The Westinghouse Bankruptcy: Test for Chinese Investment in US Infrastructure
Photo Credit: Pennwell Corporation
By Henry Hing Lee Chan

The Westinghouse Bankruptcy: Test for Chinese Investment in US Infrastructure

Apr. 17, 2017  |     |  0 comments

The Chapter 11 reorganization filing of Westinghouse on March 29, 2017 has opened the Pandora’s Box on the contentious issue of Chinese investment in the US infrastructure under Trump Administration. The immediate cause behind the decision to place Westinghouse under bankruptcy filing by its parent company, Toshiba of Japan, was the cost overrun at four 3G (third generation) AP1000 reactors under construction in two plants at the U.S. South East.

The two power plants, at the V.C. Summer station in South Carolina and the Alvin. W. Vogtle plant in Georgia, are years behind schedule and billions of dollars over budget. The state regulators approved USD 14 billion budget on each of the plant back in 2009, the latest estimate from Morgan Stanley on the final bill for the South Carolina project is USD 22 billion and USD 19 billion for the Georgia plant.

The bankruptcy filing had not stopped the work at the construction site. The power companies behind the two plant, SCANA Energy in South Carolina and a consortium in Georgia led by Georgia Power, a unit of Southern Company have all arranged continuation of work in the meantime while the companies weighed options.

“Our preferred option is to finish the plants. The least preferred option is abandonment,” said SCANA CEO Kevin Marsh in a press conference on April 5.

It is unclear whether Westinghouse will continue to work as contractor of the project. It bought the contractor, CB&I Stone & Webster for USD 229 million last year from its former parent, Chicago Bridge & Iron Company, when the two projects run into cost overruns and delays. The purchase has not solved the construction issues. Westinghouse will probably terminate the construction contracts and ask for new contract terms that passes the losses going forward.

It could be difficult for the utilities to find another builder to take them over at a “reasonable” cost. The expertise required for this new 3G design is high and there is still a lot of work to complete the plant. The US Energy Department has authorized USD 8.3 billion in federal loan guarantees for the four reactors under construction, the public fund exposure will complicate the bankruptcy restructuring effort if the decision of the owner is to abandon the plant.

Westinghouse is an iconic company that stands for the electric grid and nuclear power in the US. It supplied the world’s first commercial pressurized water reactor more than half a century ago in Pennsylvania and that design has dominated the global civilian nuclear power industry in the booming nuclear power era from the 1960s to 1980s. Out of the more than 430 operating nuclear power stations operating around the world today, about half are based on the Westinghouse design. The company still employs 7,000 workers outside of its Pittsburgh headquarter to provide fuel and maintenance services to many of them. The continuing operation of the company is critical to the smooth operation of these power plants around the world.

Westinghouse remain profitable on its global service and maintenance business. It is securing a USD 800 million loan from a consortium led by Citicorp and Apollo Global Management, subject to the approval of the bankruptcy judge. The loan will support the company’s global operations, including its healthy service and maintenance business, and pay for construction workers on site in Georgia and South Carolina. However, the money cannot be used to repay the liabilities stemming from cost overruns and delays at the projects. There is little doubt that Westinghouse will survive with its service and maintenance business after emerging from bankruptcy proceedings. The uncertainty revolves around the fate of the two-unfinished nuclear power plant and the future nuclear plant design business of Westinghouse.

Setback to US Civilian Nuclear Business

The Westinghouse bankruptcy is a serious setback to civilian nuclear power program in the US. The two affected nuclear plants are the first new US nuclear power plants in three decades. The construction started in 2009 and the original schedule is to start commercial operation in the first quarter of 2017. The completion date has now moved to end of 2020, and with the unexpected bankruptcy of Westinghouse, further delay appears likely.

The 3G AP1000 design used in the two-power plant represents the latest technology in nuclear engineering and is supposed to bring in a new era of safer civilian nuclear energy use. The Generator III (3G) reactor is a development of the Generation II(2G) nuclear reactor designs incorporating evolutionary improvements in design developed during the lifetime of the 2G reactors. The 3G plant has a design life of 60 years versus the design life of earlier generation of 40 years. Improvements include better fuel technology, better thermal efficiency, significantly enhanced safety systems from earthquake, plane hit and standardized designs for reduced maintenance and capital costs. Specific improvement to prevent repeat of Three Miles Island accident (1979), Chernobyl accident (1986), 911 terrorist attack (2001) and Fukushima accident (2011) are incorporated in the plant design and construction stage.

The rise of non-conventional energy and the natural gas glut in the US over the last few years somehow diminish the relevance of the nuclear power. However, the fact that nuclear power is the only power source that can deliver an annual 7000-8000 hours utilization for 60 years still makes it the most stable base load power source in a large grid.

Contrasting Fortune of AP1000 Reactors in China and US

In contrast to the construction troubles experienced by the four AP1000 reactors in the US, the four reactors with the same design constructed at the same time in China fared much better.

China imported AP1000 technology from Westinghouse in 2006, immediately after the US Nuclear Regulatory Commission approved the basic design in 2005. The construction of Sanmen I & II and Haiyang I & II nuclear projects commenced in March and September 2009 respectively. The 2011 Fukushima accident forced a global review of safety features and all nuclear power plant under construction at that time were redesigned to handle the contingency of massive cooling power failure aka Fukushima.

While the US government has ruled out a Chinese takeover, it does not rule out the participation of Chinese contractors to complete the two nuclear power plants.

The commercial operation of the four reactors were delayed from 2014-2015 to 2018. The latest budget estimated is RMB 23000 per kilowatt. They are generally within construction time and budget estimates considering the new design change. Civil work construction of the four reactors had completed and they are undergoing hot test with uranium fuel now. Commercial operations for all four reactors are expected to be early-mid 2018. The Chinese plants will be the first GW scale commercial size 3G power plant in the world.

The Chinese experience in AP1000 construction revealed that the design of AP1000 is not the culprit behind the construction delay and cost overrun at the US reactors. The country is a strong proponent of the AP1000 technology and the Chinese government is expected to approve construction in 2017 for 6 new nuclear reactors based on AP1000 3G technology upon successful test of the four reactors. The Chinese also developed the derivative CAP 1400 nuclear reactor design based on AP1000 technology. CAP 1400 has a higher power output of 1400 MW as against the 1100 MW of AP 1000.and all the intellectual property of CAP 1400 belongs to China as per agreement between Westinghouse and China.

The likely explanation behind the US AP1000 reactors construction trouble is not so much due to its new design nor design change as the bankruptcy court filing claims, but more likely because the nuclear construction industry in the US has been dormant since the Three Mile Island accident stopped all new plant construction in 1980s. American companies lacked the equipment and expertise needed to make some of the biggest components and other new improvements called for in the new 3G plant.

The contractor Westinghouse chose to complete the projects struggled to meet the strict demands of nuclear construction, even the acquisition of the contractor Chicago Bath & Iron Stone & Webster in early 2016 does not help. An ironic twist is that both Westinghouse and CB&I are key players in the construction of the four AP1000 reactors in China, and their performance has been satisfactory.

In September 2014, Westinghouse and China’s State Nuclear Power Automation System Engineering Company agreed to expand collaboration on Instrumental & Control systems for future Chinese AP1000 reactors, both in China and abroad. CB&I also signed a memorandum of understanding with China National Nuclear Corporation, the majority owner of Sanmen 1 and 2, for future cooperation on construction management.

The presence of a reliable general contractor accounts for the difference between the Chinese and US performance. The Chinese government established State Nuclear Power Technology Corporation (SNPTC) for the localization of 3G technology in 2006. While Westinghouse and its partner Shaw Group are building the USD 5.88 billion phase one of the Sanmen I plant, SNPTC is the general contractor for the plant and the company is apparently a quick learner on how to convert new designs to finished projects on the ground. When one checks the figure on localization of key components in a nuclear plant (per SNPTC), locally produced components will account for 55 percent of the cost of China’s first four AP1000 reactors, rising from 31 percent for Sanmen I to over 72 percent for Haiyang II.

The Westinghouse Dilemma Facing US Policymakers

The bankruptcy of Westinghouse and the success of the Chinese contractor in AP1000 immediately raised the spectre of Chinese takeover of the nuclear power plant projects. Bloomberg reported that cabinet officials including Secretary of Energy Rick Perry, Treasury Secretary Steve Mnuchin, Secretary of State Rex Tillerson and Commerce Secretary Wilbur Ross had been involved in discussions about how to keep Westinghouse out of the control of a Chinese entity.

The US sold Westinghouse to British Nuclear Fuel in a USD 1.1 billion deal in 1999 and British Nuclear Fuel sold Westinghouse to Toshiba at USD 5.4 billion in 2006. Though the company has not been in American hands for a long time, there are lingering concerns that it holds many military nuclear secrets and selling the company to anyone not considered a key US ally is unthinkable.

It is reported that the US government is examining three potential courses of action. The government might block a sale to a Chinese buyer; encourage an alternative bid from US or friendly investors; or the government might invest in the company directly in return for an equity stake, akin to the Obama administration bailout of US automakers during the global financial crises. While the US government has ruled out a Chinese takeover of Westinghouse in the bankruptcy court, it does not rule out the participation of Chinese contractors in some other form to complete the two nuclear power plants.

The “Westinghouse Dilemma” is a challenge to the US policymaker and its resolution will be indicative on what the US will do and can do on the issue of Chinese investment or involvement in US infrastructure. Chinese state owned enterprises and private businesses have built up superior infrastructure experience in many areas and are often the most competitive player in those areas. At the same time, the US has lost the implementing capacity in many key areas of infrastructure. Even though it still possesses the best design power, it takes time to rebuild the necessary expertise on the ground. The case of the nuclear power plants highlight this conundrum. How the Trump administration will work out a win-win solution will be a test of its skill in handling the contentious issue of Chinese investment in US infrastructure.

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