NOC-AE-04001712, Appendix a Cameco Corporation 2003 Consolidated Audited Financial Statements

Appendix a Cameco Corporation 2003 Consolidated Audited Financial Statements

ML041530327
Person / Time
Site:	South Texas
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 To the Shareholders of Cameco Corporation prepared by management in accordance with Canadian generally accepted accounting principles. Management is responsible for We have audited the consolidated balance sheets of Cameco ensuring that these statements, which include amounts based Corporation as at December 31, 2003 and 2002 and the upon estimates and judgment, are consistent with other consolidated statements of earnings, retained earnings and cash information and operating data contained in the annual report flows for each of the years in the three-year period ended and reflect the corporation's business transactions and financial December 31, 2003. These financial statements are the position. responsibility of the corporation's management. Our responsibility is to express an opinion on these financial Management is also responsible for the information disclosed in statements based on our audits.

the management's discussion and analysis including responsibility for the existence of appropriate information systems, procedures We conducted our audits in accordance with Canadian generally and controls to ensure that the information used internally by accepted auditing standards. Those standards require that we plan management and disclosed externally is complete and reliable in and perform an audit to obtain reasonable assurance whether the all material respects. financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the The integrity and reliability of Cameco's reporting systems are amounts and disclosures in the financial statements. An audit also achieved through the use of formal policies and procedures, the includes assessing the accounting principles used and significant carefuil selection of employees and appropriate delegation of estimates made by management, as well as evaluating the overall authority and division of responsibilities. Internal accounting financial statement presentation.

controls are monitored by the internal auditor. Cameco's code of ethics, which is communicated to all levels in the organization, In our opinion, these consolidated financial statements present requires employees to maintain high standards in their conduct of fairly, in all material respects, the financial position of the the corporation's affairs. 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-Our shareholders' independent auditors, KPMG LLP, whose year period ended December 31, 2003 in accordance with report on their examination follows, have audited the consolidated Canadian generally accepted accounting principles.

financial statements in accordance with Canadian generally accepted auditing standards.

The board of directors annually appoints an audit committee Original signed by KPMGLLP comprised of directors who are not employees of the corporation.

This committee meets regularly with management, the internal Chartered Accountants auditor and the shareholders' auditors to review significant Saskatoon, Canada accounting, reporting and internal control matters. Both the internal and shareholders' auditors have unrestricted access to the January 26, 2004, except as to note 28(b) which is as of audit committee. The audit committee reviews the financial February 27, 2004 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.

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 200i2cd' As at December 3- 2003 2002 il11  !,::'J,% lse Assets Current assets Cash

... ..... I............ ............. . .............

$ 84,069 $. ....... 58,096 Accounts .. ........

receivable ... .... .......... ................. ...... ... ............... .... ... .........-... .......... .. ... ................... ............... . . ......................

181,337 186,369 Inventories

.................. .. I

[note -

31

......... .. ................ ......... .. .. .. .. I... . ..... ......... .. ..... ............ ....... ......I............ ............... ...... I..................

316,435 339,684 Supplies and prepaid expenses 41,571 45,731 Current portion of long-term receivables, investments and other [note 51 54,866 20,163 678,278 650,043

Property, I..

........I..... ...plant

........ ...... and

............. equipment

............. [note

.... ..............4]

............. .................. ...----- ..... ........................... .............. ................. ..... 2,072,156

.. ..- - ........................ 2,060,250 ...... ......... ..

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

........ _y interest ...... ........ ......... ..... ..... -..- ---- ---- -.----- . ------ -- --- - --- --- ---- - --- ---- -

14,690 18,078 ... ...... .. .....

Shareholders' equity Preferred securities [note 9] 158,022 193,763 Convertible debentures [note 10]

226,444 ........ .... ........... ...

Share capital [note

.. .........- . ... ......... .-. 1........

11]

708,345 680,934 Contributed surplus

......-.... ... ........ ....I.............. .....

474,927 472,488 Retained earnings 665,377 494,341 Cumulative translation account [note 12] (13,256) 19,053 2,219,859 1,860,579 Total liabilities and shareholders' equity $ 3,359,411 $ 2,967,816 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*sended 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 124,489 116,958 129,298 Administration 47,011 41,693 36,644

........I.... ..............

............... 1.1-Exploration 21,923 21,532 . 18,203

-.--.......I....I..... ...... ...........

Research and development 1,717 2,257 2,097 Interest and other [note 13] 4,737 (1,957) (2,366)

Gain on property interests [note 231 (2,670) 738,700 663,968 605,943 Earnings from operations 88,246 84,366 94,896

-1.1 .I............. I................

.I.......

Earnings from Bruce Power [note 19] 107,921 15,769 12,167

..... -.1..............-.--

Other income (expenses) [note 14] 429 (878) 590 Earnings before income taxes and minority interest 196,596 99,257 107,653 Income tax expense (recovery) [note 15] (15,994) 47,265 42,241 Minority interest (3,416) (871)

Net earnings 216,006 52,863 65,412

....I....

I... -. 1.............. ---.

Preferred securities charges, net of tax [note 91 9,030 9,340 9,325 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 216,006 52,863 65,412 Dividends on common shares (33,650) (27,882) (27,804)

Preferred securities charges, net of tax [note 9] (9,030) (9,340) (9,325)

Convertible debenture charges, net of tax [note 10] (2,290)

Retained earnings at end of year $ 665,377 $ 494,341 $ 478,700 See accompanying notes to consolidated financial statements.

4

Consolidated Statements of Cash Flows Fo,-rthe veai enided Decemiber 31 2003 2002 2001 Operating activities Nct earnings $ 216,006 $ 52,863 $ 65,412 Items not requiring (providing) cash:

Depreciation, depletion and reclamation 124,489 116,958 129,298 Provision for future taxes [note 15] (26,213) 36,996 32,655

................ I--....

...I........

Deferred charges (revenue) recognized 9,331 1,375 (10,373)

Earnings from Bruce Power [note 19 ] (107,921) (15,769) (12,167)

Equity in (earnings) loss from associated companies [note 14] 1,494 1,083 Minority interest (3,416) (871)

Gain on property interests [note 23] (2,670)

....I.....

Other operating items [note 1 6] 32,123 60,877 (88,578)

Cash provided by operations 245,893 250,842 116,247 Investing activities Additions to property, plant and equipment (159,570) (90,226) (5 8,2.5)

Increase...

. ..... in...--...long-term.........:........

................ ...... re e va l s in e t e t and................ .......

other....... .....11

...I............. ------

(288,259) *(42,597)

Decrease in long-term receivables, investments and other 58,296 21,963 Proceeds on sale of property, plant and equipment 242 101 403 Cash used in investing (447,587) (74,426) (130,717)

Financing activities Decrease in debt (25,848) (130,295) (25,485)

Increase in debt 50,311 1,379 79,932 Restricted cash 342 11,138 409 Issue of convertible debentures, net of issue costs 223,032 Issue of shares 27,411 10,903 5,208 Preferred securities charges (15,306) (17,238) (17,268)

Dividends (32,275) (27,944) (27,720)

Cash provided by (used in) financing 227,667 (152,057) 15,076 Increase in cash during the year 25,973 24,359 606 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 44,472 39,097 Gold Finished 297 4,189 Broken ore 1,775 3,760 2,072 7,949 Total $ 316,435 $ 339,684

4. Property, Plant and Equipment Accumulated (RCSmarcd)

Depreciation 2003 2002 Cost and Depletion Net Net 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 34,624 15,148 19,476 15,374 Total $ 3,230,638 $ 1,158,482 $ 2,072,156 $ 2,060,250 7

5. Long-Termn Receivables, Investments and Other 2003 2002 (rThousaids)

Bruce Power L.1 [note 191 Interest in BriLice Power L.P. $ 456,520 $ 130,218 Loan receivab lc 77,028 Kumtor Gol~dCompany Subordinated loan - principal [note 18] 52,590 64,276 Subordinated loan - interest 2,261 292 Restricted cas. h -deb reserve 75 489 Investments in a .soitdcompanies Investnment in Technology Commercialization International, Inc. 4,889 4,017 Investment in UEX Corporation 3,791 3,455 Portfolio investn rients Energy Resou tees of Australia Ltd (market $4,7)18,208 17,564 Genera Hydrogen Corporation 6,323 6,323 Deferred charges 5,958 17,808 Investment in Huron Wind L.P. 2,725 Advances receivable 16,693 22,704 Accrued pension benefit asset [note 22] 10,630 1,817 Othr 6,152 8,723 663,843 277,686 Less current portion (54,866) (20,163)

Net 608,977 $ 257,523 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 11,835 243,038 224,608 Less current portion (4,331) (6,318)

Net $ 238,707 $ 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

...I........

..... ......I...... ... ...........

............-.- - - --- - -- -- ............ ............. I.......I......... ................. .................. ......... ................. . ..... .. .. .. .....

8,757. .. ........ ........... ....

8,077 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

8. Other Liabilities 2003 2002 (Thousandsl Deferred revenue $ 28,099 $ 2,102 Accrued post-retirement benefit liability [note 22] 3,389 4,092 Borrowed O

O............................product .... ... ....... ............ ..... ..... .... ....

...... ........ ........ ........ ................. .......... 12,952 Other 6,271 7,308 37,759 26,454 Less current portion (1,563) (16,931)

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,,,umberof Slh-es)

Beginning of year 55,985,873 55,671,440 Issued:

Stock option plan [note 20] 783,550 314,433 Issued share capital 56,769,423 55,985,873 Amount 2003 2002 (Thousands)

Beginning of year $ 685,491 $ 676,404 Issued:

Stock option plan [note 201 25,572 9.087 Issued share capital 711,063 685.491 Less loans receivable [note 20] (2,718) (4,557)

End of year $ 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 2002 2001 (1 hou&ands)

Interest on long-term debt

....... .... .................... .............. . ................I... .......-........... .... ........ _.

19,715

$ 14,478 _......

$ 20.116 Other interest and financing charges -....

2,221 2,039 1,616 Interest income (6,776) (6,842) (10,773)

. . ............I..... . .. .... .. . .......... ....... . .. ............ . ........ ................. ....... . ...............

.... ........ I...I...

Foreign exchange (gains) losses

.......... .. ......... . ......... ................ .. ........... ........I...... ...... ............

3,620 (1,648) (791)

Mark-to-market loss 1,811

... ................ ......... . ... . I............................

Capitalized interest (14,043) (11,795) (12,534)

Net $ 4,737 $ (1,957) $ (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)

Ne 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 42,904 6,660 Future.. ....inco me.....tax.

......liab ilities.

$ 579,259 $ 600,179 N tFuture income tax liabilities

$ 525,911 $ 539,823 Less current portion (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

.applicableto 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 2001 (Thimorsads)

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 Net $ (15,994) $ 47,265 $ 42,241 1.6. Other Operating Items 2003 2002 2001 (Thsonsads)

Changes in non-cash wotking capital:

Accounts receivable $10,351 $ 27,396 $ (82,094)

Interest receivable (2,022) 205 515 I.I.-

...... 1......- ...

Inventories (11,590) _1 10,932 -. 7,469 Supplies and prepaid expenses 4,160 (1,157) (24)

Accounts payable and accrued liabilities 24,180 18,342 5,992

................ ---...I Other liabilities (2,860) .......... 279 ........................ .

Hedge position settlements 30,852 14,794 (11,328)

Reclamation payments -- (9,903) (6,878)

Other (11,045) (3,036) (1,336)

Total $32,123 $ 60,877 $ (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 69.81%

Key Lake 83.33%

Non-producing:

Cigar Lake 50.03%

Inkai 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) 2003 2002 (Thousands)

Current assets......... .

................... ....... ....... ...... ... . ... .................. .. .... ................. .... ..I............. .. ........

$ 27,795

........................ ........... ...... ......... .......... .... .. ............... .1.....

28,933 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

.. . ....... ............ ............... . ............-......................... .......................... ... ................ . . ............ .................................. .......... I ... .... ...... ......

$ 13,142 39,804 Investing activities (4,112) (4,716) (2,492)

....... ....... ....... . ..........I.........- ................. -. .......... . ........... ..... ............. ...... ... .......... ........ ...... ..... .......

Financing activities (29,033) (16,013) (44,517)

Increase (decrease) in cash during the year $ 3,665 $ (7,587) $ (7,205)

18. Kumtor Gold Company (KGC) Joint Venture 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:

2003 2002 (0housands)

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%. $ 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) 78,884 96,414

• EBRD $10,000,000 (2002-$ ,000, 0) .......................... 12,924 15,796

• ..lEB

............ $10,000,000 ....... . ............ (2002

....................... $10,000,000)

............... (US)

................... ................................... ................ 12,924 15,796 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 $ 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:

(Thousmids)

Net book.. ....... value of assets acquired .. ................I... .............. ............ -....

$ 149,056 Excess of fair value over book value of assets acquired 144,545

.........I.... . ............

Valuation of Bruce Power sales agreements (68,593) 1.............

.I..

Pension liability (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..............-..

..... .I --

before interest and taxes

....... I ......... - - ..... ... ... ....... ..... ... - -.... - ..... ... ...... .........

355 ..... ..........

_169

....... .. . ...... .. ............. I 128 41 -- -

Interest 69 63 4 Earnings before taxes 2 86, 106 87 Cameco's share (i - 77 16 13 Adjustments (ii) 31 (1)

Cameco's share of earnings before taxes $ 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 2001 (M~illions)

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 2002 2001 (NM-nlbcr of Sharcs)

Beginning of year 2,223,750 2,195,783 1,987,883

.........-.-..........................-.....I- ................... ........ ..-.-..-..._._-................... ....-....

. ......... ......I........ ...............

I...............

Options O granted s................

e.. r..i..... .... 1_e ..... (706,350 8....I.5.....5.....

... ......... ... 489,050 3...............

........................ 482.850 50.. 0.... ...........

Options exercised [note I11] (783,550) (314,433) (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

.... . ............... 1-........... ........-._ ..... -... .... ....

$ 38.98 $ 37.34

...............I. .. ...,. .......I.. ....... ...... . . ..... .................. ....-_................ -. I.........

38.72 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 Pro....

fo.ab a _i .....e arning s.......

p e sh .................

are........ ......... ....... ... .... ...... ........................ ..........- ......... ..... 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 5 years 5 years

............................................ ............I..............................I..........................

Expected forfeitures 10% 17%

Weighted average grant date fair values $ 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 $ 14,595 $ 13.330 Current service cost 806 743 Interest cost 98483

.......I..........

Actuarial gain (483) - 3 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 1,887 2,670 Unamnortized transitional obligation 2,365 3,058 Accrued pension benefit asset $ 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.

Lo ........ g-er ....... ....... rate t of return on on assets ets... ,. 7.0% 8.0%

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

......I..........................

on benefits

..........I......... ........

earned

.....I........I........ ...I-_... .............. . ......

984

... ............ ... ......_ ............. .-....... 835

4. .... 1... _. -..................

998 .........

Expected return on

...... ...I--........ .. .................................... --

pension plan assets, nct (601)

............. .... .................. .....1 --.... ...................... ......... ... .

(885)

Net amortization -

883 752 694 Net pension expense $ 2,072 $ 1,887 $ 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 $ 4,092 $ 3.809

.. ... ....I.......... ....... .... . ....................... ...... ..................................I-------..... ..........-.1-..................... ............

_ ..........I.......... ...

Current service cost 129 147 Interest I...t........... cost

e. t ................... ............... ... .. .... ............... ........ .. ....... .. . .....

206 230 Actuarial gain (952)

Benefits paid (86) (94)

Accrued post-retirement benefit liability $ 3,389 $ 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:

(Thos.ands)

Cash and other working capital

---

..... ........ ......... ......I.......... ..... ......... ............... ..............

$ 13.845 Property, plant and equipment 27,054 Minority interest (18,981)

Net assets acquired $ 21,918 Financed by:

Cash P .................. ... ......... r......g.... ........ .. e... $ 19,562

...... ............I................. .............

Property, at carrying value 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 ... ........... ....................

I.......... ............. ...........................

190,000 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).

(Resuscad) (Restaled) 2003 2002 2001 (Thousands)

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:

..SConvertible

.......... debentures

i. s. ..... . . . . . . . . . ............... 950 49...................

Stock options

.11................. ...... ............................................

649............. ....................... ........ ...35... .............

203 Other stock-based arrangements 34 24 16 Weighted average common shares outstanding, assuming dilution 57,753 55,840 55,618 Diluted earnings per common share $ 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 (i) (i 2003 Uranium Conversion Gold Power Subtotal Adjustments Total

(,niIlioms Revenue $ 570.3 $ 142.4 $ 114 K.2 $ 371.9 $ 1,198.8 $ (371.~9) $ 826.9 Expenses Products and services sold 394.6 92.0 52.2 228.2 767.0 (228.2) 538.8 I...........

Depreciation, depletion and reclamation 9211 I.... ...... 10.9

........ _-- .. ...... ... 21.5 ..... .......................

34.6

....I..

I.... ...t59.1 I...-........

........ ..... . (34.6) ..... ..

124.5 Ex~ploration 13.3 -. ........ 8.7 22.0 22.0 Rsearch & developmenr I...........

... 1.7 1.7 1.7 Other (0.4) 1.2 0.8 (1.2)

I.....................- - - .......I... . ............ .......I..........

...I...............

..I........................... . ...................

... ........I Earnings from Bruce Power (107.9) (107/.9)

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 (i) (i 2002 (..natd) Uranium Convcrsion Gold Power Subtotal Adjustments Total (millions)

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) 2001(rsod Uranium Conversion Gold Power Subtotal Adjustments Total (millions)

Revenue $ 471.4 $ 114.4 $ 115.0 $ 89.9 $ 790.7 $ (89.9) $ 700.8 Expenses Products and services sold 298.0 72.0 52.1 63.9 486.0 (63.9) 422.1

_1 .

Depreciation, depletion 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 (Rcsmtssil (R,,stated) 2003 2002 2001 (Million,)

Revenue from products and services Canada - domestic $ 40.2 $ 62.8 $ 50.1

- export 337.5 381.6 413.3 United States 335.0 216.7 122.4 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 2002 2001 (Thousands)

Net earnings under Canadian GAAP $ 216,006 $ 52,863 $ 65,412 Adjustment to reverse Canadian GAAP restatement (viii) - 2,597 (191)

Net earnings applicable to US GAAP $ 216,006 $ 55,460 $ 65,221 Add (deduct) adjustments for:

Interest on preferred --,.......

securities and convertible debentures (i)

(19,186) _ -------.-_-- --_- -.-(17,238)

.. . . ... .. ... .... ....I. . ....... . . ...

(17,268)

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 I. of cumulative translation account

. ...... .... I.. ....... ..... ....... .... ........... . ...... .. . . ..... ........ .....

(vii) = (1,585)

(3,273)

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 . ........ 1...---

201,640 - ........... ......... 37,781 ..-...........-.... 50,889 Cumulative effect of a change in accounting principle (viii) 10,683 Net earnings ......

under US GAAP ............ ...... . ......._.. ........................ ..._..

212,323

_... .................. .I...-.. ..

37,781

........ .. .. .. I.... ...-

50,889 Hedges and derivative instruments (vi) 29,508 (6,203)

....... . .. . . .(......)..

-(22.253)

........ ... .... .... . ,,.,,.),

Foreign currency translation adjustments (32,309) -859

............ ... ............. I.-................

1,509

-111.... ................. .........................

Unrealized loss on available-for-sale securities (ix) (1,058) (334) (8,300)

Comprehensive income under US GAAP $ 230,932 $ 32,103 $ 21,845 Basic net earnings per share under US GAAP $ 3.78 $ 0.68 $ 0.92 Diluted earnings per share under US GAAP $ 3.72 $ 0.68 $ 0.92 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 (Restatecd) 2002 Canadian us Canadian us GAAP GAAP GAAP GAAP (Thousands) (Thons~ands)

Current assets $ 678,278 $ 672,340 $_ 650,043 $ 644,105

...I...... ............

...I.

Property, plant and equipment 2,072156 .. 808,483 ... 2,060,250 ........ 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

.cumulativetranslation 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 1,813,372 1,860,579 1,586,240 Total liabilities and shareholders' equity $ 3,359,411 $3,300,147 $2,967,816 $2,882,111

• (ii) Components of accounts payable and accrued liabilities are as follows:

2003 2002 Canadian us Canadian us GAAP GAAP GAAP GAAP (Thousands) (Thousands)

Accounts payable $ 120,436 $ 120,436 $ 84906 $ 84,906 Taxes and royalties payable 29,444 __29,444 26,340 22,221 I.......... ............

Accrued liabilities 7,650 .... 7,650 20,686 I..---...

20,686 Total accounts payable and accrued liabilities $ 157,530 $ 157,530 $ 131,932 $ 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 C.. .........

used in investing

......... .d..........e................

......e ... ...........n... ........ ... .. ... ............ ............... ............. . ...... . ......

$ (441,540)

$ (72,006) 3 4 ,8 1 9 _.(1 -

$ (127,306) 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

........ .................... . ... ............... ......... I. .--....... ..................... .... ......... . ........................

$ 212,323 I... - .......

....-.. ....I...............

37,781 I-......................

50,889

.. - -..............-.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 l .... .....

.. -. .. ...... ....20.0% 39.6%

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 less amounts written off to reflect a decline in value that is management in accordance with Canadian generally accepted other than temporary.

accounting principles and, except as described in note 30, conform in all material respects with accounting principles Property, Plant and Equipment generally accepted in the United States. Management makes Assets are carried at cost. Costs of additions and improvements various estimates and assumptions in determining the reported arc capitalized. When assets arc retired or sold, the resulting amounts of assets and liabilities, revenues and expenses for each gains or losses are reflected in current earnings. Maintenance year presented, and in the disclosure of commitments and and repair expenditures are charged to cost of production. The contingencies. The most significant estimates are related to the carrying values of property, plant and equipment are lives and recoverability of mineral properties, provisions for periodically assessed by management and if management decommissioning and reclamation of assets, future income determines that the carrying values cannot be recovered, the taxes, financial instruments and mineral reserves. Actual results unrecoverable amounts are written off against current earnings.

could differ from these estimates. This summary of significant accounting policies is a description of the accounting methods Non-Producing Properties and practices that have been used in the preparation of these The decision to develop a mine property within a project area consolidated financial statements and is presented to assist the is based on an assessment of the commercial viability of the reader in interpreting the statements contained herein. property, the availability of financing and the existence of markets for the product. Once the decision to proceed to Consolidation Principles development is made, development and other expenditures The consolidated financial statements include the accounts of relating to the project area are deferred and carried at cost with Cameco and its subsidiaries. Interests in joint ventures are the intention that these will be depleted by charges against accounted for by the proportionate consolidation method. earnings from future mining operations. No depreciation or Under this method, Cameco includes in its accounts its depletion is charged against the property until commercial proportionate share of assets, liabilities, revenues and expenses. production commences. After a mine property has been brought into commercial production, costs of any additional Cash work on that property are expensed as incurred, except for large Cash consists of balances with financial institutions and development programs. which will be deferred and depleted investments in money market instruments which have a term over the remaining life of the related assets.

to maturity of three months or less.

The carrying values of non-producing properties are periodically assessed by management and if management Inventories determines that the carrying values cannot be recovered, the Inventories of broken ore, uranium concentrates and refined unrecoverable amounts are written off against current earnings.

and converted products are valued at the lower of average cost and net realizable value. Property Evaluations Cameco reviews the carrying values of its properties when Supplies changes in circumstances indicate that those carrying values Consumable supplies and spares are valued at the lower of cost may not be recoverable. Estimated future net cash flows are or replacement value. calculated using estimated recoverable reserves, estimated future Investments commodity prices and the expected future operating and capital costs. An impairment loss is recognized when the carrying value Investments in associated companies over which Cameco has of an asset held for use exceeds the sum of undiscounted future the ability to exercise significant influence are accounted for net cash flows. An impairment loss is measured as the amount by the equity method. Under this method, Cameco includes by which the asset's carrying amount exceeds its fair value.

in earnings its share of earnings or losses of the associated company. Portfolio investments are carried at cost or at cost 32

Future Income Taxes regulatory requirements and cost estimates. Expenditures Future income taxes are recognized for the future income tax relating to ongoing environmental programs are charged against consequences attributable to differences between the carrying earnings as incurred or capitalized and depreciated depending values of assets and liabilities and their respective income tax on their relationship to future earnings.

bases. Future income tax assets and liabilities are measured using enacted income tax rates expected to apply to taxable Employee Future Benefits income in the years in which temporary differences are expected Cameco accrues its obligations under employee benefit plans.

to be recovered or settled. The effect on future income tax assets The cost of pensions and other retirement benefits earned by and liabilities of a change in rates is included in earnings in the employees is actuarially determined using the projected benefit period which includes the enactment date. Future income tax method pro-rated on service and management's best estimate assets are recorded in the financial statements if realization is of expected plan investment performance, salary escalation, considered more likely than not. retirement ages of employees and expected health-care costs.

For the purpose of calculating the expected return on plan Capitalization of Interest assets, those assets are measured at fair value. Past service costs Interest is capitalized on expenditures related to construction or arising from plan amendments and net actuarial gains and development projects actively being prepared for their intended losses are amortized on a straight-line basis over the expected use. Capitalization is discontinued when the asset enters average remaining service life of the plan participants.

commercial operation or development ceases.

Stock-Based Compensation Depreciation and Depletion Cameco has a stock option plan that is described in note 20.

Conversion services assets, mine buildings, equipment and Options granted under the plan on or after January 1, 2003 mineral properties are depreciated or depleted according to the are accounted for using the fair-value method. Under this unit-of-production method. This method allocates the costs of method, the compensation cost of options granted is measured these assets to each accounting period. For conversion services, at estimated fair value at the grant date and recognized over the the amount of depreciation is measured by the portion of the vesting period.

facilities' total estimated lifetime production that is produced in For options granted under the stock option plan prior to that period. For mining, the amount of depreciation or January 1, 2003, no compensation expense was recognized depletion is measured by the portion of the mines' economically when the stock options were granted. Any consideration paid recoverable proven and probable ore reserves which are on exercise of stock options is credited to share capital.

recovered during the period. Cameco accounts for other stock-based compensation Other assets are depreciated according to the straight-line arrangements in accordance with the fair-value method method based on estimated useful lives, which generally range of accounting.

from three to 10 years.

Revenue Recognition Research and Development and Exploration Costs Cameco supplies uranium concentrates and uranium conversion Expenditures for applied research and technology related to services to utility customers. Third party fabricators process the products and processes of Cameco and expenditures for Canmeco's products into fuel for use in nuclear reactors.

geological exploration programs are charged against earnings Cameco records revenue on the sale of its nuclear products as incurred. to utility customers when title to the product transfers and delivery is effected through book transfer. Since nuclear Environmental Protection and Reclamation Costs products must be stored at licensed storage facilities, Cameco The fair value of the liability for an asset retirement obligation may hold customer-owned product at its premises prior to is recognized in the period incurred. The fair value is added to shipment of the product to third parties for further processing.

the carrying amount of the associated asset and depreciated over Cameco records revenue on the sale of gold when title passes the asset's useful life. The liability is accreted over time through and delivery is effected.

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 33

Amortization of Financing Costs effective in offsetting changes in fair values or cash flows of Debt discounts and issue expenses associated with long-term hedged items. Gains and losses related to hedging items are financing are deferred and amortized over the term of the issues deferred and recognized in the same period as the to which they relate. corresponding hedged items. If derivative financial instruments are closed before planned delivery, gains or losses are recorded Foreign Currency Translation as deferred revenue or deferred charges and recognized on the Monetary assets and liabilities denominated in foreign planned delivery date. In the event a hedged item is sold, currencies are translated into Canadian dollars at year-end rates extinguished or matures prior to the termination of the related of exchange. Revenue and expense transactions denominated in hedging instrument, any realized or unrealized gain or loss on foreign currencies are translated into Canadian dollars at rates such derivative instrument is recognized in earnings.

in effect at the time of the transactions. The applicable Per Share Amounts exchange gains and losses arising on these transactions are reflected in earnings. Per share amounts are calculated using the weighted average number of paid common shares outstanding.

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.

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

delineated, the regulatory approval to Cameco is also a gold producer. In early mine is secured and the mine is January 2004, Carneco announced that Vision. developed, uranium ore is mined and it had reached an agreement with the upgraded at a mill to produce uranium Kyrgyz Republic to create a jointly Cameco will be a dominant nuclear concentrates. Uranium mining owned Canadian gold company called energy company producing uranium fuel companies sell uranium concentrates to Centerra Gold Inc. Cameco will own and generating clean electricity.

nuclear electrical generating companies 67% and the Kyrgyz government around the world on the basis of the (through its agency Kyrgyzaltyn) will Mission U308 contained in the uranium own the remaining 33%. Centerra Our core business is uranium fuel supply. concentrates. These utilities then intends to undertake an initial public Through our nuclear investments we contract with converters, enrichers and offering (IPO) in Canada and sell shares participate in the generation of clean fuel fabricators to produce the required to the public. Cameco expects to energy. Sustainable growth is realized reactor fuel. continue to hold a majority interest in by building upon our core business Centerra immediately following the IPO, Cameco is the world's largest titanium strengths through socially, environ- which is planned for the second quarter producer with 550 million pounds of mentally and economically responsible of 2004.

proven and probable reserves of uranium conduct. In doing so, we will enhance including controlling ownership of the our status as an investment, supplier and Growth Sttrategy world's largest high-grade reserves and employer of choice, and continue to earn low-cost operations in northern Cameco's vision is to be a dominant the support of the communities where Saskatchewan. The company has four nuclear energy company, producing we interact. operating mines in Canada and the US, uranium fuel and generating clean The key measures of our success will be a as well as two new mines ready to be electricity. The main strategies of safe, healthy and rewarding workplace, developed in Canada and Central Asia, Cameco are:

clean environment, and supportive subject to regulatory and partner communities wherever we operate, approval.

• to maintain and leverage the together with solid financial company's competitive advantages in The company is an integrated uranium the uranium and conversion performance, all reflected in a growing producer with refining and conversion return to shareholders. businesses, facilities at Blind River and Port Hope located in Ontario, Canada. The

• to continue vertical integration within the nuclear fuel supply, and products from these sites are used to S produce fuel for nuclear power reactors.

• to expand nuclear generation The Port Hope plant can produce 20% capacity.

Cameco is involved in four business of the world's annual requirements for The specific strategies in the uranium segments: uranium hexafluoridc (UF6 ) to make fuel and conversion businesses, which provide for light-water reactors. In addition, the

• uranium the foundation of the company, will be Port Hope plant is the world's only

• conversion services commercial producer of natural uranium

• nuclear electricity generation dioxide (U0 2 ) the fuel used by all CUSTOMER COUNTRIES Canadian-built Candu reactors. Cameco sells uranium and conversion

• gold services to companies located in 15 Through its 31.6% ownership of the countries around the globe.

The only significant commercial use for Bruce Power nuclear generating station uranium is to fuel nuclear power plants located in southern Ontario, Cameco for the generation of electricity. In recent Americas Europe generates clean electricity. Cameco is the years, nuclear plants generated Argentina Belgium sole fuel supplier to the Bruce Power approximately 16% of the world's Brazil Czech Republic Limited Partnership that leases six electricity. Canada Finland operating nuclear power reactors, plus United States France The major stages in the production of two reactors that are laid up. Bruce Germany nuclear fuel are uranium exploration, Power's operating plants have a Asia Spain mining and milling, refining and combined generation capacity of 4,660 Japan Sweden conversion, enrichment and fuel megawatts (MW), which is equivalent to South Korea United Kingdom fabrication. Once a commercial uranium the residential and industrial needs of a Taiwan deposit is discovered and reserves city the size of Toronto, Ontario.

discussed in the sections dealing with right of first refusal in favour of these those businesses. owners. The agreement is subject to regulatory approval and other closing In pursuing its plans for further conditions, and the final purchase price integration in nuclear fuel supply and is subject to closing adjustments. The expansion in nuclear power generation, transaction is expected to close in the the company has a number of goals:

second half of 2004.

• to earn a sufficient rate of return and In addition, Cameco seeks to increase provide a basis for long-term nuclear power's contribution to global profitability.

energy supply through two major

• to provide nuclear fuel supply where strategies:

possible and link to core assets and competencies,

• participate in related technologies that support nuclear energy

• to strengthen Carneco's foundation development, and for further expansion in the nuclear fuel cycle,

• promote industry initiatives to

• ,,, - position nuclear power as an

• to achieve a reward commensurate important factor in addressing with the risks taken, and climate change by providing

• to not unduly risk Cameco's overall leadership and resources to key viability. { Tonnes of greenhouse gases } industry associations, developing government relationships and further The key strategies are:

enhancing Cameco's environmental The world's nuclear reactors

• to pursue the most appropriate prevent emissions of up to and safety reputation.

investments by considering 2.5 billion tonnes of carbon investment opportunities in all dioxide annually. Trends in the Nuclear aspects of the nuclear fuel cycle, Power Industry St --02: W3std NjcOer Assio;tior-

• to guide and support Bruce Power's A nurriber of evolving trends in the growth strategy, nuclear power industry have the

• to pursue partnering opportunities in potential to affect Cameco's business new reactor construction and generating capacity from the 25.2% environment for uranium and interest in STP is 630 MW. Each owner conversion.

completions by leveraging fuel supply relationships, developing expertise in takes in kind and markets its pro-rata share of electricity generated by STP. Nuclear Utilities Consolidate new fuel requirements, and enhancing relationships with industry The balance of STP is held by Texas Electric utilities in the US and Europe leaders in reactor technology, and Genco (30.8%), San Antonio City continued to restructure in 2003, albeit

• to seek active ownership to allow, Public Service Board (28%) and Austin at a slower pace than in the previous five where possible, participation in Energy (16%). The interest being years. Consolidation of nuclear management and operational purchased by Cameco is subject to a generating plant ownership can be involvement of generation facilities.

In March 2004, Cameco announced that WORLD ELECTRICITY GENERATION one of its wholly owned US subsidiaries Nuclear's 16% share of world electricity generation is the third largest behind signed an agreement to purchase a coal and hydro.

25.2% interest in assets comprising the South Texas Project (STP) from a wholly NucleaF Hyrd owned subsidiary of American Electric Power (AEP) for $333 million (US).

Included in this purchase price is $54  : ol ilElli 15% GasI million (US) for fuel and non-fuel inventory.

STP consists of two 1,250-MW nuclear N l lOtherts units located in Texas. The net 3

expected to continue in response to marker deregulation and result in increased cost efficiency and more concentrated customer buying power.

Reactors Reactors under Nuclear in Operation Construction Electricity (%) Cap~acity' Factors (as of 12/03) (as of 12/03) (as Of 12/02)

In 2003, the world gross average capacity Argentina 2 0 7 factor of nuclear generation decreased for 0 ......... the first time in five years to 76%. This Armenia 1 41 0 2% decrease can largely be attributed Belgium 7 .. 0....

..... .. 57 to lower averages in Japan and the US.

... 4.....

BrazilI 2 0 In Japan, long regulatory outages 47 Bulgaria 4 impacted the average. The US decrease of about 2% is primarily a result of Canada 16 0 12 extended plant shutdowns for capital 0............

China 8 1 improvements and inspections. These 0

Czech Republic 6 ....

.....0..... 25 small year-to-year variances, both up and down, are not unexpected.

Finland 4 0 30 France 59 78 Existing Nuclear Plants Increase Germany 18 30 Capacity

............ Nuclear plants continue to increase Hungary 36 14 generating capacity through uprates India 4

.......... 0 .......

....I................ ....... ....

..... (the increase in the nominal level of Iran 0 ..0......

-. 0 output due to the installation of more Japan 53 0 39 efficient equipment and/or improved

---

--.............- -.1............ instrumentation). These uprates can Korea (North) 0 0 0 increase a power plant's capacity between Korea (South) 18 39 2% and 20%. In most cases, an increase

......... ...I...........

2....... - ....

-.1.......

Lithuania 0 80 in capacity translates into increased 2 ....

0.. ...... ......

...4.. demand for uranium concentrates and Mexico ............ .

0 4 conversion services.

Netherlands 2

....I...............

--. 1........... ...--.1....... 1.

. ...........-.... -........... In 2003, US regulators authorized Pakistan 3 uprares at eighit of the nation',s 103 Romania 10 reactors, resulting in an increase in 1 1.

-.1.....

Russia 16 capacity of about 130 MW. In total, 2 over the last 10 years, US uprates have Slovak Republic .9.......... 0 65

........ I......... I......I - I-....... ...-- .........

I..... resulted in the addition of about 3,500 Slovenia 11 41 MW capacity, and over the next five 33 ......6 South Africa years. another 28 units are expected to 26 increase capacity by about 1,900 MNW.

Spain 6

...... ..... ....... ................. Nuclear reactors in other countries, Sweden including France, Germany, Spain, 21 Switzerland 27 Sweden and Belgium, have increased

.......... 46 ............

..... or plan to increase capacity through Taiwan 103 uprates, a trend that Cameco expects Ukraine 20 to continue.

United Kingdom 216 437 Nuclear Plant Licence Extensions United States In 2003, 13 US nuclear units received World 20-year licence extensions, bringing the total to 23 units since 2000. Operators 4

In Sweden, the government is expected SUPPORT FOR NUCLEAR ENERGY to decide on a phase-out plan in 2004 A majority of people in the US, the world's largest electricity market, favour nuclear energy. and the timetable for the closure of one reactor, which has been delayed for several years. The Swedish public, in i Favou, (Oppose a November 2003 poll, indicated that 84% favour the continued use of nuclear, at least until existing reactor units are 6 >.... ,.. . ........ .. , .........................-----.. --- ------ -- ------........---------........--.-----.......-----.

,--_ closed for either safety or economic 5_/6o% Favour reasons.

40 --44% - - - -- - -- ------ -O--- 3-6 Cost of Nuclear Generation In 2002, the latest year for which data 20 So 90g ° 92 93 94 95 96 97 93 09 oo 0 i 01

' 03 is available, the direct costs of US nuclear Source: Biscon Reearch electricity production, for the fourth consecutive year, continued to be lower of an additional 40 units have applied US Nuclear Regulatory Agency. These than the cost of electricity from coal plants. Other than hydro, nuclear energy or are expected to apply for extensions utilities have not committed to building is the cheapest source of electricity in the in the next few years. In total, these new reactors, but the ESPs will simplify units represent more than 50% of the US. This is largely attributable to the the process if they decide to proceed with US nuclear generating capacity. improved performance of US nuclear a new build.

power plants.

In Russia, three reactors have been In the next two years, Argentina and granted life extensions, and more are Bulgaria are expected to restart planned, for a total of 12 out of 30 construction of two units that were reactors. Other countries contemplating halted in the 1990s. In 2003, Slovenia life extension of their reactors include and the Czech Republic also indicated Worldwivde Uranium Supply France, the United Kingdom, and they were considering new nuclear units. and Demand Ukraine.

Proposed US Senate energy legislation The supply and demand fundamentals provides for the construction of an in the uranium market are in a period New Nuclear Construction advanced reactor to demonstrate both of significant change and uncertainty, Three new reactors began commercial electricity and hydrogen production at and point to a need for more primary operation around the world in 2003, two the Idaho National Engineering and mine production, which will require new in China and one in the Czech Republic. Environmental Laboratory. This research investment. Higher sustained prices are In addition, construction began on a project is proposed to move the US needed to encourage the required new further two units, one in each of toward advanced nuclear energy and investment in primary production.

Romania and Japan, bringing the total Cameco is positioned to benefit from clean carbon-free hydrogen production.

under construction to 33 units. this need for new supply through its In Canada, two of the six units Nuclear Power and Politics control of more than 65% of currently mothballed in the latter part of the planned new uranium production.

In Europe, some reactors are scheduled 1990s returned to service in 2003, to close in the short term as a result of a third in January 2004. This includes Uraniumrn Demand political decisions. However, these Bruce A units 4 and 3, which restarted countries still have to deal with the The nuclear power trends mentioned in 2003 and 2004 respectively. economic and environmental realities earlier are generally positive for nuclear energy. However, it is difficult to know In Finland, the operator has applied for of replacing the electricity production of these plants, as well as the need to whether these trends and the national a construction licence and began site debates on the long-term future of preparation for the country's fifth nuclear expand electricity supply to meet nuclear power will eventually result in unit. The 1,600-MW reactor is expected growing demand.

more or less favourable conditions for to commence commercial operations in Germany experienced the first the nuclear industry. Of note, however, 2009.

permanent closure of a reactor under the is that the two most populous countries, In the US, three utilities have applied phase-out regime in late 2003. The next China and India, representing over one-for Early Site Permits (ESPs) with the permanent closure is expected in 2005. half of the world's population, are

difficulties at Cameco's McArthur River WORLD URANIUM PRODUCTION mine, but is expected to increase to Despite losing three months of production at the McArthur River mine, Cameco about 75 million pounds in 2004.

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. In 2003, the world's major uranium producers were affected by the weakening US dollar. While most

,millionlbs U30, uranium is sold in US dollars, most of 16% 22% Africa 15 the world's production comes from Australia 20 us 2 outside the US. Uranium prices Other 4 increased over 40% in 2003, but this CIS/China 24 increase was largely offset by the growing Canada 27 TotalI 9-2 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 committed to increasing their share of In 2003, five reactors started commercial African rand. The countries affected by nuclear generated electricity. operations, while five smaller reactors these currency changes produced about New construction, improved reactor closed, maintaining the total number 59% of world production in 2003.

operations, uprates and the extension of reactors at 437 at the end of the year. As a consequence, additional price of reactor lives make it highly likely that, The net gain in installed capacity was increases will be required to stimulate 3,200 MW in 2003. exploration and development of new at a minimum, the current demand for uranium will continue for a number of production in these countries.

years. In the shorter term, perceptions Uranium Supply Secondary Sources that there are ample uranium supplies are The world uranium supply comes from Secondary sources of supply consist beginning to change as excess inventories primary mine production and a number of surplus military materials, excess decline. This change has already begun of secondary sources. inventory and recycled products. With to affect uranium prices as average spot the exception of recycled material, prices rose during 2003 to $14.45 per Mine Production secondary supplies are finite. Recycled pound from $10.20 a year earlier. As World production in 2003 was about products are currently a high-cost fuel secondary supplies continue to decrease 92 million pounds U308 , about the alternative and are used by utilities in it is expected that uranium prices will same as 2002. Western world production a limited number of countries.

more closely reflect the cost of primary decreased 4% to about 68 million One of the largest sources of secondary supply, including a reasonable return pounds, largely as a result of operating supply is the uranium derived from on new investment.

Russian highly enriched uranium Western world uranium consumption (

WORLD MARKET (HEU). As a result of the 1994 HEU totalled about 155 million pounds in (mill on lbs U3%) agreement between the US and Russia to 2003. Cameco estimates that annual Uranium prices began to reflect the reduce the number of nuclear weapons, uranium consumption in the western long-standing gap between production additional supplies of uranium have been world will reach 172 million pounds in and consumption during 2003. available to the market. Under the 20-2013, reflecting an annual growth rate year agreement, weapons grade HEU is of 1% per year over the period. Demand blended down in Russia to low enriched in the former Soviet Union, Eastern

, jI*Prodwito, Flconsu,,ption uranium (LEU) capable of being used in Europe and China was about 25 million western world nuclear power plants.

pounds in 2003 and is expected to Cameco, together with two other increase to about 33 million pounds in companies, will purchase an increasing 2013. In total, world uranium demand quantity of the uranium feed component was 180 million pounds in 2003 and is of the Russian LEU over the next few expected to increase to 205 million years. Uranium not purchased is pounds in 2013. In 2004, uranium returned to Russia and held in a special demand is expected to remain about the stockpile for use in blending additional

'estimate same as 2003. HEU or, to the extent the stockpile 6

The other large source of secondary price negotiations. Many contracts also WESTERN WORLD CONTRACT supply is excess inventories. Prior to contain floor prices, ceiling prices and VOLUMES 1985, uranium mine production other negotiated provisions that affect (MiltiOn lbs U308) exceeded reactor requirements due, in the price ultimately paid.

More than 75% of world uranium contracting occurred in the Long-term large part, to government incentive programs that anticipated rapid growth Utilities acquire the remaining 10 to market over the past three years.

of nuclear generated electricity. The 15% of their uranium requirements result was a buildup of large inventories, through spot and near-term purchases

• Spo Maet (U.Q [- Long-Tern Market; both in the commercial and government from producers and traders. Spot marker 12c I ---- --- ----- -... -------- ................

sectors. Over the past 19 years, uranium purchases are those that call for delivery 99 go 97* mine production has been less than within one year. Traders generally source annual requirements and the company their uranium from organizations believes that most of these inventories holding excess inventory, including 90es 97 have been consumed. utilities, producers and governments.

Cameco estimates the drawdown in 2003 of excess inventory held by western Uranium Spot Market 2001 2002 2003 world utilities, producers, governments lestimate Spot marker demand was steady and other industry participants was in throughout 2003 and totalled 22 million the order of 35 to 40 million pounds pounds for the year, up from 20 million exceeds 58 million pounds U 3 0 8 , for UO8. Inventory drawdown in 2004 is pounds in 2002. Over 2003, the average sale under certain conditions. Carneco expected to be somewhat lower than in spot price increased by more than 40%

and its partners also have options to 2003, reflecting the declining inventory to close the year at $14.45 (US) per purchase uranium from this stockpile. At availability, as noted above. pound U3 0 8 . The spot market the end of 2003, there were 44 million represented about 14% of the western pounds U 3 08 equivalent in the Uranium Markets world's uranium consumption in 2003, stockpile. Utilities secure about 85 to 90% of their a modest increase over the past several On February 12, 2004 Cameco, its uranium requirements by entering into years.

partners and Tenex agreed in principle to medium- and long-term contracts with allow Tenex: uranium suppliers. These contracts Long-Termn Uranium Market usually provide for deliveries to begin

• to return additional quantities of The long-term contract price indicator one to three years after execution and uranium to Russia, and published by TradeTech closed the year continue for several years thereafter. In awarding contracts, utilities consider the at $15.50 (US), a 44% increase during

• the priority right to remove uranium commercial terms offered, including 2003.

from the stockpile to facilitate blending of HEU. price, and the producer's record of Long-term contracting in 2003 by performance and uranium reserves. western world utilities is estimated to This would reduce the remaining Prices are established by a number of have been more than 75 million pounds.

quantity of uranium available for methods including base prices adjusted This, combined with spot market sales Cameco and its partners to purchase over by inflation indices, reference prices of about 22 million pounds, represented the remaining life of the HEU agreement (generally spot price indicators but also only about 62% of western world which will be completed in 2013.

long-term reference prices) and annual consumption during the year.

In 2003, all scheduled LEU deliveries (24 million pounds U 3 08 equivalent) were received in the US from Russia. For 2003, dte aggregate US sales quota of Year-End Prices uranium derived from Russian HEU was ($US/lb U30 8) 12 million pounds and Cameco Market 2003 2002  % change purchased almost 4 million pounds, Spot ..uranium' I. ........................... 14.45 10.20 42 which represents its prescribed share of 15.50 10.75 4-4 Long-term uranium' ........................

..... ......I.....

I......... ... ... ................-

the quota and some additional . ..... 1 1 ... ...... ...... ........

'Spot prices are industry ave-ages.

quantities. The US sales quota in 2004 is

'2TradeTech 14 million pounds.

becamne significant as the spot price of sources consisting of mine production, AVERAGE URANIUM SPOT moved into Ehc $14.00 (US) range. long-term purchase arrangements, spot PRICE purchases and inventory.

(SUS/tb ULJ0g In addition, many of Caineco's The spot price for uranium increased by fixed/basc-price contracts were also Production Volume more than 4o0% during 2003. Spot entered into when the uranium spot For 2003, Cameco's original uranium demand increased to 22 million pounds price was considerably lower and some or about i4%/o of the western world's production target was 20.9 million of the older, more favourably priced pounds. Due to the water inflow consumption.

contracts are expiring. As a result, in incident at McArthur River, the 2003 2004, the average realized price from production target was revised to 16.7 these fixed-price contracts is expected to million pounds. Actual production in be lower than in 2003. 2003 was 18.5 million pounds, above

0. However, the impact of the current the company's revised target, and up higher spot prices will benefit Catneco almost 17% from 2002. The Inkai test over the longer term as the company mine in Kazakhstan also produced delivers uranium in the future under 169,000 pounds of uranium (Cameco's new contracts signed in the current share) in 2003.

2001 2002 2003 environment. McArthur River production was down in 2003 compared to 2002 due to the water Volume - Sales, Production, inflow incident, which resulted in the Purchases mine being closed for about three Utanium Business- Key Performance Drivers Sales Volume months to deal with the additional water.

Rabbit Lake was in the process of The major factors that drive Cameco's Cameco sold more than 35 million restarting in 2002 and produced for the uranium business results are: pounds of uranium in 2003, up 11 %

from 2002. In 2004, Cameco's uranium fill year in 2003.

• prices - spot market and contract, sales volumes are expected to total about In 2004, Carneco's share of total mine v volume - sales, production, 32 million pounds. For the period 2004 production is expected to rise to 20.7 purchases, forward, Cameco has more than 100 million pounds U3 0 5, up 2.2 million v costs - production and purchases, million pounds of uranium committed pounds or 12% from 2003 due primarily over the following five years. About 75% to the McArthur River mine returning to

• relationship between the US and of the sales commitments in that five- normal operations. The planned Canadian dollars.

year period will be delivered during 2004 production of 12.9 million pounds at to 2006. Cameco's committed sales McArthur River/Key Lake represents Prices - Spot/Long-TFerm decline rapidly over this period and they Cameco's share of the maximum While Cameco generally does not sell will be replaced in the normal course production level allowed for these uranium in the spot market, about 60% with contracts reflecting prevailing operations under their current licences.

of the company's uranium under its market conditions.

long-term contracts is sold at prices that At Rabbit Lake, the Eagle Point reference the spot market price near the Cameco sells more uranium than it underground mine is expected to time of delivery. The remaining 40% is produces from its mines. Cameco's sales produce 5.8 million pounds in 2004, sold at fixed prices or base prices commitments are filled by a combination from its remaining reserves of about 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 (Cameco's share 000 Lbs U 3 0 8) was much lower than the year-end 2004 2003 2002 average price of$ 14.45 (US) per pound. Plan Actual Actual These contracts generally contain ceiling prices. Due to the rapid increase in the MeArthur River/Key Lake_ _ 12,900 10,579 13095 Rabbit Lake 5,800 5,928 1,143 uranium spot price in the latter part of Smnith Ranch/Highland 1,200 1,201 887 2003, a number of spot market-related Crow Butte 800 823 -- 768 -

contracts reached ceiling prices in the Total 20,700 18,531 15,893 near term. The impact of ceiling prices 8

12.5 million pounds U 3 0 8. Prospects for Purchased product also impacts Cameco's additional reserves have been identified cost of supply. The majority of Cameco's and surface drilling for targets near purchase commitments are under long-current workings as well as underground term, fixed-price arrangements reflecting drilling to further explore a deeper target prices lower than the year-end average will begin in the first quarter of 2004. spot price of $14.45 (US) per pound.

{ Of the world market W In the US, the in situ leach (ISL)

Foreign Exchange operations at the Smith Ranch-Highland Cameco meets 20% of the world's In 2003, the strengthening of the mine have planned production of 1.2 uranium and UF6 conversion needs. Canadian dollar against the US dollar million pounds while Crow Butte is expected to produce 0.8 million pounds affected Cameco's results. Cameco in 2004. Studies are underway to sells most of its uranium in US dollars, examine alternatives to increase The majority of Cameco's purchase but the majority of its production comes commitments are under long-term. from Canada. As such, the company's production at these operations.

fixed-price arrangements, reflecting prices uranium sales are denominated mostly In addition, the Inkai test mine is expected much lower than the current spot price. in US dollars, while its production to produce 0.4 million pounds of uranium These purchase commitments total costs are denominated primarily in in 2004 (Cameco's share is 60%). about $1.1 billion (US) as at December Canadian dollars.

It is anticipated that Inkai will produce 31, 2003. See note 24 to the The strengthening Canadian dollar has 2.6 million pounds after it reaches full consolidated financial statements. emphasized the importance of the production. This annual production level company's currency hedging policies and will be examined to determine if it can Costs its drive toward geographic diversity of be increased. Cameco's cost of supply is influenced by production. For instance, Cameco's US its mix of produced mine material and operations are not affected by the Purchases uranium purchases. stronger Canadian dollar as their revenues Cameco also has purchase commitments and costs are both denominated in US for uranium products and services from Uranium mine production costs are dollars. In addition, prospects for various sources. At the end of 2003, driven primarily by the grade and size of production at Cameco's Inkai property in these purchase commitments totalled 88 the reserves. McArthur River is the Kazakhstan remain good, as the Kazakh world's largest, high-grade uranium million pounds uranium equivalent government has managed its currency mine. Its ore grade averages 25% U3 0 8 (most is in the form of UF6) over the exchange rate so that it does not fluctuate which means it can produce more than period 2004 to 2013. Of this, 64 million too widely against the US dollar.

18 million pounds per year by extracting pounds is from exercising options under only 100 to 120 tonnes of ore per day. The company attempts to provide some the HEU commercial agreement. In While Rabbit Lake's average ore grade of protection against exchange rate early 2004, Cameco exercised options for 1% U3 08 is much lower than McArthur fluctuations by planned hedging activity an additional 4 million pounds under River, it compares favourably to other the HEU commercial agreement. designed to smooth volatility. Thus operating mines in the world that are Cameco is protected against declines in generally below 0.5%.

the US dollar in the shorter term.

i U 3 0 8 REVENUE BY REGION ISL extraction methods can make even The Americas is our largest customer In addition, Cameco has a portion of its region accounting for 70% of Cameco's lower grade orebodies commercially I attractive. Worldwide, ISL mines annual cash outlays denominated in US I total U30s revenue.

typically recover uranium from orebodies dollars, including uranium and services with an average grade in the 0.1% U3 0 8 purchases, which provides a natural range. Cameco's cost of supply is hedge. While natural hedges provide cash influenced modestly by the two US ISL flow protection against exchange rate operations, as the production from the fluctuations, the impacts on earnings ISL operations accounts for a small may be dispersed over several fiscal percentage of its total primary output. periods and are more difficult to identify.

For example, US ISL production is expected to account for about 10% of For 2003, $177 million (US) of the company's planned primary output Cameco's uranium and conversion I in 2004. revenue was hedged using currency 9

Kazakhstan. The company owns 550

{ Of the future I million pounds of proven and probable

'01So0e -/m/a' X X , uranium reserves, which include more Cameco holds a controlling

&-* i'111 AR t" " , interest in more than 65% of than 400 million pounds of the world's richest uranium reserves at McArthur the world's identified future production capacity in uranium. 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 contracts at an average rate of $0.62. As Protect and grow its market position: of coal or 9 billion barrels of oil.

of December 31, 2003, about 50% of

• leverage industry relationships Another quality asset is the uranium 2004 uranium and conversion revenue to participate in new production, exploration expertise that Cameco has was hedged using currency contracts at

• ensure sustainable production retained even during the low uranium an effective rate of $0.68. by identifying and exploring for price cycles. The company's large and profitable uranium resources, and high-grade uranium deposits were all To the extent the company borrows in discovered through successful exploration US dollars, this provides a hedge against

• develop customer relationships and expand the range of services over the past 20 years. Cameco has its US revenue generating assets.

currently available while enhancing pursued a focused and effective the company's reputation as a secure exploration program to identify profitable Uranium Strategies supplier. uranium resources for the future to Cameco's overall objective is to maintain maintain the companys position as the and leverage its competitive advantage in Improve supply flexibility: world's largest uranium producer.

uranium. In doing so, it strives to meet

• accelerate Inkai production in The company's uranium exploration four major goals: Kazakhstan, efforts focus predominantly, but not

• to maintain its low-cost status,

• bring Cigar Lake into production exclusively, on prospects in the Athabasca when appropriate, Basin of northern Saskatchewan, Canada,

• to protect and grow its market

• continue to pursue an international and the Arnhem Land region in position, exploration program, and Northern Territory, Australia. In addition,

• to improve supply flexibility, and

• manage secondary supplies. Cameco and an exploration company

• to optimize its contract portfolio. called Pioneer Metals combined some Optimize contract portfolio: assets in 2001 to form a junior uranium There are a number of key strategies the

• position for market recovery by company called UEX Corporation. At company uses to achieve its goals:

managing the company's portfolio December 31, 2003, Cameco's ownership Maintain its low-cost status: of contracts to maximize profits for interest in UEX was 29%.

Cameco in light of future

• add low-cost reserves: In 2003, uranium exploration expectations of prices.

- through exploration and expenditures were about $13 million, up acquisition, and Capability to Deliver Results $1 million from 2002. In 2004, the

- by validating the potential for planned uranium exploration Cameco has three major resources from competitive ISL production from expenditures are $15 million.

which to draw on in order to deliver existing properties. results:

Manage Secondary Supplies

• improve margins by:

• quality uranium assets, Cameco manages a significant portion of

- optimizing ISL and conventional

• management of secondary supplies, secondary supplies through a number of production, and long-term agreements that allow the

- gaining cost efficiencies through

• strong market position. company to purchase uranium from quality and business process dismantled Russian weapons and other improvements, and Quality Uranium Assets secondary sources. These agreements give

- pursuing fundamental productivity Cameco has geographically diverse Cameco greater diversity of supply and gains through technological primary supply, with uranium mines and ensure that this material enters the development. projects in Canada, the US and market in an orderly fashion.

10

Cameco generated a profit through Gross profit its management of secondary supplies In 2003, gross profit from the uranium in 2003. business amounted to $84 million compared to $93 million in 2002, a Strong market position decrease of $9 million or 10%. This Cameco supplies about 20% of the decline was attributable to rehabilitation world's uranium demand. The company's costs at McArthur River, partially offset market position allows it to purchase by the 11% increase in deliveries of uranium in the spot market when prices uranium concentrates. Earnings before are low, adding to its profits and taxes from the uranium business

{ Uranium price increase } decreased by $13 million in 2003 and providing support for weak markets.

the profit margin declined to 15% from 18% in 2002. Excluding the Uranium Butsiness Results The average spot price rehabilitation costs at McArthur River, Cameco's uranium business consists for uranium increased more than earnings before taxes were $97 million of the McArthur River, Key Lake 40% to $14.45 (US) per pound and the gross profit margin was 17%.

and Rabbit Lake mine/mill operations during 2003.

in Saskatchewan, nvo ISL mines in 2004 Outlook for Uranium the US, the Inkai ISL test mine in to $345 million in 2002, an increase of In 2004, Cameco's uranium revenue Kazakhstan, the Cigar Lake development 14% due to the higher volume sold and is projected to dedine by about 5%

project in Saskatchewan and uranium rehabilitation costs of $26 million at compared to 2003 as the result of a exploration projects located primarily McArthur River related to the wvater 10% decline in sales volume. This in Canada and Australia. decline in sales volume reflects Cameco's inflow incident. Excluding these costs for McArthur River in 2003 and Rabbit plan to decrease the amount of uranium Revenue purchased on the spot market for resale.

Lake's care and maintenance costs of In 2003, revenue from the uranium $8 million in 2002, the unit cost of sales A modest improvement in realized price business rose by 9% to $570 million from decreased by 2% compared to 2002, is expected to partially offset the impact

$524 million in 2002 due to an 11% No primarily as a result of a $7 million of the decline in volume. Cameco increase in sales volume. For the second royalty recovery recorded in 2003. expects its average realized price in consecutive year, Cameco delivered a Canadian dollars will increase by about record quantity of uranium concentrates. 5% in 2004 even after an expected Depreciation, depletion and The average realized selling price was 2% reclamation negative impact of an anticipated 5%

lower than 2002 as the influence of higher decline in the US/Canadian dollar In 2003, depreciation, depletion and exchange rate.

spot prices in the second half of the year reclamation (DD&R) charges were was offset by a less favourable foreign Uranium margins are expected to be

$92 million compared to $86 million exchange rate and lower realized prices stronger than in 2003 due to the higher in 2002, an increase of $6 million due on fixed-price contracts. average price and lower costs. In 2003, to the higher volume sold. On a per unit basis, costs rose by about 3% due to the gross profit was burdened by the Cost of products and services sold increased deliveries of Rabbit Lake costs associated with the remcdiation of In 2003, the cost of products and material, which carries a relatively high the McArthur River mine following a services sold wvas $395 million compared DD&R charge. water inflow problem.

2003 2002  % Change Conversion Demand The demand for uranium hexafluoride Revenue ($ millions) 570 524 9 Grossprofit ($ millions) 84 93 (10;F (UF 6) conversion services is directly I linked to the level of electricity generated Gross profit % 15 18 (17; Earnis before taxes ($ millions) 71 84 (15: by light water nuclear power plants. The Sales volume (million lbs U3 0 8 ) 35.4 31.9 11 I demand for uranium dioxide (UO2 )

Production (million lbs U308) 18.5 15.9 18 conversion services is linked to the level 11

of electricity generated by Candu heavy purchasing the remainder on the spot water nuclear power plants. AVERAGE CONVERSION SPOT market. Cameco is the only commercial PRICE supplier of ceramic grade UO2 for Western world demand for UF6 and (SUS/Kg U as UF6 in North America)

Candu reactors operated in Canada.

natural U0 2 conversion services was Spot prices for UF6 conversion in the Cameco also exports UO2 to South estimated to be approximately 58,200 US increased by 17% during 2003 due Korea for its Candu reactors and to the tonnes of uranium in 2003. It is estimated to tightening of suppty.

US and Japan for use as blanket fuel in that this demand will increase to approx-boiling water reactors.

imately 65,700 tonnes of uranium by 2013. In 2003, demand in the former Spot/Long-Term Conversio Soviet Union, Eastern Europe and China

6. . . . .. Market was about 9,400 tonnes of uranium and is expected to increase to about 12,400 Due to tightening of supply, spot and tonnes of uranium by 2013. In 2004, long-term prices for UF6 rose in 2003.

2 -. -- -- . - . - -

conversion demand is expected to remain Spot prices for UF6 conversion services about the same as in 2003. in the US market increased by 17%

C, 2001 2002 2003 during 2003 and in the European Conversion Supply market the spot price rose by 10%.

The western world UF 6 conversion western inventories, Russian inventory The published long-term contract price industry consists of Cameco and three sales in the form of low enriched indicators closed the year at $6.00 (US) other commercial producers with an uranium, Russian re-enriched depleted KgU as UF6 for North American annual capacity of about 45,000 tonnes tails in the form of UF6 and Russian and delivery and $6.75 (US) for European of uranium. Cameco's annual UF 6 US uranium derived from dismantling delivery, a 15% and 14% increase conversion capacity constitutes nuclear weapons. respectively.

approximately 28% of western world capacity. Russia supplies most of the requirements Conversion prices are expected to remain of the former Soviet Union and Eastern firm in 2004, as the tight supply In 2001, British Nuclear Fuels Limited Europe in the form of low enriched situation is likely to continue in 2004.

(BNFL), with annual conversion uranium.

capacity of about 6,000 tonnes, announced that it would halt production Cameco is the only commercial supplier Conversion Business - Key of UF6 in 2006. With the of conversion for natural UO2 customers Peiformance Drivers announcement, BNFL ceased the in the world. The major factors that drive Carneco's marketing of UF6 conversion services conversion business results are:

and sold its uncommitted UF 6 Conversion Markets

• prices - spot and long-term, production to Cameco.

Utilities contract more than 90% of their

• volume - sales, production and In addition, supplies are available from UF 6 conversion services through purchases, secondary sources including excess medium- and long-term contracts,

• costs - production and purchases, and

• relationship between the US and Canadian dollars.

.Year-End Prices

$US/lb U308 Prices - Spot/Long-Term Cameco sells its conversion services Markets 2003 2002  % Change directly to utilities located in many parts Spot LF6 conversion - of the world primarily through medium-North America 5.88 17 and long-term contracts. Going forward, Europe 6.75 6.13 10 about 90% of contract commitments, in Long-term UF6 conversion 2 excess of 50,000 tonnes, have pricing I--...........

North America - 6.00 5.20 15 terms that are fixed- or base-price Europe 6.75 5.90 14 escalated. The remaining 10% reference j Spc)' prices are irnluatry ;.verages.

the spot price near the time of delivery.

X radeleCh 12

Volumes - Sales, Production, dollar in 2003 negatively affected countries. The market for UO2 is Purchaases Cameco's results. changing, at least partially, due to the Sales Volume planned introduction of slightly enriched A discussion about Cameco's hedging program can be found in the uranium uranium (SEU) in place of the natural Cameco sold 16,747 tonnes of uranium business section under the heading uranium dioxide. SEU is a uranium conversion services in 2003, up 10%

from 2002. In 2004, Camecos "Foreign Exchange". dioxide powder that has an enrichment conversion volume is expected to total level up to 2.5% U-235, and is the about 16,000 tonnes uranium, 4% less primary uranium component of a new Conversion Strategies than in 2003. type of fuel that is proposed for use in Cameco's objective is to maintain and some Candu reactors. Cameco's Production Volume leverage its competitive advantage in technology development group developed conversion services. In doing so, it strives At Cameco's Port Hope facilities, the process to produce SEU, providing to meet four major goals:

conversion production totalled 13.273 the company with an opportunity to tonnes uranium in 2003, up 7% from

• to maintain its low-cost position, capitalize on a changing marker.

2002. In 2004, production is expected

• to protect and grow its market to be about 12,400 tonnes, 6% less than Initially the SEU will be produced for position, use in Bruce Power's B reactors as part in 2003.

• to improve supply flexibility, and of a power uprate project that is expected Purchase Volume

• to optimize contract position. to add about 400 megawatts of power Cameco also has purchase commitments, (an increase of 9% over Bruce Power's which primarily reflect the HEU The following are the key strategies the current capacity) to Ontario's electricity conversion component, re-enriched tails company uses to achieve its goals:

grid. It is expected that SEU fuel will be product and the company's agreement to

• to improve margins by gaining cost used in the next generation of Candu purchase BNFEs excess production until efficiencies through quality and reactors called the advanced Candu shutdown of BNFL's plant. As noted in business process improvements and reactor (ACR) designed by Atomic the uranium business section, Cameco's pursuing productivity gains through Energy of Canada Ltd.

purchase commitments over the period technological development, 2004 to 2013 total about 88 million In 2003, Cameco has advanced the

• to grow market share through pounds uranium equivalent (or more SEU project through the first stage product diversification to meet than 34,000 tonnes U equivalent), most of the regulatory process by filing a changing nuclear fuel requirements, of which is in the form of UF6. project proposal and receiving the

• to optimize capacity utilization in approved environmental assessment preparation for BNFI's exit from the (EA) guidelines from the Canadian Costs conversion market, Nuclear Safety Commission (CNSC).

Cameco's cost of supply is influenced by

• to position for market recovery by In 2004, important project milestones its mix of production and purchases.

managing the company's portfolio include completing and submitting the Conversion operating costs are primarily of contracts to maximize profits for EA, completing the engineering design fixed with the largest component being Cameco in light of future and preparing the Port Hope site for labour. The largest variable operating expectations of prices, and the construction of the SEU blending cost is for anhydrous hydrogen fluoride.

• to manage secondary supplies. facility. Demonstration fuel bundles are The majority of Cameco's purchase to be placed in the Bruce B reactors in commitments are under long-term, Capabilityto Deliver Results late 2004 or early 2005. The SEU fixed-price arrangements reflecting prices A key competitive advantage for Cameco powder for these bundles will be lower than the current spot prices.

lies in its ability to provide both uranium produced at the Port Hope facility.

and conversion services, allowing it to Approval for preparation of limited Foreign Exchange benefit from synergies of offering quantities of these bundles has already The majority of the companys been obtained.

combined purchasing for the first two conversion products are sold in the US fuel components of nuclear fuel supply. The total annual quantity of SEU and sales are denominated in US dollars, while production costs are incurred in The Port Hope conversion facility produced will depend on future market Canada and denominated in Caniadian currently supplies natural UO2 powder development. The SEU product would dollars. As a result, the strengthening of for the manufacture of fuels for Candu replace a limited volume of the current the Canadian dollar against the US reactors operating in Canada and other natural product sales.

13

IIf U1 :U I U !i i:I[U U i'm Revenue ($ millions) ... ....... ...-.

142 4.....137 .... .......... ................. ............... 4 ........ Cameco has a 31.6% interest in the Gross

-............ profit ($. ......millions)

....................... 40 2 8....

44

........-...I.........-.

(1 0)...... Bruce Power Limited Partnership. Bruce Gross profit % .........

,,,2.8,.,.,,,,,,..,,,,,,3,2,,,,,,,.,, (13) ...I.... Power's business is the generation and Earnings before taxes ($ millions) 38 41........ ....-. ........... .......................(7)

. . . ........... .........-.-................... ...... .... sale of electricity into the Ontario Sales, volucmt e (million kgU) 16.7 15.3 10 . . ..

.......-.. .. ..... wholesale market. Bruce Power generates Production (mlion kgU) 13.3 12.4 7 electricity from the four Bruce B and two Bruce A nuclear-powered units. The Conversion Business Results declined as record production of 13,273 Bruce B nuclear units and the two tonnes was achieved. recently restarted Bruce A units have Cameco's conversion business consists of capacity to supply about 20% of the uranium refining and conversion Depreciation, depletion and Ontario's electricity needs.

facilities located in Ontario.

reclamation In addition to the carrying value of its Revenue In 2003, depreciation, depletion and investment in Bruce Power, Cameco has In 2003, revenue from the conversion reclamation (DD&R) charges were provided certain financial assurances on business rose by 4% to $142 million unchanged at $11 million. In spite of the behalf of the partnership. Carneco's from $137 million in 2002 due to a higher deliveries, total DD&R was maximum exposure under these 10% increase in sales volumes. The unchanged compared to 2002 as sales in arrangements is $274 million and at realized selling price declined by 4% due 2003 included a higher proportion of December 31, 2003, the actual exposure largely to changes in foreign exchange purchased conversion. under these assurances was $191 million.

rates. Record annual conversion sales of Sec note 19 to the consolidated financial Gross profit statements.

16,747 tonnes were achieved.

In 2003, gross profit from the conversion Cameco has extended a loan to the Cost of products and services sold business amounted to $40 million partnership in the amount of $75 In 2003, the cost of products and compared to $44 million in 2002. The million. The loan is due February 14, services sold was $92 million compared gross profit margin for the conversion 2008 and bears interest at a rate of to $83 million in 2002, an increase of business declined to 28% from 32% due 10.5% per annum. At December 31, 11% due to the higher sales volume. The to a lower average realized price. 2003, the entire amount was unit cost of product sold rose by 1% due outstanding.

to an increase in the cost of purchased 2004 Outlook for Conversion Caameco has entered into fuel supply conversion services, which more than At Port Hope, conversion production agreements with Bruce Power for the offset a reduction in the unit cost of is expected to be about 12,400 tonnes, procurement of the fabricated fuel.

produced conversion. In 2003, Cameco's a decline of 6% compared to 2003 Under these agreements, Cameco will unit cost of produced conversion output due to an anticipated decrease supply uranium and conversion services in sales volume in 2004. and finance the purchase of fabrication CONVERSION REVENUE Revenue from the conversion business services. Contract terms are at market BY REGION rates and on normal trade terms. During is anticipated to be about 5% lower than The Americas account for 58% of in 2003 due primarily to a 4% decline 2003, sales of uranium and conversion Cameco's conversion revenue. services to Bruce Power amounted to in sales volume. A modest decrease in realized price is also anticipated as a approximately 3% of Cameco's total revenue. At December 31, 2003, result of the expected continuing decline in the US dollar. Conversion margins amounts receivable under these are projected to decline compared to agreements amounted to $30 million.

2003, as the \unit cost of conversion production is likely to increase as a result Ontario ElectricityMarket of Lower expected output. The unit cost The Ontario government deregulated its of purchased conversion is also expected electricity market in May 2002 to to rise as lower-cost sources of supply encourage innovation and investment in are diminished. new generation capacity. Seven months 14

- 7-'- I -

later, the province fioze rates for retail hour (MWh)) compared to $750 million (residential and small business) customers 11!z I" ($36 per MWh) in 2002, primarily at 4.3 cents per kilowatt hour (kWh) to IN I' 4 ' reflecting increased maintenance costs for

_A shelter consumers from high prices. The the Bruce B reactors and operating costs

_W wholesale market, where Bruce Power for Bruce A unit 4 in November and sells all of its electricity, continues to December, after it was brought back into operate free of price regulation. production. Bruce Power continually Late in 2003, the newly elected Liberal / strives to control its costs through government in Ontario introduced the effective management of routine Ontario Energy Board Amendment Act maintenance programs and investments 2003, which will remove the 4.3¢1kWh intended to improve operating price freeze for the retail market. As of 'i:' ,'l L ,;^

performance.

April 1, 2004, an interim-pricing plan is Ao~g "C' . I  ; L i e expected to be implemented. The first Bruce Power Strategies 750 kWh of a customer's consumption will be priced at 4.7c/kWh and monthly { US households " Operational consumption above that level will be Bruce Power plans to improve the priced at 5.5q/kWh. The Ontario operating efficiency of the Bruce reactors.

government stated that this structure will Electricity generated from In 2003, the capacity factor achieved was remain in place until the independent Carneco's uranium powers 11%

of US households. 85%. While it is expected to decline to regulator, the Ontario Energy Board, approximately 80% in 2004 due to a develops a clear and transparent number of planned maintenance outages, mechanism for setting prices, to be market prices, which in turn are affected the long-term goal is to reach a capacity implemented as soon as possible, but no by supply (temporary generating station factor of 90%.

later than May 1, 2005. The interim shutdowns) and demand (mainly driven pricing structure does not distinguish Because about 95% of Bruce Power's by weather).

between commercial and residential operating costs are fixed, the more output users; rather it distinguishes between To reduce its exposure to fluctuations in produced, the lower the unit costs.

consumption patterns. spot marker prices, Bruce Power has a portfolio of fixed-price sales contracts. Growth These regulatory changes have not had as About 65% of Bruce Power's output was yet a direct impact on the price in the Bruce Power will examine the feasibility delivered into fixed-price contracts wholesale electricity market into which of restarting Bruce A units 1 and 2 to during 2003 compared to 69% in 2002.

Bruce Power sells its output. However, serve Ontario's growing electricity needs.

the volume of medium- and long-term The study will include a technical transactions in the wholesale electricity Volume inspection of these reactors and an market has dramatically decreased and Output is affected by shutdowns, both assessment of the cost to upgrade them the regulatory changes have increased those that are planned (for maintenance) to current industry operational safety uncertainty for generators like Bruce and those that are unplanned (such as standards.

Power. the August 14, 2003 blackout in Ontario). Carneco believes that looking at Nuclear Electricity Business - restarting these two units is a logical first Bruce Power attempts to achieve high Key Petformance Drivers step in determining if Bruce Power can output through effective maintenance play a growing role in securing Ontario's The major factors that drive Bruce programs, as well as various investments that can help secure and improve output. future energy needs. The study will Power's results arc:

Since about 95% of Bruce Power's costs determine if an adequate return on

• prices, are fixed, volume improvements are investment can be achieved.

• volume, and directly reflected in financial The study will also establish what

• costs. performance. improvements are needed to extend the lives of the four Bruce B reactors and the Prices Costs two operating Bruce A reactors, which Bruce Power earnings are significantly Bruce Power's operating costs in 2003 are scheduled to be taken out of service affected by fluctuations in electricity spot totalled $853 million ($35 per megawatt over the next 15 years.

15

Bruce Power will also examine the feasibility of building one or more advanced Candu reactors currently

($ millions) 2003 2002 being developed by Atomic Energy of Canada Limited. Bruce Power has Revenue 1,208 919 a well-established infrastructure. The Operating costs 853 750 Bruce site was designed to accommodate Earnings before interest and taxes .......-...................................

355_............................... ......... 169 expansion and as such is ideal for Interest 69 63 potential new reactors. Earnings before taxes 286 106 Output

... .....I.

(terawatt hours)

.......... .............. ....... ................................ .....I..........................

24.5 20.8 Capability to Deliver Results Capacity factor' (%) 85 75 Bruce Power has an experienced Realized price ($/MWh) 48 43 executive team leading more than 3,500 'Capacity factor for a given period represents the amount of electricity actually produced for sale as a highly skilled employees. Together they percentage of the amount of electricity the plants are capable of producing for sale.

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 ($ millions) 2003 2002 invested, and continues to invest, Bruce Power's earnings before taxes (iooo) 286 106 substantial amounts to improve reactor Cameco's share of earnings before adjustments 77 16 output and reliability.

Adjustments:

At the same time, Bruce Power's ongoing Sales contract valuation, 20 emphasis on safety was reflected in its Interest capitalization 12 2 accident frequency of only 0.12 lost-time Interest income on loan to Bruce Power 7 injuries for every 200,000 hours0 days <br />0 hours <br />0 weeks <br />0 months <br /> worked in Fair value increments on assets' (8) (2) 2003. That was significantly better than Earnings from Bruce Power 108 16 the company's ambitious target of 0.20.

See note iS to the consolidated financial statements Bruce Power's cash flows provide a source of finds to make investments to improve reactors for better long-term realized price averaged $48 per MWh its operational performance and expand performance. from a mix of contract and spot sales, a its capacity.

12% increase over the previous year.

Electricity Prices Electricity Business Results For 2003, the Ontario electricity spot Costs price averaged about $54 per MWh. The 2003 cost per MWh was lower Revenue During this period, Bruce Power's compared to 2002 because about 95%

Bruce Power's revenue in 2003 totalled

$1,208 million, up 31 % compared to 2002. Bruce Power has contributed $108 ONTARIO ELECTRICITY SPOT PRICE (monthly average S/MWh) million of pre-tax earnings to Cameco's results ($72 million after tax or $1.29 The volume of medium- and long-term transactions completed in Ontario's wholesale electricity market during 2003 declined due to uncertainty over the per share) compared to pre-tax earnings direction of government policy.

of $16 million in 2002 ($11 million after tax or $0.19 per share).

t 0oo Operation ...... 1____----- ..... ------ ....... - ----___ -------- -- ----------- ....

80 For 2003, Bruce Power achieved a total

... I......... ............. - ....... ... _ - I... ..... ...... - - ...... ... I... ...

I 6, capacity factor of 85% compared to 75%

in 2002. Bruce Power produced 24.5 40

...... .. I.......-. ...................... ....... - ........... ...- . - - ... I.... I . - .....

T h, an 18% increase over the same 20 period last year. In 2002, Bruce Power carried out a series of major planned l F M A M J i A S 0 N D outages to prepare the four Bruce B 16

of Bruce Power's total operating costs four B reactors is expected to total to Centerra. The Joint Stock Company are fixed and the output was higher year- about $280 million, plus an additional Kyrgyzaltyn (Kyrgyzaltyn), whose over-year. Interest cost of $69 million $120 million for sustaining capital and shares are held 100% by the Kyrgyx included interest on the long-term loans site service support areas. government, will transfer its two-thirds from Bruce Power partners and interest interest in KGC to the new gold Bruce Power capital expenditures are costs attributable to the capital lease. company. Initially after the transfer expected to average about $200 million of assets, Cameco subsidiaries will hold Bruce Power has spent about $350 for each of 2005 and 2006. This 67% and Kyrgyzalryn will hold 33%

million on the restart of the two Bruce A excludes sustaining capital and of Ccnterra.

units in 2003, bringing the total project expenditures for site service support capital cost to $724 million, which areas, which are expected to average In conjunction with the transfer of gold includes $4 million in post-synchro- about $120 million per year. assets, Centerra intends to undertake an nization operational losses that were initial public offering (IPO) in Canada These capital projects will provide higher and sell shares to the public. Camncco capitalized during the commissioning output for the Bruce B units, deliver the expects to retain a majority interest in phase. Bruce Power spent an additional expected operational life for Bruce A unit Centerra immediately following the IPO.

$159 million on capital expenditures 4 and increase overall efficiency for the Kyrgyzaltyn also has the option to at Bruce B, the majority of which site. These projects are the fundamental acquire an additional 2% of Centerra was for safety systems and power building blocks for enhancing from Cameco for 30 days after Centerra uprate programs.

operational performance and will allow is listed on the Toronto Stock Exchange Bruce Power to supply more power to (TSX).

2004 Outlook for Electricity the growing Ontario electricity market.

Initially, Centerra's assets will include the Output Funding needs for these projects will following:

The targeted capacity factor in 2004 depend on the electricity price and the operational performance of the Bruce

• 100% of KGC, owner of the Kumtor for the six Bruce reactors is about 80% gold mine located in the Kyrgyz compared to 85% in 2003, which reactors. Cameco does not expect it will Republic, reflects planned maintenance outages be required to contribute to the funding of these projects.

• 100% of Kumtor Operating for the Bruce A and B reactors during Company, operator of the Kumtor the year. In addition, the vacuum mine, building for Bruce B will be tested in the fall, which will require all four B reactors

• 56% of AGR Limited (AGR), 95%

em: owner of the Boroo gold mine to be taken offline for about a month.

This vacuum building test is a regulatory located in Mongolia, In early January 2004, Cameco requirement. Results from Bruce Power

• 62% interest in the REN joint announced that it had reached an are projected to decline modestly in venture, an advanced exploration agreement with the Kyrgyz Republic 2004 compared to 2003 due primarily to project located in Nevada, US, and to create a new jointly owned Canadian higher costs resulting from the increased

• 73% interest in the exploration gold company called Centerra Gold Inc.

level of planned outages. licences for the Gatsuurt exploration Under the agreement, Cameco property located about 35 kilometres Capital expenditures subsidiaries will transfer their one-third from Boroo in Mongolia.

In 2004, Bruce Power's capital interest in the Kumtor Gold Company expenditure program for the two A and In addition, about $130 million (US)

(KGC) and additional gold-related assets in loans previously advanced by Cameco subsidiaries to the Kumtor and Boroo gold mines will be contributed by Camneco in exchange

($ millions) for equity in Centerra.

Bruce B_ rbinesl..ower up.r... ate...

................................. 160 Closing is targeted for the second quarter BruceA u nit 4 steam generators (progress payment) ......._ - ....... .....- -

of 2004 and is subject to a number of Infrastructure projects 95 conditions including:

Sub-total 280 Sustaining capital and site service support areas 120

• consent from a number of third Total 400 parties, including certain financial institutions, 17

• Centerra entering into an gold hedging strategy, which the underwriting agreement for an IPO company is actively reducing. At the end DAILY GOLD PRICES of December 2003, Cameco Gold's (S$us/oz) of Centerra shares, and operating companies' hedge positions Gold prices increased 2o% in 2003.

• the conditional listing of Centerra Cameco continued to reduce its hedge shares on the TSX. totalled 478,300 ounces or about 12%

positions to take advantage of rising of proven and probable reserves. These prices.

Cameco has negotiated a new agreement hedges are expected to yield an average with the Kyrgyz government to ensure price of about $326 (US) per ounce.

that a stable investment regime will be 40,0 maintained in the Kyrgyz Republic for Voluine/Cost 3( 0 t ........

Centerra. The new agreement will take In 2003, 677,552 ounces of gold were effect on closing. Centerra will have a poured at Kumtor compared to 528,550 250i------ -- ---..----- ..................

10-year tax stabilization period, during ounces in 2002. Gold production at 2300................

. 7 0. ----. -. --.-- --. .- --- . --. -.......................

which the application of Kyrgyz tax 200;., ..,

Kumtor was 28% higher than in 2002 'S5 .............................. ----

legislation will not increase the tax due mainly to higher grade mill feed that burden on the Kumtor operation. averaged 4.5 grams per tonne (g/t) F2 PO i M J A SO0N D With an agreement to create Centerra, compared to 3.7 g/t in 2002 and an an offer will be made to the non-Cameco improved recovery rate of 83%

with mining activities such as further ore shareholders of AGR to exchange their compared to 78%. The ore grade and body delineation and grade control, with AG R shares for Centerra shares. recovery were lower in 2002 due to a the remainder related to extending the pit wall failure that occurred in July mine life. The Gold Institute Standard 2002 and forced the company to revise Gold Market Review its mining plan. The total cash cost per excludes the latter type costs from the Gold prices rose substantially again in standard unit cost calculation. As ounce in 2003 was about $199 (US) 2003, ending the year 20% higher at exploration expenditures are anticipated calculated in accordance with the

$416 (US) per ounce. That followed to increase in the coming years, and the standards of The Gold Institute.

a 25% increase in 2002. The average focus of the exploration program changes The cash cost per ounce in 2002 spot price in 2003 was $363 (US) per to extending the mine life, it was was $216 (US).

ounce, compared to $310 (US) per determined that the expense should be ounce in 2002. In 2004, production at Kumtor is identified separately and excluded from expected to be about 610,000 ounces the unit cost calculation. The exploration A number of factors continue to support representing an 10% decrease compared expense accounted for about $0, $2 and the strengthening gold price, including to 2003. This decline is due to the $7 per ounce respectively of the $216, the US dollar weakness, geopolitical milling plan which calls for a mix of low- $199 and $220 unit cash costs.

uncertainties and reductions in producer grade stockpiled ore and higher grade hedging. While years of lower gold prices Second. Cameco's wholly owned mine ore. As a result, a lower average have limited the development of new subsidiary Kurntor Operating Company millfeed ore grade of 4.1 g/t is expected, mines, higher prices are once again earns a management fee for operating compared to 4.5 g/t in 2003. The unit the Kumtor mine. As Centerra will soon opening up investment in gold cash cost is projected to increase to $220 exploration and production companies. own 100% of KOC and KGC after the (US) per ounce from $199 per ounce in restructuring, it is appropriate that the 2003. Ore grade is expected to be lower in future years. inter-company management fee now Key PerformanceDrivers also be identified separately and excluded The major factors that drive Cameco's The unit cash costs referenced above from Centerra's reported production gold business are: include exploration costs and a costs. The management fee accounted management fee. Due to the for about $9, $8 and $7 per ounce v prices, restructuring of the gold business under respectively of the $216, $199 and $220

• volume, Centerra, the cash unit operating costs unit cash costs. Beginning in 2004,

• cost, and will be adjusted to exclude exploration Centerra will report unit cash costs

• exploration. costs and the management fee for a that exclude exploration costs and the couple of reasons. management fee. See table on the next Gold Prices page for a breakdown of dte costs.

First, the exploration costs have Realized prices are largely outside the historically been nominal, with greater At Boroo in Mongolia, commercial control of Cameco, except through its than 50% of the expenditures associated production was achieved Marchl, 2004.

18

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, The cost of the project was about $75 packaging the gold assets in a single has been able to secure funds and million (US). Boroo production is vehicle for public listing. financing for the development of its expected to total about 210,000 ounces Kumtor and Boroo properties and the Cameco's partner in the Kumtor gold in 2004, at a cash cost of about $170 acquisition of its interest in AGR. Going mine, the Kyrgyz government through its (US) per ounce. forward, Centerra plans to become a agency Kyrgyzaltyn, had elected to stand-alone public company that expects Gold Exploration participate by contributing its interest, to directly access the debt and equity but the rapidly rising gold price in 2003 markets for required capital.

In 2003, gold exploration expenditures delayed implementing the strategy. At decreased to $9 million from $10 million the end of 2003, the Kyrgyx government Gold Exploration in the prior year due to the lower ratified an agreement. Assuming final Cameco Gold must find new gold exchange rate. In 2003, approximately agreements can be reached with all other reserves to extend the life of its mines 70% of the total exploration critical parties and markets remain and increase production. The company's expenditures were incurred in North favourable, the newly named Centerra exploration program is focused in America with the remainder relating to Gold Inc. plans to list on the Toronto proximity to its two existing producing exploration activity in Central Asia.

Stock Exchange in the second quarter of properties and at the REN site in 2004. Nevada. As part of Carneco Gold's Gold Strategies strategy to go public, it plans to increase Cameco has been a gold producer since Capabilityto Deliver Results its exploration efforts in 2004 and its inception and, over the years, has beyond as well as focus on potential assembled some quality gold properties. Ability to Perform in Remote acquisitions.

Cameco Gold Inc., a wholly owned Environments subsidiary of Cameco, manages the Cameco Gold, Centerra's majority Gold Business Results company's gold activities from its head owner, has a proven ability to deliver results by developing and operating Revenue office in Toronto, Ontario. Cameco believes these assets are undervalued properties in remote areas of the world. In 2003, revenue from the gold business inside of Cameco, as they do not benefit It has built expertise in managing improved by 31% to $114 million (Cdn) from higher gold company valuations relationships with local cultures and from $87 million (Cdn) in 2002, that apply in today's gold market. For governments in Central Asia and in reflecting a 35% increase in sales volume that reason, Cameco has embarked on a sourcing and training local manpower. and an increase in the average realized strategy to unlock this value by Nonetheless, the management and 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 2003 2002  % Change ounce, up 17% from the average price of Revenue

($ millions)

......................... ..-....... .. ............... ....... .... .................. 114 87 31 $310 (US) for 2002. KGC and AGR Gross profit ($ millions) -.... ...... ....._i 40 . ,.._

9 ..... .. I....- 344 .........

hedge certain price risk for future gold Gross profit % 35 10 250 sales. At the end of 2003, KGC had in Earnings before taxes ($ millions)  ! 32_ .. (3) - forward sales on 278,300 ounces place Selling price ($US/oz) -334~ 3100 and AGR had in place forward sales on ucash -- I...cost .....($US/oz) 189 207 .... ...(...

.9.

Sale-s -v'o'1um-e (ounc-e-s-) 234,864 174,394 35 200,000 ounces. Combined, these hedge Production (ounces) 225,851 176,183 28 positions represented about 12% of proven and probable gold reserves. These 19

hedges are expected to yield an average exchange rate. On a unit basis, the share) compared to $44 million ($0.78 price of about $326 (US) per ounce. depreciation rate declined to $65 (US) per share) in 2002. This increase was per ounce from $73 (US) in 2002. attributable to higher earnings from Cameco has agreed to provide various Bruce Power and higher profits in the levels of credit support up to $130 (US)

Gross profit gold segment. These improvements were per ounce to the counterparties of KGC In 2003, gross profit from the gold offset somewhat by lower earnings in the and AGR which, based on the ounces business amounted to $40 million uranium segment and higher charges for hedged at December 31, 2003, could compared to $9 million in 2002. The interest and administration.

amount to $57 million (US) depending on the spot price of gold. At December gross profit margin for gold was 35% Excluding the tax adjustment, the 31, 2003, the actual exposure under these compared to 10% in 2002. effective rare for income taxes decreased arrangements, reflecting the net mark-to- to 33% in 2003 from 48% the year market losses, was $46 million (US). 2004 Outlookfor Gold before as a higher proportion of earnings Given the increase in planned total came from the gold operations in the Cost of products and services sold Kyrgyz Republic which are subject to production from the Kumtor and Boroo In 2003, the cost of products and services mines, greater revenue is expected lower tax rates. Earnings from operations sold was $52 million compared to $58 compared to 2003, assuming gold prices were $88 million compared to $84 million in 2002, a decrease of $6 million remain at current levels. This is million in 2002 and the aggregate gross due to a reduced Canadian/US dollar independent of the planned IPO for profit margin remained at 20%.

exchange rate in 2003. Gold production Centerra, which is targeted for the at Kumtor was 28% higher than in 2002 second quarter of 2004. Cash Resources due mainly to higher-grade mill feed that averaged 4.5 g/t compared to 3.7 g/t Operating Activities in 2002 and an improved recovery rate _S S IS~ h*

In 2003, Cameco generated cash from of 83% compared to 78% in 2002. The operations of $246 million compared to ore grade and recovery were lower in ConsolidatedEarninggs $251 million in 2002. This does not 2002 due to the pit wall failure. Kumtor's For 2003, net earnings attributable to include Cameco's pro rata interest in cash cost per ounce was $199 (US) common shares were $205 million Bruce Power's operating cash flow of compared to $216 (US) in 2002. Please ($3.65 per share), an increase of$ 161 $117 million in 2003 compared to $28 see table on the previous page for unit million compared to $44 million ($0.78 million in 2002. Cameco accounts for cost information. per share) in 2002. These results include this investment using the equity method the effects of changes in Canadian and thus Bruce Power's operating cash Depreciation, depletion and federal and Ontario provincial tax laws. flows are not consolidated with reclamation Together, the changes in the tax Cameco's. For further information, refer legislation allowed Cameco to recognize to note 19(c) of the consolidated In 2003, depreciation, depletion and a non-recurring, non-cash reduction in financial statements.

reclamation charges were $22 million, an increase of $2 million compared to $20 deferred income taxes of $81 million million in 2002 due mainly to the 28% ($1.45 per share) in 2003. Investing Activities increase in production. The effect of the Excluding the tax adjustments, net Cash used in investing activities higher production was largely offset by earnings attributable to common shares increased to $448 million in 2003 from the reduction in the Canadian/US dollar in 2003 were $123 million ($2.20 per $74 million in 2002 due to the 2003 2002

($ millions except per share amounts) Q1 Q2 Q3 Q4 Year Q1 Q2 Q3 Q4 Year Revenue 103 220 . ............232- ._ .-. ......272

.. .. .. . .. ......... I.............. ..... ....... .. .... ............. ................. ...... .... .......... ..........

827 124 195 158 271 ................

748 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. ...... .....

I.......... . ...... - ...... ............

56..... --- - - 35 79 76 246 134 80 22 15

- - -- - - - - - - - - -- - -- - -I.. .. ..... .. .. ................ - ........... ... . . .... ... ... ... .. . .. . . ...........................

251 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. on the company's balance sheet. See note Cameco paid $204 million for its 10 to the consolidated financial incremental 16.6% interest and loaned statements.

an additional $75 million to Bruce Power. Expenditures for property, plant Corporate Expenses and equipment rose by $69 million compared to 2002 due to the Administration development of the Boroo gold mine { Grams I In 2003, administration costs were $47 in Mongolia. million, an increase of $5 million During 2003, Cameco received no compared to 2002 due to a number of principal repayments on its subordinated items including an expense for stock-loan to KGC, the operator of the based compensation and costs incurred Kumtor open pit gold mine in the for quality and business process A seven-gram pellet of uranium improvements.

Kyrgyz Republic whereas in 2002, contains as much energy as 17,000 Cameco received $15 million (US) Effective January 1. 2003, Cameco cubic feet of natural gas, 1,780 from KGC. The payments scheduled pounds of coal or 3.5 barrels of oil. changed its accounting policy for stock-for 2003 were deferred as the result of based compensation opting to record a a pit wall failure at the mine in 2002. compensation expense for the fair value See note 3 to the consolidated financial of stock options granted during the year.

Financing Activities statements.

The total expense for 2003 amounted to During the year, cash used in investing $2.4 million, of which $1.9 million has activities exceeded operating cash flows Debt been attributed to administration.

by $202 million due to the acquisition At the end of 2003, total outstanding of the additional interest in Bruce Power. debt amounted to $243 million, an Interest and Other Cameco financed this shortfall by issuing increase of $18 million compared to Interest and other costs increased by

$230 million in convertible debentures. $225 million at the end of 2002. The about $7 million due to revaluation of net debt to capitalization ratio declined US dollar denominated assets as a result Inventories to 7% from 8%. If the preferred of the strengthening Canadian dollar. In securities and the convertible debentures At the end of 2003, total product 2003, the company recognized foreign were accounted for as debt, the net debt inventories amounted to $316 million, exchange losses of $4 million compared to capitalization ratio would be 23%.

$24 million or 7% lower than the to gains of $2 million in 2002. See note previous year-end. There was a reduction In December 2003, $20 million (US) 13 to the consolidated financial in the quantity of uranium inventory (Cameco's share) of the Kumtor senior statements.

during the year as record deliveries debt was repaid. See note 6 to the exceeded production and purchases. consolidated financial statements. Income laxes In 2003, the federal government Convertible Debentures introduced amendments to the Canadian CASH FROM OPERATIONS (5 mitions) The company increased its short-term Income Tax Act which provide for a Camneco generated cash from commercial paper to help fund the 7% reduction in the corporate tax rate operations of $246 million in 2003, February 2003 acquisition of a further on income from resource activities. The only 2% short of the record results 16.6% interest in Bruce Power. In federal tax rate is declining from its achieved in 2002. September 2003, Cameco issued $230 previous level of 28% to 21 % over a million in convertible debentures. The five-year period commencing in 2003.

280 Under Canadian generally accepted net proceeds of approximately $223 million are being used to repay accounting principles (GAAP), the commercial paper as it matures. The cumulative effect of a change in income company decided to put in place tax legislation o0 future income tax assets financing that better matched the long- and liabilities is included in a company's term nature of the Bruce Power asset. In financial statements in the period of accordance with Canadian generally substantial enactment. Accordingly, accepted accounting principles (GAAP), Cameco reduced its balance sheet 2001 2002 2003 K these debentures are reflected as equity provision for future income taxes and 21

recognized a one-time, non-cash income tax adjustment of $86 million ($1.54 per share) in the second quarter.

(Cameco's share in $ millions)

Also in 2003, the government of Ontario 2004 Plan 2003 Actual amended the provincial income tax laws Sustaining Capital to increase the corporate income tax rate McArthur River/Key Lake _ 4 43 11 to 14% effective January 1, 2004. Prior .............

...I... . .............. ......................

to this amendment, the tax rate was It Rabbit

~~~~~~~~~..... Lake . ..............

,, ,,, ,,,,,,,, ,_,,, ,, ,,, ,7,,, ,,,,,,,,,,,,,

..............- .1. ................

,,6,, i projected to decline from 11 % in 2004 Conversion Services _ 22 6 to 8% in 2007. As a result, Cameco Botoo

... .... ... .......... ................................................ ...................... ........ 10 Kumtor 3 7 increased its provision for future income Other ,, 3 -- 8 --

taxes by $5 million ($0.09 per share). Total Sustaining 104 46 Excluding these adjustments, income tax expense was $18 million greater than in New Development Cigar Lake ,,,,,,,,,,,,,,,,,,,,,,,, ,,,,,,,,,,,,, 32,,,,,, 32 2 10 2002 primarily as a result of the Conversion Services 15 significantly higher earnings from Bruce Power which are taxed at a rate of 34%. Boroo - 81 The effective tax rate on consolidated Total Development 51 95 earnings was lower at 33% compared to Capitalized interest 9 13 48% last year due to a higher proportion Total 164 154 of earnings in the gold business.

Income tax expense includes large $164 million. In 2004, sustaining capital At Cigar Lake, the construction licence is corporations taxes which amounted to expenditures are expected to be higher now expected in late 2004, following

$5 million in each of 2003 and 2002. than in 2003 due to ongoing mine which Camcco and the partners will See note 15 to the consolidated financial development work, pumping and water make a decision on development. In the statements. treatment projects at the McArthur River meantime, activities requiring mine in northern Saskatchewan, and well considerable advanced planning are field expansions at the ISL operations in expected to continue. Procurement is Nebraska. Capital spending will also planned for several long-lead-time items increase at conversion services to improve including the #2 hoist and headframe production processes and meet complex, the freezing system, freeze hole In 2004 consolidated revenue is expected regulatory requirements. drilling and the electrical distribution to rise by about 4%. This is due to new system.

gold production from the Boroo mine, For new development projects, total which is anticipated to more than offset expenditures are projected to be $51 At the Inkai development project in reduced revenues in the titanium and million, a decrease of $48 million Kazakhstan, the feasibility study is conversion businesses. On a consolidated compared to 2003. The decline is completed and the results are being basis, the gross profit margin is projected attributable to the completion of reviewed. The feasibility results need to to increase to 23% from 20% in 2003. construction at Boroo and partially offset be approved by the Inkai joint venture In 2004, the effective rate for income by increased expenditures at the partners. Subject to these approvals, test taxes is expected to be about 30%.

proposed Cigar Lake minesite in mining is planned to continue through In 2004, total capital expenditures are northern Saskatchewan and at Cameco's 2004 as a detailed mine design is expected to increase by $10 million to conversion services facilities. prepared and an application for a 2003 2002 2001 2000 1999 Cash................

provided by operations

................... ($......millions)

. 246 ....... .................... 251 I...-......... ... . .. ...116

..... ............... ..................... .......... ... 224

_... -.............................. ........ ........ 249 Cash provided by operations/net debt' (D/Q) 155 151 36 86 80 Net debt' / total capitalization (%) 7 8 15 13 14 i doaleebtte-ss sash l arid cas} ql~ie~s

construction permit is submitted to the Foreign Exchange upon debt as a source of financing.

local authorities. Pending receipt of the Most uranium and conversion US dollar Although debt is a lower cost form of permit, construction would follow in inflows are hedged through a financingg compared to equity, a lower 2005 and the first half of 2006 with combination of forward sales of US percentage of debt also represents lower production expected to begin toward the currency and natural hedges. Gold repayment obligations.

end of 2006. revenue and expenses are not hedged.

Results from the gold business are Credit Ratings Sensitivity Analysis converted into Canadian dollars at the As of February 2004, the company has prevailing exchange rates. For 2004, the following ratings for its senior debt Uranium Price every one-cent change in the US to from third-party rating agencies:

With the recent increase in the uranium Canadian dollar exchange rate from

$0.77 would change net earnings by

• Dominion Bond Rating Service spot price, a significant proportion of the Limited deliveries in 2004 are likely to be $3 million (Cdn).

"A (low)" under review with influenced by price ceilings.

developing implications following Consequently, a $1.00 (US) increase in Cameco's announcement that it has the U308 spot price from the year-end

-I1( 1111 l~ m_'~ _i msl : bid on the South Texas Project.

average of $14.45 (US) per pound would improve revenue by about $9 million

• Moody's Investors Service (Cdn), net earnings by about $5 million Overview "Baal" with a stable outlook.

(Cdn) and cash flow by about $4 million Financial liquidity represents the

• Standard & Poor's (Cdn). Conversely, a $1.00 (US) decrease companys ability to fund future "BBB+" with a stable outlook.

in the U3Og spot price from $14.50 operating activities and investments.

(US) would reduce revenue by about Some important measures of liquidity are summarized in the table below. Debt

$11 million (Cdn), net earnings by In addition to cash flow from operations, about $7 million (Cdn) and cash flow by In 2003, Cameco issued $230 million of debt is used to provide liquidity. Carneco about $6 million (Cdn). 5% convertible subordinated debentures has access to about $700 million in and extended the term of its revolving unsecured lines of credit.

Gold Price credit facility by one year.

Commercial lenders have provided a For 2004, about 70% of forecast gold IndicatorsDefined $417.5 million unsecured revolving sales are unhedged. A $10 (US) per credit facility that is available in two ounce change in the gold spot price Cash provided by operations reflects the tranches. The first tranche is a three-year, would change each of revenue, net net cash flow generated by operating

$196.5 million revolving facility. The earnings and cash flow by about $3 activities after consideration for changes second tranche is a $221 million million (Cdn). in working capital.

revolving facility available for 364 days Cash provided by operations to net debt with a two-year term-out option. (This Electricity Price indicates the company's ability to meet means, as long as the company is not in For 2004, about 55% of forecast debt obligations from internally default, Cameco has the option to generated funds. Cash provided by extend the repayment date on the generation is to be sold at spot prices.

operations does not include Cameco's balance outstanding at maturity of the A $1.00 (Cdn) per MWh change in pro rata interest in Bruce Power's second tranche for an additional two the spot price for electricity in Ontario operating cash flow of $117 million in years.) Up to $ 100 million of this facility would change Cameco's after-tax 2003 compared to $28 million in 2002. can be used to support letters of credit.

earnings from Bruce Power by about Cameco accounts for this investment The facility ranks pari passu (or equal

$4 million (Cdn). using the equity method and thus Bruce ranking) with all other senior debt of the Power's operating cash flows are not company. At December 31, 2003, there Conversion Price consolidated with Camneco's. For further were no amounts outstanding under In the short term, Cameco's financial information, refer to note 19(c) of the these credit facilities.

results are relatively insensitive to consolidated financial statements.

Cameco also has agreements with various changes in the spot price for conversion Net debt to total capitalization measures financial institutions to provide tip to as the majority of conversion sales are the company's use of financial leverage. $294 million in short-term borrowing at fixed prices. A lower percentage means less reliance 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

..........I......................... . ..... ................................................. ....... ................................................ ............ ........ ...............

243. . ....... .........._.....

4 232 7

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 Jres by deliefin3 come um n snares of C(rrecol Denrrm*iraed in JS di"re. Converterd Canadianido-ias at the December 31, 2003 rate of 51.2 2L,.

%Vrleealieui a o Cumeco'sproduct purclase ohbgliega ns are under eitg term .ixed0 p-ce auranrgemnes.

will mature July 6, 2006. Cameco also has $100 million outstanding in senior unsecured debentures that bear interest

($ Cdn millions) Total amounts at a rate of 6.9% per annum and will committed mature July 12, 2006.

Standby letters of credit' .. . . ..- . . ..203 Guarantees Eq"uipmnent Loan KGC senior debt 2'4 . .15 A Cameco subsidiary has $9.2 million Gold hedge program 3 4' 7 73 Bruce Power investments 7 (US) outstanding under an equipment Bruce Power guarantees6 .9191 loan that is repayable in 17 remaining Total commercial commitments 489 quarterly installments of $0.4 million The standby letters of cienit maturiru<in Foo0 were issued with a one- eur term al-d Will be uutomaticaiv renemed oi a (US) with a final payment of $2.0 year-hy-year basis ur'ti Ile ure d r.n; c rbeigatioF s are resolved. Ihese obliiaturris are primarily he decmrnrmisuiriung aud million (US) in 2008.

reclamation of Camecoes mirig and conuersior fcilities. As such the letter, of credit are expec'ed u emr :r outun3d ng eltl into the ftture.

2See nutte6 to -he ' onsolidazedfin'nal s[atement PreferredSecurities 3 See note the coisolidatd fr smaetnents.'aeal Denom'fl-aLeci l US dstlars. Converted to Canudiae l d1 ars at the December 3t, 2003 raueOf $1.2e2uc. Cameco's issue of preferred securities Under its initial 5 partnership interest Camec. agreed to kilst up tO Stoc million in Bruce COver.Toihe end of 2003, ($125 million (US)) is redeemable at par Camecehad ested $9- iion in the par-n r on or after October 14, 2003. At the At December 35, 23) fnrecrs Total tommitrlent hir finauriai assurancesgiven In behae f of Bruce PrIwer is est4marret to be $19t miflihu. See lote 19 to Steconesolidated finaniai statements. present time, the company has not 7 See dis-ussiure under goih pricesit) the seCller tilled Susirre-s Risks and Un:ertailties. determined whether the issue will be redeemed in 2004.

arrangements are predominantly used to Commercial paper outstanding at fulfill regulatory requirements to provide December 31, 2003 amounted to financial assurance for fiuture reclamation $65.9 million. Convertible Debentures of the companys operating sites. During 2003, Cameco increased its Cameco has operated within the investment in Bruce Power, paying $204 Outstanding letters of credit at investment grade segment (high credit million for its incremental 16.6%

December 31, 2003 amounted to quality) of the market when obtaining interest and loaning an additional $75

$202.7 million. See Business Risks-credit. The cost, terms and conditions million to Bruce Power. This investment Reclamation and Decommissioning under which financing is available vary was initially financed mostly with short-in this MD&A and note 6 to the consolidated financial statements. over time. While future access to credit term commercial paper. On September cannot be assured, it was readily available 25, 2003 the company issued $230 The company may also borrow directly during 2003. million in convertible debentures bearing from investors by issuing commercial interest at 5% per annum and maturing paper up to $400 million. To the extent Debentures on October 1, 2013. The proceeds are necessary, Cameco uses the revolving Carneco has $50 million outstanding in being used to repay commercial paper as credit facility to provide liquidity support senior unsecured debentures that bear it matures. See note 10 to the for its commercial paper program.

interest at a rate of 7% per annum and consolidated financial statements.

24

Urwnium iPrces The company reduces its exposure to short-term volatility in uranium prices by

($US millions) Initial Funding Balance at Dec. 31, 2003 maintaining a long-term contract Debt portfolio that is diversified by price Third party mechanism, delivery date and customer.

Senior' 265 17

......... - - .............. ..... .............................. ......................... About 60% of Cameco's contract Subordinated 20 20 portfolio has been priced in relation to Total third party 285 37

-- ..................._.......I..............I.....1 1 1 1......-1 the spot market price in effect at or near Carneco subordinated loan 107 61 the time of delivery. The remaining 40%

Total debt 392 98

... ....... . ...-............. has been sold at a fixed price (usually Equity 45 45 adjusted for inflation) over the term of Total Capital 437 143 the contract. The company's sensitivity 1Casrissrras "fl asraseed hr- pajnyr ror JIss p rin-s a-al inaare-;l 'thi ha-corers% due otc the asenior d-a-L. to changes in the uranium spot price is K, noted in the section entitled consolidated Kumtor Gold Company consolidated financial statements. Under outlook for 2004 in this MD&A.

To finance the Kumtor gold project, a current production plans, the guarantee consortium of financial institutions is not expected to be called. Limited Number of advanced $285 million (US) in senior Ctustomers and subordinated loans to the project in Debt Covenants Cameco relies on a small number of 1996. During 2003, KGC repaid $60 Cameco is bound by certain covenants in customers that purchase a significant million (US) of these third party loans. portion of the company's uranium its general credit facilities and in those of After these repayments, the outstanding concentrates and conversion services. For Kumtor. The financially related balances were $17 million (US) in senior example, Cameco's five largest customers covenants place restrictions on total debt, debt and $20 million (US) in are expected to account for 42% of the including guarantees, and set minimum company's contracted supply of U308 subordinated debt. Since Carneco levels for net worth. As of December 31, for 2004 through 2006. This compares proportionately consolidates its interest 2003, Cameco met these financial to 39% of the contracted supply of in KGC, $12 million (US) ($16 million (Cdn)) of the remaining loans were covenants and does not expect its U 308 for 2003 through 2005. The loss included in Cameco's long-term debt. operating and investment activities in of any of these large customers, or any See note 6 to the consolidated financial 2004 to be constrained by them. significant curtailment of purchases or statements. lack of timely payments could have a material adverse effect on Camcco's In addition, Cameco provided a financial performance.

subordinated loan of $107 million (US) to the project. The outstanding principal Use ofDerivatives and accrued interest at the end of 2003 amounted to $61 million (US) and $3 FinancialRisk Cameco uses financial derivatives to million (US) respectively compared to assist in mitigating its exposure to Cameco's financial condition is fluctuations in gold price and foreign

$61 million (US) of outstanding influenced by operational performance principal at year-end 2002. Cameco also exchange rates. A derivative is entered and by a number of market risks. The into as a hedge against specific economic invested $45 million (US) as an equity most significant of these risks are contribution in 1996. Carneco plans to and transactional exposures. Cameco fluctuations in market prices and sales does not enter into derivative contracts contribute the subordinated loan in volumes of uranium, conversion, gold for speculative purposes. However, exchange for equity in Centerra. and electricity, foreign exchange rates derivatives bring with them an exposure The senior debt is the direct obligation and unit costs of production. Risk to counterparty default.' As of December of KGC, although Cameco has management strategies are employed to 31, 2003, Cameco's exposure is guaranteed the payment of principal and assist in identifying and mitigating these predominantly with counterparties interest owing. See note 18 to the and other risks. that had credit ratings of A+ or higher.

I CosmrtepaenydeUlt would occurif tleot lier parryin a derivativecontractis unableto performitsobligarions at thetinseof conmrct mnatrit. restdringill the interudedsedgebeingof no ,aI e. Tis conoem isaddressed by dealing 1ib a varie ofcosrnrerpani.s andprimnarilyonly thoseof high credit qlality andlimiting theamournandduration of Ic sposAue. A rseaso.r.of defanltriskis tie mor-ro-tarkcr val-ue of haedge position.

This -alueis the differenc betwen riheprice asttich a derivativecontractN,,as enteredinto anditscurretrtriarkes ,alue. A sar-ktoo-ttarekt gain irdiearesshat lIeconspayt has ealattroatrof-asric at risk shouldits cosarrtteparties default.A tsnis-to-osasket lossrepresentsIseainount of valuc Cansccowould saveto payshould thiehedgeposisionnecdsohe sestled innnediatela 25

Accordingly, Cameco believes the risks of company's revenues are in US dollars the project, but there is no assurance default are low and the benefits derived with a majority of its costs in Canadian that support will continue for the from using derivatives outweigh the risks. dollars. To reduce its currency risk, at project's duration.

December 31, 2003, Cameco had sold Cameco also owns a 56% interest in forward $457 million (US). These Gold Prices AGR, which owns 95% of the Boroo hedges are expected to yield an average KGC and AGR hedge the price risk gold project in Mongolia. At Boroo, exchange rate of $1.4179. The mark-for future gold sales. At December 31, commercial production was achieved on to-market gain on these positions was 2003, KGC had in place forward sales March 1, 2004. AGR's investment in

$51 million (Cdn) at December 31, on 278,300 ounces and AGR had in Boroo may be exposed to adverse 2003 based on a year-end exchange rate place forward sales on 200,000 ounces. political developments that could affect of $1.2924.

Combined, these hedge positions the economics of the project. The represented about 12% of proven Timing differences between the usage Mongolian government has supported and probable reserves. These hedges and designation of hedge contracts may the project to date, but there is no are expected to yield an average price result in deferred revenue or deferred assurance that support will continue of about $326 (US) per ounce. The charges. At the end of 2003, deferred for the project's duration.

mark-to-market loss on these hedge revenue to be recognized in future years Cameco's investment in these operations positions was $46 million (US) at totalled $24 million.

may be exposed to adverse political December 31, 2003.

developments that could affect the Cameco's share of these hedging PoliticalRisk economics of each operation. The agreements was 292,800 ounces in spot- The company has diversified its political company has made an assessment of the deferred contracts which are expected to risk internationally. The Kumtor gold political risk associated with each of its yield an average price of about $321 mine is located in the Kyrgyz Republic, foreign investments and has purchased (US) per ounce. Based upon Cameco's a country formerly part of the Soviet political risk insurance to mitigate losses consolidated interest in KGC (33%) Union. The mine is the largest foreign as deemed appropriate.

and AGR (56%), Cameco's net mark-to- investment in the country and market loss, after deducting other represented about 5% of the country's Insurance partners' interests on these hedge gross domestic product, 33% of export Cameco purchases insurance to mitigate positions, was $20 million (US) at earnings and 34% of total industrial losses that may arise from certain liability December 31, 2003 based on a year-end production in 2002, the latest date for and property risks. The cost of this spot gold price of $416 (US) per ounce. which information is available. The insurance and the specific protection importance of Kumtor in relation to the Cameco has agreed to provide various provided by the policies vary from rest of the Kyrgyr economy has meant levels of credit support up to $130 (US) year to year depending on conditions that Kumtor has maintained a very high per ounce to the counterparties of KGC in the insurance market. In 2003, profile within the country. This level of and AGR which, based on the ounces market conditions were difficult across attention is not without risk; however, hedged at December 31, 2003, could all lines of insurance. This resulted it has also been of benefit in ensuring amount to $57 million (US) depending in significantly increased premiums continued efficient operations.

on the spot price of gold. along with more restrictive policy terms Cameco also owns a 60% interest in and conditions.

Timing differences between the usage Joint Venture Inkai UVI), which is and designation of hedge contracts may Cameco believes that the insurance developing a uranium mine in the result in deferred revenue or deferred program it has in place continues to Republic of Kazakhstan. Through charges. At the end of 2003, Cameco's prudently address its major liability KazAtomProm, the Republic of share of deferred charges to be and property risk exposures.

Kazakhstan owns the remaining 40%

recognized in future years totalled of JVI. Cameco has agreed to provide Uncertainty in the insurance market

$2 million (US). See note 25 to the funding of up to $40 million (US) to is expected to continue for at least a consolidated financial statements. JVI for project development of which few more years. During this time, the

$19.5 million (US) has been funded to availability of certain types of insurance Foreign Exchange Risk the end of 2003. Test mining continued coverage that Cameco has purchased in The US/Canadian foreign exchange rate through 2003. Approval of the feasibility the past may be significantly reduced started the year at $1.5796 and averaged study is planned for 2004. To date, the and/or the cost to acquire insurance may

$1.40 during the year. Most of the Kazakhstan government has supported significantly increase.

26

Operations Risk Cameco embarked upon the design and of the current two-year licences for Cameco's business is capital intensive and implementation of an integrated quality the McArthur River and Key Lake subject to a number of risks and hazards, management system (QMS). Program operations and renewal of both licences including environmental pollution, development continued in 2003. The in 2004.

QMS (based upon Cameco's vision, accidents or spills, industrial and Cameco continues to face challenges mission, values, quality policy and ISO transportation accidents, labour disputes, from the burden of increasing regulatory 9001 - 2000 quality management blockades, changes in the regulatory demands and costs from the CNSC, principles) is to be implemented at environment, natural phenomena Canadian Environmental Assessment Cameco's Canadian uranium sites (such as inclement weather conditions, Agency, and other federal and provincial to a degree that meets the CNSC earthquakes, pit wall failures, cave-ins, regulators. In particular, the lead requirements by the end of 2004 and adverse mining conditions and regulator, CNSC, has increased its fees with complete QMS implementation underground flooding) and encountering charged to the nuclear industry, and at Canadian uranium operating sites unusual or unexpected geological is increasing the regulatory burden as and related head office requirements to conditions. The company also contracts a result of the implementation of the be finalized by the end of 2005. Cameco for the transport of its uranium and new Canadian Nuclear Safety and also continues to utilize an uranium products to refining, conversion Control Act. In addition the CNSC environmental management system at its and enrichment facilities in North and Environment Canada are calling operations. The company received ISO America and Europe, which exposes the for more stringent environmental 14001 certification at its Blind River company to transportation risks. Many monitoring and environmental refining facility in 2002 and at the of the foregoing risks and hazards could performance, based on precautionary McArthur River mine and the Key Lake result in damage to, or destruction of, principles, of uranium mining and milling operation in 2003. The Port the company's mineral properties or mining operations.

Hope conversion facility received this refining or conversion facilities, personal certification in 2000. Operational changes are increasingly injury or death, environmental damage, Also in conjunction with the QMS subject to regulatory approval that may delays in or interruption of or cessation include delays due to longer and more of production from the company's mines program, Cameco is reviewing its existing health and safety management complex regulatory review and approval or refining or conversion facilities or in system, based upon principles similar to processes. These increasing requirements its exploration or development activities, those in the ISO series of management are expected to continue to result in delay in or inability to receive regulatory systems and identifying ways to further higher administration costs and capital approvals to transport its uranium and implement it and integrate it with QMS. expenditures for compliance. The uranium products, or costs, monetary For the year, on a combined basis, increasing complexity of the regulatory losses and potential legal liability and Camneco, its subsidiaries and long-term approval process reduces the flexibility adverse governmental action. In contractors achieved an accident of the company to make operational addition, due to the radioactive nature of frequency of 0.61 lost-time accidents changes in a timely fashion.

the materials handled in uranium mining, refining, conversion and per 200,000 person hours worked, which transport, additional costs and risks are was up from last year's best overall record Reclamation and incurred by the company on a regular of 0.24. Decommissioning and ongoing basis. Regulators must approve the startup, The company actively plans for continued operation and decommis- the closure, reclamation and Safety, Health and sioning of many of Cameco's facilities. decommissioning of its operating Environmental Risk These facilities are subject to numerous sites. Decommissioning and reclamation laws and regulations regarding safety costs mav increase over time due to Cameco is subject not only to the and environmental matters and the increasingly stringent regulatory normal worker health, safety and management of hazardous wastes and requirements. At least bi-annually, environmental risks associated with all materials. Significant economic value is Cameco estimates its total mining and chemical processing, but also dependent on the company's ability to decommissioning and reclamation to additional risks uniquely associated obtain and renew licences necessary to costs, based on current operations to with titanium mining, milling and operate. In 2003, the CNSC renewed date, for its operating assets. At the end conversion operations.

the Rabbit Lake licence for a five-year of 2003, the estimate was $234 million.

In 200], to better manage these risks term. Given the level of regulatory work, The majority of such expenditures are and to enhance its quality culture, Cameco will seek an interim extension typically incurred at the end of the useful 27

lives of the operations to which they Of the remaining risks, the most adverse conditions such as severe weather relate and, therefore, only a very small significant is direcdy related to the or inadequate maintenance that results in percentage of total estimated costs is operating performance of Bruce Power's unreliable performance by the grid could expected to be incurred over the next five generating assets. Bruce Power manages cause significant financial loss to Bruce years. See note 7 to the consolidated this risk through preventive maintenance Power. Transmission grid risks are financial statements. to improve overall equipment reliability, beyond Bruce Power's control.

by adopting more efficient operational At the end of 2003, Cameco's processes and by improving employee accounting provision for future performance at all levels. NI UI[EA WT(sIIJI UI [c reclamation costs totalled $141 million.

To provide financial assurances for these Another category of risk is electricity costs, Cameco has provided letters of price. Bruce Power mitigates this risk credit (LOCs), where required. Cameco's by entering into long-term, fixed-price Cameco prepares its consolidated LOCs totalled $203 million at the end supply contracts with reliable customers financial statements in accordance with of 2003, of which $199 million was for the delivery of a significant portion Canadian GAAP. In doing so, related to reclamation and of its annual generation. Electricity management is required to make various decommissioning activities. generated, but not covered by such estimates and judgments in determining contracts, is sold on the wholesale spot the reported amounts of assets and Since mid-2001, all Cameco's North market and is subject to prices in effect liabilities, revenues and expenses for each American operations have in place letters of credit providing financial assurance, at the time of delivery. year presented, and in the disclosure of which are aligned with preliminary plans commitments and contingencies.

Most long-term supply agreements for site-wide decommissioning. obligate Bruce Power to deliver electricity Management bases its estimates and Beginning in 1996, the company has judgments on its own experience, at a predetermined contractual price.

conducted regulatory-required reviews guidelines established by the Canadian Credit risk arises from these contracts.

of its decommissioning plans for all Institute of Mining, Metallurgy and On the one hand, the counterparty must Canadian sites. These periodic reviews have the financial resources to take Petroleum and various other factors are done on a five-year basis, or at the believed to be reasonable under the delivery and pay for contracted time of an amendment to an operating circumstances. Management believes the electricity. On the other hand, if quoted licence, or if at renewal, there has been following critical accounting policies forward market prices exceed contracted a material change to the site. reflect its more significant estimates and prices, then the counter-parry has the Reclamation and decommissioning judgments used in the preparation of the right, in most cases, to request financial obligations represent unfunded liabilities consolidated financial statements.

assurance to mitigate the possibility that of the company. Bruce Power does not deliver the Depreciation and depletion on property, electricity as contracted. In such plant and equipment is primarily Electricity Business Risks circumstances, Cameco's contingerit calculated using the unit of production Through its interest in Bruce Power, obligations may increase if it is called method. This method allocates the cost Cameco is exposed to various business upon to guarantee its share of Bruce of an asset to each period based on risks associated with the generation and Power's obligation. To maintain the current period production as a portion marketing of electricity. The following economic benefit of the electricity supply of total lifetime production or a portion discusses some, but not all, risks contracts, Cameco and its partners must of estimated recoverable ore reserves.

associated with this business. have the financial ability to address this Estimates of lifetime production and credit risk. amounts of recoverable reserves are In Ontario, political risk results from subject to judgment and significant uncertainty over the future direction of A further risk category relates to the change over time. If actual reserves prove government energy policies. This risk transmission grid. The ability of Bruce to be significantly different than the was amplified in late 2002 when the Power to deliver electricity to its estimates, there could be a material Ontario government abandoned the customers is dependent on the provincial impact on the amounts of depreciation deregulation of the retail electricity transmission grid, owned and and depletion charged to earnings.

market. Thus far, the wholesale market maintained by Hydro One, an Ontario remains unregulated, but there can be provincial Crown corporation. Bruce Significant decommissioning and no assurance that this will continue. Power's ability to deliver power to reclamation activities are often not Political risk is beyond the control of customers is also dependent on the inter- undertaken until substantial completion Bruce Power. linked North American power grid. Any of the useful lives of the productive 28

assets. Regulatory requirements and Cameco uses derivative financial and rate regulations; weather and other alternatives with respect to these commodity instruments to reduce natural phenomena; ability to maintain activities are subject to change over time. exposure to fluctuations in foreign and further improve positive labour A significant change to either the currency exchange rates, interest rates relations; operating performance of the estimated costs or recoverable reserves and commodity prices. As long as facilities; success of planned development these instruments are effective, they projects; and other development and may result in a material change in the have the effect of offsetting future operating risks.

amount charged to earnings.

changes in these underlying rates and Although Cameco believes that the Effective January 1, 2003, Cameco prices. Future earnings may be adversely assumptions inherent in the forward-changed its policy for accounting for impacted should these instruments looking statements are reasonable, undue reclamation activities by adopting become ineffective.

reliance should not be placed on these CICA Handbook section 3110, Asset statements, which only apply as of the Retirement Obligations. This section date of this document. Cameco disclaims S

addresses financial accounting and any intention or obligation to update or reporting for obligations associated with - tS] 4!Yf 1 mU Kilel 4 I revise any forward-looking statement, the retirement of tangible long-lived 5* 0 whether as a result of new information, assets and the associated asset retirement future events or otherwise.

costs. The standard applies to legal Statements contained in this document obligations related to the retirement which are not historical facts are of long-lived assets that result from the forward-looking statements that involve .3, 0 0' S acquisition, construction, development risks, uncertainties and other factors that and use of the asset. The new rules could cause actual results to differ Additional information related to your require that the fair value of the materially from those expressed or company including Cameco's annual implied by such forward-looking information form is available at estimated cost of an asset retirement statements. Factors that could cause such vww.sedar.com and www.cameco.com.

obligation be recognized as a liability differences, without limiting the in the period in which it is incurred.

generality of the following, include:

A corresponding amount is added to the volatility and sensitivity to market prices carrying amount of the associated asset for uranium, electricity in Ontario and and depreciated over the asset's useful life gold; the impact of the sales volume of on a unit of production basis. The uranium, conversion services, electricity liability is accreted over time through generated and gold; competition; the charges to earnings. This differs from impact of change in foreign currency the previous practice that involved exchange rates and interest rates; accruing for the estimated reclamation imprecision in reserve estimates; and closure liability through annual environmental and safety risks including increased regulatory burdens; unexpected charges to earnings over the estimated geological or hydrological conditions; life of the asset.

adverse mining conditions; political If it is determined that carrying values risks arising from operating in certain of assets cannot be recovered, the developing countries; a possible unrecoverable amounts are written off deterioration in political support for against current earnings. Recoverability nuclear energy; changes in government regulations and policies, including trade is dependent upon assumptions and laws and policies; demand for nuclear judgments regarding future prices, power; replacement of production and costs of production, sustaining capital failure to obtain necessary permits and requirements and economically approvals from government authorities; recoverable ore reserves. A material legislative and regulatory initiatives change in assumptions may significantly regarding deregulation, regulation or impact the potential impairment of restructuring of the electric utility these assets. industry in Ontario; Ontario electricity 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 10CFR50.75 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 10CFR50.75(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:

• Texas Genco, LP; and

• 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 A. H. Gutterman, Esquire Regional Administrator, Region IV Morgan, Lewis & Bockius LLP U.S. Nuclear Regulatory Commission 611 Ryan Plaza Drive, Suite 400 L. D. Blaylock Arlington, Texas 76011-8064 City Public Service U. S. Nuclear Regulatory Commission Michael K. Webb Attention: Document Control Desk U. S. Nuclear Regulatory Commission One White Flint North 11555 Rockville Pike R. L. Balcom Rockville, MD 20852 Texas Genco, LP Richard A. Ratliff A. Ramirez Bureau of Radiation Control City of Austin Texas Department of Health 1100 West 49th Street C. A. Johnson Austin, TX 78756-3189 AEP Texas Central Company Jeffrey Cruz Jon C. Wood U. S. Nuclear Regulatory Commission Matthews & Branscomb P.O. Box 289, Mail Code: MN116 Wadsworth, TX 77483 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

Attachment 1 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 10CFR50.75(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.

Attachment 1 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 10CFR50.75(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

Attachment 2 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 10CFR50.75(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 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 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 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.

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: Authorized Officer of:

MELLON BANK, N.A. AEP TEXAS CENTRAL COMPANY By: By: _______,____

Name -r

• s2f- Nam vi sa

Title:

Vxcr PVe_.4ecc Tftle: s. to r r.S ts- tjr Date:- Ailc e.g, Ao , age? 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 PURA. 2 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 Enclosure 11 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 of charges administration of the nuclear decommissioning trust fund and the collection company.

from utility customers and the remittance of the funds to a transferee Trust Funds.

(d) Transfer of responsibility for administering Nuclear Decommissioning of the nuclear (1) Prior to the closing of any transaction involving the transfer review decommissioning trust, the transferor utility shall submit for the commission's shall agreement. The commission the proposed decommissioning funds collection of whether it review the agreement for compliance with this rule and provide notice 45 days of intends to initiate a proceeding to approve or reject the agreement within conducted within receipt of the agreement. If such a proceeding is initiated, it shall be not initiated, the 120 days of the receipt of the agreement. If such a proceeding is rules. The final agreement shall be deemed to be in compliance with commission executed agreement shall also be filed at the commission.

before this section (2) For transfers of nuclear decommissioning trust funds that occurred be filed at the took effect, the decommissioning funds collection agreement shall commission within 15 days of the effective date of this section.

agreement entered (3) Pursuant to the executed purchase and sale agreement or transfer decommissioning funding into, the transferor utility's rights to accumulated and future be transferred to and the responsibilities for decommissioning of the nuclear plant shall the the transferee company upon closing of the transaction. Notwithstanding accordance with foregoing, the administration of the decommissioning trust funds in utility until the commission

§25.301 of this chapter shall be continued by the Transferor to the transferee approves the transfer of responsibility for administering the trust funds the transferor company. Upon the issuance of an order from the commission releasing the decommissioning utility from this obligation, the transferee company which owns in accordance trust funds shall assume responsibility for administration of the funds regardless of whether the with §25.301 of this chapter. Such an order is required commission initiates the proceeding described in subparagraph (d)(l).

of this subsection, (5) In addition to the filing of the agreement required in paragraph (1) under oath by the transferee company shall file at the commission an affidavit, signed the transfer of an authorized executive of the transferee company, certifying that once ordered by the administration of the nuclear decommissioning trust funds is of this chapter.

commission, the funds will be administered in accordance with §25.301 trust agreement that The transferee company shall attach to the affidavit an executed incorporates the requirements of the rule.

agreement or (6) Prior to executing an amended decommissioning funds collection commission for amended trust agreement, the proposed agreements shall be filed at the with this review. The commission will review the amended agreement for compliance to approve or rule and will provide notice whether it intends to initiate a proceeding a proceeding is reject the agreement within 45 days of receipt of the agreement. If such of the agreement. If such initiated, it shall be conducted within 120 days of the receipt with a proceeding is not initiated, the agreement shall be deemed to be in compliance execution, shall also be filed commission rules. All final amended agreements, after with the commission.

Application Enclosure 11 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 Enclosure 11 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.