As discussed in Nuclear Monitor #841, Japanese conglomerate Toshiba said on April 11 that there is "substantial doubt about the Company's ability to continue as a going concern". Toshiba's US nuclear subsidiary Westinghouse filed for bankruptcy protection on March 29.
The companies are in crisis because of extraordinary cost overruns building four AP1000 reactors in the US ‒ two each in Georgia and South Carolina. Estimating the scale of the cost overruns is difficult because there is still much work to be done to complete the reactors. A reasonable estimate is that if the reactors are completed, the combined overruns will amount to about US$13 billion.1,2 Estimates compiled by Reuters put the cost overruns ‒ again assuming that the reactors are completed ‒ at US$3.9‒6.7 billion for the reactors in Georgia and US$11.9 for the reactors in South Carolina, a combined total of US$15.8‒18.6 billion.3
Toshiba wants to sell Westinghouse but can't find a buyer, although profitable parts of Westinghouse's operations might be sold off after a company restructure. Toshiba is also restructuring and selling some of its own businesses to avoid bankruptcy. Toshiba said on April 24 that it will establish its four in-house companies as wholly-owned subsidiaries.4 As of October 1, it will split off its Energy Systems & Solutions Company, and the Nuclear Energy Systems & Solutions Division, and transfer them to a newly established company. The other three companies to be established as independent business entities are Infrastructure System & Solutions Company, Storage & Electronic Devices Solutions Company, and Industrial ICT Solutions Company.
The Financial Times reported: "Toshiba is not expected to seek to sell the subsidiaries because the group last month identified that much of the activities done in these four areas as essential to its turnround strategy. But the shake-up will leave the 144-year-old conglomerate, once a proud pillar of the Japanese industrial establishment, as a mere shadow of its former self. Toshiba is planning to sell its Nand memory chip business, the group's flagship technology asset, as well as offload much or all of Westinghouse. The Nand business could raise more than $20bn for the group ‒ and therefore help repair its balance sheet."5
Toshiba's stand-off with its auditor
On April 11, Toshiba's auditor PricewaterhouseCoopers Aarata refused to sign off on Toshiba's financial report ‒ Toshiba reported a net loss of ¥647.8 billion (US$5.7bn) for the Oct. to Dec. 2016 quarter. The main sticking point has been Toshiba's accounting in relation to the AP1000 reactors in the US.
Over the past month, Toshiba has been looking for a new auditor.6 The other three of the Big Four accounting firms are probably non-starters. Deloitte Touche Tohmatsu and KPMG Azsa have past business ties to Toshiba. So does Ernst & Young ShinNihon, Toshiba's previous auditor. Ernst & Young ShinNihon incurred a fine and reputational damage for failing to detect Toshiba's billion-dollar profit-padding scam from 2008‒2014.6
Toshiba is seeking a second-tier accounting firm to sign off on its accounts but the Financial Times reported that only a few such firms have the expertise and the number of auditors needed to handle a group as large as Toshiba.6
Any auditing firm that certifies Toshiba's accounts does so at the risk of damaging its own reputation.
Sacking PricewaterhouseCoopers is not a simple option for Toshiba ‒ it would require shareholder approval.7 Sacking the auditor could unsettle the Stock Exchange, Reuters reported, but Toshiba "is out of attractive options."8
Toshiba has said it will release its figures for the March 2016 to March 2017 fiscal year by mid-May, but that could be extended to June 30. The company says it expects to report a net loss of just over ¥1 trillion (US$8.9bn) for the fiscal year, well over double the estimate of ¥390 billion provided in February.9
Stock exchange listing / delisting
Toshiba faces being delisted from the Tokyo Stock Exchange, an outcome that will be all the more likely if it releases unaudited figures for the 2016‒17 fiscal year (as it did for the Oct. to Dec. 2016 quarter). Delisting would create a new set of problems that would make it all the more difficult for the company to survive ‒ big investors would likely sell their stock, financing costs would increase, more lawsuits from shareholders would be expected, the share price would take another hit (it has fallen by 50% over the past six months) and, as Reuters reported, shareholders would be left with "near-worthless paper".8 Last but not least, the complete collapse of Toshiba would loom as a real possibility.
The Reuters report continued: "There are three hurdles. First, a Tokyo Stock Exchange review has to conclude managers have fixed long-running shortcomings in internal controls. Second, the company must claw its way out of negative equity by March – hence the 2 trillion yen-plus ($18 billion) sale of its memory-chip business. And third, it must file full-year results promptly: ideally by May 15, late June at the very latest."8
A zombie company?
Creditors and investors are nervous. In mid-April, Toshiba lost access to one of its subsidiary's funds after hedge fund Oasis Management went to court to get the subsidiary to take back its cash ‒ ¥87.8 billion (US$771m) ‒ from the parent company.10 If that trickle becomes a flood ‒ and in particular if the banks call in their loans ‒ Toshiba will be doomed.
The BBC outlined three possible outcomes for Toshiba.11 Firstly, it might become a zombie company like Sharp, TEPCO and many others: loss-making or insolvent companies that should be allowed to fail, but continue to operate because of lenient creditors. The second ‒ and most likely ‒ option is a break-up of the company (the strategy that is already playing out with Toshiba's plan to sell its memory chip business). The third possibility is a complete collapse of Toshiba. "If the chip sale falls through, more accounting irregularities emerge or the banks decide to call in their loans, then all bets are off," BBC business reported Leisha Chi said in an April 16 article.11
Might Toshiba file for bankruptcy protection?
Southern Company, which hired Toshiba subsidiary Westinghouse to build two nuclear reactors in Georgia, is concerned that Toshiba will apply for protection from creditors and relieve itself of the guarantees made on Westinghouse's behalf, sources have told the Wall Street Journal.12 A Toshiba official reportedly said the best way to save the company could be a filing under Japan's corporate reorganization law, which is similar to US Chapter 11 bankruptcy protection legislation in that it seeks to allow a company to stay in business by relieving it of some obligations. The Toshiba official said the move could free Toshiba of its obligations to Westinghouse and its customers, including its obligations to provide funding to complete AP1000 reactors under construction in the US.
However a Toshiba spokesperson said: "At this moment, we do not have any thought or intention of seeking protection under corporate-reorganization proceedings."12
The Wall Street Journal reported:12
"A Japanese chapter 11-style filing is only one of several scenarios Toshiba could choose. It presents several downsides: Suppliers could take a hit, hurting the broader economy, and shareholders could be wiped out ‒ though Toshiba's shares are already in danger of being delisted in Tokyo because of accounting problems that emerged in 2015. But the filing would strengthen Toshiba's balance sheet and could allow it to keep its profitable memory-chip business, the Toshiba official said ‒ relieving Japanese government concerns about technology leaks to Chinese or other competitors. A person familiar with Southern's thinking said Japanese creditor banks have significant leverage in deciding what to do with Toshiba, and that their loans would come ahead of other obligations. "We are not first in line," this person said."
Westinghouse and the AP1000 reactors in the US
Westinghouse filed for Chapter 11 bankruptcy protection on March 29, listing assets of US$4.3 billion and liabilities of US$9.4 billion among about 35,000 creditors.13
Westinghouse said on March 29 it would no longer spend money on the Vogtle (Georgia) and Summer (South Carolina) AP1000 projects, but reached an agreement with the utilities involved to allow them to pay costs to continue the projects during a 30-day interim period while decisions on the future of the projects are made. That 30-day period was later extended until May 12 for the Georgia project and June 26 for South Carolina.14
Between April 7 and April 20, about 30 vendors asked Westinghouse to return US$35 million in materials and products ordered for the four reactors in Georgia and South Carolina before the company filed for bankruptcy protection.15 No doubt other vendors have done likewise since April 20. Many Westinghouse suppliers received letters saying that their invoices for work performed or products supplied before the bankruptcy protection filing could not be paid at this time.16
Westinghouse plans to complete a restructuring plan by the end of June 2017 and a new business plan by the end of July 2017. The aim is to ring-fence the four AP1000 reactors. Gavin Liu, Westinghouse's president for Asia, said the "rest of the Westinghouse business, the healthy part, which is new plant construction, fuel, service, decommissioning ‒ we anticipate an ownership change."17 Liu noted that there has been "high interest from the financial community" in the profitable parts of the company's operations.17
Toshiba would like to sell Westinghouse and keep its profitable businesses ‒ but must instead sell profitable businesses to cover the debts from Westinghouse's nuclear projects. Westinghouse, in turn, would like to rid itself of the US AP1000 reactors projects and keep its profitable operations but must instead sell profitable operations to cover debts from the reactor projects.
No amount of ring-fencing will make the AP1000 problems go away. According to Westinghouse, an additional US$4 billion is required to complete the four reactors (US$2.5 billion in Georgia and US$1.5 billion in South Carolina).13 That figure may be an underestimate. Southern Co. CEO Thomas Fanning has said the company needs at least US$3.7 billion needs to complete the two reactors in Georgia ‒ possibly more.18,19
If the additional costs can be kept to US$3.7 billion, Southern Co. hopes that funding from Toshiba will suffice to complete the reactors in Georgia.19 Of course, those hopes could be dashed if Toshiba seeks protection under Japanese corporate reorganization laws.
Southern Co. subsidiary Georgia Power is also trying to convince the Georgia Public Service Commission to allow it to recoup further costs from ratepayers in Georgia, but the Commission appears reluctant.19 Georgian ratepayers have already been paying for the construction of the two AP1000 reactors since 2011, based on provisions of the 2009 Georgia Nuclear Finance Act.20,21
Tax credits and loan guarantees
The AP1000 reactors in Georgia and South Carolina need to be operating by the end of 2020 to be eligible for a US$18/MWh federal production tax credit. For the South Carolina project, the tax credit would amount to a government subsidy of about US$2.2 billion.22 Relaxation of the 2020 deadline for the tax credits is shaping as an important determinant of the future of the four reactors given the receding likelihood of completing the reactors by then. South Carolina Electricity & Gas recently said it is re-evaluating its timeline for completion of the two reactors in that state because of Westinghouse's "historical inability to achieve forecasted productivity and work for efficiency levels" and in light of Westinghouse's bankruptcy filing.23
The extension of the tax credits is "absolutely imperative" to the AP1000 projects and "next-up U.S. nuclear projects" according to David Blee, executive director of the US Nuclear Infrastructure Council.24 However an attempt to include a relaxation of the 2020 deadline in a government spending bill recently failed.25 Congressional leadership is reportedly delaying the issue until lawmakers take up tax reform later this year24 ‒ but that could be too late to save the AP1000 projects. Republican senator Lindsey Graham said: "I'm not going to sit on the sidelines and watch the nuclear industry be destroyed. For three years, we've been trying to get these tax credits extended. ... The reactors that are being built are very much at risk."24
If the Vogtle project in Georgia collapses, the federal government is on the hook for US$8.3 billion in loan guarantees. Ryan Alexander, president of Taxpayers for Common Sense, said:26
"The Title XVII program at the Energy Department provides broad authority for it to guarantee loans for early commercial use of advanced technologies if there is a "reasonable" prospect of repayment by the borrower. Loan guarantees are like cosigning a loan. The government (taxpayers) are on the hook for repayment of the loans if the borrower defaults.
"Building a nuclear reactor – two nuclear reactors – is expensive and risky. The amount of risk represented by a particular loan guarantee is measured in the project's "subsidy cost." The higher the risk, the higher the cost that gets assigned to the guarantee. You would think a loan guarantee for a nuclear power plant – the riskiest project of all – would be assessed a pretty high price. It should have been. But the Energy Department guaranteed at least $6.5 billion of the $8.3 billion total at a cost of $0. That is, it recorded no potential liabilities for its guarantee of more than $6 billion in loans for the construction of two nuclear power plants. ...
"While this might mean huge losses for taxpayers, the real tragedy is that financial entanglement with the project could have been avoided altogether. It's not clear what the Department of Energy can do now to mitigate the potential for losses. In the end, the Vogtle mishap could be a very expensive way to learn what we should have known all along – the federal government cannot ignore risk when taxpayers' money is on the line."
The plan for AP1000 reactors in the UK
NuGen was established in 2009 as a consortium between Engie, Iberdrola, and Scottish and Southern Energy. After various twists and turns, Toshiba had a 60% stake in NuGen and Engie the remaining 40% by the end of 2013. In 2014, NuGen announced plans to build three AP1000 reactors at Moorside, near Sellafield in the UK. But Engie has exercised its contractual right to force Toshiba to buy its 40% stake. Toshiba wanted to sell its 60% stake ... and now wants to sell its 100% stake.
Reactor construction never began and likely never will. In April 2017, NuGen said it has put its application for development consent on hold and is "undertaking a strategic review of its options following shareholder and vendor challenges".27 The consortium has written to suppliers to warn them it will have to cut spending, and also plans to order staff who have been seconded to the project from other companies to return to their employers.28
Toshiba (and the British government and others) are hoping that South Korean utility Kepco will buy a stake in NuGen (Toshiba presumably hopes Kepco will buy its entire 100% stake). Kepco has been considering buying a stake in NuGen for some time, but a deal has not been struck. Kepco may prefer to build its APR1400 reactors rather than Westinghouse AP1000 reactors, which would delay the project by several years: the APR1400 design has not been approved by UK regulators whereas the AP1000 design recently received approval.
Some see Kepco's purported interest in building its own reactor technology as a bargaining chip to use in negotiations. Kepco might agree to build AP1000 reactors ‒ or to be the engineering, procurement, and construction manager of Westinghouse-built AP1000 reactors ‒ on the condition that Kepco supplies expensive items like steam generators, turbines, pumps, and other system components.29
A Hinkley Point-style guaranteed 'strike price' per kilowatt-hour might make the project attractive for Kepco, but still the question remains: where will the capital costs for the three-reactor project ‒ which could amount to US$20 billion or so ‒ come from? One pro-nuclear commentator suggests that the project could be revived with a guaranteed strike price plus UK government-issued bonds covering the capital costs.29 The commentator also recommends following through on BREXIT in order to prevent any challenge under EU legislation to the subsidies required to get the Moorside project off the ground (Austria and others challenged the Hinkley Point subsidies).
NuGen chief executive Tom Samson said in early May that the project faces "significant challenges" and that direct government funding is one option on the table. He said: "We already have tremendous support from the government, we look for all opportunities to secure funding for the Moorside project and the government's involvement is one of those areas we'll continue to explore."27
Plans for AP1000 reactors in India
A. Gopalakrishnan, a former Chair of India's Atomic Energy Regulatory Board, has written an opinion piece in The Hindu strongly criticizing plans to contract Westinghouse to build six AP1000 reactors in India.30
"India must not enter into a contract involving billions of dollars with an American company that has already declared bankruptcy. ... Westinghouse going into bankruptcy causes much larger problems than just the financial consequences. With the bankruptcy filing, no creditors will come forward to lend the approximately $7 billion needed to bankroll the India project in the first phase. During the time of the Barack Obama administration, India had hoped to get a U.S. Export-Import (Exim) Bank loan for the Kovvada project. But with Donald Trump assuming the U.S. presidency and Westinghouse perilously in the red, there is little chance that the new American administration will favourably consider an Exim Bank loan for an Indian nuclear project to be technologically executed by a bankrupt U.S. company. Even if the Trump administration is willing, the project is definitely not in the interest of the people of India.
"From personal contacts, I understand that senior and mid-level Westinghouse managers and technical staff have already started looking for other jobs. The company will find itself hard-pressed to handle the completion of the eight AP1000 reactors for the U.S. and China that it is committed to, let alone competently take on and complete a new two-reactor project in Kovvada. Besides, six-eight years from the start of construction, which competent Westinghouse engineering team will be around to help India start up these reactors and provide periodic assistance thereafter? ...
"In view of these difficulties, it is best to completely keep away from agreeing to purchase the Westinghouse AP1000 reactors. In fact, the current status of world energy technology does not warrant the inclusion and consideration of nuclear power of any kind in the energy basket of our nation."
Dr Vijay Sazawal, a former Westinghouse employee who is now a member of the Civil Nuclear Trade Advisory Committee of the US Department of Commerce, also urged caution.31 He said: "Basically, Westinghouse has backed out of the contracts in place [in the US] and will renegotiate contracts with those utilities which will have to bear previous cost overruns on their projects. So both Westinghouse and a new potential customer like NPCIL in India will have to be very careful in their financial negotiations in order to ensure that Westinghouse does not back out of its legal and financial obligations if it hits a road bump as it has in its four nuclear power plants under construction in the US and China, with all four plants having exceeded their original cost and schedule commitments."
1. 17 April 2017, 'The Westinghouse Bankruptcy: Test for Chinese Investment in US Infrastructure', www.ippreview.com/index.php/Blog/single/id/405.html
2. Tom Hals / Reuters, 3 May 2017, 'Westinghouse, CB&I spar in court over $2 bln merger dispute', www.reuters.com/article/us-toshiba-accounting-westinghouse-cbi-idUSKBN17...
3. Tom Hals and Emily Flitter, 2 May 2017, 'How two cutting edge U.S. nuclear projects bankrupted Westinghouse', http://uk.reuters.com/article/us-toshiba-accounting-westinghouse-nucle-i... and see also http://fingfx.thomsonreuters.com/gfx/rngs/TOSHIBA-ACCOUNTING/010040WY1YE...
4. World Nuclear News, 24 April 2017, 'Toshiba creates subsidiaries 'to maximise value'', www.world-nuclear-news.org/C-Toshiba-creates-subsidiaries-to-maximise-va...
5. Kana Inagaki, 24 April 2017, 'Toshiba to restructure to protect core businesses', www.ft.com/content/780ae574-28df-11e7-9ec8-168383da43b7
6. Kana Inagaki, 2 May 2017, 'Brave is the auditor that takes on Toshiba's accounts', www.ft.com/content/d5709622-2ef8-11e7-9555-23ef563ecf9a
7. Intellasia, 28 April 2017, 'Toshiba plans to replace auditor PwC after earnings impasse', www.intellasia.net/toshiba-plans-to-replace-auditor-pwc-after-earnings-i...
8. Quentin Webb, 26 April 2017, Unaccountable, www.breakingviews.com/considered-view/toshiba-axing-pwc-would-be-ugly-bi...
9. BBC, 14 Feb 2017, 'Toshiba chairman quits over nuclear loss', www.bbc.com/news/business-38965380
10. 16 April 2017, 'Toshiba: loses access to unit's cash after hedge fund sues', www.4-traders.com/TOSHIBA-CORP-6493713/news/Toshiba-loses-access-to-unit...
11. Leisha Chi / BBC, 16 April 2017, 'Can Toshiba escape the clutches of corporate Japan's zombie hordes?', www.bbc.com/news/business-39585758
12. Takashi Mochizuki, Mayumi Negishi, and Kosaku Narioka, 9 May 2017, 'Toshiba partners brace for possible bankruptcy filing', www.wsj.com/articles/toshiba-partners-brace-for-possible-bankruptcy-fili...
13. World Nuclear News, 28 April 2017, 'US industry on tenterhooks over Westinghouse: NEI', www.world-nuclear-news.org/C-US-industry-on-tenterhooks-over-Westinghous...
14. Augusta Chronicle, 3 May 2017, 'Too important to fail', http://chronicle.augusta.com/opinion/editorials/2017-05-03/too-important...
15. Kristi E. Swartz, 20 April 2017, 'Vendors line up to demand returns from Westinghouse', www.eenews.net/energywire/2017/04/20/stories/1060053327
16. Anya Litvak, 28 April 2017, 'Westinghouse battles trust issues with vendors, customers and employees', http://powersource.post-gazette.com/powersource/companies/2017/04/27/EQT...
17. Reuters, 28 April 2017, 'Westinghouse says will operate normally in Asia, Europe despite Chapter 11', https://finance.yahoo.com/news/westinghouse-says-operate-normally-asia-0...
18. Power Engineering, 4 May 2017, www.power-eng.com/articles/2017/05/southern-company-requests-3-7-billion...
19. Kristi E. Swartz, 5 May 2017, 'Tug of war in Ga. over who controls Vogtle's fate', www.eenews.net/energywire/2017/05/05/stories/1060054108
20. Anne Maxwell, 8 May 2017, 'Georgia Power profits off Plant Vogtle construction despite cost overruns, delays, and contractor bankruptcy', http://wjbf.com/2017/05/08/georgia-power-profits-off-plant-vogtle-constr...
21. Georgia Watch, 'Protect Georgia Power Customers from Massive Cost Overruns', www.georgiawatch.org/issue/protect-georgia-power-customers-from-massive-...
22. David Wren, 27 April 2017, 'SCANA exec: Nuclear plant completion could hinge on extension of federal tax credits', www.postandcourier.com/business/scana-exec-nuclear-plant-completion-coul...
23. World Nuclear News, 8 May 2017, 'Summer plant construction progress continues', www.world-nuclear-news.org/NN-Summer-plant-construction-progress-continu...
24. Andrew Follett, 5 May 2017, 'Congress Gears Up For Showdown Over Billions In Nuclear Tax Credits', http://dailycaller.com/2017/05/05/congress-gears-up-for-showdown-over-bi...
25. Kristi E. Swartz, 4 May 2017, 'Southern turns to D.C. for help to finish reactors', www.eenews.net/stories/1060054028
26. Ryan Alexander 6 April 2017, 'The High Cost of Ignoring Risk', www.usnews.com/opinion/economic-intelligence/articles/2017-04-06/westing...
27. ITV, 3 May 2017, 'Exclusive: NuGen CEO certain Moorside nuclear development will go ahead', www.itv.com/news/border/2017-05-03/exclusive-nugen-ceo-certain-moorside-...
28. John Collingridge, 30 April 2017, 'Toshiba mothballs Cumbrian nuclear power project', www.thetimes.co.uk/article/toshiba-mothballs-cumbrian-nuclear-power-proj...
29. Dan Yurman, 8 April 2017, 'A Modest Proposal to Save NuGen's Moorside Nuclear Project', http://neutronbytes.com/2017/04/08/a-modest-proposal-to-save-nugens-moor...
30. A. Gopalakrishnan, 31 March 2017, 'Say no to Westinghouse', www.thehindu.com/opinion/op-ed/say-no-to-westinghouse-india-must-not-ent...
31. PTI, 30 March 2017, 'Westinghouse bankruptcy unlikely to impact Indo-US N-deal', www.financialexpress.com/india-news/westinghouse-bankruptcy-unlikely-to-...