Bruce Power restart costs climb sharply

Globe and Mail Update: JOHN PARTRIDGE - April 17, 2008

TransCanada Corp. says it will cost as much as 24 per cent more than estimated three years ago to refurbish and restart two units at the Bruce nuclear power plant in Ontario, taking the total tab for the company and its partners to as much as $3.4-billion.

However, analysts said the cost overruns revealed Thursday are in line with those being experienced by major construction projects in other sectors, and that the Calgary pipeline and power company still expects strong returns from its investment.

They also said the update from TransCanada removes one of the final hurdles it was facing before launching an equity issue to help finance its planned $2.8-billion (U.S.) purchase of New York City's largest power plant, Ravenswood, unveiled April 1.

TransCanada said that following a review by Bruce Power, its owners and "independent experts," the cost of getting units 1 and 2 of the Bruce A plant back on line is now expected to come in at between $3.1-billion (Canadian) and $3.4-billion in all, up from the original 2005 estimate of $2.75-billion.

TransCanada Corp.

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It is also higher than a revised figure TransCanada gave analysts during a quarterly conference call Jan. 29. It said at the time that Bruce Power had authorized an increase in funding for the project to $3-billion but was initiating a detailed review.

The latest forecast will push TransCanada's share of the bill for the Bruce A refurbishment to between $1.55-billion and $1.7-billion from the $1.375-billion it initially forecast.

TransCanada owns 48.7 per cent of Bruce A, which has four units in all, as well as 31.6 per cent of Bruce B, which also has four units.

The company said Thursday it now expects the un-levered after-tax return on its investment to be in the middle of the stated range of 9.5 per cent to 13.5 per cent - or about 11.5 per cent.

"In the event of a further 10 per cent increase in capital costs, our ... return on the project would be approximately 10 per cent," TransCanada chief executive officer Hal Kvisle said in a news release.

The project is about 60 per cent complete, the company said. The two units are expected to return to service late next year and early in 2010, adding 1,500 megawatts to the Ontario power grid. Bruce A units 3 and 4 also produce about 1,500 MW, while Bruce B generates a total of 3,200 MW, according to TransCanada.

Analyst Grant Hofer at UBS Securities Canada Inc. said the Bruce A cost update was "the major issue to be clarified" before TransCanada could move forward on an equity issue for the Ravenswood acquisition.

He also told clients in a note that he figures that because of the higher Bruce cost estimate and the "higher risk profile of Ravenswood," TransCanada is likely to try to tap the markets for about $1.5-billion in new equity, up from his previous estimate of $1.2-billion.

Mr. Hofer has a "buy" recommendation and a 12-month price target of $46 on TransCanada's shares.

The company has not provided any estimate of how large an issue it is planning, other than to say the financing plan for Ravenswood calls for "significant new equity," TransCanada spokeswoman Shela Shapiro said.

Bob Hastings, an analyst with Canaccord Adams in Vancouver, said that it is "nice to have a little more clarity" on the Bruce A costs.

The overruns are "nothing particularly untoward," he said in a telephone interview, adding that any construction price index you care to look at is up, "whether it's oil sands, pipelines or power."

Mr. Hastings, who also has a "buy" recommendation on TransCanada's shares, said the slightly lower returns the company is now forecasting on the project are "still great."

The Canaccord analyst also said that together with quarterly earnings TransCanada is set to report next week, the Bruce update will help to get rid of any "overhang" there might be, enabling the company to get a better price for its planned equity issue.

However, he added that TransCanada executives need to get out and "tell the Ravenswood story a little better" to investors before launching a share issue. "They were out marketing a bit last week," he said.

Investors greeted the planned acquisition with a distinct lack of enthusiasm, partly because they are skeptical over the potential payback from the power plant, and partly because of the size of the equity issue TransCanada needs to float. They knocked TransCanada's shares down by $2.29 to $37.26 on the Toronto Stock Exchange the day it announced the deal.

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