The French government is selling assets so it can prop up its heavily indebted nuclear utilities. Électricité de France (EDF) announced in 2015 that it would divest €10bn (US$10.6bn) of assets by 2020 to ease its debt load ‒ which now stands at €37.4bn (US$39.7bn) ‒ and EDF is acquiring parts of its bankrupt sibling Areva. Meanwhile, Japanese industrial giant Toshiba would like to sell indebted subsidiary Westinghouse, but there are no buyers so Toshiba must instead sell profitable assets to cover its nuclear debts and avoid bankruptcy.
One site where these problems come together is Moorside in the UK. A Toshiba / Engie consortium was planning to build three AP1000 reactors, but Toshiba wants to sell its stake in the consortium in the wake of its massive losses from AP1000 construction projects in the US. Engie reportedly wants to sell its stake in the consortium, and the French government has already sold part of its stake in Engie ... to help prop up EDF and Areva! Deck-chairs are being shuffled.
The latest dramas occur against a backdrop of industry malaise, with the receding hope of even modest growth resting squarely on the shoulders of China. A February 15 piece in the Financial Times said: "Hopes of a nuclear renaissance have largely disappeared. For many suppliers, not least Toshiba, simply avoiding a nuclear dark ages would be achievement enough."1
Toshiba ‒ downfall of a titan
Nuclear-watchers around the world tuned in for Toshiba's February 14 announcement concerning its financial position and future plans. Great theatre ensued as the deadline passed with no announcement and the share price plunged 8%. Toshiba said it needed more time as its lawyers and auditors probe Westinghouse, in particular a whistleblower's claim that senior managers exerted "inappropriate pressure" over the calculation of assets and liabilities for the construction company it bought from Chicago Bridge & Iron (CB&I).2,3
The CB&I saga ‒ detailed in Bloomberg pieces titled 'Toshiba's Nuclear Reactor Mess Winds Back to a Louisiana Swamp'4 and 'Toshiba's Record Fall Highlights U.S. Nuclear Cost Nightmare'5 ‒ concerns delayed and over-budget AP1000 reactor projects in the US. The cost to complete four AP1000 reactors ‒ two each in South Carolina and Georgia ‒ will "far surpass the original estimates", Toshiba said.6 Combined, the cost overruns exceed US$10 billion.7,8 And since there is still a long way to go before construction of the four reactors is complete, there is plenty of scope for further cost overruns.
"The [Feb. 14 reporting] delay shows that the company is in a mess," said Makoto Kikuchi, from Myojo Asset Management. "We can assume that the company is not delaying its earnings release for good news."9
Despite the earlier anticlimax, Toshiba released unaudited financial figures later on February 14. The company said it expects to book a US$6.3 billion (€5.9bn) writedown on Westinghouse ‒ more than the US$5.4 billion it paid when it bought a majority stake in Westinghouse from the British government's BNFL in 2006 ‒ and it expects to report a net loss of US$3.4 billion (€3.2bn) in the fiscal year to March 2017.10
Audited figures are now due on March 14. Ominously, Toshiba cautioned that a major revision was possible.2
The reactors under construction in South Carolina and Georgia are the only reactors under construction in the US. "There's billions and billions of dollars at stake here," said Gregory Jaczko, former head of the US Nuclear Regulatory Commission. "This could take down Toshiba and it certainly means the end of new nuclear construction in the US."4
Toshiba said its shareholder equity has fallen into negative territory, a situation it hoped to rectify before the March 31 fiscal year-end.3 The company's stock value has fallen by more than half since mid-December, wiping out more than US$7 billion in market value.4 It faces a "very real" risk of being delisted from the Tokyo Stock Exchange according to JPMorgan's Hisashi Moriyama.1,11
Bankruptcy looms, with the risk heightened by the potential for further delays and cost overruns with the AP1000 reactors in the US, and unresolved litigation over those projects.4 Amir Anvarzadeh from BGC Partners in Singapore is a little more optimistic: "Toshiba is being torn apart. It's going to survive, it's not going to go bankrupt. But it's the end of Toshiba as a company with any hopes to grow."12
Former Westinghouse boss Shigenori Shiga, appointed as chair of Toshiba following a US$1.3 billion accounting scandal in 2015, stood down from the position on February 14.2
"I apologise deeply for all the inconvenience we have caused our stakeholders," Toshiba chief executive and president Satoshi Tsunakawa said at a news conference.3 The Financial Times reported: "After a day of chaotic communication, a stock sell-off and a $6.3bn writedown that may destroy one of Japan's greatest industrial names, the Toshiba president's bow of apology finally came. Satoshi Tsunakawa's head nodded for just one perfunctory second on Tuesday. Most assume there will be much deeper, longer bows to come as Toshiba leads investors, customers, employees and Japan as a whole through the country's first downfall of a nuclear industry titan."1
Toshiba cannot currently raise cash by issuing shares because of restrictions imposed by the stock exchange after the 2015 profit-padding scandal.13 Toshiba says it would likely sell Westinghouse if that was an option ‒ but there is no prospect of a buyer.1,14 The nuclear unit is, as Bloomberg noted, "too much of a mess" to sell.15 And since that isn't an option, Toshiba must sell profitable businesses instead to stave off bankruptcy. The sell-off will be all the more difficult because asset sales following the 2015 accounting scandal eliminated many of the easy choices.15
The company planned to make nuclear operations and microchips its two growth areas. But now the company plans to sell most ‒ perhaps all ‒ of its profitable microchip business to prop up the nuclear mess and avoid bankruptcy.16
Toshiba might get US$13‒17 billion by selling its entire stake in its microchip business, said Joel Hruska from ExtremeTech. "That would pay off the company's immediate debts, but would leave it holding the bag on an incredibly expensive, underwhelming nuclear business with no prospects for near-term improvement."17
Macquarie analyst Damian Thong said that since Toshiba cannot sell its nuclear business, it is left with the "second-best outcome, selling off the crown jewels."18 Masayuki Kubota, chief strategist at Rakuten Securities, said: "Usually in a corporate turnaround plan, the company would keep its most competitive business after selling nonperforming businesses. This turnaround plan gives no hope for Toshiba's future."11
Analysts have speculated that a partnership between Toshiba, Hitachi and Mitsubishi Heavy Industries could be formed to rescue Toshiba. Restructuring decisions are reportedly being led by Toshiba's biggest bank lenders, Mizuho and Sumitomo Mitsui Financial Group.1 However both Hitachi and Mitsubishi said they had no plans to acquire Toshiba's nuclear business.19,20 And Hitachi has its own problems ‒ the company is expected to report a US$620m (€583m) non-operating loss at the end of March 2017, largely due to GE Hitachi Nuclear Energy's withdrawal from a laser uranium enrichment joint venture that is going nowhere.21
Toshiba is saddled with loans totaling around US$7 billion and has been pleading with banks for time to meet its obligations. One trust bank is preparing to sue Toshiba for damages after the 2015 profit-padding scandal caused a share price collapse, and two others may do the same.22
Government funding, in one form or another, may be necessary to save Toshiba. But that brings with it another set of risks. Tom O'Sullivan, a Tokyo-based energy analyst, told the Washington Post: "This is one of Japan's historic corporations and it's very important to the Japanese economy, so this could be very significant for Japan. It would even impact Japan's sovereign credit rating if there's a knock-on effect."23
Nuclear projects and plans
Toshiba plans to exit the high-risk reactor construction business and focus its nuclear business on design, equipment supply and engineering services.2
In Japan, Toshiba will assist with the restart of idled nuclear power plants, maintenance operations and decommissioning. Elsewhere, Toshiba's future role is unclear except in broad terms: the company plans to significantly reduce its role in the nuclear industry and, where possible, to get out of reactor construction altogether.2
For current overseas reactor projects ‒ in particular, the partially-built AP1000 reactors in the US and China ‒ Toshiba aims to "reduce risk" by implementing "comprehensive cost reduction measures."24
Plans for three AP1000 reactors at Moorside in the UK are in doubt. Toshiba has a 60% stake in the project consortium NuGen, with French utility Engie holding 40%. Toshiba said it would still "consider participating" in Moorside, without taking on any risk from carrying out actual construction work, but is seeking to sell its stake in NuGen.24 According to a February 3 Reuters report, Engie also wants to pull out of NuGen (Engie declined to comment).25 The French government sold part of its stake in Engie in January 2017 to help prop up EDF and Areva.26
Cumbrians Opposed to a Radioactive Environment (CORE) reported on February 2: "The financial fog swirling around the Moorside new-build project in West Cumbria continues to thicken by the day. The development consortium NuGen must inadvertently have added to the gloom with its recently published statement that "NuGen's shareholders [Toshiba and Engie] are committed to the development of the Moorside project." Folks with longish memories will recall an identical statement (though with names changed) coming just a few short weeks before the widely predicted departure from NuGen of Scottish & Southern Energy (SSE) in 2011 and in 2013 when Spain's Iberdrola also pulled out of the project."27
Cumbrians will be glad to see the back of corruption-plagued Toshiba ‒ but corruption-plagued South Korean utility KEPCO might take its place. CORE commented: "KEPCO is itself still emerging from a major scandal that surfaced in 2012 involving bribery, corruption and faked safety tests for critical nuclear plant equipment which resulted in a prolonged shut-down of a number of nuclear power stations and the jailing of power engineers and parts suppliers."27
A debate is raging in the UK as to whether the government should take a direct stake in NuGen.28 CORE commented: "Picking the UK taxpayer pocket to support a technology past its sell-by date wholly undermines the Government's erstwhile promise that the full costs of developing, constructing and operating new-build reactors would be borne by the developer and is not likely to go unchallenged."27
Plans for six AP1000 reactors in India may not survive the Toshiba / Westinghouse meltdown. Theoretically, Westinghouse might still supply the reactors with someone other than Toshiba taking on the civil engineering works. That arrangement was put to Reuters by Sekhar Basu, secretary of India's Department of Atomic Energy,29 but it was dismissed as "wishful thinking" by a pro-nuclear commentator.30 Toshiba said that India's liability legislation ‒ which provides some recourse to sue vendors in the event of an accident ‒ would have to be changed to promote reactor projects in India.24 The project is now almost impossible according to three industry sources contacted by Reuters.25 Nuclear Power Corporation of India has not yet signed a contract with Westinghouse.
Toshiba's demise would not greatly concern the nuclear industry if it was an isolated case, but it is symptomatic of industry-wide problems. Nick Butler from Kings College London wrote in a Financial Times online post: "Toshiba is just one company in the global nuclear industry, but its current problems are symptomatic of the difficulties facing all the private enterprises in the sector. Civil nuclear power involves huge up-front capital costs, very long pay-back periods and high risks that are compounded by a lack of experience, especially in managing nuclear construction projects after a long period with few new plants. For all those reasons, private investors avoid the sector and prefer to put their money where they see faster and safer returns."31
1. Kana Inagaki, Leo Lewis and Ed Crooks, 15 Feb 2017, 'Downfall of Toshiba, a nuclear industry titan', www.ft.com/content/416a2c9c-f2d3-11e6-8758-6876151821a6
2. 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
3. Takashi Mochizuki, 16 Feb 2017, 'Toshiba near meltdown over US nuclear projects cost blowouts', Wall Street Journal, www.theaustralian.com.au/business/wall-street-journal/toshiba-near-meltd...
4. Jason Clenfield and Yuji Nakamura, 13 Feb 2017, 'Toshiba's Nuclear Reactor Mess Winds Back to a Louisiana Swamp', www.bloomberg.com/news/articles/2017-02-13/toshiba-s-nuclear-reactor-mes...
5. Mark Chediak, 28 Dec 2016, 'Toshiba's Record Fall Highlights U.S. Nuclear Cost Nightmare', www.bloomberg.com/news/articles/2016-12-27/toshiba-finds-u-s-nuclear-ren...
6. Leo Lewis, 28 Dec 2016, 'Toshiba warns of multibillion-dollar charge on US nuclear arm', www.ft.com/content/8d0be920-cc26-11e6-864f-20dcb35cede2
7. Financial Times, 17 Feb 2017, Toshiba brought to its knees by two US nuclear plants', www.ft.com/content/b7053ab4-f45e-11e6-95ee-f14e55513608
8. World Nuclear Industry Status Report, 2 Feb 2017, 'Toshiba-Westinghouse: The End of New-build for the Largest Historic Nuclear Builder', www.worldnuclearreport.org/Toshiba-Westinghouse-The-End-of-New-build-for...
9. Makiko Yamazaki, 14 Feb 2017, 'Toshiba says 'not ready', delays earnings, nuclear write-down', www.reuters.com/article/us-toshiba-accounting-idUSKBN15T033
10. BBC, 14 Feb 2017, 'Toshiba chairman quits over nuclear loss', www.bbc.com/news/business-38965380
11. Tomoyuki Tachikawa, 15 Feb 2017, 'Toshiba's latest confusion could complicate path to revival', www.japantimes.co.jp/news/2017/02/15/business/corporate-business/toshiba...
12. Bloomberg New Energy Finance, 20 Feb 2017, 'How Toshiba Lost $6 Billion', https://about.bnef.com/blog/how-toshiba-lost-6-billion/
13. Toru Yamanaka, 29 Dec 2016, 'Battered Toshiba out of easy options to plug nuclear hole', www.cnbc.com/2016/12/29/battered-toshiba-out-of-easy-options-to-plug-nuc...
14. Anya Litvak, 14 Feb 2017, 'Uncertainty at Toshiba puts Westinghouse in limbo', http://powersource.post-gazette.com/powersource/companies/2017/02/14/Cha...
15. Pavel Alpeyev, 30 Jan 2017, 'Toshiba Asset Sales After Chips Spinoff Will Cut to the Bone', www.bloomberg.com/news/articles/2017-01-29/toshiba-s-asset-sales-after-c...
16. Shusuke Murai, 14 Feb 2017, 'Toshiba says it is now considering selling majority stake in flash memory spinoff', www.japantimes.co.jp/news/2017/02/14/business/corporate-business/ailing-...
17. Joel Hruska, 14 Feb 2017, 'Toshiba facing bankruptcy, total disintegration thanks to bad bets on nuclear power', www.extremetech.com/computing/244441-toshiba-facing-bankruptcy-total-dis...
18. Leo Lewis and Kana Inagaki, 19 Jan 2017, 'Toshiba: Shrinking to survive', www.ft.com/content/c904ef2c-dcce-11e6-9d7c-be108f1c1dce
19. Nathalie Thomas, Michael Pooler and Kana Inagaki, 17 Feb 2017, 'Mitsubishi Heavy rules out Toshiba nuclear rescue', www.ft.com/content/0238df8c-f44f-11e6-8758-6876151821a6
20. Dan Yurman, 19 Feb 2017, 'Fate of Toshiba's Nuclear Projects Remains Uncertain', http://neutronbytes.com/2017/02/19/fate-of-toshibas-nuclear-projects-rem...
21. Satoshi Seii, 2 Feb 2017, 'Hitachi to take a 70 billion yen hit after U.S nuclear project fails', www.asahi.com/ajw/articles/AJ201702020042.html
22. Jillian Ambrose, 15 Feb 2017, 'Toshiba handed a one month reprieve from lenders as financial woes deepen', www.telegraph.co.uk/business/2017/02/15/toshiba-seeks-stay-execution-ban...
23. Anna Fifield, 14 Feb 2017, 'Chaos at Toshiba: $6.3 billion write-down, chairman resigns, bankruptcy looms', The Washington Post, http://gazette.com/chaos-at-toshiba-6.3-billion-write-down-chairman-resi...
24. World Nuclear News, 14 Feb 2017, 'NuGen confirms Toshiba commitment to Moorside', www.world-nuclear-news.org/C-NuGen-confirms-Toshiba-commitment-to-Moorsi...
25. Geert De Clercq and Kentaro Hamada, 3 Feb 2017, 'Battered Toshiba seeks exit from UK, India in nuclear retreat: sources', www.reuters.com/article/us-toshiba-accounting-idUSKBN15I0VG
26. Francois de Beaupuy, 6 Feb 2017, 'France's Next President Said to Face $3 Billion Nuclear Hangover', www.bloombergquint.com/business/2017/02/03/france-s-next-president-said-...
27. CORE, 2 Feb 2017, 'Moorside or Doomrise – NuGen or NoGen', http://corecumbria.co.uk/news/moorside-or-doomrise-nugen-or-nogen/
28. Guardian, 14 Feb 2017, 'Toshiba to confirm cessation of new nuclear projects outside Japan', www.theguardian.com/business/2017/feb/13/toshiba-to-confirm-cessation-of...
29. Douglas Busvine, 17 Feb 2017, 'India still keen to buy Westinghouse reactors despite Toshiba meltdown', http://in.reuters.com/article/toshiba-accounting-india-idINKBN15W0C3
30. Dan Yurman, 19 Feb 2017, 'Does India still want the Westinghouse reactors despite Toshiba meltdown?', http://neutronbytes.com/2017/02/19/us-industry-consortium-calls-for-smr-...
31. Nick Butler, 15 Feb 2017, 'Toshiba and the options on new nuclear ', http://blogs.ft.com/nick-butler/2017/02/15/toshiba-and-the-options-on-ne...