Bruce Power: First in fission

Nuclear has been tomorrow's new infrastructure finance class for several decades. It has relatively low operating costs, but huge upfront capital costs, and requires careful allocation of risks as diverse as security, waste disposal and decommissioning. Non-recourse financings for pure nuclear assets have been few and reliant on a suite of sponsor and/or government guarantees.

Borealis Infrastructure's C$750 million ($726.8 million) financing for the upgrade of its Bruce A nuclear asset has a good claim to be the first ever non-recourse financing of a nuclear project. It exposes lenders to nuclear operating risk, but not the catastrophic consequences of a nuclear accident, or nuclear decommissioning liabilities. Moreover, its embrace of construction risk provides a limited template for the long-predicted wave of new nuclear projects in Europe and North America.

Borealis, the investment manager for the Ontario Municipal Employees Retirement System (OMERS), led the consortium that acquired control of the lease of the Bruce Power assets in December 2002. Before that, British Energy had acquired 85% of Bruce when it was privatised, but sold its interest when it ran into financial difficulties in the UK. Bruce Power, located 250km northwest of Toronto, owns eight nuclear reactors with a nominal capacity of 6,841MW.

The sponsors of Bruce Power are now BPC Generation Infrastructure Trust, which is OMERS' holding company (31.6%), Cameco (31.6%) TransCanada (31.6%), the Power Workers' Union (4%) and the Society of Energy Professionals (1.2%). When the sponsors took over, units 5-8 (collectively known as Bruce B) were operating, but the first four units had been mothballed. The new owners brought the 3 and 4 units back online in the 12 months to January 2004.

The restart of units 1 (laid up in 1997) and 2 (laid up in 1995), first mooted that month, waited for a clearer idea of the government of Ontario's attitude to both nuclear power and the future structure of the province's electricity market. The sponsors settled on a price of C$63 per MWh for the restarted 1 & 2 units' output in October 2005, and formed a new holding entity for the A units – Bruce Power A Limited Partnership – in which OMERS owned 47.4%, TransCanada the same size stake and the two unions the remainder.

The 1 and 2 restart has an estimated capital cost of C$3 billion, of which the two main sponsors will each finance half. TransCanada's contribution comes primarily from balance sheet funds, while OMERS is using a mixture of debt and equity. While the two operating companies for the A and B entities each have limited amounts of working capital debt, and this is without recourse to the shareholders, it does not constitute a project financing on the assets.

The new financing covers some of the contribution that OMERS must make towards the restart, and benefits from security over BPC's ownership interest in both sets of assets. It also benefits from cashflows from both, since the B units dispatch their output onto spot markets, subject to a price floor, and also sell power to larger customers under short- and medium-term contracts. The A units have long-term, fixed-price contracts with the Ontario Power Authority, a state-owned non-profit entity.

The project also forces lenders to accept a substantial degree of construction risk. Contractors on the project include AECL, Babcock & Wilcox, SNC Lavalin and AMEC, each of which is providing smaller sub-guarantees equivalent in total to roughly 70% of the total cost of the work. Moreover, lenders can be reassured that the same set of sponsors brought the 3 and 4 units back online, and will likely initiate another refurbishment at these units in the years up to 2013.

Canada's Nuclear Liability Act caps the liability of nuclear plant owners at $75 million, an amount that would be absorbed by equity in the event of an accident. While raising this cap has been the subject of some discussion, and is much lower than its equivalent in the US, for now lenders' exposure to an accident is limited.

Decommissioning liabilities are assumed by the Federal government, which in turn charges operators a fixed amount and puts this in trust to be used at the end of the life of the assets. Neither lenders nor sponsors are exposed to the risk that costs will exceed this amount, and the charges can be considered an operating cost on a par with fuel supply and maintenance.

The lead arrangers for the financing, Dexia Credit Local and Scotia Capital, are providing a C$750 million, five-year loan that can be extended by mutual consent for another five years. The size of the loan both as a proportion of the value of OMERS' stakes and as a proportion of the project cost, is small, and while the facility is subordinate, the lenders benefit from a very attractive collateral package, in the form of OMERS's stakes in the units.

But lenders still exhibit some nervousness about nuclear risk. Several banks were exposed to the cost escalations that bedevilled North American projects in the 70s and 80s. Still others worry about the reputational risk from nuclear lending. But the operator benefits from strong local support, and was smart enough to bring the plant's two biggest unions on board.

Dexia and Scotia brought in Toronto-Dominion Bank, Bank of Montreal, Allied Irish Banks, and Fortis Capital as top-level participants shortly after close on 4 October 2007. The debt is currently in syndication, and has been pitched to a mixture of US, European and Asian lenders.

The unique ownership structure of the asset, its existing cashflows, and the unsettled conditions for syndicating infrastructure debt towards the end of 2007 make it difficult to see how influential the financing will be for a putative new generation of nuclear plants in North America. In the US, for instance, newbuild projects will benefit from a generous package of Federal loan guarantees. But Bruce, for coming up with the tweaks necessary to get banks comfortable, well deserves its first in class status.

BPC Generation Infrastructure Trust
Status: Closed 4 October 2007, in syndication
Size: C$3 billion
Location: Ontario, Canada
Description: Holding company financing for refurbishment of 1,500MW nuclear units
Sponsor: Borealis Infrastructure Management
Debt: C$750 million
Lead arrangers: Scotia Capital, Dexia Credit Local
Legal adviser to the sponsors: McCarthy Tétrault
Legal adviser to the lenders: Torys
Insurance adviser: Marsh
Consultant: Performance Management Advisors
Independent engineer: Stone & Webster