Amendments made to the Bruce Power Agreement in July are
detailed in recent financial reports of Cameco and TransCanada Corp, making changes
to terms and conditions of commercial agreements in place between Bruce Power
and the Ontario Power Authority (OPA) included in the Bruce Power Refurbishment
Implementation Agreement, originally signed in 2005.
Cameco’s results, issued on August 12, 2009, were
only affected by amendments related to Bruce B. Cameco’s Q2 report and the
associated press release provide details on these amendments:
“Under the
terms of the agreement, all output from the B reactors is supported by a floor
price. The floor price is adjusted annually for inflation and is currently
$48.76/MWh. Payments under the agreement are received monthly, based on the
positive difference between the floor price and the spot price and are not
subject to repayment to the extent that the floor price exceeds the average
spot price for the year. A recent amendment to the agreement limits to the
current year (versus over the contract life) the period over which repayment is
calculated.”
The day following the release of its Q2 report, Cameco’s
stock experienced its largest one day increase year-to-date.
TransCanada Corporation’s second quarter financial report,
issued on July 30, 2009, describes the amendments as “consistent with the
original intent of the contract and … [to] recognize the significant changes in
Ontario’s electricity market”:[2]
“Other
changes to the contract with the OPA include the removal of a support payment
cap for Bruce A. The cumulative support payments received by Bruce A, which are
equal to the difference between the fixed prices under the OPA contract and
spot market prices, were originally capped at $575 million until both Units 1
and 2 were restarted. Under the amendment, should either of the restarted Units
1 and 2 not be placed into commercial service by December 31, 2011, Bruce A
will receive spot prices on all of its output until the restart of both units
is complete, after which Bruce A prices will return to the then prevailing
contract levels.
The OPA
contract was also amended, commencing July 6, 2009, to provide for deemed
generation payments to Bruce Power at contract prices under circumstances when
Bruce Power generation is reduced due to system curtailments on the Independent
Electricity System Operator controlled grid in Ontario.
Additionally,
the capital cost sharing mechanism for the restart and refurbishment of Bruce A
Units 1 and 2 was amended such that the OPA will not share in any cost overruns
over $3.4 billion. Previously the OPA was responsible for 25 per cent of cost
overruns above $3.4 billion through a future adjustment to the fixed price paid
to Bruce Power for power generated by the Bruce A units. Although Bruce Power
estimates the total capital costs to be $3.4 billion, the Company’s current
view is that costs may exceed that amount by up to ten per cent. Units 1 and 2
are expected to return to service by the end of 2010.”
The scope of the refurbishment of the Bruce 1 and 2 units includes
the replacement of all the pressure tubes, calandria tubes and boilers. The
original 2005 refurbishment agreement anticipated a return to service starting
in 2009. The Bruce A refurbishment project is now substantially behind
schedule, with the last calandria tube from Bruce 1 finally removed only in
March of this year.
The original deal entitled the OPA to recover liquidated
damages from Bruce Power in the event that the in-service date slipped by 3
months, an outcome that now appears certain. The limit for liquidated damages
for each of units 1 and 2 is $125 million each. In correspondence with the OPA,
the OPA notes that there was “no
change to the liquidated damages provisions in the amendment.”
Also, according to the original deal, the OPA was entitled
to claw back a portion of the contingent support payments if units 1 and 2 were
not in-service by a specified date. If the in-service date of units 1 and 2 was
delayed by 33 months, the OPA had the right to call off the whole deal.
The Bruce 1 and 2 refurbishment
project's original budget was pegged at $2.75 billion with customers on the hook for 50% of the first 11% over the
original "base case" and 25% thereafter. In April 2008, Bruce Power reported that the restart was
$300 million over budget and could run up to $650 million over budget, bringing
project costs to $3.4 billion. The amendment appears to follow the original
structure but introduces a payment limit of about $238 million. The additional payments are administered through
adjustments to the price paid for power over time.
Cameco
and TCPL both report an average realized electricity price for Bruce for the
first two quarters of 2009 at $63/MWh. The average Ontario market price for the
period was $33/MWh.
The Bruce refurbishment agreement is similar to the OPA’s
new feed-in tariff (FIT) rates in that it was designed to produce a target ROE,
was not competitively procured, indemnified the producer for transmission
congestion, and contains significant escalators (much more rapid escalation than
the new green power FIT). The ROE was calculated by CIBC World Markets to be in
the range of 13.8% to 18%. One major difference between the FIT program and the
Bruce refurbishment agreement is that the FIT program makes no adjustments to
the ultimate price paid in the event of cost-overruns.
