Court Dismisses Westinghouse Claim for $2B Recovery from CB&I
More grim news emerged for financially strapped Westinghouse after the Delaware Supreme Court reversed a chancery court decision that the company was counting on to recoup $2 billion from an acquisition dispute with Chicago Bridge & Iron (CB&I).
The court rejected Westinghouse's contention of CB&I's calculations of its final purchase price-even though it paid nothing for the company up front. In favor of CB&I's pleading, the court also ruled that nearly all of Westinghouse's claims would not be presented to an independent auditor.
A Contentious Relationship
Westinghouse took the desperate step of filing for bankruptcy protection in March 29, crippled by financial setbacks stemming from half-built AP1000 reactor projects in Georgia and South Carolina. In documents associated with the filing, Westinghouse pointed to compounding delays associated with federally mandated design changes to the Vogtle and V.C. Summer projects, as well construction challenges, all of which played into the exorbitant cost increases that ultimately caused its financial debacle (for more, see How Westinghouse, Symbol of U.S. Nuclear Power, Collapsed).
Disputes about who should bear the responsibility for these cost increases ultimately arose between the two nuclear expansion projects' owners and the consortium that had been awarded engineering, procurement, and construction (EPC) contracts in early 2008-which included Westinghouse and CB&I's nuclear construction and integrated service arm Stone & Webster (S&W). Vogtle's owners eventually sued Westinghouse, S&W, and S&W's parent company, CB&I.
To resolve that litigation, and thwart litigation that could affect the V.C. Summer project, Westinghouse moved to acquire S&W for a purchase price at closing of $0. However, soon after closing the deal, a dispute arose between the two companies rooted in post-closing "true-up" working capital adjustments related to the sale.
CB&I claimed it is entitled to $428 million in working capital. However, Westinghouse claimed, using a disputed provision in the agreement, that CB&I owed it $2 billion. CB&I in July 2016 sued Westinghouse in a bid to protect itself from the $2 billion claim.
An Unusual Agreement
According to the state Supreme Court's order on June 28, the acquisition agreement between CB&I and Westinghouse was unusual "in a few key respects." The $0 closing purchase price-"a figure in Yiddish that, perhaps appropriately given Chicago Bridge's Chicago connection, sounds like an iconic linebacker," Chief Justice Leo Strine noted dryly-was partly based on a target for S&W's net working capital (less current liabilities) of $1.174 billion. In return, CB&I was to obtain liability releases from the Vogtle and V.C. Summer project owners and give it a clean break from the spiraling cost of the nuclear projects.
The dispute was rooted in "true up" provisions the parties settled on to iron out contentions about the final purchase price. As Justice Strine exclaimed: "In contesting Chicago Bridge's calculation of the Final Purchase Price, Westinghouse asserted that Chicago Bridge, which had been paid zero at closing and had invested approximately $1 billion in the plants in the six months leading to the December 31, 2015 closing, owed it nearly $2 billion!"
According to the court, Westinghouse admitted a percentage of its claims were based on CB&I's historical financial statements, which were not based on "proper application of generally accepted accounting principles (GAAP)."
The Court of Chancery in December 2016 ultimately tossed out the case, ruling that under the purchase agreement, the matter was to be decided by an independent auditor, not the court. The decision was thought to provide Westinghouse with a broad opening to challenge accounting principles used by CB&I.
But on June 28, the Delaware Supreme Court disagreed. "We conclude that the Court of Chancery erred in interpreting the Purchase Agreement this way."
The court said that when viewed in proper context, the "True Up is an important, but narrow, subordinate, and cabined remedy available to address any developments affecting Stone's working capital that occurred in the period between signing and closing."
For CB&I, which is headquartered in The Woodlands, Texas, the state Supreme Court's decision is a vindication of its position "that Westinghouse's $2 billion claim was without merit under the agreement," said President and CEO Philip K. Asherman on June 28. "CB&I looks forward to quickly resolving any remaining disputes between the parties, which we believe should be immaterial in light of the Court's ruling."
The Nuclear Projects
It is unclear if or how the ruling will affect the two nuclear expansion projects in Georgia and South Carolina, which are estimated to be $13 billion over budget and at least three years behind schedule. Westinghouse has interim agreements with project owners of both projects as they assess a full-schedule and cost-to-complete analysis.
On June 28, Georgia Power, a Southern Co. subsidiary that is spearheading the Vogtle expansion, announced that it is prepared to assume project management of the project along with Southern Co.'s nuclear operator Southern Nuclear by late July. SCANA Corp. and Santee Cooper also recently extended an interim agreement to allow it more time to mull the fate of the expansion project at V.C. Summer.
-Sonal Patel is a POWER associate editor (@sonalcpatel, @POWERmagazine)
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