Corporate Expenses
Administration
| ($ millions) | 2012 | 2011 | Change |
|---|---|---|---|
| Direct administration | 163 | 147 | 11% |
| Stock-based compensation | 18 | 10 | 80% |
| Total administration | 181 | 157 | 15% |
Direct administration costs in 2012 were $16 million higher than in 2011. The increase in the year reflects the following:
- studies and analyses of various business opportunities
- enhancements to information systems
We recorded $18 million in stock-based compensation expenses this year under our stock option, deferred share unit, performance share unit and phantom stock option plans, an increase of $8 million compared to 2011. Our share price increased by 6.4% in 2012, whereas it declined markedly in 2011 following the Fukushima disaster. See note 27 to the financial statements.
Outlook for 2013
We expect administration costs (not including stock-based compensation) to be up to 5% lower than in 2012 due to expected reductions in business development and corporate administrative activities related to our adjusted growth plans.
Exploration
In 2012, uranium exploration expenses were $97 million, an increase of $12 million compared to 2011 due largely to greater exploration activity in Saskatchewan. Our exploration efforts in 2012 focused on Canada, Australia, Kazakhstan and the United States.
Outlook for 2013
We expect exploration expenses to be about 5% to 10% lower than they were in 2012 due to:
- decreased evaluation activities at Kintyre
- a general reorganization of our global exploration portfolio that has allowed us to focus on our core projects in Saskatchewan, the US, Kazakhstan and Australia
Finance Costs
Finance costs were $80 million compared to $74 million in 2011. The increase from last year largely reflects higher foreign exchange expenses and interest charges related to the debentures issued in the fourth quarter of 2012. See note 22 to the financial statements.
Finance Income
Finance income was $21 million compared to $25 million in 2011 due to lower levels of short-term investments in 2012.
Gains and Losses on Derivatives
In 2012, we recorded $39 million in gains on our derivatives compared to losses of $4 million in 2011. The gains reflect the strengthening of the Canadian dollar compared to the US dollar in 2012. See note 29 to the financial statements.
Income Taxes
We recorded an income tax recovery of $46 million in 2012 compared to an expense of $12 million in 2011. The change in the net expense was in part due to a decline in pre-tax earnings in 2012. The distribution of earnings between jurisdictions was also different compared to 2011. In 2012, we recorded losses of $320 million in Canada compared to $377 million in 2011, whereas earnings in foreign jurisdictions declined to $538 million from $839 million. The tax rate in Canada is higher than the average of the rates in the foreign jurisdictions in which we operate. The decline was also in part due to:
- a decrease in the expense recorded in 2012 related to the CRA transfer pricing dispute. In 2012, we increased our provision by $9 million whereas the amount recognized in 2011 was $27 million.
- additional certainty we received on particular tax provisions that allowed us to recognize a $9 million recovery in our income tax expense
See note 24 to the financial statements.
On an adjusted earnings basis, we recognized a tax recovery of $42 million in 2012 compared to an expense of $33 million in 2011. The increase was related to the items noted above. Our effective tax rate was a recovery of 10% in 2012 compared to an expense of 6% in 2011. The table below presents our adjusted earnings and adjusted income tax expenses attributable to Canadian and foreign jurisdictions.
| ($ millions) | 2012 | 2011 |
|---|---|---|
|
||
| Pre-tax Adjusted Earnings1 | ||
| Canada2 | (303) | (298) |
| Foreign2 | 706 | 839 |
| Total pre-tax adjusted earnings | 403 | 541 |
| Adjusted Income Taxes1 | ||
| Canada2 | (70) | (34) |
| Foreign | 28 | 67 |
| Adjusted income tax expense (recovery) | (42) | 33 |
| Effective tax rate | (10)% | 6% |
Since 2008, CRA has disputed the offshore marketing company structure and related transfer pricing methodology we used for certain uranium sale and purchase agreements and issued notices of reassessment for our 2003 through 2007 tax returns. We believe it is likely that CRA will reassess our tax returns for 2008 through 2012 on a similar basis. Our view is that CRA is incorrect, and we are contesting its position. As a result, we are pursuing our appeal rights under the Income Tax Act. However, to reflect the uncertainties of CRA’s appeals process and litigation, we have provided a total of $63 million for uncertain tax positions for the years 2003 through 2012. We believe that the ultimate resolution of this matter will not be material to our financial position, results of operations or liquidity in the year(s) of resolution. However, substantial success for the CRA would be material, and other unfavourable outcomes for the years 2003 to 2012 could be material, to our financial position, results of operations and cash flows in the year(s) of resolution. Due to the availability of elective deductions and tax loss carrybacks, we were not required to make any significant payment of cash taxes through 2012. However, upon receipt of the reassessment for 2007, an amount of about $27 million became payable and was remitted in January 2013. See note 24 to the financial statements.
Outlook for 2013
We have contractual arrangements to sell uranium produced at our Canadian mining operations to a trading and marketing company located in a foreign jurisdiction. These arrangements reflect the uranium markets at the time they were signed, with the risk and benefit of subsequent movements in uranium prices accruing to the foreign trading and marketing company.
On an adjusted net earnings basis, we expect a recovery of 15% to 20% in 2013 from our uranium, fuel services and electricity segments, as taxable income in Canada is expected to decline. Subject to our success in the litigation with CRA, we expect our tax rate to continue in accordance with the 2013 outlook until the contractual arrangements noted above expire in 2016. As these arrangements expire and are replaced by new contracts that reflect the uranium market at the time of signing, our tax expense is expected to rise over time.
Foreign Exchange
The exchange rate between the Canadian dollar and US dollar affects the financial results of our uranium and fuel services segments.
Sales of uranium and fuel services are routinely denominated in US dollars, while production costs are largely denominated in Canadian dollars. We use planned hedging to try to protect net inflows (total uranium and fuel services sales less US dollar cash expenses and product purchases) from the uranium and fuel services segments against declines in the US dollar in the shorter term. Our strategy is to hedge net inflows over a rolling 60-month period. Our policy is to hedge 35% to 100% of net inflows in the first 12 months. The range declines every year until it reaches 0% to 10% of our net inflows (from 48 and 60 months).
We also have a natural hedge against US currency fluctuations as a portion of our annual cash outlays, including purchases of uranium and fuel services, are denominated in US dollars. The earnings impact of this natural hedge is more difficult to identify because inventory includes material added over more than one fiscal period.
At December 31, 2012:
- The value of the US dollar relative to the Canadian dollar was $1.00 (US) for $0.99(Cdn), down from $1.00 (US) for $1.02 (Cdn) at December 31, 2011. The exchange rate averaged $1.00 (US) for $1.00 (Cdn) over the year.
- Our effective exchange rate for the year was about $1.00 (US) for $1.00 (Cdn), the same as in 2011.
- We had foreign currency forward contracts of $1.4 billion (US),EUR 110 million, AUD 20 million and an option to buy EUR 105 million at December 31, 2012. The US currency contracts had an average exchange rate of $1.00 (US) for $1.01 (Cdn).
- The mark-to-market gain on all foreign exchange contracts was $15 million compared to an $18 million loss at December 31, 2011.
We manage counterparty risk associated with hedging by dealing with highly rated counterparties and limiting our exposure. At December 31, 2012, all counterparties to foreign exchange hedging contracts had a Standard & Poor’s (S&P) credit rating of A or better.
Sensitivity analysis
At December 31, 2012, every one-cent change in the value of the Canadian dollar versus the US dollar would change our 2013 net earnings by about $10 million (Cdn). This sensitivity is based on an exchange rate of $1.00 (US) for $1.00 (Cdn).