mew Doc 1172 Filed 08/17/17 Entered 08/17/17 15:11:35 Main Document Pg 1 of 11

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1 Pg 1 of 11 REED SMITH LLP Paul M. Singer Tarek Abdalla 225 Fifth Avenue Pittsburgh, PA Telephone: (412) Facsimile: (412) psinger@reedsmith.com tabdalla@reedsmith.com Admitted Pro Hac Vice -and- Derek J. Baker Three Logan Square 1717 Arch Street, Suite 3100 Philadelphia, PA, Telephone: (215) Facsimile: (215) dbaker@reedsmith.com Admitted Pro Hac Vice Attorneys for South Carolina Electric & Gas Company And South Carolina Public Service Authority IN THE UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK In re: WESTINGHOUSE ELECTRIC COMPANY LLC, et al., Debtors. 1 Chapter 11 Case No (MEW) (Jointly Administered) Relates to ECF No RESPONSE BY SOUTH CAROLINA ELECTRIC & GAS COMPANY AND SOUTH CAROLINA PUBLIC SERVICE AUTHORITY TO OMNIBUS MOTION OF DEBTORS PURSUANT TO 11 U.S.C. 365(a) AND 105(a) FOR ENTRY OF 1 The Debtors in these chapter 11 cases, along with the last four digits of each Debtor s federal tax identification number, if any, are: Westinghouse Electric Company LLC (0933), CE Nuclear Power International, Inc. (8833), Fauske and Associates LLC (8538), Field Services, LLC (2550), Nuclear Technology Solutions LLC (1921), PaR Nuclear Holding Co., Inc. (7944), PaR Nuclear, Inc. (6586), PCI Energy Services LLC (9100), Shaw Global Services, LLC (0436), Shaw Nuclear Services, Inc. (6250), Stone & Webster Asia Inc. (1348), Stone & Webster Construction Inc. (1673), Stone & Webster International Inc. (1586), Stone & Webster Services LLC (5448), Toshiba Nuclear Energy Holdings (UK) Limited (N/A), TSB Nuclear Energy Services Inc. (2348), WEC Carolina Energy Solutions, Inc. (8735), WEC Carolina Energy Solutions, LLC (2002), WEC Engineering Services Inc. (6759), WEC Equipment & Machining Solutions, LLC (3135), WEC Specialty LLC (N/A), WEC Welding and Machining, LLC (8771), WECTEC Contractors Inc. (4168), WECTEC Global Project Services Inc. (8572), WECTEC LLC (6222), WECTEC Staffing Services LLC (4135), Westinghouse Energy Systems LLC (0328), Westinghouse Industry Products International Company LLC (3909), Westinghouse International Technology LLC (N/A), and Westinghouse Technology Licensing Company LLC (5961). The Debtors principal offices are located at 1000 Westinghouse Drive, Cranberry Township, Pennsylvania

2 Pg 2 of 11 ORDER AUTHORIZING DEBTORS TO REJECT CERTAIN EXECUTORY CONTRACTS RELATED TO THE VC SUMMER PROJECT TO THE HONORABLE MICHAEL E. WILES UNITED STATES BANKRUPTCY JUDGE: South Carolina Electric & Gas Company ( SCE&G ) and South Carolina Public Service Authority ( Santee Cooper and together with SCE&G, the VC Summer Owners ) hereby file this Response ( Response ) to the Omnibus Motion of Debtors Pursuant to 11 U.S.C. 365(a) and 105(a) For Entry of Order Authorizing Debtors to Reject Certain Executory Contracts Related to the VC Summer Project ( Motion ) 2 and in support thereof state as follows: PRELIMINARY STATEMENT 1. In 2008, the VC Summer Owners entered into an Engineering, Procurement and Construction Agreement (the EPC Agreement ) with a Consortium consisting of Westinghouse Electric Company LLC ( WEC ) and Stone & Webster, Inc. to design and build two (2) nuclear power units in Jenkinsville, South Carolina (the VC Summer Project ). The EPC Agreement contemplated that WEC would provide engineering services and Stone & Webster, Inc. would provide construction services, although WEC and Stone & Webster, Inc. were jointly and severally liable for overall performance under the EPC Agreement. 2. As originally contracted, the V.C. Summer Owners would pay WEC (and Stone and Webster, Inc.) for the design, engineering, procurement and construction of the VC Summer Project. The EPC Agreement originally promised completion of the VC Summer Project by April 2016 (for Unit 2) and January 2019 (for Unit 3). 3. There have been several amendments to the EPC Agreement; however, the most significant amendment was executed in October, 2015 (the October 2015 Amendment ). The October 2015 Amendment converted EPC Agreement to a fixed price contract and extended the 2 Capitalized terms not otherwise defined herein shall have the meanings ascribed thereto in the Motion

3 Pg 3 of 11 completion date of the VC Summer Project to August 2019 (for Unit 2) and August 2020 (for Unit 3). 4. Additionally, the October 2015 Amendment contemplated that WEC would purchase the stock of Stone & Webster, Inc. That purchase occurred, and Stone & Webster, Inc., the entity managing construction of VC Summer Project, was renamed WECTEC Global Project Services, Inc. ( WECTEC ). WEC and WECTEC are both debtors in this Chapter 11 case. 5. In March 2017, WEC, WECTEC and Toshiba Corporation (WEC s ultimate parent company) advised the VC Summer Owners that they would be unable to complete the VC Summer Project on the timeline originally promised in the EPC Agreement (even as extended under the October 2015 Amendment). They also advised the VC Summer Owners that, due to the fixed price nature of the EPC Agreement, they suffered extensive losses and anticipated future losses associated with construction of the VC Summer Project (together with and a similar project in Georgia). Toshiba Corporation made public announcements indicating that such losses were in the neighborhood of $6 billion on the two projects. 6. WEC and Toshiba Corporation also advised the VC Summer Owners that it was WEC s intention to enter Chapter 11, and upon filing, to cease all construction activities on the VC Summer Project and reject the EPC Agreement. WEC s abandonment of its obligations under the EPC Agreement constituted an anticipatory repudiation and material breach of the EPC Agreement. 7. WEC commenced a chapter 11 case to protect their profitable Core Businesses and isolate them from the one specific area of their businesses that is losing money: their construction of nuclear power plants in Georgia and South Carolina. (First Day Affidavit 5 [Docket No. 4].) - 3 -

4 Pg 4 of Upon learning of WEC s intention to cease nuclear construction and to reject the EPC Agreement, the VC Summer Owners needed information upon which to assess the overall viability of the VC Summer Project, to continue or alter construction or otherwise preserve value. Due to the fixed price nature of the EPC Agreement, WEC historically refused to provide the VC Summer Owners with the detailed information of the actual costs and actual time necessary to complete the VC Summer Project. Once WEC announced that it no longer intended to honor the EPC Agreement and complete the VC Summer Project, the VC Summer Owners needed to understand what would now be required to complete the VC Summer Project, if they undertook to complete the VC Summer Project at their own cost and risk. 9. WEC insisted that it would only delay rejecting the EPC Agreement to allow for an assessment of the overall viability of the VC Summer Project so long as it would not incur any administrative claims associated with the VC Summer Project during the assessment period. WEC ignored the express terms of the fixed price EPC Agreement and forced the VC Summer Owners to fund amounts in excess of the EPC Agreement terms simply to gain access to the required assessment information. 10. To gain access to the information to assess the costs of the VC Summer Project, the VC Summer Owners and WEC entered into an Interim Assessment Agreement, dated March 28, 2017 (the IAA ). 11. One of the principal purposes of the IAA, as expressed in its title and paragraph 15 thereof, was to enable the VC Summer Owners time to investigate the completion status of the VC Summer Project. As part of that investigation WEC was required to provide the VC Summer Owners with, among other things, the EPC cost to complete projection and access to underlying information

5 Pg 5 of The IAA provided that the VC Summer Owners would fund all construction activities for the VC Summer Project during the period of the IAA. As part of the IAA, WEC required that the VC Summer Owners to agree to pay all sums WEC estimated to be paid by WEC for engineering and construction services on a weekly basis and to indemnify WEC against any administrative claims resulting from the continuance of the VC Summer Project during WEC s Chapter 11 Case. 13. On the Petition Date, the VC Summer Owners began funding the continuation of the VC Summer Project to perform the assessment contemplated under the IAA. 14. The VC Summer Owners have made all appropriate payments during the IAA. Since the inception of the IAA, the VC Summer Owners have paid over $590 million to WEC and its subcontractors or vendors during the IAA amounts far in excess of the amounts required to be paid under the EPC Agreement. 15. Eventually, WEC provided the VC Summer Owner the information which was required to determine the actual cost and timeline required to complete the VC Summer Project. The VC Summer Owners retained experts and worked diligently over the term of the IAA to determine the costs to complete as well as the timeline required for completion. The analysis showed that the actual costs of construction would be several billion dollars more than the amounts to be paid to WEC under the EPC Agreement (as amended by the October 2015 Amendment). The analysis also showed that the VC Summer Project could not be completed before at least another several years after WEC had agreed to complete the VC Summer Project under the EPC Agreement (as amended by the October 2015 Amendment). 3 3 The original EPC Agreement and the October 2015 Amendment each contemplated that completion of the two nuclear units would be by dates that would enable the VC Summer Owners to receive the benefits of various tax credits. The new projections indicate that completion of the VC Summer Project would be outside the time for the tax benefits to be achieved

6 Pg 6 of In light of WEC s refusal to complete performance under the EPC Agreement, and after reviewing the estimated cost to complete, and considering the extended time it would take to complete the VC Summer Project, the VC Summer Owners were unable to economically justify taking over and the completing the VC Summer Project at their own cost and risk. 17. Accordingly, the VC Summer Owners exercised their rights under the IAA and terminated the IAA effective on August 7, 2017 (three (3) days prior to the stated end of the IAA term on August 10, 2017). 18. Because of WEC s decision to withdraw from the nuclear construction business, its refusal to complete performance under the EPC Agreement and its stated intention to reject the EPC Agreement, the VC Summer Owners had no choice but to begin activities to wind down operations to protect the VC Summer Project site. 19. Since the termination of the IAA, and to insure WEC, WECTEC, the other on-site contractors and vendors and on-site labor were not harmed, the VC Summer Owners worked through an orderly and considered process to suspend operations and to secure the VC Summer Project site. Such activity continues today. RELIEF REQUESTED A. The VC Summer Project Status 20. The VC Summer Owners are in the position they are in and have been forced to stop work on the VC Summer Project due to WEC s decision to refuse to honor the EPC Agreement and perform thereunder as agreed. 21. Despite having ceased responsibility for construction-related activities on the VC Summer Project and having told the VC Summer Owners that they intended to reject the EPC Agreement on termination of the IAA, the Debtors have not yet moved to reject the EPC Agreement. Therefore, the EPC Agreement remains in effect and executory. Nevertheless, in - 6 -

7 Pg 7 of 11 the Motion the Debtors are seeking to reject all subcontractor and vendor agreements related to the VC Summer Project. 22. The VC Summer Owners have various rights under the EPC Agreement that prevent WEC from modifying or rejecting agreements with subcontractors and vendors without the VC Summer Owners consent. 23. As the EPC Agreement remains executory, the rejection of the subcontractor and vendor agreements is a clear breach of the EPC Agreement. Further, the Motion would result in substantial rejection damage claims from all the subcontractors and vendors related to the VC Summer Project without any regard to the potential to mitigate such claims if the subcontractor and vendor agreements related to the VC Summer Project were utilized as part of the orderly winddown of the VC Summer Project. As such, WEC cannot establish a valid business justification for the Motion. 24. Accordingly, the VC Summer Owners request that the Court deny the Motion outright or continue the Motion and direct the Debtors to cooperate with the VC Summer Owners to enable them to evaluate the subcontractor and vendor agreements in order to determine whether the VC Summer Owners could take over those agreements as part of the winddown of the VC Summer Project. B. The VC Summer Owners Rights Under EPC Agreement 25. There are a number of provisions of the EPC Agreement that prevents WEC from terminating or rejecting subcontractor and vendor agreements related to the VC Summer Project without the VC Summer Owners consent, especially those involving Major Equipment. 4 4 Major Equipment is defined broadly under the EPC and means the following equipment: steam generators, reactor vessel and reactor vessel head, control rod drive mechanisms, main turbine, main turbine generator, deaerator, reactor coolant pumps, containment vessel, cooling towers, main turbine condenser, reactor internals, main step-up transformers, pressurizer, diesel generators, feedwater pumps, circulating water pumps, polar crane, core makeup tanks, moisture separator reheaters, and any other equipment for which the contract(s) with the - 7 -

8 Pg 8 of The EPC Agreement preserves the rights to the VC Summer Owners to prevent termination of agreements with Major Equipment Vendors when amounts are owed to them. Section 3.7 (d) (i) of the EPC Agreement provides: In the event that [WEC] fails to pay a Major Equipment Vendor all undisputed sums due and owing within forty-five (45) Days after the applicable due date, without providing advance notice to Owner demonstrating to Owner s satisfaction that any Major Equipment provided under such Major Equipment Purchase Order shall be timely delivered at no additional charge and at terms that are no less favorable to Owner, [WEC] shall not (A) terminate, cancel, release or assign such Major Equipment Purchase Order (nor permit any of the foregoing to occur), whether under Section 365 of the Bankruptcy Code (or any successor provision) or under any similar law or right of any nature, or otherwise; nor (B) modify, abridge, change, supplement, alter or amend any material provision of such Major Equipment Purchase Order, either orally or in writing, and no agreement seeking to modify, abridge, change, supplement, alter or amend a material provision of such Major Equipment Purchase Order shall be valid or binding without the prior written consent of Owner; nor (C) waive any of its material rights against the Major Equipment Vendor under such Major Equipment Purchase Order; nor (D) agree to or acquiesce in any rejection or termination of such Major Equipment Purchase Order by such Major Equipment Vendor or such Major Equipment Vendor's trustee in bankruptcy, whether under Section 365 of the Bankruptcy Code (or any successor provision) or under any similar law or provision, and any such abandonment, termination, cancellation, release, modification, change, supplement, alteration, amendment, waiver, agreement or acquiescence that negatively impacts Owner (i.e., increased cost or delayed delivery) shall be ineffective as against Owner. Such provisions shall apply until such time when Contractor has made the payments described above. 27. Similarly, the EPC Agreement limits WEC s ability to terminate Major Equipment Purchase Orders, without the VC Summer Owner s consent, when the VC Summer Owner has paid at least one-third of the total price of such Purchase Orders. Section 3.7 (d) (ii) of the EPC Agreement provides: Subcontractor is for an amount in excess of $10,000,000 or that Owner and Contractor agree shall be designated as Major Equipment

9 Pg 9 of 11 To the extent Owner has paid at least one-third of the total price of any Major Equipment Purchase Order, [WEC] shall not, without the prior written consent of Owner, which consent shall not be unreasonably withheld: (a) terminate, cancel, release or assign such Major Equipment Purchase Order (nor permit any of the foregoing to occur), whether under Section 365 of the Bankruptcy Code (or any successor provision) or under any similar law or right of any nature, or otherwise; nor (b) modify, abridge, change, supplement, alter or amend any material schedule, performance, or payment requirements under such Major Equipment Purchase Order, either orally or in writing, and no agreement seeking to modify, abridge, change, supplement, alter or amend a material schedule, performance, or payment requirements under such Major Equipment Purchase Order shall be valid or binding without the prior written consent of Owner; nor (c) waive any of its material rights against the Major Equipment Vendor under such Major Equipment Purchase Order; nor (d) agree to or acquiesce in any rejection or termination of such Major Equipment Purchase Order by such Major Equipment Vendor or Major Equipment Vendor's trustee in bankruptcy, whether under Section 365 of the Bankruptcy Code (or any successor provision) or under any similar law or provision, and any such abandonment, termination, cancellation, release, modification, change, supplement, alteration, amendment, waiver, agreement or acquiescence without Owner's prior written consent shall be ineffective as against Owner. 28. The EPC Agreement further expressly limits WEC s right to reject Major Equipment Purchase Orders, and requires WEC, on direction of the VC Summer Owners, to assume and assign Major Equipment Purchase Orders to the VC Summer Owners. Section 3.7(e) of the EPC Agreement provides: If there shall be filed by or against [WEC] a petition under the Bankruptcy Code, and [WEC] shall determine to reject the Major Equipment Purchase Order pursuant to Section 365 of the Bankruptcy Code, [WEC] shall give the Owner not less than ten (10) Days' prior written notice of the date on which [WEC] shall apply to the bankruptcy court for authority to reject such Major Equipment Purchase Order. Owner shall have the right, but not the obligation, to serve upon [WEEC] within such ten (10) Day period a notice stating that (A) Owner demands that [WEC] assume and assign such Major Equipment Purchase Order to the Owner pursuant to Section 365 of the Bankruptcy Code and (B) Owner covenants to cure (or provide adequate assurance of prompt cure of) all defaults and provide adequate assurance of future - 9 -

10 Pg 10 of 11 performance under such Major Equipment Purchase Order. If Owner serves upon [WEC] the notice described in the preceding sentence, [WEC] shall not seek to reject such Major Equipment Purchase Order and shall comply with the demand provided for in clause (A) of the preceding sentence within thirty (30) Days after the notice shall have been given, subject to the performance by Owner of the covenant provided for in clause (B) of the preceding sentence. 29. Finally, Section 22.2(c) of the EPC Agreement provides the VC Summer Owners with an option to succeed to subcontracts entered by WEC when WEC is in default of the EPC Agreement. 30. The VC Summer Owners have requested that WEC provide it information to enable the VC Summer Owners to determine whether the executory subcontractor and vendor agreements related to the VC Summer Project which should be assumed and assigned to the VC Summer Owners as detailed in the EPC Agreement. To date, such information has not yet been fully provided. 31. WEC s reactionary Motion lacks any proper, valid business justification. In addition to the Motion creating substantial rejection damage claims from all the subcontractors and vendors related to the VC Summer Project the Motion blatantly violates the express terms of the EPC Agreement which remains executory. Such breach further compounds the damages the VC Summer Owners suffered and will suffer if the Motion is granted. 32. Accordingly, the VC Summer Owners request that the Court deny the Motion outright or continue the Motion to provide the VC Summer Owners sufficient time to make an informed decision regarding which subcontracts, vendor agreements and purchase orders should be transferred to the VC Summer Owners for use in the winddown process. Further, the Court should direct the Debtors to cooperate with the VC Summer Owners to enable them to make the

11 Pg 11 of 11 required evaluation for themselves, the subcontractors and vendors affected and the bankruptcy estate as a whole. WHEREFORE, the VC Summer Owners respectfully request that the Court deny the Motion or continue the Motion on the terms outlined herein, and for such other relief as is just and proper. Dated: August 17, 2017 New York, New York Respectfully submitted, REED SMITH LLP By: /s/ Paul M. Singer Paul M. Singer Tarek Abdalla 225 Fifth Avenue Pittsburgh, PA Telephone: (412) Facsimile: (412) psinger@reedsmith.com tabdalla@reedsmith.com -and- Derek J. Baker Three Logan Square 1717 Arch Street, Suite 3100 Philadelphia, PA, Telephone: (215) Facsimile: (215) dbaker@reedsmith.com Attorneys for South Carolina Electric & Gas Company and South Carolina Public Service Authority