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Wall Street Journal (US): Toshiba Shares Plunge Further Over Problems at Nuclear-Power Subsidiary

Thursday 29 December 2016

Toshiba Shares Plunge Further Over Problems at Nuclear-Power Subsidiary

Japanese conglomerate warns it might take multibillion-dollar write-down stemming from cost overruns at Westinghouse

Wall Street Journal, Updated Dec. 29, 2016 11:46 a.m. ET

By REBECCA SMITH and KOSAKU NARIOKA

TOKYO—Toshiba Corp. seemed poised to profit from a global nuclear power revival when it paid $5.4 billion to win a bidding war for Westinghouse Electric Co. in 2006.

Today, that bet threatens to sink the venerable Japanese conglomerate, as cost overruns and missed deadlines on nuclear reactor projects around the world have forced it to warn investors that it may soon have to report billions of dollars in losses.

Toshiba lost a fifth of its market value Wednesday and its stock fell an additional 17% Thursday in Tokyo as panicked investors rushed to sell shares. The news of the nuclear write-downs came just as Toshiba was beginning to emerge from an earlier accounting scandal.

“It’s an unexpected development at a time when concerns had been receding,” said Yoshinori Ogawa, strategist at Okasan Securities.

Toshiba shares had surged since February on optimism about its semiconductor business and expectations for solid net profit in the current fiscal year ending March 2017. A Toshiba spokesman declined to comment on the stock plunge. On Tuesday, Toshiba executives said they remain optimistic about the nuclear business.

Westinghouse’s woes help explain why the nuclear industry has seen its dreams of global growth sputter. Until recently, the company was regarded as the industry’s front-runner, the only nuclear supplier to have landed
contracts for its next-generation reactor in both the U.S. and China.

But a series of missteps and unexpected problems have snarled nuclear projects by Westinghouse and rivals including Areva SA and General Electric Co.

Currently, 54 reactors are under construction in 13 nations, and 33 are badly delayed, according to the World Nuclear Industry Status Report, an independent annual assessment. Blunders have afflicted projects regardless of location, reactor design or construction consortia.

To lower construction costs and speed erection times, Westinghouse and its competitors came up with cookie-cutter plant designs in which major sections would be built as modules in factories and then hauled to plant sites for final assembly. Gone was the customization that added expense.

But the strategy appears to have backfired. “Supply-chain issues just moved from the plant sites to the factories. It didn’t solve the basic issue of quality control,” said Mycle Schneider, a nuclear expert based in Paris. And cookie-cutter designs meant flaws got replicated.

In France, Areva is trying to get to the bottom of a scandal involving falsified records for critical components that have wound up in nuclear plants there and in other countries, including the U.S. The problems appear to stretch back decades and to have gone unnoticed despite supposedly strict government supervision. Areva has said it is cooperating with government investigators from France and other nations.

“There’s a world-wide problem with managing these megaprojects,” said Edwin Lyman, senior scientist for the Union of Concerned Scientists in Washington, D.C. “Managers grossly underestimated the time and cost of construction.”

Westinghouse and its subcontractors recently took over construction management duties at its reactor projects in Georgia and South Carolina for CB&I Stone & Webster Inc., a U.S. company that it acquired in December 2015 for $229 million. Toshiba said this week it discovered unexpected inefficiencies in the labor force at the subsidiary that along with other factors were driving up costs.

Westinghouse acquired CB&I Stone & Webster in part because it was having difficulty producing the big modules at a facility at Lake Charles, La., that form the building-block units for nuclear reactors going up in the U.S. But the company struggled to find skilled construction workers, maintain quality control and tap a global supply chain that is required to meet rigorous standards of nuclear regulators.

Toshiba Chief Executive Satoshi Tsunakawa said the problems would force the company to take a write-down estimated at several hundred billion yen, or several billion dollars. Toshiba said it would release an exact number for accounting charges in February.

It isn’t clear if Toshiba’s financial difficulties will have an impact on the eight reactors it is trying to complete in the U.S. and China, but its disclosure suggests the situation is worse than previously understood.

In the U.S., Westinghouse was providing reactor components for nuclear plants in Georgia and South Carolina being built by utilities Southern Co. and SCANA Corp.

At the site of Southern’s Vogtle 3&4 reactors going up in rural Georgia, there have been rumors of financial problems for months, said Will Salters, business manager for the union IBEW Local 1579.

He said the site now employs about 500 of his electricians but the union recently received notice that there would be a hiring freeze pending a full review of manpower needs.

“We’ve been hearing for months they were broke and had to meet certain milestones by Southern to get paid,” Mr. Salters said.

Southern declined to comment on those claims.

In past discussions about the Vogtle project, Southern Chief Executive Tom Fanning said that his company had endeavored not to repeat the mistakes of the past when it entered into “cost plus” contracts with nuclear vendors in which it reimbursed companies for their expenses. Instead, he said, it tried to nail down costs through fixed price contracts, thus shifting some of the risks of cost overruns to vendors.

Southern spokesman Craig Bell said the wisdom of the company’s approach was plain this week, saying it had protected customers by shifting “significant construction risks to the contractor.”

A spokesman for SCANA said the Pittsburgh company is still evaluating the finances of its reactor projects and will have more to report soon.

A spokeswoman for Westinghouse declined to comment.

Toshiba is already on a Tokyo Stock Exchange watch list because of the accounting scandal that forced it to take a $1.3 billion write-down for its nuclear business in November 2015. At the time, it acknowledged that it had overstated its profit for seven years.

A reduced stock value makes it difficult to raise funds by issuing new shares. Stockexchange rules call for a company to be delisted if it falls into negative net worth at the end of its fiscal year and fails to repair the situation within a year.

Toshiba executives said they would ask the company’s banks for support. Toshiba already sold one of its best-performing units, Toshiba Medical Systems, to Canon Inc. this year.

—Takashi Mochizuki contributed to this article.

Write to Rebecca Smith at rebecca.smith@wsj.com and Kosaku Narioka at
kosaku.narioka@wsj.com

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See also:

• The Wall Street Journal (US): "Los problemas en su negocio nuclear amenazan con derrumbar a Toshiba", 29 December 2016

• The Australian (Australia): "Toshiba’s nuclear power hopes in meltdown", 29 December 2016

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