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Teck Resources Limited
Notes to Condensed Interim Consolidated Financial Statements
(Unaudited)
1. BASIS OF PREPARATION
We prepare our annual consolidated financial statements in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). These condensed interim consolidated financial statements have been prepared in accordance with IAS 34, Interim Financial Reporting (IAS 34).
These condensed interim consolidated financial statements follow the same accounting policies and methods of application as our most recent annual financial statements. Accordingly, they should be read in conjunction with our most recent annual financial statements. On April 24, 2017, the Audit Committee of the Board of Directors authorized these financial statements for issuance.
2. OTHER OPERATING INCOME (EXPENSE)
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Three months ended March 31, (CAD$ in millions) 2017 2016----------------------------------------------------------------------------
Settlement pricing adjustments $ 38 $ 27 Share-based compensation (Note 6(a)) (24) (27) Environmental and care and maintenance costs (19) (17) Social responsibility and donations (1) (16) Gain on sale of assets 11 14 Commodity derivatives 46 35 Take or pay contract costs (21) (4) Other (18) (2) ----------------------------------------------------------------------------$ 12 $ 10 ----------------------------------------------------------------------------
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3. FINANCE EXPENSE
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Three months ended March 31, (CAD$ in millions) 2017 2016----------------------------------------------------------------------------
Debt interest $ 112 $ 115 Letters of credit and standby fees 17 14 Net interest expense on retirement benefit plans 3 3 Accretion on decommissioning and restoration provisions 19 12 Other 2 5 ----------------------------------------------------------------------------153 149 Less capitalized borrowing costs (74) (53) ----------------------------------------------------------------------------
$ 79 $ 96 ----------------------------------------------------------------------------
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4. NON-OPERATING INCOME (EXPENSE)
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Three months ended March 31, (CAD$ in millions) 2017 2016----------------------------------------------------------------------------
Foreign exchange gains $ 12 $ 88 Gain on debt prepayment options 21 - Gain on sale of investments - 2 Loss on debt repurchases (Note 5(a)) (178) - ----------------------------------------------------------------------------$ (145) $ 90 ----------------------------------------------------------------------------
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5. DEBT
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(CAD$ in millions) March 31, 2017 December 31, 2016----------------------------------------------------------------------------
Carrying Fair Carrying Fair Value Value Value Value----------------------------------------------------------------------------
3.15% notes due January 2017 (US$34 million) $ - $ - $ 45 $ 45 3.85% notes due August 2017 (US$16 million) 21 21 21 21 2.5% notes due February 2018 (US$22 million) 30 30 30 30 3.0% notes due March 2019 (US$84 million) (a) 111 114 372 375 4.5% notes due January 2021 (US$225 million) (a) 297 311 668 685 8.0% notes due June 2021 (US$130 million) (a) 172 189 866 963 4.75% notes due January 2022 (US$689 million) (a) 913 951 936 951 3.75% notes due February 2023 (US$670 million) 883 869 891 858 8.5% notes due June 2024 (US$600 million) 798 924 806 935 6.125% notes due October 2035 (US$609 million) 797 848 804 801 6.0% notes due August 2040 (US$491 million) 650 657 658 623 6.25% notes due July 2041 (US$795 million) 1,045 1,103 1,055 1,043 5.2% notes due March 2042 (US$399 million) 523 502 528 477 5.4% notes due February 2043 (US$377 million) 496 479 500 450 Antamina term loan due April 2020 30 30 30 30 Other 118 118 133 133 ----------------------------------------------------------------------------6,884 7,146 8,343 8,420
Less current portion of long-term debt (83) (83) (99) (99) ----------------------------------------------------------------------------
$ 6,801 $ 7,063 $ 8,244 $ 8,321 ----------------------------------------------------------------------------
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The fair values of debt are determined using market values, if available, and discounted cash flows based on our cost of borrowing where market values are not available. The latter are considered Level 2 fair value measurements with significant other observable inputs on the fair value hierarchy (Note 10).
a) Note Purchases
On March 8, 2017, we purchased US$1.0 billion aggregate principal amount of our outstanding notes pursuant to cash tender offers. The principal amount of notes purchased was US$194 million of 3.00% notes due 2019, US$275 million of 4.50% notes due January 2021, US$520 million of 8.00% notes due June 2021 (June 2021 notes) and US$11 million of 4.75% notes due 2022. The total cost of the purchases, which was funded from cash on hand, including the premiums, was US$1.08 billion. We recorded a pre-tax accounting charge of $178 million ($132 million after-tax) in non-operating income (expense) (Note 4) in connection with these purchases. The accounting charge of $178 million included $61 million relating to the write-off of a portion of the prepayment option recorded in other assets for the June 2021 notes (Note 5(b)).
b) Embedded Prepayment Options
The June 2021 notes and 2024 notes include prepayment options that are considered to be embedded derivatives. At March 31, 2017, these prepayment options are recorded as other assets on the balance sheet at fair values of $10 million and $88 million for the June 2021 notes and 2024 notes, respectively, based on current market interest rates for similar instruments and our credit spread. The value of the prepayment option relating to the June 2021 notes was reduced by $61 million as a result of the repurchase of a portion of these notes in the first quarter (Note 5(a)). For the three months ended March 31, 2017, the value of the prepayment options increased by $21 million, which has been recorded as a gain in non-operating income (expense) (Note 4).
c) Revolving Facilities
At March 31, 2017, we had two committed revolving credit facilities in the amounts of US$3.0 billion and US$1.2 billion, respectively. The US$3.0 billion facility is available until July 2020 and is undrawn at March 31, 2017. The US$1.2 billion facility is available until June 2019 and has an aggregate of US$910 million in outstanding letters of credit drawn against it at March 31, 2017.
Under our US$3.0 billion and US$1.2 billion facilities, our uncommitted credit facilities and certain hedging lines, we have provided subsidiary guarantees for the benefit of the credit facilities. As a result our obligations under these agreements are guaranteed on a senior unsecured basis by Teck Metals Ltd, (TML), Teck Coal Partnership, Teck South American Holdings Ltd., TCL U.S. Holdings Ltd., Teck Alaska Incorporated and Teck Highland Valley Copper Partnership, each a wholly owned subsidiary of Teck.
Any amounts drawn under the committed revolving credit facilities can be repaid at any time and are due in full at maturity. Amounts outstanding under the US$3.0 billion facility bear interest at LIBOR plus an applicable margin based on our credit ratings, which is 225 basis points when our credit ratings are below investment grade. Amounts outstanding under the US$1.2 billion facility bear interest at LIBOR plus an applicable margin based on our leverage ratio. Based on our March 31, 2017 leverage ratio, the applicable margin is 275 basis points. Both facilities require that our total debt-to-capitalization ratio, which was 0.28 to 1.0 at March 31, 2017, not exceed 0.5 to 1.0.
When our credit ratings are below investment grade, we are required to deliver letters of credit to satisfy financial security requirements under power purchase agreements at Quebrada Blanca and transportation, tank storage and pipeline capacity agreements for our interest in Fort Hills. At March 31, 2017, we had an aggregate of US$798 million in letters of credit outstanding for these security requirements. These letters of credit will be terminated if and when we regain investment grade ratings or reduced if and when certain project milestones are reached.
We maintain uncommitted bilateral credit facilities primarily for the issuance of letters of credit to support our future reclamation obligations. As at March 31, 2017, we were party to various uncommitted credit facilities providing for a total of $1.35 billion of capacity and the aggregate outstanding letters of credit issued thereunder were $1.20 billion. In addition to the letters of credit outstanding under these uncommitted credit facilities, we also had stand-alone letters of credit of $337 million outstanding at March 31, 2017, which were not issued under a credit facility. These uncommitted credit facilities and stand-alone letters of credit are typically renewed on an annual basis.
We also have $234 million in surety bonds outstanding at March 31, 2017 to support current and future reclamation obligations.
6. EQUITY
a) Share-Based Compensation
During the first quarter of 2017, we granted 1,967,045 Class B subordinate voting share options to employees. These options have a weighted average exercise price of $27.78, a term of 10 years and vest in equal amounts over three years. The weighted average fair value of Class B subordinate voting share options issued was estimated at $8.32 per share option at the grant date using the Black-Scholes option-pricing model. The option valuations were based on an average expected option life of 4 years, a risk-free interest rate of 1.06%, a dividend yield of 2.20% and an expected volatility of 42%.
We have issued and outstanding deferred share units, restricted share units, performance and performance deferred share units (collectively referred to as units). Deferred and restricted share units are granted to both employees and directors. Performance and performance deferred share units are granted to employees only. During the first quarter of 2017, we issued 828,738 units to employees and directors. Deferred and restricted share units issued vest immediately for directors and vest in three years for employees. Performance and performance deferred share units vest in three years. Furthermore, the performance and performance deferred share units have performance vesting criteria that may result in 0% to 200% of units ultimately vesting. The total number of units outstanding at March 31, 2017 was 8,204,717.
Share-based compensation expense of $24 million (2016 - $27 million) was recorded for the three months ended March 31, 2017 in respect of all outstanding share options and units.
b) Accumulated Other Comprehensive Income (Loss)
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March 31, March 31, (CAD$ in millions) 2017 2016----------------------------------------------------------------------------
Currency translation differences $ 377 $ 354 Unrealized gain on available-for-sale financial assets (net of tax of $(4) and $(4)) 33 25 Share of other comprehensive income of associates and joint ventures - 3 ----------------------------------------------------------------------------$ 410 $ 382 ----------------------------------------------------------------------------
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c) Class A Share Conversion
Subsequent to March 31, 2017, 1,576,166 Class A common shares were converted into the same number of Class B subordinate voting shares. Class A common shares carry the right to 100 votes per share and Class B subordinate voting shares carry the right to one vote per share. As a result of this conversion, the percentage of total votes attached to outstanding Class A common shares has been reduced from 62.2% to 57.7%. Upon completion of this transaction, there were 7,777,304 Class A common shares and 569,873,311 Class B subordinate voting shares outstanding (representing 42.3% of total votes attached to all outstanding Teck shares).
7. SEGMENTED INFORMATION
Based on the primary products we produce and our development projects, we have five reportable segments - steelmaking coal, copper, zinc, energy and corporate - which is the way we report information to our Chief Executive Officer. The corporate segment includes all of our initiatives in other commodities, our corporate growth activities and groups that provide administrative, technical, financial and other support to all of our business units. Other operating expenses include general and administration costs, exploration, research and development, and other operating income (expense). Sales between segments are carried out on terms that arm's-length parties would use. Total assets does not include intra-group receivables between segments. Deferred tax assets and liabilities have been allocated amongst segments.
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