All participants, please stand by. Your conference is ready to begin. Good day, ladies and gentlemen. Welcome to TransCanada's Bruce Power Life Extension Agreement conference call. We'd now like to turn the meeting over to Mr. David Moneta, Vice President of Investor Relations. Please go ahead, Mr. Moneta.
Thanks very much. Good afternoon, everyone. We're pleased you could join us today to discuss Bruce Power's life extension agreement that was announced earlier this morning. With me today to discuss the announcement are Russ Girling, our President and Chief Executive Officer; Bill Taylor, Executive Vice President and President of Energy; and Don Marchand, Executive Vice President, Corporate Development and Chief Financial Officer. Russ and Bill will begin today with some opening comments on the announcement. Please note that a slide presentation will accompany their remarks. A copy of the presentation is available on our website at transcanada.com. It can be found in the investor section under the heading Events and Presentations. Following their prepared remarks, we'll turn the call over to the conference coordinator for questions from the investment community.
In order to provide everyone with an equal opportunity to participate, we ask that you limit yourself to two questions. If you have additional questions, please re-enter the queue. Before Russ begins, I'd like to remind you that our remarks today will include forward-looking statements that are subject to important risks and uncertainties. For more information on these risks and uncertainties, please see the reports filed by TransCanada with Canadian securities regulators and with the U.S. Securities and Exchange Commission. Finally, I'd also like to point out that during the presentation, we may refer to certain non-GAAP measures. These measures do not have any standardized meaning under GAAP, and as a result, they may not be comparable to similar measures presented by other entities. With that, I'll now turn the call over to Russ.
Thanks very much, David. Good afternoon, everyone. Thank you all for joining us this afternoon. I'm very pleased to report today that Bruce Power has entered into an agreement with the Ontario Independent Electricity System Operator, or as we call it, the IESO, to extend the operating life of Bruce Power through 2064. The long-term arrangement is consistent with our strategy of building a portfolio of contracted and low-cost power generation assets and provides us with another significant and attractive growth opportunity that is expected to increase earnings and cash flow both in the near and long term. The agreement is also consistent with Ontario's long-term energy plan, providing the province with an abundant source of safe, reliable, low-cost, emissionless energy for decades to come. As you know, Bruce Power is the world's largest nuclear facility.
It's located 250 kilometers northwest of Toronto and is capable of producing 6,300 megawatts of electricity, which is equivalent to approximately 30% of Ontario's daily power needs. The facility is comprised of the Bruce A and Bruce B sites, each housing four operating reactors. During the past year, the facility has produced a number of excellent operating and technical achievements and was recently recognized internationally by an independent review agency for its strong operating performance. Looking forward, all of the power produced by all eight units at the site through 2064 will be sold to the IESO under a fixed-price contract that escalates over time. Bill will provide you a little bit more detail about the contract in just a few minutes.
In connection with the signing of this long-term agreement with the IESO, we have announced today that we've exercised our option to acquire an additional interest in Bruce Power from the Ontario Municipal Employees Retirement System, or OMERS, for CAD 236 million. Along with the acquisition, which is effective today, the Bruce A and Bruce B partnerships will be consolidated into one entity. Going forward, TransCanada and OMERS will each own 48.5% of Bruce Power. The Power Workers' Union, the Society of Energy Professionals, and the Bruce Power Employee Trust will hold the remaining 3%. Previously, TransCanada owned 48.9% of Bruce A and 31.6% of Bruce B.
Just before I pass the call on to Bill, I would like to thank and congratulate all of the people from the Ontario Independent Electric System Operator, from Bruce Power, our partner, the Ontario Municipal Employees Retirement System, and our team here at TransCanada, and the numerous other contributors who have worked tirelessly for the past couple of years to bring this complex arrangement all together. It truly is a win-win transaction that will benefit Ontario electric consumers, the environment, Bruce Power, and the shareholders of both OMERS and TransCanada for the next five decades. This, in my mind, is quite an accomplishment, and we're very proud to be part of Bruce Power. Now I'd like to turn the call over to Bill Taylor, who will provide you with some additional detail on the long-term life extension agreement between Bruce Power and the IESO.
Thanks, Russ, and good afternoon, everyone. As Russ mentioned, I will now turn to some details in the amended agreement that supports additional investments in Bruce Power. First, the agreement executed today goes into effect on January 1, 2016, and runs through to December 31, 2064. This amending agreement supporting life extension and refurbishment at Bruce secures the future of the entire site that, absent such an arrangement, was facing an uncertain future. In particular, Bruce B side of the plant was in need of clarity as to commercial structure to support its continued operation beyond the end of the current decade. With this amending contract, near-term investment will begin to extend the life of the units and prepare them for eventual full refurbishment as part of this multi-unit, multi-year investment program.
Bruce Power will earn a targeted return on capital employed and other cash commitments made in support of the operations. The life extension and the refurbishment work that is completed at site over the extended life of the facility. New capital to be deployed going forward falls into three categories. First is sustaining capital, which covers annual repairs and replacement of general site assets outside of the power generation portion of the plant. Second is what Bruce Power has termed asset management or AM capital. This work is necessary to extend the life of the units to meet the timeline agreed to with the ISO for the phased-in refurbishment of units three through eight. It includes repair and replacement of equipment not related to the reactor, such as turbines, pumps, piping, electrical systems, and instrumentation and control systems.
The final category of investment is called Major Component Replacement, or MCR work. The MCR capital essentially covers the replacement of all of the life-limiting components within the reactor portion of each unit. The first of this MCR work is expected to begin on unit 6 in 2020. Work on the other 5 units will follow between 2022 and 2030. For details on the full refurbishment schedule, I refer you to the Bruce Power website, where you will find a backgrounder and some other information regarding the overall program. One of the most important elements of this transaction is the contract power pricing mechanism. I will provide more detail on a later slide, but for now, I would note that the capital estimates for both the AM capital and the MCR capital are revisited and finalized over a period of time prior to the commencement of those investments.
Subject to various terms and conditions in the contract, the power price is then adjusted at predetermined dates to reflect the estimated amounts that will be invested in the AM and MCR capital programs in advance of the work actually taking place. Finally, I would highlight that the overall transaction, owing to the phased-in nature of the investments and the power price changes that are incorporated over time, is accretive to earnings and cash flow for TransCanada over both the near term and very significantly over the long term. Turning to how the power pricing for power delivered under the contract is adjusted over time. As I alluded to a moment ago, there will now be a uniform price that applies to all site generation.
This price is adjusted each year for a variety of factors, some of which are adjusted annually, while others are periodic and driven by capital investment. The earning base contract price is roughly CAD 56 per megawatt hour, which includes consideration of return of and on the historic investments made at the site, as well as the first six years of the required asset management or AM capital investment. This base contract price will be adjusted annually in accordance with a formula utilizing a basket of economic indices. Some of the escalation is fixed, some is driven by general CPI escalation, and some is specific to labor index increases. The next component included in the price paid for each megawatt hour is compensation for the dynamic capability potential Bruce Power will be providing to the ISO in the future.
Dynamic capability is associated with the ISO's ability to maneuver the output of a portion of the total plant output. Bruce Power will continue to be paid the dynamic capability price and the base contract price for expected base load generation, even while the available capacity is not fully dispatched. Dynamic capability price also escalates, but with CPI. Finally, all costs associated with nuclear fuel are paid to Ontario Power Gen are a full flow-through and are included in the per-unit price. As I noted a moment ago, the initial contract price takes into account a return of and on approximately CAD 600 million of capital expected to be invested in the asset management program over the first six years of the deal. This number is TransCanada's share of the AM investment during this period.
Going forward, six years of AM capital spend will always be reflected in the contracted power price. The CAD 600 million initially included is part of the CAD 2.5 billion total that is expected to be spent on asset management or life extension activity over the life of the contract. Again, this is TransCanada's share of the AM investment. Every three years, the power price will be adjusted upward to account for an additional three years of AM capital. The first such adjustment will occur on April 1, 2019. The next category of capital spend that affects the power price over time is related to Major Component Replacement work or MCR activity. The first cost estimate to be provided to the ISO for the refurbishment of a reactor will be for work that is expected to start in January 2020 on unit 6.
The estimate will be provided to the ISO in September 2018 and will be reflected in the price of power beginning April 1, 2019. In accordance with the overall refurbishment schedule that is available on the Bruce Power website, the other key dates for MCR-related price adjustments under the contract would occur between 2022 and 2030. On the right-hand side of this next slide, you will see a drawing of the equipment covered under the Major Component Replacement, or MCR program, for each of units 3 to 8. The program involves replacing the reactor calandria tubes, fuel channels, feeder tubes, steam generators, and other related systems listed at the bottom of the drawing. Although only four steam generators are shown here on this graphic, there are eight per reactor.
The schedule of outages for the MCR program has been set to optimize the unit's overall economic life while minimizing outage duration and MCR overlap. As mentioned, 15 months prior to the scheduled start of each MCR outage, Bruce Power will provide a final cost estimate and duration estimate to the ISO. Once the final cost estimate and duration are set, Bruce Power will manage capital cost risk associated with each unit outage. 50% of any capital cost underspend or additional revenue from early return to service may be shared with the ISO. TransCanada's share of the total program is currently expected to be approximately CAD 4 billion in 2014 CAD. Under certain conditions, both Bruce Power or the ISO can elect to not proceed with the remaining MCR investments should the cost exceed certain thresholds or not provide sufficient economic benefit.
I would like to spend a few minutes on how Bruce Power intends to undertake this long-term capital program to ensure the work is completed on time and on budget. First, since all the units are operating, there is a high degree of knowledge of the current condition of the equipment as a result of ongoing maintenance and inspection work. Second, Bruce Power has three years to plan and analyze the cost estimate and schedule prior to finalizing the MCR cost estimate and related price adjustment for the first unit. Third, the refurbishment and replacement of a large number of systems has been moved into the asset management program to reduce the number of tasks that will be completed during the MCR outage, and also minimizing that outage duration.
Bruce Power has experienced senior project management staff who will plan the capital program and establish a detailed resource plan going forward. Bruce Power has upgraded its project management and risk control systems, and they will be refined further through the asset management capital projects prior to starting the main MCR outage program. In summary, I would like to leave you with the following key messages. This amended agreement allows TransCanada and its partners to extend the life of this facility for over 40 years through a significant capital investment program and at an attractive return. A combination of better escalators applied to the component of revenue that tracks salaries, which is the largest cost component at the facility, and a reset of that price component to reflect actual salaries every nine years reduces the risk of revenue growth not tracking cost escalation.
Capital costs and the related revenues are determined and adjusted more closely to the time when the capital programs are about to start, thus providing a high degree of confidence that the capital program can be delivered on time and on budget. The amended ISO contract means that Bruce Power will continue to generate strong and growing earnings and cash flow for TransCanada shareholders for decades to come. That concludes my prepared remarks. I would now like to turn the call back to David for the question and answer period.
Thanks, Bill. Just a reminder before I turn it over to the conference coordinator for questions from the investment community. We ask that you limit yourself to two questions. If you have additional questions, please re-enter the queue. I'll turn it back to the conference coordinator.
Thank you. We will now take questions from the telephone lines. If you have a question and you're using a speakerphone, please mute your handset before making your selection. If you have a question, please press star one on your telephone keypad. If at any time you wish to cancel your question, please press the pound sign. Please press star one at this time if you have a question. There will be a brief pause while the participants register for questions. Thank you for your patience. Our first question is from Linda Ezergailis with TD Securities. Please go ahead.
Thank you. Congratulations on finally putting a pin on this agreement. I'm just wondering if you can comment on your range of possible returns and what the main swing factors might be. You mentioned the sharing mechanism. I assume it's symmetric. There's no cap on that. Would it be capital costs, utilization, some other factor that would cause your returns to vary versus your initial expectations?
Well, Linda, it's Bill. Thanks for the question. I guess what I would refer you to, maybe in part for your question, then I'll give a shot at the answer, would be that contained on the Bruce Power website are some links to some further information on the agreement. In particular, there's a copy of the fairness opinion that has a pretty good description of the overall workings of the transaction. The targeted return as it's described in the agreement is in the low double digits on an after-tax, unlevered return on capital basis. That number is basically modeled into the power price that we're receiving over time. The variation in that return would arise as to whether we were unable to meet our schedule or our cost projections as we price the various work activity over time.
It's really our performance against that target return will be determined against our performance in delivering the program.
Thank you. Just as a follow-up, I'm wondering how you might comment on the utilization of the units, not when they're down for your major capital program, but as a run rate over time. Would you expect it to remain steady in the high 80% range, or would you expect it to decline as they approach both the major refurbishment period and then the ultimate end of the life many years out?
Sure. Thanks, Linda. I guess there's really two periods of time to think about in response to your question. During the period of time between now and when the major MCR work is begun, there will be some, I guess I would call it some choppiness in the overall capacity factor or availability, because we're taking the units down for some more complex outages, in part to deal with the near-term life extension. I would say that in a low year of availability overall, you should expect low 80s overall availability in that period. Some of the years are not quite that low, and I would say more in the mid to high 80s. Then on the long-run basis, over the life of the agreement, the target availability that is driving the overall transaction is 87%.
Okay, thank you. Maybe just to help us out over the next couple of years, would 2016 and 2017 be characterized as low 80s utilization?
The outlook right now, based on our current work plan, there could be some variation in this as the work plan is revised over the next couple of years, but it would be low 80s in 2016 and then actually jumping up some in 2017, above that.
Great. Thank you. I'll jump back in the queue.
Thanks, Linda.
Thank you. Our next question is from Rob Hope with Macquarie. Please go ahead.
Yes, thank you. Maybe just first, in terms of the risk sharing, for the cost, it looks like you'll be on the hook for any overages there. Just based on your existing experience with Bruce A, what gives you confidence that we won't see another significant cost overage there?
Well, I think I covered some of that, Rob. It's Bill. I covered some of that, I think, in my prepared remarks. Just to reiterate, I think we have a significantly different situation at the site versus the prior refurbishment work that was undertaken. At this juncture, we've got all eight reactors operating. The condition assessments literally of every piece, of every valve, every pump, every aspect of the plant is very well understood by Bruce management and the operating team. With that knowledge, combined with the fact that the work package is being undertaken in a significantly different way, as between the split between the reactor work and the other work that will be occurring over time on the balance of plant, significantly reduces the scope, the overall effort during the major outage.
This was a key area of experience that was learned from the prior effort, and we anticipate that the project management challenges overall will be significantly different as a result of that.
All right, thanks for that. Then maybe a follow-up. Just in terms of the asset management capital over the next few years, can you give us a sense of magnitude overall for the CapEx needs at Bruce Power, or at least your share?
Our share over the next few years is CAD 600 million for TransCanada's share in 2014 CAD.
On a per year basis?
Sorry, Rob, that was CAD 600 million, that would be overall over the next six years for the asset management program.
I think you might want to mention sustaining capital as well.
Yeah, in addition, there's, per what we described in our release, Rob, there was another CAD 110 million our share, 2014 CAD of sustaining capital that would go in each year.
The asset management, is that evenly spread over the next few years?
More or less. It's got a little variation, but it's pretty even.
Thank you.
Thanks, Rob.
Thank you. Our next question is from Robert Kwan with RBC Capital Markets. Please go ahead.
Great. Good afternoon. Just in terms of the cost that you had put in front of the ISO as part of the agreement, to kind of get them comfortable that at least the economics, as you see it today, are worth going forward, what was it based on? Was it based on detailed engineering?
Yeah. Robert, it's Bill. There's a fair bit of work that has been done. The commercial team at Bruce Power has been putting together these estimates. They're not fully refined in terms of the By the time we get to the mid-2018, when the final number is provided, that estimate will be categorized under cost estimating guidelines as a Class 2, so it will be a very tight estimate by the time we get to the point when that estimate becomes live in the price. The preliminary estimates that we provided and the basis of estimates that were provided to the ISO, they reviewed with a great degree of due diligence over the past 18 to 24 months, are comprehensive, I guess I would say. I wouldn't categorize them obviously as a Class 2 as yet, but they're a very comprehensive estimate.
Okay, thank you. Just, I guess, as the second question, does the pricing adjustments
As part of this agreement, in addition to the pricing under the AM program, does that all stay completely intact if the ISO or yourselves decide not to go ahead with the MCR spending?
The final version of the contract is going to be, if not already, is going to be posted on the government and ISO, or I'm sorry, on the ISO and Bruce Power website. You can get into that detail, Robert, with regards to how the pricing is adjusted in what we perceive to be the unlikely event of any off-ramp occurring. We're confident that this program is affordable and it will remain affordable going forward. Nonetheless, the details of that price adjustment would basically account for the remaining generation if there ever was an off-ramp that was taken under the agreement.
Okay. Ahead of actually looking at the agreement, if you don't go ahead with the MCR, it sounds like there may be a step down in the pricing?
No, it's actually the opposite. There would be a price adjustment, the net effect of which would increase the price, because your overall generation over life would be reduced.
Okay. Is it just averaging, so you can somehow make it up over a lower period of time? Is that kind of what the driver is on?
Yeah, over a lower period of time or perhaps more correctly, over a lower number of megawatt hours.
Yeah. The numerator is the cost, the denominator is the volume, and if you don't move forward with volume enrichment, then cost over volume leads you to a higher price.
Okay. All right. Thanks very much.
Thanks, Robert.
Thank you. Our next question is from Andrew Kuske with Credit Suisse. Please go ahead.
Thank you. Good afternoon. I guess a question either for Russ or for Bill, now that you're going to embark upon the Bruce life extension, you've got the agreement in hand, how do you think about just your portfolio mix on the power side of assets in Ontario and the interplay between them? Obviously you've got a bunch of gas plants that are under longer-term PPAs. Those will roll off within the life of Bruce. How do you think about the mix of assets in this deal as you're here overall?
Well, I'll give it a quick shot, I'll leave the most of it to Bill. As you know, most of those, the average contract life that we have remaining on our facilities in Ontario is quite long. This particular one goes out to 2064, there isn't any other contract that kind of looks like that. As we look out into, we are well into the next decade, we're fully contracted on our power in sales in Ontario, whether that be solar or the gas-fired that we have. Once those expire, our belief would be is that there's still going to be a need for both solar generation and for gas-fired power in the province of Ontario. If I look out, it's hard to predict sort of out into late 2020s as to when those expire as to what the market's going to look like.
I would expect that they will be very economic sources of power still in the province and it'd be our intent to operate those for the life of those facilities.
I would maybe just augment Russ's response, Andrew, by adding that, perhaps I'm a little biased, I like our portfolio in Ontario. We're active in all aspects of the market. They have designed a power system that its foundational element of which is now nuclear or has always been nuclear, but is now further enhanced by this agreement. We're participating on that end of it. Gas plants that we own are critical infrastructure. They're both close to Toronto. The Napanee plant is a little further distant, but it's well-connected electrically, I should say, to the backbone of the system. Then we're also participating in the renewable portion with our investments in the solar plants. We kind of have a spectrum of investments in Ontario, and we think that mix will likely not change.
Then just maybe one follow-up. Are you concerned about any degree of concentration risk, just being big in the province?
No, Andrew, I don't have any issue with that at all. I mean, it's a core geography for us. We've operated in the energy business in Ontario for about 60 years. We do provide either through the south end of our gas system or the north end of our gas system, we are the largest supplier of natural gas to the region. Power is a logical extension of that portfolio. The single largest market in Canada and a place where we want to continue to hold a large position. We're very comfortable with Ontario over time. What we know is that consumers in Ontario are going to continue to consume natural gas and power for many decades to come. I think from an environmental perspective, we've positioned ourselves well with the energy mixes, Bill said, with nuclear energy, which is the cornerstone of their strategy.
The solar portfolio providing emissionless energy and the backstop of capacity with the more natural gas plants positioned in the core market pockets that are going to need that generation at critical peak times. I look at the quality of our assets. They're solid in a marketplace that's continuing to grow and consume energy for many decades to come. We're pretty comfortable with our position in Ontario.
Okay. That's great. Thank you.
Thanks, Andrew.
Thank you. Our next question is from Paul Lechem with CIBC. Please go ahead.
Thank you.
First off, why 2064? Do you expect all eight units to operate into that period, or is that when the last one comes off, and you just grab sort of the tail end of the agreement?
Sure. Yeah. Each refurbishment, Paul, adds about 30 to 35 years to the life of that particular unit. The investments that we're making in the asset management, as I mentioned earlier, will extend the life at the front end. You're correct in saying that the tail end is the end of the last unit. You would expect that around the end of the agreement, obviously, there would be units coming off as operations wound down.
Okay.
As I think about it, Paul, as occurred in this latest round when they reached the end of their current life, there's still considerable value in the facility and in life extension. This is a process that could be repeated down the road if the demand's still there and this is still economic power. I would fully expect that we would continue to do this refurbishment process going forward. That's way out there beyond my life point, for sure.
You have no liabilities as you reach end of life? There's no cost to you at that point if it didn't operate beyond that time?
No, there's no delta in that aspect from what the agreement contained before. The end-of-life obligations are basically funded along the way, and that will not be the responsibility of Bruce Power or the owners.
Okay. Can I ask just a couple of quick questions on the mechanics of the MCR negotiations? Is each unit a separate negotiation? Such that if you had an overrun on the first unit, is there a way for you to recoup even the cost of the second, or are they completely separate negotiations?
Well, it's Bill. I would not characterize them as a negotiation so much as it is, there's a process that's well-defined in the agreement. Your question's kind of a complex one that I don't mean to defer on it, but I would suggest that detail can be picked up in your read of the agreement. The short answer would be that, no, we wouldn't be able to recoup. The intention is not that we'd be able to recoup any overruns on one within the next. That's sort of defined as to what the cost basis of each estimate is. There's a well-defined process as to how to determine that cost basis for each unit.
We would incorporate learnings, obviously.
Yes
from unit to unit as we move forward. We wouldn't recoup any losses from the past, but obviously learnings could be incorporated into the next estimate.
learnings or, more importantly, cost increases that could be just due to general.
Sure
matters.
Okay. Thanks very much.
Thanks, Paul.
Thank you. Our next question is from Ben Pham with BMO Capital. Please go ahead.
Okay. Thank you. Many of my questions have been answered, but I just wanted to go back to, you had some commentary about potentially getting to the point where the CapEx program for one particular unit could be too high for you to move forward, and it's a process of negotiation with your partners and the government. I'm just curious, ultimately, who really has the kind of tipping point on that negotiation process? If you guys come up with a fixed number that looks okay from your perspective, how do your partners kind of think about it, and how does the government look at it?
Well, again, it's not really a negotiation so much as it is a defined process under the agreement. There's certain cost thresholds that have been defined. Further to the question that Robert asked earlier about the quality of the current estimates. Those provided a framework and guideline for both parties to understand what this cost of power would look like over time. There's a band basically around that estimate then. To the extent that it falls within that band, then we proceed. If it falls outside of that band, then parties have rights to choose to proceed or not according to the terms of the agreement.
Okay. That's all kind of laid out right now in front of you then?
Yep.
Those bands. Okay.
That's right.
Okay. Then I just wanted to clarify, just on the 2020 program, when these facilities are off for three to four years, how does the revenue stream look for that unit? Should we think of the model as a hold to earning cash?
You're paid still on a dollar-per-megawatt hour basis, but the effect of that is, I guess, mitigated to some degree because remember, you have all eight units operating generally. You have one unit down, but you'd still have revenue. The price of which would reflect the unit that is down. You'd have revenue coming from the remaining seven.
Okay. Thanks, everybody.
Thanks, Ben.
Thank you. Next question is from Robert Catellier with GMP Securities. Please go ahead.
Hi, good afternoon. Thanks for the presentation. I'm also curious about the risk/reward aspect and the cost-sharing of the-
Of the program, the risk you've taken on capital. Is that last off-ramp feature, because of Ben's question, really the biggest risk mitigant? In other words, are there any other risk mitigants other than getting outside of band comfort that can allow you to not proceed or otherwise modify your risk?
I think the best way to answer that would be that once the estimate is established and we have reached a go decision on that particular MCR, then at that point, but again, we're talking about a situation where we've got considerable time between now and then to establish that Class 2 estimate. Once that estimate is in the price and that we are going, well, then the project execution risk rests with Bruce Power.
I think, as with all of our capital projects, once we've reached that point, we will look to our other levers to mitigate risk through fixed price contracting and those kinds of things as we nail down those estimates and nail down those contractors when you get close to construction. We would use our traditional risk management tools to mitigate our construction cost risk once you're implementing the construction.
I would just further add to, and remind you of my remarks earlier, of the comments that I made on the AM capital portion of this, which is a rolling three-year set of estimates. That program, which comprises our share, CAD 2.5 billion, would be a rolling three-year set of estimates that would be worked into the price. Again, to the extent that there's market changes affecting our contractors, et cetera, that would be reflected in whatever those then-current estimates would be for the AM capital over time.
Just how do you distinguish between the sustaining capital and the AM portion? Is the sustaining capital drawing a return as well, or is that outside the IRR that you described previously?
In terms of what the work represents, the sustaining capital, as I mentioned, is anything that is going on at the site, that has naught to do with the actual power generation equipment. Building maintenance, road maintenance, there's a fair bit of complex security at the site. This is what that element of capital is basically for. Yes, you would in effect be earning on that capital over time. It's embedded in the price calculation that we've arrived at.
Just to be clear, Rob, is we get return of and on capital on all capital buckets, if you will, sustaining capital, asset management capital and MCR capital.
Okay. With the schedule you have in front of you for Bruce now, assuming you hit those milestones and there's no outside events getting in the way, how does that impact your ability to accelerate returns to shareholders? The schedule looks like maybe it's a little more back-ended, from my perspective. Is there any more flexibility in your capital plan before we get to the 2020 timeframe?
The schedule is established pretty firmly in the agreement. As I highlighted, there is capital that's going in, and it's essentially immediately once this program goes live here on January 1 of next year. That capital will build. There's obviously a larger jump in price, and therefore in our earnings and return, starting in 2019. You can expect that it is a growing profile over time, obviously, as the capital builds in the overall program.
I think, again, you can think of it as upfront, we were increasing our investment by about CAD 235 million in facilities, and that capital gets employed right away. There's CAD 600 million of asset management capital that goes into the pricing and about CAD 110 million of sustaining capital. Then, as Bill said, once we get to 2019, we have our share of the MCR capital that comes alive. That's the total of coming down 2020, what comes into play in terms of the pricing.
Yeah, Rob, it's Don here. If your question's more is, does this soak up our capacity to do other things? The answer is no. We're looking at including sustaining capital, which is there in any event, CAD 1.7 billion over the next five years. The cash generation from this asset is fairly strong as well. As we pointed out at Investor Day, we have about CAD 14 billion of spend over the 2016, 2017, 2018 timeframe, and that's imminently manageable from a financing standpoint. 2018 and onward, there is significant free cash flow available and capacity for additional investment. This will soak up part of that, but it certainly doesn't preclude us from taking on new projects.
Actually, the way I was looking at it is because actually doing a full unit refurb before 2020, a lumpier part of the capital seems to be further out in the schedule and perhaps giving that more flexibility that you alluded to in the interim period.
Yeah, that's a fair way of looking at it.
Yeah. Okay. Thank you.
Thanks, Rob.
Thank you. Once again, please press star one at this time if you have a question. The next question is from Linda Ezergailis with TD Securities. Please go ahead.
Thank you. Just another cleanup question. While we're talking about Bruce Power, you can help us understand how your costs are trending over the next couple of years as well. Will there be a change in your lease revenues or your depreciation payments or anything else in terms of your cost structure?
It's Bill. Linda, I'll start with the lease costs. I think as I may have highlighted in my prepared remarks, the lease costs are a full flow-through under this agreement. So we wouldn't expect there to be any change, good or bad, in regards to that. On the depreciation side, there is some modest pickup. I could defer to Don here to maybe describe this better, but there's some modest pickup in the near term as the clarity on Bruce B was extended out with the life extension capital that's part of it.
Yeah. There is some life extensional component to the depreciation expense, but the book on B is not substantial right now. We need to invest capital first to achieve that life extension. As Bill mentioned, it'd be modest, but there would be some.
Thank you.
Thanks, Linda.
Thank you. There are no further questions registered at this time. I would like to turn the meeting back over to you, Mr. Moneta.
Okay, thanks very much, and thanks to all of you for participating today on such short notice. We very much appreciate your interest in TransCanada, and we do look forward to speaking to you again soon. Just a reminder for media, you have obviously full access to our media relations team. To the extent you do have questions, please feel free to give them a call. Thanks, and bye for now.
Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.