2 February 2017

Toshiba‑Westinghouse: The End of New‑build for the Largest Historic Nuclear Builder

Toshiba-Westinghouse: The End of New-build for the Largest Historic Nuclear Builder

On 28 January 2017, Japanese media reported that Toshiba will not take any new nuclear reactor orders, “a move that would effectively mark its withdrawal from the nuclear plant construction business”. Toshiba, owner of Westinghouse—no other company built more nuclear plants in the world— “will focus on maintenance and decommissioning operations”.

Three days later, on 31 January 2017, the Wall Street Journal confirmed that “Toshiba Corp. plans to stop building nuclear power plants”, a decision that “could have widespread ramifications for the future of the nuclear-power industry”, and reported that Toshiba’s chairman, Shigenori Shiga, and Danny Roderick, a Toshiba executive and head of Westinghouse, are expected to step down by mid-February 2017.

The decision to withdraw from the business of constructing nuclear reactors is mainly due to liabilities arising from multi-billion dollar cost overruns on two U.S. reactor construction projects in Georgia and South Carolina. First indications from Toshiba on losses were disclosed in December 2016. The crisis has in part been been triggered by an accounting and legal dispute between the nuclear division Westinghouse Electric Company LLC and Chicago, Bridge and Iron (CB&I) over the valuation of the nuclear construction company CB&I Stone and Webster. Westinghouse purchased Stone and Webster from CB&I in 2015.

On 24 January 2017, Standard & Poor’s Global Ratings cut Toshiba’s credit rating deeper into junk status, downgrading it to CCC+ (“substantial risks”), down one notch from the previous B- (“highly speculative”). Both ratings are considered non-investment or “junk” level. Japan’s securities watchdog recommended that Toshiba be fined a record 7.37 billion yen US$60.5 million for overstating profits, while it is already being sued by shareholders over damages brought about by stock losses.

In future, Toshiba’s nuclear division is planning to concentrate on designing nuclear reactors due to the difficulties in forecasting construction costs. The decision followed an emergency board meeting in Tokyo to discuss the survival of one of Japan’s major companies, with the President of Toshiba explaining that the decision “will eliminate the risk from the construction business”. In June 2016, the incoming President of Toshiba had recommitted to the company’s aim to win orders for 45 or more nuclear reactors overseas by 2030, however, it now appears to abandon that goal.

U.S. Nuclear Plants At Centre of Crisis

The Vogtle and Summer plants are at least three years behind schedule and billions of dollars over budget. The AP1000 reactor projects are managed by CB&I Stone and Webster, a subsidiary of Westinghouse Electric Company LLC, which was purchased by Toshiba in 2006. In mid-February 2017, Toshiba is expected to declare a deficit of about 700 billion yen ($6.1 billion).

As of September 2016, the total cost of the Vogtle project was reported as US$21 billion, more than US$7 billion above initial estimates. With regards to VC Summer, in October 2016, after a review of the project, Westinghouse and the reactor owners South Carolina Electric and Gas Company (SC&G) agreed on a new contract with a higher projected cost of US$14 billion, about 43 percent higher than the US$9.8 billion price tag announced in 2008.

The latest start dates of June 2019 and June 2020 for Plant Vogtle, are unlikely to be attained, raising the prospects of further costs.

The 2017 losses greatly exceed Toshiba’s projections announced in 2016. In April 2016, Toshiba announced that it expected to have US$2.3 billion in impairment losses, in recognition that it had overpaid for Westinghouse and its falling revenues. Toshiba’s fiscal year estimate for sales revenue from the nuclear firm is US$3.1 billion in 2015/6 — US$540 million below what it was in November 2015 and US$180 million below what the company projected in March 2016.

Toshiba bought the Westinghouse nuclear group from British Nuclear Fuels Limited (BNFL) in 2006 for US$4.1 billion. At the time the acquisition was hailed as bringing together the “powerful combination of Toshiba and Westinghouse’s respective strengths, complementary technologies and businesses, [which] will position Toshiba as the world’s leading nuclear power group, with an unrivaled business range extending to both BWR [Boiling Water Reactor] and PWR [Pressurized Water Reactor] systems.”

Accounting and Valuation Dispute – Write Down of Goodwill

In October 2015, Westinghouse signed a purchase agreement to acquire CB&I Stone & Webster Inc., the nuclear construction and integrated services businesses then owned by CB&I. Westinghouse President and CEO Danny Roderick said the agreement “supports our company’s strategic global growth framework, and expands our capabilities”. Westinghouse and its affiliates became the sole contractor for construction of Vogtle-3 and -4, owned by Georgia Power, and V.C. Summer-2 and -3 reactors owned by SC&G.

CB&I have charged that Westinghouse reneged on promises to wipe out all the construction company’s liabilities tied to the Vogtle and VC Summer projects. The dispute relates to the value of the net working capital of the CB&I Stone and Webster nuclear construction business. As explained in an analysis from Reuters, Toshiba had claimed that it was owed US$2.15 billion by CB&I. Net working capital is a measure of the financial strength of a business, defined as its current assets minus its current liabilities. When Westinghouse bought Stone and Webster, the sale agreement included a target figure for net working capital to ensure that the financial position of the business would not change materially from the time the deal is signed to when it closes. The two companies agreed that CB&I would not be paid any money, when the deal closed, and instead would receive earning going forward. An independent auditor was brought in to calculate the net working capital of CB&I Stone & Webster. Prior to Westinghouse’s purchase of Stone and Webster, CB&I channeled US$1 billion to Stone & Webster between June 2015 and December 2015, when the sale agreement with Westinghouse entered into force. CB&I sees the net working capital mechanism as a way to be compensated for continuing to support the unit after the deal signed. But Westinghouse changed the calculations on Stone and Webster’s net working capital and argued that “CB&I’s methodology did not adhere sufficiently to Generally Accepted Accounting Principles (GAAP)”, while “CB&I maintained that it has stuck to the accounting methodology it used before and Westinghouse previously accepted”.

The nuclear power plant construction unit’s liabilities affect not just the net working capital calculations, but also the valuation of the unit. Toshiba initially estimated the ‘goodwill’ resulting from the purchase of CB&I Stone and Webster at around US$87 million, which has now morphed into several billions of dollars. Clearly, as an intangible asset, the goodwill estimated by Toshiba was massively overvalued failing to take into account the rising cost of materials and goodwill to complete Vogtle and VC Summer, leading to the company’s assets worth being less than expected. In April 2016, Toshiba reported the write down of goodwill as likely to be US$2.3 billion, now revised downward further by several billion.

On 5 December 2016, the Delaware Chancery Court found in favor of Westinghouse and dismissed the filing of CB&I, and found that the parties’ purchase agreement required an independent auditor to resolve the dispute. CB&I filed an appeal on 7 December 2016.

"We focused on the nuclear business among all of our energy businesses, but this will change... This will entail a review of our overseas (nuclear) business."

Satoshi Tsunakawa President, Toshiba Corp. 27 January 2017

Implications for Toshiba-Westinghouse’s Worldwide Nuclear Ambitions

The Toshiba crisis raises significant implications for planned projects worldwide, as well as undermining a central tenet of Japanese government economic policy of promoting nuclear reactor exports. Over the decades, Toshiba, alone or in joint ventures, has built 20 reactors in Japan, none of which are operating (nine are closed and 11 in long-term outage) and Westinghouse has built 91 reactors globally, of which 67 are still operating, 12 are closed and four are in long-term outage. (See the Global Nuclear Power Database for details and locations).

Currently, in addition to the four AP1000 reactors under construction in the U.S., four are under construction at Sanmen and Haiyang in China. As in the U.S., the Chinese projects have suffered construction delays and cost overruns, design changes and equipment failure. The Sanmen cost overruns were the probable cause of the resignations at Toshiba in 2015. They are however, currently scheduled for grid connection of Sanmen-1 in 2017, three years behind schedule, with Haiyang-1 scheduled shortly thereafter.

Toshiba-Westinghouse has been actively seeking contracts for the construction of AP1000’s worldwide, including in the U.K. and India.

The U.K. NuGen consortium, with a 60 percent share owned by Toshiba, and the balance with French company Engie, has plans to build three AP1000 reactors near the UK Sellafield site, with Generic Design Assessment for the AP1000 not yet concluded. As with nuclear projects worldwide, financing for the UK project is critical and so far not secured. The financial crisis at Toshiba is impacting the ability of the company to secure the financing it requires for the project. It has already made requests to Japanese insurers as well as some banks including Norinchukin Bank and has hired HSBC as advisor.

In 2015, Toshiba had estimated a total cost of 1.5 trillion yen US$12.4 billion for the NuGen project. But industry analysts now believe the cost could be roughly double that due to higher-than-expected labor costs and revised safety standards. The current schedule of 2018 for finalizing financial plans for the 3.4 GW project appear unattainable at this stage.

Toshiba-Westinghouse has long touted the Indian market for exports, with ambitions to build twelve AP1000 in Andhra Pradesh and Gujarat. Despite Toshiba-Westinghouse and the Nuclear Power Company of India Limited (NPCIL) having signed a works agreement in 2013 no construction has begun at either sites and financing has still to be secured. Both, Toshiba-Westinghouse and GE-Hitachi have been reluctant to rush into the Indian market because there is a possibility that they could be facing compensation of billions of dollars in a case of an accident.

However, trade journal Nucleonics Week reported in January 2017 that Toshiba-Westinghouse were ready to sign a commercial contract to supply reactors to India without a final settlement of the nuclear liability issue. Analysis carried out by the Institute for Energy Economics and Financial Analysis (IEEFA) concluded that the Mithivirdi project, at Bhavnagar, in Gujurat in northwest India was not financially viable. Toshiba-Westinghouse has been desperately trying to secure financing for the reactor project, with the U.S. Exim Bank being a particular target. Toshiba-Westinghouse was seeking US$8-9 billion from Exim towards the cost of the project. However, U.S. Exim is not able to issue loan guarantees over US10$ million presently, due to a political dispute that has meant that only two of the five board members are currently in place. There is no clarity as to when or if this obstacle will be resolved, given that leading House Republicans are seeking to terminate the bank’s very existence, with critical comments on the Bank made by President Trump prior to the election. Financing from the Japan Bank for International Cooperation—the international arm of the Japan Finance Corporation, and under the administration of the Ministry of Finance—while theoretically possible, will be further complicated by the latest crisis at Toshiba.

However, there is no point in continuing the difficult search for financing if the decision to exit nuclear construction altogether is officially confirmed. Toshiba-Westinghouse management is expected to provide the answer by mid-February 2017.