Notes to Consolidated Financial Statements
For the years ended December 31, 2014 and 2013
- Cameco Corporation
- Significant accounting policies
- Accounting standards
- Determination of fair values
- Use of estimates and judgments
- Discontinued operation
- Acquisitions
- Accounts receivable
- Inventories
- Property, plant and equipment
- Goodwill and intangible assets
- Long-term receivables, investments and other
- Equity-accounted investees
- Accounts payable and accrued liabilities
- Short-term debt
- Long-term debt
- Other liabilities
- Provisions
- Share capital
- Employee benefit expense
- Finance costs
- Other income (expense)
- Income taxes
- Per share amounts
- Statements of cash flows
- Share-based compensation plans
- Pension and other post-retirement benefits
- Financial instruments and related risk management
- Capital management
- Segmented information
- Group entities
- Joint operations
- Related parties
- Subsequent event
28. Financial instruments and related risk management
Cameco is exposed in varying degrees to a variety of risks from its use of financial instruments. Management and the board of directors, both separately and together, discuss the principal risks of our businesses. The board sets policies for the implementation of systems to manage, monitor and mitigate identifiable risks. Cameco’s risk management objective in relation to these instruments is to protect and minimize volatility in cash flow. The types of risks Cameco is exposed to, the source of risk exposure and how each is managed is outlined below.
Market risk
Market risk is the risk that changes in market prices, such as commodity prices, foreign currency exchange rates and interest rates, will affect the Company’s earnings or the fair value of its financial instruments. Cameco engages in various business activities which expose the Company to market risk. As part of its overall risk management strategy, Cameco uses derivatives to manage some of its exposures to market risk that result from these activities.
Derivative instruments may include financial and physical forward contracts. Such contracts may be used to establish a fixed price for a commodity, an interest-bearing obligation or a cash flow denominated in a foreign currency. Market risks are monitored regularly against defined risk limits and tolerances.
Cameco’s actual exposure to these market risks is constantly changing as the Company’s portfolios of foreign currency and commodity contracts change. Changes in fair value or cash flows based on market variable fluctuations cannot be extrapolated as the relationship between the change in the market variable and the change in fair value or cash flow may not be linear.
The types of market risk exposure and the way in which such exposure is managed are as follows:
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A. Commodity price risk
As a significant producer and supplier of uranium and nuclear fuel processing services, Cameco bears significant exposure to changes in prices for these products. A substantial change in prices will affect the Company’s net earnings and operating cash flows. Prices for Cameco’s products are volatile and are influenced by numerous factors beyond the Company’s control, such as supply and demand fundamentals and geopolitical events.
Cameco’s sales contracting strategy focuses on reducing the volatility in future earnings and cash flow, while providing both protection against decreases in market price and retention of exposure to future market price increases. To mitigate the risks associated with the fluctuations in the market price for uranium products, Cameco seeks to maintain a portfolio of uranium product sales contracts with a variety of delivery dates and pricing mechanisms that provide a degree of protection from pricing volatility.
Cameco does not hold any significant financial instruments that expose the Company to material commodity price risk as of the reporting date.
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B. Foreign exchange risk
The relationship between the Canadian and US dollar affects financial results of the uranium business as well as the fuel services business. Sales of uranium product, conversion and fuel manufacturing services are routinely denominated in US dollars while production costs are largely denominated in Canadian dollars.
Cameco attempts to provide some protection against exchange rate fluctuations by planned hedging activity designed to smooth volatility. To mitigate risks associated with foreign currency, Cameco enters into forward sales and option contracts to establish a price for future delivery of the foreign currency. These foreign currency contracts are not designated as hedges and are recorded at fair value with changes in fair value recognized in earnings. Cameco also has a natural hedge against US currency fluctuations because a portion of its annual cash outlays, including purchases of uranium and conversion services, is denominated in US dollars.
Cameco holds a number of financial instruments denominated in foreign currencies that expose the Company to foreign exchange risk. Cameco measures its exposure to foreign exchange risk on financial instruments as the change in carrying values that would occur as a result of reasonably possible changes in foreign exchange constant. As of the reporting date, the Company has determined its pre-tax exposure to financial instruments to be as follows based on a 5% weakening of the Canadian dollar:
| Currency | Carrying value (Cdn) |
Gain (loss) | |
|---|---|---|---|
| Cash and cash equivalents | EUR | $13,537 | $677 |
| Cash and cash equivalents | USD | 46,958 | 2,348 |
| Accounts receivable | USD | 346,331 | 17,317 |
| Accounts receivable | EUR | 14,798 | 740 |
| Long-term receivables, investments and other | USD | (91,672) | (4,584) |
| Accounts payable and accrued liabilities | USD | (97,508) | (4,875) |
| Accounts payable and accrued liabilities | GBP | (18,999) | (950) |
| Net foreign currency derivatives | USD | (67,005) | (104,479) |
A 5% strengthening of the Canadian dollar against the currencies above at December 31, 2014 would have had an equal but opposite effect on the amounts shown above, assuming all other variables remained constant.
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C. Interest rate risk
The Company has a strategy of minimizing its exposure to interest rate risk by maintaining target levels of fixed and variable rate borrowings. The proportions of outstanding debt carrying fixed and variable interest rates are reviewed by senior management to ensure that these levels are within approved policy limits. At December 31, 2014, the proportion of Cameco’s outstanding debt that carries fixed interest rates is 80% (2013 – 84%).
Cameco is exposed to interest rate risk through its interest rate swap contracts whereby fixed rate payments on a notional amount of $300,000,000 of the Series D senior unsecured debentures were swapped for variable rate payments. The swaps terminate on September 2, 2019. Under the terms of the swaps, Cameco makes interest payments based on the three-month Canada Dealer Offered Rate plus an average margin of 3.7% and receives fixed interest payments of 5.67%. To mitigate this risk, Cameco entered into interest rate cap arrangements, effective March 18, 2013, whereby the three-month Canada Dealer Offered Rate was capped at 5.0% such that total variable payments will not exceed, on average, 8.7%. At December 31, 2014, the fair value of Cameco’s interest rate swaps and caps was $2,978,000 (2013 – $3,616,000).
Cameco is also exposed to interest rate risk on its loan facility with Inkai and on NUKEM’s multicurrency revolving loan facility due to the variable nature of the interest rates contained in the terms therein.
Cameco measures its exposure to interest rate risk as the change in cash flows that would occur as a result of reasonably possible changes in interest rates, holding all other variables constant. As of the reporting date, the Company has determined the impact on earnings of a 1% increase in interest rate on variable rate financial instruments to be as follows:
| Gain (loss) | |
|---|---|
| Interest rate contracts | $(4,028) |
| Advances receivable from Inkai | 867 |
No amounts were withdrawn against NUKEM’s revolving load facility as of December 31, 2014.
Counterparty credit risk
Counterparty credit risk is associated with the ability of counterparties to satisfy their contractual obligations to Cameco, including both payment and performance. Cameco’s sales of uranium product, conversion and fuel manufacturing services expose the Company to the risk of non-payment.
Cameco manages the risk of non-payment by monitoring the credit worthiness of its customers and seeking pre-payment or other forms of payment security from customers with an unacceptable level of credit risk. To mitigate risks associated with certain financial assets, Cameco will hold positions with a variety of large creditworthy institutions.
The maximum exposure to credit risk, as represented by the carrying amount of the financial assets, at December 31 was:
| 2014 | 2013 | |
|---|---|---|
| Cash and cash equivalents | $566,583 | $229,135 |
| Accounts receivable | 435,479 | 416,031 |
| Advances receivable from Inkai [note 33] | 91,672 | 95,319 |
| Derivative assets | 3,889 | 7,391 |
At December 31, 2014, there were no significant concentrations of credit risk and no amounts were held as collateral. Historically, Cameco has experienced minimal customer defaults and, as a result, considers the credit quality of its accounts receivable to be high. All accounts receivable at the reporting date are neither past due nor impaired.
Liquidity risk
Financial liquidity represents Cameco’s ability to fund future operating activities and investments. Cameco ensures that there is sufficient capital in order to meet short-term business requirements, after taking into account cash flows from operations and the Company’s holdings of cash and cash equivalents. The Company believes that these sources will be sufficient to cover the likely short-term and long-term cash requirements.
The table below outlines the Company’s available debt facilities at December 31, 2014:
| Total amount | Outstanding and committed | Amount available | |
|---|---|---|---|
| Unsecured revolving credit facility | $1,250,000 | $ — | $1,250,000 |
| Letter of credit facility | 1,068,420 | 950,716 | 117,704 |
| Inkai revolving credit facility (Cameco’s share) | 13,921 | — | 13,921 |
| NUKEM multicurrency revolving loan facility | 140,380 | 413 | 139,967 |
The tables below present a maturity analysis of Cameco’s financial liabilities, including principal and interest, based on the expected cash flows from the reporting date to the contractual maturity date:
| Carrying amount | Contractual cash flows | Due in less than 1 year | Due in 1-3 years | Due in 3-5 years | Due after 5 years | |
|---|---|---|---|---|---|---|
| Accounts payable and accrued liabilities | $316,258 | $316,258 | $316,258 | $ — | $ — | $ — |
| Long-term debt | 1,491,198 | 1,500,000 | — | — | 500,000 | 1,000,000 |
| Foreign currency contracts | 67,916 | 67,916 | 53,873 | 14,043 | — | — |
| Total contractual repayments | $1,875,372 | $1,884,174 | $370,131 | $14,043 | $500,000 | $1,000,000 |
| Total | Due in less than 1 year | Due in 1-3 years | Due in 3-5 years | Due after 5 years | |
|---|---|---|---|---|---|
| Total interest payments on long-term debt | $613,770 | $69,390 | $138,780 | $138,780 | $266,820 |
Measurement of fair values
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A. Accounting classifications and fair values
The following tables summarize the carrying amounts and accounting classifications of Cameco’s financial instruments at the reporting date:
| Fair value through profit or loss |
Loans and receivables | Available for sale | Other financial liabilities |
Total | |
|---|---|---|---|---|---|
| Financial assets | |||||
| Cash and cash equivalents | $ — | $566,583 | $ — | $ — | $566,583 |
| Accounts receivable [note 8] | — | 455,002 | — | — | 455,002 |
| Derivative assets [note 12] | |||||
| Foreign currency contracts | 911 | — | — | — | 911 |
| Interest rate contracts | 2,978 | — | — | — | 2,978 |
| Investments in equity securities [note 12] | — | — | 6,601 | — | 6,601 |
| Advances receivable from Inkai [note 33] | — | 91,672 | — | — | 91,672 |
| 3,889 | 1,113,257 | 6,601 | — | 1,123,747 | |
| Financial liabilities | |||||
| Accounts payable and accrued liabilities [note 14] | — | — | — | 316,258 | 316,258 |
| Derivative liabilities [note 17] | |||||
| Foreign currency contracts | 67,916 | — | — | — | 67,916 |
| Long-term debt [note 16] | — | — | — | 1,491,198 | 1,491,198 |
| 67,916 | — | — | 1,807,456 | 1,875,372 | |
| Net | $(64,027) | $1,113,257 | $6,601 | $(1,807,456) | $(751,625) |
| Fair value through profit or loss |
Loans and receivables | Available for sale | Other financial liabilities |
Total | |
|---|---|---|---|---|---|
| Financial assets | |||||
| Cash and cash equivalents | $ — | $229,135 | $ — | $ — | $229,135 |
| Accounts receivable [note 8] | — | 431,375 | — | — | 431,375 |
| Derivative assets [note 12] | |||||
| Foreign currency contracts | 3,775 | — | — | — | 3,775 |
| Interest rate contracts | 3,616 | — | — | — | 3,616 |
| Investments in equity securities [note 12] | — | — | 22,805 | — | 22,805 |
| Advances receivable from Inkai [note 33] | — | 95,319 | — | — | 95,319 |
| 7,391 | 755,829 | 22,805 | — | 786,025 | |
| Financial liabilities | |||||
| Bank overdraft | 41,226 | — | — | — | 41,226 |
| Accounts payable and accrued liabilities [note 14] | — | — | — | 437,941 | 437,941 |
| Short-term debt [note 15] | |||||
| Commercial paper | — | — | — | 24,974 | 24,974 |
| Promissory note | — | — | — | 10,601 | 10,601 |
| NUKEM short-term loan | — | — | — | 14,655 | 14,655 |
| Derivative liabilities [note 17] | |||||
| Foreign currency contracts | 30,907 | — | — | — | 30,907 |
| Share purchase options | 16 | — | — | — | 16 |
| Long-term debt [note 16] | — | — | — | 1,293,383 | 1,293,383 |
| 72,149 | — | — | 1,781,554 | 1,853,703 | |
| Net | $64,758 | $755,829 | $22,805 | $(1,781,554) | $(1,067,678) |
Cameco does not have any financial instruments classified as held-for-trading, or held-to-maturity as of the reporting date.
The following tables summarize the carrying amounts and fair values of Cameco’s financial instruments that are measured at fair value, including their levels in the fair value hierarchy:
| Fair value | ||||
|---|---|---|---|---|
| Carrying value | Level 1 | Level 2 | Total | |
| Derivative assets [note 12] | ||||
| Foreign currency contracts | $911 | $ — | $911 | $911 |
| Interest rate contracts | 2,978 | — | 2,978 | 2,978 |
| Investments in equity securities [note 12] | 6,601 | 6,601 | — | 6,601 |
| Derivative liabilities [note 17] | ||||
| Foreign currency contracts | (67,916) | — | (67,916) | (67,916) |
| Net | $(57,426) | $(6,601) | $(64,027) | $(57,426) |
| Fair value | ||||
|---|---|---|---|---|
| Carrying value | Level 1 | Level 2 | Total | |
| Derivative assets [note 12] | ||||
| Foreign currency contracts | 3,775 | — | 3,775 | 3,775 |
| Interest rate contracts | 3,616 | — | 3,616 | 3,616 |
| Derivative liabilities [note 17] | ||||
| Foreign currency contracts | (30,907) | — | (30,907) | (30,907) |
| Share purchase options | (16) | (16) | — | (16) |
| Net | $23,532 | $16 | $23,516 | $23,532 |
The preceding tables exclude fair value information for financial instruments whose carrying amounts are a reasonable approximation of fair value.
There were no transfers between level 1 and level 2 during the period. Cameco does not have any financial instruments that are classified as level 3 as of the reporting date.
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B. Financial instruments measured at fair value
Cameco measures its short-term investments, derivative financial instruments and material investments in equity securities at fair value. Short-term investments and investments in publicly held equity securities are classified as a recurring level 1 fair value measurement and derivative financial instruments are classified as a recurring level 2 fair value measurement.
Short-term investments represent available-for-sale money market instruments. The fair value of these instruments is determined using quoted market yields as of the reporting date. The fair value of investments in equity securities is determined using quoted share prices observed in the principal market for the securities as of the reporting date.
Foreign currency derivatives consist of foreign currency forward contracts, options and swaps. The fair value of foreign currency options is measured based on the Black Scholes option-pricing model. The fair value of foreign currency forward contracts and swaps is measured using a market approach, based on the difference between contracted foreign exchange rates and quoted forward exchange rates as of the reporting date.
Interest rate derivatives consist of interest rate swap contracts and interest rate caps. The fair value of interest rate swaps is determined by discounting expected future cash flows from the contracts. The future cash flows are determined by measuring the difference between fixed interest payments to be received and floating interest payments to be made to the counterparty based on Canada Dealer Offer Rate forward interest rate curves. The fair value of interest rate caps is determined based on broker quotes observed in active markets at the reporting date.
Where applicable, the fair value of the derivatives reflects the credit risk of the instrument and includes adjustments to take into account the credit risk of the Company and counterparty. These adjustments are based on credit ratings and yield curves observed in active markets at the reporting date.
Cameco previously measured its investment in GoviEx at cost due to the unavailability of a quoted price in an active market. GoviEx is now listed on the Canadian Securities Exchange and as a result the Company has measured its investment at fair value as of the reporting date.
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C. Financial instruments not measured at fair value
The carrying value of Cameco’s cash and cash equivalents, receivables, payables and accrued liabilities is assumed to approximate the fair value as a result of the short-term nature of the instruments. The carrying value of Cameco’s short-term debt (commercial paper and promissory notes) and long-term debt (debentures) is assumed to approximate the fair value as a result of the variable interest rate associated with the instruments or the fixed interest rate of the instruments being similar to market rates.
Derivatives
The following tables summarize the fair value of derivatives and classification on the consolidated statements of financial position:
| 2014 | 2013 | |
|---|---|---|
| Non-hedge derivatives: | ||
| Foreign currency contracts | $(67,005) | $(27,132) |
| Interest rate contracts | 2,978 | 3,616 |
| Share purchase options | — | (16) |
| Net | $(64,027) | $(23,532) |
| Classification: | ||
| Current portion of long-term receivables, investments and other [note 12] | $500 | $3,775 |
| Long-term receivables, investments and other [note 12] | 3,389 | 3,616 |
| Current portion of other liabilities [note 17] | (53,873) | (30,923) |
| Other liabilities [note 17] | (14,043) | — |
| Net | $(64,027) | $(23,532) |
The following tables summarize different components of the losses on derivatives included in net earnings:
| 2014 | 2013 | |
|---|---|---|
| Non-hedge derivatives: | ||
| Foreign currency contracts | $(126,069) | $(62,578) |
| Interest rate contracts | 4,893 | 624 |
| Share purchase options | 16 | (16) |
| Net | $(121,160) | $(61,970) |