This excerpt taken from the SGR 8-K filed Jun 15, 2007.
Investment in Westinghouse
On October 16, 2006, two newly-formed acquisition companies (the Acquisition Companies) owned and capitalized to a total of $5.4 billion provided 77% by Toshiba Corporation (Toshiba), 20% by Shaw (through its wholly-owned acquisition subsidiary Nuclear Energy Holdings LLC (NEH)) and 3% by Ishikawajima-Harima Heavy Industries Co., Ltd (IHI) acquired BNFL USA Group Inc. (also referred to as Westinghouse Electric Company LLC) and Westinghouse Electric UK Limited and their subsidiaries (collectively Westinghouse) from British Nuclear Fuels plc (BNFL). Shaw obtained financing for its equity investment through the Japanese-market private placement, on October 13, 2006, of approximately $1.08 billion face value of Japanese Yen (JPY) denominated bonds (the Westinghouse Bonds).
Shaw also paid cash of approximately $50.5 million and a promissory note of $2.5 million for the remaining acquisition price and fees related to the acquisition. The total price paid, including deferred financing costs related to the Westinghouse Bonds, was $1.102 billion.
Put Option Agreement
In connection and concurrent with the acquisition by Shaw of its investment in Westinghouse, Shaw entered into a JPY-denominated Put Option Agreement (the Put Option) that provides to Shaw an option to sell all or part of its 20% equity interest in Westinghouse to Toshiba for 97% of the original JPY-equivalent purchase price, approximately 124.68 billion JPY (the equivalent of approximately $1.04 billion at October 16, 2006 exchange rates). The Put Option is exercisable by Shaw only during the period from March 31, 2010 through March 15, 2013, (covenants with the owners of the Westinghouse Bonds require us to exercise the Put Option at least 160 days prior to March 15, 2013, if, by such date, the Westinghouse Bonds have not been repaid or earlier in the event of certain Toshiba credit events). The Put Option provided financial support to NEH to issue the Westinghouse Bonds on a non-recourse basis to Shaw (except NEH) as the Westinghouse Bonds are collateralized exclusively by the security addressed below in the section Westinghouse Bonds. If, due to legal reasons or other regulatory constraints, Toshiba cannot take possession of the shares upon our exercise of the Put Option, Toshiba is required to provide security for the Westinghouse Bonds for a period of time and may delay the transfer of ownership and settlement of the Westinghouse Bonds by NEH. The Put Option can only be exercised once, and any proceeds received from the Put Option must be used to repay the Westinghouse Bonds. The Put Option is bifurcated as it contains an embedded foreign currency derivative instrument as discussed below.
Embedded Foreign Currency Derivative Instrument
Since the Put Option exercise price is denominated in JPY, the Put Option contains an embedded foreign currency derivative instrument (the Embedded Derivative). Shaw will receive a fixed amount of JPY (approximately 124.68 billion JPY if we choose to put 100% of our ownership in Westinghouse to Toshiba) upon the exercise of the Put Option. This embedded derivative is being accounted for as a bifurcated instrument and separately considered as an acquired component of the investment in Westinghouse and the related agreements.
Commercial Relationship Agreement
In connection with the investment in Westinghouse and related agreements, we executed a Commercial Relationship Agreement (the CRA) which provides us with certain exclusive opportunities to participate in projects where we would perform engineering, procurement and construction services on future Westinghouse advanced passive AP 1000 nuclear power plants, along with other commercial opportunities, such as the supply of piping for those units. The term of the CRA is six years and contains renewal provisions. Our opportunities to participate in projects sourced before exercise of the Put Option survives the termination of the CRA. If, upon our exercise of the Put Option, we put more than 5% of our equity interest in Westinghouse to Toshiba, the CRA is terminated.
Shareholder Agreement and Dividend Policy
On October 4, 2006, NEH entered into shareholder agreements with respect to the Acquisition Companies setting forth certain agreements regarding the capitalization, management, control and other matters relating to the Acquisition Companies. Under the shareholders agreements, the Acquisition Companies will distribute agreed percentages of the net income of Westinghouse to its shareholders as dividends, and the shares to be owned by NEH will be entitled to limited preferences with respect to dividends to the extent that targeted minimum dividends are not distributed (the Dividend Policy). The intent of the Dividend Policy is that we expect that approximately 80% of Westinghouses targeted earnings will be distributed as dividends for the six-year term of the Put Option. Our right to receive dividends for the first six years of our investment in Westinghouse survives the exercise or expiration of the Put Option.
The Westinghouse Bonds were issued at a discount for net proceeds of $1.049 billion. The Westinghouse Bonds are non-recourse to Shaw and its subsidiaries, except NEH. The Westinghouse Bonds are secured by the assets of and 100% of our ownership in NEH, its shares in Westinghouse, the Put Option, a $36.8 million letter of credit (JPY-denominated) established by Shaw for the benefit of NEH related to principal on the Westinghouse Bonds (the Principal LC) and the letters of credit (JPY-denominated) for the benefit of NEH related to interest on the Westinghouse Bonds (the Interest LC). An Interest LC was issued in the amount of $115.9 million, which will automatically renew and remain outstanding until March 31, 2010. If at such time the option is not exercised, then we will have to renew it for the amount of interest remaining. The initial Interest LC is approximately $115.9 million in the aggregate to cover interest until the beginning of the Put Option period. Other than the Principal LC and the Interest LC delivered at the closing of the Westinghouse Bonds and an agreement to reimburse Toshiba for amounts related to possible changes in tax treatment, Shaw is not required to provide any additional letters of credit or cash to or for the benefit of NEH.
The Westinghouse Bonds were issued in two tranches, a floating-rate tranche and a fixed-rate tranche; and will mature on March 15, 2013. We entered into contracts to fix the JPY-denominated interest payments on the floating rate tranche. Shaw has entered into an interest rate swap agreement in the aggregate notional amount of 78 billion JPY. We designated the swap as a hedge against changes in cash flows attributable to changes in the benchmark interest rate. Under the agreement, we will make fixed interest payments at a rate of 2.398%, and we will receive a variable interest payment equal to the six-month JPY London Interbank Offered Rate, (LIBOR) plus a fixed margin of 0.7%.
Deferred financing costs associated with the Westinghouse Bonds of approximately $11.0 million and the original discount of $30.5 million are being amortized and accreted to interest expense over the term of the Westinghouse Bonds. We anticipate combined amortization and accretion of approximately $6.6 million (discount accretion amount at October 16, 2006 exchange rates) each year related to these agreements.
Summary of the Investment in Westinghouse and Related Agreements
The agreements described above reflect that we paid $1,091.4 billion for our investment in Westinghouse, and reflect that we paid no identifiable consideration to Toshiba for the Put Option or the Embedded Derivative and no separate, identifiable consideration to Westinghouse or Toshiba for the CRA.
We believe we would not have agreed to, nor been able to, complete the investment in Westinghouse without the Put Option, which provided the financial support for us to place the Westinghouse Bonds on a non-recourse basis, or the Dividend Policy, which allows us the opportunity to offset our interest payments on the Westinghouse Bonds with dividend income from the investment in Westinghouse. Additionally, we would not have entered into the agreements without the CRA. Further, it is unlikely that Shaw would have been able to place the Westinghouse Bonds without the Put Option as security.