SNC-Lavalin’s power division buzzing but questions raised about mining contract

MONTREAL – SNC-Lavalin’s power division was abuzz Tuesday after securing a contract with its Swedish partner to build a major gas-fired power plant in New Jersey.

The Montreal-based company said that it will provide engineering, procurement, start-up and commissioning services for a 655-megawatt power plant in Newark, N.J. Its joint venture partner, Skanska, is responsible for construction and site management.

No value for the contract was provided but industry analysts pegged total capital costs at about $655 million, with SNC-Lavalin’s share estimated at more than $200 million.

The announcement came a day after the Newfoundland and Labrador government gave the green light to the $7.7-billion Muskrat Falls hydroelectric project in the Lower Churchill region.

SNC will be the lead engineering firm on Muskrat Falls, which will have a capacity of 824 MW and will have both overhead and undersea transmission lines that will carry power to Nova Scotia and the United States.

The Newark Energy Center is being developed by a joint venture of Hess Newark Plant Holdings, a subsidiary of Hess Corp., and EIF-NEC, a subsidiary of private equity funds managed by Energy Investors Funds.

The plant will use General Electric combustion gas turbines to generate power and sophisticated emissions control technology to make it one of the cleanest of its kind in the United States, SNC-Lavalin said in a news release. The facility is scheduled to begin generating power in 2015.

“We are proud to support a project that will provide clean, efficient and dependable electricity to the northern New Jersey grid, while bringing new jobs and revenue to Newark,” said SNC executive vice-president Patrick Lamarre.

SNC-Lavalin (TSX:SNC) has installed 70 of the GE F-class gas turbines around the world, including Astoria Energy in New York’s Queen’s borough.

The new contract represents about 10 per cent of the power division’s sales backlog and two per cent of SNC-Lavalin’s overall backlog, said Maxim Sytchev of AltaCorp Capital.

“The company’s power division is going through improved and what we would qualify as a steady momentum phase right now,” he wrote in a report.

“We are also pleased to see that the gradual move towards adding some work south of the border is starting to bear fruit,” Sytchev added, pointing to SNC being a bidder on two public-private partnerships. One is the US$2.6-billion Ohio River Bridges contract while the other is a US$7.4-billion Texas highway.

Frederic Bastien of Raymond James said the power contracts are not only positive but also overshadow any potential loss of business for the SNC mining segment if First Quantum Minerals (TSX:FM) is successful in its $5.1-billion bid to acquire Inmet Mining (TSX:IMN) and its flagship Cobre Panama copper project.

Bastien said the two power contracts could add about $800 billion to the power division’s backlog in the fourth quarter of fiscal 2013, “lending support to our bullish outlook for the division.”

However, the Vancouver-based analyst also referred to First Quantum’s renewed bid for Inmet, noting that First Quantum’s recognized ability to build new mines might prompt it to conduct some of Inmet’s technical and project development in-house should the bid be successful.

“Our view is that SNC’s expertise would still be needed on site, but perhaps not to the same extent as what Inmet had envisioned for the firm,” he said.

SNC-Lavalin is one of the leading engineering and construction groups in the world, with projects in some 100 countries.

Its shares closed down nine cents at $41.06 Tuesday on the Toronto Stock Exchange.