) 608,977
............6,323 17,808 22,704 1,817 8,723 277,686 (20,163) 257,523 Less current portion Net The security agreement between Kumtor Gold Company (KGC) and Its senior debt lenders requires that in order to make certain payments to shareholders and subordinated lenders, funds sufficient to meet those senior debt principal and interest payments scheduled to occur over the ensuing six months to be held in a debt reserve account until paid.
- 6. Long-Termi Debt 2003 2002 (Thous0,-ds)
Debentures$
149,329
$ 149,079 Commercial paper 65,934 24,455 Kumtor Gold Companyv [note 181 Senior debt 7,324 40,543 Subordinated debt 8,616 10,531 Equipment loan 11,835 Less current portion Net 243,038 (4,331)
$ 238,707 224,608 (6,318)
$ 218,290 Cameco has $50,000,000 outstanding in senior unsecured debentures that bear interest at a rate of 7.0% per annum and will mature July 6, 2006. Caineco also has $1 00,000,000 outstanding in senior unsecured debentures that bear interest at a rate of 6.9% per annumn and will mature July 12, 2006.
Cameco has a $196,500,000 three-year unsecured revolving credit facility that is available until December 4, 2006 and a
$221,000,000 364-day unsecured revolving credit facility with a two-year term-nut option. Cameco may also borrow directly from investors by issuing commercial paper. Commercial paper outstanding at December 31, 2003 was $61,4 19,000 (Cdn) and $3,493,000 (US) (2002 - $15,482,000 (US)) and bears interest at an average rate of 2.6% (2002 - 1.4%). These amounts are classified as long-term debt.
Cameco has $11,835,000 ($9,158,000 (US)) outstanding under an equipment loan which is repayable in 17 remaining quarterly installments of $421,000 (US) with a final payment of $2,000,000 (US) in 2008.
Cameco has $294,100,000 ($168,800,000 (Cdn) and $96,951,000 (US)) in letter of credit facilities. Outstanding letters of credit at December 31, 2003 amounted to $202,745,000 (2002 - $208,975.000). The majority of the letters of credit relate to future decommissioning and reclamation liabilities [note 7].
The table below represents currently scheduled maturities of long-term debt over the next five years including Cameco's one-third share of Kumtor Gold Company principal repayments on debt.
(Tho-sa,,ds) 2004 4,331 2005 9,502 2006 221,749 2007 4,331 2008 3,125 Total
$ 243,038 Cameco has guaranteed the repayment of KGC senior debt [note 18]. Cameco's contingent obligation under this guarantee exceeds the amount included in the Cameco long-term debt as at December 31, 2003 by $14,647,000 (2002 - $81,086,000).
- 7.
Provision for Reclamation Cameco's estimates of future asset retirement obligations are based on reclamation standards that meet or exceed regulatory requirements. Elements of uncertainty in estimating these amounts include potential changes in regulatory requirements, decommissioning and reclamation alternatives and amounts to be recovered from other parties.
Cameco estimates total future decommissioning and reclamation costs for its operating assets to be $234,000,000. These estimates are formally reviewed by Cameco technical personnel at least every two years or more frequently as required by regulatory agencies. In connection with future decommissioning and reclamation costs, Cameco has provided financial assurances of $198,674,000 in the form of letters of credit to satisfy current regulatory requirements.
Following is a reconciliation of the total liability for asset retirement obligations:
(Restated) 2003 2002 (Thousands)
Balance, beginning of year
$ 159,344
$ 138,445
....... I o...........
-.t...J................
i.........it........s..
_00 Additions to liabilities 19,600 Liabilities settled (13,214)
(6,878)
Accretion expense 8,757 8,077
...I...................I....................
......................... I.......I............................................................................
Remeasurement of non-Canadian liabilities (4,443) 100 Balance, end of year
$ 150,444
$ 159,344 Following is a summary of the key assumptions on which the carrying amount of the asset retirement obligations is based:
(i) Total undiscounted amount of the estimated cash flows - $234,000,000.
(ii) Expected timing of payment of the cash flows - timing is based on life of mine plans. The majority of expenditures are expected to occur after 2013.
(iii) Discount rates - 7.5% for operations in North America; 8.5% for operations in Central Asia.
9
The asset retirement obligations liability is comprised of:
(Resrtatd) 2003 2002 (Thousands)
Uranium 92,279 96,463 Conversion 48,706 47.286 Gold 9,459 15,595 Total
$ 150,444
$ 159,344 Other Liabilities 2003 2002 (Thousandsl Deferred revenue 28,099 2,102 Accrued post-retirement benefit liability [note 22]
3,389 4,092 Borrowed product 12,952 O
O............................
Other 6,271 7,308 8.
37,759 (1,563) 26,454 (16,931)
Less current portion Net 36,196 9,523
- 9. Preferred Securities Cameco issued $125,000,000 (US), 8.75% preferred securities in denominations of $25 (US) each due September 30, 2047 accruing interest from the date of issuance payable quarterly commencing December 31, 1998.
The preferred securities are redeemable, at the option of Cameco, in whole or in part at any time on or after October 14, 2003 at a redemption price equal to 100% of the principal amount of the preferred securities to be redeemed plus any accrued and unpaid interest thereon to the date of redemption.
The principal amounts of the preferred securities, net of after-tax issue costs of $4,330,000 (Cdn) have been classified as equity, and interest payments on an after-tax basis are classified as distributions of equity, as Cameco has the unrestricted ability to settle its obligations by delivering common shares of Cameco.
The fair value of the preferred securities approximates the carrying value.
- 10. Convertible Debentures On September 25, 2003 the company issued unsecured convertible debentures in the amount of $230 million. The debentures bear interest at 5% per annum, mature on October 1, 2013, and at the holder's option are convertible into common shares of Cameco. The conversion price is $65 per share, a rate of approximately 15.4 common shares per $1,000 of convertible debentures. Interest is payable semi-annually in arrears on April 1 and October 1. The debentures are redeemable by the company beginning October 1, 2008 at a redemption price of par plus accrued and unpaid interest.
The convertible debentures are being accounted for in accordance with their substance and the principal amounts, net of after-tax issue costs, have been classified as equity. The interest payments, on an after-tax basis, will be classified as distributions of equity, as Cameco has the unrestricted ability to settle its obligations by delivering common shares of Cameco.
The fair value of the outstanding convertible debentures is based on the quoted market price of the debentures at December 31, 2003 and was approximately $308,200,000.
10
I 1. Share Capital Authorized share capital:
Unlimited number of first preferred shares Unlimited number of second preferred shares Unlimited number of voting common shares, and One Class B share (a) Common Shares Number Issued 2003 2002 (N,,,umber of Slh-es) 55,671,440 Beginning of year Issued:
Stock option plan [note 20]
Issued share capital 55,985,873 Amount Beginning of year Issued:
Stock option plan [note 201 Issued share capital Less loans receivable [note 20]
End of year 783,550 314,433 56,769,423 55,985,873 2003 2002 (Thousands)
$ 685,491
$ 676,404 25,572 9.087 711,063 685.491 (2,718)
(4,557)
$ 708,345
$ 680,934 (b) Class B Share One Class B share issued during 1988 and assigned $1 of share capital, entitles the shareholder to vote separately as a class in respect of any proposal to locate the head office of Cameco to a place not in the province of Saskatchewan.
(c) Contributed Surplus The increase in contributed surplus of $2,439,000 is the result of expensing stock-based compensation (note 21).
- 12. Cumulative Translation Account The balance of $(13,256,000) (2002 - $19,053,000) represents the cumulative unrealized net exchange gain (loss) on Cameco's net investments in foreign operations, and on the foreign currency debt and preferred securities designated as hedges of the net investments.
- 13. Interest and Other 2003 Interest on long-term debt
..............................................................I..........-...............
Other interest and financing charges Interest income Foreign exchange (gains) losses
........I........................
Mark-to-market loss Capitalized interest Net 19,715 2,221 (6,776) 3,620 2002 (1 hou&ands) 14,478 2,039 (6,842)
(1,648) 2001 20.116 1,616 (10,773)
(791)
..............I................................................................................
........ I...I...
(14,043) 4,737 1,811 (11,795)
(1,957)
I...............................--...
(12,534)
(2,366)
As a result of the Kumtor pit wall failure in 2002. certain gold contracts designated as hedges of Kumtor's gold production were no longer effective. Mark-to-market losses on these contracts were expensed.
11
14, Other Income (Expenses) 2003 2002 2001 (Ihousa,,~Ids)
Dividends on portfolio investments I,923 205 590 Equity in earnings (loss) of associated companies (1,494)
-(1,083)
N e t.....
.1......................................... -...... I.............
Net$
429 (878) 590 1.5. Incomie Taxes The significant components of future income tax assets and liabilities at December 31 ate as follows:
(Resramd) 2003 2002 (Thousands)
Assets Property, plant and equipment 38,409 52,638 Provision for reclamation 44,129 44,818 Foreign exploration and development 37,566 27,771 Other 743 4,634 Furure income tax assets before valuation allowance 120,847 129,861 Valuation allowance (67,499)
(69,505)
Future income tax assets, net of valuation allowance 53,348 60,356 Liabilities Property, plant and equipment
$531,295
$ 584,321 Inventories 5,060 9.198 Long-term invesrments F u tu re..
.... in co me.. tax.
liab ilities.
N tFuture income tax liabilities Less current portion 42,904
$ 579,259 6,660
$ 600,179
$ 525,911
$ 539,823 (24,237)
(9,198)
$ 501,674
$ 530,625 The provision for income taxes differs from the amount computed by applying the combined expected federal and provincial income tax rate to earnings before income taxes. The reasons for these differences are as follows:
2003 2002 2001 fThousands)
Earnings before income taxes and minority interest
$ 196,596 99,257 107,653 Combin-e-d -f~e-d-e-r-a~l an-d "p~r-o-v-incial tax rate 44.1%
45.4%
45.5%
Computed income tax expense 86,699 45,063 48,982 Increase (decrease) in taxes resulting from:
Change in tax legislation (8]1,300)
Provincial royalties and other taxes 7,380 8,883 10,212 Federal resource allowance (1,506)
(5,918)
(6,710)
Manufacturing and processing deduction (8,443)
(283)
(791)
Difference between Canadian rate and rates
.applicable to subsidiaries in other countries--(18,968)
(7,379)
(12,895)
Large corporations and other taxes 4,988 4,521 4,558 Other (4,844) 2,378 (1,115)
Income tax expense (recovery)
(15,994) 47,265 42,241 12
In 2003, the federal government introduced amendments to the Canadian Income Tax Act which provide for a reduction in the corporate tax rate on income from resource activities. The cumulative effect of the change in income tax legislation on Camneco's future income tax liability was $86,200,000.
In 2003, the Ontario government introduced amendments to the Corporations Tax Act which provide for an increase in the corporate tax rate on all income. The cumulative effect of the change in income tax legislation on Camcco's future income tax liability was $4,900,000.
2003 2002 (Thimorsads) 2001 Current 'income taxes Canada 6,984 7,895 7,704 Other 3,235 2,374 1,882 10,219 10,269 9,586 Future income taxes (recovery)
Canada (25,337) 37,813 30,945 Other (876)
(817) 1,710
$ (26,213) 36,996 32,655
$ (15,994) 47,265 42,241 Net 1.6. Other Operating Items 2003 2002 (Thsonsads) 2001 Changes in non-cash wotking capital:
Accounts receivable Interest receivable Inventories Supplies and prepaid expenses Accounts payable and accrued liabilities Other liabilities Hedge position settlements Reclamation payments Other Total I.I.-
$10,351 (2,022)
(11,590) 4,160 24,180 (2,860) 30,852
-- (9,903)
(11,045)
$32,123
_1
---...I 27,396 205 10,932 (1,157) 18,342 279 14,794 (6,878)
(3,036) 60,877
-.1......-
(82,094) 515 7,469 (24) 5,992 (11,328)
(1,336)
(88,578)
- 17. joint Ventures Cameco conducts a portion of its exploration, development, mining and milling activities through joint ventures. Carneco's significant urtanium joint venture interests are comprised of:
Producing:
McArthur River Key Lake Non-producing:
Cigar Lake Inkai 69.81%
83.33%
50.03%
60.00%
13
Uranium joint ventures allocate uranium production to each joint venture participant and the joint venture participant derives revenue directly from the sale of such product. Mining and milling expenses incurred by the joint venture are included in the cost of inventory. The majority of the uranium mining and development property, plant and equipment as disclosed in note 4 are held in joint ventures.
Cameco's gold joint venture interests are comprised of a 33.33% participation interest in Kumtor Gold Company. Kumrtor Gold Company obtains revenue directly from the sale of products. Cameco's share of the assets and liabilities, revenue and expenses, and cash flows relating to the Kumtor joint venture is as follows:
(Restated) 2002 2003 (Thousands)
Current assets 27,795 28,933
.............................I.............
.1.....
Property, plant and equipment 61,771 91,969 89,566
$ 120,902 Current liabilities 7,458 6,772 Long-term liabilities 51,305 86,301 Equity 30,803 27,829 89,566
$ 120,902 (Rcstated)
(Restated) 2003 2002 2001 (Trlousands)
Revenues
$ 109,287 82,361
$ 110,225 Expenses (99,863)
(92,036)
(81,180)
Net earnings (loss) 9,424 (9,675) 29,045 Cash provided by (used in)
Operating activities 36,810 13,142 39,804
..................................................-................................................................................................................................ I................... -............................ _.....
Investing activities Financing activities Increase (decrease) in cash during the year
- 18. Kumtor Gold Company (KGC) Joint Venture
................................I.........-.................
(4,112)
(29,033)
(4,716)
(16,013)
(2,492)
(44,517) 3,665 (7,587)
(7,205)
On May 26, 1994, Cameco, the Republic of Kyrgyzstan and Kyrgyzaltyn, an instrumentality of the Republic, signed an amended joint venture master agreement that provided for the exploration, development, operation and arrangement of financing, of the Kumtor gold project by Cameco. KGC was formed in the Republic of Kyrgyzstan as a joint stock company to hold the assets of the Kumtor gold project pursuant to a master agreement among the parties. Kyrgyzaltyn holds a two-thirds interest in KGC and Cameco holds a one-third interest.
Cameco has guaranteed the repayment of KGC senior debt and has purchased political risk insurance to support the guarantee.
Cameco has proportionately consolidated its one-third interest in KGC.
14
KGC's long-term debt at December 31, is as follows:
Senior debt (US dollar denominated):
- Commercial banks $17,000,000 (2002 - $77,000,000) (US) repayable in two remaining installments on December 1, 2004 $5,000,000 (US) and June 1, 2005 $12,000,000 (US). Interest is based on LIBOR plus an applicable percentage based on credit rating ranging from 0.8% to 1.55%.
2003 2002 (0housands) 21,971
$ 121,629 Subordinated debt (US dollar denominated):
- Shareholder loan from Cameco $61,037,000 (2002 - $61,037,000) (US) with interest based on LIBOR plus 6%, repayable in 12 equal semi-annual installments of $8,953,000 (US) commencing on December 2, 1999. In accordance with the terms of the loan agreement, certain installments have been deferred amounting to $34,178,000 (2002 - $16,272,000) (US)
- EBRD $10,000,000 (2002-$,000, 0)
- lEB $10,000,000 (2002 - $10,000,000) (US)
The IFC and EBRD subordinated debt is repayable in four equal semi-annual installments commencing on December 2, 2005, extendable at the option of EBRD or IFC to commence no later than December 2, 2013. The interest rate applicable to the EBRD and IFC subordinated debt is based on the cash generated by the project subject to a minimum interest rate. The annualized rate for 2003 was approximately 16.8% (2002 - 4.6%).
Total KGC debt 78,884 12,924 12,924 96,414 15,796 15,796
$ 126,703
$ 249,635 Cameco's one-third proportionate share of KGC senior debt is $7,324,000 (2002 - $40,543,000) and of KGC's third party subordinated debt is $8,616,000 (2002 - $10,531,000) [note 6].
- 19. Investment in Bruce Power L.P. (Bruce Power)
(a) Investment On February 14, 2003, Cameco, TransCanada PipeLines Limited (TransCanada) and BPC Generation Infrastructure Trust (BPC), amongst others, purchased a 79.8% interest in Bruce Power from British Energy plc (British Energy). Upon closing, Cameco increased its ownership interest in Bruce Power from 15% to 31.6%. TransCanada and BPC each hold, directly or indirectly, a 31.6% interest in Bruce Power with the Power Workers' Union Trust holding a 4% interest and the Society of Energy Professionals Trust holding a 1.2% interest. Cameco is using the equity method to account for this investment.
Cameco's purchase price for the additional interest in Bruce Power was approximately $204,466,000 including final closing adjustments. The purchase price was initially financed with cash and debt. The purchase price of Cameco's incremental 16.6% has been allocated as follows:
Net book value of assets acquired
..................I............................. -....
Excess of fair value over book value of assets acquired Valuation of Bruce Power sales agreements Pension liability (Thousmids)
$ 149,056 144,545
.........I.................
(68,593)
- 1.............
.I..
(20,542)
$ 204,466 15
The amount allocated to the investment in Bruce Power includes an excess purchase price of approximately $144,545,000 over Cameco's incremental share of the book value of the underlying net assets. This amount will be amortized to income based on the expected useful life of the Bruce Power assets which extends to 2018. The valuation of Bruce Power sales contracts will be amortized to income over the remaining term of the underlying sales contracts, which extend to 2007. The approximate amount of pre-tax income relating to the amortization of the fair value allocated to these contracts is as follows:
(Tliosands) 2003
$ 20,071 2004 19,341 2005 13,133 2006 15,192 2007 856 Total
$ 68,593 The amount allocated to the pension liability will be amortized to income over the 11-year expected average remaining service life of Bruce Power employees, resulting in an annual pre-tax amortization to income of $1,867,000.
In addition, Cameco, TransCanada and BPC loaned Bruce Power funds to repay $225,000,000, plus accrued interest, in deferred lease payments to Ontario Power Generation Inc. (OPG). Cameco's share was $75,000,000 plus accrued interest.
This loan is due February 14, 2008 and bears interest at 10.5% per annlum.
Bruce Power holds a long-term lease with OPG to operate the Bruce nuclear power facility. The term of the lease, which expires in 2018 is 18 years with an option to extend the lease for up to an additional 25 years.
Cameco, TransCanada and BPC have assumed the obligations to provide financial guarantees on behalf of the partnership.
Cameco has provided the following financial assurances, with varying terms that range from 2003 to 2018:
(i) Licensing assurances to Canadian Nuclear Safety Commission of $88,000,000.
(ii) Guarantees to customers under power sale agreements of up to $127,171,000. At December 31, 2003, Cameco's actual exposure under these guarantees was $44,291,000.
(iii) Termination payments to OPG pursuant to the lease agreement of $58,333,000.
Under the lease agreement, OPG, as the owner of the Bruce nuclear plants, is responsible to decommission the Bruce facility and to provide funding and meet other requirements that the Canadian Nuclear Safety Commission (CNSC) may require of Bruce Power as licensed operator of the Bruce facility. OPG is also responsible to manage radioactive waste associated with decommissioning of the Bruce nuclear plants.
(b) Fuel Supply Agreements Cameco has entered into fuel supply agreements with Bruce Power for the procurement of fabricated fuel. Under these agreements, Cameco will supply uranium and conversion services and finance the purchase of fabrication services. Contract terms are at market rates and on normal trade terms. During 2003, sales of uranium and conversion services to Bruce Power amounted to approximately 3% of Cameco's total revenue. At December 31, 2003, amounts receivable under these agreements totalled $30,193,000 (2002 - $18,349,000).
16
(c) Supplementary Information - Bruce Power L.P. (100%)
Balance Sheets 2003 2002 Assets z-..
Current assets 290 232 Proery,_plant and equipment 2,032 1,623 Long-term receivables, and investments2021 2,523 2,069 Liabilities and Partners' Capital Current liabilities 194 154 Long-term debt 1,244 1,115 1,438 1,269 Partners' capital 1,085 800 2,523 2,069 Statements of Earnings 2003 2002 2001 Revenue 1,208 919 599 Operating costs 853 750 471 Earnings before interest and taxes 355
_169 128
......I
....... I......... -
4 1
............. I Interest 69 63 4
Earnings before taxes 2 86, 106 87 Cameco's share (i 77 16 13 Adjustments (ii)
Cameco's share of earnings before taxes 31 (1) 108 16 12 (i) Camneco's interest in Bruce Power earnings prior to February 14, 2003 was 15%. Subsequent to the acquisition of an additional 16.6% interest on February 14, 2003, Camreco's share is 31.6%.
(ii) In addition to its proportionate share of earnings from Bruce Power, Camneco records certain adjustments to account for any differences in accounting policy and to amortize fair values assignecd to assets and liabilities at the time of acquisition.
(iii) The comparative data for 2001 is for a 7.5-month period from May 12 to December 31.
Statements of Cash Flows 2003 2002 (M~illions) 2001 Cash provided by operations 387 185 140 Cash used in investing (528)
(432)
(445)
Cash provided by financing 131 220 370
- 20. Stock Option Plan Cameco has established a stock option plan under which options to purchase common shares may be granted to directors, officers and other employees of Cameco. Options granted under the stock option plan have an exercise price of not less than the closing price quoted on the Toronto Stock Exchange for the common shares of Cameco on tbe tradiing day prior to the date on which the option is granted. The options vest over three years and expire eight years from the date granted. Options granted prior to 1999 expire 10 years from the date of the grant of the option.
17
Prior to 1999, participants were eligible to receive loans from Cameco to assist in the purchase of common shares pursuant to the exercise of options. The maximum term of the loans was 10 years from the date of the grant of the related option. The loans bear interest at a rate equivalent to the regular dividends paid on the common shares to which the loans were provided.
Common shares purchased by way of a company loan are held in escrow in the account of the option holder and are pledged as security for the respective loan until the loan has been repaid in full. Outstanding loans are shown as a reduction of share capital.
The aggregate number of common shares that may be issued pursuant to the Cameco stock option plan shall not exceed 5,243,403, of which 1,779,279 shares have been issued.
Stock option transactions for the respective years were as follows:
2003 Beginning of year Options granted O
s................
e r..i.........
_e 1
Options exercised [note I11]
.........-.-..........................-.....I-.............................-.-..-..._._-...................
.................. 2,223,750 706,350
..... ( 8....I.5.....5.....
(783,550) 2002 (NM-nlbcr of Sharcs) 2,195,783 489,050 3...............
(314,433)
......I........
2001
...............I...............1,987,883 482.850
.... 50..
0....
(159,000)
Options cancelled (106,550)
(146,650)
(115,950)
End of year 2,040,000 2,223,750 2,195,783 Exercisable 954,100 1,331,550 1,362,983 Upon exercise of certain existing options, additional options in respect of 184,550 shares would be granted.
Weighted average exercise prices were as follows:
2003 2002 2001 Beginning of year 38.98 37.34 38.72
............... 1-...................-._..... -..........................I......,........I..
............................-_................ -. I..................- - -........
Options granted 38.57 43.88 28.98 Options exercised 32.64 28.90 24.64 Options cancelled 58.06 52.33 43.52 End of year 40.22 38.98 37.34 Exercisable 43.80 41.41 44.09 Total options outstanding and exercisable at December 31, 2003 were as follows:
2003 Options Outstanding Options Exercisable Weighted Weighted Weighted Average Average Average Option Price Remaining Exercisable Exercisable Per Share Number Life Price Number Price
$ 15.00-35.00 538,400 5
27.39 387,300 26.83
~~~.
35.01-55.00 1,311,000 7
40.59 377,450 46.04 55.01-75.50 190,600 3
73.93 189,350 74.04
- 21. Stock-Based Compensation CICA Handbook Section 3870 establishes a fair-value based method of accounting for stock-based compensation plans which Cameco has adopted with retroactive effect to January 1, 2003.
For the year ended December 31, 2003, Cameco has recorded compensation expense of $2,439,000 with an offsetting credit to contributed surplus to reflect the estimated fair value of stock options granted to employees in 2003.
18
Camneco has applied the pro forma disclosure provisions of the standard to awards granted on or after January 1, 2002 but prior to January 1, 2003. The pro forma effect of awards granted prior to January 1, 2002 has nor been included. The pro forma net earnings attributable to common shares, basic and diluted earnings per share after giving effect to the grant of these options in 2002 arc:
2003 2002 Pro forma net earnings attributable to common shares
$ 203,233 41,303 P ro....
fo.ab a i e a rn in g s.......
p e sh a re........
3.62.......
0.74...........
Pro forma daiue earnings per share 3.562 0.74 The fair value of the options issued was determined using the Black-Scholes option pricing model with the following assumptions:
2003 2002 Number of options granted 706,350 489,050 Average strike price
$ _38.62 43.84 Dividend 0.60 0.50 Expected volatility 20%
20%
Risk-free interest rate 4.1%
5.0%
Expected life of option Expected forfeitures Weighted average grant date fair values
........................................................I..............................I..........................
5 years 5 years 10%
17%
8.14 10.83
- 22. Pension and Other Post-Retiremient Benefits Cameco maintains both defined benefit and defined contribution plans providing pension and post-retirement beniefits to substantially all of its employees.
Pension Plans The pension expense for Carneco's defined contribution plans was $5,348,000 (2002 - $4,989,000; 2001 - $4,41 1,000).
The status of defined benefit pensions plans are as follows:
2003 2002 (Thocusands)
Accrued Benefit Obligation Balance at beginning of year Current service cost Interest cost Actuarial gain 14,595 13.330 806 743 98483 (483) 3
.......I..........
Benefits paid 522__ __
_313__
Balance at end of year 15,380 14,595 Plan Assets Fair value at beginning of year 10,684 10,915 Actual return on plan assets 711 (528)
Employer contributions 10,885 610 Benefits paid
~(522)
(313)
Fair value at end of year 21,758 10,684 Funded status 6,378 (3,911)
Unamnortized net actuarial loss Unamnortized transitional obligation Accrued pension benefit asset 1,887 2,365 2,670 3,058 10,630 1,817 19
Significant actuarial assumptions used in calculating the net pension expense for Cameco's funded plans were as follows:
2003 2002 Discount rate 6.5%
6.0%
Long-term. rate of return on assets 7.0%
8.0%
Lo g-er t
on ets...
Rate of increase in compensation levels 4.5%
4.5%
Net pension expense for the defined benefit pension plans has been determined as follows:
2003 2002 2001 (Ti'housands)
Cost of benefits earned by employees 806 743 743 Interest cost on benefits earned
......I..........................
..........I.................
.....I........I...........I-_.................
Expected return on pension plan assets, nct
......... I--..............................................
Net amortization Net pension expense 984 (601)
........................................ 1 883 2,072 835
.-....... 4..... 1...
752 1,887 998 (885) 694 1,550 Other Post-Retirement Benefits Cameco provides post-retirement benefits to substantially all employees. The costs are accrued over the expected service lives of employees. No funding is provided. The status of the plan is as follows:
2003 2002 (Thousa-ds)
Accrued Benefit Obligation Balance at beginning of year Current service cost Interest cost I...t. e. t Actuarial gain Benefits paid Accrued post-retirement benefit liability
.........I.....................................................................................I-------...............-.1-.....................
4,092 129 206 (952)
(86) 3,389
..........I.......... $
3.809 147 230 (94) 4,092
- 23. Property and Business Acquisitions (a) AGR Limited On March 5, 2002, Cameco acquired a 52% interest in AGR Limited (AGR). AGR is an Australia-based exploration company whose principal asset is a 95% interest in the Boroo gold deposit located in Mongolia. The purchase price was financed with $12,000,000 (US) in cash and the contribution of a neighboring property. In exchange, AGR issued 240 million shares to Cameco. The acquisition was accounted for using the purchase method and the results of operations are included in Cameco's consolidated financial statements from the effective date of the purchase.
The values assigned to the net assets acquired are as follows:
Cash and other working capital
............................I.....................................................
Property, plant and equipment Minority interest Net assets acquired (Thos.ands) 13.845 27,054 (18,981) 21,918 Financed by:
Cash
...P..................
r g....
.. e...
Property, at carrying value 19,562
..................I..............................
2,356 21.918 Subsequent to the acquisition, Cameco provided an additional $3,000,000 (US) of further exploration in the area in exchange for an incremental 4% interest in AGR (43 million shares), increasing its total interest to 56% at December 31, 2002.
20
(b) Smith Ranch On July 22, 2002, Cameco acquired the assets comprising the Smith Ranch in situ leach (ISL) operation and various other ISL properties from Rio Algom Mining LLC. In exchange for these assets, Cameco assumed the decommissioning liabilities associated with the Smith Ranch operation. At the acquisition date, the value of the liabilities was estimated to be
$9,157,000 (US). Cameco also secured forward sales commitments for more than 900,000 pounds of uranium concentrates. The acquisition was accounted for using the purchase method and the results of operations arc included in Cameco's consolidated financial statements from the effective date of the purchase.
(c) UEX Corporation On July 18, 2002, Cameco acquired a 35.3% ownership interest in UEX Corporation (UEX); a company traded on the Toronto Stock Exchange (TSX). The principal assets of UEX consist of several uranium exploration properties located in the Athabasca region of Northern Saskatchewan. In acquiring this interest, Cameco transferred its Hidden Bay exploration properties to UEX in exchange for approximately 31 million shares. In addition, Cameco purchased another 2 million shares at a price of $0.25 per share.
In 2002, Cameco recorded a gain of $2,670,000 on the transfer of its Hidden Bay properties to UEX. The equity method is being used to account for this investment.
- 24. Commitments and Contingencies (a) An action against Cameco, Cameco Gold Inc., Kumtor Operating Company and certain other parties commenced in a Canadian court by certain dependents of nine persons seeking damages, in the amount of $20,700,000 plus interest and costs, and punitive damages, in connection with the death of the said nine persons in a helicopter accident in Kyrgyzstan on October 4, 1995, is continuing. This action is being defended by the insurers of Cameco. Management is of the opinion, after review of the facts with counsel, that the outcome of this action will not have a material financial impact on Cameco's financial position, results of operations or liquidity.
(b) An action against Cameco was filed by Oren Benton on November 28, 2000 in the State of Colorado, U.S.A.. The action alleges breach of contract and tortious interference and sets forth a claim for purported damages in excess of $200,000,000 (US). Cameco's motion to dismiss was granted by order filed November 15, 2002 and Mr. Benton's claim was dismissed.
Mr. Benton has appealed this decision. The appeal was heard on November 20, 2003 and judgment was reserved.
Management is of the opinion, after review of the facts with counsel, that the claim is completely without merit and that the outcome of this action will not have a material financial impact on Cameco's financial position, results of operations or liquidity.
(c) Commitments At December 31, 2003, Cameco's purchase commitments, the majority of which are fixed-price uranium and conversion purchase arrangements, were as follows:
(Millions (US) 2004 113 2005 128 2006 145 2007 144 2008 131 Thereafter 454 Total 1,115 21
- 25. Financial Instruments The majority of revenues are derived from the sale of uranium products. Cameco's financial results are closely related to the long-and short-term market price of uranium sales and conversion services. Prices fluctuate and can be affected by demand for nuclear power, worldwide production and uranium inventory levels, and political and economic conditions in uranium producing and consuming countries. Revenue from gold operations is largely dependent on the market price of gold, which can be affected by political and economic factors, industry activity and the policies of central banks with respect to their levels of gold held as reserves. Financial results are also impacted by changes in foreign currency exchange rates, interest rates and other operating risks.
To hedge risks associated with fluctuations in the market price for uranium, Cameco seeks to maintain a portfolio of uranium sales contracts with a variety of delivery dates and pricing mechanisms that provide a degree of protection from price volatility.
Cameco employs a number of financial instruments to hedge risks associated with gold prices and foreign currency exchange rates. Put and call options are used to establish a minimum and maximum price range for gold sales and exchange rates for cash flows denominated in a foreign currency. Cameco also enters into forward sales contracts to establish a price for future deliveries of gold and US dollars. Net realized gains (losses) on contracts designated as hedges are recorded as deferred revenues (deferred charges) and recognized in earnings when the related hedged transactions occur.
Cameco also uses instruments such as swaps, puts and calls and forward rate agreements to manage funding costs and reduce the impact of interest rate volatility.
Financial assets that are subject to credit risks include cash and securities, accounts receivable and commodity and currency instruments. Cameco mitigates credit risk on these financial assets by holding positions with a variety of large creditworthy institutions. Sales of uranium, with short payment terms, are made to customers that management believes are creditworthy.
Except as disclosed below, the fair market value of Cameco's financial assets and financial liabilities approximates net book value as a result of the short-term nature of the instrument or the variable interest rate associated with the instrument.
Currency At December 31, 2003, Cameco had hedged $457,300,000 (US) at an average spot exchange rate of $1.41 designated to various dates through 2008 as follows:
(Thousands) 2004 257,300 2005 190,000 I.................................................._....................................................................
2006 60,000 2007 10,000 2008 (60,000)
Total 457,300 These hedge positions consist entirely of spot-deferred forward contracts. The average exchange rate reflects contract prices as at December 31, 2003 to their initial maturity date which is earlier than the designation date in many cases. The realized exchange rate will depend on the forward premium (discount) that is earned (paid) as hedge contracts are extended to their final designation date.
At December 31, 2003, Cameco's net mark-to-marker gain on these foreign currency instruments was $51,060,000 (Cdn).
Timing differences between the usage and designation of hedge contracts may result in deferred revenue or deferred charges.
At December 31, 2003, deferred revenue to be recognized totalled $24,487,000.
22
Interest At December 31, 2003, Cameco had in place $85,000,000 (Cdn) of interest rate swaps whereby Cameco receives fixed interest rates ranging from 3.0% to 6.1 %. These positions are designated over various dates maturing as follows:
(Thousands) 2005 32,500 2006 22,500 2007 2008 30,000 Total 85,000 At December 31, 2003, Cameco's net mark-to-market gain on these interest rate swaps was $1,964,000 (Cdn).
Commodity At December 31, 2003, Cameco's share of gold hedging positions have been designated against deliveries as follows:
Forwards Average Price Ounces (US$/oz) 2004 134,000 320 2005 91,000 312 2006 59,000 311 2007 9,000 309 293,000 315 Average prices reflect contract prices as at December 31, 2003 to their initial maturity date which is earlier than the designation date in many cases.
Timing differences between the usage and designation of hedge contracts may result in deferred revenue or deferred charges.
At the end of 2003, Cameco's share of deferred charges to be recognized totalled $1,816,000 (US).
From the initial maturity date to the designation date contract prices are expected to accrue conrango. The rate of contango earned will depend on the difference between future US interest rates and gold lease rates.
At December 31, 2003, the net mark-to-market loss on the above instruments was $20,199,000 (US).
Gold Commitment As of December 31, 2003, Cameco agreed to provide credit support to a maximum of $130 (US) per ounce to the counterparties of KGC and AGR. At December 31, 2003, Cameco's maximum financial exposure under these arrangements based on outstanding commitments was $56,613,000 (US) (2002 - $60,724,000 (US)).
At December 31, 2003, Cameco's actual exposure under these arrangements, including its share of the net mark-to-market losses mentioned above, was $45,938,000 (US) (2002 - $37,838,000).
23
- 26. Per Share Amounts Per share amounts have been calculated based on the weighted average number of common shares outstanding during the year net of shares held as security for employee loans to purchase such shares. The weighted average number of paid shares outstanding in 2003 was 56,119,557 (2002 - 55,780,978; 2001 - 55,398,552).
2003 (Resuscad) 2002 (Thousands)
(Restaled) 2001 Basic earnings per share computation Earnings available to common shareholders
$ 204,686 43,523 56,087 Weighted average common shares outstanding 56,120 55,781 55,399 Basic earnings per common share 3.65 0.78 1.01 Diluted earnings per share computation Earnings available to common shareholders
$ 204,686 43,523 56,087 Dilutive effect of:
Convertible debentures 2,290 Earnings available to common shareholders, assuming dilution
$ 206,976 43,523 56,087 Weighted average common shares outstanding 56,120 55,781 55,399 Dilutive effect of:
Convertible debentures 950
..S..........
- i.
- s.
49...................
Stock options 649 35 203
.11...................................................................
Other stock-based arrangements Weighted average common shares outstanding, assuming dilution Diluted earnings per common share 34 57,753 24 55,840 16 55,618 3.58 0.78 1.01 Options whose exercise price was greater than the average market price were excluded from the calculation.
- 27. Segmented Information Cameco has four reportable segments: uranium, conversion, gold and power. The uranium segment involves the exploration for, mining, milling, purchase and sale of uranium concentrate. The conversion segment involves the refining and conversion of uranium concentrate and the purchase and sale of conversion services. The gold segment involves the exploration for, mining, milling and sale of gold. The power segment involves the generation and sale of electricity.
Cameco's reportable segments are strategic business units with different products, processes and marketing strategies.
Accounting policies used in each segment are consistent with the policies outlined in the summary of significant accounting policies.
24
(a) Business Segments 2003
(,niIlioms Revenue Uranium Conversion Gold 570.3 142.4 114 (i)
(i Power Subtotal Adjustments Total K.2 371.9 1,198.8 (371.~9) $
826.9 Expenses Products and services sold 394.6 Depreciation, depletion and reclamation 9211 Ex~ploration 13.3 Rsearch & developmenr Other (0.4)
Earnings from Bruce Power 92.0 52.2 228.2 767.0 (228.2) 538.8
.......I...........
I..........
I...........
........ 10.9 1.7
...21.5 8.7.....
34.6 1.2 I....
....I..........
...t59.1 22.0 1.7 0.8 I...-........
. (34.6)
(1.2)
(107.9) 124.5 22.0 1.7 (107/.9)
I..................... - - -.......I.......................I..........
...I...............
..I...............................................
........I Non-segmented expenses 51.6 Earnings before income taxes 70.7 37.8 __
31.8 107.9 248.2 196.6 Income tax expense (recovery)
(16.0)
Minority interest (3.4)
Net earnings 216.0 Preferred securities charges, net of tax 9.0 Convertible debenture charges, net of tax 2.3 Net earnings attributable to common shares 204.7-Assets
$ 2,294.8 180.3 346.1 _$
992.3 3,813.5 (454.1) $ 3,359.4 Capital expenditures for the year $
65.2 6.0 87.1 156.5 314.8 (156.5) $
158.3 2002 (..natd)
(millions)
Power (i
Subtotal Adjustments Total Revenue
$ 523.7 137.4 87.2 137.8 886.1 (137.8) $
748.3 Expenses Products and services sold 345.1 82.7 58.3 100.7 586.8 (100.7) 486.2 Depreciation, depletion and reclamation 85.6 11.1 20.2 13.8 130.7 (13.8) 116.9 Exploration 11.8
-9.7
-21.5 21.5 Research & development
-2.3 2.3
-2.3 Other (0.2)
-1.8 7.5 9.1 (7.5) 1.6 Gain on propert interests (2.7)
(2.7) 27 Earnings from Bruce Power (15.8)
(15.8)
Non-segmented expenses 39.2 Earnings before income taxes 84.1 41.3 (2.8) 15.8 138.4 99.2 Income tax expense 47.3 Minority interest (0.9)
Net earrnig 52.8 Preferred securities charges, net of tax 9.3 Net earnings attributable to common shares 43.5 Assets
$ 2,309.8 177.6 349.2 321.6
$ 3,158.2 (190.4) $ 2,967.8 Capitlil expenditures for the year $
55.5 6.9 27.8 64.8 123.1 (64.8) $
90.2 25
(i (i)
Power Subtotal Adjustments 2001(rsod (millions)
Uranium Conversion Gold Total Revenue Expenses Products and services sold Depreciation, depletion 471.4 114.4 115.0 89.9 790.7 (89.9) $
700.8 298.0 72.0 52.1 63.9 486.0 (63.9) 422.1
_1 and reclamation 87.7 12.8 28.9 7.7 137.1 (7.7) 129.3 Exploation 10.1
-8.1
-18.2
-18.2 Research & development
-2.1 2.1
-2.1 O ther.(0.6)
(0.6).-
(0.6)
Earnings from Bruce Power
-6.1 6.1 (6.1)
(12.2)
Non-segmented expenses 34.2 Earnngsbefore income taxes 76.2 27.5 25.9 12.2 141.9 107.6 Income tax expense 42.2 Net earnings 65.4 Preferred securities charges, net of tax 9.3 Net earnings attributable to common shares 56.1 Assets
$ 2,389.2 171.0 326.5 262.6 3,149.3 (180.6) $ 2,968.7 Capital expenditures for the year $
51.1 4.8 2.4 17.0
-75.3 (17.0) $
58.3 (i) Consistent with the presentation of financial information for internal management purposes, Camneco's pro rata share of Bruce Power's financial results have been presented as a separate segment. In accordance with GAAP, this investment is accounted for by the equity method of accounting in these consolidated financial statements and the associated revenues and expenses arc eliminated in the adjustments column.
(b) Geographic Segments 2003 (Rcsmtssil 2002 (Million,)
(R,,stated) 2001 Revenue from products and services Canada - domestic
- export United States 40.2 337.5 335.0 62.8 381.6 216.7 50.1 413.3 122.4 Central Asia 114.2 87.2 115.0 826.9 748.3 700.8 Assets Canada 2,833.0 2,436.1 2,486.8 United States 180.3 191.6 182.2 Central Asia 346.1 340.1 299.7 3,359.4
$ 2,967.8 2,968.7 (c) Major Customers Carneco relies on a small number of customers to purchase a significant portion of its uranium concentrates and uranium conversion services. During 2003, revenues from one customer of Cameco's uranium and conversion segments represented approximately $97,000,000 (14%) of Cameco's total revenues. In 2002, revenues from one customer of Cameco's uranium and conversion segments represented approximately $92,000,000 (14%) of Cameco's total revenues. In 2001, revenues from one customer of Cameco's uranium and conversion segments represented approximately $84,000,000 (12%) of total revenue. As customers are relatively few in number, accounts receivable from any individual customer may periodically exceed 10% of accounts receivable depending on delivery schedules.
26
- 28. Subsequent Event (a) On January 5, 2004 Cameco Corporation and the Kyrgyz government announced an agreement to transfer all of Kumtor Gold Company (KGC), the owner of the Kumtor gold mine in the Kyrgyz Republic, to a new jointly owned Canadian company called Centerra Gold Inc. (Centerra). In conjunction with its acquisition of KGC and Cameco's other gold assets, Centerra intends to undertake a public offering (IPO) in Canada. Cameco expects to hold a majority interest in Centerra following the IPO.
(b) On February 27, 2004, Cameco, through one of its wholly owned US subsidiaries, signed an agreement to purchase a 25.2% interest in assets comprising the South Texas Project (STP) from a wholly owned subsidiary of American Electric Power (AEP) for $333 million (US). STP consists primarily of two 1,250 megawatt (MW) nuclear power plants located in Texas. These two units were commissioned in 1988 and 1999 and are licensed until 2027 and 2028. The interest which Cameco intends to purchase is subject to a right of first refusal in favour of the current participants for a period of 90 days.
The transaction is expected to close in the second half of 2004 and, based on current operating performance and market conditions, would have a positive impact on net earnings and for 2004. Cameco does not expect to finance the acquisition with debt and is looking at various options, including issuing equity.
- 29. Comparative Figures Certain prior year balances have been reclassified to conform to the current financial statement presentation.
- 30. Generally Accepted Accounting Principles in Canada and the United States The consolidated financial statements of Cameco are expressed in Canadian dollars in accordance with Canadian generally accepted accounting principles (Canadian GAAP). The following adjustments and disclosures would be required in order to present these consolidated financial statements in accordance with accounting principles generally accepted in the United States (US GAAP).
(a) Reconciliation of earnings in accordance with Canadian GAAP to earnings determined in accordance with US GAAP:
2003 Net earnings under Canadian GAAP Adjustment to reverse Canadian GAAP restatement (viii)
Net earnings applicable to US GAAP Add (deduct) adjustments for:
$ 216,006
$ 216,006 2002 (Thousands) 52,863 2,597 55,460 2001 65,412 (191) 65,221 Interest on preferred securities and convertible debentures (i)
(19,186)
(17,238)
(17,268)
....................I...........
Capitalized interest (ii) 3,768 Depreciation and depletion (iii) 2,579 2,579 2,895 Mineral property costs (iv)
(6,047)
(6,188)
(6,806)
Pre-operating costs (v)
(200)
(2,578)
(6,232)
Hedges and derative instruments (vi) 12,304 1,928 1,810 Realization of cumulative translation account (vii)
=
(1,585)
(3,273)
I............ I.................................................................
Earnings from Bruce Power (v) (vi)
(13,938)
(12,481)
Income tax effect of adjustments 10,121 14,116 14,542 Net earnings before cumulative effect of a change in accounting principle Cumulative effect of a change in accounting principle (viii)
Net earnings under US GAAP Hedges and derivative instruments (vi)
Foreign currency translation adjustments Unrealized loss on available-for-sale securities (ix)
Comprehensive income under US GAAP Basic net earnings per share under US GAAP Diluted earnings per share under US GAAP
......... 1...---
201,640 10,683 212,323
.I...-....
29,508 (32,309)
(1,058)
$ 230,932 3.78 3.72 37,781 37,781 I.....-
(6,203)
......(......)..
-859 (334) 32,103 0.68 0.68 50,889 50,889
-(22.253) 1,509
....................,,.,,.),
(8,300) 21,845 0.92 0.92
-111.....................
I.-................
27
(b) Comparison of balance sheet items determined in accordance wAith Canadian GAAP to balance sheet items determined in accordance with US GAAP:
(i) Balance Sheets 2003 Canadian GAAP us GAAP (Restatecd)
Canadian GAAP 2002 us GAAP (Thousands)
(Thons~ands)
Current assets Property, plant and equipment 678,278 2,072156
.........$ 672,340 808,483......I......
--.- $_ 650,043 2,060,250........
...I.............
$ 644,105 750,628 Mineral interests and other intangibles (x)
I,225,804
-1,250,365 Long-term receivables, investments and other 608,977 593,520 257,523 237,013 Total assets
$ 3,359,411
$3,300,147
$2,967,816
$2,882,111 Current liabilities 197,841 188,983
$_ 171,377 167,258 Long-term debt 238,707 623,173 218,290 412,053 Provision for reclamation 150,444 150,444 159,344 155,036 Other liabilities (vi) 36,196 22,097
_9,523
_57,999 Deferred incomne taxes 501,674 487,388 530,625 485,447 1,124,862 1,472,085 1,089,159 1,277,793 Minority interest 14,690 14,690 18,078 18,078 Shareholders' equity Preferred securities 158,022
_-193,763 Convertible debentures 226,444--
Share capital 708,345 708,345 680,934
_680,934 Contributed surplus 474,927 474,927 472,488 472,488 Retained earnings 66,7 597,,219 494,341 418,546 Accumulared other comprehensive income
.cumulative translation account (13.256) 7,966 19,053 40,275
-availabl-for-sale securities (IX)
-23,864 2,454
- hedges and derivative instruments (vi)
-1,051
-(28,457) 2,219,859
$ 3,359,411 1,813,372
$3,300,147 1,860,579
$2,967,816 1,586,240
$2,882,111 Total liabilities and shareholders' equity
- (ii) Components of accounts payable and accrued liabilities are as follows:
2003 Canadian us GAAP GAAP (Thousands) 2002 Canadian GAAP us GAAP (Thousands)
Accounts payable 120,436 Taxes and royalties payable 29,444 Accrued liabilities 7,650 Total accounts payable and accrued liabilities 157,530
....I..........
120,436
__29,444 7,650
$ 157,530
$ 84906 26,340 20,686
$ 131,932 I..---...
84,906 22,221 20,686 127,813 28
(c) The effects of these adjustments would result in the consolidated statements of cash flows reporting the following under US GAAP:
2003 2002 2001 (Thlouisands)
Cash provided by operations
$ 224,540
$ 231,184 95,568 Cash used in investing
$ (441,540)
$ (72,006)
$ (127,306)
C..
..........d..........e................
......e...
n..
.(1 3 4,8 1 9 3
Cash provided by (used in) financing
.$ 242,973
$ (134,819) 32,344 (d) A description of certain significant differences between Canadian GAAP and US GAAP follows:
(i) Preferred Securities and Convertible Debentures These instruments are classified as equity under Canadian GAAP and interest payments, on an after-tax basis, are classified as distributions of equity. Under US GAAP, they are classified as debt and interest payments are included in interest expense.
(ii) Capitalized Interest Cameco's policy under both Canadian GAAP and US GAAP is to capitalize interest on expenditures related to construction of development projects actively being prepared for their intended use. Under US GAAP, a portion of the interest on the preferred securities, classified as debt under US GAAP, would be capitalized to development properties.
(iii) Writedown of Mineral Properties Under both Canadian and US GAAP, property, plant and equipment must be assessed for potential impairment. In 2003 there is no longer any difference in the calculation of an impairment loss between Canadian and US GAAP. However, as a result of previous differences in the amounts of impairment losses recognized under US and Canadian GAAP, there is a difference in the amount of depreciation and depletion charged to earnings.
(iv) Mineral Property Costs Consistent with Canadian GAAP, Cameco defers costs related to mineral properties once the decision to proceed to development has been made. Under US GAAP, these costs are expensed until such time as a final feasibility study has confirmed the existence of a commercially mineable deposit.
(v) Pre-Operating Costs Under Canadian GAAP, pre-operating costs incurred during the commissioning phase of a new project are deferred until commercial production levels are achieved. After such time, those costs are amortized over the estimated life of the project.
Under US GAAP, such costs are expensed as incurred as required by AICPA Statement of Position 98-5, Reporting on the Cost of Start-Up Activities. In 2000, these costs related to the production of uranium concentrates at the McArthur River mine and were charged to product inventory. Portions of this product inventory were sold in each of the years.
During 2003, $17,917,000 (2002 - $8,628,000) of costs related to the restart of two nuclear reactors at Bruce Power were considered to be startup costs required to be expensed under US GAAP.
(vi) Hedges and Derivative Instruments During 2003, $12,304,000 was excluded from the assessment of hedge effectiveness. For amounts included in the balance sheet as accumulated other comprehensive income as at December 31, 2003, a gain of $250,000 (after tax) relates to the hedging of interest rate risk, a loss of $18,971,000 (after tax) relates to the hedging of gold price risk, and a gain of
$38,625,000 (after tax) relates to the hedging of foreign exchange rate risk. Of these amounts, $14,890,000 (after tax) would be recorded in earnings during 2004 if market conditions remained unchanged. The impact on other comprehensive income for 2003 is $26,107,000 after consideration of the reversal of the 2002 amounts described below. During 2003, no net gains or losses from the hedging of net investments were realized.
During 2002, $1,928,000 was excluded from the assessment of hedge effectiveness. For amounts included in other comprehensive income as at December 31, 2002, a gain of $277,000 (after tax) relates to the hedging of interest rate risk, 29
a loss of $18,076,000 (after tax) relates to the hedging of gold price risk, and a loss of $10,658,000 (after tax) relates to the hedging of foreign exchange rate risk. During 2002, no net gains or losses from the hedging of net investments were realized.
Prior to July, 2003, $3,979,000 of gains related to Bruce Power energy contracts did not qualify for hedge accounting under US GAAP as the documentation required for hedge accounting was not contemplated at the time of entering into the contracts. The impact on other comprehensive income for 2003 is $3,401,000.
(vii) Realization of Cumulative Translation Account Under Canadian GAAP, a proportionate amount of the cumulative translation account is recognized in earnings when a portion of the net investment in a subsidiary is realized. US GAAP does not allow for any of the cumulative translation account to be taken to earnings unless a portion of the investment has been sold or substantially liquidated.
(viii) Cumulative Effect of a Change in Accounting Policy In 2001, the FASB issued Statement 143, Accounting for Asset Retirement Obligations, which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The standard applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and use of the asset. Statement 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The fair value is added to the carrying amount of the associated asset. The liability is accreted at the end of each period through charges to operating expenses.
For Canadian GAAP, the cumulative effect of the change in policy on the balance sheet at December 31, 2002 is to increase property, plant and equipment by $23 million, future income taxes by $8 million, liabilities by $4 million and opening retained earnings by $11 million. Under US GAAP no restatement is required.
(ix) Available-for-Sale Securities Under Canadian GAAP, portfolio investments are accounted for using the cost method. Under US GAAP, portfolio investments classified as available-for-sale securities are carried at market values with unrealized gains or losses reflected as a separate component of shareholders' equity and included in comprehensive income. Cameco's investments in Energy Resources of Australia Ltd., Batavia Mining Ltd. (formerly Menzies Gold NL) and Tenke Mining Corp. are classified as available-for-sale. The fair market value of these investments at December 31, 2003 was $41,428,000 (2002 - $20,018,000). The cumulative unrealized gain at December 31, 2003 was $23,864,000.
(x) Mineral Interests and Other Intangible Assets Under US GAAP, acquisition costs associated with mining interests are classified according to the land tenure position. Costs associated with owned mineral claims and mining leases where the company does not own the underlying land are classified as definite life intangible assets and amortized over the period of intended use.
For mineral claims with proven and probable reserves, amortization is taken on a unit of production basis resulting in no charge during the exploration and development phases.
(e) Stock-Based Compensation Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation establishes financial accounting and reporting standards for stock-based employee compensation plans. This statement defines a fair-value based method of accounting for employee stock options. However, it also allows an entity to continue to measure compensation cost for those plans using the intrinsic value based method of accounting prescribed by APB Opinion No. 25, which is similar to the method applied under Canadian GAAP and followed by Cameco prior to 2003. For periods prior to adoption, companies that continue to follow the intrinsic value based method must disclose pro-forma earnings and earnings per share information under the fair-value method.
30
Cameco has adopted the fair-value method of accounting for employee stock options with retroactive effect to January 1, 2003. Pursuant to new transitional rules related to accounting for stock-based compensation under Canadian GAAP, Carneco chose to record compensation expense for all employee stock options granted on or after January 1, 2003 with a corresponding increase to contributed surplus. Compensation expense for options granted during 2003 is determined based on the estimated fair values at the time of grant, the cost of which is recognized over the vesting periods of the respective options. This change in accounting policy has increased expenses by $2,439,000 in 2003.
Cameco has applied the pro forma disclosure provisions of the standard to awards granted prior to January 1, 2003. The pro forma net earnings attributable to common shares, basic and diluted earnings per share after giving effect to the grant of these options are:
2003 2002 2001 (Thousa,,ds)
Net earnings for the year in accordance with US GAAP as calculated above
$ 212,323 37,781 50,889
........................ I..--..................................................................
I... -.......
....-......I...............
I-......................
.. - -..............-.1....I...
Effect of recording compensation expense under stock options plans (2,027)
(3,991)
(4,168)
Pro-forma net earnings after application of SFAS 123
$ 210,296 33,790 46,721 Pro-forma basic net earnings per common share after application of SFAS 123 3 75 0.61 0.84 Pro-forma diluted net earnings per common share after application of SFAS 123 3.68 0.61 0.84 In calculating the foregoing pro-forma amounts, the fair value of each option grant was estimated as of the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:
2002 2001 Dividend 0.50 0.50 Expected volatility 20.0%
39.6%
l Risk-free interest rate 5.0%
5.5%
..................I.................................
Expected life of option 5 years 8 years Expected forfeitures 17.0%
20.0%
(f) New Accounting Pronouncements In 2002, the FASB issued Financial Interpretation 45 (FIN 45) that requires the recognition of a liability for the fair value of certain guarantees that require payments contingent on specified types of future events. The measurement standards of FIN 45 are applicable to guarantees entered into after January 1, 2003. For guarantees that existed at December 31, 2003, FIN 45 requires additional disclosures which have been included in these financial statements to the extent applicable to Cameco.
During 2003, the FASB issued Financial Interpretation 46 Revised (FIN 46 Revised) that requires the consolidation of certain entities that are controlled through financial interests that indicate control (referred to as variable interests). Variable interests are the rights or obligations that convey economic gains or losses from changes in the values of the entity's assets and liabilities. The holder of the majority of an entity's variable interests will be required to consolidate the variable interest entity. This change has not had any impact on these consolidated financial statements.
31
Summary of Significant Accounting Policies The consolidated financial statements are prepared by management in accordance with Canadian generally accepted accounting principles and, except as described in note 30, conform in all material respects with accounting principles generally accepted in the United States. Management makes various estimates and assumptions in determining the reported amounts of assets and liabilities, revenues and expenses for each year presented, and in the disclosure of commitments and contingencies. The most significant estimates are related to the lives and recoverability of mineral properties, provisions for decommissioning and reclamation of assets, future income taxes, financial instruments and mineral reserves. Actual results could differ from these estimates. This summary of significant accounting policies is a description of the accounting methods and practices that have been used in the preparation of these consolidated financial statements and is presented to assist the reader in interpreting the statements contained herein.
Consolidation Principles The consolidated financial statements include the accounts of Cameco and its subsidiaries. Interests in joint ventures are accounted for by the proportionate consolidation method.
Under this method, Cameco includes in its accounts its proportionate share of assets, liabilities, revenues and expenses.
Cash Cash consists of balances with financial institutions and investments in money market instruments which have a term to maturity of three months or less.
Inventories Inventories of broken ore, uranium concentrates and refined and converted products are valued at the lower of average cost and net realizable value.
Supplies Consumable supplies and spares are valued at the lower of cost or replacement value.
Investments Investments in associated companies over which Cameco has the ability to exercise significant influence are accounted for by the equity method. Under this method, Cameco includes in earnings its share of earnings or losses of the associated company. Portfolio investments are carried at cost or at cost less amounts written off to reflect a decline in value that is other than temporary.
Property, Plant and Equipment Assets are carried at cost. Costs of additions and improvements arc capitalized. When assets arc retired or sold, the resulting gains or losses are reflected in current earnings. Maintenance and repair expenditures are charged to cost of production. The carrying values of property, plant and equipment are periodically assessed by management and if management determines that the carrying values cannot be recovered, the unrecoverable amounts are written off against current earnings.
Non-Producing Properties The decision to develop a mine property within a project area is based on an assessment of the commercial viability of the property, the availability of financing and the existence of markets for the product. Once the decision to proceed to development is made, development and other expenditures relating to the project area are deferred and carried at cost with the intention that these will be depleted by charges against earnings from future mining operations. No depreciation or depletion is charged against the property until commercial production commences. After a mine property has been brought into commercial production, costs of any additional work on that property are expensed as incurred, except for large development programs. which will be deferred and depleted over the remaining life of the related assets.
The carrying values of non-producing properties are periodically assessed by management and if management determines that the carrying values cannot be recovered, the unrecoverable amounts are written off against current earnings.
Property Evaluations Cameco reviews the carrying values of its properties when changes in circumstances indicate that those carrying values may not be recoverable. Estimated future net cash flows are calculated using estimated recoverable reserves, estimated future commodity prices and the expected future operating and capital costs. An impairment loss is recognized when the carrying value of an asset held for use exceeds the sum of undiscounted future net cash flows. An impairment loss is measured as the amount by which the asset's carrying amount exceeds its fair value.
32
Future Income Taxes Future income taxes are recognized for the future income tax consequences attributable to differences between the carrying values of assets and liabilities and their respective income tax bases. Future income tax assets and liabilities are measured using enacted income tax rates expected to apply to taxable income in the years in which temporary differences are expected to be recovered or settled. The effect on future income tax assets and liabilities of a change in rates is included in earnings in the period which includes the enactment date. Future income tax assets are recorded in the financial statements if realization is considered more likely than not.
Capitalization of Interest Interest is capitalized on expenditures related to construction or development projects actively being prepared for their intended use. Capitalization is discontinued when the asset enters commercial operation or development ceases.
Depreciation and Depletion Conversion services assets, mine buildings, equipment and mineral properties are depreciated or depleted according to the unit-of-production method. This method allocates the costs of these assets to each accounting period. For conversion services, the amount of depreciation is measured by the portion of the facilities' total estimated lifetime production that is produced in that period. For mining, the amount of depreciation or depletion is measured by the portion of the mines' economically recoverable proven and probable ore reserves which are recovered during the period.
Other assets are depreciated according to the straight-line method based on estimated useful lives, which generally range from three to 10 years.
Research and Development and Exploration Costs Expenditures for applied research and technology related to the products and processes of Cameco and expenditures for geological exploration programs are charged against earnings as incurred.
Environmental Protection and Reclamation Costs The fair value of the liability for an asset retirement obligation is recognized in the period incurred. The fair value is added to the carrying amount of the associated asset and depreciated over the asset's useful life. The liability is accreted over time through periodic charges to earnings and it is reduced by actual costs of decommissioning and reclamation. Cameco's estimates of reclamation costs could change as a result of changes in regulatory requirements and cost estimates. Expenditures relating to ongoing environmental programs are charged against earnings as incurred or capitalized and depreciated depending on their relationship to future earnings.
Employee Future Benefits Cameco accrues its obligations under employee benefit plans.
The cost of pensions and other retirement benefits earned by employees is actuarially determined using the projected benefit method pro-rated on service and management's best estimate of expected plan investment performance, salary escalation, retirement ages of employees and expected health-care costs.
For the purpose of calculating the expected return on plan assets, those assets are measured at fair value. Past service costs arising from plan amendments and net actuarial gains and losses are amortized on a straight-line basis over the expected average remaining service life of the plan participants.
Stock-Based Compensation Cameco has a stock option plan that is described in note 20.
Options granted under the plan on or after January 1, 2003 are accounted for using the fair-value method. Under this method, the compensation cost of options granted is measured at estimated fair value at the grant date and recognized over the vesting period.
For options granted under the stock option plan prior to January 1, 2003, no compensation expense was recognized when the stock options were granted. Any consideration paid on exercise of stock options is credited to share capital.
Cameco accounts for other stock-based compensation arrangements in accordance with the fair-value method of accounting.
Revenue Recognition Cameco supplies uranium concentrates and uranium conversion services to utility customers. Third party fabricators process Canmeco's products into fuel for use in nuclear reactors.
Cameco records revenue on the sale of its nuclear products to utility customers when title to the product transfers and delivery is effected through book transfer. Since nuclear products must be stored at licensed storage facilities, Cameco may hold customer-owned product at its premises prior to shipment of the product to third parties for further processing.
Cameco records revenue on the sale of gold when title passes and delivery is effected.
33
Amortization of Financing Costs Debt discounts and issue expenses associated with long-term financing are deferred and amortized over the term of the issues to which they relate.
Foreign Currency Translation Monetary assets and liabilities denominated in foreign currencies are translated into Canadian dollars at year-end rates of exchange. Revenue and expense transactions denominated in foreign currencies are translated into Canadian dollars at rates in effect at the time of the transactions. The applicable exchange gains and losses arising on these transactions are reflected in earnings.
Foreign currency gains or losses arising on translation of long-term monetary items with a fixed or ascertainable life beyond the end of the following fiscal year are deferred and amortized to earnings over the remaining life of the item.
The United States dollar is considered the functional currency of most of Cameco's uranium and gold operations outside of Canada. The financial statements of these operations are translated into Canadian dollars using the current-rate method whereby all assets and liabilities are translated at the year-end rate of exchange and all revenue and expense items are translated at the average rate of exchange prevailing during the year. Exchange gains and losses arising from this translation, representing the net unrealized foreign currency translation gain (loss) on Cameco's net investment in these foreign operations, are recorded in the cumulative translation account component of shareholders' equity. Exchange gains or losses arising from the translation of foreign debt and preferred securities designated as hedges of a net investment in foreign operations are also recorded in the cumulative translation account component of shareholders' equity. These adjustments are not included in earnings until realized through a reduction in Cameco's net investment in such operations.
effective in offsetting changes in fair values or cash flows of hedged items. Gains and losses related to hedging items are deferred and recognized in the same period as the corresponding hedged items. If derivative financial instruments are closed before planned delivery, gains or losses are recorded as deferred revenue or deferred charges and recognized on the planned delivery date. In the event a hedged item is sold, extinguished or matures prior to the termination of the related hedging instrument, any realized or unrealized gain or loss on such derivative instrument is recognized in earnings.
Per Share Amounts Per share amounts are calculated using the weighted average number of paid common shares outstanding.
Derivative Financial Instruments and Hedging Transactions Cameco uses derivative financial and commodity instruments to reduce exposure to fluctuations in foreign currency exchange rates, interest rates and commodity prices. Cameco formally documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. Cameco also formally assesses, both at the hedge's inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly 34
Appendix "B" 2003 MANAGEMENT'S DISCUSSION AND ANALYSIS 2003 Cameco Annual Information Form
Vision.
Cameco will be a dominant nuclear energy company producing uranium fuel and generating clean electricity.
Mission Our core business is uranium fuel supply.
Through our nuclear investments we participate in the generation of clean energy. Sustainable growth is realized by building upon our core business strengths through socially, environ-mentally and economically responsible conduct. In doing so, we will enhance our status as an investment, supplier and employer of choice, and continue to earn the support of the communities where we interact.
The key measures of our success will be a safe, healthy and rewarding workplace, clean environment, and supportive communities wherever we operate, together with solid financial performance, all reflected in a growing return to shareholders.
delineated, the regulatory approval to mine is secured and the mine is developed, uranium ore is mined and upgraded at a mill to produce uranium concentrates. Uranium mining companies sell uranium concentrates to nuclear electrical generating companies around the world on the basis of the U308 contained in the uranium concentrates. These utilities then contract with converters, enrichers and fuel fabricators to produce the required reactor fuel.
Cameco is the world's largest titanium producer with 550 million pounds of proven and probable reserves of uranium including controlling ownership of the world's largest high-grade reserves and low-cost operations in northern Saskatchewan. The company has four operating mines in Canada and the US, as well as two new mines ready to be developed in Canada and Central Asia, subject to regulatory and partner approval.
The company is an integrated uranium producer with refining and conversion facilities at Blind River and Port Hope located in Ontario, Canada. The products from these sites are used to produce fuel for nuclear power reactors.
The Port Hope plant can produce 20%
of the world's annual requirements for uranium hexafluoridc (UF6 ) to make fuel for light-water reactors. In addition, the Port Hope plant is the world's only commercial producer of natural uranium dioxide (U0 2) the fuel used by all Canadian-built Candu reactors.
Through its 31.6% ownership of the Bruce Power nuclear generating station located in southern Ontario, Cameco generates clean electricity. Cameco is the sole fuel supplier to the Bruce Power Limited Partnership that leases six operating nuclear power reactors, plus two reactors that are laid up. Bruce Power's operating plants have a combined generation capacity of 4,660 megawatts (MW), which is equivalent to the residential and industrial needs of a city the size of Toronto, Ontario.
Cameco is also a gold producer. In early January 2004, Carneco announced that it had reached an agreement with the Kyrgyz Republic to create a jointly owned Canadian gold company called Centerra Gold Inc. Cameco will own 67% and the Kyrgyz government (through its agency Kyrgyzaltyn) will own the remaining 33%. Centerra intends to undertake an initial public offering (IPO) in Canada and sell shares to the public. Cameco expects to continue to hold a majority interest in Centerra immediately following the IPO, which is planned for the second quarter of 2004.
Growth Sttrategy Cameco's vision is to be a dominant nuclear energy company, producing uranium fuel and generating clean electricity. The main strategies of Cameco are:
- to maintain and leverage the company's competitive advantages in the uranium and conversion businesses,
- to continue vertical integration within the nuclear fuel supply, and
- to expand nuclear generation capacity.
The specific strategies in the uranium and conversion businesses, which provide the foundation of the company, will be S
Cameco is involved in four business segments:
- conversion services
- nuclear electricity generation
- gold The only significant commercial use for uranium is to fuel nuclear power plants for the generation of electricity. In recent years, nuclear plants generated approximately 16% of the world's electricity.
The major stages in the production of nuclear fuel are uranium exploration, mining and milling, refining and conversion, enrichment and fuel fabrication. Once a commercial uranium deposit is discovered and reserves CUSTOMER COUNTRIES Cameco sells uranium and conversion services to companies located in 15 countries around the globe.
Americas Europe Argentina Belgium Brazil Czech Republic Canada Finland United States France Germany Asia Spain Japan Sweden South Korea United Kingdom Taiwan
discussed in the sections dealing with those businesses.
In pursuing its plans for further integration in nuclear fuel supply and expansion in nuclear power generation, the company has a number of goals:
- to earn a sufficient rate of return and provide a basis for long-term profitability.
- to provide nuclear fuel supply where possible and link to core assets and competencies,
- to strengthen Carneco's foundation for further expansion in the nuclear fuel cycle,
- to achieve a reward commensurate with the risks taken, and
- to not unduly risk Cameco's overall viability.
The key strategies are:
- to pursue the most appropriate investments by considering investment opportunities in all aspects of the nuclear fuel cycle,
- to guide and support Bruce Power's growth strategy,
- to pursue partnering opportunities in new reactor construction and completions by leveraging fuel supply relationships, developing expertise in new fuel requirements, and enhancing relationships with industry leaders in reactor technology, and
- to seek active ownership to allow, where possible, participation in management and operational involvement of generation facilities.
In March 2004, Cameco announced that one of its wholly owned US subsidiaries signed an agreement to purchase a 25.2% interest in assets comprising the South Texas Project (STP) from a wholly owned subsidiary of American Electric Power (AEP) for $333 million (US).
Included in this purchase price is $54 million (US) for fuel and non-fuel inventory.
STP consists of two 1,250-MW nuclear units located in Texas. The net
{ Tonnes of greenhouse gases }
right of first refusal in favour of these owners. The agreement is subject to regulatory approval and other closing conditions, and the final purchase price is subject to closing adjustments. The transaction is expected to close in the second half of 2004.
In addition, Cameco seeks to increase nuclear power's contribution to global energy supply through two major strategies:
- participate in related technologies that support nuclear energy development, and
- promote industry initiatives to position nuclear power as an important factor in addressing climate change by providing leadership and resources to key industry associations, developing government relationships and further enhancing Cameco's environmental and safety reputation.
Trends in the Nuclear Power Industry A nurriber of evolving trends in the nuclear power industry have the potential to affect Cameco's business environment for uranium and conversion.
Nuclear Utilities Consolidate Electric utilities in the US and Europe continued to restructure in 2003, albeit at a slower pace than in the previous five years. Consolidation of nuclear generating plant ownership can be The world's nuclear reactors prevent emissions of up to 2.5 billion tonnes of carbon dioxide annually.
St --02: W3std NjcOer Assio;tior-generating capacity from the 25.2%
interest in STP is 630 MW. Each owner takes in kind and markets its pro-rata share of electricity generated by STP.
The balance of STP is held by Texas Genco (30.8%), San Antonio City Public Service Board (28%) and Austin Energy (16%). The interest being purchased by Cameco is subject to a WORLD ELECTRICITY GENERATION Nuclear's 16% share of world electricity generation is the third largest behind coal and hydro.
NucleaF Hyrd ol ilElli 15%
GasI N
l lOtherts 3
Reactors Reactors under Nuclear in Operation Construction Electricity (%)
(as of 12/03)
(as of 12/03)
(as Of 12/02)
Argentina Armenia Belgium BrazilI Bulgaria Canada China Czech Republic Finland France Germany Hungary India Iran Japan Korea (North)
Korea (South)
Lithuania 2
1 7
2 4
16 8
6 4
59 18 14 0
53 0
18 2.......
2 2
1 2
.9..........
11 6
27 103 437
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33
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7 41 57 4.....
47 12 1
25 30 78 30 36 4
0 39 0
39 80 4..
4 3
10 16 65 41 6
26 21 46 20 216
-.1............
expected to continue in response to marker deregulation and result in increased cost efficiency and more concentrated customer buying power.
Cap~acity' Factors In 2003, the world gross average capacity factor of nuclear generation decreased for the first time in five years to 76%. This 2% decrease can largely be attributed to lower averages in Japan and the US.
In Japan, long regulatory outages impacted the average. The US decrease of about 2% is primarily a result of extended plant shutdowns for capital improvements and inspections. These small year-to-year variances, both up and down, are not unexpected.
Existing Nuclear Plants Increase Capacity Nuclear plants continue to increase generating capacity through uprates (the increase in the nominal level of output due to the installation of more efficient equipment and/or improved instrumentation). These uprates can increase a power plant's capacity between 2% and 20%. In most cases, an increase in capacity translates into increased demand for uranium concentrates and conversion services.
In 2003, US regulators authorized uprares at eighit of the nation',s 103 reactors, resulting in an increase in capacity of about 130 MW. In total, over the last 10 years, US uprates have resulted in the addition of about 3,500 MW capacity, and over the next five years. another 28 units are expected to increase capacity by about 1,900 MNW.
Nuclear reactors in other countries, including France, Germany, Spain, Sweden and Belgium, have increased or plan to increase capacity through uprates, a trend that Cameco expects to continue.
Nuclear Plant Licence Extensions In 2003, 13 US nuclear units received 20-year licence extensions, bringing the total to 23 units since 2000. Operators
-.1.......
Mexico Netherlands Pakistan
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Romania Russia 1.
-.1.....
Slovak Republic Slovenia
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South Africa Spain Sweden Switzerland Taiwan Ukraine United Kingdom United States World 4
SUPPORT FOR NUCLEAR ENERGY A majority of people in the US, the world's largest electricity market, favour nuclear energy.
i
- Favou, (Oppose 6 >....,.............,.........................-----.. --- ------
5_/6o%
Favour 40 -- 44% - - -
3-6
-O---
20 So 90g
° 92 93 94 95 96 97 93 09 oo 0
i 01 03 Source: Biscon Reearch In Sweden, the government is expected to decide on a phase-out plan in 2004 and the timetable for the closure of one reactor, which has been delayed for several years. The Swedish public, in a November 2003 poll, indicated that 84% favour the continued use of nuclear, at least until existing reactor units are closed for either safety or economic reasons.
Cost of Nuclear Generation In 2002, the latest year for which data is available, the direct costs of US nuclear electricity production, for the fourth consecutive year, continued to be lower than the cost of electricity from coal plants. Other than hydro, nuclear energy is the cheapest source of electricity in the US. This is largely attributable to the improved performance of US nuclear power plants.
of an additional 40 units have applied or are expected to apply for extensions in the next few years. In total, these units represent more than 50% of the US nuclear generating capacity.
In Russia, three reactors have been granted life extensions, and more are planned, for a total of 12 out of 30 reactors. Other countries contemplating life extension of their reactors include France, the United Kingdom, and Ukraine.
New Nuclear Construction Three new reactors began commercial operation around the world in 2003, two in China and one in the Czech Republic.
In addition, construction began on a further two units, one in each of Romania and Japan, bringing the total under construction to 33 units.
In Canada, two of the six units mothballed in the latter part of the 1990s returned to service in 2003, a third in January 2004. This includes Bruce A units 4 and 3, which restarted in 2003 and 2004 respectively.
In Finland, the operator has applied for a construction licence and began site preparation for the country's fifth nuclear unit. The 1,600-MW reactor is expected to commence commercial operations in 2009.
In the US, three utilities have applied for Early Site Permits (ESPs) with the US Nuclear Regulatory Agency. These utilities have not committed to building new reactors, but the ESPs will simplify the process if they decide to proceed with a new build.
In the next two years, Argentina and Bulgaria are expected to restart construction of two units that were halted in the 1990s. In 2003, Slovenia and the Czech Republic also indicated they were considering new nuclear units.
Proposed US Senate energy legislation provides for the construction of an advanced reactor to demonstrate both electricity and hydrogen production at the Idaho National Engineering and Environmental Laboratory. This research project is proposed to move the US toward advanced nuclear energy and clean carbon-free hydrogen production.
Nuclear Power and Politics In Europe, some reactors are scheduled to close in the short term as a result of political decisions. However, these countries still have to deal with the economic and environmental realities of replacing the electricity production of these plants, as well as the need to expand electricity supply to meet growing demand.
Germany experienced the first permanent closure of a reactor under the phase-out regime in late 2003. The next permanent closure is expected in 2005.
Worldwivde Uranium Supply and Demand The supply and demand fundamentals in the uranium market are in a period of significant change and uncertainty, and point to a need for more primary mine production, which will require new investment. Higher sustained prices are needed to encourage the required new investment in primary production.
Cameco is positioned to benefit from this need for new supply through its control of more than 65% of currently planned new uranium production.
Uraniumrn Demand The nuclear power trends mentioned earlier are generally positive for nuclear energy. However, it is difficult to know whether these trends and the national debates on the long-term future of nuclear power will eventually result in more or less favourable conditions for the nuclear industry. Of note, however, is that the two most populous countries, China and India, representing over one-half of the world's population, are
WORLD URANIUM PRODUCTION Despite losing three months of production at the McArthur River mine, Cameco i increased uranium production by i6% during 2003 to rS.v5 milion pounds or more than 20o of world output. The company plans to produce 20.7 million pounds during 2004.
,million lbs U30, 16%
22%
Africa 15 Australia 20 us 2
Other 4
CIS/China 24 Canada 27 TotalI 9-2 committed to increasing their share of nuclear generated electricity.
New construction, improved reactor operations, uprates and the extension of reactor lives make it highly likely that, at a minimum, the current demand for uranium will continue for a number of years. In the shorter term, perceptions that there are ample uranium supplies are beginning to change as excess inventories decline. This change has already begun to affect uranium prices as average spot prices rose during 2003 to $14.45 per pound from $10.20 a year earlier. As secondary supplies continue to decrease it is expected that uranium prices will more closely reflect the cost of primary supply, including a reasonable return on new investment.
Western world uranium consumption totalled about 155 million pounds in 2003. Cameco estimates that annual uranium consumption in the western world will reach 172 million pounds in 2013, reflecting an annual growth rate of 1% per year over the period. Demand in the former Soviet Union, Eastern Europe and China was about 25 million pounds in 2003 and is expected to increase to about 33 million pounds in 2013. In total, world uranium demand was 180 million pounds in 2003 and is expected to increase to 205 million pounds in 2013. In 2004, uranium demand is expected to remain about the same as 2003.
In 2003, five reactors started commercial operations, while five smaller reactors closed, maintaining the total number of reactors at 437 at the end of the year.
The net gain in installed capacity was 3,200 MW in 2003.
Uranium Supply The world uranium supply comes from primary mine production and a number of secondary sources.
Mine Production World production in 2003 was about 92 million pounds U308, about the same as 2002. Western world production decreased 4% to about 68 million pounds, largely as a result of operating difficulties at Cameco's McArthur River mine, but is expected to increase to about 75 million pounds in 2004.
In 2003, the world's major uranium producers were affected by the weakening US dollar. While most uranium is sold in US dollars, most of the world's production comes from outside the US. Uranium prices increased over 40% in 2003, but this increase was largely offset by the growing strength of other currencies against the US dollar. For example, in the same period, the uranium price only increased by 18% in Canadian dollars, 6% in Australian dollars, and 5% in South African rand. The countries affected by these currency changes produced about 59% of world production in 2003.
As a consequence, additional price increases will be required to stimulate exploration and development of new production in these countries.
Secondary Sources Secondary sources of supply consist of surplus military materials, excess inventory and recycled products. With the exception of recycled material, secondary supplies are finite. Recycled products are currently a high-cost fuel alternative and are used by utilities in a limited number of countries.
One of the largest sources of secondary supply is the uranium derived from Russian highly enriched uranium (HEU). As a result of the 1994 HEU agreement between the US and Russia to reduce the number of nuclear weapons, additional supplies of uranium have been available to the market. Under the 20-year agreement, weapons grade HEU is blended down in Russia to low enriched uranium (LEU) capable of being used in western world nuclear power plants.
Cameco, together with two other companies, will purchase an increasing quantity of the uranium feed component of the Russian LEU over the next few years. Uranium not purchased is returned to Russia and held in a special stockpile for use in blending additional HEU or, to the extent the stockpile
(
WORLD MARKET (mill on lbs U3%)
Uranium prices began to reflect the long-standing gap between production and consumption during 2003.
, jI
- Prodwito, Flconsu,,ption
'estimate 6
WESTERN WORLD CONTRACT VOLUMES (MiltiOn lbs U308)
More than 75% of world uranium contracting occurred in the Long-term market over the past three years.
- Spo Maet (U.Q
[- Long-Tern Market; I
12c 99 go 97*
90es 97 2001 2002 2003 lestimate exceeds 58 million pounds U30 8, for sale under certain conditions. Carneco and its partners also have options to purchase uranium from this stockpile. At the end of 2003, there were 44 million pounds U308 equivalent in the stockpile.
On February 12, 2004 Cameco, its partners and Tenex agreed in principle to allow Tenex:
- to return additional quantities of uranium to Russia, and
This would reduce the remaining quantity of uranium available for Cameco and its partners to purchase over the remaining life of the HEU agreement which will be completed in 2013.
In 2003, all scheduled LEU deliveries (24 million pounds U3 08 equivalent) were received in the US from Russia. For 2003, dte aggregate US sales quota of uranium derived from Russian HEU was 12 million pounds and Cameco purchased almost 4 million pounds, which represents its prescribed share of the quota and some additional quantities. The US sales quota in 2004 is 14 million pounds.
The other large source of secondary supply is excess inventories. Prior to 1985, uranium mine production exceeded reactor requirements due, in large part, to government incentive programs that anticipated rapid growth of nuclear generated electricity. The result was a buildup of large inventories, both in the commercial and government sectors. Over the past 19 years, uranium mine production has been less than annual requirements and the company believes that most of these inventories have been consumed.
Cameco estimates the drawdown in 2003 of excess inventory held by western world utilities, producers, governments and other industry participants was in the order of 35 to 40 million pounds UO8. Inventory drawdown in 2004 is expected to be somewhat lower than in 2003, reflecting the declining inventory availability, as noted above.
Uranium Markets Utilities secure about 85 to 90% of their uranium requirements by entering into medium-and long-term contracts with uranium suppliers. These contracts usually provide for deliveries to begin one to three years after execution and continue for several years thereafter. In awarding contracts, utilities consider the commercial terms offered, including price, and the producer's record of performance and uranium reserves.
Prices are established by a number of methods including base prices adjusted by inflation indices, reference prices (generally spot price indicators but also long-term reference prices) and annual price negotiations. Many contracts also contain floor prices, ceiling prices and other negotiated provisions that affect the price ultimately paid.
Utilities acquire the remaining 10 to 15% of their uranium requirements through spot and near-term purchases from producers and traders. Spot marker purchases are those that call for delivery within one year. Traders generally source their uranium from organizations holding excess inventory, including utilities, producers and governments.
Uranium Spot Market Spot marker demand was steady throughout 2003 and totalled 22 million pounds for the year, up from 20 million pounds in 2002. Over 2003, the average spot price increased by more than 40%
to close the year at $14.45 (US) per pound U3 0 8. The spot market represented about 14% of the western world's uranium consumption in 2003, a modest increase over the past several years.
Long-Termn Uranium Market The long-term contract price indicator published by TradeTech closed the year at $15.50 (US), a 44% increase during 2003.
Long-term contracting in 2003 by western world utilities is estimated to have been more than 75 million pounds.
This, combined with spot market sales of about 22 million pounds, represented only about 62% of western world consumption during the year.
Year-End Prices
($US/lb U308)
Market Spot uranium'
..I..
Long-term uranium' 2003 2002
% change 14.45 10.20 42 15.50 10.75 4-4
...... 1 1...
I.........
I -....
'Spot prices are industry ave-ages.
'2TradeTech
AVERAGE URANIUM SPOT PRICE (SUS/tb ULJ0g The spot price for uranium increased by more than 4o0% during 2003. Spot demand increased to 22 million pounds or about i4%/o of the western world's consumption.
0.
2001 2002 2003 Utanium Business-Key Performance Drivers The major factors that drive Cameco's uranium business results are:
- prices - spot market and contract, v volume - sales, production, purchases, v costs - production and purchases,
- relationship between the US and Canadian dollars.
Prices - Spot/Long-TFerm While Cameco generally does not sell uranium in the spot market, about 60%
of the company's uranium under its long-term contracts is sold at prices that reference the spot market price near the time of delivery. The remaining 40% is sold at fixed prices or base prices escalated by an inflation index.
Most of the company's spot market-related contracts were entered into a number of years ago when the spot price was much lower than the year-end average price of$ 14.45 (US) per pound.
These contracts generally contain ceiling prices. Due to the rapid increase in the uranium spot price in the latter part of 2003, a number of spot market-related contracts reached ceiling prices in the near term. The impact of ceiling prices becamne significant as the spot price moved into Ehc $14.00 (US) range.
In addition, many of Caineco's fixed/basc-price contracts were also entered into when the uranium spot price was considerably lower and some of the older, more favourably priced contracts are expiring. As a result, in 2004, the average realized price from these fixed-price contracts is expected to be lower than in 2003.
However, the impact of the current higher spot prices will benefit Catneco over the longer term as the company delivers uranium in the future under new contracts signed in the current environment.
Volume - Sales, Production, Purchases Sales Volume Cameco sold more than 35 million pounds of uranium in 2003, up 11 %
from 2002. In 2004, Cameco's uranium sales volumes are expected to total about 32 million pounds. For the period 2004 forward, Cameco has more than 1 00 million pounds of uranium committed over the following five years. About 75%
of the sales commitments in that five-year period will be delivered during 2004 to 2006. Cameco's committed sales decline rapidly over this period and they will be replaced in the normal course with contracts reflecting prevailing market conditions.
Cameco sells more uranium than it produces from its mines. Cameco's sales commitments are filled by a combination of sources consisting of mine production, long-term purchase arrangements, spot purchases and inventory.
Production Volume For 2003, Cameco's original uranium production target was 20.9 million pounds. Due to the water inflow incident at McArthur River, the 2003 production target was revised to 16.7 million pounds. Actual production in 2003 was 18.5 million pounds, above the company's revised target, and up almost 17% from 2002. The Inkai test mine in Kazakhstan also produced 169,000 pounds of uranium (Cameco's share) in 2003.
McArthur River production was down in 2003 compared to 2002 due to the water inflow incident, which resulted in the mine being closed for about three months to deal with the additional water.
Rabbit Lake was in the process of restarting in 2002 and produced for the fill year in 2003.
In 2004, Carneco's share of total mine production is expected to rise to 20.7 million pounds U30 5, up 2.2 million pounds or 12% from 2003 due primarily to the McArthur River mine returning to normal operations. The planned production of 12.9 million pounds at McArthur River/Key Lake represents Cameco's share of the maximum production level allowed for these operations under their current licences.
At Rabbit Lake, the Eagle Point underground mine is expected to produce 5.8 million pounds in 2004, from its remaining reserves of about (Cameco's share 000 Lbs U30 8) 2004 Plan 2003 Actual 2002 Actual MeArthur River/Key Lake_
12,900 10,579 13095 Rabbit Lake 5,800 5,928 1,143 Smnith Ranch/Highland 1,200 1,201 887 Crow Butte 800 823 768 Total 20,700 18,531 15,893 8
12.5 million pounds U30 8. Prospects for additional reserves have been identified and surface drilling for targets near current workings as well as underground drilling to further explore a deeper target will begin in the first quarter of 2004.
In the US, the in situ leach (ISL) operations at the Smith Ranch-Highland mine have planned production of 1.2 million pounds while Crow Butte is expected to produce 0.8 million pounds in 2004. Studies are underway to examine alternatives to increase production at these operations.
In addition, the Inkai test mine is expected to produce 0.4 million pounds of uranium in 2004 (Cameco's share is 60%).
It is anticipated that Inkai will produce 2.6 million pounds after it reaches full production. This annual production level will be examined to determine if it can be increased.
Purchases Cameco also has purchase commitments for uranium products and services from various sources. At the end of 2003, these purchase commitments totalled 88 million pounds uranium equivalent (most is in the form of UF6) over the period 2004 to 2013. Of this, 64 million pounds is from exercising options under the HEU commercial agreement. In early 2004, Cameco exercised options for an additional 4 million pounds under the HEU commercial agreement.
Purchased product also impacts Cameco's cost of supply. The majority of Cameco's purchase commitments are under long-term, fixed-price arrangements reflecting prices lower than the year-end average spot price of $14.45 (US) per pound.
{ Of the world market W Cameco meets 20% of the world's uranium and UF6 conversion needs.
The majority of Cameco's purchase commitments are under long-term.
fixed-price arrangements, reflecting prices much lower than the current spot price.
These purchase commitments total about $1.1 billion (US) as at December 31, 2003. See note 24 to the consolidated financial statements.
Costs Cameco's cost of supply is influenced by its mix of produced mine material and uranium purchases.
Uranium mine production costs are driven primarily by the grade and size of the reserves. McArthur River is the world's largest, high-grade uranium mine. Its ore grade averages 25% U308 which means it can produce more than 18 million pounds per year by extracting only 100 to 120 tonnes of ore per day.
While Rabbit Lake's average ore grade of 1% U308 is much lower than McArthur River, it compares favourably to other operating mines in the world that are generally below 0.5%.
ISL extraction methods can make even lower grade orebodies commercially attractive. Worldwide, ISL mines typically recover uranium from orebodies with an average grade in the 0.1% U308 range. Cameco's cost of supply is influenced modestly by the two US ISL operations, as the production from the ISL operations accounts for a small percentage of its total primary output.
For example, US ISL production is expected to account for about 10% of the company's planned primary output in 2004.
Foreign Exchange In 2003, the strengthening of the Canadian dollar against the US dollar affected Cameco's results. Cameco sells most of its uranium in US dollars, but the majority of its production comes from Canada. As such, the company's uranium sales are denominated mostly in US dollars, while its production costs are denominated primarily in Canadian dollars.
The strengthening Canadian dollar has emphasized the importance of the company's currency hedging policies and its drive toward geographic diversity of production. For instance, Cameco's US operations are not affected by the stronger Canadian dollar as their revenues and costs are both denominated in US dollars. In addition, prospects for production at Cameco's Inkai property in Kazakhstan remain good, as the Kazakh government has managed its currency exchange rate so that it does not fluctuate too widely against the US dollar.
The company attempts to provide some protection against exchange rate fluctuations by planned hedging activity designed to smooth volatility. Thus Cameco is protected against declines in the US dollar in the shorter term.
In addition, Cameco has a portion of its annual cash outlays denominated in US dollars, including uranium and services purchases, which provides a natural hedge. While natural hedges provide cash flow protection against exchange rate fluctuations, the impacts on earnings may be dispersed over several fiscal periods and are more difficult to identify.
For 2003, $177 million (US) of Cameco's uranium and conversion revenue was hedged using currency i
I I
U308 REVENUE BY REGION The Americas is our largest customer region accounting for 70% of Cameco's total U30s revenue.
I 9
'01So0e
-/m/a' X X,
& -* i'111 AR t" ",
{ Of the future I Cameco holds a controlling interest in more than 65% of the world's identified future production capacity in uranium.
contracts at an average rate of $0.62. As of December 31, 2003, about 50% of 2004 uranium and conversion revenue was hedged using currency contracts at an effective rate of $0.68.
To the extent the company borrows in US dollars, this provides a hedge against its US revenue generating assets.
Uranium Strategies Cameco's overall objective is to maintain and leverage its competitive advantage in uranium. In doing so, it strives to meet four major goals:
- to maintain its low-cost status,
- to protect and grow its market
- position,
- to improve supply flexibility, and
- to optimize its contract portfolio.
There are a number of key strategies the company uses to achieve its goals:
Maintain its low-cost status:
- add low-cost reserves:
- through exploration and acquisition, and
- by validating the potential for competitive ISL production from existing properties.
- improve margins by:
- optimizing ISL and conventional production,
- gaining cost efficiencies through quality and business process improvements, and
- pursuing fundamental productivity gains through technological development.
Protect and grow its market position:
- leverage industry relationships to participate in new production,
- ensure sustainable production by identifying and exploring for profitable uranium resources, and
- develop customer relationships and expand the range of services currently available while enhancing the company's reputation as a secure supplier.
Improve supply flexibility:
- accelerate Inkai production in Kazakhstan,
- bring Cigar Lake into production when appropriate,
- continue to pursue an international exploration program, and
- manage secondary supplies.
Optimize contract portfolio:
- position for market recovery by managing the company's portfolio of contracts to maximize profits for Cameco in light of future expectations of prices.
Capability to Deliver Results Cameco has three major resources from which to draw on in order to deliver results:
- quality uranium assets,
- management of secondary supplies, and
- strong market position.
Quality Uranium Assets Cameco has geographically diverse primary supply, with uranium mines and projects in Canada, the US and Kazakhstan. The company owns 550 million pounds of proven and probable uranium reserves, which include more than 400 million pounds of the world's richest uranium reserves at McArthur River and Cigar Lake. Cameco's share of reserves at McArthur River and Cigar Lake can produce as much electricity as would be generated by 2 billion tonnes of coal or 9 billion barrels of oil.
Another quality asset is the uranium exploration expertise that Cameco has retained even during the low uranium price cycles. The company's large and high-grade uranium deposits were all discovered through successful exploration over the past 20 years. Cameco has pursued a focused and effective exploration program to identify profitable uranium resources for the future to maintain the companys position as the world's largest uranium producer.
The company's uranium exploration efforts focus predominantly, but not exclusively, on prospects in the Athabasca Basin of northern Saskatchewan, Canada, and the Arnhem Land region in Northern Territory, Australia. In addition, Cameco and an exploration company called Pioneer Metals combined some assets in 2001 to form a junior uranium company called UEX Corporation. At December 31, 2003, Cameco's ownership interest in UEX was 29%.
In 2003, uranium exploration expenditures were about $13 million, up
$1 million from 2002. In 2004, the planned uranium exploration expenditures are $15 million.
Manage Secondary Supplies Cameco manages a significant portion of secondary supplies through a number of long-term agreements that allow the company to purchase uranium from dismantled Russian weapons and other secondary sources. These agreements give Cameco greater diversity of supply and ensure that this material enters the market in an orderly fashion.
10
Cameco generated a profit through its management of secondary supplies in 2003.
Strong market position Cameco supplies about 20% of the world's uranium demand. The company's market position allows it to purchase uranium in the spot market when prices are low, adding to its profits and providing support for weak markets.
Uranium Butsiness Results Cameco's uranium business consists of the McArthur River, Key Lake and Rabbit Lake mine/mill operations in Saskatchewan, nvo ISL mines in the US, the Inkai ISL test mine in Kazakhstan, the Cigar Lake development project in Saskatchewan and uranium exploration projects located primarily in Canada and Australia.
Revenue In 2003, revenue from the uranium business rose by 9% to $570 million from
$524 million in 2002 due to an 11%
No increase in sales volume. For the second consecutive year, Cameco delivered a record quantity of uranium concentrates.
The average realized selling price was 2%
lower than 2002 as the influence of higher spot prices in the second half of the year was offset by a less favourable foreign exchange rate and lower realized prices on fixed-price contracts.
Cost of products and services sold In 2003, the cost of products and services sold wvas $395 million compared
{ Uranium price increase }
The average spot price for uranium increased more than 40% to $14.45 (US) per pound during 2003.
to $345 million in 2002, an increase of 14% due to the higher volume sold and rehabilitation costs of $26 million at McArthur River related to the wvater inflow incident. Excluding these costs for McArthur River in 2003 and Rabbit Lake's care and maintenance costs of
$8 million in 2002, the unit cost of sales decreased by 2% compared to 2002, primarily as a result of a $7 million royalty recovery recorded in 2003.
Depreciation, depletion and reclamation In 2003, depreciation, depletion and reclamation (DD&R) charges were
$92 million compared to $86 million in 2002, an increase of $6 million due to the higher volume sold. On a per unit basis, costs rose by about 3% due to increased deliveries of Rabbit Lake material, which carries a relatively high DD&R charge.
Gross profit In 2003, gross profit from the uranium business amounted to $84 million compared to $93 million in 2002, a decrease of $9 million or 10%. This decline was attributable to rehabilitation costs at McArthur River, partially offset by the 11% increase in deliveries of uranium concentrates. Earnings before taxes from the uranium business decreased by $13 million in 2003 and the profit margin declined to 15% from 18% in 2002. Excluding the rehabilitation costs at McArthur River, earnings before taxes were $97 million and the gross profit margin was 17%.
2004 Outlook for Uranium In 2004, Cameco's uranium revenue is projected to dedine by about 5%
compared to 2003 as the result of a 10% decline in sales volume. This decline in sales volume reflects Cameco's plan to decrease the amount of uranium purchased on the spot market for resale.
A modest improvement in realized price is expected to partially offset the impact of the decline in volume. Cameco expects its average realized price in Canadian dollars will increase by about 5% in 2004 even after an expected negative impact of an anticipated 5%
decline in the US/Canadian dollar exchange rate.
Uranium margins are expected to be stronger than in 2003 due to the higher average price and lower costs. In 2003, the gross profit was burdened by the costs associated with the remcdiation of the McArthur River mine following a water inflow problem.
Revenue ($ millions)
Grossprofit ($ millions)
Gross profit %
Earnis before taxes ($ millions)
Sales volume (million lbs U3 0 8 )
Production (million lbs U308)
I P I I A I I _r I
_ ____ ___J 2003 2002
% Change 570 524 9
84 93 (10; 15 18 (17; 71 84 (15:
35.4 31.9 11 18.5 15.9 18 F
Conversion Demand The demand for uranium hexafluoride (UF6) conversion services is directly linked to the level of electricity generated by light water nuclear power plants. The demand for uranium dioxide (UO2) conversion services is linked to the level I
11
of electricity generated by Candu heavy water nuclear power plants.
Western world demand for UF6 and natural U0 2 conversion services was estimated to be approximately 58,200 tonnes of uranium in 2003. It is estimated that this demand will increase to approx-imately 65,700 tonnes of uranium by 2013. In 2003, demand in the former Soviet Union, Eastern Europe and China was about 9,400 tonnes of uranium and is expected to increase to about 12,400 tonnes of uranium by 2013. In 2004, conversion demand is expected to remain about the same as in 2003.
Conversion Supply The western world UF6 conversion industry consists of Cameco and three other commercial producers with an annual capacity of about 45,000 tonnes of uranium. Cameco's annual UF6 conversion capacity constitutes approximately 28% of western world capacity.
In 2001, British Nuclear Fuels Limited (BNFL), with annual conversion capacity of about 6,000 tonnes, announced that it would halt production of UF6 in 2006. With the announcement, BNFL ceased the marketing of UF6 conversion services and sold its uncommitted UF6 production to Cameco.
In addition, supplies are available from secondary sources including excess AVERAGE CONVERSION SPOT PRICE (SUS/Kg U as UF6 in North America)
Spot prices for UF6 conversion in the US increased by 17% during 2003 due to tightening of suppty.
- 6.
2 -. -- --. -. - -
C, 2001 2002 2003 western inventories, Russian inventory sales in the form of low enriched uranium, Russian re-enriched depleted tails in the form of UF6 and Russian and US uranium derived from dismantling nuclear weapons.
Russia supplies most of the requirements of the former Soviet Union and Eastern Europe in the form of low enriched uranium.
Cameco is the only commercial supplier of conversion for natural UO2 customers in the world.
Conversion Markets Utilities contract more than 90% of their UF 6 conversion services through medium-and long-term contracts, purchasing the remainder on the spot market. Cameco is the only commercial supplier of ceramic grade UO2 for Candu reactors operated in Canada.
Cameco also exports UO2 to South Korea for its Candu reactors and to the US and Japan for use as blanket fuel in boiling water reactors.
Spot/Long-Term Conversio Market Due to tightening of supply, spot and long-term prices for UF6 rose in 2003.
Spot prices for UF6 conversion services in the US market increased by 17%
during 2003 and in the European market the spot price rose by 10%.
The published long-term contract price indicators closed the year at $6.00 (US)
KgU as UF6 for North American delivery and $6.75 (US) for European delivery, a 15% and 14% increase respectively.
Conversion prices are expected to remain firm in 2004, as the tight supply situation is likely to continue in 2004.
Conversion Business - Key Peiformance Drivers The major factors that drive Carneco's conversion business results are:
- prices - spot and long-term,
- volume - sales, production and purchases,
- costs - production and purchases, and
- relationship between the US and Canadian dollars.
Prices - Spot/Long-Term Cameco sells its conversion services directly to utilities located in many parts of the world primarily through medium-and long-term contracts. Going forward, about 90% of contract commitments, in excess of 50,000 tonnes, have pricing terms that are fixed-or base-price escalated. The remaining 10% reference the spot price near the time of delivery.
.Year-End Prices
$US/lb U308 Markets 2003 2002
% Change Spot LF6 conversion North America 5.88 17 Europe 6.75 6.13 10 Long-term UF6 conversion2
...............I--...........
North America 6.00 5.20 15 Europe 6.75 5.90 14 j Spc)' prices are irnluatry ;.verages.
X radeleCh 12
Volumes - Sales, Production, Purchaases Sales Volume Cameco sold 16,747 tonnes of uranium conversion services in 2003, up 10%
from 2002. In 2004, Camecos conversion volume is expected to total about 16,000 tonnes uranium, 4% less than in 2003.
Production Volume At Cameco's Port Hope facilities, conversion production totalled 13.273 tonnes uranium in 2003, up 7% from 2002. In 2004, production is expected to be about 12,400 tonnes, 6% less than in 2003.
Purchase Volume Cameco also has purchase commitments, which primarily reflect the HEU conversion component, re-enriched tails product and the company's agreement to purchase BNFEs excess production until shutdown of BNFL's plant. As noted in the uranium business section, Cameco's purchase commitments over the period 2004 to 2013 total about 88 million pounds uranium equivalent (or more than 34,000 tonnes U equivalent), most of which is in the form of UF6.
Costs Cameco's cost of supply is influenced by its mix of production and purchases.
Conversion operating costs are primarily fixed with the largest component being labour. The largest variable operating cost is for anhydrous hydrogen fluoride.
The majority of Cameco's purchase commitments are under long-term, fixed-price arrangements reflecting prices lower than the current spot prices.
Foreign Exchange The majority of the companys conversion products are sold in the US and sales are denominated in US dollars, while production costs are incurred in Canada and denominated in Caniadian dollars. As a result, the strengthening of the Canadian dollar against the US dollar in 2003 negatively affected Cameco's results.
A discussion about Cameco's hedging program can be found in the uranium business section under the heading "Foreign Exchange".
Conversion Strategies Cameco's objective is to maintain and leverage its competitive advantage in conversion services. In doing so, it strives to meet four major goals:
- to maintain its low-cost position,
- to protect and grow its market
- position,
- to improve supply flexibility, and
- to optimize contract position.
The following are the key strategies the company uses to achieve its goals:
- to improve margins by gaining cost efficiencies through quality and business process improvements and pursuing productivity gains through technological development,
- to grow market share through product diversification to meet changing nuclear fuel requirements,
- to optimize capacity utilization in preparation for BNFI's exit from the conversion market,
- to position for market recovery by managing the company's portfolio of contracts to maximize profits for Cameco in light of future expectations of prices, and
- to manage secondary supplies.
Capability to Deliver Results A key competitive advantage for Cameco lies in its ability to provide both uranium and conversion services, allowing it to benefit from synergies of offering combined purchasing for the first two fuel components of nuclear fuel supply.
The Port Hope conversion facility currently supplies natural UO2 powder for the manufacture of fuels for Candu reactors operating in Canada and other countries. The market for UO2 is changing, at least partially, due to the planned introduction of slightly enriched uranium (SEU) in place of the natural uranium dioxide. SEU is a uranium dioxide powder that has an enrichment level up to 2.5% U-235, and is the primary uranium component of a new type of fuel that is proposed for use in some Candu reactors. Cameco's technology development group developed the process to produce SEU, providing the company with an opportunity to capitalize on a changing marker.
Initially the SEU will be produced for use in Bruce Power's B reactors as part of a power uprate project that is expected to add about 400 megawatts of power (an increase of 9% over Bruce Power's current capacity) to Ontario's electricity grid. It is expected that SEU fuel will be used in the next generation of Candu reactors called the advanced Candu reactor (ACR) designed by Atomic Energy of Canada Ltd.
In 2003, Cameco has advanced the SEU project through the first stage of the regulatory process by filing a project proposal and receiving the approved environmental assessment (EA) guidelines from the Canadian Nuclear Safety Commission (CNSC).
In 2004, important project milestones include completing and submitting the EA, completing the engineering design and preparing the Port Hope site for the construction of the SEU blending facility. Demonstration fuel bundles are to be placed in the Bruce B reactors in late 2004 or early 2005. The SEU powder for these bundles will be produced at the Port Hope facility.
Approval for preparation of limited quantities of these bundles has already been obtained.
The total annual quantity of SEU produced will depend on future market development. The SEU product would replace a limited volume of the current natural product sales.
13
IIf U 1 :U I U !i i:I[U U i'm Revenue ($ millions)
Gross profit ($ millions)
Gross profit %
Earnings before taxes ($ millions)
Sales, volucmt e (million kgU)
Production (mlion kgU) 142 137 4
- 4...................
40 44 (1 0) 2 8....
........-...I.........-.
,,,2.8,.,.,,,,,,..,,,,,,3,2,,,,,,,.,,
(13) 38 41 (7) 16.7 15.3 10 13.3 12.4 7
...I....
Conversion Business Results Cameco's conversion business consists of the uranium refining and conversion facilities located in Ontario.
Revenue In 2003, revenue from the conversion business rose by 4% to $142 million from $137 million in 2002 due to a 10% increase in sales volumes. The realized selling price declined by 4% due largely to changes in foreign exchange rates. Record annual conversion sales of 16,747 tonnes were achieved.
Cost of products and services sold In 2003, the cost of products and services sold was $92 million compared to $83 million in 2002, an increase of 11% due to the higher sales volume. The unit cost of product sold rose by 1% due to an increase in the cost of purchased conversion services, which more than offset a reduction in the unit cost of produced conversion. In 2003, Cameco's unit cost of produced conversion declined as record production of 13,273 tonnes was achieved.
Depreciation, depletion and reclamation In 2003, depreciation, depletion and reclamation (DD&R) charges were unchanged at $11 million. In spite of the higher deliveries, total DD&R was unchanged compared to 2002 as sales in 2003 included a higher proportion of purchased conversion.
Gross profit In 2003, gross profit from the conversion business amounted to $40 million compared to $44 million in 2002. The gross profit margin for the conversion business declined to 28% from 32% due to a lower average realized price.
2004 Outlook for Conversion At Port Hope, conversion production is expected to be about 12,400 tonnes, a decline of 6% compared to 2003 output due to an anticipated decrease in sales volume in 2004.
Revenue from the conversion business is anticipated to be about 5% lower than in 2003 due primarily to a 4% decline in sales volume. A modest decrease in realized price is also anticipated as a result of the expected continuing decline in the US dollar. Conversion margins are projected to decline compared to 2003, as the \\unit cost of conversion production is likely to increase as a result of Lower expected output. The unit cost of purchased conversion is also expected to rise as lower-cost sources of supply are diminished.
Cameco has a 31.6% interest in the Bruce Power Limited Partnership. Bruce Power's business is the generation and sale of electricity into the Ontario wholesale market. Bruce Power generates electricity from the four Bruce B and two Bruce A nuclear-powered units. The Bruce B nuclear units and the two recently restarted Bruce A units have capacity to supply about 20% of Ontario's electricity needs.
In addition to the carrying value of its investment in Bruce Power, Cameco has provided certain financial assurances on behalf of the partnership. Carneco's maximum exposure under these arrangements is $274 million and at December 31, 2003, the actual exposure under these assurances was $191 million.
Sec note 19 to the consolidated financial statements.
Cameco has extended a loan to the partnership in the amount of $75 million. The loan is due February 14, 2008 and bears interest at a rate of 10.5% per annum. At December 31, 2003, the entire amount was outstanding.
Caameco has entered into fuel supply agreements with Bruce Power for the procurement of the fabricated fuel.
Under these agreements, Cameco will supply uranium and conversion services and finance the purchase of fabrication services. Contract terms are at market rates and on normal trade terms. During 2003, sales of uranium and conversion services to Bruce Power amounted to approximately 3% of Cameco's total revenue. At December 31, 2003, amounts receivable under these agreements amounted to $30 million.
Ontario Electricity Market The Ontario government deregulated its electricity market in May 2002 to encourage innovation and investment in new generation capacity. Seven months CONVERSION REVENUE BY REGION The Americas account for 58% of Cameco's conversion revenue.
14
later, the province fioze rates for retail (residential and small business) customers at 4.3 cents per kilowatt hour (kWh) to shelter consumers from high prices. The wholesale market, where Bruce Power sells all of its electricity, continues to operate free of price regulation.
Late in 2003, the newly elected Liberal government in Ontario introduced the Ontario Energy Board Amendment Act 2003, which will remove the 4.3¢1kWh price freeze for the retail market. As of April 1, 2004, an interim-pricing plan is expected to be implemented. The first 750 kWh of a customer's consumption will be priced at 4.7c/kWh and monthly consumption above that level will be priced at 5.5q/kWh. The Ontario government stated that this structure will remain in place until the independent regulator, the Ontario Energy Board, develops a clear and transparent mechanism for setting prices, to be implemented as soon as possible, but no later than May 1, 2005. The interim pricing structure does not distinguish between commercial and residential users; rather it distinguishes between consumption patterns.
These regulatory changes have not had as yet a direct impact on the price in the wholesale electricity market into which Bruce Power sells its output. However, the volume of medium-and long-term transactions in the wholesale electricity market has dramatically decreased and the regulatory changes have increased uncertainty for generators like Bruce Power.
Nuclear Electricity Business -
Key Petformance Drivers The major factors that drive Bruce Power's results arc:
- prices,
- volume, and
- costs.
Prices Bruce Power earnings are significantly affected by fluctuations in electricity spot
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{ US households "
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Electricity generated from Carneco's uranium powers 11%
of US households.
market prices, which in turn are affected by supply (temporary generating station shutdowns) and demand (mainly driven by weather).
To reduce its exposure to fluctuations in spot marker prices, Bruce Power has a portfolio of fixed-price sales contracts.
About 65% of Bruce Power's output was delivered into fixed-price contracts during 2003 compared to 69% in 2002.
Volume Output is affected by shutdowns, both those that are planned (for maintenance) and those that are unplanned (such as the August 14, 2003 blackout in Ontario).
Bruce Power attempts to achieve high output through effective maintenance programs, as well as various investments that can help secure and improve output.
Since about 95% of Bruce Power's costs are fixed, volume improvements are directly reflected in financial performance.
Costs Bruce Power's operating costs in 2003 totalled $853 million ($35 per megawatt hour (MWh)) compared to $750 million
($36 per MWh) in 2002, primarily reflecting increased maintenance costs for the Bruce B reactors and operating costs for Bruce A unit 4 in November and December, after it was brought back into production. Bruce Power continually strives to control its costs through effective management of routine maintenance programs and investments intended to improve operating performance.
Bruce Power Strategies Operational Bruce Power plans to improve the operating efficiency of the Bruce reactors.
In 2003, the capacity factor achieved was 85%. While it is expected to decline to approximately 80% in 2004 due to a number of planned maintenance outages, the long-term goal is to reach a capacity factor of 90%.
Because about 95% of Bruce Power's operating costs are fixed, the more output produced, the lower the unit costs.
Growth Bruce Power will examine the feasibility of restarting Bruce A units 1 and 2 to serve Ontario's growing electricity needs.
The study will include a technical inspection of these reactors and an assessment of the cost to upgrade them to current industry operational safety standards.
Carneco believes that looking at restarting these two units is a logical first step in determining if Bruce Power can play a growing role in securing Ontario's future energy needs. The study will determine if an adequate return on investment can be achieved.
The study will also establish what improvements are needed to extend the lives of the four Bruce B reactors and the two operating Bruce A reactors, which are scheduled to be taken out of service over the next 15 years.
15
Bruce Power will also examine the feasibility of building one or more advanced Candu reactors currently being developed by Atomic Energy of Canada Limited. Bruce Power has a well-established infrastructure. The Bruce site was designed to accommodate expansion and as such is ideal for potential new reactors.
Capability to Deliver Results Bruce Power has an experienced executive team leading more than 3,500 highly skilled employees. Together they achieved an 18% increase in output and a 13% increase in the capacity factor in 2003 while managing the restart of two long-idled reactors. Bruce Power has invested, and continues to invest, substantial amounts to improve reactor output and reliability.
At the same time, Bruce Power's ongoing emphasis on safety was reflected in its accident frequency of only 0.12 lost-time injuries for every 200,000 hours0 days <br />0 hours <br />0 weeks <br />0 months <br /> worked in 2003. That was significantly better than the company's ambitious target of 0.20.
Bruce Power's cash flows provide a source of finds to make investments to improve its operational performance and expand its capacity.
Electricity Business Results Revenue Bruce Power's revenue in 2003 totalled
$1,208 million, up 31 % compared to 2002. Bruce Power has contributed $108 million of pre-tax earnings to Cameco's results ($72 million after tax or $1.29 per share) compared to pre-tax earnings of $16 million in 2002 ($11 million after tax or $0.19 per share).
Operation For 2003, Bruce Power achieved a total capacity factor of 85% compared to 75%
in 2002. Bruce Power produced 24.5 T
h, an 18% increase over the same period last year. In 2002, Bruce Power carried out a series of major planned outages to prepare the four Bruce B
($ millions) 2003 2002 Revenue 1,208 919 Operating costs 853 750 Earnings before interest and taxes 355 169 Interest 69 63 Earnings before taxes 286 106 Output (terawatt hours) 24.5 20.8
........I.
............................................I..........................
Capacity factor' (%)
85 75 Realized price ($/MWh) 48 43
'Capacity factor for a given period represents the amount of electricity actually produced for sale as a percentage of the amount of electricity the plants are capable of producing for sale.
($ millions) 2003 2002 Bruce Power's earnings before taxes (iooo) 286 106 Cameco's share of earnings before adjustments 77 16 Adjustments:
Sales contract valuation, 20 Interest capitalization 12 2
Interest income on loan to Bruce Power 7
Fair value increments on assets' (8)
(2)
Earnings from Bruce Power 108 16
- See note iS to the consolidated financial statements reactors for better long-term realized price averaged $48 per MWh performance.
from a mix of contract and spot sales, a 12% increase over the previous year.
Electricity Prices For 2003, the Ontario electricity spot Costs price averaged about $54 per MWh.
The 2003 cost per MWh was lower During this period, Bruce Power's compared to 2002 because about 95%
ONTARIO ELECTRICITY SPOT PRICE (monthly average S/MWh)
The volume of medium-and long-term transactions completed in Ontario's wholesale electricity market during 2003 declined due to uncertainty over the direction of government policy.
t 0oo 80 I 6, 40 20
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16
of Bruce Power's total operating costs are fixed and the output was higher year-over-year. Interest cost of $69 million included interest on the long-term loans from Bruce Power partners and interest costs attributable to the capital lease.
Bruce Power has spent about $350 million on the restart of the two Bruce A units in 2003, bringing the total project capital cost to $724 million, which includes $4 million in post-synchro-nization operational losses that were capitalized during the commissioning phase. Bruce Power spent an additional
$159 million on capital expenditures at Bruce B, the majority of which was for safety systems and power uprate programs.
2004 Outlook for Electricity Output The targeted capacity factor in 2004 for the six Bruce reactors is about 80%
compared to 85% in 2003, which reflects planned maintenance outages for the Bruce A and B reactors during the year. In addition, the vacuum building for Bruce B will be tested in the fall, which will require all four B reactors to be taken offline for about a month.
This vacuum building test is a regulatory requirement. Results from Bruce Power are projected to decline modestly in 2004 compared to 2003 due primarily to higher costs resulting from the increased level of planned outages.
Capital expenditures In 2004, Bruce Power's capital expenditure program for the two A and four B reactors is expected to total about $280 million, plus an additional
$120 million for sustaining capital and site service support areas.
Bruce Power capital expenditures are expected to average about $200 million for each of 2005 and 2006. This excludes sustaining capital and expenditures for site service support areas, which are expected to average about $120 million per year.
These capital projects will provide higher output for the Bruce B units, deliver the expected operational life for Bruce A unit 4 and increase overall efficiency for the site. These projects are the fundamental building blocks for enhancing operational performance and will allow Bruce Power to supply more power to the growing Ontario electricity market.
Funding needs for these projects will depend on the electricity price and the operational performance of the Bruce reactors. Cameco does not expect it will be required to contribute to the funding of these projects.
to Centerra. The Joint Stock Company Kyrgyzaltyn (Kyrgyzaltyn), whose shares are held 100% by the Kyrgyx government, will transfer its two-thirds interest in KGC to the new gold company. Initially after the transfer of assets, Cameco subsidiaries will hold 67% and Kyrgyzalryn will hold 33%
of Ccnterra.
In conjunction with the transfer of gold assets, Centerra intends to undertake an initial public offering (IPO) in Canada and sell shares to the public. Camncco expects to retain a majority interest in Centerra immediately following the IPO.
Kyrgyzaltyn also has the option to acquire an additional 2% of Centerra from Cameco for 30 days after Centerra is listed on the Toronto Stock Exchange (TSX).
Initially, Centerra's assets will include the following:
- 100% of KGC, owner of the Kumtor gold mine located in the Kyrgyz
- Republic,
- 100% of Kumtor Operating Company, operator of the Kumtor
- mine,
- 56% of AGR Limited (AGR), 95%
owner of the Boroo gold mine located in Mongolia,
- 62% interest in the REN joint venture, an advanced exploration project located in Nevada, US, and
- 73% interest in the exploration licences for the Gatsuurt exploration property located about 35 kilometres from Boroo in Mongolia.
In addition, about $130 million (US) in loans previously advanced by Cameco subsidiaries to the Kumtor and Boroo gold mines will be contributed by Camneco in exchange for equity in Centerra.
Closing is targeted for the second quarter of 2004 and is subject to a number of conditions including:
- consent from a number of third parties, including certain financial institutions, em:
In early January 2004, Cameco announced that it had reached an agreement with the Kyrgyz Republic to create a new jointly owned Canadian gold company called Centerra Gold Inc.
Under the agreement, Cameco subsidiaries will transfer their one-third interest in the Kumtor Gold Company (KGC) and additional gold-related assets
($ millions)
Bruce B_
rbinesl..ower up.r...
ate...
BruceA u nit 4 steam generators (progress payment)
Infrastructure projects Sub-total Sustaining capital and site service support areas Total 160 95 280 120 400 17
- Centerra entering into an underwriting agreement for an IPO of Centerra shares, and
- the conditional listing of Centerra shares on the TSX.
Cameco has negotiated a new agreement with the Kyrgyz government to ensure that a stable investment regime will be maintained in the Kyrgyz Republic for Centerra. The new agreement will take effect on closing. Centerra will have a 1 0-year tax stabilization period, during which the application of Kyrgyz tax legislation will not increase the tax burden on the Kumtor operation.
With an agreement to create Centerra, an offer will be made to the non-Cameco shareholders of AGR to exchange their AG R shares for Centerra shares.
Gold Market Review Gold prices rose substantially again in 2003, ending the year 20% higher at
$416 (US) per ounce. That followed a 25% increase in 2002. The average spot price in 2003 was $363 (US) per ounce, compared to $310 (US) per ounce in 2002.
A number of factors continue to support the strengthening gold price, including the US dollar weakness, geopolitical uncertainties and reductions in producer hedging. While years of lower gold prices have limited the development of new mines, higher prices are once again opening up investment in gold exploration and production companies.
Key Performance Drivers The major factors that drive Cameco's gold business are:
v prices,
- volume,
- cost, and
- exploration.
Gold Prices Realized prices are largely outside the control of Cameco, except through its gold hedging strategy, which the company is actively reducing. At the end of December 2003, Cameco Gold's operating companies' hedge positions totalled 478,300 ounces or about 12%
of proven and probable reserves. These hedges are expected to yield an average price of about $326 (US) per ounce.
Voluine/Cost In 2003, 677,552 ounces of gold were poured at Kumtor compared to 528,550 ounces in 2002. Gold production at Kumtor was 28% higher than in 2002 due mainly to higher grade mill feed that averaged 4.5 grams per tonne (g/t) compared to 3.7 g/t in 2002 and an improved recovery rate of 83%
compared to 78%. The ore grade and recovery were lower in 2002 due to a pit wall failure that occurred in July 2002 and forced the company to revise its mining plan. The total cash cost per ounce in 2003 was about $199 (US) calculated in accordance with the standards of The Gold Institute.
The cash cost per ounce in 2002 was $216 (US).
In 2004, production at Kumtor is expected to be about 610,000 ounces representing an 10% decrease compared to 2003. This decline is due to the milling plan which calls for a mix of low-grade stockpiled ore and higher grade mine ore. As a result, a lower average millfeed ore grade of 4.1 g/t is expected, compared to 4.5 g/t in 2003. The unit cash cost is projected to increase to $220 (US) per ounce from $199 per ounce in 2003. Ore grade is expected to be lower in future years.
The unit cash costs referenced above include exploration costs and a management fee. Due to the restructuring of the gold business under Centerra, the cash unit operating costs will be adjusted to exclude exploration costs and the management fee for a couple of reasons.
First, the exploration costs have historically been nominal, with greater than 50% of the expenditures associated DAILY GOLD PRICES (S$us/oz)
Gold prices increased 2o% in 2003.
Cameco continued to reduce its hedge positions to take advantage of rising prices.
40,0 3( 0 t 250i------ --
7 0 ---- - -- -- -- - --- -- -.......................
'S5 2300................
200;.,
2 F i
PO M
J A SO0N D with mining activities such as further ore body delineation and grade control, with the remainder related to extending the mine life. The Gold Institute Standard excludes the latter type costs from the standard unit cost calculation. As exploration expenditures are anticipated to increase in the coming years, and the focus of the exploration program changes to extending the mine life, it was determined that the expense should be identified separately and excluded from the unit cost calculation. The exploration expense accounted for about $0, $2 and
$7 per ounce respectively of the $216,
$199 and $220 unit cash costs.
Second. Cameco's wholly owned subsidiary Kurntor Operating Company earns a management fee for operating the Kumtor mine. As Centerra will soon own 100% of KOC and KGC after the restructuring, it is appropriate that the inter-company management fee now also be identified separately and excluded from Centerra's reported production costs. The management fee accounted for about $9, $8 and $7 per ounce respectively of the $216, $199 and $220 unit cash costs. Beginning in 2004, Centerra will report unit cash costs that exclude exploration costs and the management fee. See table on the next page for a breakdown of dte costs.
At Boroo in Mongolia, commercial production was achieved Marchl, 2004.
18
The cost of the project was about $75 million (US). Boroo production is expected to total about 210,000 ounces in 2004, at a cash cost of about $170 (US) per ounce.
Gold Exploration In 2003, gold exploration expenditures decreased to $9 million from $10 million in the prior year due to the lower exchange rate. In 2003, approximately 70% of the total exploration expenditures were incurred in North America with the remainder relating to exploration activity in Central Asia.
Gold Strategies Cameco has been a gold producer since its inception and, over the years, has assembled some quality gold properties.
Cameco Gold Inc., a wholly owned subsidiary of Cameco, manages the company's gold activities from its head office in Toronto, Ontario. Cameco believes these assets are undervalued inside of Cameco, as they do not benefit from higher gold company valuations that apply in today's gold market. For that reason, Cameco has embarked on a strategy to unlock this value by packaging the gold assets in a single vehicle for public listing.
Cameco's partner in the Kumtor gold mine, the Kyrgyz government through its agency Kyrgyzaltyn, had elected to participate by contributing its interest, but the rapidly rising gold price in 2003 delayed implementing the strategy. At the end of 2003, the Kyrgyx government ratified an agreement. Assuming final agreements can be reached with all other critical parties and markets remain favourable, the newly named Centerra Gold Inc. plans to list on the Toronto Stock Exchange in the second quarter of 2004.
Capability to Deliver Results Ability to Perform in Remote Environments Cameco Gold, Centerra's majority owner, has a proven ability to deliver results by developing and operating properties in remote areas of the world.
It has built expertise in managing relationships with local cultures and governments in Central Asia and in sourcing and training local manpower.
Nonetheless, the management and training of local labour resources can be challenging as standards, customs and practices vary widely.
Access to Capital Cameco Gold needs reasonable access to funds to undertake projects and acquisitions that allow for expansion of its assets and production. Cameco Gold, as a wholly owned subsidiary of Cameco, has been able to secure funds and financing for the development of its Kumtor and Boroo properties and the acquisition of its interest in AGR. Going forward, Centerra plans to become a stand-alone public company that expects to directly access the debt and equity markets for required capital.
Gold Exploration Cameco Gold must find new gold reserves to extend the life of its mines and increase production. The company's exploration program is focused in proximity to its two existing producing properties and at the REN site in Nevada. As part of Carneco Gold's strategy to go public, it plans to increase its exploration efforts in 2004 and beyond as well as focus on potential acquisitions.
Gold Business Results Revenue In 2003, revenue from the gold business improved by 31% to $114 million (Cdn) from $87 million (Cdn) in 2002, reflecting a 35% increase in sales volume and an increase in the average realized selling price. Carneco's realized gold price increased to $334 (US) per ounce in 2003 compared to $300 (US) in 2002.The average spot market price for gold during 2003 was $363 (US) per ounce, up 17% from the average price of
$310 (US) for 2002. KGC and AGR hedge certain price risk for future gold sales. At the end of 2003, KGC had in place forward sales on 278,300 ounces and AGR had in place forward sales on 200,000 ounces. Combined, these hedge positions represented about 12% of proven and probable gold reserves. These Revenue ($ millions)
Gross profit ($ millions)
Gross profit %
Earnings before taxes ($ millions)
Selling price ($US/oz)
I...
ucash cost ($US/oz)
Sale-s -v'o'1u m -e (o un c-e-s-)
Production (ounces) 2003 114 40
-............... _i 35 32_
-334~
189 234,864 225,851 2002 87 9
10 (3) 3100 207 174,394 176,183
....... I....-
% Change 31 344 250
(...
....9.
35 28 19
hedges are expected to yield an average price of about $326 (US) per ounce.
Cameco has agreed to provide various levels of credit support up to $130 (US) per ounce to the counterparties of KGC and AGR which, based on the ounces hedged at December 31, 2003, could amount to $57 million (US) depending on the spot price of gold. At December 31, 2003, the actual exposure under these arrangements, reflecting the net mark-to-market losses, was $46 million (US).
Cost of products and services sold In 2003, the cost of products and services sold was $52 million compared to $58 million in 2002, a decrease of $6 million due to a reduced Canadian/US dollar exchange rate in 2003. Gold production at Kumtor was 28% higher than in 2002 due mainly to higher-grade mill feed that averaged 4.5 g/t compared to 3.7 g/t in 2002 and an improved recovery rate of 83% compared to 78% in 2002. The ore grade and recovery were lower in 2002 due to the pit wall failure. Kumtor's cash cost per ounce was $199 (US) compared to $216 (US) in 2002. Please see table on the previous page for unit cost information.
Depreciation, depletion and reclamation In 2003, depreciation, depletion and reclamation charges were $22 million, an increase of $2 million compared to $20 million in 2002 due mainly to the 28%
increase in production. The effect of the higher production was largely offset by the reduction in the Canadian/US dollar exchange rate. On a unit basis, the depreciation rate declined to $65 (US) per ounce from $73 (US) in 2002.
Gross profit In 2003, gross profit from the gold business amounted to $40 million compared to $9 million in 2002. The gross profit margin for gold was 35%
compared to 10% in 2002.
2004 Outlookfor Gold Given the increase in planned total production from the Kumtor and Boroo mines, greater revenue is expected compared to 2003, assuming gold prices remain at current levels. This is independent of the planned IPO for Centerra, which is targeted for the second quarter of 2004.
share) compared to $44 million ($0.78 per share) in 2002. This increase was attributable to higher earnings from Bruce Power and higher profits in the gold segment. These improvements were offset somewhat by lower earnings in the uranium segment and higher charges for interest and administration.
Excluding the tax adjustment, the effective rare for income taxes decreased to 33% in 2003 from 48% the year before as a higher proportion of earnings came from the gold operations in the Kyrgyz Republic which are subject to lower tax rates. Earnings from operations were $88 million compared to $84 million in 2002 and the aggregate gross profit margin remained at 20%.
Cash Resources Operating Activities In 2003, Cameco generated cash from operations of $246 million compared to
$251 million in 2002. This does not include Cameco's pro rata interest in Bruce Power's operating cash flow of
$117 million in 2003 compared to $28 million in 2002. Cameco accounts for this investment using the equity method and thus Bruce Power's operating cash flows are not consolidated with Cameco's. For further information, refer to note 19(c) of the consolidated financial statements.
Investing Activities Cash used in investing activities increased to $448 million in 2003 from
$74 million in 2002 due to the
_S S IS~
h*
Consolidated Earninggs For 2003, net earnings attributable to common shares were $205 million
($3.65 per share), an increase of$ 161 million compared to $44 million ($0.78 per share) in 2002. These results include the effects of changes in Canadian federal and Ontario provincial tax laws.
Together, the changes in the tax legislation allowed Cameco to recognize a non-recurring, non-cash reduction in deferred income taxes of $81 million
($1.45 per share) in 2003.
Excluding the tax adjustments, net earnings attributable to common shares in 2003 were $123 million ($2.20 per 2003 2002
($ millions except per share amounts)
Revenue Q1 Q2 Q3 Q4 Year Q1 Q2 Q3 Q4 Year 103 220 232 272 827 124 195 158 271 748
.................. I....................................................................
Earnings from Bruce Power 17 49 36 6
108 (3)
(1) 12 8
16 Net earnings 37 105 33 30 205 5
12 7
20 44
- per share 0.66 1.87 0.59 0.53 3.65 0.09 0.20 0.11 0.38 0.78 Cash provided by operations 56 35 79 76 246 134 80 22 15 251
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~...
I................. -..................
..........................................- --- - - - - -- - - - - - - - - -- - -- - -I...........
Cash dividends per share 0.15 0.15 0.15 0.15 0.60 0.125 0.125 0.125 0.125 0.50 20
additional investment in Bruce Power.
Cameco paid $204 million for its incremental 16.6% interest and loaned an additional $75 million to Bruce Power. Expenditures for property, plant and equipment rose by $69 million compared to 2002 due to the development of the Boroo gold mine in Mongolia.
During 2003, Cameco received no principal repayments on its subordinated loan to KGC, the operator of the Kumtor open pit gold mine in the Kyrgyz Republic whereas in 2002, Cameco received $15 million (US) from KGC. The payments scheduled for 2003 were deferred as the result of a pit wall failure at the mine in 2002.
Financing Activities During the year, cash used in investing activities exceeded operating cash flows by $202 million due to the acquisition of the additional interest in Bruce Power.
Cameco financed this shortfall by issuing
$230 million in convertible debentures.
Inventories At the end of 2003, total product inventories amounted to $316 million,
$24 million or 7% lower than the previous year-end. There was a reduction in the quantity of uranium inventory during the year as record deliveries exceeded production and purchases.
on the company's balance sheet. See note 10 to the consolidated financial statements.
{ Grams I A seven-gram pellet of uranium contains as much energy as 17,000 cubic feet of natural gas, 1,780 pounds of coal or 3.5 barrels of oil.
See note 3 to the consolidated financial statements.
Debt At the end of 2003, total outstanding debt amounted to $243 million, an increase of $18 million compared to
$225 million at the end of 2002. The net debt to capitalization ratio declined to 7% from 8%. If the preferred securities and the convertible debentures were accounted for as debt, the net debt to capitalization ratio would be 23%.
In December 2003, $20 million (US)
(Cameco's share) of the Kumtor senior debt was repaid. See note 6 to the consolidated financial statements.
Corporate Expenses Administration In 2003, administration costs were $47 million, an increase of $5 million compared to 2002 due to a number of items including an expense for stock-based compensation and costs incurred for quality and business process improvements.
Effective January 1. 2003, Cameco changed its accounting policy for stock-based compensation opting to record a compensation expense for the fair value of stock options granted during the year.
The total expense for 2003 amounted to
$2.4 million, of which $1.9 million has been attributed to administration.
Interest and Other Interest and other costs increased by about $7 million due to revaluation of US dollar denominated assets as a result of the strengthening Canadian dollar. In 2003, the company recognized foreign exchange losses of $4 million compared to gains of $2 million in 2002. See note 13 to the consolidated financial statements.
Income laxes In 2003, the federal government introduced amendments to the Canadian Income Tax Act which provide for a 7% reduction in the corporate tax rate on income from resource activities. The federal tax rate is declining from its previous level of 28% to 21 % over a five-year period commencing in 2003.
Under Canadian generally accepted accounting principles (GAAP), the cumulative effect of a change in income tax legislation o0 future income tax assets and liabilities is included in a company's financial statements in the period of substantial enactment. Accordingly, Cameco reduced its balance sheet provision for future income taxes and CASH FROM OPERATIONS (5 mitions)
Camneco generated cash from operations of $246 million in 2003, only 2% short of the record results achieved in 2002.
280 Convertible Debentures The company increased its short-term commercial paper to help fund the February 2003 acquisition of a further 16.6% interest in Bruce Power. In September 2003, Cameco issued $230 million in convertible debentures. The net proceeds of approximately $223 million are being used to repay commercial paper as it matures. The company decided to put in place financing that better matched the long-term nature of the Bruce Power asset. In accordance with Canadian generally accepted accounting principles (GAAP),
these debentures are reflected as equity 2001 2002 2003 K
21
recognized a one-time, non-cash income tax adjustment of $86 million ($1.54 per share) in the second quarter.
Also in 2003, the government of Ontario amended the provincial income tax laws to increase the corporate income tax rate to 14% effective January 1, 2004. Prior to this amendment, the tax rate was projected to decline from 11 % in 2004 to 8% in 2007. As a result, Cameco increased its provision for future income taxes by $5 million ($0.09 per share).
Excluding these adjustments, income tax expense was $18 million greater than in 2002 primarily as a result of the significantly higher earnings from Bruce Power which are taxed at a rate of 34%.
The effective tax rate on consolidated earnings was lower at 33% compared to 48% last year due to a higher proportion of earnings in the gold business.
Income tax expense includes large corporations taxes which amounted to
$5 million in each of 2003 and 2002.
See note 15 to the consolidated financial statements.
(Cameco's share in $ millions) 2004 Plan 2003 Actual Sustaining Capital McArthur River/Key Lake 43 4
11
...I........................................
It Rabbit Lake
,,,,,,,,,,,,,,_,,,,,,,,,7,,,,,,,,,,,,,,,,
,,6,, i
~~~~~~~~~....................
.............. -.1.
Conversion Services 22 6
Botoo 10 Kumtor 3
7 Other 3
8 Total Sustaining 104 46 New Development 32 10 Cigar Lake 32,,,,,,
2 Conversion Services 15 Boroo 81 Total Development 51 95 Capitalized interest 9
13 Total 164 154 In 2004 consolidated revenue is expected to rise by about 4%. This is due to new gold production from the Boroo mine, which is anticipated to more than offset reduced revenues in the titanium and conversion businesses. On a consolidated basis, the gross profit margin is projected to increase to 23% from 20% in 2003.
In 2004, the effective rate for income taxes is expected to be about 30%.
In 2004, total capital expenditures are expected to increase by $10 million to
$164 million. In 2004, sustaining capital expenditures are expected to be higher than in 2003 due to ongoing mine development work, pumping and water treatment projects at the McArthur River mine in northern Saskatchewan, and well field expansions at the ISL operations in Nebraska. Capital spending will also increase at conversion services to improve production processes and meet regulatory requirements.
For new development projects, total expenditures are projected to be $51 million, a decrease of $48 million compared to 2003. The decline is attributable to the completion of construction at Boroo and partially offset by increased expenditures at the proposed Cigar Lake minesite in northern Saskatchewan and at Cameco's conversion services facilities.
At Cigar Lake, the construction licence is now expected in late 2004, following which Camcco and the partners will make a decision on development. In the meantime, activities requiring considerable advanced planning are expected to continue. Procurement is planned for several long-lead-time items including the #2 hoist and headframe complex, the freezing system, freeze hole drilling and the electrical distribution system.
At the Inkai development project in Kazakhstan, the feasibility study is completed and the results are being reviewed. The feasibility results need to be approved by the Inkai joint venture partners. Subject to these approvals, test mining is planned to continue through 2004 as a detailed mine design is prepared and an application for a 2003 2002 2001 2000 1999 Cash provided by operations ($ millions) 246 251 116 224 249 I... -.........
Cash provided by operations/net debt' (D/Q) 155 151 36 86 80 Net debt' / total capitalization (%)
7 8
15 13 14 i
l doaleebt te-ss sash arid cas} ql~ie~s
construction permit is submitted to the local authorities. Pending receipt of the permit, construction would follow in 2005 and the first half of 2006 with production expected to begin toward the end of 2006.
Sensitivity Analysis Uranium Price With the recent increase in the uranium spot price, a significant proportion of the deliveries in 2004 are likely to be influenced by price ceilings.
Consequently, a $1.00 (US) increase in the U308 spot price from the year-end average of $14.45 (US) per pound would improve revenue by about $9 million (Cdn), net earnings by about $5 million (Cdn) and cash flow by about $4 million (Cdn). Conversely, a $1.00 (US) decrease in the U3Og spot price from $14.50 (US) would reduce revenue by about
$11 million (Cdn), net earnings by about $7 million (Cdn) and cash flow by about $6 million (Cdn).
Gold Price For 2004, about 70% of forecast gold sales are unhedged. A $10 (US) per ounce change in the gold spot price would change each of revenue, net earnings and cash flow by about $3 million (Cdn).
Electricity Price For 2004, about 55% of forecast generation is to be sold at spot prices.
A $1.00 (Cdn) per MWh change in the spot price for electricity in Ontario would change Cameco's after-tax earnings from Bruce Power by about
$4 million (Cdn).
Conversion Price In the short term, Cameco's financial results are relatively insensitive to changes in the spot price for conversion as the majority of conversion sales are at fixed prices.
Foreign Exchange Most uranium and conversion US dollar inflows are hedged through a combination of forward sales of US currency and natural hedges. Gold revenue and expenses are not hedged.
Results from the gold business are converted into Canadian dollars at the prevailing exchange rates. For 2004, every one-cent change in the US to Canadian dollar exchange rate from
$0.77 would change net earnings by
$3 million (Cdn).
-I1
( 1111 l~ m
_'~ _i msl :
Overview Financial liquidity represents the companys ability to fund future operating activities and investments.
Some important measures of liquidity are summarized in the table below.
In 2003, Cameco issued $230 million of 5% convertible subordinated debentures and extended the term of its revolving credit facility by one year.
Indicators Defined Cash provided by operations reflects the net cash flow generated by operating activities after consideration for changes in working capital.
Cash provided by operations to net debt indicates the company's ability to meet debt obligations from internally generated funds. Cash provided by operations does not include Cameco's pro rata interest in Bruce Power's operating cash flow of $117 million in 2003 compared to $28 million in 2002.
Cameco accounts for this investment using the equity method and thus Bruce Power's operating cash flows are not consolidated with Camneco's. For further information, refer to note 19(c) of the consolidated financial statements.
Net debt to total capitalization measures the company's use of financial leverage.
A lower percentage means less reliance upon debt as a source of financing.
Although debt is a lower cost form of financingg compared to equity, a lower percentage of debt also represents lower repayment obligations.
Credit Ratings As of February 2004, the company has the following ratings for its senior debt from third-party rating agencies:
- Dominion Bond Rating Service Limited "A (low)" under review with developing implications following Cameco's announcement that it has bid on the South Texas Project.
- Moody's Investors Service "Baal" with a stable outlook.
- Standard & Poor's "BBB+" with a stable outlook.
Debt In addition to cash flow from operations, debt is used to provide liquidity. Carneco has access to about $700 million in unsecured lines of credit.
Commercial lenders have provided a
$417.5 million unsecured revolving credit facility that is available in two tranches. The first tranche is a three-year,
$196.5 million revolving facility. The second tranche is a $221 million revolving facility available for 364 days with a two-year term-out option. (This means, as long as the company is not in default, Cameco has the option to extend the repayment date on the balance outstanding at maturity of the second tranche for an additional two years.) Up to $ 100 million of this facility can be used to support letters of credit.
The facility ranks pari passu (or equal ranking) with all other senior debt of the company. At December 31, 2003, there were no amounts outstanding under these credit facilities.
Cameco also has agreements with various financial institutions to provide tip to
$294 million in short-term borrowing and letter of credit facilities. These 23
i ($ Cdn millions)
Due in Due in Due in Due Less Than 1-3 4-5 After 5 Total 1 Year Years Years Years Long-term debt 243 4
232 7
..........I...............................
Preferred Securities 162 i Convertible Debentures 230 230 Unconditional product purchase obligations2'3 1,441 146 353 355 587 Total contractual cash obligations 2,076 150 585 362 979 Cameco has the restricted us liy e sc-.e 'es u-uns 'or i's preferred securiries aird convrertibe debee Jre s by deliefin3 come um n snares of C(rrecol Denrrm*iraed in JS di"re. Converterd Canadiani do-ias at the December 31, 2003 rate of 51.2 2L,.
%Vrleealie ui a
o Cumeco's product purclase ohbgliega ns are under eitg term
.ixed0 p-ce auranrgemnes.
($ Cdn millions)
Standby letters of credit' Guarantees KGC senior debt2'4 Gold hedge program3 4' 7 Bruce Power investments Bruce Power guarantees6 Total commercial commitments Total amounts committed
..203
.15 73 7
.9191 489 The standby letters of cienit maturiru< in Foo0 were issued with a one-eur term al-d Will be uutomaticaiv renemed oi a year-hy-year basis ur'ti Ile ure d
r.n; c rbeigatioF s are resolved. Ihese obliiaturris are primarily he decmrnrmisuiriung aud reclamation of Camecoes mirig and conuersior fcil ities. As such the letter, of credit are expec'ed u emr :r outun3d ng eltl into the ftture.
2See nutte 6 to -he ' onsolidazed fin'nal s[atement 3 See note the coisolida td fr
'aeal smaetnents.
Denom'fl-aLec i l US dstlars. Converted to Canudiae l d1 ars at the December 3t, 2003 raue Of $1.2e2uc.
Under its initial 5 partnership interest Camec. agreed to ki lst up tO Stoc million in Bruce COver. To ihe end of 2003, Camece had ested $9-iion in the par-n r At December 35, 23) fnrecrs Total tommitrlent hir finauriai assurances given In behae f of Bruce PrIwer is est4marret to be $19t miflihu. See lote 19 to Ste conesolidated finaniai statements.
7 See dis-ussiure under goih prices it) the seCller tilled Susirre-s Risks and Un:ertailties.
will mature July 6, 2006. Cameco also has $100 million outstanding in senior unsecured debentures that bear interest at a rate of 6.9% per annum and will mature July 12, 2006.
Eq"uipmnent Loan A Cameco subsidiary has $9.2 million (US) outstanding under an equipment loan that is repayable in 17 remaining quarterly installments of $0.4 million (US) with a final payment of $2.0 million (US) in 2008.
Preferred Securities Cameco's issue of preferred securities
($125 million (US)) is redeemable at par on or after October 14, 2003. At the present time, the company has not determined whether the issue will be redeemed in 2004.
Convertible Debentures During 2003, Cameco increased its investment in Bruce Power, paying $204 million for its incremental 16.6%
interest and loaning an additional $75 million to Bruce Power. This investment was initially financed mostly with short-term commercial paper. On September 25, 2003 the company issued $230 million in convertible debentures bearing interest at 5% per annum and maturing on October 1, 2013. The proceeds are being used to repay commercial paper as it matures. See note 10 to the consolidated financial statements.
arrangements are predominantly used to fulfill regulatory requirements to provide financial assurance for fiuture reclamation of the companys operating sites.
Outstanding letters of credit at December 31, 2003 amounted to
$202.7 million. See Business Risks-Reclamation and Decommissioning in this MD&A and note 6 to the consolidated financial statements.
The company may also borrow directly from investors by issuing commercial paper up to $400 million. To the extent necessary, Cameco uses the revolving credit facility to provide liquidity support for its commercial paper program.
Commercial paper outstanding at December 31, 2003 amounted to
$65.9 million.
Cameco has operated within the investment grade segment (high credit quality) of the market when obtaining credit. The cost, terms and conditions under which financing is available vary over time. While future access to credit cannot be assured, it was readily available during 2003.
Debentures Carneco has $50 million outstanding in senior unsecured debentures that bear interest at a rate of 7% per annum and 24
($US millions)
Initial Funding Balance at Dec. 31, 2003 Debt Third party Senior' Subordinated Total third party Carneco subordinated loan Total debt Equity Total Capital 265 17 20 20 285 37
--..................._.......I..............I..... 1 1 1 1......-1 107 61 392 98 45 45 437 143 1Casrissrras "fl asraseed hr-pajnyr ror JIss p rin-s a-al inaare-;l 'thi ha-corers%
due otc the asenior d-a-L.
K, Kumtor Gold Company To finance the Kumtor gold project, a consortium of financial institutions advanced $285 million (US) in senior and subordinated loans to the project in 1996. During 2003, KGC repaid $60 million (US) of these third party loans.
After these repayments, the outstanding balances were $17 million (US) in senior debt and $20 million (US) in subordinated debt. Since Carneco proportionately consolidates its interest in KGC, $12 million (US) ($16 million (Cdn)) of the remaining loans were included in Cameco's long-term debt.
See note 6 to the consolidated financial statements.
In addition, Cameco provided a subordinated loan of $107 million (US) to the project. The outstanding principal and accrued interest at the end of 2003 amounted to $61 million (US) and $3 million (US) respectively compared to
$61 million (US) of outstanding principal at year-end 2002. Cameco also invested $45 million (US) as an equity contribution in 1996. Carneco plans to contribute the subordinated loan in exchange for equity in Centerra.
The senior debt is the direct obligation of KGC, although Cameco has guaranteed the payment of principal and interest owing. See note 18 to the consolidated financial statements. Under current production plans, the guarantee is not expected to be called.
Debt Covenants Cameco is bound by certain covenants in its general credit facilities and in those of Kumtor. The financially related covenants place restrictions on total debt, including guarantees, and set minimum levels for net worth. As of December 31, 2003, Cameco met these financial covenants and does not expect its operating and investment activities in 2004 to be constrained by them.
Urwnium iPrces The company reduces its exposure to short-term volatility in uranium prices by maintaining a long-term contract portfolio that is diversified by price mechanism, delivery date and customer.
About 60% of Cameco's contract portfolio has been priced in relation to the spot market price in effect at or near the time of delivery. The remaining 40%
has been sold at a fixed price (usually adjusted for inflation) over the term of the contract. The company's sensitivity to changes in the uranium spot price is noted in the section entitled consolidated outlook for 2004 in this MD&A.
Limited Number of Ctustomers Cameco relies on a small number of customers that purchase a significant portion of the company's uranium concentrates and conversion services. For example, Cameco's five largest customers are expected to account for 42% of the company's contracted supply of U308 for 2004 through 2006. This compares to 39% of the contracted supply of U308 for 2003 through 2005. The loss of any of these large customers, or any significant curtailment of purchases or lack of timely payments could have a material adverse effect on Camcco's financial performance.
Use ofDerivatives Cameco uses financial derivatives to assist in mitigating its exposure to fluctuations in gold price and foreign exchange rates. A derivative is entered into as a hedge against specific economic and transactional exposures. Cameco does not enter into derivative contracts for speculative purposes. However, derivatives bring with them an exposure to counterparty default.' As of December 31, 2003, Cameco's exposure is predominantly with counterparties that had credit ratings of A+ or higher.
Financial Risk Cameco's financial condition is influenced by operational performance and by a number of market risks. The most significant of these risks are fluctuations in market prices and sales volumes of uranium, conversion, gold and electricity, foreign exchange rates and unit costs of production. Risk management strategies are employed to assist in identifying and mitigating these and other risks.
I CosmrtepaenydeUlt would occur if tleot lier parry in a derivative contract is unable to perform its obligarions at the tinse of conmrct mnat rit. restdring ill the interuded sedge being of no,aI e. Tis co noem is addressed by dealing 1ib a varie ofcosrnrerpani.s and primnarily only those of high credit qlality and limiting the amourn and duration of Ic sposAue.
A rseaso.r.
of defanlt risk is tie mor-ro-tarkcr val-ue of haedge position.
This -alue is the differenc betwen rihe price as ttich a derivative contract N,,as entered into and its curretrt riarkes,alue. A sar-ktoo-ttarekt gain irdieares shat lIe conspay has t
eal attroatr of-asric at risk should its cosarrtteparties default. A tsnis-to-osasket loss represents Ise ainount of valuc Canscco would save to pay should thie hedge posision necd so he sestled innnediatela 25
Accordingly, Cameco believes the risks of default are low and the benefits derived from using derivatives outweigh the risks.
Gold Prices KGC and AGR hedge the price risk for future gold sales. At December 31, 2003, KGC had in place forward sales on 278,300 ounces and AGR had in place forward sales on 200,000 ounces.
Combined, these hedge positions represented about 12% of proven and probable reserves. These hedges are expected to yield an average price of about $326 (US) per ounce. The mark-to-market loss on these hedge positions was $46 million (US) at December 31, 2003.
Cameco's share of these hedging agreements was 292,800 ounces in spot-deferred contracts which are expected to yield an average price of about $321 (US) per ounce. Based upon Cameco's consolidated interest in KGC (33%)
and AGR (56%), Cameco's net mark-to-market loss, after deducting other partners' interests on these hedge positions, was $20 million (US) at December 31, 2003 based on a year-end spot gold price of $416 (US) per ounce.
Cameco has agreed to provide various levels of credit support up to $130 (US) per ounce to the counterparties of KGC and AGR which, based on the ounces hedged at December 31, 2003, could amount to $57 million (US) depending on the spot price of gold.
Timing differences between the usage and designation of hedge contracts may result in deferred revenue or deferred charges. At the end of 2003, Cameco's share of deferred charges to be recognized in future years totalled
$2 million (US). See note 25 to the consolidated financial statements.
Foreign Exchange Risk The US/Canadian foreign exchange rate started the year at $1.5796 and averaged
$1.40 during the year. Most of the company's revenues are in US dollars with a majority of its costs in Canadian dollars. To reduce its currency risk, at December 31, 2003, Cameco had sold forward $457 million (US). These hedges are expected to yield an average exchange rate of $1.4179. The mark-to-market gain on these positions was
$51 million (Cdn) at December 31, 2003 based on a year-end exchange rate of $1.2924.
Timing differences between the usage and designation of hedge contracts may result in deferred revenue or deferred charges. At the end of 2003, deferred revenue to be recognized in future years totalled $24 million.
Political Risk The company has diversified its political risk internationally. The Kumtor gold mine is located in the Kyrgyz Republic, a country formerly part of the Soviet Union. The mine is the largest foreign investment in the country and represented about 5% of the country's gross domestic product, 33% of export earnings and 34% of total industrial production in 2002, the latest date for which information is available. The importance of Kumtor in relation to the rest of the Kyrgyr economy has meant that Kumtor has maintained a very high profile within the country. This level of attention is not without risk; however, it has also been of benefit in ensuring continued efficient operations.
Cameco also owns a 60% interest in Joint Venture Inkai UVI), which is developing a uranium mine in the Republic of Kazakhstan. Through KazAtomProm, the Republic of Kazakhstan owns the remaining 40%
of JVI. Cameco has agreed to provide funding of up to $40 million (US) to JVI for project development of which
$19.5 million (US) has been funded to the end of 2003. Test mining continued through 2003. Approval of the feasibility study is planned for 2004. To date, the Kazakhstan government has supported the project, but there is no assurance that support will continue for the project's duration.
Cameco also owns a 56% interest in AGR, which owns 95% of the Boroo gold project in Mongolia. At Boroo, commercial production was achieved on March 1, 2004. AGR's investment in Boroo may be exposed to adverse political developments that could affect the economics of the project. The Mongolian government has supported the project to date, but there is no assurance that support will continue for the project's duration.
Cameco's investment in these operations may be exposed to adverse political developments that could affect the economics of each operation. The company has made an assessment of the political risk associated with each of its foreign investments and has purchased political risk insurance to mitigate losses as deemed appropriate.
Insurance Cameco purchases insurance to mitigate losses that may arise from certain liability and property risks. The cost of this insurance and the specific protection provided by the policies vary from year to year depending on conditions in the insurance market. In 2003, market conditions were difficult across all lines of insurance. This resulted in significantly increased premiums along with more restrictive policy terms and conditions.
Cameco believes that the insurance program it has in place continues to prudently address its major liability and property risk exposures.
Uncertainty in the insurance market is expected to continue for at least a few more years. During this time, the availability of certain types of insurance coverage that Cameco has purchased in the past may be significantly reduced and/or the cost to acquire insurance may significantly increase.
26
Operations Risk Cameco's business is capital intensive and subject to a number of risks and hazards, including environmental pollution, accidents or spills, industrial and transportation accidents, labour disputes, blockades, changes in the regulatory environment, natural phenomena (such as inclement weather conditions, earthquakes, pit wall failures, cave-ins, adverse mining conditions and underground flooding) and encountering unusual or unexpected geological conditions. The company also contracts for the transport of its uranium and uranium products to refining, conversion and enrichment facilities in North America and Europe, which exposes the company to transportation risks. Many of the foregoing risks and hazards could result in damage to, or destruction of, the company's mineral properties or refining or conversion facilities, personal injury or death, environmental damage, delays in or interruption of or cessation of production from the company's mines or refining or conversion facilities or in its exploration or development activities, delay in or inability to receive regulatory approvals to transport its uranium and uranium products, or costs, monetary losses and potential legal liability and adverse governmental action. In addition, due to the radioactive nature of the materials handled in uranium mining, refining, conversion and transport, additional costs and risks are incurred by the company on a regular and ongoing basis.
Safety, Health and Environmental Risk Cameco is subject not only to the normal worker health, safety and environmental risks associated with all mining and chemical processing, but also to additional risks uniquely associated with titanium mining, milling and conversion operations.
In 200], to better manage these risks and to enhance its quality culture, Cameco embarked upon the design and implementation of an integrated quality management system (QMS). Program development continued in 2003. The QMS (based upon Cameco's vision, mission, values, quality policy and ISO 9001 - 2000 quality management principles) is to be implemented at Cameco's Canadian uranium sites to a degree that meets the CNSC requirements by the end of 2004 and with complete QMS implementation at Canadian uranium operating sites and related head office requirements to be finalized by the end of 2005. Cameco also continues to utilize an environmental management system at its operations. The company received ISO 14001 certification at its Blind River refining facility in 2002 and at the McArthur River mine and the Key Lake milling operation in 2003. The Port Hope conversion facility received this certification in 2000.
Also in conjunction with the QMS program, Cameco is reviewing its existing health and safety management system, based upon principles similar to those in the ISO series of management systems and identifying ways to further implement it and integrate it with QMS.
For the year, on a combined basis, Camneco, its subsidiaries and long-term contractors achieved an accident frequency of 0.61 lost-time accidents per 200,000 person hours worked, which was up from last year's best overall record of 0.24.
Regulators must approve the startup, continued operation and decommis-sioning of many of Cameco's facilities.
These facilities are subject to numerous laws and regulations regarding safety and environmental matters and the management of hazardous wastes and materials. Significant economic value is dependent on the company's ability to obtain and renew licences necessary to operate. In 2003, the CNSC renewed the Rabbit Lake licence for a five-year term. Given the level of regulatory work, Cameco will seek an interim extension of the current two-year licences for the McArthur River and Key Lake operations and renewal of both licences in 2004.
Cameco continues to face challenges from the burden of increasing regulatory demands and costs from the CNSC, Canadian Environmental Assessment Agency, and other federal and provincial regulators. In particular, the lead regulator, CNSC, has increased its fees charged to the nuclear industry, and is increasing the regulatory burden as a result of the implementation of the new Canadian Nuclear Safety and Control Act. In addition the CNSC and Environment Canada are calling for more stringent environmental monitoring and environmental performance, based on precautionary principles, of uranium mining and mining operations.
Operational changes are increasingly subject to regulatory approval that may include delays due to longer and more complex regulatory review and approval processes. These increasing requirements are expected to continue to result in higher administration costs and capital expenditures for compliance. The increasing complexity of the regulatory approval process reduces the flexibility of the company to make operational changes in a timely fashion.
Reclamation and Decommissioning The company actively plans for the closure, reclamation and decommissioning of its operating sites. Decommissioning and reclamation costs mav increase over time due to increasingly stringent regulatory requirements. At least bi-annually, Cameco estimates its total decommissioning and reclamation costs, based on current operations to date, for its operating assets. At the end of 2003, the estimate was $234 million.
The majority of such expenditures are typically incurred at the end of the useful 27
lives of the operations to which they relate and, therefore, only a very small percentage of total estimated costs is expected to be incurred over the next five years. See note 7 to the consolidated financial statements.
At the end of 2003, Cameco's accounting provision for future reclamation costs totalled $141 million.
To provide financial assurances for these costs, Cameco has provided letters of credit (LOCs), where required. Cameco's LOCs totalled $203 million at the end of 2003, of which $199 million was related to reclamation and decommissioning activities.
Since mid-2001, all Cameco's North American operations have in place letters of credit providing financial assurance, which are aligned with preliminary plans for site-wide decommissioning.
Beginning in 1996, the company has conducted regulatory-required reviews of its decommissioning plans for all Canadian sites. These periodic reviews are done on a five-year basis, or at the time of an amendment to an operating licence, or if at renewal, there has been a material change to the site.
Reclamation and decommissioning obligations represent unfunded liabilities of the company.
Electricity Business Risks Through its interest in Bruce Power, Cameco is exposed to various business risks associated with the generation and marketing of electricity. The following discusses some, but not all, risks associated with this business.
In Ontario, political risk results from uncertainty over the future direction of government energy policies. This risk was amplified in late 2002 when the Ontario government abandoned the deregulation of the retail electricity market. Thus far, the wholesale market remains unregulated, but there can be no assurance that this will continue.
Political risk is beyond the control of Bruce Power.
Of the remaining risks, the most significant is direcdy related to the operating performance of Bruce Power's generating assets. Bruce Power manages this risk through preventive maintenance to improve overall equipment reliability, by adopting more efficient operational processes and by improving employee performance at all levels.
Another category of risk is electricity price. Bruce Power mitigates this risk by entering into long-term, fixed-price supply contracts with reliable customers for the delivery of a significant portion of its annual generation. Electricity generated, but not covered by such contracts, is sold on the wholesale spot market and is subject to prices in effect at the time of delivery.
Most long-term supply agreements obligate Bruce Power to deliver electricity at a predetermined contractual price.
Credit risk arises from these contracts.
On the one hand, the counterparty must have the financial resources to take delivery and pay for contracted electricity. On the other hand, if quoted forward market prices exceed contracted prices, then the counter-parry has the right, in most cases, to request financial assurance to mitigate the possibility that Bruce Power does not deliver the electricity as contracted. In such circumstances, Cameco's contingerit obligations may increase if it is called upon to guarantee its share of Bruce Power's obligation. To maintain the economic benefit of the electricity supply contracts, Cameco and its partners must have the financial ability to address this credit risk.
A further risk category relates to the transmission grid. The ability of Bruce Power to deliver electricity to its customers is dependent on the provincial transmission grid, owned and maintained by Hydro One, an Ontario provincial Crown corporation. Bruce Power's ability to deliver power to customers is also dependent on the inter-linked North American power grid. Any adverse conditions such as severe weather or inadequate maintenance that results in unreliable performance by the grid could cause significant financial loss to Bruce Power. Transmission grid risks are beyond Bruce Power's control.
N I U I[EA WT(sIIJI U I [c Cameco prepares its consolidated financial statements in accordance with Canadian GAAP. In doing so, management is required to make various estimates and judgments in determining the reported amounts of assets and liabilities, revenues and expenses for each year presented, and in the disclosure of commitments and contingencies.
Management bases its estimates and judgments on its own experience, guidelines established by the Canadian Institute of Mining, Metallurgy and Petroleum and various other factors believed to be reasonable under the circumstances. Management believes the following critical accounting policies reflect its more significant estimates and judgments used in the preparation of the consolidated financial statements.
Depreciation and depletion on property, plant and equipment is primarily calculated using the unit of production method. This method allocates the cost of an asset to each period based on current period production as a portion of total lifetime production or a portion of estimated recoverable ore reserves.
Estimates of lifetime production and amounts of recoverable reserves are subject to judgment and significant change over time. If actual reserves prove to be significantly different than the estimates, there could be a material impact on the amounts of depreciation and depletion charged to earnings.
Significant decommissioning and reclamation activities are often not undertaken until substantial completion of the useful lives of the productive 28
assets. Regulatory requirements and alternatives with respect to these activities are subject to change over time.
A significant change to either the estimated costs or recoverable reserves may result in a material change in the amount charged to earnings.
Effective January 1, 2003, Cameco changed its policy for accounting for reclamation activities by adopting CICA Handbook section 3110, Asset Retirement Obligations. This section addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The standard applies to legal obligations related to the retirement of long-lived assets that result from the acquisition, construction, development and use of the asset. The new rules require that the fair value of the estimated cost of an asset retirement obligation be recognized as a liability in the period in which it is incurred.
A corresponding amount is added to the carrying amount of the associated asset and depreciated over the asset's useful life on a unit of production basis. The liability is accreted over time through charges to earnings. This differs from the previous practice that involved accruing for the estimated reclamation and closure liability through annual charges to earnings over the estimated life of the asset.
If it is determined that carrying values of assets cannot be recovered, the unrecoverable amounts are written off against current earnings. Recoverability is dependent upon assumptions and judgments regarding future prices, costs of production, sustaining capital requirements and economically recoverable ore reserves. A material change in assumptions may significantly impact the potential impairment of these assets.
Cameco uses derivative financial and commodity instruments to reduce exposure to fluctuations in foreign currency exchange rates, interest rates and commodity prices. As long as these instruments are effective, they have the effect of offsetting future changes in these underlying rates and prices. Future earnings may be adversely impacted should these instruments become ineffective.
rate regulations; weather and other natural phenomena; ability to maintain and further improve positive labour relations; operating performance of the facilities; success of planned development projects; and other development and operating risks.
Although Cameco believes that the assumptions inherent in the forward-looking statements are reasonable, undue reliance should not be placed on these statements, which only apply as of the date of this document. Cameco disclaims any intention or obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.
S tS] 4!Yf 1 mU Kilel 4 I
5*
0 Statements contained in this document which are not historical facts are forward-looking statements that involve risks, uncertainties and other factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. Factors that could cause such differences, without limiting the generality of the following, include:
volatility and sensitivity to market prices for uranium, electricity in Ontario and gold; the impact of the sales volume of uranium, conversion services, electricity generated and gold; competition; the impact of change in foreign currency exchange rates and interest rates; imprecision in reserve estimates; environmental and safety risks including increased regulatory burdens; unexpected geological or hydrological conditions; adverse mining conditions; political risks arising from operating in certain developing countries; a possible deterioration in political support for nuclear energy; changes in government regulations and policies, including trade laws and policies; demand for nuclear power; replacement of production and failure to obtain necessary permits and approvals from government authorities; legislative and regulatory initiatives regarding deregulation, regulation or restructuring of the electric utility industry in Ontario; Ontario electricity
.3, 0
0' S
Additional information related to your company including Cameco's annual information form is available at vww.sedar.com and www.cameco.com.
29
Application ENCLOSURE 8 DECOMMISSIONING FUNDING STATUS REPORT (MARCH 29, 2004)
Nuclear Operating Company Soah TcsPdredFam~rlncSjeallOn B~Ahar2839 It&
raar;sll
-74,?
-AA March 29, 2004 NOC-AE-04001 699 File No.: G25 1 OCFR50.75 U. S. Nuclear Regulatory Commission Attention: Document Control Desk One White Flint North 11555 Rockville Pike Rockville, MD 20852 South Texas Project Units 1 and 2 Docket Nos. STN 50-498, STN 50-499 Decommissioning Funding Status Report - 2003 Pursuant to 1 OCFR50.75(f), the South Texas Project submits the attached reports on the status of funds available for decommissioning Units 1 and 2. The reports were prepared for the following co-owners of the South Texas Project:
- AEP Texas Central Company.
These co-owners are in the process of changing the terms of ownership of their respective shares in the South Texas Project. Consequently, this report satisfies the annual reporting requirements of 10CFR50.75(f)(1).
The attached reports provide the following information for the affected co-owners:
Estimated amount of decommissioning funds required; Amount accumulated by the end of calendar year 2003;
- A schedule of the annual amounts remaining to be collected;
- Assumptions used regarding rates of escalation in decommissioning cost, rates of earnings on decommissioning funds, and rates of other factors used in funding projections; Contracts upon which the owners rely.pursuantto 10CFR50.75(e)(1)(v);
Modifications to method of providing financial fund assurance; and
- Material changes to trust agreements.
If there are any questions, please contact me at (361) 972-8085.
Frank H. Mallen General Manager, Financial Support Attachments:
2003 Decommissioning Funding Status Report - Texas Genco, LP 2003 Decommissioning Funding Status Report - AEP Texas Central Company STI #31716722
NOC-AE-04001699 Page 2 of 2 cc:
(paper copy)
(electronic copy)
Bruce S. Mallett Regional Administrator, Region IV U.S. Nuclear Regulatory Commission 611 Ryan Plaza Drive, Suite 400 Arlington, Texas 76011-8064 U. S. Nuclear Regulatory Commission Attention: Document Control Desk One White Flint North 11555 Rockville Pike Rockville, MD 20852 Richard A. Ratliff Bureau of Radiation Control Texas Department of Health 1100 West 49th Street Austin, TX 78756-3189 Jeffrey Cruz U. S. Nuclear Regulatory Commission P.O. Box 289, Mail Code: MN116 Wadsworth, TX 77483 A. H. Gutterman, Esquire Morgan, Lewis & Bockius LLP L. D. Blaylock City Public Service Michael K. Webb U. S. Nuclear Regulatory Commission R. L. Balcom Texas Genco, LP A. Ramirez City of Austin C. A. Johnson AEP Texas Central Company Jon C. Wood Matthews & Branscomb C. M. Canady City of Austin Electric Utility Department 721 Barton Springs Road Austin, TX 78704
ATTACHMENT 1 SOUTH TEXAS PROJECT 2003 DECOMMISSIONING FUNDING STATUS REPORT TEXAS GENCO, LP NOC-AE-04001 699 Page 1 of 2 TEXAS GENCO, LP 30.8% Ownership of South Texas Project Unit 1 2003 DECOMMISSIONING FUNDING STATUS REPORT As provided in 10CFR50.75(f)(1), each power reactor licensee is required to report to the NRC on a calendar year basis, beginning on March 31, 1999, and every 2 years thereafter or annually if the reactor is part of a merger or acquisition, on the status of its decommissioning funding for each reactor or share of reactor it owns. Please refer to the responses below for the requested information:
- 1. The minimum decommissioning fund estimate, pursuant to IOCFR50.75(b) and (c)':
Total Required:
$111,249,600 Required by 12131/2003:
$ 39,087,697
- 2. The amount accumulated at the end of the calendar year preceding the date of the report for items included in 1 OCFR50.75(b) and (c):
$ 83,459,419
- 3. A schedule of the annual amounts remaining to be collected for items in 10CFR50.75(b) and (c):
Amount remaining:
$47,532,562 Number of years to collect:
23.6
- 4. The assumptions used regarding escalation in decommissioning cost, rates of earnings on decommissioning funds, and rates of other factors used in funding projections:
Escalation factor:
3.01%
Net earnings rate (after taxes and fees):
4.64% to 5.20%
- 5. Any contracts upon which the licensee is relying pursuant to 10CFR50.75(e)(1)(v):
None
- 6. Any modifications to a licensee's current method of providing financial assurance occurring since the last submitted report:
None
- 7. Any material changes to the decommissioning trust agreements:
None
'The NRC formulas in section 10CFR50.75(c) include only those decommissioning costs incurred by licensees to remove a facility or site safely from service, and reduce residual radioactivity to levels that permit: (1) release of the property for unrestricted use and termination of the license; or (2) release of the property under restricted conditions and termination of the license.
The cost of dismantling or demolishing non-radiological systems and structures is not included in the NRC decommissioning cost estimates. The costs of managing and storing spent fuel on site until transfer to DOE are not included in the cost formulas.
NOC-AE-04001 699 Page 2 of 2 TEXAS GENCO, LP 30.8% Ownership of South Texas Project Unit 2 2003 NRC DECOMMISSIONING FUNDING STATUS REPORT As provided in 10CFR50.75(f)(1), each power reactor licensee is required to report to the NRC on a calendar year basis, beginning on March 31, 1999, and every 2 years thereafter or annually if the reactor is part of a merger or acquisition, on the status of its decommissioning funding for each reactor or share of reactor it owns. Please refer to the responses below for the requested information:
- 1. The minimum decommissioning fund estimate, pursuant to IOCFR50.75(b) and (c)':
Total Required:
$111,249,600 Required by 12131/2003:
$38,059,074
- 2. The amount accumulated at the end of the calendar year preceding the date of the report for items included in 1 OCFR50.75(b) and (c):
$111,838,360
- 3. A schedule of the annual amounts remaining to be collected for items in 10CFR50.75(b) and (c):
Amount remaining:
$22,241,937 Number of years to collect:
24.9
- 4. The assumptions used regarding escalation in decommissioning cost, rates of earnings on decommissioning funds, and rates of other factors used in funding projections:
Escalation factor:
3.01%
Net earnings rate (after taxes and fees):
4.64% to 5.20%
- 5. Any contracts upon which the licensee is relying pursuant to 10 CFR 50.75(e)(1)(v):
None
- 6. Any modifications to a licensee's current method of providing financial assurance occurring since the last submitted report:
None
- 7. Any material changes to trust agreements:
None
'The NRC formulas in section 10CFR50.75(c) include only those decommissioning costs incurred by licensees to remove a facility or site safely from service, and reduce residual radioactivity to levels that permit: (1) release of the property for unrestricted use and termination of the license; or (2) release of the property under restricted conditions and termination of the license.
The cost of dismantling or demolishing non-radiological systems and structures is not included in the NRC decommissioning cost estimates. The costs of managing and storing spent fuel on site until transfer to DOE are not included in the cost formulas.
ATTACHMENT 2 SOUTH TEXAS PROJECT 2003 DECOMMISSIONING FUNDING STATUS REPORT AEP TEXAS CENTRAL COMPANY NOC-AE-04001 699 Page 1 of 2 AEP TEXAS CENTRAL COMPANY 25.2% Ownership of South Texas Project Unit 1 2003 NRC DECOMMISSIONING FUNDING STATUS REPORT As provided in 10CFR50.75(f)(1), each power reactor licensee is required to report to the NRC on a calendar year basis, beginning on March 31, 1999, and every 2 years thereafter or annually if the reactor is part of a merger or acquisition, on the status of its decommissioning funding for each reactor or share of reactor it owns. Please refer to the responses below for the requested inforrnation:
- 1. The minimum decommissioning fund estimate, pursuant to 10CFR50.75(b) and (c)':
Total Required:
$91,154,700 Required by 12/31/2003:
$32,027,327
- 2. The amount accumulated at the end of the calendar year preceding the date of the report for items included in 10CFR50.75(b) and (c):
$53,203,210
- 3. A schedule of the annual amounts remaining to be collected for items in 10CFR50.75(b) and (c):
Amount remaining:
$80,602,111 Number of years to collect:
24
- 4. The assumptions used regarding escalation in decommissioning cost, rates of earnings on decommissioning funds, and rates of other factors used in funding projections:
Escalation factor:
4.18%
Net earnings rate (after taxes and fees):
5.76%
(These percentages are based upon AEP Texas Central's most recently decided rate case.)
- 5. Any contracts upon which the licensee is relying pursuant to 1 OCFR50.75(e)(1)(v):
No contracts. The source of funds for the external decommissioning fund is cost-of-service regulation.
- 6. Any modifications to a licensee's current method of providing financial assurance occurring since the last submitted report:
None
- 7. Any material changes to the decommissioning trust agreements:
Trust was amended in December 2003 to comply with NRC guidelines. A copy of the amendment is included for reference.
'The NRC formulas in section 1 OCFR50.75(c) include only those decommissioning costs incurred by licensees to remove a facility or site safely from service, and reduce residual radioactivity to levels that permit: (1) release of the property for unrestricted use and termination of the license; or (2) release of the property under restricted conditions and termination of the license. The cost of dismantling or demolishing non-radiological systems and structures is not included in the NRC decommissioning cost estimates. The costs of managing and storing spent fuel on site until transfer to DOE are not included in the cost formulas.
NOC-AE-04001 699 Page 2 of 2 AEP TEXAS CENTRAL COMPANY 25.2% Ownership of South Texas Project Unit 2 2003 NRC DECOMMISSIONING FUNDING STATUS REPORT As provided in 10CFR50.75(f)(1), each power reactor licensee is required to report to the NRC on a calendar year basis, beginning on March 31, 1999, and every 2 years thereafter or annually if the reactor is part of a merger or acquisition, on the status of its decommissioning funding for each reactor or share of reactor it owns. Please refer to the responses below for the requested information:
- 1. The minimum decommissioning fund estimate, pursuant to 1QCFR50.75(b) and (c)':
Total Required:
$91,154,700 Required by 12/31/2002:
$31,184,503
- 2. The amount accumulated at the end of the calendar year preceding the date of the report for items included in I OCFR50.75(b) and (c):
$64,515,168
- 3. A schedule of the annual amounts remaining to be collected for items in IOCFR50.75(b) and (c):
Amount remaining:
$115,572,825 Number of years to collect:
25
- 4. The assumptions used regarding escalation in decommissioning cost, rates of earnings on decommissioning funds, and rates of other factors used in funding projections:
Escalation factor:
4.18%
Net earnings rate (after taxes and fees):
5.76%
(These percentages are based upon AEP Texas Central's most recently decided rate case).
- 5. Any contracts upon which the licensee is relying pursuant to 10 CFR 50.75(e)(1)(v):
No contracts.
The source of funds for the external decommissioning fund is cost-of-service regulation.
- 6. Any modifications to a licensee's current method of providing financial assurance occurring since the last submitted report:
None
- 7. Any material changes to trust agreements:
Trust was amended in December 2003 to comply with NRC guidelines. A copy of the amendment is included for reference.
1The NRC formulas in section 1 OCFR50.75(c) include only those decommissioning costs incurred by licensees to remove a facility or site safely from service, and reduce residual radioactivity to levels that permit: (1) release of the property for unrestricted use and termination of the license; or (2) release of the property under restricted conditions and termination of the license. The cost of dismantling or demolishing non-radiological systems and structures is not included in the NRC decommissioning cost estimates. The costs of managing and storing spent fuel on site until transfer to DOE are not included in the cost formulas.
FOURTH AMENDMENT TO THE AEP TEXAS CENTRAL COMPANY
[Formerly the CENTRAL POWER AND LIGHT COMPANY]
MASTER DECOMMISSIONING TRUST AGREEMENT FOR UNITS ONE AND TWO OF THE SOUTH TEXAS PROJECT ELECTRIC GENERATING STATION This Fourth Amendment is entered into as of the 18 day of December, 2003, by and between AEP Texas Central Company [formerly Central Power and Light Company]
("Company"), a Texas corporation, and Mellon Bank, N.A. ("Trustee"), a national banking association having trust powers.
WITNESSETH:
WHEREAS, the Company and the Trustee entered into that certain Master Decommissioning Trust Agreement dated as of June 25, 1990 (the "Agreement"), pursuant to which, among other things, the Company established the Fund for the exclusive purpose of providing for the decommissioning of the Plants and to constitute qualified and nonqualified nuclear decommissioning reserve fund; WHEREAS, the Company and the Trustee also entered into that First Amendment dated October 4, 1991 ("First Amendment") to the Agreement in order to comply with certain rules promulgated by the Public Utility Commission of Texas; WHEREAS, the Company and the Trustee also entered into that Second Amendment dated July 13, 1995 ("Second Amendment") to the Agreement in order to ensure that any pooling of the assets of the Master Trust does not create an association taxable as a corporation; WHEREAS, the Company and the Trustee also entered into that Third Amendment dated December 2, 1996 ("Third Amendment") to the Agreement in order to incorporate certain provisions required by Treasury Regulations section 1.458A-5(a)(4);
WHEREAS, in Section 10.05 of the Agreement, as previously amended, the Company specifically reserves the right to amend the Agreement.
NOW THEREFORE, the parties hereby agree as follows:
- 1. The following Section 4.05 shall be added:
Section 4.05. Notice Regarding Disbursements or Payments. Except for (i) payments of ordinary administrative costs (including taxes) and other incidental expenses of the fund (including legal, accounting, actuarial, and trustee expenses) in connection with the operation of the fund, (ii) withdrawals being made under 10 CFR 50.82(a)(8), and (iii) adjustments for Excess Contributions pursuant to Section 3.04 hereof being transferred to the Nonqualified Funds, no disbursement or payment may be made from the Master Trust until written notice of the intention to make a disbursement or payment has been given to the Director, Office of Nuclear Reactor Regulation, or the Director, Office of Nuclear Material Safety and Safeguards, as applicable, at least 30 working days before the date of the intended disbursement or payment. The disbursement or payment from the trust may be made following the 30-working day notice period if no written notice of objection from the Director, Office of Nuclear Reactor Regulation, or the Director, Office of Nuclear Material Safety and Safeguards, as applicable, is received by the Trustee or the Company within the notice period. The required notice may be made by the Trustee or on the Trustee's behalf. No such notice is required for withdrawals being made pursuant to 10 CFR 50.82(a)(8)(ii), including withdrawals made during the operating life of the plant to be used for decommissioning planning.
In addition, no such notice is required to be made to the NRC after decommissioning has begun and withdrawals are being made under 10 CFR 50.82(a)(8).
- 2. The following Section 9.07 shall be added:
For the purposes of this Section 9.07, the Trustee, investment manager, or other person directing investment 'of the Fund is referred to as the "Investment Director."
(1) The Investment Director is prohibited from investing the Fund in securities or other obligations of the Company or any other owner or operator of any nuclear power reactor or their affiliates, subsidiaries, successors or assigns. The Investment Director is prohibited from investing the Fund in a mutual fund in which at least 50 percent of the fund is invested in the securities of a licensee or parent company whose subsidiary is an owner of an interest in a foreign or domestic nuclear power plant or an operator of a foreign or domestic nuclear power plant. However, the Fund may be invested in securities tied to market indices or other non-nuclear sector collective, commingled, or mutual fund. Provided further that this subsection shall not operate in such a way as to require the sale or transfer either in whole or in part, or other disposition of any such prohibited investment that was made 2
Doc #218514. v2 Date: 12/18/2003 4:06 PM
before December 24, 2002.
And provided further that no more than 10 percent of the Fund may be indirectly invested in securities of any entity owning or operating one or more nuclear power plants.
(2) The Investment Director is obligated at all times, whether in investing or otherwise, to adhere to the standard of care required by State or Federal law or one or more State or Federal regulatory agencies with jurisdiction over the trust funds, or, in the absence of any such standard of care, whether in investing or otherwise, that a prudent investor would use in the same circumstances. For this purpose, the term "prudent investor," shall have the same meaning as set forth in the Federal Energy Regulatory Commission's "Regulations Governing Nuclear Plant Decommissioning Trust Fund" at 18 C.F.R. 35.32(a)(3), or any successor regulation.
The Company, its affiliates, and its subsidiaries are prohibited from being engaged as investment manager for the Fund or from giving day-to-day management direction of the Fund's investments or direction on individual investments by the Fund, except in the case of passive fund management of the Fund where management is limited to investments tracking market indices.
- 3. The following shall be added to Section 10.05:
Notwithstanding any provision herein to the contrary, this Agreement cannot be amended in any material respect without first providing 30 working days prior written notice to the NRC's Director of the Office of Nuclear Reactor Regulation or the Director of the Office of Nuclear Material Safety and Safeguards, as applicable. The Company shall provide the text of the proposed amendment and a statement of the reason for the proposed amendment. The Agreement may not be amended if the Company or the Trustee receives written notice of objection from the Director, Office of Nuclear Reactor Regulation, or the Director, Office of Nuclear Material Safety and Safeguards, as applicable, within the notice period.
- 4. Except as set forth herein, the Agreement is hereby ratified and confirmed and remains in full force and effect.
- 5. Each of the parties represents and warrants to the other parties that it has full authority to enter into this Amendment upon the terms and conditions hereof and that the individual executing this Amendment on its behalf has the requisite authority to bind the respective parties to this Amendment.
3 Doc #218514. v2 Date: 12118/2003 4:06 PM
IN WITNESS WHEREOF, the parties hereto, each intending to be legally bound hereby, have executed this Amendment as of the day and year first above written.
Authorized Signer of:
MELLON BANK, N.A.
By:
Name -r
- s2f-
Title:
Vxcr PVe c
_.4ec Date:- Ail c e.g, Ao
, age?
Authorized Officer of:
AEP TEXAS CENTRAL COMPANY By: _______,____
Nam vi sa Tftle:
- s. to r r.S ts tjr Date: bL r M ?-.haoO 4
Doc #218514. v2 Date: 12/18/2003 4:06 PM
Application ENCLOSURE 9 ORDER IN PUCT DOCKET NO. 26844
DOCKET NO. 26844 PETITION OF CENTRAL POWER AND
§ PUBLIC UTILITY COMMISSION LIGHT COMPANY FOR AN ORDER
§ REGARDING DECOMMISSIONING
§ OF TEXAS FUNDS
§ ORDER This Order grants Central Power and Light Company's (CPL)l petition for an order regarding decommissioning funds pursuant to §§ 14.001, 14.051, 32.001, 35.004, and 37.051 of 2
PURA.
The docket was processed in accordance with applicable statutes and Commission rules. Notice of the petition was provided to all interested parties. No requests for hearing were filed, and no party opposes the entry of this Order. The petition is approved as set forth in the findings of fact and conclusions of law.
I. Findings of Fact
- 1.
On October 23, 2002, Central Power and Light Company (CPL) filed its petition for an order regarding decommissioning funds.
- 2.
CPL provided notice of the filing of this petition to each party in Docket No. 22352, the CPL unbundled Cost of Service Case.3
- 3.
The Office of Public Utility Counsel (OPC) filed a motion to intervene on December 9, 2002, which was granted on December 19, 2002.
- 4.
CPL Cities Steering Committee (Cities) filed a motion to intervene on December 10, 2002, which was granted on December 19, 2002.
On December 23, 2002, the name of Central Power and Light Company changed to AEP Texas Central Company. For purposes of this order, the Company will continue to be referred to as Central Power and Light Company (CPL).
2 Public Utility Regulatory Act, TEX. UTIL. CODE ANN. §§ 11.001-64.158 (Vernon 1998 & Supp. 2003)
(PURA).
3 Application of Central Power and Light Company for Approval of Unbundled Cost of Service Rate Pursuant to PURA § 39.201 and Public Utility Commission Substantive Rule § 25.344, Docket 22352 (Oct 5, 2001).
DOCKET NO. 26844 ORDER PAGE20F5
- 5.
Ordering Paragraph No. 9 of the Final Order in Docket No. 22352 approves CPL's business separation plan, pursuant to which CPL will transfer its power generation assets, including its 25.2% interest in the South Texas Project (STP), to an affiliated power generation company.
- 6.
As noted at page 64 of the Order, CPL maintained that implementation of its business separation plan, including the transfer of appropriate assets to each new company, would also require regulatory approval from the Securities and Exchange Commission, the Federal Energy Regulatory Commission, the Nuclear Regulatory Commission, and the Arkansas and Louisiana Public Service Commissions.
- 7.
Upon receipt of all required regulatory approvals, and upon transfer of CPL's power generation assets to its proposed affiliated power generation company, CPL will transfer to its affiliated power generation company all of its rights, title, and interest in (i) its 25.2% undivided interest in each of Units 1 and 2 of STP, and (ii) the associated qualified and non-qualified nuclear decommissioning trust funds (the Decommissioning Trust Funds).
- 8.
Pursuant to PURA § 39.205, costs associated with nuclear decommissioning obligations continue to be subject to cost of service rate regulation and must be included in nonbypassable charges to retail electric providers.
- 9.
CPL will be the collection agent on behalf of the affiliated power generation company for the decommissioning amounts collected through the nonbypassable charge.
- 10.
CPL's affiliated power generation company will assume the decommissioning liability associated with its 25.2% interest in STP.
- 11.
CPL's affiliated power generation company will be beneficiary of the Decommissioning Trust Funds.
DOCKET NO. 26844 ORDER PAGE 3 OF 5
- 12.
CPL's ongoing nuclear decommissioning obligation was established pursuant to the Order in Docket No. 22352, in Finding of Fact No. 87, which provides as follows:
- 87.
It is reasonable that CPL be permitted to continue to fund its nuclear decommissioning trust fund at the total company level approved in Docket No. 14965: $3,455,715 annually for STP Unit 1 and $4,702,523 annually for STP Unit 2, or a total amount of $8,158,238 annually, of which the Texas retail amount is $8,156,968 as established in this proceeding.
- 13.
CPL will be obliged to pay the decommissioning amounts to its affiliated power generation company.
- 14.
CPL's affiliated power generation company will be obliged to contribute the decommissioning amounts received from CPL to the Decommissioning Trust Funds.
- 15.
Finding of Fact No. 88 in Docket No. 22352 provides as follows:
- 88.
The proposed resolution of the issues dealing with any funds remaining in the STP decommissioning trust as set forth in Article IV of the Stipulation and Agreement is reasonable and should be adopted by the Commission.
- 16.
The portion of Article IV of the Stipulation and Agreement referenced in Finding of Fact No. 88 in Docket No. 22352 provides as follows:
- After the South Texas Project has been safely decommissioned, all spent fuel and low level wastes have been permanently disposed of, all obligations of the CPL power generation company pursuant to federal, state and local law regarding decommissioning and all obligations pursuant to the Central Power and Light Company Master Decommissioning Trust Agreement For Units 1 and 2 of the South Texas
DOCKET NO. 26844 ORDER PAG;E 4 OF 5 Project Electric Generating Station have been discharged, any funds remaining in the decommissioning trust should be returned to end-use customers. If nuclear decommissioning costs exceed the amount of the nuclear decommissioning trust fund, the additional decommissioning costs will be treated as determined by the Commission consistent with Section 39.205 of PURA. The CPL-EDC will make the appropriate filings with the Commission after decommissioning is completed to implement the above provisions.
HI. Conclusions of Law
- 1.
The Commission has jurisdiction over the parties and subject matter of this petition by virtue of §§ 14.001, 14.051, 32.001, 35.004 and 37.051 of PURA.
- m. Ordering Paragraphs I.
The petition of CPL for an order regarding decommissioning funds is APPROVED as set forth in the above Findings of Fact and Conclusions of Law.
- 2.
All other motions, requests for entry of specific findings of fact and conclusions of law, and any other requests for general or specific relief, if not expressly granted herein, are hereby denied for want of merit.
DOCKET NO. 26844 ORDER PAGESOF5 SIGNED AT AUSTIN, TEXAS the day of 2003.
PUBLIC UTILITY COMMISSION OF TEXAS REBECCA XlEIN, CHAIRMAN BRETT A. PERLMAN, COMMISSIONER JULIE CARUT HERS PARSLEY, COMMISSIONER Q:\\PD\\ORDERS\\FINAL\\26000\\26844_FO.doc
. Application ENCLOSURE 10 FORM OF DECOMMISSIONING FUNDS COLLECTION AGREEMENT (PROPRIETARY - UlNDER SEPARATE COVER)
Application ENCLOSURE 11 PROPOSED PUCT SUBSTANTIVE RULE § 25.303
Application 1 Page 1 of 4 This strawman draft rule is not an official proposed rulemaking. The substance of any strawman draft rule is subject to informal comments from interested parties before publication and formal comments after publication. The strawman draft rule may be amended by the PUCT before publication and/or adoption in accordance with normal regulatory rulemaking procedures, and no assurance can be provided that a rule will be adopted as described herein.
§ 25.303. Nuclear Decommissioning following the Sale or Transfer of Nuclear Generating Assets.
(a)
Purpose.
(1) The purpose of this rule is to delineate the rights and obligations of an electric utility or its successor transmission and distribution utility and affiliated power generation company, and the entity to which nuclear generating plant assets, including the associated nuclear decommissioning trust funds, are transferred. This rule, among other purposes, prescribes the utility's responsibility for charging rates for the purpose of collecting funds for nuclear decommissioning trust funds.
(2) The rule is intended to protect the nuclear decommissioning trust funds so that the funds collected from customers through the utility's rates, plus the amounts earned from investment of the funds, will be available at the time of decommissioning in the event of a transfer of the nuclear decommissioning trust funds.
(b)
Application.
(1) This rule applies to an electric utility or a power generation company which transfers its nuclear generating plant assets, including any associated nuclear decommissioning trust funds, to another entity.
(2) This rule also applies to a transmission and distribution utility that is the successor of an electric utility that transfers nuclear decommissioning trust funds or is affiliated with an affiliated power generation company that transfers nuclear decommissioning trust funds to another entity.
(c)
Definitions.
(1) Transferor Utilty--An electric utility or an affiliated power generating company or their respective successor in interest that transfers nuclear generating plant assets, including any nuclear decommissioning trust funds.
(2) Transferee Company-An entity or its successor in interest to wvhich nuclear decommissioning generating plant assets, including the nuclear decommissioning trust funds, are transferred from a transferor utility.
(3) Nuclear Decommissioning Trust Funds -
Funds contained in one or more external and irrevocable trusts created for the purpose of protecting and holding charges provided by customers so that the funds and the interest earned on the funds are available to be used solely for the decommissioning of nuclear generating units at the end of their useful lives.
(4) Decommissioning Funds Collection Agreement-An agreement between the transferor utility and the transferee company that governs the transfer of responsibility for
Application Enclosure II Page 2 of 4 administration of the nuclear decommissioning trust fund and the collection of charges from utility customers and the remittance of the funds to a transferee company.
(d) Transfer of responsibility for administering Nuclear Decommissioning Trust Funds.
(1) Prior to the closing of any transaction involving the transfer of the nuclear decommissioning trust, the transferor utility shall submit for the commission's review the proposed decommissioning funds collection agreement.
The commission shall review the agreement for compliance with this rule and provide notice of whether it intends to initiate a proceeding to approve or reject the agreement within 45 days of receipt of the agreement. If such a proceeding is initiated, it shall be conducted within 120 days of the receipt of the agreement. If such a proceeding is not initiated, the agreement shall be deemed to be in compliance with commission rules. The final executed agreement shall also be filed at the commission.
(2) For transfers of nuclear decommissioning trust funds that occurred before this section took effect, the decommissioning funds collection agreement shall be filed at the commission within 15 days of the effective date of this section.
(3) Pursuant to the executed purchase and sale agreement or transfer agreement entered into, the transferor utility's rights to accumulated and future decommissioning funding and the responsibilities for decommissioning of the nuclear plant shall be transferred to the transferee company upon closing of the transaction.
Notwithstanding the foregoing, the administration of the decommissioning trust funds in accordance with
§25.301 of this chapter shall be continued by the Transferor utility until the commission approves the transfer of responsibility for administering the trust funds to the transferee company. Upon the issuance of an order from the commission releasing the transferor utility from this obligation, the transferee company which owns the decommissioning trust funds shall assume responsibility for administration of the funds in accordance with §25.301 of this chapter. Such an order is required regardless of whether the commission initiates the proceeding described in subparagraph (d)(l).
(5) In addition to the filing of the agreement required in paragraph (1) of this subsection, the transferee company shall file at the commission an affidavit, signed under oath by an authorized executive of the transferee company, certifying that once the transfer of administration of the nuclear decommissioning trust funds is ordered by the commission, the funds will be administered in accordance with §25.301 of this chapter.
The transferee company shall attach to the affidavit an executed trust agreement that incorporates the requirements of the rule.
(6) Prior to executing an amended decommissioning funds collection agreement or amended trust agreement, the proposed agreements shall be filed at the commission for review. The commission will review the amended agreement for compliance with this rule and will provide notice whether it intends to initiate a proceeding to approve or reject the agreement within 45 days of receipt of the agreement. If such a proceeding is initiated, it shall be conducted within 120 days of the receipt of the agreement. If such a proceeding is not initiated, the agreement shall be deemed to be in compliance with commission rules. All final amended agreements, after execution, shall also be filed with the commission.
Application 1 Page 3 of 4 (e)
Periodic Reviews of Decommissioning Costs and Nuclear Decommissioning Trust Funds.
(1) The reasonable and necessary nuclear decommissioning costs most recently approved by the commission shall be included in a non-bypassable charge of the applicable electric utility or transmission and distribution utility. The commission may order the utility to discontinue the deposit of decommissioning charges if the transferee company fails to comply with any provision of this section.
(2) The transferee company shall periodically perform, or cause to be performed, a study of the decommissioning costs of each nuclear generating unit that it owns or in which it leases an interest. A study or re-determination of the previous study shall be performed at least every five years, starting from the date of the most recent decommissioning cost study for the plant on file with the commission. The study or re-determination shall consider the most current information reasonably available on the cost of decommissioning.
A copy of the study or re-determination shall be filed with the commission and copies provided to the commission's Financial Review Division and the Office of Public Utility Counsel.
(3) The periodic cost study described in subsection (e)(2),
and an updated decommissioning funding analysis, shall be filed at the commission within 60 days of completion of the periodic study. The funding analysis shall be based on the most current information reasonably available for the cost of decommissioning, an allowance for contingencies of 10% of the cost of decommissioning, the balance of funds in the decommissioning trusts, anticipated escalation rates, the anticipated after-tax return on the funds in the trust, and other relevant factors. The funding analysis shall be accompanied by testimony or a report supporting the assumptions used in the analysis and shall calculate the required annual funding amount necessary to ensure sufficient funds to decommission the nuclear units at the end of their useful lives.
(4) The commission, on its own motion or on the motion of the Legal and Enforcement Division, the Office of Public Utility Counsel, or any affected person, may initiate a proceeding to review the transferee company's balance of the trust, compliance with
§25.301 of this chapter or the annual funding amount. The transferee company shall provide any information required to conduct the review upon request in accordance with the commission's procedural rules.
(5) Within 90 days after the completion of decommissioning, the transferee company shall file a request for a final reconciliation proceeding at the commission.
Any funds remaining in the trust after the completion of decommissioning will be returned to customers in a manner determined by the commission. If the reasonable and necessary costs of decommissioning exceed the amount available in the trust, the shortfall will be recovered through a non-bypassable charge approved by the commission if the transferee company has substantially complied with §25.301 of this chapter and this section.
(6) The transferee company or its successor in interest may request an increase or decrease in the annual funding amount by filing an updated funding analysis as described in subparagraph (e)(3) if the most recent periodic study is less than four years old and there has been a change of more than ten percent in the required annual funding amount
Application 1 Page 4 of 4 necessary to ensure sufficient funds to decommission the nuclear units at the end of their useful lives.
(7) The transferee company shall file an annual report on May 15 of each year on the status of the trust fund on a form approved by the commission.
(f) Utility rate proceedings for collecting decommissioning charges.
(1) Any electric utility or its successor transmission and distribution utility responsible for collecting the non-bypassable charge for nuclear decommissioning may request an adjustment in the charge if there is a material cumulative over-or under-collection of revenues, including interest, greater than or equal to fifteen percent of the most recent annual decommissioning charge amount approved by the commission.
(2) No later than 30 days following the closing of a transaction involving a transfer of nuclear generating plant assets, including associated nuclear decommissioning trust funds, to a non-affiliated entity, the transferor utility shall apply to the commission to have its current level of decommissioning funding removed from its general rates and stated as a separate non-bypassable charge.
(3) If nuclear generating plant assets, including associated nuclear decommissioning trust funds, are transferred to an affiliated power generating company, the request for a separate non-bypassable charge shall be made during the first general rate case following the transfer.
(4) Absent a commission order to the contrary, following the closing of a transaction involving a transfer of the nuclear decommissioning trust fund, one-twelfth of the most recent annual amount ordered by the commission to be collected from customers for decommissioning shall be deposited each month by the utility, along with any accrued interest from investment of the collections, into the nuclear decommissioning trust funds of the transferee company in accordance with the terms of the most recent decommissioning funds collection agreement reviewed by the commission.
(5) After the issuance of a commission order that the cost of service for nuclear decommissioning for a particular plant has increased or decreased and should be adjusted, the electric utility or its successor transmission and distribution utility responsible for collecting the non-bypassable charge shall file a rate application within 45 days solely to adjust the non-bypassable charge. The filing shall provide a sales forecast, a proposed allocation methodology, a proposed tariff, and any other information necessary to implement the commission's order and shall calculate the difference between the actual cumulative decommissioning charge revenues collected from customers including interest applied in accordance with 25.236(e)(1) of this chapter and the cumulative amount remitted in accordance with subsection (f)(4) since the last rate adjustment. The calculated over-or under-recovery amount will be applied to the new commission authorized annual amount to determine the required non-bypassable charge.
Such rate proceedings will be conducted separately from the electric utility's or its successor transmission and distribution utility's general rate proceedings and will be approved within 120 days of receipt of the filing.