For the years ended December 31, 2007 and 2006
($Cdn thousands except per share amounts and as noted)
The majority of revenues at Cameco are derived from the sale of uranium products, electricity through its investment in BPLP, and gold through its investment in Centerra. Cameco's uranium product 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 levels, and political and economic conditions in uranium producing and consuming countries. BPLP's revenue from electricity is affected by changes in electricity prices associated with an open spot market for electricity in Ontario. Centerra's gold revenue 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 level of gold held as reserves. Financial results for Cameco are also impacted by changes in foreign currency exchange rates and other operating risks. Finally, certain financial assets are subject to credit risks including cash and securities, accounts receivable, and commodity and currency instruments.
To mitigate risks associated with certain financial assets, Cameco will hold positions with a variety of large creditworthy institutions. Sales of uranium products, with short payment terms, are made to customers that management believes are creditworthy.
To mitigate risks associated with foreign currency on its sale of uranium products, Cameco enters into forward sales contracts to establish a price for future delivery of the foreign currency. The majority of the contracts qualify as cash flow hedges.
To mitigate 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 price volatility. To mitigate risks associated with the fluctuations in the market price for electricity, BPLP enters into various energy and sales related contracts that qualify as cash flow hedges. These instruments have terms ranging from 2008 to 2013. At December 31, 2007, the mark-to-market gain on these sales contracts was $67,600,000.
Except as otherwise disclosed, the fair market value of Cameco's financial assets and liabilities approximates the carrying amount as a result of the short-term nature of the instruments, or the variable interest rate associated with the instruments, or the fixed interest rate of the instruments being similar to market rates.
At December 31, 2007, Cameco had $1,908,000,000 (US) in forward contracts at an average exchange rate of $1.11 and €88,420,000 at an average exchange rate of $1.35. The foreign currency contracts are scheduled for use as follows:
| (Millions) | US | Rate | Cdn | Euro | Rate | US | ||||||||
| 2008 | $ | 918 | 1.12 | $ | 1,028 | € | 45 | 1.36 | $ | 61 | ||||
| 2009 | 510 | 1.11 | 566 | 20 | 1.29 | 26 | ||||||||
| 2010 | 380 | 1.11 | 422 | 15 | 1.34 | 20 | ||||||||
| 2011 | 100 | 1.08 | 108 | 8 | 1.40 | 11 | ||||||||
| Total | $ | 1,908 | 1.11 | $ | 2,124 | € | 88 | 1.35 | $ | 118 | ||||
These positions consist entirely of forward sales contracts. The average exchange rate reflects the original spot prices at the time the contracts were entered into and includes deferred gains and deferred charges. The realized exchange rate will depend on the forward premium (discount) that is earned (paid) as contracts are utilized. Of these amounts, $1,293,000 of the US-denominated contracts and $88,000,000 of the Euro-denominated contracts mature in 2008. The remaining $615,000 in US-denominated contracts matures in 2009.
At December 31, 2007, Cameco's net mark-to-market gain on these foreign currency instruments was $139,700,000 (Cdn).
The following table summarizes the fair value of derivatives and classification on the December 31, 2007, balance sheet:
| Cameco | BPLP | Total | ||||
| Non-hedge derivatives: | ||||||
Embedded derivatives – sales contracts |
$ | 7,318 | $ | 7,185 | $ | 14,503 |
Foreign currency contracts |
14,834 | – | 14,834 | |||
| Cash flow hedges: | ||||||
Foreign currency contracts |
124,870 | – | 124,870 | |||
Energy and sales contracts |
– | 67,546 | 67,546 | |||
| Net | $ | 147,022 | $ | 74,731 | $ | 221,753 |
| Classification: | ||||||
Current portion of long-term receivables, investments and other [note 7] |
$ | 125,101 | $ | 35,839 | $ | 160,940 |
Long-term receivables, investments and other [note 7] |
43,540 | 39,949 | 83,489 | |||
Current portion of other liabilities [note 10] |
(17,213) | (448) | (17,661) | |||
Other liabilities [note 10] |
(4,406) | (609) | (5,015) | |||
| Net | $ | 147,022 | $ | 74,731 | $ | 221,753 |
The following table summarizes different components of the (gains) and losses on derivatives:
| Cameco | BPLP | Total | ||||
| Non-hedge derivatives: | ||||||
Embedded derivatives – sales contracts |
$ | (634) | $ | – | $ | (634) |
Foreign currency contracts |
(14,107) | – | (14,107) | |||
Energy and sales contracts |
– | (7,183) | (7,183) | |||
| Cash flow hedges: | ||||||
Energy and sales contracts |
– | (7,616) | (7,616) | |||
Ongoing hedge inefficiency |
(6,252) | – | (6,252) | |||
Ineligible for hedge accounting |
(17,814) | – | (17,814) | |||
| Net | $ | (38,807) | $ | (14,799) | $ | (53,606) |
Over the next twelve months, based on current exchange rates, Cameco expects an estimated $89,300,000 of pre-tax gains from the foreign currency cash flow hedges to be reclassified through other comprehensive income to net earnings. The maximum length of time Cameco hedges its exposure to the variability in future cash flows related to foreign currency on anticipated transactions is five years.
Over the next twelve months, based on current prices, Cameco expects an estimated $33,200,000 of pre-tax gains from BPLP's various energy and sales related cash flow hedges to be reclassified through other comprehensive income to net earnings. The maximum length of time BPLP is hedging its exposure to the variability in future cash flows related to electricity prices on anticipated transactions is five years.