Reactor refurbishment service will be a cash cow for SNC Lavalin with limited options for sales of new reactors
This is my updated coverage of the sale of AECL originally reported in Fuel Cycle Week July 21, 20011, V10:N434 by International Nuclear Associates, Washington, DC
On June 29 the government of Canada finally put an end to industry uncertainty about how it would dispose of its nuclear crown corporation, Atomic Energy Canada Ltd. (AECL).
The administration of Stephen Harper signed away the company’s CANDU reactor division to SNC Lavalin as a re-branded entity, CANDU Energy, at the bargain-basement price of C$15 million in cash, plus $285 million in future royalties earned through the sale of new reactors.
That final price of $300 million had been kicked around in on-and-off negotiations for nearly two years.
Leslie Quinton, a spokesperson for SNC Lavalin, told FCW the purchase price includes “exclusive rights for commercialization of the CANDU technology.” The royalties pay out to the government for 15 years, after which anything SNC Lavalin sells is gravy. This of course assumes that the “extended version” of the 740 MWe CANDU 6, AECL’s flagship reactor design now in development, will still be in demand by 2026.
Next Step to Finish EC6 Design
Out of AECL’s 4,000 employees some 1,200 come to SNC Lavalin in the package, along with a one-time government gift of $75 million in cash—five times the “sale price”—to wrap up work on the EC6. Another $32 million in development costs will come out of SNC Lavalin’s coffers.
The EC6 features a slightly smaller and more easily maintained fuel assembly design. Also, instead of operating at maximum capacity all the time, the new reactor is designed to allow for load following— generating the electricity needed to meet demand at any one time, which is especially attractive for smaller electricity markets, such as in developing countries.
Among its passive safety features is an elevated reserve-water tank that in an emergency would rely on gravity to deliver cooling water into the reactor.
Meanwhile, plans to develop the 1,100 MWe ACR1000 AECL’s original attempt to modernize the CANDU reactor, have been shelved, maybe for good. The Canadian Nuclear Safety Commission declined to certify the design for safety and the expense of redesigning it to meet regulatory requirements is said by some to be too high for the Canadian government. SNC Lavalin shows no interest in reviving it. During the bidding process for AECL Bruce Power, which in the past referenced the ACR1000 for a twin reactor facility in Alberta, also said no dice to putting money into completing the design.
AECL will continue to exist as a much smaller organization, primarily to continue running the medical isotopes-producing reactor at Chalk River, as well as decommissioning and other administrative work. This will include managing Candu Energy’s taking over its existing refurbishment work.
Debt Not Part of the Package
One thing that SNC Lavalin will not take on with the low-ball price is AECL’s outstanding cost overruns in the life-extension project at the Point Lepreau nuclear plant in New Brunswick. What remains of AECL will retain the liability of cost overruns to date, and will continue in the role of master contractor for the job.
AECL, which underestimated the technical complexity of the task, ran up more than $400 million in excess costs, which Ottawa is expected to pay as part of the deal. Quinton said CANDU Energy would now step in as a subcontractor on the job, presumably bringing badly needed SNC Lavalin expertise to the project.
Due to delays in completing the project the provincial government of New Brunswick has found itself on the hook for replacement power purchases, and it is lobbying the federal government for help—with no success so far.
According to Quinton, CANDU Energy will perform four other refurbishments under subcontract, including two at Bruce Power in Ontaria, one at Gentilly-2 in Quebec, and one at Wolsong in South Korea.
Government expenditures on AECL since 1952 come to $1.7 billion. Of those costs, $854 million have occurred since 2003. Another $476 million went to develop the EC6 and the ACR1000.
Life-Cycle Costs Debated
One unknown is whether the EC6 will bring in revenue, and therefore how high a priority a sales push would be for the new owner. Certainly its royalties obligation to the government would skim off profits.
But there are some prospects in Canada, the most promising of which in the near term is the need for two reactors at the Darlington plant site in Ontario. This project has been discussed for years, but remains intractably stalled, to the frustration of Canadian energy officials.
Steve Aplin, vice president at the Toronto energy consultancy HDP Group, told FCW that what has held back the Darlington deal is uncertainty about whether the federal government will backstop the new builds for cost overruns.
The reactors themselves are a relatively small part of the cost. In 2009 industry analysts estimated their cost per KW at $2,700, or $1.9 billion each. But the total cost, including new transmission infrastructure, long-term refurbishment cycles and decommissioning for the two 740-MWe units would cost more like $28 billion.
Ontario provincial government officials said they were concerned about these life-cycle costs, but the federal government has taken the position that waht the province really wants is a guarantee on costs plus lifetime subsidies for capital projects. In short, Ottawa has told Ontario it is on its own for the Darlington deal. Ontario is not budging.
Ontario’s Energy Minister Brad Duguid has often pressed the government in Ottawa to move forward on the AECL sale. He recently told financial wire services that he was relieved that the province could now move forward with the Darlington project. But he also repeated that he expected the government to take responsibility for future cost overruns.
Overseas Prospects for EC6
But even more important is how the EC6 would fare in the global market. Argentina is said to be interested in a new CANDU reactor, as is Romania, which already has two. Quinton also named Jordan, Turkey, and the Ukraine as prospective buyers. But Aplin said SNC Lavalin would have to mend some fences if it wanted to bring Argentina back.
“Basically, while the federal government fiddled around with the sale of AECL for two years it told a willing buyer to get lost,” Aplin said.
Jordan might be interested possible because it has uranium, but, like the United Arab Emirates, does not want to build its own enrichment plant, which would constitute a provocation to its neighbors in the volatile Middle East.
Romania is interested in two more CANDU reactors but has not raised enough money to pay for them. Earlier this year European investors backed out of a deal, leaving a technical team in place with no funding.
India, too, has expressed interest. although at the moment appears primarily interesting in securing uranium. This week an Indian delegation visited Canada on July 17 for that purpose. A deal between the two nations would perhaps put to rest Canada’s longstanding ill will springing from India’s use of a CANDU reactor to develop a nuclear device in the early 1970s.
Indian officials have also raised the possibility of joint projects marketing CANDU reactors to smaller countries that cannot buy larger units. India has a 700-MWe indigenous reactor design based on the CANDU technology, which it wants to position for export sales. Joining forces with the now-privatized segment of AECL might make sense for both parties.
What is boils down to is that SNC Lavalin has pretty good prospects of selling at least three EC6 reactors in the next few years. Hypothetically speaking, if the delivered price in the not too distant future is $3,500/ Kw, then the gross revenue of the reactors would be in the range of $2.6 billion each or just shy of $8 billion. That’s not bad for an investment of $15 million in upfront money plus another $32 million in R&D work.
Refurbishment Contracts a Money-Maker
The sure thing for SNC Lavalin will be a series of contracts to finish refurbishment of CANDU reactors in Canada and elsewhere in the world (the global fleet consists of 34 reactors). The reactor design is so specialized that no one else can perform that job. Refurbishment business of other CANDU reactors in India, China, and South Korea is virtually guaranteed to come in the door sooner or later.
While it is impossible to estimate the ultimate value of these contracts to SNC Lavalin. Each refurbishment project takes several years, employs hundreds of people with nuclear and related engineering expertise, and involves little technical risk. It’s a beans-and-bread business that could generate substantial profits for the firm.
From the Canadian government’s perspective, the key benefit of the deal is that it will have privatized the future maintenance of its CANDU fleet, while freeing the government from taking a role in nuclear reactor design development.
Government Was Forced to Sell Low
Did the government give away the store? One way to judge the value of a deal is to look at the revenue a company gains per employee. SNC Lavalin took 1,200 employees, but at the moment they represent only potential revenue, as AECL has not sold a reactor in years.
Meanwhile, the highly visible refurbishment project at Point Lepreau is in the ditch, with significant schedule delays and massive cost overruns. An enraged provincial government is waving an invoice worth tens of millions for replacement power purchases while the reactor has remained idle.
If AECL could sell one CANDU EC6 at $3,500 per KW it would produce $259 million in revenue. For each of the 1,200 employees in the newly privatized reactor business, that gains an indicator of $216,000 in revenue. The government royalty would lessen those revenues, but how much so is unclear, because neither the government nor SNC Lavalin has revealed the rates.
Total government spending in 2009 on AECL was $822 million. Of that amount, $346 million went to life-extension projects (refurbishment) and $108 million to new reactor R&D and design work. Allocating all the government’s spending against AECL’s 4,000 employees produces a figure of $205,500 per employee. That's on a par for this metric with grocery stores and other consumer goods retail chains.
If allocated against just the 1,200 employees SNC Lavalin accepted, it results in a much better number: $685,000. But the government probably hoped for a larger privatization effort that would leave a small workforce to run Chalk River. This may have been a sticking point that delayed negotiations.
Unfortunately, the amount of revenue per employee for all 4,000 workers in 2009 is far lower than what global engineering and construction firms expect. By comparison, Fluor Corp. recorded revenue per employee of $834,000 for its entire workforce.
Given the skill sets of the reactor engineers at AECL, a more reasonable number that would attract investors would have to be in the range of what Rolls Royce tallied in 2009, of $375,000 in revenue per employee. Rolls Royce is deeply involved in the business of manufacturing nuclear reactor components, which makes it a useful benchmark.
It follows that with lower-than-industry-average revenue numbers for the employees that moved to CANDU Energy, the Canadian government had little choice but to give AECL away for a pittance.
Layoffs are likely if no sales emerge in the near term. The Canadian Society of Professional Engineers told the Toronto Star on June 30 that as many as two-thirds of the employees transferred to CANDU Energy could lose their jobs if there are no E-6 buyers. The union complained that layoffs would also affect refurbishment projects.
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A council of wise men and women is Washington is almost always called a “Blue Ribbon Commission,” which may make its members feel like a slice of prize peach pie at the county fair. 
The BRC noted that it sees “no unmanageable safety or security risks associated with current methods of storage” in the U.S. This is the essence of the charge the BRC has kicked the can down the road leaving nuclear utilities holding the bag, so to speak, with wet and dry at reactor storage of spent fuel. 
