A brief history of Westinghouse’s financial struggles, beginning in 1907

Westinghouse filed for bankruptcy in March of 2017. But this isn’t the first time the company has had financial struggles…

Westinghouse was founded by George Westinghouse in 1886.

A concise summary of the company’s early history is found at the Encyclopedia of Cleveland History:

The WESTINGHOUSE ELECTRIC CORP., established by Geo. Westinghouse in 1886, was an early manufacturer of electrical equipment that evolved into a multipurpose engineering firm. Westinghouse became a manufacturer in Cleveland partly as the result of an 1894 patent-infringement lawsuit against the Cleveland-based Walker Mfg. Co. The company, established in 1883 by machinist John Walker, produced power-transmitting machinery and cable railway networks. When Walker lost the case, court-ordered constraints on the firm’s activities led to its sale to Westinghouse for about $1 million in 1898. Westinghouse manufactured aluminum and brass castings at Walker’s plant at the foot of Waverly Ave. (W. 58th St.) and the lake shore. During the 1930s it produced a variety of lights, including those used at airports, along highways, and in industry.

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As Westinghouse closed its manufacturing facilities in Cleveland during the post-World War II period, the corporation expanded its sales and service activities, operating branches of sales and engineering, elevator, and repair divisions, as well as sales offices. By the mid-1970s its operations included architectural systems, computer instrumentation sales and services, and construction-industry sales. By 1978 many of these operations were located at 4600 Rockside Rd. In the 1980s, however, the Reagan-era defense build-up brought Westinghouse lucrative government contracts as the Cleveland factories geared toward the production of torpedoes. But by 1993, defense cuts again affected the company as it was forced to lay off 150 workers from its Cleveland division.

As the article indicates, trouble struck the company in the early 1990s. After that, the company began to fragment, so keeping up with all the little strands can be precarious. I’ve tried to follow a few of them below.

CAUGHT IN THE RECESSION

In 1990, the company lost a billion dollars because of loans that went bad. Like other companies (specifically GE), it had created a financing division in 1954 “to help Westinghouse appliance and radio-television dealers obtain inventory and retail sales financing assistance in areas where credit facilities were inadequate.”

The early 1990s recession in the United States began in July of 1990. Commercial and industrial loans usually hit a maximum before the recession begins as the bubbles, buoyed by consumer confidence and investors’ increasing exuberance, reach their peak before popping. This chart from the St. Louis Federal Reserve shows the link (the shaded areas are recessions). Loans generally peak before recessions begin:

Riding the market highs of the late ’80s, and in the wake of Gordon Gekko’s 1987 pronouncement that “greed, for a lack of a better word, is good,” Westinghouse itself indulged in greater risk through its financing arm:

Profits at the once-sleepy appliance and equipment financing unit jumped from $22 million in 1980 to $106 million in 1986, while assets — primarily loans — jumped from $1.9 billion to $5.7 billion during the same period.

And it was just getting revved up. A July 1986 strategic plan put together by consultants under Danforth called for even faster growth, with an emphasis on riskier but more lucrative corporate and junk bond financing, speculative commercial real estate loans and direct loans to developers.

In other words, Westinghouse loaded up on commercial loans during the boom. When the music stopped and the bust arrived, Westinghouse was caught without a chair to sit in.

(As a side note, GE announced in 2015 that it was selling its financing arm, GE Capital. A large portion was purchased by Wells Fargo. Maybe GE senses danger.)

RE-IMAGINED IN THE NINETIES

After their struggles in the recession of the early 1990s, and in an attempt to rise out of the ashes and reinvent itself, Westinghouse began the process of transformation. It made $15 billion in purchases of various media companies, like TNN, CMT, and rights to NFL broadcasting. Westinghouse also purchased CBS in 1995 for $5.4 billion. To fund this massive expenditure, it sold off other divisions of its company.

The non-nuclear power generation division went to Siemens in 1998, for example. Eaton purchased Westinghouse’s distribution and controls division, located in Cleveland, in 1994 for $1.6 billion. Today, various model Eaton breakers are sold as replacements for obsolete Westinghouse models.

So, as a barely recognizable version of its former self, and having completely redefined its purpose and market, the company renamed itself to CBS Corporation in 1997. Then, in 2000, Viacom, who had begun as CBS Films in 1952, and was later renamed to CBS Enterprises in 1968, merged with CBS Corporation to form a mass media empire.

At that time, the original Westinghouse Electric Corporation, founded by George Westinghouse in 1886, ceased to functionally exist.

THE MODERN WESTINGHOUSE

The modern Westinghouse that filed for bankruptcy in March of 2017 was actually formed in 1999 when CBS Corporation packaged up the remains of its nuclear division into a new company. CBS named the new company Westinghouse Electric Company, LLC.

Then, as part of its corporate refocusing process, CBS Corporation sold its nuclear energy business to British Nuclear Fuels Ltd (BNFL) for $1.1 billion in 1999. BNFL then later purchased the nuclear division of ABB, merging their assets into the Westinghouse brand. BNFL, owned by the British government, then went into decline, suffered financial stress, and announced in April of 2005 that it had plans to sell Westinghouse Electric Company, LLC.

Initially valued at $1.8 billion, BNFL’s offer surprisingly attracted competing bids from several big-name companies: Toshiba, General Electric, and Mitsubishi. Toshiba was the highest bidder and announced in February of 2006 that it was purchasing Westinghouse Electric Company, LLC for $5.4 billion, which was three times its value as originally estimated by BNFL. At the time, experts expected it to sell for around just $2 billion.

Westinghouse was just getting started developing four new AP1000 reactors in China. They had begun production in 2007, and around then they awarded Curtiss-Wright a contract to produce 15 reactor coolant pumps. The AP1000 was developed by Westinghouse Electric Company, and it evolved out of the AP600, which had been developed in the nuclear department at Westinghouse Electric Corporation in the early 1990s before it was sold to BNFL.

Shortly afterwards, in 2008, Westinghouse signed contracts with both Southern Company and South Carolina Electric & Gas (SCE&G) to build two AP1000s each at the Vogtle and VC Summer sites.

Westinghouse was under contract to deliver eight AP1000 reactors that were in development and production simultaneously. Was it over-extended?

At the time, analysts wondered if Toshiba had overpaid for Westinghouse, and after the Fukushima events of 2011, these doubts increased. Trouble arose in 2012 when Westinghouse and The Shaw Group, who was constructing the Vogtle plants, sued Georgia Power:

The companies are suing for an amount originally set at $58 million, and the lawsuit says Georgia Power have paid $29.3 million of that, the article said. The two contractors have accused the plant owners of underestimating the amount of suitable soil to backfill two excavation sites for the two new reactors. Backfill is material excavated from a site and reused for filling that must meet standards set by federal nuclear safety regulators, the article said. As a result, Westinghouse and Shaw had to excavate and stockpile additional material and haul it further than planned.

FROM SHAW TO WESTINGHOUSE

The history of the Shaw Group is interesting in its own right. Shaw came to life in 1986 in the pipe manufacturing sector. Then, it purchased Stone & Webster in 2000 after that company went bankrupt following a failed bribery attempt that ended in scandal.

Stone & Webster was one of the original contractors who first got involved with atomic energy. They were the government’s main sub-contractor for building the facilities associated with the Manhattan Project. This included the facilities in Oak Ridge, Tennessee.

In 2010, Shaw was awarded the contract to perform the extended power update (EPU) for Entergy’s Grand Gulf Nuclear Station. That work was completed in June of 2012, which resulted in GGNS becoming the largest single-unit reactor in the United States (1,443 MW).

Then, in 2012, Chicago Bridge & Iron Company purchased Shaw for $3 billion, forming a subsidiary called CB&I Stone & Webster.

Meanwhile, the Shaw Group acquired a 20% interest in Westinghouse Electric Company in 2006, while Toshiba owned most of the rest of it. Then, Toshiba purchased Shaw’s stake in 2013.

THE DECLINE

By 2013, schedule delays and cost overruns at the new reactor construction sites for SCE&G and Southern Company erupted into a lawsuit between the utilities and Westinghouse and CB&I. This resulted in Westinghouse agreeing to buy CB&I Stone & Webster in October of 2015 for $229 million. Georgia Power agreed to pay $350 million in the settlement. CB&I then wrote off $1 billion in losses.

A month after that, scandal hit Toshiba as it revealed that it had not disclosed $1.3 billion in losses it had accumulated through Westinghouse in 2012 and 2013. Toshiba’ woes continued. In April of 2016, Toshiba reported that it was writing down its investment in Westinghouse by $2.3 billion. Then, in December of 2016, The New York Times reported that Toshiba warned investors that several billion in write-offs were coming due to its acquisition of CB&I Stone & Webster:

Toshiba and CB&I Stone & Webster’s former parent, the engineering group Chicago Bridge & Iron Company, have been arguing over the business’s true value ever since the deal closed.

Projects that CB&I Stone & Webster is working on have been hit by delays and cost overruns. In dueling legal claims, Westinghouse and Chicago Bridge & Iron have been disputing how expensive the delays will be and which company should take the financial hit.

The purchase was a gamble from the start: The Toshiba subsidiary was paying relatively little to buy the business, but its ultimate costs could end up being many times higher if things went badly. That outcome now looks likely.

“Westinghouse has found that the cost to complete the U.S. projects will far surpass the original estimates, mainly due to increases in key project parameters, resulting in far lower asset value than originally determined,” Toshiba said on Tuesday.

THE AFTERMATH

So what happened?

Westinghouse announced in December of 2006 that it had just negotiated a deal with China to build 4 new AP1000 reactors on Chinese soil. It originally hoped to have the units in operation by 2013. As of April of 2017, none of the four units have yet to begun power ascension.

Shortly after, in 2008, Westinghouse announced that it had sold two reactors to Southern Company and two to SCE&G.

It was in the process of building 8 new reactors simultaneously. None have started yet. Maybe it simply bit off more than it could chew.

THE LEGACY OF WESTINGHOUSE

George Westinghouse, in his early years, was successful. He defeated Thomas Edison and his General Electric company to gain dominance in the power industry. Westinghouse promoted AC power, Edison promoted DC, and in the end, of course, AC won out.

But it wasn’t all roses for Westinghouse. Most notably, even though it seemed to be on top of the market, the company suffered severely through the Panic of 1907. Westinghouse went into receivership and was taken over by J.P. Morgan, who had interests in Westinghouse’s chief rival: General Electric.

Several of George Westinghouse’s companies, like Westinghouse Air Brake, had no debt on their books. Therefore, they were incapable of being manipulated by Morgan. But Westinghouse Electric, on the other hand, had enough debt that, when the bankers panicked, its was immediately threatened. Westinghouse had its loans called in, and it was short on cash.

The media painted J.P. Morgan as the valiant knight riding in on the white horse who saved the banking industry. The New York Times was primarily responsible for painting that image. Of course, Morgan had financed the purchase of The New York Times in 1896, preventing the paper from going out of business. It’s not a stretch to think he used the paper to his benefit.

Editorials disparaged Westinghouse during the fiasco, blaming the company’s failure on his poor business skills. The bankers effectively forced Westinghouse out of the company. He remained as President after 1907, but Westinghouse was his life’s work. It was a devastating blow to the man.

But the company quickly recovered, leading to the rise of CBS Corporation and the sell-off of its nuclear energy division, Westinghouse Electric Company, LLC.

Only time will tell how Westinghouse fairs from this latest series of events.