BUSINESS
03/01/2012 12:44 EST | Updated 05/01/2012 05:12 EDT

SNC-Lavalin and Aecon win $600M contract to refurbish Ontario nuclear station

TORONTO - Ontario has awarded a contract worth more than $600 million to a joint venture between SNC-Lavalin Nuclear Inc. (TSX:SNC) and Aecon Construction Group Inc. (TSX:ARE) to refurbish its Darlington nuclear station.

Ontario Power Generation said the contract involves drafting plans and replacing major components of the four reactors at the station in Clarington, Ont.

The four-year contract announced Thursday for the definition phase is the first step in the refurbishment of a facility that will eventually see the removal and replacement of hundreds of tubes and feeder pipes for each of the reactors.

"This is a significant step for our refurbishment project," said Albert Sweetnam, the utility's executive vice-president of nuclear projects.

"The Darlington Nuclear Generating Station currently powers one out of every five homes in Ontario and is an important part of the energy mix in the province."

However, the announcement didn't sit well with provincial NDP energy critic Peter Tabuns, who said the news "strikes me that this is just setting Ontario up for much, much higher hydro prices in the years to come."

Ontario doesn't have a power supply plan and doesn't know what the most cost-effective mix is, "yet the government is prepared to put down $600 million on a process, the final cost of which no one knows," he said.

Tabuns said no business case was brought forward for the refurbishment and the plans haven't been subjected to hearings at the Ontario Energy Board. "This is bad planning and it's going to be very expensive," he said.

News of the contract sent shares of SNC and Aecon higher. Aecon shares gained 52 cents or about 4.4 per cent to close at $12.24 on the Toronto Stock Exchange on Thursday afternoon, while SNC shares, which had been beaten down earlier this week, closed up $1.46 or nearly four per cent at $38.86.

On Tuesday, SNC stock fell more than 20 per cent after it announced an investigation into $35 million in mysterious payments made by the company that had been attributed to unrelated projects.

The company also said that its profits for 2011 would come in roughly 18 per cent lower than earlier forecasted due to the undocumented payments as well as a charge related to its operations in Libya and unfavourable cost changes on certain projects in its infrastructure and environment and chemicals and petroleum businesses.

The contract Thursday will see the construction of a full-scale reactor mock-up where key elements of the refurbishment will be simulated and tested. Specialized tools required for the job will be developed as well.

The deal also includes the development of a detailed schedule and budget for the project's execution phase and the procurement of critical reactor components for the first unit to be refurbished.

AltaCorp Capital managing director Maxim Sytchev said the power utility market is also entering a period of unprecedented investment, with nuclear being one of the components.

"With the industrial market finally finding its legs on the back of commodity pricing, the margin upside from the private construction spending up-cycle will drive Aecon's profitability while the institutional market remains relatively robust," Sytchev wrote in a note to clients.

Sytchev noted that while SNC has faced negative news in recent days, the company's strength outside of Libya remains intact.

"With SNC's market cap shrinking by $1.6 billion over the last several days, we think that the market is extrapolating contagion from Libyan issues into other locales," Sytchev said.

"While we cannot say with certainty, we believe the probability of such an occurrence is outweighed by the risk/reward relationship that we see in SNC’s valuation."

Aecon said the contract Thursday will mean more than $100 million in revenue.

"This major award builds on the successful partnership Aecon and SNC-Lavalin have forged on nuclear projects over many years," Aecon chairman and chief executive John Beck said in a statement.

"It will help ensure Aecon's continued growth in the nuclear power sector for years to come."

Aecon will primarily provide construction and fabrication services for the joint venture, while SNC will focus on specialty tooling and engineering.

"The decision by OPG to approach this project in two phases is consistent with SNC-Lavalin's best practices on project execution for large-scale projects," said Patrick Lamarre, executive vice-president at SNC.

"Having an in-depth definition phase validates and supports the planning of the execution phase."

The station's refurbishment also involves replacing reactor components and maintaining station systems that have reached the end of their planned lifespan.

The province is planning to build two new nuclear reactors at Darlington, but has not yet awarded a contract for the multibillion-dollar project.

Last year, SNC bought Atomic Energy of Canada's commercial services business from the federal government for $15 million.