Keeping a nice clean balance sheet

Ontario Power Generation (OPG) produced 88% of the province’s electricity in 1999, but in the next ten years the company will have to ‘transfer control’ of 65% of its capacity as part of an attempt to open up the Ontario electricity market to competition. The first transfer was announced on 11 July: the eight-unit Bruce Candu station near the Great Lakes is to be leased by a Canada-based subsidiary of British Energy.

A deal on Bruce had been on the cards for some time: British Energy and its partner PEco energy have been acquisitive in the USA through their joint venture Amergen, and British Energy has been pursuing opportunities in Canada for the better part of three years.

Under the Bruce agreement British Energy will lease the station – four units currently operating and four in long term layup – until 2018, with provision to extend the lease for a further 25 years. In return, British Energy will make an upfront investment of £279 million, which will comprise a payment of £179 million at financial close and two further payments of £50 million. The company expects to finance these through its UK cash flows and bank facilities. In addition it will pay an annual rent comprising a fixed element and a variable element which will depend on sales revenue. Ontario Power Generation has assessed the payment over the duration of the lease as C$3.1 billion, or C$1.8 billion net present value.

What is the attraction of the lease agreement to the vendor? “In the leasehold agreement the companies share the upside and the downside,” according to Bruce Power chairman and CEO Robin Jeffrey. “The company taking out the lease can put on the table a share of the upside. The value to the current owner will be increased if we are successful in running the plant. If it is not so successful we don’t pay so much. It is a balance of risk and reward.”

Jeffrey explained that it would take at least a year for Bruce Power to take over as licensee: “We submitted our application to the safety commission on 1 August and they are currently assessing it. They have a process in which a public hearing is followed by a period of time for evaluation, in which intervenors can lodge comments. There is then a second hearing. We are currently early on in that process.

“We are targetting for transaction completion in the summer of 2001. In the first financial year we expect to approximately break even. In the second year the project will be earnings accretive.”

How would a visitor in 2003/4 see that the plants were different? “They would be much better managed: that is the key,” says Jeffrey. “We are applying the BE-Amergen formula. First, we aim to improve safety performance. The second target is to reduce the planned outage period through better work management and reduce the number of unplanned outages. Now [the units] are all downrated: through engineering, safety studies and investment we will bring the safety and performance closer to what should be achievable.”

Bruce Power certainly hopes to restart two of the four reactors currently in long term layup. “We have begun a restart inspection,” Jeffrey said. “If it confirms our findings from due diligence it should be possible to restart units 3 and 4.“

“The restart inspection will find out the condition of the steam generators and pressure tubes. We don’t think the unit will need to be retubed. There may be some work on the steam generators and we are spending $25 million taking the covers off and going in to carry out non-destructive testing. We wouldn’t be spending that $25 million if there was no chance of those units operating.” The steam generators at these plants have certainly been a cause for concern and their condition was thought to be a large contributor to the original decision to lay up the the units. Replacing the steam generators - now a routine operation in light water reactors where the steam generators are discrete, if not always compact - would be problematic at Bruce. There each plant pair shares four large steam generators connected by a single header. It is likely that the entire assembly would need to be replaced, certainly at Bruce 1 and 2 where a lead blanket inadvertently left inside the steam generator assembly after maintenance work caused widespread corrosion. At Bruce 3 and 4 the corrosion is considered to be far less damaging, although not inconsiderable, and replacement may be avoidable.

If, as Bruce Power believes, large scale replacement of pressure tubes is not required, the need for single channel replacement remains. But this is part of the regular maintenance programme and Jeffrey anticipates carrying out “Single tube replacement as and when necessary as the plants age.” This will be part of an investment programme, Jeffrey says, and he anticipates some C$30 million in capital expenditure on Bruce A. Work will start with projects begun as part of the integrated improvement

programme (IIP) studies from 1996.

STAFFING

British Energy has sometimes had a hard time dealing with staffing levels at its UK plants. Since privatisation it has reduced staff from 8000 to 5000, and along with rising output that means productivity per employee has risen from 2.5GWh to 13GWh. But the company had to swallow some harsh words from the regulator, the Nuclear Installations Inspectorate, about areas where it had reduced safety functions. It has also learned some lessons from taking over staff in the UK who had effectively had to change companies three or four times as the UK’s nuclear stations moved through a bumpy ride to privatisation.

Bruce Power has made significant efforts to win over staff as it starts its association with the Canadian plant. Some 5% of equity in Bruce Power is available to the major unions on the site, the Power Workers Union and the Society of Energy Professionals, and the company is working hard to convince staff that their jobs are safe. “The average age at Bruce is 48,” notes Jeffrey. “We have signed an agreement which says that everyone currently employed, other than those with OPGI, will be retained. Everyone who transfers will be taken onto the payroll of Bruce Power. We have guaranteed a collective agreement on salaries, and entitlements regarding healthcare, pension and so on. We have also agreed a new Memorandum of Understanding which introduces new working arrangements with greater flexibility – in fact the largest union, the Public Workers Union – voted by 93% to endorse [the MoU].

“We have committed that there will be no forced layoffs. As we move forward, if there is a need to improve commercial performance we would use selective voluntary severance. The company would decide who can go and who is essential. Of course if Bruce A comes back on line there will be further jobs assigned to that plant.”

In the end, how are staff numbers likely to compare to those at other plants? They are not comparable, Jeffrey says: “In the USA, for example, lots of the engineering support is done by the plant vendors, whereas in the UK the great majority is done by British Energy staff. In US plants there are lots of contractors employed at the plant, whereas at Bruce there are almost no contractors involved in regular operation.”

The company is committing not just to the Bruce plant but to the area: “By the end of September we will have closed our Toronto office and all senior management will be at Bruce, and so will the marketing, finance and PR operations. The corporate office has about 30 people and we are in the process of preparing space for them in a existing building.”

WASTE MANAGEMENT

The attractions of a lease arrangement for Bruce are very clear when it comes to dealing with spent fuel and waste produced by the reactors. For Bruce Power, out of sight really is out of mind:

Jeffrey explains: “OPG has a low level waste management facility on the Bruce site for all the Ontario reactors. It is a well engineered and managed facility. They have a contract with Bruce where they take the plant’s low level waste.”

Jeffrey notes, however, that convenience does not mean complacence: “We do have an incentive to reduce the amount of low level waste generated because we are paying by volume. But of course lots of low level waste reduction is simply common sense and we have improved on this in the UK.”

Spent fuel management is difficult for most reactor operators: in the UK the generators are embroiled in discussions over whether or not to reprocess, and in the USA a dispute over exactly when the US Government will keep its promise to take title to the fuel has been rumbling on for years. But at Bruce, the lease arrangement means that long term management and disposal is just not Bruce Power’s concern, as Jeffrey explains: “For spent fuel we have a contract with OPGI, similar to contracts the US utilities have with the US Department of Energy. It is basically ‘pay as you go’. For each MWh generated a sum is paid to OPGI. When the fuel is discharged to the [spent fuel] pool OPGI takes title to it.

“That is the attraction of this arrangement. The principle is established that OPGI takes title, so in terms of the balance sheet it is just a steady stream of payments. That deals with the issue.”

The responsibility for decommissioning will also revert to OPG.

“[As the licensee] we will have responsibility that decommissioning arrangements, including funding, are in place, “ Jeffrey explains. “But at the end of the lease the site responsibility will go back to OPG and we must bear in mind that they will have responsibility for the work [of decommissioning]. So we are making a stream of performance-related payments to OPG.

“Every five years we will review the cost of decommissioning. If it has increased we will increase the rental payments to deal with it. This is the big attraction: for us it is ‘pay as you go’ and there are no big liabilities at the end of the lease. It makes for a nice clean balance sheet.”

OPG is happy with the arrangement as well: OPG will have to swallow the costs for decommissioning and spent fuel when the contract comes to an end, the company says, but in fact these costs are covered by funds OPG has set aside and the payments from Bruce Power. What is more, OPG says, in order to avoid these expenses Bruce Power is spending more for the lease than it would for a straight purchase.

PAYMENTS AND POOL PRICES

The Ontario power pool will be substantially different to that in the UK or in the deregulating markets in the USA. Nevertheless Bruce Power has learned from the experience of British Energy and Amergen, as Jeffrey explains:

“Our UK experience of negotiating 3-5 year contracts has already been put to use. In anticipation of deregulation, we have already set up at Bruce some power purchase agreements with private sector utilities. These will kick in at deregulation. In the future we do hope to sell the majority of Bruce’s output direct to wholesale customers, but we will certainly trade in the pool as well. If we were to sell 100% direct, then an unplanned outage could leave us exposed. We will always sell a certain amount to the pool.”

Ontario currently has overcapacity, but the potential market for Bruce’s product may be wider than OPG’s traditional service area. The east coast of the US is a neighbouring area where there is chronic undercapacity. The markets are changing and there are opportunities outside Ontario, as Jeffrey agrees, but he says British Energy’s lease agreement is based on a fairly conservative business case:

“There is a fairly substantial interconnector to the USA, but we have based the [Bruce] transaction on people trading in the Canadian market. Rules on access to the interconnector are in flux, but if it stabilised it would be a commercial opportunity.”

And in the future, Jeffrey saees nothing but positives for Bruce Power: “Although there is overcapacity [in Ontario] lots of it is low merit coal plant with no cleanup’” he says. “This may be the cheapest generation, but if so it is at the price of air quality, and air quality is becoming a major issue in Canada. Clean air legislation would pay nuclear power and levy polluters and we do expect to see this happen.

“What is more, Canada is falling behind on its Kyoto commitment [on greenhouse gas production]. Nuclear technology can help meet those commitments.”