In a huge deal that Wall Steet analysts said posed both rewards and risks for its key participants, Chicago Bridge & Iron on Oct. 27 said it would sell its nuclear construction business in the U.S. and China to Westinghouse Electric. Included in the deal is ongoing construction of the controversial Summer and Vogtle plants in South Carolina and Georgia, respectively, that Fluor Corp. now is set to complete. Under the $229-million transaction, CB&I’s nuclear construction division, Stone & Webster, would transfer to Westinghouse.The buyer plans to assume all liabilities for the projects, indemnifying CB&I, while Fluor is set to finish the projects on a cost-plus basis.
Under the agreement, Westinghouse will purchase CB&I’s nuclear-facility design, construction, procurement, management, installation, start-up and testing operations. It also is buying CB&I’s nuclear integrated-services business, which includes small capital projects for existing nuclear plants in the U.S. Westinghouse will pay CB&I $161 million after Westinghouse substantially completes work on the eight reactors—four in the U.S. and four in China—that the two firms had been working on together. The 1,100-MW AP1000 reactors are slated to be operational by 2020.Westinghouse will pay CB&I another $68 million for a continued supply of modules, fabricated pipe and specialty services on a subcontract basis.
CB&I acquired the nuclear business in its 2012 acquisition of The Shaw Group. “The two ongoing, large construction projects were experiencing substantial cost overruns that created significant risks for CB&I, which were unlikely to be resolved for several years,” says John Rogers, lead construction analyst for D.A. Davidson Cos.Pending approvals, the deal is expected to close by the end of the year, but it likely will be scrutinized at a scheduled Nov. 5 Georgia Public Service Commission meeting to review progress on the Vogtle site. Westinghouse and Fluor now are developing transition plans and a definitive agreement that will leave Fluor without liability for preexisting conditions.
CB&I will take a non-cash, transaction-related charge of between $1 billion and $1.2 billion, of which $904 million will be recorded in the third-quarter
results. “While the charge is large, we see this as a positive catalyst [since] the charge is now known, over and non-cash,” says Jamie Cook, lead industry sector analyst for Credit Suisse.
The transaction excludes CB&I’s fossil power-generating business, as well as its operations in nuclear and industrial maintenance, work on the mixed-oxide project in South Carolina and its federal decommissioning business.
Deck Chairs?
For nuclear-industry critics, the move is akin to “rearranging deck chairs on the Titanic,” according to Ed Lyman, a senior scientist at the Union of Concerned Scientists. The shift indicates multiple failures, ranging from the supply chain to finding qualified workers, he says.
It also is likely to have cost and contracting repercussions, not only for the reactors that CB&I was building but also for any companies considering building new nuclear plants. “The big question for us [is], what did CB&I see in the future that their board said, ‘We have to get out of this and cut our losses,’ ” said Sara Barczak of the Southern Alliance for Clean Energy. But Andrew Wittmann, senior research analyst at Robert W. Baird and Co., believes that investors simply aren’t comfortable with the amount of risk and uncertainty hanging over CB&I’s nuclear business. “I think it was that simple,” he says. “It’s clearly about the removal of this risk.”
As part of the acquisition, Westinghouse and CB&I settled all cost-overrun claims with Georgia Power, owner of the two Vogtle plant reactors near Waynesboro, Ga. Under the EPC contract, CB&I had claimed it was not responsible for the overruns—which topped $1.5 billion—so it sued the company and other Vogtle owners.
Southern Co., owner of Georgia Power, said it would pay $350 million to settle the claims. Other owners of the reactor—Oglethorpe Power Corp., the Municipal Electric Authority of Georgia and Dalton Utilities—agreed to pay an additional $410 million. Tom Fanning, Southern’s chairman and CEO, told analysts the amended contract language makes clear that any changes required by the U.S. Nuclear Regulatory Commission will be considered the owners’ responsibility. Lines of responsibility about such changes were the subject of many of the previous disputes, he said.
Vogtle and Summer owners said that, as part of the acquisition deal, they received stronger commitments for work schedules from Westinghouse. Kevin Marsh, CEO of South Carolina utility SCANA, said the amendments to the contract provide for “significantly higher liquidated damages that are linked to timely completion of the nuclear plants and qualification of federal production tax credits.” He also notes, “We have strengthened the language in the EPC contract defining regulatory changes, which has been the basis for many of our disputes with the consortium in the past. We also have negotiated a fixed-price option, which, if exercised, would limit the construction cost of the new nuclear plants.”
Good Move?
Barczak said that under different circumstances, the move might be seen as good for the utilities and ratepayers. But because the same assurances and guarantees of better management and workflow were made when CB&I acquired Shaw, she and others are skeptical. “This happened once before. It was supposed to correct everything,” she said. “After CB&I took over, Vogtle’s 18-month delay became a 39-month delay.” Additionally, despite management changes to rectify persistent qualitycontrol and management problems at CB&I’s Lake Charles, La., modular construction facility—the source of many of the reactor slowdowns and delays—Oregon Iron Works, Newport News Industries, Toshiba Corp., IHI and SCMI were tapped to build other modular units originally set for the CB&I facility. CB&I expects to complete its reactor-related modular work at the Lake Charles facility by the middle of 2016, says spokeswoman Gentry Brann.
The move, though, could be good. Westinghouse, which is majorityowned by Japan’s Toshiba, has a bigger stake in successfully completing the projects as the provider of the AP1000 technology, Wittmann says. Toshiba’s size makes it more able to absorb the risk of the complex projects, he adds. “It’s of vital importance that these things are done and done well,” Wittmann says. But the two companies also face the biggest risk. The nuclear division will be in a new Westinghouse subsidiary that also will house a government services business that is under development, according to the company. “It seems like a big win for CB&I, and a big win for [Fluor],” said Cook on an Oct. 28 earnings call with Fluor. “I don’t understand Westinghouse, but they seem like the loser [here].”
While Fluor’s contract hasn’t been finalized, Wittmann says the firm is likely the biggest winner in the deal. As one of perhaps only two construction companies capable of handling largescale nuclear work—the other is Bechtel—Fluor comes from a position of strength, the analyst adds. That means the contractor can insist on, essentially, a risk-free contract. “There’s obviously reputational risk because we’ve got to perform, but we did not and will not accept the same commercial terms that [were] in the previous contract,” said Chairman and CEO David Seaton on Fluor’s latest earnings call.
Before determining if more units can be built, the industry is closely watching nuclear work now in the U.S., China and elsewhere to see if reactors can be built on budget and on time. Virginia Attorney General Mark R. Herring says the state corporation commission should not let utility Dominion Virginia Power continue to spend money on licensing and planning activities for a possible third reactor at its North Anna site. The utility, which has not yet decided whether to build another reactor, is on track to spend close to $2 billion on plant plans and licensing by 2018. “I don’t know if people are willing to pull the plug,” says Paul Patterson, an analyst at Glenrock Associates. “But going ahead and committing to build is another thing.”
