EXHIBIT 99.2
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TECK COMINCO LIMITED
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005, 2004
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TECK COMINCO LIMITED
Consolidated Balance Sheets
As at December 31
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(Cdn$ in millions) 2006 2005
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ASSETS
Current assets
Cash and cash equivalents $ 5,054 $ 2,098
Temporary investments 227 986
Cash held in trust (Note 5) 105 -
Accounts and settlements receivable (Note 6) 723 531
Inventories (Note 7) 786 668
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6,895 4,283
Investments (Note 8) 251 649
Property, plant and equipment (Note 9) 3,648 3,513
Oil sands properties (Note 10) 190 20
Other assets (Note 11) 463 344
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$ 11,447 $ 8,809
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Dividends payable (Note 17(l)) $ 216 $ 81
Exchangeable debentures (Note 5) 105 -
Accounts payable and accrued liabilities
(Note 12) 763 442
Current portion of long-term debt (Note 13) - 213
Current income and resource taxes payable 443 261
Current portion of future income and
resource taxes (Note 19(c)) 161 118
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1,688 1,115
Long-term debt (Note 13) 1,509 1,508
Other liabilities (Note 14) 821 667
Future income and resource taxes (Note 19(c)) 880 888
Exchangeable debentures (Note 5) - 248
Shareholders' equity (Note 17) 6,549 4,383
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$ 11,447 $ 8,809
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Commitments and contingencies (Note 22)
Subsequent event (Note 26)
Approved on behalf of the Board of Directors
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The accompanying notes are an integral part of these financial statements.
TECK COMINCO LIMITED
Consolidated Statements of Earnings
Years ended December 31
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(Cdn$ in millions, except share data) 2006 2005 2004
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Revenues $ 6,539 $ 4,415 $ 3,428
Operating expenses (2,714) (2,181) (2,058)
Depreciation and amortization (264) (272) (275)
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Operating profit 3,561 1,962 1,095
Other expenses
General and administration (96) (74) (52)
Interest on long-term debt (Note 13(g)) (97) (69) (61)
Exploration (72) (70) (42)
Research and development (17) (13) (14)
Other income (expense) (Note 18) 331 155 (40)
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3,610 1,891 886
Provision for income and resource taxes
(Note 19) (1,215) (546) (292)
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Net earnings from continuing operations 2,395 1,345 594
Net earnings from discontinued operation
(Note 4(a)) 36 - 23
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Net earnings $ 2,431 $ 1,345 $ 617
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Earnings Per Share (Note 17(k))
Basic $ 11.53 $ 6.62 $ 3.18
Basic from continuing operations $ 11.36 $ 6.62 $ 3.06
Diluted $ 11.20 $ 6.22 $ 2.99
Diluted from continuing operations $ 11.04 $ 6.22 $ 2.88
Weighted average shares outstanding (millions) 210.6 202.5 193.0
Shares outstanding at end of year (millions) 215.8 203.4 201.4
The accompanying notes are an integral part of these financial statements.
TECK COMINCO LIMITED
Consolidated Statements of Cash Flows
Years ended December 31
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(Cdn$ in millions) 2006 2005 2004
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Operating activities
Net earnings from continuing operations $ 2,395 $ 1,345 $ 594
Items not affecting cash
Depreciation and amortization 264 272 275
Future income and resource taxes
(Note 19(a)) 59 122 186
Write-down of investment - - 64
Gain on sale of investments and assets (201) (77) (16)
Other 89 (15) 6
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2,606 1,647 1,109
Net change in non-cash working capital
items (Note 21(b)) 299 (21) (27)
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2,905 1,626 1,082
Financing activities
Issuance of long-term debt 123 1,167 -
Repayment of long-term debt (333) (95) (124)
Issuance of Class B subordinate voting
shares 16 28 126
Dividends paid (296) (81) (60)
Interest on exchangeable debentures
(Note 17(c)) (5) (6) (5)
Redemption of exchangeable debentures (340) - -
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(835) 1,013 (63)
Investing activities
Decrease (increase) in temporary
investments 759 (954) (32)
Cash held in trust (105) - -
Property, plant and equipment (318) (323) (216)
Oil sands properties (170) (20) -
Investments and other assets (175) (203) (52)
Proceeds from sale of investments
and assets 885 118 21
Proceeds from sale of Cajamarquilla
(Note 4(a)) - - 156
Acquisition of interest in Highland
Valley Copper (Note 4(c)) - - (80)
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876 (1,382) (203)
Effect of exchange rate changes on cash
and cash equivalents in U.S. dollars 10 (34) (40)
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Increase in cash and cash equivalents from
continuing operations 2,956 1,223 776
Increase in cash from discontinued
operation (Note 4(a)) - - 3
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Increase in cash and cash equivalents 2,956 1,223 779
Cash and cash equivalents at beginning of year 2,098 875 96
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Cash and cash equivalents at end of year $ 5,054 $ 2,098 $ 875
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The accompanying notes are an integral part of these financial statements.
TECK COMINCO LIMITED
Consolidated Statements of Retained Earnings
Years ended December 31
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(Cdn$ in millions) 2006 2005 2004
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Retained earnings at beginning of year $ 2,228 $ 1,049 $ 495
Net earnings 2,431 1,345 617
Dividends declared (Note 17(l)) (431) (162) (60)
Interest on exchangeable debentures, net
of taxes (Note 17(c)) (3) (4) (3)
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Retained earnings at end of year $ 4,225 $ 2,228 $ 1,049
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The accompanying notes are an integral part of these financial statements.
TECK COMINCO LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2006, 2005 and 2004
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1. NATURE OF OPERATIONS
Teck Cominco Limited (referred to as the "Company") is engaged in mining
and related activities including exploration, development, processing,
smelting and refining. The Company's major products are zinc, copper and
metallurgical coal. The Company also produces precious metals, lead,
molybdenum, electrical power, fertilizers and various specialty metals.
Metal products are sold as refined metals, concentrates or both. The
Company also owns an interest in certain oil sands leases and has a
partnership interest in an oil sands development project.
2. SIGNIFICANT ACCOUNTING POLICIES
Generally Accepted Accounting Principles
These consolidated financial statements are prepared using Generally
Accepted Accounting Principles (GAAP) in Canada. Note 25 reconciles the
consolidated financial statements prepared in accordance with accounting
principles generally accepted in Canada to financial statements prepared
with accounting principles generally accepted in the United States.
Basis of Presentation
These consolidated financial statements include the accounts of the
Company and all of its subsidiaries. The significant subsidiaries include
Teck Cominco Metals Ltd. (TCML), Teck Cominco American Inc. (TCAI) and
Teck Cominco Alaska Inc. (TCAK). Many of the Company's mining activities
are conducted through interests in entities where the Company shares joint
control including Compania Minera Antamina (Antamina), Elk Valley Coal
Partnership (Elk Valley Coal), and Pogo Joint Venture (Pogo). These
entities are accounted for using the proportionate consolidation method.
Certain comparative figures have been reclassified to conform with the
presentation adopted for the current period.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements. Significant areas where
management's judgment is applied include asset and investment valuations,
ore reserve estimations, finished and in-process inventory quantities,
plant and equipment lives, contingent liabilities including matters in
litigation, tax provisions and future tax balances including valuation
allowances in respect of future tax balances, asset retirement
obligations, other environmental liabilities, pension and other
post-retirement benefits and other accrued liabilities. Actual results
could differ from these estimates.
Translation of Foreign Currencies
The Company's functional currency is the Canadian dollar. For integrated
foreign operations, monetary assets and liabilities are translated at year
end exchange rates and other assets and liabilities are translated at
historical rates. Revenues, expenses and cash flows are translated at
monthly average exchange rates. Gains and losses on translation of
monetary assets and monetary liabilities are charged to earnings.
The accounts of self-sustaining foreign operations are translated at year
end exchange rates, and revenues and expenses are translated at monthly
average exchange rates. Differences arising from these foreign currency
translations are recorded in shareholders' equity as a cumulative
translation adjustment until they are realized by a reduction in the
investment.
Cash and Cash Equivalents
Cash and cash equivalents include cash on account, demand deposits and
money market investments with maturities from the date of acquisition of
three months or less which are readily convertible to known amounts of
cash and are subject to insignificant changes in value.
TECK COMINCO LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2006, 2005 and 2004
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2. SIGNIFICANT ACCOUNTING POLICIES, continued
Temporary Investments
Temporary investments are carried at cost and translated at year end
foreign exchange rates. They include money market investments with
maturities from the date of acquisition of greater than three months.
Inventories
Finished products, work in process and raw material inventories are valued
at the lower of cost and net realizable value. Raw materials include
concentrates for use at smelting and refining operations. Work in process
inventory includes inventory in the milling, smelting or refining process
and stockpiled ore at mining operations. Supplies inventory is valued at
the lower of average cost and replacement value.
For work in process and finished product inventories, cost includes all
direct costs incurred in production including direct labour and materials,
freight, depreciation and amortization and directly attributable overhead
costs. For supplies and raw materials, cost includes acquisition, freight
and other directly attributable costs.
The Company uses both joint-product and by-product costing for work in
process and finished product inventories. Joint costing is applied to
primary products at the Red Dog, Antamina and Pend Oreille mines and the
Trail operations, where the profitability of the operation is dependent
upon the production of a number of primary products. Joint costing
allocates total production costs based on the relative values of the
products. Where by-product costing is used, by-products are allocated the
incremental costs of processes that are specific to the production of that
product.
Investments
Investments in Fording Canadian Coal Trust (Fording) and the Fort Hills
Energy Limited Partnership (Fort Hills) are accounted for using the equity
method as the Company is considered to have significant influence over
these investments. Investments other than Fording and Fort Hills are
carried at cost less any amounts written off to reflect an impairment in
value that is considered to be other than temporary.
Property, Plant and Equipment
(a) Plant and equipment
Plant and equipment are recorded at cost. The cost of plant and
processing equipment at the Company's mining operations is amortized
on a units of production basis over the lesser of the estimated
useful life of the asset or the estimated proven and probable ore
reserves. Amortization of plant and equipment at smelting operations
is calculated on a straight-line basis over the estimated useful life
of the asset. Mobile equipment is depreciated over the estimated
equipment operating hours. Buildings are amortized on a straight-line
basis over their estimated useful life, not exceeding the estimated
life of the mine.
(b) Mineral properties and development costs
Acquisition, exploration and evaluation costs are charged to earnings
in the year in which they are incurred, except where these costs
relate to specific properties for which resources as defined under
National Instrument 43-101 exist and it is expected that the
expenditure can be recovered by future exploitation or sale, in which
case they are deferred.
When the Company incurs debt directly related to the construction of
a new operation or major expansion, the interest and financing costs
associated with such debt are capitalized during the construction
period.
TECK COMINCO LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2006, 2005 and 2004
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2. SIGNIFICANT ACCOUNTING POLICIES, continued
Upon commencement of commercial production, mineral properties and
deferred costs relating to mines are amortized over the estimated
life of the proven and probable reserves to which they relate
calculated on a units of production basis.
(c) Underground development costs
Underground development costs are amortized using the block
amortization method. Under this method development costs associated
with each section of the mine are amortized over the reserves of that
particular section of the mine.
(d) Asset impairment
The Company performs impairment tests on its property, plant and
equipment when events or changes in circumstance indicate that the
carrying value of an asset may not be recoverable. These tests
compare expected undiscounted future cash flows from these assets to
their carrying values. If shortfalls exist, assets are written down
to the discounted value of the future cash flows based on the
Company's average cost of borrowing.
(e) Repairs and maintenance
Repairs and maintenance, including shutdown maintenance costs, are
charged to expense as incurred except when these repairs
significantly extend asset life or result in an operating
improvement. In these instances the portion of these repairs relating
to the betterment is capitalized as part of plant and equipment.
Revenue Recognition
Sales are recognized when title transfers and the rights and obligations
of ownership pass to the customer. The majority of the Company's metal
concentrates are sold under pricing arrangements where final prices are
determined by quoted market prices in a period subsequent to the date of
sale. In these circumstances, revenues are recorded at the time of sale
based on forward prices for the expected date of the final settlement.
Subsequent variations in prices are recognized as revenue adjustments as
they occur.
Income and Resource Taxes
Current income taxes are recorded based on the estimated income and
resource taxes payable on taxable income for the current year. Future
income tax assets and liabilities are recognized based on the difference
between the tax and accounting value of assets and liabilities and are
calculated using the tax rates for the periods in which the differences
are expected to reverse. Tax rate changes are recognized in earnings in
the period of substantive enactment. Future tax assets are recognized to
the extent that they are considered more likely than not to be realized.
The Company is subject to assessments by various taxation authorities
which may interpret tax legislation differently. The final amount of taxes
to be paid depends on a number of factors including outcomes of audits,
appeals, disputes, negotiations and litigation. The Company provides for
such differences where known based on management's best estimate of the
probable outcome of these matters.
Pension and Other Employee Future Benefits
(a) Defined benefit pension plans
Defined benefit pension plan obligations are based on actuarial
determinations. The projected benefit method prorated on services has
been used to determine the accrued benefit obligation. Actuarial
assumptions used in the determination of defined benefit pension plan
liabilities and non-pension post-retirement benefits are based upon
management's best estimates, including discount rate,
TECK COMINCO LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2006, 2005 and 2004
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2. SIGNIFICANT ACCOUNTING POLICIES, continued
expected plan performance, salary escalation, expected health care
costs and retirement dates of employees. The expected return on plan
assets is estimated based on the fair value of plan assets, asset
allocation and expected long-term returns on these components.
Past service costs and transitional assets or liabilities are
amortized on a straight-line basis over the expected average
remaining service period of active employees expected to receive
benefits under the plan up to the full eligibility date.
Differences between the actuarial liabilities and the amounts
recorded in the financial statements will arise from changes in plan
assumptions, changes in benefits, or through experience as results
differ from actuarial assumptions. Cumulative differences which are
greater than 10% of either the fair value of the plan assets or the
accrued benefit obligation, whichever is greater, are amortized over
the average remaining service life of the related employees.
(b) Defined contribution pension plans
The cost of providing benefits through defined contribution plans is
charged to earnings as the obligation to contribute is incurred.
(c) Non-pension post-retirement plans
The Company provides certain health care benefits for certain
employees when they retire. The cost of these benefits is expensed
over the period in which the employees render services. These
non-pension post-retirement benefits are funded by the Company as
they become due.
Stock-Based Compensation
The fair value method of accounting is used for stock-based awards. Under
this method, the compensation cost of options and other stock-based
compensation arrangements are estimated at fair value at the grant date
and charged to earnings over the vesting period. For employees eligible
for normal retirement before vesting, the expense is charged to earnings
over the period from the grant date to the date they are eligible for
retirement.
Stock-based compensation expense relating to deferred and restricted share
units is accrued over the vesting period of the units based on the quoted
market value of Class B subordinate voting shares. The expense and
liability are adjusted each reporting period for changes in the underlying
share price.
Research and Development
Research costs are expensed as incurred. Development costs are only
deferred when the product or process is clearly defined, the technical
feasibility has been established, the future market for the product or
process is clearly defined and the Company is committed to and has the
resources to complete the project.
Asset Retirement Obligations
Future obligations to retire an asset including dismantling, remediation
and ongoing treatment and monitoring of the site are initially recognized
and recorded as a liability at fair value, based on estimated future cash
flows, the Company's current credit adjusted risk-free discount rate and
an estimated inflation factor. The liability is adjusted for changes in
the expected amounts and timing of cash flows required to discharge the
liability and accreted to full value over time through periodic charges to
earnings. For operating properties, the amount of the asset retirement
liability initially recognized and any subsequent adjustments are
capitalized as part of the asset's carrying value and amortized over the
asset's estimated useful life.
TECK COMINCO LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2006, 2005 and 2004
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2. SIGNIFICANT ACCOUNTING POLICIES, continued
For closed properties, any adjustments to the liability are charged to
other income (expense). Future asset retirement obligations are only
recorded when the timing or amount of remediation costs can be reasonably
estimated.
Earnings Per Share
Earnings per share is calculated based on the weighted average number of
shares outstanding during the year. The Company follows the treasury stock
method in the calculation of diluted earnings per share. Under this
method, dilution is calculated based upon the net number of common shares
issued should "in the money" options and warrants be exercised and the
proceeds be used to repurchase common shares at the average market price
in the year. Dilution from convertible securities is calculated based on
the number of shares to be issued after taking into account the reduction
of the related after-tax interest expense.
Derivatives and Hedging Activities
The Company's risk management policy is to mitigate the impact of market
risks to enable the Company to plan its business with greater certainty.
In particular, the Company may use foreign exchange forward contracts,
commodity price contracts and interest rate swaps to manage exposure to
fluctuations in foreign exchange, metal prices and interest rates. The
Company's use of derivatives is based on established practices and
parameters which are subject to the oversight of the Board of Directors.
Certain of the Company's commodity and foreign exchange forward contracts
are accounted for as cash flow hedges of anticipated commodity sales.
Gains or losses on these contracts are recognized in revenue when the
hedged sale occurs. The Inco exchangeable debentures were also accounted
for as a cash flow hedge prior to the sale of the Inco shares in November
2006. The Company's interest rate swaps are accounted for as fair value
hedges, with gains or losses recognized in interest expense. From time to
time, the Company also designates a portion of its U.S. dollar debt as a
hedge of a portion of its net investment in foreign subsidiaries whose
functional currency is the U.S. dollar. Foreign exchange gains and losses
on the designated debt are included in the cumulative translation
adjustment in shareholders' equity.
The fair values of the derivative instruments that do not qualify for
hedge accounting are recorded on the balance sheet with realized and
unrealized gains and losses charged to other income (expense).
3. ADOPTION OF NEW ACCOUNTING STANDARDS AND ACCOUNTING DEVELOPMENTS
(a) Deferred stripping
Effective January 1, 2006, the Company adopted the CICA Emerging
Issues Committee Abstract 160 (EIC-160), "Stripping Costs Incurred in
the Production Phase of a Mining Operation". EIC-160 requires
stripping costs to be accounted for as variable production costs to
be included in the costs of inventory produced, unless the stripping
activity can be shown to be a betterment of the mineral property, in
which case the stripping costs would be capitalized. Betterment
occurs when stripping activity increases future output of the mine by
providing access to additional sources of reserves. Capitalized
stripping costs would be amortized on a unit of production basis over
the proven and probable reserves to which they relate.
The prospective application of this standard permits the existing
deferred stripping costs incurred in the production phase to be
amortized on a unit of production basis over the remaining respective
reserves. As at January 1, 2006, the opening balance of capitalized
stripping costs was $52 million. Stripping costs relating to the mine
expansion at Highland Valley Copper, which is considered to be a
betterment of the property, are capitalized and amounted to $25
million as at December 31, 2006 (2005-$3 million).
TECK COMINCO LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2006, 2005 and 2004
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3. ADOPTION OF NEW ACCOUNTING STANDARDS AND ACCOUNTING DEVELOPMENTS,
continued
(b) Mineral properties costs
Effective January 1, 2006, the Company amended its accounting policy
on the treatment of costs for the acquisition, exploration and
evaluation of mineral properties.
Under this policy, acquisition, exploration and evaluation costs are
charged to earnings in the year in which they are incurred, except
where these costs relate to specific properties for which resources
as defined under National Policy Statement 43-101 exist and it is
expected that the expenditure can be recovered by future exploitation
or sale, in which case they are deferred.
Previously, the Company capitalized acquisition, exploration and
evaluation costs only when economically recoverable reserves as shown
by economic studies were believed to exist. This change has been
applied retroactively but did not have any effect on the Company's
reported earnings or retained earnings.
(c) Stock-based compensation for employees eligible to retire before the
vesting date
Effective December 31, 2006, the Company adopted the new CICA
Emerging Issues Committee Abstract 162 (EIC-162), "Stock-Based
Compensation for Employees Eligible to Retire before the Vesting
Date". EIC-162 requires that stock-based compensation costs are to be
recorded over the period from the grant date to the awards to the
time employees are eligible to retire as opposed to being recorded
over the stated vesting period of the awards. These new provisions
are applied with retroactive restatement. The adoption of the new
standard did not have any effect on the Company's reported earnings
or retained earnings.
(d) Conditional asset retirement obligations
During 2006, the Company applied the interpretations of the CICA
Emerging Issues Committee Abstract 159 (EIC-159), "Conditional Asset
Retirement Obligations". EIC-159 requires the recognition of a
liability if the entity has sufficient information to reasonably
estimate the fair value of the asset retirement obligation, even if
the timing and/or method of settling the legal obligation are
conditional on a future event. If sufficient information is not
available at the time the liability is incurred, a liability should
be recognized in the period in which sufficient information becomes
available. The application of EIC-159 did not have any impact on the
Company's consolidated financial statements.
(e) Variable interest entities (VIE)
Effective January 1, 2005, the Company adopted Accounting Guideline
15 (AcG-15), "Consolidation of Variable Interest Entities". The
standard establishes when a company should consolidate a variable
interest entity in its financial statements. AcG-15 provides the
definition of a variable interest entity and requires a variable
interest entity to be consolidated if a company is at risk of
absorbing the variable interest entity's expected losses, or is
entitled to receive a majority of the variable interest entity's
residual returns, or both. Adoption of this guideline resulted in
insignificant changes in certain balance sheet and income statement
accounts and no change to earnings or retained earnings.
(f) Canadian accounting pronouncements effective for 2007
Determining the variability to be considered in applying VIE
standards
In September 2006, the CICA Emerging Issues Committee issued Abstract
163 (EIC-163), "Determining the Variability to Be Considered in
Applying AcG-15". EIC-163 provides clarification of how an entity
should determine the variability in assessment of a VIE. EIC-163
requires an analysis of the design of the entity in determining the
variability to be considered in applying AcG-15, using a two-step
approach. The guidance will be applied to all entities (including
newly created entities) when an enterprise first becomes involved and
to all entities previously required to be analyzed under AcG-15 when
a reconsideration event has occurred, subsequent to January 1, 2007.
TECK COMINCO LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2006, 2005 and 2004
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3. ADOPTION OF NEW ACCOUNTING STANDARDS AND ACCOUNTING DEVELOPMENTS,
continued
Accounting changes
In July 2006, the CICA revised Section 1506, "Accounting Changes",
which now requires that: (a) a voluntary change in accounting
principles can be made if, and only if, the changes result in more
reliable and relevant information, (b) changes in accounting policies
are accompanied with disclosures of prior period amounts and
justification for the change, and (c) for changes in estimates, the
nature and amount of the change should be disclosed. The revised
section is effective for the Company's financial year beginning
January 1, 2007.
Financial instruments
In April 2005, the Accounting Standards Board issued three new
accounting standards dealing with the recognition, measurement and
disclosure of financial instruments, hedges and comprehensive income,
together with many consequential amendments throughout the CICA
Handbook. These new standards will affect the Company's interim and
annual financial statements beginning with the first quarter of 2007.
(i) Financial Instruments - Recognition and Measurement, Section
3855
This standard prescribes when a financial asset, financial
liability, or non-financial derivative is to be recognized on
the balance sheet and whether fair value or cost-based methods
are used to measure the recorded amounts. It also specifies how
financial instrument gains and losses are to be presented.
Effective January 1, 2007, the Company's cash equivalents,
temporary investments and investments in marketable securities
have been classified as available-for-sale and will be recorded
at fair value on the balance sheet. Changes in the fair value of
these instruments will be reflected in other comprehensive
income and included in shareholders' equity on the balance
sheet.
All derivatives will be recorded on the balance sheet at fair
value. Mark-to-market adjustments on these instruments will be
included in net income, unless the instruments are designated as
part of a cash flow hedge relationship.
All other financial instruments will be recorded at cost or
amortized cost, subject to impairment reviews. Transaction costs
incurred to acquire financial instruments will be included in
the underlying balance.
(ii) Hedges, Section 3865
This standard is applicable when a Company chooses to designate
a hedging relationship for accounting purposes. It builds on the
existing AcG-13, "Hedging Relationships", and Section 1650,
"Foreign Currency Translation", by specifying how hedge
accounting is applied and what disclosures are necessary when it
is applied.
Upon adoption of this standard, the Company will discontinue
hedge accounting on all commodity derivative contracts and
interest rate swaps. The Company may enter into foreign exchange
forward contracts in the future to hedge anticipated sales and
may account for these contracts as cash flow hedges.
(iii) Comprehensive Income, Section 1530
This standard requires the presentation of a statement of
comprehensive income and its components. Comprehensive income
includes both net earnings and other comprehensive income. Other
comprehensive income includes holding gains and losses on
certain investments, gains and losses on certain derivative
instruments and foreign currency gains and losses relating to
self-sustaining foreign operations, all of which are not
included in the calculation of net earnings until realized.
TECK COMINCO LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2006, 2005 and 2004
===============================================================================
3. ADOPTION OF NEW ACCOUNTING STANDARDS AND ACCOUNTING DEVELOPMENTS,
continued
As at January 1, 2007, the estimated effect on the Company's balance sheet
of adopting these standards is summarized below. As prescribed by GAAP,
prior periods will not be restated.
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(Cdn$ in millions) January 1, 2007
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Adjusted on Estimated
adoption of restated
Financial opening
As Instruments balances
reported standards in 2007
ASSETS
Current assets
Cash and cash equivalents $ 5,054 $ 5,054
Temporary investments 227 227
Cash held in trust 105 105
Accounts and settlements
receivable 723 723
Inventories 786 786
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6,895 - 6,895
Investments 251 106 (a)(b) 357
Property, plant and equipment 3,648 3,648
Oil sands properties 190 190
Other assets 463 128 (b)(c) 591
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$ 11,447 $ 234 $ 11,681
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LIABILITIES AND SHAREHOLDERS'
EQUITY
Current liabilities
Dividends payable $ 216 $ 216
Exchangeable debentures 105 105
Accounts payable and
accrued liabilities 763 24 (b) 781
Current income and resource
taxes payable 443 443
Current portion of future
income and resource taxes 161 161
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1,688 24 1,706
Long-term debt 1,509 (11) (c) 1,498
Other liabilities 821 46 (b) 867
Future income and resource taxes 880 12 (d) 892
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4,898 71 4,969
Shareholders' equity
Share capital 2,405 2,405
Retained earnings 4,225 112 (b) 4,337
Contributed surplus 64 64
Cumulative translation
adjustment (145) 145 (e) -
Accumulated other
comprehensive income - (145) (e) (94)
51 (a)(b)
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6,549 163 6,712
---------------------------------------------------------------------------
$ 11,447 $ 234 $ 11,681
===========================================================================
TECK COMINCO LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2006, 2005 and 2004
===============================================================================
3. ADOPTION OF NEW ACCOUNTING STANDARDS AND ACCOUNTING DEVELOPMENTS,
continued
Notes:
(a) The Company's investments in marketable securities accounted for at
cost are available for sale and are measured at fair value.
(b) Unrealized gains and losses on derivative assets and liabilities are
recorded at fair value.
(c) Debt financing costs previously deferred as other assets are
reclassified to long-term debt.
(d) The tax effect of the above adjustments is recorded to future income
and resource taxes.
(e) The cumulative translation adjustment is reclassified to accumulated
other comprehensive income.
4. ACQUISITIONS AND DISPOSITIONS
(a) Sale of Cajamarquilla (discontinued operation)
On December 15, 2004, the Company completed the sale of its 85%
interest in the Cajamarquilla zinc refinery for proceeds of $168
million (US$142 million) after repayment of debt of $56 million
(US$47 million). The Company recorded an after-tax gain of $12
million on the transaction, being total consideration of $224 million
less net assets disposed of $186 million less a cumulative foreign
exchange loss of $26 million.
The agreement for sale also provides that, in each of the years from
2005 to 2009 inclusive, the Company is entitled to additional
consideration of US$365,000 for each US$0.01 that the average annual
price of zinc exceeds US$0.454 per pound. The Company has recorded an
additional after-tax gain of $36 million (US$31 million) as result of
the price participation in 2006. This gain is classified as a gain
from discontinued operation on an after-tax basis on the consolidated
statement of earnings.
Earnings and cash flow from Cajamarquilla for 2004 were as follows:
======================================================================
(Cdn$ in millions) 2004
----------------------------------------------------------------------
Earnings from discontinued operation
Revenues $ 196
Cost of sales (173)
Other expenses (7)
Income taxes (5)
----------------------------------------------------------------------
Net earnings 11
Gain on sale 12
----------------------------------------------------------------------
Net earnings from discontinued operation $ 23
======================================================================
Cash flow from discontinued operation
Operating activities $ 26
Financing activities (20)
Investing activities (2)
Effect of exchange rate changes on cash (1)
----------------------------------------------------------------------
Net increase in cash $ 3
======================================================================
(b) Investment in Elk Valley Coal Partnership and Fording Canadian Coal
Trust
Under the terms of the Partnership Agreement entered into in 2003,
the Company could increase its interest in Elk Valley Coal by up to
5% if Elk Valley Coal achieved certain specified synergies by March
31, 2007. Following the issue of the opinion of the independent
expert engaged to assess the synergies of Elk Valley Coal for the
coal year ended March 31, 2004, agreement was reached with Fording
Inc. in July 2004 on the synergies realized and the resulting
adjustments to Elk Valley Coal interests. As a result of this
agreement, the Company's 35% interest was increased by 3% effective
April 1, 2004, an additional 1% on April 1, 2005 and a further 1% on
April 1, 2006, bringing the Company's total direct interest in Elk
Valley Coal to 40% on April 1, 2006.
TECK COMINCO LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2006, 2005 and 2004
===============================================================================
4. ACQUISITIONS AND DISPOSITIONS, continued
The additional interest received has been treated as part of the
initial consideration given and received on the formation of Elk
Valley Coal and accordingly no gain was recorded.
(c) Acquisition of additional interest in Highland Valley Copper
On March 2, 2004, the Company completed the acquisition of a further
33.6% interest in the Highland Valley Copper mine in British Columbia
to increase the Company's interest to 97.5%. The Company purchased
the additional interest for a net acquisition cost of $80 million.
5. SALE OF INCO SHARES AND REDEMPTION OF INCO EXCHANGEABLE DEBENTURES
===========================================================================
(Cdn$ in millions) 2006 2005
---------------------------------------------------------------------------
Exchangeable debentures due 2021 at quoted
market value $105 $ 260
Deferred loss - (12)
---------------------------------------------------------------------------
$105 $ 248
===========================================================================
In 1996, the Company issued $248 million of 3% exchangeable debentures due
September 30, 2021. Each $1,000 principal amount debenture was exchangeable
at the option of the holder for 20.7254 common shares of Inco Limited
(Inco), subject to adjustment in certain circumstances. The Company held
5,148,000 Inco common shares, which were sufficient to effect this
exchange, and pledged these shares as security for the debentures. The
Company also had the option to satisfy the exchange obligation in cash
based on the market value of the Inco shares at the time of the exchange.
In 2006, the Company acquired an additional 3,800,000 shares of Inco and
made a takeover bid to acquire all the outstanding shares of Inco. This bid
expired on August 16, 2006, when insufficient shares were tendered to meet
the minimum tender condition. The Company later tendered all of its Inco
shares to a competing bid. Before the Company's sale of the Inco shares,
some holders of the Inco exchangeable debentures tendered their debentures
to the Company for exchange and the Company exercised its option to pay the
equivalent amount of cash. When the Inco shares were sold, an amount was
placed in trust sufficient to repay the remaining debentures in cash. At
December 31, 2006, debentures with a face value of $59 million and a cash
value on exchange of $105 million remained outstanding. The cash in trust
to meet this obligation is excluded from cash and cash equivalents on the
balance sheet and is classified as cash held in trust.
The Company accounted for the Inco exchangeable debentures as a cash flow
hedge of the anticipated disposition of the Inco common shares. The hedging
relationship was discontinued upon sale of the Inco shares. The unrealized
losses on the remaining outstanding debentures have been accrued and
included in the net gain on the sale of the Inco shares. The net gain on
these transactions is as follows:
===========================================================================
(Cdn$ in millions) 2006
---------------------------------------------------------------------------
Gain on sale of Inco shares $ 332
Loss on redemption of debentures (194)
---------------------------------------------------------------------------
138
Less transaction costs (18)
---------------------------------------------------------------------------
Net gain before tax $ 120
===========================================================================
The remaining Inco exchangeable debentures have been reclassified as a
current liability as they are now expected to be settled within one year.
TECK COMINCO LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2006, 2005 and 2004
===============================================================================
6. ACCOUNTS AND SETTLEMENTS RECEIVABLE
Accounts and settlements receivable consist of trade receivables and are
recorded at cost net of a provision for doubtful accounts based on
expected collectibility. As at December 31, 2006, accounts and settlements
receivable are net of an allowance for doubtful accounts of nil (2005-$3
million).
7. INVENTORIES
===========================================================================
(Cdn$ in millions) 2006 2005
---------------------------------------------------------------------------
Finished product $ 313 $ 266
Work in process 206 182
Raw materials 91 80
Supplies inventory 176 140
---------------------------------------------------------------------------
$ 786 $ 668
===========================================================================
8. INVESTMENTS
===========================================================================
(Cdn$ in millions) 2006 2005
---------------------------------------------------------------------------
Fording Canadian Coal Trust (8.74% interest)
(Note 4(b)) $ 148 $ 153
Inco Limited common shares (Note 5) - 246
Marketable securities 103 250
---------------------------------------------------------------------------
$ 251 $ 649
===========================================================================
The investment in Fording had a quoted market value of $309 million at
December 31, 2006 (2005-$517 million), and the marketable securities had a
quoted market value of $209 million at December 31, 2006 (2005-$330
million).
9. PROPERTY, PLANT AND EQUIPMENT
===========================================================================
(Cdn$ in millions) 2006 2005
---------------------------------------------------------------------------
Operating
Mines and mining facilities $ 4,827 $ 4,635
Accumulated depreciation and amortization (2,620) (2,463)
---------------------------------------------------------------------------
2,207 2,172
Smelter and refineries 1,722 1,649
Accumulated depreciation and amortization (694) (650)
---------------------------------------------------------------------------
1,028 999
Properties in development 413 342
---------------------------------------------------------------------------
$ 3,648 $ 3,513
===========================================================================
TECK COMINCO LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2006, 2005 and 2004
===============================================================================
10. OIL SANDS PROPERTIES
===========================================================================
(Cdn$ in millions) 2006 2005
---------------------------------------------------------------------------
Fort Hills Energy Limited Partnership (a) $ 114 $ 17
Oil sands leases (b) 76 3
---------------------------------------------------------------------------
$ 190 $ 20
===========================================================================
(a) Fort Hills Energy Limited Partnership
In November 2005, the Company completed an agreement to acquire a 15%
interest in the Fort Hills Energy Limited Partnership, which is
developing the Fort Hills oil sands project in Alberta, Canada. As
consideration for its 15% interest, the Company is required to
contribute 34% of the first $2.5 billion of project expenditures and
its 15% share of project expenditures thereafter (Note 22(d)). Tax
benefits arising from these expenditures are allocated to the
contributing partner. The interest in Fort Hills is recorded as an
investment using the equity method.
(b) Oil sands leases
The Company has a 50% interest with UTS Energy Corporation (UTS) in
oil sands leases covering 277,000 acres in the Athabasca oil sands
region in Alberta. In addition, the Company has a right to acquire
from UTS a 50% interest in an oil sands lease covering 7,064
additional acres.
11. OTHER ASSETS
===========================================================================
(Cdn$ in millions) 2006 2005
---------------------------------------------------------------------------
Pension assets (Note 16(a)) $ 194 $ 151
Future income and resource tax assets
(Note 19(c)) 103 115
Long-term receivables 109 47
Other 57 31
---------------------------------------------------------------------------
$ 463 $ 344
===========================================================================
12. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
===========================================================================
(Cdn$ in millions) 2006 2005
---------------------------------------------------------------------------
Trade payables $ 415 $ 228
Commercial and government royalties 118 -
Payroll related liabilities 101 99
Capital project accruals 44 39
Current portion of asset retirement obligations
(Note 15) 22 31
Accrued interest 24 35
Other 39 10
---------------------------------------------------------------------------
$ 763 $ 442
===========================================================================
TECK COMINCO LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2006, 2005 and 2004
===============================================================================
13. LONG-TERM DEBT
===========================================================================
(Cdn$ in millions) 2006 2005
---------------------------------------------------------------------------
6.125% debentures due October 2035
(US$700 million) (a) $ 806 $ 806
5.375% debentures due October 2015
(US$300 million) (a) 349 349
7.000% debentures due September 2012
(US$200 million) 231 231
6.875% debentures due February 2006
(US$150 million) - 175
Antamina senior revolving credit
facility due August 2011 (b) 108 -
Antamina senior debt
(nil; 2005-US$125 million) (b) - 146
Other 15 14
---------------------------------------------------------------------------
1,509 1,721
Less current portion (f) - (213)
---------------------------------------------------------------------------
$ 1,509 $ 1,508
===========================================================================
(a) On September 28, 2005, the Company issued US$300 million of 5.375%
notes due October 1, 2015, and US$700 million of 6.125% notes due
October 1, 2035. Net proceeds, after issue costs of $11 million, were
$1.16 billion. The issue costs are deferred as part of other assets
and amortized over the term of the debentures. The Company can call
these notes at any time by repaying the greater of the principal
amount with accrued interest and the present value of the principal
and interest amounts discounted at comparable treasury yield plus a
stipulated spread.
(b) In September 2006, the remaining balance of Antamina's senior debt of
US$411 million (Teck Cominco's share-US$93 million) was refinanced on
a non-recourse basis with a syndicated five-year revolving term bank
facility with a bullet repayment due at maturity. The facility may be
renewed and extended annually with the concurrence of the
participating banks.
(c) Elk Valley Coal has a $200 million revolving credit facility for
working capital purposes, of which the Company's 40% share is $80
million. At December 31, 2006, Elk Valley Coal had issued outstanding
letters of credit and guarantees totalling $86 million.
Highland Valley Copper has a US$25 million demand revolving facility
for working capital purposes. At December 31, 2006, Highland Valley
Copper had issued letters of credit for $9 million.
(d) At December 31, 2006, the Company had revolving credit facilities
aggregating $1 billion which are available until 2011. The Company has
issued $124 million of letters of credit, leaving the unused portion
of the credit facility at $918 million as at December 31, 2006.
(e) The Company's bank credit facilities require the maintenance of a
defined debt to capitalization ratio. As at December 31, 2006, the
Company was in compliance with all debt covenants and default
provisions.
(f) The Company has $3 million of scheduled long-term debt payments due in
2009 and $120 million due in 2011. The remaining balance of $1.386
billion is due thereafter.
(g) The Company incurred interest expense on long-term debt as follows:
======================================================================
(Cdn$ in millions) 2006 2005 2004
----------------------------------------------------------------------
Interest expense $ 102 $ 69 $ 58
Amortization of debt discount - - 3
Less amounts capitalized (5) - -
----------------------------------------------------------------------
$ 97 $ 69 $ 61
======================================================================
TECK COMINCO LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2006, 2005 and 2004
===============================================================================
14. OTHER LIABILITIES
===========================================================================
(Cdn$ in millions) 2006 2005
---------------------------------------------------------------------------
Asset retirement obligations (Note 15) $ 427 $ 347
Other post-closure and environmental costs 70 60
Pension and other employee future benefits (Note 16(a))
Defined benefit pension plans 39 42
Non-pension post-retirement benefits 183 164
Minority interests 43 18
Other 59 36
---------------------------------------------------------------------------
$ 821 $ 667
===========================================================================
15. ASSET RETIREMENT OBLIGATIONS
The Company has recorded an asset retirement obligation for all of its
closed and operating mines. The refining and smelting facilities in Trail
are considered to be indefinite life operations and neither the amounts
that may be required to retire these facilities nor the timing of required
expenditures can be estimated at this time. In this case, the recorded
liability is limited to secondary sites and components of the facilities
where costs and expected dates of existing retirement and remediation
requirements can be estimated.
The following table summarizes the movements in the asset retirement
obligation for the years ended December 31, 2006 and 2005.
===========================================================================
(Cdn$ in millions) 2006 2005
---------------------------------------------------------------------------
At January 1 $ 378 $ 366
Changes in cash flow estimates 79 13
Expenditures and settlements (31) (29)
Accretion expense 21 23
Obligations incurred in the period 1 10
Foreign currency translation adjustments 1 (5)
---------------------------------------------------------------------------
At December 31 449 378
Current portion (22) (31)
---------------------------------------------------------------------------
$ 427 $ 347
===========================================================================
Asset retirement obligations are initially recorded as a liability at fair
value, assuming credit adjusted risk-free discount rates between 5.75% and
6.80% and inflation factors between 2.00% and 2.75%. The liability for
retirement and remediation on an undiscounted basis before inflation is
estimated to be approximately $359 million. In addition, for ongoing
treatment and monitoring of the sites, the estimated undiscounted payments
in current dollars before inflation adjustment are $3.6 million per annum
for 2007-2031 and $11.6 million per annum for 2032-2106. Due to the nature
of closure plans, cash expenditures are expected to occur over a
significant period of time, from one year for plans that are already in
progress to over 100 years for the longest plan.
The change in cash flow estimates included $11 million in 2006 (2005-$9
million) relating to asset retirement obligations at closed properties that
have been recognized in other income (expense) (Note 18).
TECK COMINCO LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2006, 2005 and 2004
===============================================================================
16. PENSION AND OTHER EMPLOYEE FUTURE BENEFITS
Defined Contribution Plans
The Company has defined contribution pension plans for certain groups of
employees. The Company's share of contributions to these plans is expensed
in the year it is earned by the employee.
Defined Benefit Plans and Non-Pension Post-Retirement Benefits
The Company has various defined benefit pension plans that provide benefits
based principally on employees' years of service. These plans are only
eligible to certain qualifying employees. The plans are "flat-benefit" or
"final-pay" plans which are not indexed. Annual contributions to these
plans are actuarially determined and made at or in excess of minimum
requirements prescribed by legislation.
All defined benefit pension plans are actuarially evaluated for funding
purposes on a three-year cycle. The most significant plan, which accounts
for 57% of the accrued benefit obligation at December 31, 2006, was last
actuarially evaluated on December 31, 2004. The measurement date used to
determine all of the accrued benefit obligation and plan assets for
determination of accounting information was December 31, 2006.
The Company also has several post-retirement plans, which generally provide
post-retirement medical and life insurance benefits to certain qualifying
employees.
TECK COMINCO LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2006, 2005 and 2004
===============================================================================
16. PENSION AND OTHER EMPLOYEE FUTURE BENEFITS, continued
(a) Actuarial valuation of plans
=========================================================================================================================
(Cdn$ in millions) 2006 2005
--------------------------------------------------------------------------------------------------------------------------
Defined Non-pension Defined Non-pension
benefit post-retirement benefit post-retirement
pension benefit pension benefit
plans plans plans plans
--------------------------------------------------------------------------------------------------------------------------
Accrued benefit obligation
Balance at beginning of year $ 1,198 $ 273 $ 1,036 $ 229
Current service cost 25 5 19 4
Benefits paid (72) (10) (65) (9)
Interest cost 62 15 62 14
Actuarial revaluation 11 8 125 37
Past service costs arising from plan improvements 43 24 21 -
Foreign currency exchange rate changes - - (2) (1)
Transfers from other plans 3 - 2 -
Other - 1 - (1)
--------------------------------------------------------------------------------------------------------------------------
Balance at end of year 1,270 316 1,198 273
Plan assets
Fair value at beginning of year 1,126 - 975 -
Actual return on plan assets 143 - 129 -
Benefits paid (72) (10) (65) (9)
Foreign currency exchange rate changes - - (2) -
Contributions 76 10 87 9
Transfer from other plans 2 - 2 -
Other - - - -
--------------------------------------------------------------------------------------------------------------------------
Fair value at end of year 1,275 - 1,126 -
--------------------------------------------------------------------------------------------------------------------------
Funding surplus (deficit) 5 (316) (72) (273)
Unamortized actuarial costs 75 91 137 111
Unamortized past service costs 75 42 44 (2)
--------------------------------------------------------------------------------------------------------------------------
Net accrued benefit asset (liability) $ 155 $ (183) $ 109 $ (164)
=========================================================================================================================
Represented by
Pension assets (Note 11) $ 194 $ - $ 151 $ -
Accrued benefit liability (Note 14) (39) (183) (42) (164)
--------------------------------------------------------------------------------------------------------------------------
Net accrued benefit asset (liability) $ 155 $ (183) $ 109 $ (164)
=========================================================================================================================
TECK COMINCO LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2006, 2005 and 2004
===============================================================================
16. PENSION AND OTHER EMPLOYEE FUTURE BENEFITS, continued
(b) Funding status
The funding status of the Company's defined benefit pension plans is
as follows:
==========================================================================================================================
(Cdn$ in millions) 2006 2005
--------------------------------------------------------------------------------------------------------------------------
Plans where Plans where Plans where Plans where
assets benefit assets benefit
exceed obligations exceed obligations
benefit exceed benefit exceed
obligations assets Total obligations assets Total
--------------------------------------------------------------------------------------------------------------------------
Plan assets $ 1,083 $ 192 $ 1,275 $ 720 $ 406 $ 1,126
Benefit obligations (988) (282) (1,270) (690) (508) (1,198)
--------------------------------------------------------------------------------------------------------------------------
Excess (deficit) of plan assets over
benefit obligations $ 95 $ (90) $ 5 $ 30 $ (102) $ 72
==========================================================================================================================
Total cash payments for pension and other employee future benefits for
2006, including cash contributed to defined benefit and defined
contribution pension plans and cash payments made directly to
beneficiaries, were $94 million. The Company expects to contribute $55
million to its defined contribution and defined benefit pension plans
in 2007 based on minimum funding requirements.
The estimated future benefit payments to pensioners for the next five
years and five years thereafter are as follows:
==========================================================================================================================
(Cdn$ in millions) 2007 2008 2009 2010 2011 2012-2016
--------------------------------------------------------------------------------------------------------------------------
$ 83 $ 85 $ 88 $ 92 $ 96 $ 560
--------------------------------------------------------------------------------------------------------------------------
(c) Significant assumptions
The assumptions used to calculate annual expenses are those used to
calculate the accrued benefit obligation at the end of the previous
year. Weighted average assumptions used to calculate the accrued
benefit obligation at the end of each year are as follows:
==========================================================================================================================
2006 2005 2004
--------------------------------------------------------------------------------------------------------------------------
Non-pension Non-pension Non-pension
Defined post- Defined post- Defined post-
benefit retirement benefit retirement benefit retirement
pension benefit pension benefit pension benefit
plans plans plans plans plans plans
--------------------------------------------------------------------------------------------------------------------------
Discount rate 5% 5% 5% 5% 6% 6%
Assumed long-term rate of return on assets 7% - 7% - 7.25% -
Rate of increase in future compensation 4% 4% 4% 4% 4% 4%
Initial medical trend rate - 10% - 10% - 11%
Ultimate medical trend rate - 5% - 5% - 5%
Years to reach ultimate medical trend rate - 5 - 6 - 6
Dental trend rates - 5% - 4% - 4%
--------------------------------------------------------------------------------------------------------------------------
The expected long-term rate of return on plan assets is developed
based on the historical and projected returns for each asset class, as
well as the target asset allocation of the pension portfolio.
Projected rates of return for fixed income securities and equities are
developed using a model that factors in long-term government debt
rates, real bond yield trend, inflation, and equity premiums based on
a combination of historical experience and future long-term
expectations.
TECK COMINCO LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2006, 2005 and 2004
===============================================================================
16. PENSION AND OTHER EMPLOYEE FUTURE BENEFITS, continued
The discount rate used to determine the accrued benefit obligation is
determined by reference to the market interest rates at the
measurement date of high quality debt instruments.
(d) Employee future benefits expense
==========================================================================================================================
(Cdn$ in millions) 2006 2005 2004
--------------------------------------------------------------------------------------------------------------------------
Non-pension Non-pension Non-pension
Defined post- Defined post- Defined post-
benefit retirement benefit retirement benefit retirement
pension benefit pension benefit pension benefit
plans plans plans plans plans plans
--------------------------------------------------------------------------------------------------------------------------
Current service cost $ 25 $ 5 $ 19 $ 4 $ 18 $ 4
Interest cost 62 15 62 14 59 13
Expected gain on assets (77) - (69) - (63) -
Actuarial loss recognized 10 7 5 5 7 5
Early retirement window - - 1 - 3 -
Past service cost recognized 9 1 6 - 4 -
Other 3 - 9 (1) 7 -
--------------------------------------------------------------------------------------------------------------------------
Expense recognized for the year $ 32 $ 28 $ 33 $ 22 $ 35 $ 22
==========================================================================================================================
The defined contribution expense for 2006 is $8 million (2005-$7
million; 2004-$5 million).
Certain employee future benefit costs incurred in the year and the
actual return on plan assets in excess of or short of the actuarially
assumed return are not taken into income and are amortized over the
expected average remaining service life of employees. Employee future
benefit expenses recognized in the year are reconciled to employee
future benefit costs incurred as follows:
==========================================================================================================================
(Cdn$ in millions) 2006 2005 2004
--------------------------------------------------------------------------------------------------------------------------
Non-pension Non-pension Non-pension
Defined post- Defined post- Defined post-
benefit retirement benefit retirement benefit retirement
pension benefit pension benefit pension benefit
plans plans plans plans plans plans
--------------------------------------------------------------------------------------------------------------------------
Expense recognized $ 32 $ 28 $ 33 $ 22 $ 35 $ 22
Difference between expected and actual
return on plan assets (66) - (60) - (31) -
Difference between actuarial losses (gains)
amortized and actuarial losses (gains) arising 1 1 120 32 43 11
Difference between past service costs
amortized and past service costs arising 34 21 15 - 23 -
Other (3) - (9) 1 (7) -
--------------------------------------------------------------------------------------------------------------------------
Costs incurred (recovered) $(2) $ 50 $ 99 $ 55 $ 63 $ 33
==========================================================================================================================
(e) Health care sensitivity
A 1% change in the initial and ultimate medical trend rates
assumptions would have the following effect on post-retirement health
care obligations and expense:
======================================================================
(Cdn$ in millions) Increase Increase
(decrease) (decrease)
in service and in service and
interest cost interest cost
----------------------------------------------------------------------
Impact of 1% increase
in medical trend rate $ 3 $ 43
Impact of 1% decrease
in medical trend rate (3) (36)
----------------------------------------------------------------------
TECK COMINCO LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2006, 2005 and 2004
===============================================================================
16. PENSION AND OTHER EMPLOYEE FUTURE BENEFITS, continued
(f) Investment of plan assets
The assets of the Company's defined benefit pension plans are managed
by pension fund managers under the oversight of the Teck Cominco
Pension Fund Co-ordinating Society and management committees.
The Company's pension plan investment strategies support the
objectives of each defined benefit plan and are related to the plan
demographics and timing of expected benefit payments to plan members.
The objective for the plan asset portfolios is to achieve an annual
portfolio return over a four-year period equal to at least the annual
percentage change in the Consumer Price Index plus 4%. To achieve this
objective, a strategic asset allocation policy has been developed for
each defined benefit plan. The asset allocation is monitored quarterly
and rebalanced if the funds in an asset class exceed their allowable
allocation ranges. The Company reviews the investment guidelines for
each plan at least annually, and the portfolio and investment
managers' performance is monitored quarterly.
The composition of the pension plan assets at December 31, 2006 and
2005, and the target composition for 2007 are as follows:
======================================================================
2006 2005 2004
Target Actual Actual
----------------------------------------------------------------------
Equity securities 50% 58% 58%
Debt securities 36% 37% 37%
Real estate and other 14% 5% 5%
Total 100% 100% 100%
----------------------------------------------------------------------
17. SHAREHOLDERS' EQUITY
======================================================================
2006 2005
----------------------------------------------------------------------
Amount Amount
Shares (Cdn$ in Shares (Cdn$ in
(in 000's) millions (in 000's) millions)
----------------------------------------------------------------------
Share capital (a)
Class A common shares 4,674 $ 7 4,674 $ 7
Class B subordinate
voting shares (b) 211,153 2,398 198,752 2,148
----------------------------------------------------------------------
2,405 2,155
Retained earnings 4,225 2,228
Exchangeable debentures
due 2024 (c) - 107
Contributed surplus (i) 64 61
Cumulative translation
adjustment (j) (145) (168)
----------------------------------------------------------------------
$ 6,549 $ 4,383
======================================================================
(a) Authorized share capital
The Company's authorized share capital consists of an unlimited number
of Class A common shares (Class A shares) without par value, an
unlimited number of Class B subordinate voting shares without par
value and an unlimited number of preferred shares without par value
issuable in series.
The Class A shares carry the right to 100 votes per share, and the
Class B subordinate voting shares carry the right to one vote per
share. Each Class A share is convertible, at the option of the holder,
into one Class B subordinate voting share. In all other respects, the
Class A shares and Class B
TECK COMINCO LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2006, 2005 and 2004
===============================================================================
17. SHAREHOLDERS' EQUITY, continued
subordinate voting shares rank equally. Subject to certain exceptions,
if a takeover bid is made in respect of the Class A shares and is not
made concurrently with an offer to purchase Class B subordinate voting
shares on identical terms, each outstanding Class B subordinate voting
share will be convertible into a Class A share, if the takeover bid is
accepted by holders of a majority of the Class A shares.
(b) Class B subordinate voting shares
======================================================================
Amount
Shares (Cdn$ in
(in 000's) millions)
----------------------------------------------------------------------
At December 31, 2003 181,810 $ 1,804
Options exercised (f) 2,609 38
Issued for convertible subordinate
debentures (d) 7,275 185
Exercise of warrants (h) 4,980 90
Conversion of Class A shares to
Class B subordinate voting shares 8 -
----------------------------------------------------------------------
At December 31, 2004 196,682 $ 2,117
Options exercised (f) 2,067 31
Issued to holders of shares of predecessor
companies merged with the Company 3 -
----------------------------------------------------------------------
At December 31, 2005 198,752 $ 2,148
Options exercised (f) 907 20
Issued in settlement of exchangeable
debentures due 2024 (c) 11,489 230
Issued to holders of shares of predecessor
companies merged with the Company 5 -
----------------------------------------------------------------------
At December 31, 2006 211,153 $ 2,398
======================================================================
At December 31, 2006, there were 370,356 Class B subordinate voting
shares (2005-375,158 shares) reserved for issuance to the former
shareholders of predecessor companies that merged with the Company in
prior years.
(c) Exchangeable debentures due 2024
In April 1999, the Company issued $150 million of 25-year debentures
with each $1,000 debenture exchangeable, at a reference price of
$23.50 per share, into 42.5532 shares of Cominco Ltd. At the time of
the merger with Cominco Ltd. in 2001, holders of these debentures were
paid $6 in respect of each underlying Cominco share as a partial
repayment. The face value of each $1,000 debenture was reduced to
$745, and each debenture became convertible into 76.596 Class B
subordinate voting shares for a total, if exchanged, of 11.5 million
Class B subordinate voting shares. The debentures were exchangeable by
the holder or redeemable by the Company at any time.
By virtue of the Company's option to deliver a fixed number of Class B
subordinate voting shares to satisfy the principal payments, the
debentures net of issue costs and taxes were classified as a component
of shareholders' equity and the interest, net of taxes, was charged
directly to retained earnings. This interest, net of taxes, totalled
$3 million in 2006 (2005-$4 million; 2004-$3 million).
TECK COMINCO LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2006, 2005 and 2004
===============================================================================
17. SHAREHOLDERS' EQUITY, continued
On June 1, 2006, the Company completed a series of transactions
culminating in the redemption of these debentures. In the course of
these transactions, all outstanding debentures were exchanged and the
Company issued 11.5 million Class B subordinate voting shares.
The exchange was a non-monetary transaction and did not affect the
Company's cash flow or earnings. Current tax benefits of $124 million
on these transactions were recorded directly to shareholders' equity.
(d) Redemption of convertible debt
On October 12, 2004, the Company issued 7.3 million Class B
subordinate voting shares on conversion of US$156 million stated
amount at maturity of its convertible subordinate debentures due 2006,
which were called for redemption. Debentures with a stated amount at
maturity of US$14 million were redeemed for cash.
(e) Preference shares
In November 2003, the Articles of the Company were amended and the
Company issued 790,000 Series 1 and 550,000 Series 2 preference shares
to replace certain preference shares of its wholly owned subsidiary,
TCML (formerly Cominco Ltd.). These shares entitle the holders to
receive dividends and redemptions based upon a rate of return index
governed by world prices for lead and silver. The rate of return index
had been insufficient to trigger any dividend or redemption; therefore
these shares expired in April 2006 without any payment.
(f) Share options
Under the Company's share option plan, 9 million Class B subordinate
voting shares have been set aside for grant of share options to
full-time employees and directors of the Company and its affiliates.
The exercise price for each option is the closing price for Class B
subordinate voting shares on the last trading day before the date of
grant. The Company issues new shares upon exercise of share options.
In the year ended December 31, 2006, the Company granted 355,450 Class
B subordinate voting share options at market price to employees. These
share options have an exercise price of $66.40, a vesting period of
three years and expire in 2014.
The weighted average fair value of Class B subordinate voting share
options granted in the year was estimated as $23 per share option
(2005-$18; 2004-$10) at the grant date based on the Black-Scholes
option-pricing model using the following assumptions:
======================================================================
2006 2005 2004
----------------------------------------------------------------------
Dividend yield 1.04% 0.88% 0.80%
Risk-free interest rate 4.11% 3.75% 3.50%
Expected life 5.0 years 4.7 years 4.5 years
Expected volatility 35% 36% 36%
TECK COMINCO LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2006, 2005 and 2004
===============================================================================
17. SHAREHOLDERS' EQUITY, continued
Outstanding share options
======================================================================
2006 2005
----------------------------------------------------------------------
Weighted Weighted
average average
Shares exercise Shares exercise
(in 000's) price (in 000's) price
----------------------------------------------------------------------
Outstanding at beginning
of year 2,691 $ 20.04 4,426 $ 15.09
Granted 355 66.40 367 45.28
Exercised (907) 17.45 (2,067) 13.77
Expired - - (14) 25.09
Forfeited (2) 61.73 (21) 31.39
----------------------------------------------------------------------
Outstanding at end of year 2,137 $ 28.79 2,691 $ 20.04
----------------------------------------------------------------------
Vested and exercisable
at end of year 1,278 $ 16.07 1,803 $ 13.51
----------------------------------------------------------------------
Information relating to share options outstanding at December 31, 2006
==========================================================================================================================
Weighted average Weighted average Weighted average
Outstanding Vested exercise exercise price remaining life
share share options price on on options on outstanding
options outstanding currently options
(in 000's) (in 000's) Price range options exercisable (months)
--------------------------------------------------------------------------------------------------------------------------
33 33 $ 6.39 - $ 9.59 $ 7.16 $ 7.16 28
912 912 $ 9.60 - $ 14.39 $ 11.80 $ 11.80 28
63 63 $ 14.40 - $ 21.60 $ 15.73 $ 15.73 4
447 182 $ 21.61 - $ 32.42 $ 25.09 $ 25.09 38
329 88 $ 32.43 - $ 48.65 $ 45.28 $ 45.28 50
353 - $ 48.66 - $ 66.40 $ 66.40 - 86
--------------------------------------------------------------------------------------------------------------------------
2,137 1,278 $ 6.39 - $ 66.40 $ 28.79 $ 16.07 42
==========================================================================================================================
The intrinsic value of a share option is the difference between the
current market price for the Company's Class B subordinate voting
share and the exercise price of the option. At December 31, 2006, the
aggregate intrinsic value, based on the December 31, 2006 closing
price of $87.90 for the Class B subordinate voting share, was $126
million for outstanding options and $92 million for vested options.
Further information about our share options
======================================================================
(Cdn$ in millions) 2006 2005 2004
----------------------------------------------------------------------
Total compensation cost recognized $ 7 $ 6 $ 4
Total fair value of shares vested 5 3 -
Total intrinsic value of share
options exercised 54 70 37
The unrecognized compensation costs for non-vested share options at
December 31, 2006 were $5 million. The weighted average period over
which it is expected to be recognized is 1.4 years.
(g) Deferred Share Units and Restricted Share Units
Under the Deferred Share Unit (DSU) or Restricted Share Unit (RSU)
plan, directors and employees may receive either DSUs or RSUs, each of
which entitle the holder to a cash payment equal to the market value
of a Class B subordinate voting share of the Company at the time they
are redeemed. In the case of directors, these units vest immediately.
The units granted to employees vest after three years. Upon normal
TECK COMINCO LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2006, 2005 and 2004
===============================================================================
17. SHAREHOLDERS' EQUITY, continued
retirementthe units vest immediately and when early retirement occurs,
units vest on a pro-rata basis. Should employees be terminated without
cause, units would vest on a pro-rata basis. Should employees be
terminated with cause, units would be forfeited. DSUs may only be
redeemed within twelve months from the date a holder ceases to be an
employee or director while RSUs must be redeemed at the end of a
three-year period measured from the end of the year immediately
preceding the grant. Additional units are issued to reflect dividends
paid on Class B subordinate voting shares and other adjustments to
Class B subordinate voting shares.
As at December 31, 2006, total outstanding DSUs and RSUs issued were
503,909.
Non-vested DSU and RSU activity for the year ended December 31, 2006
======================================================================
Deferred share
unit and Weighted
restricted average
share unit grant date
(in 000's) fair value
----------------------------------------------------------------------
Non-vested at beginning of year 215 $ 40.45
Granted 244 70.23
Expired - -
Forfeited (1) 58.01
Vested (99) 47.23
----------------------------------------------------------------------
Non-vested at end of year 359 $ 58.72
======================================================================
Further information about our DSUs and RSUs
==========================================================================================================================
(Cdn$ in dollars, except as weighted average) 2006 2005 2004
--------------------------------------------------------------------------------------------------------------------------
Weighted average grant date fair value of the units granted $71.25 $43.68 $20.15
Total fair value of units vested 8 2 2
Total compensation cost recognized 17 12 3
Tax benefits realized 2 - -
Cash used to settle DSUs and RSUs 6 - -
The unrecognized compensation cost for non-vested DSUs and RSUs at
December 31, 2006, was $18 million. The weighted average period over
which it is expected to be recognized is 1.8 years.
(h) Warrants
In May 2004, the Company received $90 million on the exercise of the
4,980,000 remaining warrants to purchase Class B subordinate voting
shares at a price of $18 per share. The warrants were issued in 1999.
(i) Contributed surplus
======================================================================
(Cdn$ in millions) 2006 2005 2004
----------------------------------------------------------------------
Beginning of year $ 61 $ 58 $ 57
Stock-based compensation expense (f) 7 6 4
Transfer to Class B subordinate
voting shares on exercise of
share options (4) (3) (2)
Redemption of convertible debt (d) - - (1)
----------------------------------------------------------------------
End of year $ 64 $ 61 $ 58
======================================================================
TECK COMINCO LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2006, 2005 and 2004
===============================================================================
17. SHAREHOLDERS' EQUITY, continued
(j) Cumulative translation adjustment
The cumulative translation adjustment represents the net unrealized
foreign exchange gains (losses) on translation of the accounts of
self-sustaining foreign subsidiaries, net of foreign exchange losses
on the portion of U.S. dollar denominated debt designated as hedges
against these investments.
======================================================================
(Cdn$ in millions) 2006 2005 2004
----------------------------------------------------------------------
Cumulative translation adjustment at
beginning of year $ (168) $ (117) $ (43)
Exchange differences on investments
in foreign subsidiaries 20 (53) (134)
Exchange differences on debt designated
as a hedge of self-sustaining
foreign subsidiaries 1 - 34
Exchange loss realized on reduction or
disposal of foreign investment 2 2 26
----------------------------------------------------------------------
Cumulative translation adjustment at
end of year $ (145) $ (168) $ (117)
======================================================================
(k) Earnings per share
The following table reconciles the Company's basic and diluted
earnings per share:
==========================================================================================================================
(Cdn$ in millions, except per share data) 2006 2005 2004
--------------------------------------------------------------------------------------------------------------------------
Basic earnings
Earnings from continuing operations $ 2,395 $ 1,345 $ 594
Less interest on exchangeable debentures, net of taxes (3) (4) (3)
--------------------------------------------------------------------------------------------------------------------------
Earnings from continuing operations, less interest on exchangeable
debentures, net of taxes 2,392 1,341 591
Earnings from discontinued operation 36 - 23
--------------------------------------------------------------------------------------------------------------------------
Net earnings available to common shareholders $ 2,428 $ 1,341 $ 614
==========================================================================================================================
Diluted earnings
Earnings from continuing operations $ 2,395 $ 1,345 $ 594
Earnings from discontinued operation 36 - 23
--------------------------------------------------------------------------------------------------------------------------
Net diluted earnings available to common shareholders $ 2,431 $ 1,345 $ 617
==========================================================================================================================
Weighted average shares outstanding (000's) 210,578 202,472 192,993
Effect of dilutive securities
Incremental shares from share options 1,659 2,121 1,830
Shares issuable on conversion of exchangeable debentures 4,787 11,489 11,489
--------------------------------------------------------------------------------------------------------------------------
Weighted average diluted shares outstanding 217,024 216,082 206,312
==========================================================================================================================
Basic earnings per share $ 11.53 $ 6.62 $ 3.18
Basic earnings per share from continuing operations $ 11.36 $ 6.62 $ 3.06
Diluted earnings per share $ 11.20 $ 6.22 $ 2.99
Diluted earnings per share from continuing operations $ 11.04 $ 6.22 $ 2.88
TECK COMINCO LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2006, 2005 and 2004
===============================================================================
17. SHAREHOLDERS' EQUITY, continued
(l) Dividends
Dividends declared in 2006, 2005 and 2004 totalled $2.00 per share,
$0.80 per share, and $0.30 per share respectively. Dividends paid on
or after January 1, 2006 are eligible for the enhanced federal and
provincial dividend tax credits.
18. OTHER INCOME (EXPENSE)
===========================================================================
(Cdn$ in millions) 2006 2005 2004
---------------------------------------------------------------------------
Interest income $ 186 $ 56 $ 10
Net gain on disposal of investment in Inco,
net of loss on exchangeable debentures
(Note 5) 120 - -
Gain on sale of investments and assets 81 58 37
Income from Fording 48 76 13
Non-hedge derivative losses - (29) (4)
Investment write-down - - (64)
Foreign exchange gains (losses) (7) 19 -
Minority interests (33) (15) (9)
Asset retirement expense for closed
properties (17) (14) (22)
Donations and sponsorships (40) - -
Miscellaneous (7) 4 (1)
---------------------------------------------------------------------------
$ 331 $ 155 $ (40)
===========================================================================
19. INCOME AND RESOURCE TAXES
(a) Income and resource tax expense from continuing operations
======================================================================
(Cdn$ in millions) 2006 2005 2004
----------------------------------------------------------------------
Current
Canadian income tax $ 485 $ 223 $ 21
Foreign income tax 499 85 5
Canadian resource tax 172 116 76
Canadian large corporation tax - - 4
----------------------------------------------------------------------
1,156 424 106
Future
Canadian income tax 34 103 157
Foreign income tax 19 7 35
Canadian resource tax 6 12 (6)
----------------------------------------------------------------------
59 122 186
----------------------------------------------------------------------
$ 1,215 $ 546 $ 292
======================================================================
TECK COMINCO LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2006, 2005 and 2004
===============================================================================
19. INCOME AND RESOURCE TAXES, continued
(b) Reconciliation of income and resource taxes calculated at the
statutory rates to the actual tax provision
======================================================================
(Cdn$ in millions) 2006 2005 2004
----------------------------------------------------------------------
Tax expense at the statutory income
tax rate of 34.6% (2005-34.4%;
2004-35.5%) $ 1,249 $ 651 $ 315
Tax effect of
Resource taxes, net of resource and
depletion allowances (10) 48 31
Non-taxable portion of income
including one-half of capital gains (41) (35) -
Benefit of current tax losses not
recognized (recognition of
previously unrecognized losses) 14 (45) (31)
Benefit of tax rate reduction (21) (21) -
Difference in tax rates in foreign
jurisdictions 32 (18) (23)
Other (8) (34) -
----------------------------------------------------------------------
$ 1,215 $ 546 $ 292
======================================================================
(c) Temporary differences giving rise to future income and resource tax
assets and liabilities
======================================================================
(Cdn$ in millions) 2006 2005
----------------------------------------------------------------------
Future income and resource tax assets
Net operating loss carry-forwards $ 98 $ 230
Property, plant and equipment (92) (124)
Alternative minimum and other tax credits 104 10
Asset retirement obligations 28 37
Other 31 12
Valuation allowance (56) (42)
----------------------------------------------------------------------
113 123
Less current portion (10) (8)
----------------------------------------------------------------------
$ 103 $ 115
======================================================================
Future income and resource tax liabilities
Property, plant and equipment $ 727 $ 721
Asset retirement obligations (118) (92)
Amounts relating to partnership year-ends 484 348
Other (52) 29
----------------------------------------------------------------------
1,041 1,006
Less current portion (161) (118)
----------------------------------------------------------------------
$ 880 $ 888
======================================================================
TECK COMINCO LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2006, 2005 and 2004
===============================================================================
19. INCOME AND RESOURCE TAXES, continued
(d) Earnings by jurisdiction
Earnings before income and resource taxes from continuing operations
are earned in the following tax jurisdictions:
======================================================================
(Cdn$ in millions) 2006 2005 2004
----------------------------------------------------------------------
Canada $ 1,419 $ 1,215 $ 534
Foreign 2,191 676 352
----------------------------------------------------------------------
$ 3,610 $ 1,891 $ 886
======================================================================
(e) The Company has non-resident subsidiaries that have undistributed
earnings. Provisions have not been recorded for taxes that may arise
on repatriation of these earnings as these undistributed earnings are
not expected to be repatriated in the foreseeable future. It is not
possible to determine the future taxes that may be payable upon the
repatriation of such earnings.
(f) Loss carry-forwards
(i) Canada and provincial tax jurisdictions
At December 31, 2006, the Company had no remaining Canadian and
provincial net operating loss carry-forwards (2005-nil).
(ii) United States federal and state tax jurisdictions
At December 31, 2006, the Company had United States federal and
state net operating loss carry-forwards of $98 million (2005-$477
million). These loss carry-forwards expire at various dates
between 2008 and 2024.
(g) Valuation allowance
The benefit of regular income loss carry-forwards, except for $56
million relating to jurisdictions that do not have established sources
of taxable income, has been fully recognized.
(h) Other disclosure
In the normal course of business, the Company is subject to audit by
taxation authorities. For major entities, audits by the Canadian
taxation authorities on years after 2000 are not yet completed. These
audits may alter the timing or amount of taxable income or deductions.
The amount ultimately reassessed upon resolution of issues raised may
differ from the amount accrued.
TECK COMINCO LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2006, 2005 and 2004
===============================================================================
20. PARTNERSHIPS AND JOINT VENTURES
The Company's principal operations that are accounted for using the
proportionate consolidation method are Elk Valley Coal, and the Antamina,
Pogo, Hemlo and Lennard Shelf mines. The Company's share of the assets and
liabilities, revenues and expenses and cash flows of these operations is as
follows:
===========================================================================
(Cdn$ in millions) 2006 2005 2004
---------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 88 $ 166 $ 143
Other current assets 347 320 204
Mineral properties, plant and equipment 1,252 1,258 1,128
---------------------------------------------------------------------------
$ 1,687 $ 1,744 $ 1,475
===========================================================================
Liabilities and equity
Current liabilities $ 274 $ 223 $ 150
Long-term liabilities 368 381 447
Equity 1,045 1,140 878
---------------------------------------------------------------------------
$ 1,687 $ 1,744 $ 1,475
===========================================================================
Earnings
Revenues $ 2,127 $ 1,847 $ 1,223
Operating and other expenses 1,077 934 858
Provision for income and resource taxes 222 99 62
---------------------------------------------------------------------------
Net earnings $ 828 $ 814 $ 303
===========================================================================
Cash flow
Operating activities $ 981 $ 843 $ 496
Financing activities (38) (83) (61)
Investing activities (76) (203) (144)
Distributions (945) (526) (203)
Effect of exchange rates on cash - (8) (6)
---------------------------------------------------------------------------
Increase (decrease) in cash $ (78) $ 23 $ 82
===========================================================================
Income and resource taxes are only provided for incorporated joint
ventures. The liability for income taxes for unincorporated joint ventures
rests at the parent entity level and is not included in this table.
TECK COMINCO LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2006, 2005 and 2004
===============================================================================
21. SUPPLEMENTARY CASH FLOW INFORMATION
===========================================================================
(Cdn$ in millions) 2006 2005 2004
---------------------------------------------------------------------------
(a) Cash and cash equivalents
Cash $ 156 $ 132 $ 115
Money market investments with
maturities from the date of
acquisition of 3 months or less 4,898 1,966 760
---------------------------------------------------------------------------
$ 5,054 $ 2,098 $ 875
===========================================================================
(b) Changes to non-cash working capital
items
Accounts and settlements receivable $ (192) $ (164) $ (58)
Inventories (118) (120) (24)
Accounts payable and accrued
liabilities 321 34 6
Current income and resource taxes
payable 288 229 49
---------------------------------------------------------------------------
$ 299 $ (21) $ (27)
===========================================================================
(c) Interest and taxes paid
Interest paid $ 111 $ 49 $ 50
Income and resource taxes paid $ 846 $ 177 $ 79
(d) Non-cash financing transaction Value
ascribed to shares issued on
conversion of debt (Note 17(c)(d)) $ 107 $ - $ 185
TECK COMINCO LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2006, 2005 and 2004
===============================================================================
22. COMMITMENTS AND CONTINGENCIES
(a) Derivatives and financial instruments
Derivative positions at December 31, 2006, are as follows:
==========================================================================================================================
Unrealized Carrying
2007 2008 2009 Total gain (loss) Value
--------------------------------------------------------------------------------------------------------------------------
(Cdn$ in millions)
Gold (thousands of ozs)
Fixed forward sales contracts 44 44 43 131
Average price (US$/oz) 350 350 350 350 $ (47) $ -
Fixed forward sales contracts 8 - - 8
Average price (Cdn$/oz) 520 - - 520 (2) -
U.S. dollars (millions) (i)
Fixed forward sales contracts 1,304 - - 1,304
Average exchange rate 1.14 - - 1.14 (24) (24)
Zinc (millions of lbs) (ii)
Fixed forward purchase commitments 12 - - 12
Average price (US(cent)/lb) 1.74 - - 1.74 2 2
------ -----
$ (71) $ (22)
==========================================================================================================================
Interest rate swap
Principal amount Rate swapped Rate obtained Maturity date Unrealized loss Carrying value
--------------------------------------------------------------------------------------------------------------------------
US$100 million 7.00% LIBOR plus 2.14% September 2012 $ (2) $ -
==========================================================================================================================
(i) From time to time, the Company purchases U.S. dollar short-term
money market investments. The Company purchases the U.S. dollars
and at the same time sells U.S. dollars forward to match the
maturity of the investment. The unrealized gain or loss on the
U.S. dollar investments is offset by the unrealized gain or loss
on the foreign exchange contracts. The Company does not apply
hedge accounting to these as the change in value of the contracts
substantially offsets the change in value of the U.S. dollar
investments. The change in market value of both of these items is
reported in the earnings for the period.
(ii) From time to time, certain customers purchase refined zinc at
fixed forward prices from the Company's smelting and refining
operations. Forward purchase commitments for zinc are matched to
these fixed price sales commitments to customers. As the fixed
price sales commitments to customers contain a fixed premium
component, the relationships are not considered to be
sufficiently effective under hedge accounting standards.
Accordingly, the Company is unable to apply hedge accounting to
zinc forward purchase commitments and has recognized
mark-to-market and realized gains on these forward purchase
commitments in other income (expense).
(b) Legal proceedings and contingencies
On November 11, 2004, the District Court for Eastern Washington State
denied a motion by TCML to dismiss, for want of jurisdiction, a
citizen's suit brought by two members of the Confederated Tribes of
the Colville Reservation (the "Tribes") supported by the State of
Washington. The citizen's suit was brought pursuant to Section
310(a)(i) of the Comprehensive Environmental Response, Compensation,
and Liability Act (CERCLA) to enforce a unilateral administrative
order issued by the U.S. Environmental Protection Agency (EPA) on
TECK COMINCO LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2006, 2005 and 2004
===============================================================================
22. COMMITMENTS AND CONTINGENCIES, continued
December 11, 2003 (the "UAO"), purporting to require TCML to conduct a
remedial investigation and feasibility study with respect to metal
contamination in the sediments of the Upper Columbia River and Lake
Roosevelt. On February 14, 2005, the Federal Court of Appeals for the
9th Circuit granted TCML's petition for permission to appeal that
decision and the District Court entered a stay of proceedings (the
"Stay") pending a final decision on the appeal. In September 2005, the
District Court lifted the Stay to allow the State of Washington and
the Tribes to add the Tribes as an additional plaintiff and to file
amended complaints adding the State's and the Tribes' claims for
natural resource damages and cost recovery under CERCLA. On September
29, 2005, the individual plaintiffs also served notice of their
intention to file suit under the U.S. Resource Conservation and
Recovery Act (RCRA) seeking injunctive relief and costs. As far as the
Company is aware, no suit has been filed under RCRA.
On July 3, 2006, the 9th Circuit affirmed the District Court's denial
of TCML's motion to dismiss the citizen's suit. On October 30, 2006,
the 9th Circuit denied TCML's petition for a rehearing and
subsequently granted a stay of mandate until March 6, 2007, pending
the filing of an application for further appeal to the U.S. Supreme
Court. The Company is preparing the application, which must be filed
before February 27, 2007.
On June 2, 2006, TCML and its U.S. affiliate, TCAI, entered into a
Settlement Agreement (the "Agreement") with the EPA and the United
States under which TCAI is paying for and conducting a remedial
investigation and feasibility study (the "Studies") that, while not
carried out under an administrative or judicial order, is consistent
with the U.S. National Contingency Plan. TCAI is paying EPA's
oversight costs and providing US$1.1 million in annual funding to the
EPA to facilitate the full participation of the Tribes, the State and
the U.S. Department of Interior, and TCML guaranteed TCAI's
performance of the Agreement. TCAI has placed US$20 million in escrow
as financial assurance of its obligations under the Agreement.
Contemporaneously with the execution of the Agreement, the EPA
withdrew the UAO. The recent decision of the 9th Circuit will not
affect the Agreement.
There can be no assurance that the agreement to conduct and fund the
Studies and the withdrawal of the UAO will be sufficient to resolve
the matter or that TCML or its affiliates will not be faced with
further liability in relation to this matter. Until the studies are
completed, it is not possible to estimate the extent and cost, if any,
of remediation that may be required.
The Company considers provisions for all our outstanding and pending
legal claims to be adequate. The final outcome with respect to actions
outstanding or pending as at December 31, 2006, or with respect to
future claims, cannot be predicted with certainty.
(c) Mining royalty in Peru
On June 25, 2004, legislation that established a mining royalty of up
to 3% of the value of sales of concentrate came into force. Management
and its legal advisors are of the opinion that, under current
legislation and as well as the mining stability agreement subscribed
with the Peruvian government, this royalty is not applicable to
Compania Minera Antamina S.A. (CMA) until the expiration of such
mining stability agreement on December 31, 2015. On June 28, 2006,
however, the Peruvian congress passed a law that requires all mining
companies in Peru to pay the mining royalty regardless of whether they
have been granted protection under a mining stability agreement; the
law was observed by the Peruvian president and returned to Congress to
be reviewed. The Company and its legal advisors are of the opinion
that any change to the law that unilaterally imposes a royalty payment
to a mining Company protected under a mining stability agreement is
illegal and unconstitutional. In addition, in December CMA entered
into an agreement with the government of Peru providing for voluntary
contributions to funds established for the benefit of communities
affected by mining operations. These contributions are to be suspended
in the event that CMA becomes subject to new royalties or mining
levies. As a consequence, no provision for the mining royalty has been
made in the financial statements.
TECK COMINCO LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2006, 2005 and 2004
===============================================================================
22. COMMITMENTS AND CONTINGENCIES, continued
(d) Commitments and guarantees
Red Dog commitments
Pursuant to a royalty agreement with NANA Regional Corporation Inc.
(NANA), TCAK pays NANA an annual advance royalty equal to the greater
of 4.5% of Red Dog mine's net smelter return or US$1 million. After
the Company recovers certain capital expenditures including an
interest factor, TCAK will pay to NANA 25% of net proceeds of
production from the Red Dog mine, increasing in 5% increments every
fifth year to a maximum of 50%. Advance royalties previously paid will
be recoverable against the 25% royalty on net proceeds of production.
As at December 31, 2006, expenditures including an interest factor
have been fully recovered. The unrecovered cumulative amount of
advance royalties paid was US$104 million (2005-US$114 million). Based
on the average realized zinc and lead prices in 2006, the Company
estimates that the payment of the 25% royalty to NANA will commence in
the fourth quarter of 2007 after the Company has recovered all advance
royalty payments.
TCAK leases road and port facilities from the Alaska Industrial
Development and Export Authority through which it ships all
concentrates produced at the Red Dog mine. The lease requires TCAK to
pay a minimum annual user fee of US$18 million but has no minimum
tonnage requirements. There are also fee escalation provisions based
on zinc price and annual tonnage.
TCAK has also entered into agreements for the transportation and
handling of concentrates from the millsite. These agreements have
varying terms expiring at various dates through 2010 and include
provisions for extensions. There are minimum tonnage requirements and
the minimum annual fees amount to approximately US$9 million, with
adjustment provisions based on variable cost factors.
Antamina royalty
On the acquisition of the Company's interest in the Antamina mine, the
vendor was granted a net profits royalty equivalent to 7.4% of the
Company's share of the project's free cash flow after recovery of
capital costs and an interest factor on approximately 60% of project
costs. The recovery of accumulated capital costs together with
interest was completed in 2006 and an expense of $33 million was
recorded in the year in respect of this royalty.
Fort Hills
Under the Fort Hills agreement, the Company has committed to
contribute 34% of the first $2.5 billion of partnership expenditures
on the Fort Hills project. In the event that the project is abandoned,
all limited partners are required to make additional contributions
such that the aggregate contributions of all partners equal $2.5
billion and any unexpended amount will be distributed to the partners
according to their partnership interest.
Elk Valley Coal Partnership guarantee
Elk Valley Coal has provided an unsecured guarantee, limited in
recourse against the Company to the assets of Elk Valley Coal and the
interest of the Company therein, with respect to up to $400 million of
borrowings by Fording incurred principally in connection with the
financing of the transaction pursuant to which the Company acquired
its interest in Elk Valley Coal. As at December 31, 2006, Fording had
$30 million outstanding under these borrowings of which the Company's
40% share was $12 million.
Operating leases
Amounts payable under operating leases are $102 million, with annual
payments of $19 million in 2007, $14 million in 2008, $11 million in
2009, $9 million in 2010, $7 million in 2011, and $42 million
thereafter. The leases are primarily for office premises, mobile
equipment and rail cars.
TECK COMINCO LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2006, 2005 and 2004
===============================================================================
22. COMMITMENTS AND CONTINGENCIES, continued
Forward purchase commitments
The Company has a number of forward purchase commitments for the
purchase of concentrates and power and for shipping and distribution
of its products which are incurred in the normal course of business.
The majority of these contracts are subject to force majeure
provisions.
Environmental protection
The Company's operations are affected by federal, provincial, state
and local laws and regulations concerning environmental protection.
Provisions for future reclamation and site restoration are based on
known requirements. It is not possible to estimate the impact on
operating results, if any, of future legislative or regulatory
developments.
23. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and temporary investments, cash held in trust,
accounts and settlements receivable, long-term receivables and deposits,
other investments, accounts payable, accrued liabilities and other
liabilities represent their fair value unless otherwise disclosed. The
carrying amounts and the quoted market values of the Company's investments
are disclosed in Note 8, and the debentures exchangeable for Inco common
shares are disclosed in Note 5. The carrying amounts and the market values
for derivative and financial instruments are disclosed in Note 22(a).
The estimated impact of recording some of these balances at fair value upon
adoption of the financial instrument standards is disclosed in Note 3(f).
The carrying amounts and estimated fair values of the Company's debt
instruments at December 31 are summarized as follows:
===========================================================================
(Cdn$ in millions) 2006 2005
---------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
amount fair value amount fair value
---------------------------------------------------------------------------
6.125% debentures due
October 2035 $ 806 $ 783 $ 806 $ 810
5.375% debentures due
October 2015 349 339 349 347
7.000% debentures due
September 2012 231 249 231 254
6.875% debentures due
February 2006 - - 175 175
Antamina senior debt - - 146 146
Antamina senior revolving
credit facility 108 108 - -
24. SEGMENTED INFORMATION
The Company has five reportable segments: smelting and refining, base
metals, gold, coal, and corporate and other. Revenue from refined zinc and
lead, electrical power, fertilizers and specialty metals operations are
included in smelting and refining revenue for segmented purposes. The
corporate segment includes administrative, investment, exploration and
business development activities. Concentrates sold from one segment to
another are valued at market prices. Information for zinc and copper mines
were combined into the base metal mines segment in 2006 on the basis that
this more appropriately reflects the strategic management of the Company's
operations. Prior year comparatives have been restated to conform with
current year presentation.
TECK COMINCO LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2006, 2005 and 2004
===============================================================================
24. SEGMENTED INFORMATION, continued
===============================================================================================================================
(Cdn$ in millions) 2006
-------------------------------------------------------------------------------------------------------------------------------
Smelting Base metal Gold Coal Corporate
and refining mines mines mines and other Total
-------------------------------------------------------------------------------------------------------------------------------
Segment revenues $ 1,802 $ 3,847 $ 143 $ 1,177 $ 38 $ 7,007
Less inter-segment revenues - (466) - - (2) (468)
Revenues 1,802 3,381 143 1,177 36 6,539
Operating profit 395 2,734 7 444 (19) 3,561
Interest expense - (11) - (2) (84) (97)
Other corporate expenses - (10) - - 156 146
-------------------------------------------------------------------------------------------------------------------------------
Earnings before taxes and 395 2,713 7 442 53 3,610
discontinued operation
Capital expenditures 76 159 44 18 21 318
Total assets 1,627 4,015 402 631 4,772 11,447
===============================================================================================================================
(Cdn$ in millions) 2005
-------------------------------------------------------------------------------------------------------------------------------
Smelting Base metal Gold Coal Corporate
and refining mines mines mines and other Total
-------------------------------------------------------------------------------------------------------------------------------
Segment revenues $ 937 $ 2,276 $ 127 $ 1,173 $ 65 $ 4,578
Less inter-segment revenues - (159) - (2) (2) (163)
-------------------------------------------------------------------------------------------------------------------------------
Revenues 937 2,117 127 1,171 63 4,415
Operating profit 134 1,295 9 512 12 1,962
Interest expense - (14) - - (55) (69)
Other corporate expenses - - - - (2) (2)
-------------------------------------------------------------------------------------------------------------------------------
Earnings before taxes and 134 1,281 9 512 (45) 1,891
discontinued operation
Capital expenditures 34 77 100 98 14 323
Total assets 1,370 2,881 358 656 3,544 8,809
===============================================================================================================================
(Cdn$ in millions) 2004
-------------------------------------------------------------------------------------------------------------------------------
Smelting Base metal Gold Coal Corporate
and refining mines mines mines and other Total
-------------------------------------------------------------------------------------------------------------------------------
Segment revenues $ 1,006 $ 1,709 $ 142 $ 645 $ 51 $3,553
Less inter-segment revenues - (123) - - (2) (125)
-------------------------------------------------------------------------------------------------------------------------------
Revenues 1,006 1,586 142 645 49 3,428
Operating profit 119 805 32 125 14 1,095
Interest expense - (15) - - (46) (61)
Other corporate expenses - - - - (148) (148)
-------------------------------------------------------------------------------------------------------------------------------
Earnings before taxes and 119 790 32 125 (180) 886
discontinued operation
Capital expenditures 24 54 82 53 3 216
Total assets 1,297 2,653 263 513 1,333 6,059
TECK COMINCO LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2006, 2005 and 2004
===============================================================================
24. SEGMENTED INFORMATION, continued
The geographic distribution of the Company's property, plant and equipment
and external sales revenue with revenue attributed to regions based on the
location of the customer is as follows:
===============================================================================================================================
Property, plant and equipment Revenues
-------------------------------------------------------------------------------------------------------------------------------
(Cdn$ in millions) 2006 2005 2006 2005 2004
-------------------------------------------------------------------------------------------------------------------------------
Canada $1,810 $1,740 $ 724 $ 578 $ 583
United States 1,308 1,256 1,487 842 680
Latin America 498 509 251 252 156
Asia - - 2,770 1,894 1,321
Europe - - 1,201 809 688
Australia 32 8 106 40 -
-------------------------------------------------------------------------------------------------------------------------------
$3,648 $3,513 $6,539 $4,415 $3,428
===============================================================================================================================
TECK COMINCO LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2006, 2005 and 2004
===============================================================================
25. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA AND THE UNITED STATES
The effect of the material measurement differences between generally
accepted accounting principles in Canada and the United States on the
Company's net earnings is summarized as follows:
===========================================================================
(Cdn$ in millions, except per share data) 2006 2005 2004
---------------------------------------------------------------------------
Net earnings under Canadian GAAP $ 2,431 $ 1,345 $ 617
Add (deduct)
Exchangeable debentures due 2024 (b) (4) (6) (6)
Unrealized holding gains (losses)
on investments (c) (14) 33 (51)
Deferred start-up costs (d) (11) 3 (4)
Exploration expenses (e) (21) - -
Derivative instruments (f)
Embedded derivatives 94 (25) 46
Non-hedge derivatives (53) (62) 31
Asset retirement obligations (g) (3) (3) (4)
Deferred stripping (h) (17) - -
Other (i) (2) 7 (1)
Tax effect of adjustments noted above 40 23 (16)
Tax benefit on redemption of
exchangeable debentures (b) 124 - -
---------------------------------------------------------------------------
Net earnings before changes in accounting
principles 2,564 1,315 612
Add (deduct)
Underground development amortization (j) - - (7)
Tax effect of adjustments - - 3
---------------------------------------------------------------------------
Net earnings under U.S. GAAP
before comprehensive income adjustments 2,564 1,315 608
Other comprehensive income (k)
Add (deduct)
Unrealized gains (losses) on
investments (c)
Arising during the period 104 102 12
Less: reclassification adjustments to
net income (78) (51) (16)
---------------------------------------------------------------------------
26 51 (4)
Losses on derivatives designated as cash
flow hedges (f)
Arising during the period - (4) (32)
Less: reclassification adjustments to
net income (13) (26) (1)
---------------------------------------------------------------------------
(13) (30) (33)
Cumulative translation adjustment (k) 21 (51) (79)
Additional pension liability (l) 8 (22) 52
Tax effect of adjustments (2) 11 (1)
---------------------------------------------------------------------------
Comprehensive income $ 2,604 $ 1,274 $ 543
===========================================================================
Earnings per share under U.S. GAAP before
comprehensive income adjustments
Basic $ 12.18 $ 6.49 $ 3.15
Diluted $ 11.83 $ 6.09 $ 2.95
Basic from continuing operations $ 11.63 $ 6.49 $ 3.15
Diluted from continuing operations $ 11.29 $ 6.09 $ 2.95
TECK COMINCO LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2006, 2005 and 2004
===============================================================================
25. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA AND THE UNITED STATES,
continued
Balance sheets under Canadian GAAP and U.S. GAAP
===========================================================================
(Cdn$ in millions) 2006 2005
---------------------------------------------------------------------------
Canadian U.S. Canadian U.S.
GAAP GAAP GAAP GAAP
---------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents $ 5,054 $ 5,054 $ 2,098 $ 2,098
Temporary investments 227 227 986 986
Cash held in trust 105 105 - -
Accounts and settlements
receivable 723 723 531 531
Inventories 786 786 668 668
Derivative instruments (f) - - - 45
---------------------------------------------------------------------------
6,895 6,895 4,283 4,328
Investments (c) 251 348 649 743
Property, plant and
equipment (d)(e)(g)(h)(i)(j) 3,648 3,483 3,513 3,450
Oil sands properties 190 190 20 20
Other assets (f)(l) 463 467 344 382
---------------------------------------------------------------------------
$11,447 $11,383 $ 8,809 $ 8,923
===========================================================================
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current liabilities
Dividends payable $ 216 $ 216 $ 81 $ 81
Exchangeable debentures 105 105 - -
Accounts payable and
accrued liabilities (f) 763 794 442 445
Current portion of
long-term debt - - 213 213
Current income and resource
taxes payable 443 443 261 261
Current portion of future
income and resource taxes 161 161 118 118
---------------------------------------------------------------------------
1,688 1,719 1,115 1,118
Long-term debt (b) 1,509 1,498 1,508 1,615
Other liabilities (f)(g)(l) 821 911 667 634
Future income and resource taxes 880 760 888 919
Exchangeable debentures - - 248 248
Shareholders' equity 6,549 6,495 4,383 4,389
---------------------------------------------------------------------------
$11,447 $11,383 $ 8,809 $ 8,923
===========================================================================
TECK COMINCO LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2006, 2005 and 2004
===============================================================================
25. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA AND THE UNITED STATES,
continued
Shareholders' equity under Canadian GAAP and U.S. GAAP
===========================================================================
(Cdn$ in millions) 2006 2005
---------------------------------------------------------------------------
Canadian U.S. Canadian U.S.
GAAP GAAP GAAP GAAP
---------------------------------------------------------------------------
Capital stock $ 2,405 $ 2,281 $ 2,155 $ 2,155
Retained earnings 4,225 4,431 2,228 2,330
Exchangeable debentures
due 2024 (b) - - 107 -
Contributed surplus 64 64 61 61
Cumulative translation
adjustment (k) (145) - (168) -
Accumulated other comprehensive
income (k) - (281) - (157)
---------------------------------------------------------------------------
$ 6,549 $ 6,495 $ 4,383 $ 4,389
===========================================================================
(a) Adoption of new accounting standards
(i) Accounting for defined benefit pension and other post-retirement
plans
During the year, the Company adopted FASB Statement No. 158,
"Employers' Accounting for Defined Benefit Pension and Other
Post-Retirement Plans - An Amendment of FASB Statements No. 87,
88, 106 and 132(R)". Under SFAS No. 158, employers must recognize
a net liability or asset to report the funded or underfunded
status of their defined benefit pension and other post-retirement
benefit plans on their balance sheets. Changes in the funded
status during the year will be recorded in other comprehensive
income. The standard does not change the calculation of periodic
pension expense under U.S. GAAP but will affect other
comprehensive income in future years. Before adoption of this
standard, the Company had an additional minimum pension liability
of $21 million. The adoption of this standard resulted in a $263
million charge, net of $99 million of taxes, directly to ending
accumulated other comprehensive income and had no impact on the
Company's net earnings or retained earnings.
(ii) Post-production stripping costs
Effective January 1, 2006, under U.S. GAAP, the Company adopted
EITF 04-6, "Accounting for Stripping Costs Incurred during
Production in the Mining Industry". It requires stripping costs
to be accounted for as a variable production cost to be included
in the costs of inventory produced during the production phase.
Under Canadian GAAP, the Company has elected to prospectively
adopt EIC-160, the related Canadian standard, and amortizes the
existing balance sheet amount relating to deferred stripping
costs over the reserves to which it relates. Under U.S. GAAP, the
Company has retroactively adopted EITF 04-06 and has elected to
recognize the cumulative effect of the adjustment in the opening
balance of retained earnings. This resulted in an initial U.S.
GAAP difference to decrease property, plant and equipment by $52
million, decrease future income tax liability by $23 million and
decrease retained earnings by $29 million.
Canadian GAAP permits capitalization of stripping activity which
represents a betterment of a mineral property. Betterment occurs
when the stripping activity increases future output of the mine
by providing access to additional sources of reserves.
Capitalized stripping costs are amortized on a unit of production
basis over the proven and probable reserves to which they relate.
Under U.S. GAAP, all stripping costs are treated as variable
production costs.
TECK COMINCO LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2006, 2005 and 2004
===============================================================================
25. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA AND THE UNITED STATES,
continued
(iii) Accounting changes and error corrections
On January 1, 2006, the Company adopted SFAS No. 154, "Accounting
for Changes and Error Corrections". The new standard requires
that entities that make a voluntary change in accounting
principle apply that change retroactively to prior period
financial statements, unless this would be impracticable. For
changes in methods of depreciation and amortization for
long-lived assets, the change must be accounted for
prospectively, as a change in estimate. The adoption of this
standard did not result in a material impact to the Company's
consolidated financial statements.
(iv) Quantifying misstatements in the financial statements
In 2006, the Company applied Staffing Accounting Bulletin No.
108, issued by the Securities and Exchange Commission. The
bulletin provides interpretive guidance on the consideration of
the effects of prior year misstatements in quantifying current
year misstatements for the purpose of materiality assessment. The
standard uses a dual approach that includes both an income
statement and balance sheet assessment of any misstatement. The
implementation of this guidance did not result in a material
impact to the Company's consolidated financial statements.
(b) Exchangeable debentures due 2024
The exchangeable debentures due 2024, redeemed in 2006, were
classified as equity with related interest being charged directly to
retained earnings. Under U.S. GAAP, these were classified as
liabilities and interest was charged against current period earnings.
The redemption of the debentures in 2006 (Note 17(c)) was treated as a
non-monetary transaction and the carrying value of the debentures was
transferred to share capital. Tax benefits arising on the settlement
of the debt instrument were recorded in earnings for U.S. GAAP
purposes.
(c) Unrealized holding gains (losses) on investments
For U.S. GAAP purposes, certain of the Company's marketable securities
are considered to be either available-for-sale securities or trading
securities. Available-for-sale securities are carried at market value
with unrealized gains or losses included in other comprehensive income
until realized or until an other-than-temporary decline occurs. The
Company's trading securities are carried at market value with
unrealized gains or losses included in net earnings.
(d) Deferred start-up costs
Under Canadian GAAP, mine start-up costs are deferred until the mine
reaches commercial levels of production and are amortized over the
life of the project. Under U.S. GAAP, these costs are expensed as
incurred.
(e) Exploration expense
Under Canadian GAAP, the Company capitalizes exploration expenditures
where resources as defined under National Instrument 43-101 exist and
it is expected that the expenditures can be recovered by future
exploitation or sale. For U.S. GAAP, exploration expenditures are
expensed unless proven and probable reserves have been established by
a feasibility study.
(f) Derivative instruments
Under Canadian GAAP, derivative instruments to which hedge accounting
is applied are held off-balance sheet with realized gains and losses
recorded in net earnings. Non-hedge derivative instruments are
recorded on the balance sheet at fair value with changes in fair value
recorded in other income (Note 22(a)).
TECK COMINCO LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2006, 2005 and 2004
===============================================================================
25. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA AND THE UNITED STATES,
continued
For U.S. GAAP purposes, all derivatives are recorded on the balance
sheet as either assets or liabilities at fair value. The accounting
for changes in the fair value of derivatives depends on whether the
derivative has been designated as a fair value or cash flow hedge and
whether it qualifies as part of a hedging relationship.
(i) For fair value hedges, the effective portion of the changes in
fair value of the derivatives is offset by changes in the fair
value of the hedged item in net earnings. For cash flow hedges,
the effective portion of the changes in fair value is accumulated
in other comprehensive income and released into net earnings when
the hedged item affects net earnings. For derivatives not
accounted for as part of a hedging relationship, changes in fair
value are included in net earnings.
(ii) The Company's Inco exchangeable debentures include an option to
settle the debt with Inco shares. Under U.S. GAAP, this option
constitutes an embedded derivative which is accounted for as a
separate derivative instrument and recorded on the balance sheet
at fair value with changes in fair value included in net
earnings.
(iii) TCAK's agreement with the Northwest Arctic Borough includes an
escalation clause based on zinc price. This constitutes an
embedded derivative under U.S. GAAP, and the derivative
instrument has been separately valued and recorded at fair value
on the balance sheet. Changes in fair value are included in net
earnings.
(iv) The Company's contingent consideration from the sale of
Cajamarquilla based on zinc prices (Note 4(a)) constitutes an
embedded derivative under U.S. GAAP, and the derivative
instrument has been separately valued and recorded at fair value
on the balance sheet. Changes in fair value are included in net
earnings.
In 2005 and 2004, certain instruments entered into by Elk Valley Coal
were designated as cash flow hedges. For U.S. GAAP purposes, the
Company did not designate any other derivatives as hedges under SFAS
133 in the periods presented.
(g) Asset retirement obligations
For U.S. GAAP purposes, the Company adopted FASB Statement No. 143,
"Accounting for Asset Retirement Obligations", effective January 1,
2003. The Company adopted the provisions of CICA 3110, "Asset
Retirement Obligations", for Canadian GAAP purposes effective January
1, 2004.
The Canadian and U.S. standards for asset retirement obligations are
substantially the same; however, due to the difference in adoption
dates, different discount rate assumptions were used in initial
liability recognition. This resulted in differences in the asset and
liability balances on adoption and will result in different
amortization and accretion charges over time.
(h) Deferred stripping
Canadian GAAP differs from U.S. GAAP in that it allows the
capitalization of deferred stripping costs when such costs are
considered a betterment of the asset.
(i) Other
Other adjustments include differences in respect of equity earnings,
long-term debt discounts, interest capitalization and other items.
TECK COMINCO LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2006, 2005 and 2004
===============================================================================
25. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA AND THE UNITED STATES,
continued
(j) Underground development amortization
Under Canadian GAAP, the Company retroactively adopted the block
method of underground amortization, effective January 1, 2004, which
resulted in a $4 million charge to opening retained earnings. U.S.
GAAP requires that such a change be accounted for as a cumulative
adjustment through the current period income statement. Net earnings
under U.S. GAAP were reduced by $4 million after-tax during 2004.
(k) Comprehensive income
Under U.S. GAAP, comprehensive income is recognized and measured in
accordance with FASB Statement No. 130, "Reporting Comprehensive
Income". Comprehensive income includes all changes in equity other
than those resulting from investments by owners and distributions to
owners. Comprehensive income includes two components, net income and
other comprehensive income. Other comprehensive income includes
amounts that are recorded as an element of shareholders' equity but
are excluded from net income as these transactions or events were
attributable to changes from non-owner sources. These items include
pension liability adjustments, holding gains and losses on certain
investments, gains and losses on certain derivative instruments and
foreign currency gains and losses related to self-sustaining foreign
operations (cumulative translation adjustment). A standard for
comprehensive income and other comprehensive income becomes effective
under Canadian GAAP on January 1, 2007.
(l) Pension liability
For U.S. GAAP purposes, the Company is required to report the
overfunded asset or underfunded liability of the Company's defined
benefit pension and other post-retirement plans on the balance sheet.
Changes in the funded status are recorded through other comprehensive
income. The information set out below should be read in conjunction
with the information disclosed under Canadian GAAP requirements for
pension and other employee future benefits provided in Note 16.
TECK COMINCO LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2006, 2005 and 2004
===============================================================================
25. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA AND THE UNITED STATES,
continued
The funded status at the end of the year and the related amounts
recognized on the statement of financial position for U.S. GAAP
purposes are as follows:
===========================================================================
(Cdn$ in millions) 2006 2005
---------------------------------------------------------------------------
Other post- Other post-
Pension retirement Pension retirement
benefits benefits benefits benefits
---------------------------------------------------------------------------
Funded status at end of year
Fair value of plan assets $ 1,275 $ - $ 1,126 $ -
Benefit obligations 1,270 316 1,198 273
---------------------------------------------------------------------------
Funded status 5 (316) (72) (273)
Unrecognized net actuarial
gain (loss) - - 187 103
Unrecognized prior service
credit (cost) - - 43 (1)
---------------------------------------------------------------------------
Amount recognized at end of year $ 5 $ (316) $ 158 $ (171)
===========================================================================
Amounts recognized in the
balance sheet
Non-current asset $ 95 $ - $ - $ -
Current liability (3) (10) - -
Non-current liability (87) (306) - -
Prepaid benefit cost - - 174 -
Accrued benefit cost - - (16) -
Additional minimum
liability - - (70) (171)
Intangible asset - - 11 -
Accumulated other
comprehensive income - - 59 -
---------------------------------------------------------------------------
$ 5 $ (316) $ 158 $ (171)
===========================================================================
Amounts recognized in accumulated
other comprehensive income
Net actuarial loss (gain) $ 75 $112 $ - $ -
Prior service cost (credit) 75 22 - -
---------------------------------------------------------------------------
$150 $134 $ - $ -
===========================================================================
The projected benefit obligation, accumulated benefit obligation and fair
value of plan assets for pension plans with an accumulated benefit
obligation in excess of plan assets at December 31, 2006 and 2005, were as
follows:
===========================================================================
(Cdn$ in millions) 2006 2005
---------------------------------------------------------------------------
Accumulated benefit obligation in excess of plan assets
Projected benefit obligation at end of year $ 239 $ 362
Accumulated benefit obligation at end of year 218 340
Fair value of plan assets at end of year 160 285
---------------------------------------------------------------------------
===========================================================================
TECK COMINCO LIMITED
Notes to Consolidated Financial Statements
Years ended December 31, 2006, 2005 and 2004
===============================================================================
25. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA AND THE UNITED STATES,
continued
The estimated amounts that will be amortized from accumulated other
comprehensive income into net periodic benefit cost in 2007 are as
follows:
======================================================================
Other post-
Pension retirement
(Cdn$ in millions) benefits benefits
----------------------------------------------------------------------
Actuarial loss $ 4 $ 6
Prior service cost 10 6
----------------------------------------------------------------------
Total $ 14 $ 12
======================================================================
(m) Cash flow from operating activities
Under U.S. GAAP, cash flow from operating activities must be presented
as the amount calculated after taking into effect the changes in
non-cash working capital items. The disclosure of a subtotal referring
to the amount of cash flow from operating activities before changes to
working capital items is not permitted.
(n) Proportionate consolidation
U.S. GAAP requires investments in joint ventures to be accounted for
under the equity method, while under Canadian GAAP the accounts of
joint ventures are proportionately consolidated. All of the Company's
joint ventures qualify for the Securities and Exchange Commission's
accommodation which allows the Company to continue to follow
proportionate consolidation. Additional information concerning the
Company's interests in joint ventures is presented in Note 20.
(o) Recent U.S. accounting pronouncements
(i) Accounting for uncertainty in income taxes
In June 2006, FASB issued an interpretation under FIN No. 48
which prescribes a recognition and measurement model for
uncertain tax positions taken or expected to be taken in the
Company's tax returns. In addition, FIN No. 48 also provides
guidance on derecognition, classification, presentation and
disclosure of unrecognized tax benefits. FIN No. 48 is applicable
for fiscal years beginning on or after December 15, 2006. The
Company estimates the impact of adopting FIN No. 48 will result
in an increase to opening retained earnings of approximately $85
million, and a corresponding reduction in tax liabilities. This
will have no impact on the Company's results or cash flows.
(ii) Fair value measurements
In September 2006, FASB issued SFAS No. 157 which defines fair
value, establishes a framework for measuring fair value under
U.S. GAAP and expands disclosures about fair values. This
standard does not require any new fair value measurements. The
standard is applicable for fiscal years beginning after November
15, 2007. The Company is currently considering the impact of the
adoption of this interpretation.
26. SUBSEQUENT EVENT
On February 12, 2007, the Company announced its intention, subject to
regulatory approval, to purchase up to 20 million of its outstanding Class
B subordinate voting shares by way of a normal course issuer bid and to
implement a two for one subdivision or share split of its Class A common
shares and Class B subordinate voting shares. Regulatory approval for the
normal course issue bid was received effective February 22, 2007. The share
split must be approved by shareholders at the Annual General meeting
scheduled for April 25, 2007.