Report into AECL's structure is released

In May 2009 a review into the structure of Atomic Energy Canada Ltd was released, and with it came the announcement that the Canadian government was considering selling a stake in the commercial arm of the business.

This review into AECL’s structure was announced by the Minister of Natural Resources in November 2007. Its purpose was to determine whether the company’s structure is appropriate and if it best equips AECL and Canada to participate in the resurgent global nuclear industry. The review was led by Natural Resources Canada, with the participation of the Departments of Finance and Justice and the full collaboration of AECL.

The conclusions from the review are that AECL should be restructured, with its commercial and research arms separated. “The status quo is not an option,” the report said. How did it come to this conclusion? Below is a summary of the report. The full document is available from Natural Resources Canada (see link below).

Current structure

AECL is a Crown corporation whose shares are wholly owned by the government. Created in 1952, AECL reports to parliament through the Minister of Natural Resources and is subject to the Financial Administration Act, which notably prevents AECL from borrowing money from sources other than the government and from making equity investments. As a result, AECL relies upon government funding, and government approvals for certain key decisions. Most importantly, it manages its operations through its Corporate Plan, which is approved annually by the government

Structurally, AECL is currently composed of two divisions: the CANDU reactor division (CRD) and the research and technology division (RTD).

The CANDU reactor division is responsible for the Corporation’s commercial activities and includes two main activities, the refurbishment and servicing of existing reactors and the development and marketing on new reactors.

The research and technology division manages AECL’s public policy business activities. These include the development of new reactor technologies and medical isotope production, as well as managing nuclear waste, decommissioning and legacy liabilities.

Case for restructure

The review concluded that the two divisions have very different objectives and said “AECL has not been able to bring the necessary focus each division requires.” The commercial division is profit-orientated while the success of the research division is measured on its ability to respond to public policy requirements. The report said that this structure of AECL has led to “blurred accountability,” and the fact that the company “has not been profitable for the last five years.” It said that the Chalk River Laboratories has represented a draw on the limited commercial revenues available to AECL to expand its reactor business. The best outcome, the report concluded, would be in the restructuring of AECL.

According to the report the desired outcomes of such a restructuring include:

– Improving access to key growth markets and maximising Canadian participation in these markets.

– Providing access to capital.

– Risk sharing with private partners.

– Contributing enhanced project planning and management resources.

– Maximising employment in Canada.

Commercial division – “status quo is not an option”

The report looked at ‘building a successful commercial nuclear company,’ and noted how the industry has evolved through acquisitions, mergers and restructurings over the last decade.

The nuclear industry currently comprises a small number of large, well-capitalised and integrated companies, it said, citing Areva, Westinghouse/Toshiba and GE/Hitachi as examples. “Unlike its main competitors, AECL is not part of an integrated alliance,” the report noted. This, together with its size, has hampered AECL’s ability to penetrate mature Western markets or to expand its operations beyond the supply of nuclear power stations, it added.

“Simply put, AECL does not have the critical mass or financial strength to establish a strong presence into the key markets that will ensure its success. Moreover, its reliance on government funding and approval processes in managing commercial projects valued in the billions of dollars places it at a further disadvantage.

“Remaining a niche player, however, will not generate sufficient demand for new reactor construction to make the CANDU Reactor Division a viable business. The likely result would be a withering of the commercial division, which would in turn put in jeopardy the broader nuclear industry in Canada. The status quo is thus not a viable option.”

Research division

CRL is Canada’s largest scientific research establishment, employing over 2000 people. Its activities cover the entire spectrum of peaceful and safe nuclear energy use including, development of new reactor designs, isotope production and waste management.

“In contrast to the commercial division, the primary issue surrounding CRL’s future is not whether it can become a profitable, commercially viable enterprise, but whether its activities are focussed, driven by innovation and managed optimally.”

Like all national nuclear laboratories, CRL is supported by significant public funding. The public cost of the facility has been increasing in recent years because: CANDU related activities and thus funding has declined; AECL is managing an 80-year programme to deal with Canada’s legacy liabilities (estimated at CAN$2.7 billion); and the CRL infrastructure is ageing and needs restoring.

The report noted that in order to reduce costs “some CRL activities could be developed on a more commercially-oriented footing.” It suggested that the CANDU R&D services may be of interest to other reactor manufacturers and that there could be opportunities to market CRL’s waste management services both domestically and internationally.

The options

The review examined a number of alternative structures for AECL including: public-private partnership; government-owned/company-operated; strategic alliance and divesture.

National Bank Financial found significant private sector interest in AECL’s commercial operations. It concluded that the commercial activities of the CANDU Reactor Division would be best served by a strategic alliance with one or more partners with global scale that can leverage the technology, skills and experience of AECL in Canada and internationally.

Unsurprisingly there was no interest from the private sector regarding purchase of the R&D division, however the private sector did express interest in managing Chalk River. The report concluded that a new approach, such as a government-owned/company-operated management model, should be pursued for CRL, along the lines practiced successfully in the USA and the United Kingdom.

The review team stated that a detailed restructuring plan and negotiating mandates should now be developed.

The response

“The government agrees with the conclusions of the review, which found that AECL’s current mandate and structure limit the corporation’s success and development, and that restructuring would help to maximize benefits for Canada,” it said in statement on 28 May.

The government has engaged N.M. Rothschild & Sons to develop a restructuring plan and to provide external financial advice as required. As well, David Leith, formerly of CIBC World Markets, has been engaged as advisor to the Minister to assist in this project and to work with Natural Resources Canada, AECL and the government’s financial advisors.

Lisa Raitt, Minister of Natural Resources said: “A key element of this plan is to maximize opportunities for AECL’s employees, who are the corporation’s most valuable assets. Their interests will be considered throughout this restructuring.”