Suit expected to hinder possible AECL sale

Globe and Mail: JOHN PARTRIDGE - July 9, 2008

A $1.6-billion lawsuit against Atomic Energy of Canada Ltd. and the federal government will further impede Ottawa's efforts to sell all or part of the Crown corporation to a private sector buyer, a nuclear industry executive says.

It must complicate matters, because it's one more liability, the executive, who spoke on condition he not be named, said of the suit, which was unveiled Wednesday by Mississauga-based life sciences company MDS Inc.

MDS is suing in connection with AECL's decision in May supported by the government to cancel plans for two new nuclear reactors to produce vital medical isotopes that its MDS Nordion unit sells.

The so-called Maple reactors were intended to replace a 50-year-old National Research Unit reactor at Chalk River, Ont., where production was temporarily halted last year, disrupting isotope supplies. AECL cancelled the project, citing a serious design flaw that it said raised the risk of a reactor meltdown.

MDS is claiming $1.6-billion in damages against AECL for negligence and breach of contract and against Ottawa for inducing breach of contract and interference with economic relations over the decision in to scrap the Maple project.

MDS also has served AECL with a notice of arbitration, seeking an order compelling AECL to live up to a 40-year contract to supply the isotopes.

The lawsuit comes about a month after federal opposition Liberals made public a government memo warning Natural Resources Minister Gary Lunn that AECL could face a penalty of up to $150-million for cancelling the project. It also warned that the problems with Maple and with AECL's advanced Candu reactor technology could hurt Ottawa's sales efforts.

Ottawa hired investment bank National Bank Financial (NBF) months ago to look into structuring a deal to privatize 55-year-old AECL in whole or in part.

However, the industry executive said Wednesday that although NBF has put out feelers to potential buyers, the process is moving slowly. No timetable has been established and no offering memorandum has yet been circulated.

It is not clear, he added, whether the government has yet made up its mind how much of AECL it wants to sell or what terms and condition it would seek to impose on a private-sector buyer.

Nobody knows for the moment exactly what the plan is or whether the plan has been decided, he said.

As a result, it appears less and less likely that the government will be able to meet its apparent goal of reaching some sort of an AECL deal this year.

Initially, they wanted to go quickly, the executive said. My feeling is that given the number of issues that have not been solved, it may take longer.

One key issue for Ottawa is whether the Ontario government, which has announced plans to add new nuclear plants to its aging fleet, decides to buy them from AECL or a foreign competitor. If the province does opt for AECL it is expected to announce its decision by year-end the company would look a lot stronger.

A spokeswoman for engineering and construction firm SNC-Lavalin Group Inc. of Montreal, which has said publicly that it is interested in establishing some sort of partnership arrangement with AECL, appeared to confirm Wednesday that no formal bidding process has yet been established.

I can tell you that, a, we've always said that if we were approached by the government we would be interested, but, b, if there was a process of negotiation, our interest would be in the AECL reactor commercial business, Gillian MacCormack said in a telephone interview. That's quite independent of the Chalk River operations.

SNC-Lavalin has a long-standing commercial relationship with AECL, helping build and refurbish the Crown corporation's Candu reactors.

Among other companies beside SNC-Lavalin that have been cited as potential bidders are competitors of AECL such as France's Areva SA, and General Electric Co. of Fairfield, Conn.

Meanwhile, Canadian nuclear power plant operator, Bruce Power, which is owned by a private-sector consortium led by TransCanada Pipelines Ltd. of Calgary and is AECL's largest customer, has also been pegged by one industry source as more than an interested bystander in any sales process.

MDS also said Wednesday that it has served a notice of arbitration on AECL, seeking an order compelling the Crown corporation to live up to a 40-year contract to supply the isotopes, which are used in a variety of critical medical tests and procedures.

We have had to resort to taking these steps to protect the interests of patients, the nuclear medicine community, our shareholders and our customers, MDS chief executive officer Stephen DeFalco said in a news release. We are disappointed that AECL and the government decided to abandon the Maple project without establishing a clear plan for the long-term supply of critical medical isotopes.

MDS spokeswoman Janet Ko said the cancellation, announced May 16, came without notice just four days after the company had received a regular update from AECL indicating that the project was proceeding as planned.

AECL had never wavered from their commitment pre-May 16, Ms. Ko said. We were surprised. . . when they unilaterally made their announcement.

AECL issued a statement acknowledging it has been served with the arbitration notice and the lawsuit, but also said it believes it has met and continues to meet all its contractual obligations to MDS Nordion.

AECL will therefore vigorously defend both the arbitration and the civil action, it said.

Mr. Lunn, who has been overseeing the matter for the government, also defended both AECL and Ottawa's role in the affair.

We regret that MDS Nordion has decided to pursue litigation, he said in an e-mailed statement. Neither the government nor AECL accept the allegations made in the statement of claim, accordingly we will be taking steps to defend AECL and the Crown.

The statement of claim that MDS filed in Ontario Superior court contains a litany of allegations of poor management and broken commitments by both AECL and Ottawa dating back to 1991 when MDS bought Nordion from the government.

Mr. Lunn said the government had accepted AECL's decision to terminate the Maple project, which, he added, had been mismanaged by the previous Liberal governments, leaving it crippled with technical and economic problems for years, which cost the taxpayers hundreds of millions of dollars and did not produce one single medical isotope.

Reviews by the Auditor General had confirmed these significant concerns about the costs and viability of the project, he added.

Mr. Lunn also said that the NRU reactor, which is licensed to operate until 2011, is continuing to provide a reliable and consistent supply of isotopes.

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