DBRS Comments on Cameco’s Agreement to Sell its Interest in Bruce Power

DBRS notes that Cameco Corporation (Cameco or the Company) has today announced that it has agreed to sell its 31.6% limited partnership interest in Bruce Power L.P. (BPLP) to BPC Generation Infrastructure Trust, one of the limited partners in BPLP, for proceeds estimated at $450 million. Cameco’s investment in BPLP represents vertical integration as well as diversification for Cameco with a more stable earnings profile than its uranium business. That said, the BPLP investment has not been considered as a key driver of Cameco’s uranium production and sales by DBRS and is expected to only modestly narrow the Company’s business profile. The proceeds from the transaction if completed successfully will, at least in the short term, partially restore the reduction in cash balances Cameco has experienced over the last four years or so. Accordingly, the successful completion of Cameco’s sale of its Bruce Power interest is not expected to have a material impact on its ratings.

Completion of Cameco’s sale of its interest in BPLP is subject to exercise or waiver of the right of first offer held by the other three limited partners of BPLP as well as receipt of certain regulatory approvals.

In the five years ending in 2012, Cameco’s Electricity business unit (largely BPLP) provided on average $236.9 million per year or 26% of Cameco’s gross profit before depreciation of the Company’s business units. Earnings from the Electricity unit have been less volatile than those from its Uranium unit. In addition, Cameco is a supplier of uranium and other services to BPLP‘s reactors. That said, BPLP faces the end of the initial term of its reactor leases, as well as current price supports for its electricity sales beginning in 2019, which limits the lifespan of BPLP’s earnings stream under existing terms. Accordingly, DBRS considers the BPLP sale will only have a moderate near-term impact on Cameco’s business profile and that the sale of its BPLP interest will have no impact on its fuel supply and other contract arrangements related to the BPLP reactors.

Cameco’s cash balances have declined from $1.3 billion at the end of 2009 to $272.8 million at September 30, 2013, during a period of elevated capital expenditures as it built its Cigar Lake mine (expected to start production in the first half of 2014) along with other capital projects and investments. The sale of BPLP will increase the Company’s liquidity as Cigar Lake ramps up, at least in the short to medium term pending some other redeployment of the funds received.

DBRS views Cameco’s current coverage metrics as cyclically depressed with its coverage metrics normally solidly in the “A” range, dipping into the “BBB” category in 2013. Cameco’s level of indebtedness is moderate (gross debt leverage 21% at September 30, 2013) but its coverage metrics have weakened in 2012 and to September 30, 2013, in light of depressed uranium prices following the serious nuclear accident at the Fukushima Daiichi power plant in Japan.

DBRS expects the Company’s coverage metrics to improve as uranium prices strengthen following the 2013 expiry of the Highly Enriched Uranium Agreement to recycle weapons-grade uranium and the expected restarts of Japanese reactors serve to help restore the demand/ supply balance to uranium markets. Accordingly, Cameco’s ratings remain vulnerable to a prolonged slump in the uranium markets or any significant unforeseen issues with the ramp up of the Cigar Lake operation.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodologies are Rating Companies in the Mining Industry (June 2011) and Rating Companies in the Industrial Products Industry (June 2013), which can be found on our website under Methodologies.