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...