Westinghouse

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The Toshiba / Westinghouse crisis continues to drag on without any clear resolution in sight. As things stand:

• Toshiba will probably survive in a much-weakened form, assuming it can sell profitable assets to cover debts.
• Profitable parts of Toshiba's US-based nuclear subsidiary Westinghouse will survive in one form or another after a restructuring plan has been developed and approved by the bankruptcy court. Westinghouse might survive in a weakened form or it might be carved up for sale and no longer be a recognizable entity.
• Toshiba would like to sell its entire 90% stake in Westinghouse but that may not be possible.
• Toshiba and Westinghouse will no longer take on reactor construction projects in their home countries or abroad.
• Much of the discussion about the four partially-built AP1000 reactors in the US assumes that one way or another the reactors will be completed. The four reactors ‒ two in Georgia and two in South Carolina ‒ are largely responsible for the crisis facing Toshiba and Westinghouse due to cost overruns of around US$13 billion. But to push ahead would entail enormous risk and it would be no surprise if the owners of the nuclear plants decided to cancel one or both of the reactors at each plant.
• Toshiba / Westinghouse and the NuGen consortium have yet to acknowledge that the plan for three AP1000 at Moorside in the UK is dead ... but it is dead.
• The likelihood that the plan to build AP1000 reactors in India will proceed is vanishingly small.

Toshiba

Toshiba hopes to submit audited financial figures for the 2016/17 fiscal year, which ended 31 March 2017, by August 10.¹ Toshiba and its auditor PwC Aarata are still working to reach agreement on the figures and to resolve their disagreement as to whether Toshiba should correct past financial reports.²

On June 23, Toshiba said it expects to report a negative net worth as of 31 March 2017 of ¥581.6 billion (US$5.18 billion), a 7.7% increase on earlier estimates.³ The company's estimated net loss for the 2016/17 fiscal year has also increased, to ¥995 billion (US$8.87 billion).³

Also on June 23, the Tokyo Stock Exchange (TSE) announced that from 1 August 2017, Toshiba shares will be demoted from the exchange's first section to its second tier.^2,3 The TSE is also reviewing Toshiba's internal control systems to decide whether to remove the company from the exchange's designation as a "security on alert."²

Toshiba is trying to sell its prize asset, its memory chip business, to stave off bankruptcy and to avoid being delisted altogether from the TSE. But negotiations over the sale of the memory chip business have become complicated, as reported by Nikkei Asian Review:³

"Massive losses from its U.S. nuclear unit plunged the once-mighty Toshiba into negative net worth in fiscal 2016. The company is now desperately trying to raise enough funds to save itself from remaining in negative net worth for a second year ‒ a scenario that would see the company face delisting from the TSE. On Wednesday [June 21], it decided to prioritize negotiations with a Japanese government-led alliance for the sale of its flash memory unit.

"Any conclusion to the deal, however, faces obstacles. Bain Capital, the private equity firm in the alliance, is collaborating with South Korean chipmaker SK Hynix, making a protracted examination into antitrust matters a possibility.

"In addition, Toshiba chipmaking partner Western Digital has sought an injunction against the sale in a California court. With the U.S.-based company weary of the involvement of direct rival SK Hynix, the government-led alliance will have to negotiate with Western Digital, either by asking it to drop the case or trying to include it in the consortium.

"The formation of the alliance was mostly orchestrated by Japan's Ministry of Economy, Trade and Industry, which wants to keep Toshiba's sensitive chip technologies under domestic control."

Some bankers and potential investors are reportedly pressing the Toshiba board to consider alternatives to the sale of its memory chip business. But selling other assets is problematic as Toshiba has few of sufficient value, and a piecemeal sell-off could take too long.⁴ Toshiba will be automatically delisted from the TSE if it cannot drag itself out of its negative shareholder equity position by the end of the current fiscal year, ending 31 March 2018.⁵

In mid-June, Toshiba said it is being jointly sued by 70 shareholders, foreign institutional investors, and individuals seeking damages of ¥43.9 billion (US$391 million) related to a US$1.3 billion profit-padding scandal from 2008‒2014. Separately, Toshiba has been sued by 26 groups and individuals over the scandal with total damages of ¥108.4 billion (US$960 million) being sought.⁶

There was a moment's respite for Toshiba in early June when its share price rose, partly due to an agreement to cap Toshiba's liabilities for the AP1000 reactor project in Georgia at US$3.68 billion.⁷ But Toshiba lost all those gains and more and its stock price fell to half what it was before the problems with the US AP1000 projects came to light last December.⁸

Westinghouse

According to a July 3 Reuters report, citing industry and diplomatic sources, the US administration has said that Westinghouse will emerge from Chapter 11 bankruptcy and be sold to a US investor by the end of the year.⁹

But of course the government can't force investors to buy a bankrupt company. Toshiba has previously tried to sell Westinghouse, without success, and has openly flagged its ongoing desire to rid itself of Westinghouse. But the process is on hold until Westinghouse emerges from Chapter 11 bankruptcy proceedings with a court-approved restructuring plan.⁹

According to Reuters: "Some form of U.S. backing or involvement, industry experts say, could avoid a Chinese or Russian buyer unpalatable to Washington, which would prefer to keep Westinghouse's advanced nuclear technology out of the hands of its foreign rivals."⁹

In court records filed on June 5, the US Committee on Foreign Investments in the United States said that the sale of Westinghouse or its assets could be subject to the panel's review. Consisting of various cabinet members, the Committee is authorized to review transactions which could result in foreign persons or entities acquiring US businesses.¹⁰

In May, Westinghouse was in trouble with the US Nuclear Regulatory Commission (NRC) because of problems at its nuclear fuel plant in Columbia, South Carolina.¹¹ After finding an accumulation of uranium in an air pollution control device last year, in May the NRC cited one additional violation related to the same piece of equipment. In June 2017, the NRC issued a notice of non-conformance to Westinghouse over lax quality assurance at its Mangiarotti subsidiary in Italy.¹² The problem concerns incorrect use of material for AP1000 passive residual heat removal heat exchanger stiffener plates, identified in an earlier inspection. As with the problem at Columbia, Westinghouse has been slow to act. NRC inspections were carried out at Mangiarotti's plant in Italy in July 2016. Follow-up inspections were carried out at Westinghouse's plant in Rockville, Maryland in April 2017. The NRC concluded that Westinghouse "had not taken prompt corrective action or identified the cause of a significant condition adverse to quality", which involved the use of a different type of stainless steel in the manufacture of the component from that required.¹²

It has emerged that Toshiba didn't know that Westinghouse was preparing for a bankruptcy filing even after Westinghouse had hired lawyers for the task late last year, according to court records and Toshiba's official timeline. The Wall Street Journal commented: "If Toshiba's timeline is accurate, it suggests poor communication between parent and subsidiary contributed to letting the problems at Westinghouse get out of hand. Toshiba, one of Japan's biggest and oldest conglomerates, has said it has doubts whether it is a going concern because of its unit's bankruptcy. Conversely, if Toshiba did know about the unit's bankruptcy plans ahead of time but failed to disclose them promptly, it could worsen trust among investors at a time when stock-exchange officials in Tokyo are weighing whether to delist Toshiba shares."¹³

AP1000 reactors under construction in the US

Decisions about the fate of the partially-built AP1000 reactors in Georgia and South Carolina keep being deferred. Westinghouse is expected to break its contracts with the owners of the Vogtle (Georgia) and Summer (South Carolina) plants. Meanwhile the plant owners are weighing up their options regarding the future of the reactors, and paying for work to continue in the meantime. The owners of the South Carolina plant hope to make a decision on the fate of the two AP1000 reactors by August 10.¹⁴ And Southern Co. hopes to make a decision about the two reactors in Georgia "sometime in August" according to CEO Tom Fanning.¹⁵ But no previous deadlines have been met and the issue is likely to drag on for months.

Georgia Power and Westinghouse have finalized an agreement which allows for the transition of project management at the Vogtle plant from Westinghouse to Southern Nuclear and Georgia Power. Under the agreement, finalized on June 9, Toshiba will meet its contractual obligations by paying Southern Co. US$3.68 billion from October 2017 to January 2021 to help cover the costs of completing the two reactors, while Southern Co. agreed not to ask for more, even if the project continues to run over budget.¹⁶ The agreement has been approved by the US Department of Energy, which has a stake in the outcome of the negotiations because it approved a US$8.3 billion loan guarantee for the Vogtle project.

Toshiba may strike a similar agreement with SCANA and Santee Cooper in relation to the two AP1000 reactors under construction in South Carolina. SCANA and Santee Cooper would take responsibility for completing (or abandoning) the reactors, and Toshiba would make a payment to settle contractual obligations.¹⁷

On May 15, Toshiba said it had set aside ¥670 billion (US6.0 billion) to cover parent company guarantees for the Vogtle and Summer plants. Thus a payment of US2.3 billion for the South Carolina plant can be expected in addition to the US3.68 allocated for Georgia.

Another modest win for those hoping to complete the reactor projects in Georgia and South Carolina came on June 15 when the House of Representatives approved a bill on tax credits that could amount to around US$2 billion in subsidies for each of the nuclear plants ‒ Vogtle and Summer.¹⁸ However the future of the bill in the Senate is uncertain. The owners of the nuclear plants need the tax-credit subsidies locked in, and soon.

Despite the Toshiba agreement with the Vogtle owners, and the House of Representatives' vote on tax credits, the future of the Vogtle and Summer reactors is still very much in doubt.

Construction of the four reactors is less than half complete so there is ample scope for further delays and cost overruns. A report by consultants to the Georgia Public Service Commission found that attempts to improve efficiency have had little success: over the past year, four core activities at the Vogtle plant fell an average of 325 days further behind schedule.¹⁹

A recent document written by South Carolina state regulators states: "The projection of

time and costs is made more difficult given the incredible variances in time and costs

actually incurred in comparison to Westinghouse's previous quotes and projections of time

and costs."¹⁴

Owners of the nuclear plants are doing their best to estimate the likely costs to complete the four reactors ‒ but it is a guessing game. Analysts at Morgan Stanley say future costs could exceed current estimates by as much as US$8.5 billion, more than double what shareholders of the two companies are effectively pricing in.²⁰

The Southern Alliance for Clean Energy (SACE) estimates that the total cost of the two reactors in Georgia could reach US$29 billion.¹⁹ SACE based its estimate on a June 2017 report by two utility consultants to the Georgia Public Service Commission. The consultants' report is based on a scenario in which the project comes online in 2022, and Westinghouse's bankruptcy adds further costs.¹⁹

A Morgan Stanley report in March 2017 said the final cost of the two Summer reactors could be as high as US$22.9 billion ‒ double the original estimate.¹⁸

Using the SACE figure for Georgia, and the Morgan Stanley figure for South Carolina, the total cost for the four reactors could be US$51.9 billion, more than double the original estimate of US$23.9 billion (US$14.1 billion for Vogtle and US$9.8 billion for Summer).

Nuclear corporations and lobby groups argue that completion of the Vogtle and Summer reactors is a "national security issue" and a "strategic national imperative". Typically, those meaningless assertions are backed up with the meaningless justification that the US will be "left behind" by other countries such as Russia and China if it exits the global nuclear industry. The Nuclear Energy Institute has gone one step further. The industry lobby group has been circulating a document in Washington arguing the case for tax credits to support nuclear power projects. The document states that if the Vogtle and Summer plants aren't completed, it would stunt development of the nation's nuclear weapons complex because the engineering expertise on the energy side helps the weapons side.²¹

A further complication for the owners of the South Carolina plant is that they learnt in June, much to their astonishment, that Westinghouse's detailed construction schedule for the two reactors is non-existent.¹⁸ "I'm just floored that they haven't been able to produce a schedule for their own project," said Tom Clements from Savannah River Site Watch. "That violates a basic tenet of sound construction management, and I think it reveals that there are more problems to be encountered if the project continues."¹⁸

Friends of the Earth and the Sierra Club filed a complaint with South Carolina state regulators on June 22, calling for a hearing on whether construction should be allowed to move forward at the Summer plant and whether the utilities should be forced to pay back money customers have already spent through higher rates to build the reactors.¹⁸ The South Carolina Public Service Commission approved the groups' request and a hearing is scheduled for August 14 in Columbia.¹⁸

The groups call on the Summer plant owners to "cease and desist from expending any further capital costs related to the Project" and referred to "unreasonable electric rates" ‒ in particular, nine electricity rate hikes since 2008 to help fund the Summer project.¹⁷

Dr Mark Cooper from the Institute for Energy and the Environment at Vermont Law School has written a detailed paper for Friends of the Earth and the Sierra Club in support of their complaint to the South Carolina Public Service Commission.²² Cooper argues:

"Management will waste more money going forward in a futile attempt to complete the project ... Future costs may be twice as much as the costs that have been sunk. This report outlines five steps that can be taken to soften the negative blow to both SCE&G ratepayers and the economy of South Carolina:

• Stop wasting money by abandoning the project.
• Claw back improperly expended sunk costs through reclamation under the bankruptcy laws and reparation for imprudent costs improperly incurred.
• Return to traditional least-cost, used and useful principles for utility resource acquisition.
• Rely on lower cost, cleaner resources, like efficiency, renewables and dynamic system management to meet any growth in demand or reduction in emission of pollutants.
• Mitigate the bill impact by enhancing ratepayer ability to lower their electricity costs with on-bill financing of efficiency, reducing the profit paid on wasted capital expenses, and extending the period for cost recovery."

Cooper argues that "even under the unjustifiably optimistic projection of no future delays and cost overruns, ratepayers will be better off if the utility abandons the project, even if ratepayers are forced to bear the costs that have been sunk to date." In the best-case scenario, swift action by the Public Service Commission could save ratepayers as much as US$10 billion.

Planned AP1000 reactors in the UK

Numerous media reports over the past six weeks have flagged the possibility that South Korea's Kepco could buy into the NuGen consortium that planned to build three AP1000 reactors at Moorside in the UK. Toshiba would be more than happy to sell most or all of its stake in NuGen to Kepco ‒ or anyone else. But Kepco wants to build its own APR1400 reactors instead of Westinghouse AP1000s. That brings with it another set of problems ‒ financing, the anti-nuclear stance of recently-elected South Korean President Moon Jae-in, and the several years it would take for the APR1400 reactor design to go through a generic design assessment process in the UK. Suffice it here to note that previous plans to build AP1000 reactors at Moorside appear to be stone cold dead.

Planned AP1000 reactors in India

Indian Prime Minister Narendra Modi and US President Donald Trump issued a communique after their meeting in Washington in late June. The two leaders "looked forward to conclusion of contractual agreements between Westinghouse Electric Company and the Nuclear Power Corporation of India for six nuclear reactors in India and also related project financing," the communique said.²³

However there is very little likelihood of contractual agreements, no clarity about financing, no obvious reason why India would pay for Westinghouse reactors when cheaper options are available to meet energy needs, no obvious reason why India would sign up for AP1000 reactors given the massive cost overruns in the US, and an unresolved disagreement about India's nuclear liability law.

Another obstacle is that Westinghouse ‒ assuming that Westinghouse even exists after the bankruptcy process ‒ is exiting the reactor construction business. The Hindu reported: "Westinghouse is working out a new model with its lenders under which they will design the reactor and provide consultations, but Indian companies would be entrusted with the actual construction of the plant. A process is underway to ascertain who will do what in the new business model and which Indian companies could be involved."²⁴

References:

1. Reuters, 13 July 2017, 'Toshiba: Not true auditor told co it can't form opinion on annual report', www.reuters.com/article/us-toshiba-accounting-idUSKBN19Y03K?il=0

2. Nikkei Asian Review, 24 June 2017, 'Toshiba teeters on brink of delisting', http://asia.nikkei.com/Business/Companies/Toshiba-teeters-on-brink-of-de...

3. Shotaro Tani / Nikkei Asian Review, 23 June 2017, 'Toshiba's negative net worth widens to 5.2 billion dollars', http://asia.nikkei.com/Business/Companies/Toshiba-s-negative-net-worth-w...

4. 10 July 2017, 'Toshiba need alternative plan quick', www.simmtester.com/page/news/shownews.asp?num=19296

5. 23 June 2017, 'Toshiba asks regulators for extension on annual statement deadline to Aug. 10', www.japantimes.co.jp/news/2017/06/23/business/corporate-business/toshiba...

6. Kathleen Wirth, 13 June 2017, 'Toshiba Being Sued for $399 Million for Accounting Irregularities', http://wirthconsulting.org/2017/06/13/toshiba-being-sued-for-399-million...

7. Peter Wells, 12 June 2017, 'Toshiba jumps 8% after deal to cap US reactor liability', www.ft.com/content/889d3470-4a72-3039-9450-9602bd2faef1?mhq5j=e3
8. www.bloomberg.com/quote/6502:JP

9. Reuters, 3 July 2017, 'Indo-US nuclear deal: Westinghouse could be sold by Dec, ending bankruptcy, says report', http://indianexpress.com/article/business/companies/westinghouse-could-b...

10. Michael Smith, 7 June 2017, 'Washington weighs in on Westinghouse bankruptcy', www.northaugustastar.com/news/washington-weighs-in-on-westinghouse-bankr... of Form

11. Sammy Fretwell, 8 May 2017, 'Nuclear-safety concerns linger at Westinghouse plant', www.thestate.com/news/local/article149368179.html

12. World Nuclear News, 21 June 2017, 'Westinghouse subsidiary receives notice of non-conformance', www.world-nuclear-news.org/RS-Westinghouse-subsidiary-receives-notice-of...

13. Kosaku Narioka, 8 June 2017, 'Toshiba Unaware Its Nuclear Unit Was Preparing for Bankruptcy, Timeline Shows', Wall Street Journal, www.advfn.com/news_Units-Woes-Stun-Toshiba-Toshiba-Missed-Unit-Woes_7496...

14. www.regulatorystaff.sc.gov/Documents/7-12-17%20Nuclear%20Construction%20...

15. Nikkei Asian Review, 13 July 2017, 'US utility to decide fate of Westinghouse reactors in August', http://asia.nikkei.com/Business/Companies/US-utility-to-decide-fate-of-W...

16. World Nuclear News, 12 June 2017, 'Vogtle agreement caps Toshiba obligation', www.world-nuclear-news.org/C-Vogtle-agreement-caps-Toshiba-obligation-12...

17. Michael Smith, 23 June 2017, 'Toshiba seeks SCANA, Santee Cooper takeover of V.C. Summer', www.aikenstandard.com/news/toshiba-seeks-scana-santee-cooper-takeover-of...

18. David Wren, 24 June 2017, 'Missing documentation throws Santee Cooper, SCE&G nuclear project timeline, costs in doubt', www.postandcourier.com/news/missing-documentation-throws-santee-cooper-s...

19. Tom Hals, 15 June 2017, 'Group says Georgia nuclear plant costs rise to $29 billion', www.reuters.com/article/us-toshiba-accounting-westinghouse-bankr-idUSKBN...

20. Lauren Silva Laughlin, 28 March 2017, 'Nuclear waste', www.breakingviews.com/considered-view/utilities-to-pay-price-of-westingh...

21. Amy Harder, 16 June 2017, 'Nuclear scramble on tax credits', www.axios.com/nuclear-scramble-on-tax-credits-2442400126.html

22. Mark Cooper, July 2017, 'The Failure of the Nuclear Gamble in South Carolina', www.cleanenergy.org/wp-content/uploads/MarkCooper_VCSummerReport_Final_J...

23. Reuters, 3 July 2017, 'Indo-US nuclear deal: Westinghouse could be sold by Dec, ending bankruptcy, says report', http://indianexpress.com/article/business/companies/westinghouse-could-b...

24. Vikas Dhoot, 28 June 2017, 'Westinghouse's $20 billion nuclear deal needs a reboot', www.thehindu.com/business/Economy/westinghouses-20-billion-nuclear-deal-...

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On August 10, Toshiba reported its financial figures for the 2016 fiscal year (ending 31 March 2017) after repeated delays and a protracted dispute with its auditor. Toshiba reported a net loss of ¥‎965.7 billion (US$8.83bn; €7.51bn)¹ ‒ more than double the loss of the previous year, and the largest-ever annual loss for a Japanese manufacturer.²

Toshiba said its net worth is negative ¥552.9 billion ($5.07bn; €4.29bn)² and notes (as it did in April) that there is "substantial doubt about the Company's ability to continue as a going concern".¹

Toshiba's losses on its nuclear businesses amounted to over US$11 billion (€9.65bn) in the 2016 fiscal year. The company's financial report states: "Toshiba Group recorded a net loss attributable to shareholders of the Company of 965.7 billion yen (US$8622.0 million), due to the loss of 1,242.8 billion yen (US$11,096.3 million) generated in Westinghouse, its U.S. subsidiaries and affiliates, and Toshiba Nuclear Energy Holdings (UK) Limited, a holding company for Westinghouse Group operating companies outside the U.S."¹

Toshiba noted that its subsidiary Westinghouse Electric Company, Westinghouse's US subsidiaries, and Toshiba Nuclear Energy Holdings (UK) Limited, had all filed for Chapter 11 bankruptcy protection under the US Bankruptcy Code on March 29. Those filings "deconsolidated Westinghouse from Toshiba", Toshiba said.¹

Toshiba has agreed to meet parent-company contractual agreements with US utilities by paying US$3.68 billion to the owners of the Vogtle AP1000 project in Georgia, and US$2.17 billion to the owners of the VC Summer AP1000 project in South Carolina, in the coming years.¹ Thus Toshiba ‒ assuming the company still exists ‒ will be free from the mess of the AP1000 projects in the US when its makes its final payment in September 2022.

And Toshiba hopes to rid itself of Westinghouse altogether: "As part of the Company's plan to offset the negative impact of the ongoing situation, the Company has been reviewing a restructuring plan of Westinghouse Group including deconsolidation by a potential sale of a majority stake in order to eliminate risk in the overseas nuclear power business."¹

Auditor dispute

Toshiba had to repeatedly delay releasing its financial figures because of a protracted dispute with its auditor, PricewaterhouseCoopers (PWC) Aarata. The auditor issued an "opinion with qualifications" regarding Toshiba's annual earnings report on August 10, along with an "adverse opinion" on Toshiba's internal controls.^2,3 PWC Aarata also said there is an "unfixed significant misstatement" and that Toshiba's figures "are not based on generally accepted corporate accounting levels".²

PWC Aarata believes Toshiba "should have booked a respectable degree or all" of the massive losses stemming from its US-based subsidiary Westinghouse ‒ lead contractor for the VC Summer and Vogtle AP1000 projects ‒ in fiscal 2015 instead of the following year.² Toshiba claims it wasn't aware of the massive cost overruns with the US AP1000 projects but PWC Aarata evidently believes otherwise.⁴

If Toshiba followed its auditor's advice, it would have recorded negative net worth for two consecutive years, which would normally trigger a delisting from the Tokyo Stock Exchange.⁵ That, in turn, would take Toshiba one step closer to bankruptcy ‒ hence the company's reluctance to accept the auditor's advice.

Stock exchange listing

As things stand, Toshiba has avoided a stock exchange delisting – but on August 1 it was demoted to the second tier of the exchange, and will no longer feature in the Nikkei 225 index of Japan's top public companies.⁶

Toshiba is still under pressure. Japan Times noted that "there are still two scenarios under which it could be delisted from the Tokyo Stock Exchange: by failing to eliminate its negative net worth and failing to show improvement in its internal management controls. TSE rules stipulate that firms must be delisted if they conclude two consecutive business years in a negative net worth. Because Toshiba ended 2016 with a negative net worth, it was demoted last Tuesday to the TSE's second section."⁷

Financial Times journalist Peter Wells wrote on August 10:⁸

"The immediate threat to Toshiba may have receded after its auditor signed off its annual results but the broader dangers that still threaten the company's future have not disappeared. Toshiba remains, say people close to the conglomerate, "absolutely devoted" to remaining listed on the Tokyo Stock Exchange.

"But the decision by PwC Aarata, Toshiba's auditor, to add a so-called adverse opinion of the company's internal controls could still bring about its delisting. "I don't see how the TSE can look at the wording of that criticism and decide that Toshiba did have adequate control of its systems at the end of March 2017," says Travis Lundy, an analyst at Smartkarma. The wording, he suggests, lowers the likelihood of Toshiba remaining listed. "I don't see anything that suggests this was a problem in the past, but that it has now been fixed."

"Toshiba's biggest challenge has certainly not gone away. It is still scrambling to fill a $5bn hole in its shareholder equity, punched by a $6.3bn writedown on its US nuclear business, the Westinghouse subsidiary that filed for Chapter 11 bankruptcy protection this year. Japanese companies that report two consecutive years of negative shareholder equity face delisting from the TSE, although the exchange operator is able to exercise some discretion.

"Successfully closing the $18bn sale of its memory chip business by the end of its financial year in March 2018 remains Toshiba's best shot at reversing the shareholder equity deficit and avoiding a forced delisting. But the sale process continues to face numerous obstacles, and bankers, lawyers and other executives involved with the sale have repeatedly described "chaos" in the process. ... Owing to the time any sale agreement would take to pass regulators ‒ as well as the need to smooth out a complicated legal spat with joint venture partner Western Digital ‒ Toshiba has in effect until the end of August to conclude a sale, say bankers and lawyers involved in the talks."

"Even if Toshiba can get the chip unit sale back on track in a timely fashion, the risk of delisting may not subside quickly. Since its [profit padding] accounting scandal in 2015, Toshiba has been under scrutiny from the TSE, and in September last year submitted a report on its internal management controls to the bourse operator. But that was knocked back by the exchange three months later. In March, Toshiba resubmitted the report ‒ its second and final chance to impress the TSE that its controls were up to scratch. Should the TSE at some point decide that Toshiba's internal controls are passable, then it would have to justify how it arrived at a different conclusion from the independent auditor. Such a discrepancy could send investors at home and abroad the wrong signal at a time when Japan is keen to show it is trying to improve corporate governance standards."

Bankruptcy

The small risk of Toshiba going bankrupt will loom much larger if the sale of the memory chip business falls through. There is also a possibility that Toshiba will voluntarily file for bankruptcy protection, much as Westinghouse has done in the US. The Wall Street Journal reported on July 27:⁹

"A number of creditors and others involved in Toshiba Corp.'s restructuring are pushing for a Toshiba bankruptcy filing as the best path to rebirth after its effort to raise money through a chip-unit sale stalled. People involved in talks over Toshiba's workout, including business partners, lawyers and people with ties to the company's main bankers, said bankruptcy is worth serious study. Some of them said it is the best available option and that they are advocating it in discussions with Toshiba or creditors. They said a bankruptcy filing by Toshiba, the core of an industrial conglomerate, could free it of burdens that include lingering liabilities from the March bankruptcy of its Westinghouse Electric Co. nuclear unit in the U.S."

"Toshiba's chief executive, Satoshi Tsunakawa, said at a recent news conference that seeking debt relief through the courts isn't an option. A Toshiba spokesman reiterated this week that the company has "no specific plan" to seek bankruptcy protection.

"A person familiar with deliberations at one of Toshiba's main lenders compared the conglomerate to a hole that might have treasure at the bottom but also lurking snakes. Bankruptcy, this person said, could kill any snakes and let the lenders access the treasure. ...

"One person directly involved in a portion of the Toshiba recovery plan said "everyone thinks" bankruptcy has to be looked at ‒ but it is difficult to say so publicly."

Westinghouse

On July 31, SCE&G and Santee Cooper announced their decision to abandon the two partially-built AP1000 reactors at the VC Summer plant in South Carolina. Westinghouse wasn't forewarned even though it was formally the lead contractor on the project (though less directly involved since its March 29 bankruptcy filing). Westinghouse has been working on restructuring plans which assumed that the company would play a minor but profitable role in the completion of the VC Summer project ‒ those plans must now be reworked.

In a court filing on July 26, Westinghouse asked a New York bankruptcy judge to allow the company an extra three months to file a restructuring plan.¹⁰ Westinghouse said it needs more time given the complicated nature of the business ‒ the company has thousands of vendors, around 37,000 creditors and "five different business lines that serve more than half of the nuclear power plants in the world".¹⁰ Bankrupt companies have a 120-day exclusivity period to come up with a reorganization plan, the Pittsburgh Post-Gazette reported, and another 60 days to try to gain approval of it without worrying about creditors or others introducing competing plans.¹⁰ Westinghouse is seeking to extend both deadlines until December 6 and February 4, 2018, respectively.

On July 31, Westinghouse said it has submitted a five-year business forecast to its bankruptcy lenders which includes savings of US$205 million over that period and plans to cut 7% of its 14,000-strong global workforce.^11,12

In early August, Westinghouse laid off 870 employees who were working on or supporting the VC Summer project.¹³ That prompted a lawsuit alleging that Westinghouse violated labor laws by laying off hundreds of workers without proper notice. Seeking class-action status, Andrew Fleetwood, a field engineering manager at VC Summer, is suing Westinghouse for violating the Worker Adjustment and Retraining Notification Act, which requires employers to provide at least 60 days of advance notice before a plant shutdown or a mass layoff.¹³ Westinghouse said it provided as much notice as practicable and that the employees will be permanently laid off on August 31 if no other assignment is identified for them.

On August 7, Westinghouse asked the bankruptcy court to allow it to break thousands of contracts associated with the VC Summer project ‒ contracts cover everything from engineering services and security protection to scaffolding and urine testing.¹⁴ These contractors will join the long list of unsecured creditors in Westinghouse's bankruptcy. The company has accumulated debts of around US$9.8 billion.¹⁵

Santee Cooper said in late July that it will continue to pursue Westinghouse's assets in bankruptcy court to obtain further payment on top of its share (US$976 million) of the parent-company contractual settlement of US$2.17 billion agreed to by Westinghouse's parent company Toshiba for the VC Summer project.¹⁶ Santee Cooper will "continue to pursue Westinghouse ... revenues and assets through bankruptcy court and other legal channels" to further offset its losses, according to chief executive Lonnie Carter.¹⁷

On June 27, the Delaware Supreme Court ruled against Westinghouse, and in favor of Chicago Bridge & Iron Co, in a US$2 billion dispute over cost overruns with the four AP1000 reactors under construction in Georgia and South Carolina.^18,19

References:

1. Toshiba Corporation, 10 Aug 2017, 'Toshiba Announces Consolidated Results for Fiscal Year 2016, to March 31, 2017', www.toshiba.co.jp/about/ir/en/finance/er/er2016/q4/ter2016q4e.pdf

2. Kyodo, 10 Aug 2017, 'Toshiba submits delayed financial report, avoids immediate delisting', https://english.kyodonews.net/news/2017/08/ba1c8caa4acd-toshiba-submits-...

3. Reuters, 10 Aug 2017, 'Toshiba's auditor gives 'adverse opinion' on governance: filing', www.reuters.com/article/us-toshiba-accounting-governance-idUSKBN1AQ0CN

4. Nikkei Asian Review, 11 Aug 2017, 'Battle between auditors drove Toshiba's earnings delay'', https://asia.nikkei.com/Japan-Update/Battle-between-auditors-drove-Toshi...

5. Reuters, 10 Aug 2017, 'Toshiba wins auditor sign-off, likely avoiding delisting for now', www.reuters.com/article/us-charter-commns-m-a-altice-idUSKBN1AP1QN

6. 2 Aug 2017, 'Cumbria nuclear backer Toshiba sees stock exchange demotion', www.in-cumbria.com/Cumbria-nuclear-backer-Toshiba-sees-stock-exchange-de...

7. Kazuaki Nagata, 10 Aug 2017, 'Toshiba ducks delisting by submitting long overdue financial report', www.japantimes.co.jp/news/2017/08/10/business/corporate-business/toshiba...

8. Peter Wells, 10 Aug 2017, 'Cloud hangs over Toshiba even after auditor sign-off', www.ft.com/content/d6ac9154-7dc1-11e7-9108-edda0bcbc928
9. Kosaku Narioka, Takashi Mochizuki and Peter Landers, 27 July 2017, 'Toshiba Bankruptcy Filing Pushed by Some Involved in Workout', www.wsj.com/articles/toshiba-bankruptcy-filing-pushed-by-some-involved-i...

10. Anya Litvak / Pittsburgh Post-Gazette, 27 July 2017, 'Westinghouse needs more time in crafting bankruptcy plan', http://powersource.post-gazette.com/powersource/companies/2017/07/26/Bri...

11. Anya Litvak / Pittsburgh Post-Gazette, 16 Aug 2017, 'Westinghouse cuts office space in North Hills', http://powersource.post-gazette.com/powersource/companies/2017/08/16/Wes...

12. World Nuclear News, 1 Aug 2017, 'US nuclear construction project to be abandoned', www.world-nuclear-news.org/NN-US-nuclear-construction-project-to-be-aban...

13. Anya Litvak / Pittsburgh Post-Gazette, 11 Aug 2017, 'Westinghouse furloughed 870 employees in fallout from the cancelled South Carolina nuclear project', http://powersource.post-gazette.com/powersource/companies/2017/08/11/Wes...

14. Anya Litvak / Pittsburgh Post-Gazette, 9 Aug 2017, 'Westinghouse: Project canceled 'without warning'', http://powersource.post-gazette.com/powersource/companies/2017/08/09/Sou...

15. Nathan Bomey / USA Today, 30 March 2017, 'Georgia nuclear plant in jeopardy after Westinghouse plunges into bankruptcy', www.11alive.com/money/georgia-nuclear-plant-in-jeorpardy-after-westingho...

16. Steven Mufson, 31 July 2017, 'S.C. utilities halt work on new nuclear reactors, dimming the prospects for a nuclear energy revival', www.washingtonpost.com/business/economy/sc-utilities-halt-work-on-new-nu...

17. Andrew Ward, 1 Aug 2017, 'Westinghouse nuclear project halted in South Carolina', www.ft.com/content/aaaeda90-761d-11e7-a3e8-60495fe6ca71

18. Reuters, 29 June 2017, 'US court rules for Chicago Bridge in Westinghouse dispute', http://asia.nikkei.com/Spotlight/Toshiba-in-Turmoil/US-court-rules-for-C...

19. Anya Litvak / Pittsburgh Post-Gazette, 27 June 2017, 'Court rules against Westinghouse in nuclear acquisition deal', http://powersource.post-gazette.com/powersource/companies/2017/06/27/wes...

Nuclear Monitor has been covering the Toshiba / Westinghouse crisis in detail, on the expectation that it might soon reach a dramatic resolution, and because we think it is useful to have a detailed record of these momentous developments. The resolution might yet be dramatic but it won't be reached anytime soon. Japanese conglomerate Toshiba and its US nuclear subsidiary Westinghouse are undergoing complex negotiations about restructuring options, including selling profitable parts of their operations to stave off bankruptcy. Decisions on the fate of the four Westinghouse AP1000 reactors under construction in the US are also unfolding slowly.

The best-case scenario from the point of view of Toshiba and Westinghouse is that both companies survive ‒ albeit with some painful downsizing. And they hope that the US AP1000 projects will be completed, though the fate of those projects is largely out of their hands. Even in the best-case scenario (from their point of view), much damage has already been done: the multi-billion-dollar cost overruns with the US reactor projects, and the near-collapse of nuclear industry giants, will have a chilling effect on the global nuclear power industry for decades to come.

Toshiba

Toshiba announced on May 15 that it expects to report a consolidated net loss of ¥950 billion (US$8.6 billion) for the 2016-2017 financial year which ended March 31.¹ But the figure was an unaudited projection as the company and its auditor PricewaterhouseCoopers (PwC) Aarata remain in dispute about Toshiba's accounting for cost overruns with the four AP1000 reactors under construction in the US.

Toshiba said it aims to file a financial report with the Tokyo Stock Exchange and Tokyo's Kanto Finance Bureau by the legally required deadline of June 30. But audited figures will not be available ahead of a June 28 general meeting of shareholders. An extraordinary general meeting will be held at a later date to present audited financial figures. "The company expresses its sincere apologies to its shareholders, investors and all other stakeholders for any concerns or inconvenience caused by this situation," Toshiba said in a statement.²

In addition to the unresolved dispute over Toshiba's historical accounting for AP1000 cost overruns in the US, the company is unsure how much it will have to pay US utilities building those reactors, further complicating efforts to accurately assess its financial position. And Westinghouse's Chapter 11 bankruptcy filing further complicates the process. Nikkei Asian Review reported: "The Chapter 11 bankruptcy filing itself also is slowing the process. Westinghouse looks to firm up a turnaround plan in late July, which will confirm the extent of Toshiba's losses. This will let PwC Aarata kick the auditing process into high gear."³

Toshiba's efforts to find a new auditor to replace PwC Aarata have been unsuccessful. Finding a new, second-tier auditor in a short space of time to endorse figures from the past fiscal year, when a large auditing firm has refused to sign off on those figures, has proven to be impossible.⁴

Thus Toshiba plans to work with PwC Aarata to finalize figures for the March 2016 to March 2017 fiscal year, and then to find a new auditor. Nikkei Asian Review reported: "PwC Aarata has reportedly agreed to audit Toshiba's earnings only under certain conditions, including further investigation into the Westinghouse problems. Ironing out these issues is likely to take some time. Toshiba may submit a request soon to the Financial Services Agency to extend the securities report deadline beyond June. Some company insiders say the final report may not come out until around September."⁵

One of Toshiba's many problems is that its efforts to sell its lucrative NAND flash memory chip business are being frustrated by joint partner Western Digital. US-based Western Digital announced on May 14 that several of its SanDisk subsidiaries have filed a request for arbitration through the International Chamber of Commerce related to flash-memory joint ventures operated with Toshiba.¹

Western Digital wants to increase its stake in NAND but its proposed purchase price is "low-ball" according to Nisha Gopalan, a Bloomberg columnist.⁶ Gopalan wrote on May 29: "Western Digital has Toshiba over a barrel. It took the Japanese company to the International Chamber of Commerce's International Court of Arbitration, and has refused to allow Toshiba to use its shares as collateral to access a much-needed 700 billion yen credit line. Western Digital has since softened its stance, but the point's been made: There's not going to be a sale unless Western Digital is invited to the party."⁶

Arbitration between Western Digital and Toshiba could take a year or so.⁷ But Toshiba doesn't have that amount of time to sort out its current mess. It has to recover its financial situation, and produce audited financial figures, to avoid a stock-exchange delisting that would make the company's current situation much worse and possibly irretrievable. A negotiated settlement over the sale of NAND seems likely.⁸

In a piece titled 'Toshiba: From nuclear renaissance to nuclear nightmare', market analyst Venkat Subramaniam notes that Toshiba faces "significant risks on a number of fronts – e.g. delisting risk with the TSE [Tokyo Stock Exchange], banks pulling the plug, execution risk with NAND sale, getting auditor sign-off on the accounts, and the very real possibility of crippling additional liabilities on the Westinghouse side."⁹

A growing number of Toshiba's subsidiaries and affiliates are withdrawing money from the parent company, seeking to minimize risks and appease shareholders.¹⁰

Associated Press reported on May 31 that Toshiba is facing 20 lawsuits in Japan filed by banks, individuals, overseas investors and other parties seeking damages totaling ¥50 billion (US$455 million).¹¹

Masashi Goto, a former Toshiba engineer who specialized in nuclear containment vessels, told Associated Press that nuclear reactors can be likened to bedridden patients, who must be cared for and eventually properly buried ‒ an onerous, decades or possibly centuries-long task for the industry. "Even after Fukushima," he said, "Toshiba management did not have the wisdom to change course."¹¹

Westinghouse

Mark Marano, Westinghouse's chief operating officer, said on May 23 that Toshiba has "signalled pretty clearly to the market" that it wants to divest a majority stake in Westinghouse.¹² The process of selling Toshiba's 90% stake in Westinghouse "may materialize into the fall, once we get further along in the Chapter 11 process," Marano said.¹²

But previous efforts to sell Westinghouse have failed and future attempts will be unlikely to succeed unless Westinghouse is sold for a song (Toshiba chief executive Satoshi Tsunakawa said in mid-March that Toshiba might have to pay a buyer to take Westinghouse off its hands¹³) and/or broken up into bite-sized chunks. There will certainly be bidders for Westinghouse's profitable operations.

Westinghouse says it plans to file a business plan with the bankruptcy court in July, but approval of the plan may have to wait until "some months after" according to company executive David Howell.¹²

Westinghouse's interim president and CEO José Gutíerrez said on May 24 that the company remains committed to its reactor design business and will pursue future sales with opportunities in China, India, Turkey and the UK.¹⁴ That may be wishful thinking, of course.

Westinghouse is working to develop a "more achievable delivery model" to reduce risk, Gutíerrez said.¹⁴ The company hopes to remain involved in the nuclear industry in areas such as engineering and procurement, instrumentation and controls, and fuel services ‒ but will no longer take on reactor construction contracts such as the AP1000 projects that have led it to seek bankruptcy protection. "Construction is not our forte, and we certainly have decided from a risk perspective, never to do that again," David Howell said.¹⁵

One of the company's problems is keeping skilled staff ‒ and more broadly, the lack of skilled, experienced staff goes some way to explaining the failure of the US AP1000 projects, and the failure of the AP1000 projects will make a bad situation worse. Westinghouse notified around 75 former senior managers in April that it will stop paying their pension entitlements, thus removing a benefit that has helped the company retain top talent.¹⁶ Some of the former managers may take Westinghouse to court, Reuters reported on May 25. Former Westinghouse CEO Steve Tritch told Reuters the company may struggle to keep top talent without the plan in place.¹⁶

Westinghouse's ability to keep skilled staff was further strained by a lockout of over 170 workers from the company's Newington plant in New Hampshire, and a smaller facility at Pease Development Authority, beginning May 21. Westinghouse wanted workers to sign a new agreement freezing wages for three years and severely curtailing conditions relating to health care, pensions, and severance packages.¹⁷ Newington worker and union leader Duane Egan said the union is willing to forgo wage increases but the contract put forward by Westinghouse "strips us of most of our benefits, and we're not agreeable to that."¹⁸ The two-week lockout ended on June 5 with a compromise agreement on employment conditions.¹⁹

The Newington plant manufactures the reactor vessel barrel and the parts that go into it for AP1000 nuclear power plants. Currently, it is working on reactor vessel parts and coolant pumps that will go into the AP1000 projects in Georgia and South Carolina.¹⁸

Further disputes between Westinghouse and other unions are anticipated in the coming months. Union members claim that Westinghouse is trying to bring union employees in line with its non-unionized workers, who have seen their pensions frozen, their severance pay slashed, and their health-care costs increase in recent months.¹⁸ Westinghouse has 713 union employees across its operations, according to the company's bankruptcy documents, a small fraction of its total workforce which numbers around 11,500 worldwide.¹⁸

Westinghouse is also having problems at its nuclear fuel plant in Columbia, South Carolina. Since finding an accumulation of uranium in an air pollution control device last year ‒ leading to a shut-down of part of the plant for several months ‒ the Nuclear Regulatory Commission has cited one additional violation related to the same piece of equipment. The NRC says it will conduct comprehensive performance reviews annually instead of every two years.²⁰

The problems just keep piling up for Westinghouse. The Pittsburgh Post-Gazette reported on June 6:²¹

"In new documents, Westinghouse disclosed a litany of lawsuits, including those stemming from its AP1000 construction projects. It also listed conflicts that may at some point lead to more lawsuits, including potential breach-of-contract claims against Curtiss-Wright Electro-Mechanical Corp., whose Cheswick plant makes reactor coolant pumps. Defects in coolant pumps delivered to Westinghouse's AP1000 projects in China and in the U.S. delayed progress there.

"Westinghouse indicated it is mulling an action against its Japanese parent company, Toshiba Corp., for breach of contract. And the company disclosed that it received a subpoena from the U.S. Securities and Exchange commission in March, a year after Toshiba confirmed the federal agency is investigating it for potential fraud around an accounting scandal."

References:

1. World Nuclear News, 15 May 2017, 'Toshiba projects JPY950 billion loss for FY2016', www.world-nuclear-news.org/C-Toshiba-projects-JPY950-billion-loss-for-FY...

2. Toshiba Corporation, 31 May 2017, 'Notice on the Ordinary General Meeting of Shareholders', www.toshiba.co.jp/about/ir/en/news/20170531_1.pdf

3. Nikkei Asian Review, 1 June 2017, 'Toshiba earnings delayed again amid uncertainty over losses', http://asia.nikkei.com/Spotlight/Toshiba-in-Turmoil/Toshiba-earnings-del...

4. Japan Times, 11 May 2017, 'Toshiba gives up finding new auditor for now', www.japantimes.co.jp/news/2017/05/11/business/corporate-business/toshiba...

5. Nikkei Asian Review, 11 May 2017, 'Toshiba keeping current auditor for fiscal 2016 earnings', http://asia.nikkei.com/Business/Companies/Toshiba-keeping-current-audito...

6. Nisha Gopalan, 29 May 2017, 'Western Digital Isn't Going Anywhere, Toshiba', www.bloomberg.com/gadfly/articles/2017-05-29/western-digital-isn-t-going...

7. 15 May 2017, 'Toshiba's U.S. partner Western Digital seeks right to have say in sale of chip unit', www.japantimes.co.jp/news/2017/05/15/business/corporate-business/toshiba...

8. Nikkei Asian Review, 2 June 2017, 'Western Digital CEO to return to Japan, seeking Toshiba deal', http://asia.nikkei.com/Spotlight/Toshiba-in-Turmoil/Western-Digital-CEO-...

9. Venkat Subramaniam, 26 May 2017, 'Toshiba: From nuclear renaissance to nuclear nightmare', http://humblevalueinvestor.blogspot.com.au/2017/05/toshiba-from-nuclear-...

10. Nikkei Asian Review, 17 May 2017, 'Group companies pulling money out of Toshiba', http://asia.nikkei.com/Spotlight/Toshiba-in-Turmoil/Group-companies-pull...

11. Associated Press, 31 May 2017, 'For Toshiba, a management meltdown', www.cbsnews.com/news/toshiba-management-nuclear-reactors-chips/

12. Rebecca Kern and Pavel Alpeyev, 24 May 2017, 'Toshiba may seek buyers for Westinghouse starting this fall', www.livemint.com/Companies/AZRedxj8mUfFWFAGY9WPDL/Toshiba-may-seek-buyer...

13. Makiko Yamazaki and Taiga Uranaka, 14 March 2017, 'Toshiba pushes sale of nuclear unit Westinghouse as crisis deepens', www.reuters.com/article/us-toshiba-accounting-idUSKBN16L02X

14. World Nuclear News, 25 May 2017, 'Westinghouse aims for competitive future', www.world-nuclear-news.org/C-Westinghouse-aims-for-competitive-future-25...

15. Rebecca Kern, 25 May 2017, 'Westinghouse to Emerge From Bankruptcy Stronger, CEO Says', www.bna.com/westinghouse-emerge-bankruptcy-n73014451517/

16. Tom Hals, 25 May 2017, 'EXCLUSIVE-Bankrupt Westinghouse ends pensions for ex-CEOs, execs', www.nasdaq.com/article/exclusivebankrupt-westinghouse-ends-pensions-for-...

17. Doug Alden, 2 June 2017, 'Westinghouse workers seek support from State House legislators', www.unionleader.com/article/20170602/NEWS02/170609918/-1/

18. Anya Litvak / Pittsburgh Post-Gazette, 22 May 2017, 'Westinghouse locks out union at New Hampshire plant', http://powersource.post-gazette.com/powersource/companies/2017/05/22/Wes...

19. Jason Moon, 5 June 2017, 'Westinghouse, Union Reach Deal to End Newington Employee Lockout', http://nhpr.org/post/westinghouse-union-reach-deal-end-newington-employe...

20. Sammy Fretwell, 8 May 2017, 'Nuclear-safety concerns linger at Westinghouse plant', www.thestate.com/news/local/article149368179.html#storylink=cpy

21. Anya Litvak / Pittsburgh Post-Gazette, 6 June 2017, ''We, Westinghouse, cannot fail': CEO gives fuller picture of business in new documents', http://powersource.post-gazette.com/powersource/companies/2017/06/06/Wes...

On March 29, the day that Westinghouse filed for Chapter 11 bankruptcy protection in New York, Bloomberg noted: "Westinghouse Electric Co., once synonymous with America's industrial might, wagered its future on nuclear power ‒ and lost."¹

Whether Westinghouse will survive is an open question. Toshiba said on March 29 that Westinghouse has debts totalling US$9.8 billion and the bankruptcy filing is a clear indication that the company's viability is in doubt.²

Toshiba would sell Westinghouse if it could find a buyer, but it can't. Toshiba has tried but failed to sell Westinghouse several times already.³ Incredibly, Toshiba chief executive Satoshi Tsunakawa said in mid-March that Toshiba might have to pay a buyer to take Westinghouse off its hands.⁴ Presumably a utility or company willing to accept Westinghouse (along with a payment) would also be taking on a debt load as well as future risks associated with Westinghouse's nuclear business.

The Financial Times reported on March 5: "Mitsubishi this month ruled out rescuing the US company, citing its partnership with Areva, the troubled French reactor designer. Hitachi, which makes reactors with GE, also said it would not invest in Westinghouse, highlighting technology differences. GE is also thought to be highly unlikely to have any interest in Westinghouse. GE declined to comment. EDF, the French power company that is planning to buy a controlling stake in Areva's reactor business, is not expected to pursue Westinghouse. An EDF spokesperson said buying Westinghouse was "not in our plan"."³

South Korea's Kepco is seen as a possible buyer of Westinghouse, or parts of Westinghouse, and Kepco is also seen as a possible saviour of Toshiba's NuGen reactor project at Moorside in the UK. George Borovas from law firm Shearman & Sterling said: "It is therefore possible that some kind of 'package deal' could be structured for a strategic Korean investment into Westinghouse and NuGen at the same time."³

But Suh Kyun-ryul, professor of atomic engineering at Seoul National University, asked: "Why should [Kepco] take such big financial risks by taking over a troubled business amid the gloomy industry outlook?"³ And Kepco president Cho Hwan-eik was unequivocal in his comments on March 22: "We have no plan to acquire Toshiba's stake [in Westinghouse] ... there is no role for us there".⁵

There is speculation that Chinese utilities might be interested in buying Westinghouse ... if only because just about every other possibility has been ruled out.⁶ None of the speculation about a Chinese buy-out addresses the point that Chinese interests are no more likely to be interested in a bankrupt company than anyone else. Speculation about a Chinese buy-out has been laced with warnings about the 'need' to keep Westinghouse out of Chinese hands for various non-descript 'national interest' and 'national security' reasons.⁷

Bloomberg reports that Westinghouse has been a repeated target of Chinese espionage.⁷ Five Chinese military officials were indicted in absentia in 2014 for allegedly stealing trade secrets from Westinghouse through computer hacks, and China General Nuclear Power Corp. was indicted in 2016 for conspiring to steal restricted nuclear technology from Westinghouse.⁷

US officials are reportedly examining three options to keep Westinghouse out of Chinese hands: blocking a sale to a Chinese buyer (assuming there is a Chinese buyer ... which seems to be the elephant in the room ... at the moment there isn't a buyer); encouraging a bid from US investors or US-allied foreign investors; or direct US government investment in Westinghouse in return for an equity stake.⁷

A carve-up of Westinghouse is possible with profitable operations sold off to lessen existing debts. Jose Emeterio Gutierrez, interim president and CEO of Westinghouse, said in early April: "It's a reality that we have this problem with the construction of the US AP1000 projects, but it's also true that the rest of the company is in good shape. It's a healthy business. We don't have significant problems."⁸

But Westinghouse may have to sell profitable operations to stave off bankruptcy and may be left with little or nothing other than the high-risk, heavily-indebted AP1000 reactor projects in the US. George Borovas from law firm Shearman & Sterling said: "Any sale would likely be preceded by a restructuring of Westinghouse so that the 'new Westinghouse' being sold would be free of any liabilities arising from the current new build projects that Westinghouse is constructing."⁶

Toshiba itself is already in precisely that situation: reluctantly selling profitable parts of its business to stave off bankruptcy and being left holding an unwanted atomic bomb.

Currently, Toshiba is being forced to increase its 87% stake in Westinghouse. Japanese company IHI Corporation is exercizing its put option to sell its 3% stake of Westinghouse to Toshiba for US$157 million.⁹ KazAtomProm owns the remaining 10% of Westinghouse and may also exercize its right to sell its stake to Toshiba on or after 1 October 2017.¹⁰

On a brighter note, Jose Emeterio Gutierrez, interim president and CEO of Westinghouse, recently told staff that the company's decommissioning business currently brings in almost US$100 million a year and could easily double or triple in the next few years.⁸ He pointed to plants at risk of early closure in the US and fleets in countries like Germany that are phasing out nuclear power altogether after the Fukushima disaster. "The market is huge. Also, it's not a market that is short term," he said.⁸

Will Toshiba survive?

Toshiba said in February that it expects to book a US$6.3 billion writedown on Westinghouse¹¹, on top of a US$2.3 billion writedown in April 2016.¹² The losses exceed the US$5.4 billion Toshiba paid when it bought a majority stake in Westinghouse in 2006.¹¹

Now Toshiba says there is "substantial doubt about the Company's ability to continue as a going concern".¹³

Toshiba's demise is a crushing blow to Japan's nuclear industry ... which was already crushed by the Fukushima disaster. Nikkei Asian Review commented on April 10:¹⁴

"Japan's nuclear power industry is at the most critical juncture in its history. Demand for new reactors has dried up at home following the Fukushima nuclear disaster and dismal prospects for export are dual menaces threatening the fate of the country's nuclear technology. No domestic construction on a new reactor has begun for the past eight years. The catastrophic accident at the Fukushima Daiichi nuclear power plant in 2011 blew a hole in the industry's plans. The picture for exports of Japanese nuclear power technology looks just as gloomy. Japanese reactor manufacturers and suppliers of key components are now facing the possible loss of their technological viability."

Toshiba's decision to have its subsidiary Westinghouse file for bankruptcy protection may put some boundaries around future liabilities and losses, particularly those associated with the US AP1000 projects. But Toshiba will still be responsible for guaranteeing roughly ¥650 billion (US$5.9bn) worth of Westinghouse debt if the nuclear projects are delayed due to the bankruptcy filing, and Toshiba also needs to set aside about ¥170 billion (US$1.54bn) in loan-loss provisions in case loans to Westinghouse prove unrecoverable.¹⁵

The US government is also on the hook due to its US$8.3 billion loan guarantee for the two AP1000 reactors under construction in Georgia.¹⁶ A Department of Energy spokesperson said the agency is "keenly interested" in Westinghouse's bankruptcy proceedings and that the administration expects all companies to "honor their commitments" to finish the project.¹⁶ If Westinghouse cannot complete the reactors, repayment of the loans will likely be delayed, in which case the government would take on the debt. Nikkei Asian Review reported on March 11: "It remains unclear how Washington and Toshiba would split the costs in this case. But the possibility that American taxpayers could bear some of the burden has spurred negotiations involving the U.S. and Japanese governments to settle the matter."¹⁷

The BBC noted on March 29 that Toshiba's share-price has been in freefall, losing more than 60% since the company first unveiled the massive cost overruns with US reactor projects in December 2016.¹⁸

Standard & Poor's cut its credit rating on Toshiba on March 17, down two notches to CCC-, pushing it further into junk status after previous downgrades in December and January.¹⁹

Toshiba is selling profitable businesses to stave off bankruptcy, including its highly-profitable memory chip business. Toshiba will need to earn about ¥1 trillion (US$9.1bn) from the sale to bring its net worth out of the red.¹⁵

Toshiba, Hitachi and Mitsubishi Heavy Industries were planning an integration of their nuclear fuel operations due to the protracted weakness of Japan's nuclear industry ‒ but that has stalled due to Toshiba's current crisis.²⁰

A broader integration between the three companies would make sense according to Tom O'Sullivan from energy consultancy Mathyos Japan. "It would make sense. There's no point in having three companies chasing a dying market in Japan," he said.²¹ But Mitsubishi president and chief executive Shunichi Miyanaga ruled out a merger in mid-February²² and a Hitachi spokesperson said there are no discussions on merging the companies' overall nuclear operations.²¹ Nevertheless, the Japanese government might use whatever leverage it has to force a tie-up between the three companies.

There are conflicting reports as to whether Tokyo might use government funds to rescue Toshiba. Most of the statements from the government suggest that there will not be a government bail-out.²³ But Nikkei Asian Review reported on March 18 that the Toshiba/Westinghouse crisis was discussed at a meeting between Japan's minister of economy, trade and industry and the US commerce secretary and energy secretary, and speculated that the two governments "seem to be softening on their previous stance that the company's restructuring is a private-sector matter."²⁴

In February, Toshiba said it plans to exit the reactor construction business and focus its nuclear business on design, equipment supply and engineering services.²⁵ That probably remains the plan, but comments by Toshiba chief executive Satoshi Tsunakawa on March 29 suggest a more complete withdrawal from the nuclear industry outside of Japan. "This is a de facto withdrawal from the overseas nuclear business for us. Therefore, we don't see any more risk," he said.

Whatever Toshiba does, it is still on the hook for multi-billion dollar liabilities associated with the AP1000 projects in the US.

References:

1. Chris Martin and Chris Cooper, 29 March 2017, 'How an American Tech Icon Bet on Nuclear ‒ and Lost its Way', www.bloomberg.com/news/articles/2017-03-29/how-an-american-tech-icon-bet...

2. Diane Cardwell and Jonathan Soble, 29 March 2017, 'Westinghouse Files for Bankruptcy, in Blow to Nuclear Power', www.nytimes.com/2017/03/29/business/westinghouse-toshiba-nuclear-bankrup...

3. Kana Inagaki and Song Jung-a, 5 March 2017, 'Kepco seen as potential buyer for Toshiba's ailing nuclear unit', www.ft.com/content/32f14d76-f8e6-11e6-9516-2d969e0d3b65
4. Makiko Yamazaki and Taiga Uranaka, 14 March 2017, 'Toshiba pushes sale of nuclear unit Westinghouse as crisis deepens', www.reuters.com/article/us-toshiba-accounting-idUSKBN16L02X

5. Song Jung-a in, 22 March 2017, 'Kepco rules out buying Westinghouse stake', www.ft.com/content/cd70d392-0ec8-11e7-b030-768954394623

6. Stephen Stapczynski, 13 March 2017, 'Troubled Nuclear Builder Seen Best Fit for Asian Ambitions', www.bloomberg.com/news/articles/2017-03-13/troubled-nuclear-builder-seen...

7. Jennifer Jacobs, Saleha Mohsin, and Jennifer A Dlouhy, 5 April 2017, 'Trump Team Takes Steps to Keep Chinese From Westinghouse', www.bloomberg.com/politics/articles/2017-04-04/trump-officials-alarmed-c...

8. Anya Litva, 11 April 2017, 'Westinghouse CEO tries to spread optimism despite bankruptcy', http://powersource.post-gazette.com/powersource/companies/2017/04/11/Wes...

9. Tom Hals and Jessica DiNapoli, 27 March 2017, 'Factbox: Toshiba's options in U.S. nuclear bankruptcy', www.reuters.com/article/us-toshiba-westinghouse-factbox-idUSKBN16Y2QP?il=0

10. World Nuclear News, 29 March 2017, 'Westinghouse files for US bankruptcy protection', www.world-nuclear-news.org/C-Westinghouse-files-for-US-bankruptcy-protec...

11. BBC, 14 Feb 2017, 'Toshiba chairman quits over nuclear loss', www.bbc.com/news/business-38965380

12. Reuters, 26 April 2016, 'Toshiba Takes $2.3 Billion Writedown on U.S. Nuclear Unit Westinghouse', http://fortune.com/2016/04/26/toshiba-writedown-westinghouse-nuclear/

13. Toshiba Corporation, 11 April 2017, 'Toshiba Announces Consolidated Results for the First Nine Months and the Third Quarter for Fiscal Year 2016, Ending March 2017', www.toshiba.co.jp/about/ir/en/finance/er/er2016/q3/ter2016q3e.pdf

14. Nikkei Asian Review, 10 April 2017, 'Japan's nuclear technology faces extinction', http://asia.nikkei.com/Business/Trends/Japan-s-nuclear-technology-faces-...

15. Nikkei Asian Review, 6 April 2017, 'Cutting Westinghouse loose puts Toshiba in a deeper hole', http://asia.nikkei.com/magazine/20170406/Business/Cutting-Westinghouse-l...

16. Peter Maloney, 3 April 2017, 'Westinghouse bankruptcy puts $8.3B in federal loan guarantees for Vogtle plant at risk', www.utilitydive.com/news/westinghouse-bankruptcy-puts-83b-in-federal-loa...

17. Nikkei Asian Review, 11 March 2017, 'Toshiba scrambles to stem further bleeding from Westinghouse', http://asia.nikkei.com/Spotlight/Toshiba-in-Turmoil/Toshiba-scrambles-to...

18. BBC, 29 March 2017, 'Toshiba's Westinghouse files for US bankruptcy', www.bbc.com/news/business-39424634

19. AFP, 17 March 2017, 'S&P cuts troubled Toshiba's credit rating', www.businesstimes.com.sg/consumer/sp-cuts-troubled-toshibas-credit-rating

20. Japan Times, 23 Feb 2017, www.japantimes.co.jp/news/2017/02/23/business/hitachi-toshiba-mitsubishi...

21. Aaron Sheldrick, 31 March 2017, 'Big in Japan? Hope at home for Toshiba's nuclear arm after U.S. debacle', www.reuters.com/article/us-toshiba-nuclear-idUSKBN17211S

22. Financial Times, 16 Feb 2017, 'Mitsubishi Heavy rules out Toshiba nuclear rescue', www.ft.com/content/0238df8c-f44f-11e6-8758-6876151821a6

23. Samantha Cheh, 3 April 2017, 'Never-ending misfortunes: Toshiba stuck in the news cycle from hell', http://techwireasia.com/2017/04/toshiba-stuck-newscycle-hell/

24. Nikkei Asian Review, 18 March 2017, 'Toshiba's trials entangle Tokyo, Washington', http://asia.nikkei.com/Spotlight/Toshiba-in-Turmoil/Toshiba-s-trials-ent...

25. Makiko Yamazaki, 14 Feb 2017, 'Delays, confusion as Toshiba reports $6 billion nuclear hit and slides to loss', http://uk.reuters.com/article/us-toshiba-accounting-idUKKBN15T033

26. Russell Gold and Mayumi Negishi, 31 March 2017, 'Ire at Toshiba's nuclear backdown', www.wsj.com/articles/toshibas-westinghouse-electric-files-for-bankruptcy...

Claims in late January from US President Barack Obama and Indian Prime Minister Narendra Modi that they had reached an agreement on accident liability arrangements have been met with scepticism.

In a detailed analysis posted on the website of the (Indian) Institute for Defence Studies and Analysis, G. Balachandran writes:

"In a sort of official statement, US Ambassador to India Richard Verma was reported in the media to have said – although the US Embassy refused to either clarify or deny his having ever made such a statement – that the liability issue was to be resolved through a "memorandum of law within the Indian system" that would not require a change of the Indian law. Later on, the spokesperson of the Indian Ministry of External affairs clarified the situation by the mere statement that "We will indeed be providing you that information and that will be copious in nature, it will answer all your questions." This was done ... in a Frequently Asked Questions (FAQ) format, although this still leaves many questions unanswered. For instance, it does not answer how the understanding between the two sides will be formalised. On the contrary, the FAQ answers raise further questions that need to be answered. Obviously, a FAQ will not carry much weight in business decisions that have to be made in respect of nuclear transfers."¹

Pro-nuclear commentator Dan Yurman said:

"There is no signed piece of paper, joint communique, or treaty between the US and India that says US nuclear firms, including Westinghouse and GE Hitachi, will now be exempt from the provisions of a nuclear liability law enacted with the support of the BJP, the political party that swept PM Nodi into office. ... No one on the US side is buying it. Spokesmen for both Westinghouse and GE Hitachi were noncommittal in response to questions from the news media about the so-called "breakthrough" deal and the insurance pool. At best their responses have been lukewarm."²

Washington Post reporters Annie Gowen and Steven Mufson wrote:

"We've been characterizing it as a breakthrough or breakthrough understanding," said a senior U.S. administration official on Tuesday. But, the official said, "It is not a signed piece of paper but a process that led us to a better understanding of how we might move forward. ..."

The key issue will be whether the conflict between international law and Indian law can be waved away by a memorandum from India's attorney general. The memorandum would have to say that the 2010 liability law "doesn't mean what it says," said a Washington lawyer familiar with the issues but who asked for anonymity to protect his professional relationships. "The fear is that the U.S. government will say this is good enough," the lawyer added. "Even if the [Indian] attorney general comes out with a memorandum saying the law doesn't apply to suppliers, that's not binding on Indian courts."³

The Associated Press reported:

"India and America's declaration of a breakthrough in contentious nuclear energy cooperation has been met with a lukewarm response from industry and analysts. Few expect the potentially lucrative Indian market to suddenly become less complicated for U.S. nuclear companies."⁴

Other obstacles remain in addition to the liability issue, as energy and nuclear policy consultant Mycle Schneider told Deutsche Welle:

"In reality, there is no real market for foreign nuclear companies in India, unless they bring their own funding. Under free market conditions it is not possible anymore to build a nuclear power plant anywhere in the world. So if new reactors are built in India or elsewhere, the projects are highly subsidized, either by the government − the taxpayer − or the ratepayer."⁵

Schneider is a nuclear critic but his views on nuclear economics can also be found in the industry literature. World Nuclear News recently ran an article by Edward Kee from the Nuclear Economics Consulting Group, who notes that of the 69 reactors under construction around the world, only one is in a liberalized electricity market.⁶

References:

1. G. Balachandran, 10 Feb 2015, 'Some issues in respect of Indian's nuclear liability law', www.idsa.in/idsacomments/issuesinIndiansnuclearliabilitylaw_gbalachandra...
2. Dan Yurman, 8 Feb 2015, 'India's Nuclear Deal; Good for Diplomats; Bad for US Nuclear Firms', http://neutronbytes.com/2015/02/08/indias-nuclear-deal-good-for-diplomat...
3. Annie Gowen and Steven Mufson, 4 Feb 2015, 'Is the India nuclear agreement really the 'breakthrough' Obama promised?',
www.washingtonpost.com/world/is-the-india-nuclear-agreement-really-the-b...
4. Associated Press, 27 Jan 2015, India nuke deals still thorny for US despite 'breakthrough' www.washingtonpost.com/business/india-nuke-deals-still-thorny-for-us-des...
5. 28 Jan 2015, Breakthrough in US-India civil nuclear deal 'more symbolism than reality', www.dw.de/breakthrough-in-us-india-civil-nuclear-deal-more-symbolism-tha...
6. WNN, 4 Feb 2015, 'Can nuclear succeed in liberalized power markets?', www.world-nuclear-news.org/V-Can-nuclear-succeed-in-liberalized-power-ma...

In its efforts to promote nuclear commerce with the United States, India's Narendra Modi government has run into a dichotomy that lies at the heart of this industry. While multinational nuclear suppliers, such as G.E. and Westinghouse publicly insist that their products are extraordinarily safe, they are adamant that they will not accept any liability should an accident occur at one of their reactors.

The joint announcement by Mr. Modi and US President Barack Obama in January raised concerns that the government would move to effectively indemnify suppliers, contrary to the interests of potential victims. The list of "frequently asked questions" (FAQs) on nuclear liability released by the Ministry of External Affairs on February 8 confirms the suspicion that the Modi government is trying to reinterpret India's liability law by executive fiat in order to protect nuclear vendors (http://tinyurl.com/india-liability).

The government has disingenuously suggested that it achieved the recent "breakthrough" by establishing an insurance pool to support suppliers. However, to focus on this arrangement is to miss the wood for the trees as even a cursory analysis of the economics of nuclear plants shows.

A section in the Indian law called the "right of recourse" allows the Nuclear Power Corporation of India Ltd. (NPCIL) to claim compensation from suppliers up to a maximum of Rs.1,500 crore (US$240 million; €214m). This pales in comparison with the total cost of the six planned Westinghouse reactors at Mithi Virdi in Gujarat; estimates from similar plants under construction in the US suggest that this may be as high as Rs.2.5 lakh crore (US$40.1 billion; €35.8b). In the US, all nuclear plant operators must have third-party insurance for at least US$375 million (€335m), and suppliers could easily set aside a small portion of their profits to do the same for reactors sold in India.

Problematic principle

What suppliers are worried about is not the amount, but the principle. More concretely, if the law places some responsibility on suppliers, then a future Indian government could use this to gain leverage by forcing them to pay substantially more for a serious disaster. Moreover, their executives could be held accountable under other civil and criminal statutes in India. The FAQs released by the government are meant to reassure nuclear vendors on these counts.

The FAQs claim that the provision allowing the NPCIL a right of recourse "is to be read ... in the context of ... the contract between the operator and supplier." This goes beyond the law, where the right of recourse exists independently of a contract.

In 2010, when a parliamentary standing committee suggested such a linkage, its recommendation was rejected by the Cabinet after a public outcry. Although the FAQs later state that "a provision that was expressly excluded from the statute cannot be read into the statute by interpretation," this is precisely what the government is doing here.

The FAQs suggest that the government is also committed to the interests of the public sector NPCIL which "would insist that ... contracts contain provisions that provide for a right of recourse consistent with Rule 24 of CLND Rules of 2011." However, this is a cunning sleight of hand. A central element of these rules is that "the provision for right of recourse ... shall be for the duration of initial license," which is usually granted only for five years. In contrast, the promised lifetime of modern reactors is 60 years, and failure rates tend to increase in later years. Therefore, linking the right of recourse to a contract is an attempt to water down supplier liability to a meaningless level.

The FAQs also declare that suppliers cannot be "asked to pay more compensation in the future ... than currently provided under the law." However, this ignores the fact that the law itself has a provision for revising liability, which states that "the Central Government may ... from time to time ... specify, by notification, a higher amount."

A revision of the cap with time is only natural. Several decades from now, Rs.1,500 crore may be worth much less than it is currently. Therefore, the government's move to perpetually limit supplier liability to this nominal amount defies basic economic principles, and implies that victims will receive a lower compensation, in real terms, for future accidents.

Finally, the FAQs assert that the liability act, ipso facto, takes away the rights of victims to sue suppliers even under other laws. If this interpretation of the law is correct, then it implies that suppliers cannot be prosecuted even for criminal negligence.

Double standards

This provides a striking example of double standards. Under US law, suppliers can be held legally responsible for accidents. Consequently, for decades, the US refused to join any international convention that would require it to legally indemnify suppliers. When it engineered the Convention on Supplementary Compensation for Nuclear Damage, it inserted a "grandfather clause" to ensure that it would not have to alter its own law. In contrast, the Indian government seems willing to meekly surrender the rights of its citizens.

It is sometimes argued that India must make these concessions to "repay" the US for its help in facilitating India's access to international nuclear commerce. US policymakers pushed for such access in a calculated attempt to induce India to support its geostrategic objectives and to ensure that US companies would have access to the emerging Indian nuclear market. However, just because the Manmohan Singh government accepted this Faustian pact − and even cast an unconscionable vote against Iran at the International Atomic Energy Agency − does not mean that the country needs to repay this self-serving "favour" endlessly by bending its laws and spending billions of dollars on US reactors.

Although the question of liability is somewhat abstruse, it deserves greater public attention because it serves as a clear lens to understand the central conflict involved in India's nuclear expansion: the desire of nuclear vendors to have profitability without accountability and the interests of ordinary people who could be potential victims. The government's attempt to resolve this conflict in favour of the industry is a revealing indicator of its priorities.

M.V. Ramana and Suvrat Raju are physicists with the Coalition for Nuclear Disarmament and Peace. Ramana is the author of 'The Power of Promise: Examining Nuclear Energy in India', 2012.

Reprinted from The Hindu, 16 Feb 2015, www.thehindu.com/opinion/op-ed/comment-profitability-without-accountabil...

On April 21, twelve national and regional environmental organizations called upon U.S. nuclear regulators to launch an investigation into newly identified flaws in Westinghouse’s new reactor design. The coalition asked three federal agencies to suspend the AP1000 reactor from licensing and taxpayer loan consideration.

The newly discovered design flaw is tied to documentation of dozens of corrosion holes being found in existing U.S. reactor containments, which recently has raised concern at the Advisory Committee on Reactor Safeguards (ACRS), an independent arm of the U.S. Nuclear Regulatory Commission (NRC). Containment buildings are vital barriers against radiation releases during nuclear accidents.

“The proposed AP1000 containment design is inherently less safe than current reactors,” said Arnold Gundersen, former senior vice-president at Nuclear Energy Services PCC. Westinghouse did not analyze the scenario for failure containment warned of by Gundersen. He continued, “Westinghouse has ignored the long history of previous containment failures that indicate there is a high likelihood that the AP1000 containment might be in a failed condition [one or more undetected holes] before an accident begins. The containment leakage problem is exacerbated because the AP1000 is specifically intended to function as a chimney – to pull air up and release it through the top of the building.”
 
Gundersen, a 38-year engineering veteran of the nuclear power industry, produced a 32-page technical report(*1) detailing a history of holes and cracks found at operating nuclear plants. Such corrosion problems, if coupled with the experimental “passive” emergency cooling feature in the AP1000, could accelerate and greatly increase the early release of radiation during an accident. Gundersen’s report is backed by engineer and corrosion specialist Rudolf Hauser.

Based on the report, the coalition urged NRC Chairman Gregory Jaczko to suspend license reviews of 14 proposed AP1000 reactors pending the ACRS investigation. They also urged Secretary of Energy Chu and the White House Office of Management and Budget to drop plans for taxpayer funding for the reactor due to increasing risks of projects failing in midstream. In February, the Obama Administration awarded US$8.33 billion (6.5 billion euro) in controversial taxpayer-financed loans (with a public guarantee to cover default) to an AP1000 project at Southern Company’s Vogtle plant in Waynesboro, Georgia.

Gundersen’s analysis shows that even a three-quarter inch hole in the AP1000 reactor building could, under pressure from a pipe break or other accidents, result in a large and unfiltered radiation release because the building is deliberately intended to move air and heat into the atmosphere during an emergency. That heat removal – via a gap between an inner metal containment and the outer shield building – is the very feature Westinghouse touts as its principal safety upgrade.

Gundersen explained why the probability of a radiation accident is higher with the AP1000: “Existing data shows that containment system failure occurs with moisture and oxygen.” He explained today that for the AP1000 design, leakage from the emergency water tank located above the reactor, testing the tank and/or atmospheric humidity will create, within the gap between liners, “a constant environment of moisture and oxygen that may, in fact, provoke a through-wall containment failure in locations that are difficult or impossible to inspect.”

“The Obama Administration should put the brakes on. The consequences of containment failure at Plant Vogtle would be devastating,” said Lou Zeller, Science Director for the Blue Ridge Environmental Defense League. “We call upon Energy Secretary Chu and NRC Chairman Jaczko to recall the dangerously flawed AP1000 design before accidents occur and more tax dollars are wasted.”

A number of organizations are contesting design and licensing efforts of 14 AP1000s at seven sites across the Southeast. Also, four AP1000s are under construction in China, with more planned there and in India.

At least 77 instances of containment system degradation have occurred at operating US reactors since 1970. That includes eight through-wall holes or cracks in steel containments – two discovered in 2009 – and 60 instances of corrosion that thinned the liner walls below the allowable thickness. In addition to the ACRS, nuclear experts in Europe have recently expressed concern about the likelihood of containment failures at aging plants.

"The AP1000 flaw identified in this report puts into further question the reality of the so-called 'nuclear renaissance.' If Vogtle's proposed new reactors are the flagship of the nuclear industry's claimed resurgence, then everyone needs to pay closer attention because not only are billions of dollars at risk but so is the potential safety of communities living near these proposed new reactors," said Sara Barczak, High Risk Program Director with the Southern Alliance for Clean Energy.

Although Westinghouse and nuclear utilities such as Duke Energy, Progress Energy and others contend that the AP1000 design was “pre-certified” by the NRC in 2006, in the past two years the NRC has identified a daunting list of design problems involving major components and operating systems, resulting in eighteen revisions to the design. Thus, cost estimates for some of the projects have doubled or tripled. Last October the NRC stunned observers by rejecting the reactor building for its potential inability to withstand high winds and the weight of the emergency water tank.

“The so-called nuclear revival is in real trouble, so it’s no wonder the industry insists on socializing the risks,” said Mary Olson of Nuclear Information and Resource Service. “President Obama and Congress seem clueless to the construction failures occurring in Europe and design problems in the U.S. It’s tragic that industry’s lobbying money has blinded them into efforts to risk 54 billion public dollars for nuclear plants, while a fraction of that amount could help America move quickly into genuine climate protection through clean, efficient energy.”

*1 See www.fairewinds.com/reports for the engineer’s report and graphic illustrations of the chimney-effect during an accident.
 

Source: Press release 'AP1000 Oversight Group', 21 April 2010
Contact: Mary Olson at NIRS
Tel: +1 828 252-8409

Two new reactor designs were forecast (at least in Europe and North-America) make the nuclear renaissance happen: the Westinghouse AP1000 and Areva’s EPR. The EPR-design, is as we all know, under heavy fire, and now also from the French nuclear regulator (see next article). But in the U.S., the AP1000-design is also running into all kind of problems with the Nuclear Regulatory Commission.

In a highly unusual move, on 15 October 2009, the U.S. nuclear regulator sent a key component of the Westinghouse AP1000 (not-yet-licensed) “standardized design” back to the drawing board. The NRC staff is quoted in a press release stating that the AP1000 “Safety Shield Building,” the outer structure surrounding the AP1000 containment, does not meet “fundamental engineering standards” with respect to design basis loads, as well as several other concerns not disclosed to the public.

The press release indicates, and a review of NRC documents confirms, that NRC had been raising issues with Westinghouse for more than a year. This move impacts 14 out of 26 currently proposed new reactor licenses in the US and throws the review schedule for reactor into the air.

The NRC October 15, press release states that NRC have been talking to Westinghouse regularly about the shield building since October 2008, and "we’ve consistently laid out our questions to the company,” according to Michael Johnson, director of the NRC’s Office of New Reactors. “This is a situation where fundamental engineering standards will have to be met before we can begin determining whether the shield building meets the agency’s requirements.”

The “Safety Shield Building” which surrounds the containment has several functions, among these to hold a large tank of water over containment so that in the event of an accident the water is dribbled over the surface of the steel containment dome (the so-called gravity-fed cooling). The AP1000 containment is a separate, inner structure made of 1 inch (2.54 cm) thick steel. This “passive” convection cooling of the containment surface is projected to lower pressure inside containment, in the event of a major core disaster. Given the weight of water, in two storage tanks of 70 cubic meters each, design basis loading is a serious concern.

The Safety Shield Building is three feet (91.4 cm) thick reinforced concrete, and is intended to protect the reactor from severe weather including tornado- hurled projectiles, hurricanes, earthquakes and air crashes. A somewhat more eerie function is to add shielding in the event of a severe accident; the new 1 inch steel containment does not provide sufficient mass to absorb gamma ray emissions after a major accident. In effect, the Safety Shield Building is a pre-installed “sarcophagus” (like at Chernobyl) which would provide some protection for emergency workers called to the site in the event of a meltdown. The structure, far from containment, also functions as a cooling tower for the melting core, sporting an air-circulation hole at the top.

Given how the US NRC embraced its mandate from industry and Congress to streamline the new reactor licensing process, rejection of a major component of a reactor that was previously certified as “standard” is a substantial departure from this regime. In an apparent attempt at cost-cutting, the new AP1000 version features modular construction – bringing prefab components to the site, rather than construction of the Safety Shield Building on-site from the ground-up. The difference in integrity between pouring concrete on the site and erecting “building blocks” is apparently substantial.

The NRC notified Westinghouse on 15 October in a letter, linked in the NRC news release, that ‘either a confirmation test or a validated (or benchmarked) analysis method” must be used to demonstrate that the “shield building” can survive design basis events. The letters state that the “NRC considers its review of the shield building, as proposed, to be complete” but affirms that a review of other parts of review, now in Revision 17, will continue and that a new review schedule for the “design certification amendment” had yet to be established.

Westinghouse, which is owned by Toshiba, has four AP1000s planned for China. Two nuclear utilities in the U.S. which are pursuing AP1000s are on the U.S. Department of Energy’s short list to receive federal loan guarantees to back private loans for construction. Given the news from the NRC about the design flaws in the AP1000 design, a number of U.S. public interest groups wrote to the DOE on 19 October, calling on a halt to the imminent issuance of “conditional” loan guarantees for the projects. They stated: "Given that the action by the NRC is so serious in nature, it is imperative that the Department of Energy immediately halt the issuance of any conditional loan guarantees to any utilities which are basing their plans on the AP1000 reactor design. Issuance of DOE loan guarantees at this time to companies which are considering a reactor which may well have serious design problems would not only heighten public concern about DOE’s regard of oversight of nuclear reactor safety but would also further call into question the methodology applied by the DOE’s Loan Guarantee Program (LPG) as it considers which reactor applications garner a loan guarantee subsidy.

That the LGP has been considering issuing loan guarantees to reactors that do not have final certification and also do not have construction and operating licenses is now clearly revealed to be an extremely risky approach. As we now see that it is far from certain if reactors or combined licenses will win regulatory approval, any move to now issue conditional loan guarantees is premature and opens DOE to justified criticism."

Given the serious issued now raised by the reactor regulatory agency itself, the public interest groups call on DOE to "immediately halt issuance of conditional loan guarantees and take action to publicly assure the public that this is the case."

Source: Tom Clements (FOE U.S.A.) and Mary Olson (NIRS Southeast)
Contact: Mary Olson, Nuclear Information and Resource Service (NIRS), Southeast Office. PO Box 7586, Asheville, North Carolina 28802, USA.
Tel: +1 828-252-8409
Email: maryo@nirs.org
Web: www.nirs.org