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On August 10, Toshiba reported its financial figures for the 2016 fiscal year (ending 31 March 2017) after repeated delays and a protracted dispute with its auditor. Toshiba reported a net loss of ¥965.7 billion (US$8.83bn; €7.51bn)1 ‒ more than double the loss of the previous year, and the largest-ever annual loss for a Japanese manufacturer.2
Toshiba said its net worth is negative ¥552.9 billion ($5.07bn; €4.29bn)2 and notes (as it did in April) that there is "substantial doubt about the Company's ability to continue as a going concern".1
Toshiba's losses on its nuclear businesses amounted to over US$11 billion (€9.65bn) in the 2016 fiscal year. The company's financial report states: "Toshiba Group recorded a net loss attributable to shareholders of the Company of 965.7 billion yen (US$8622.0 million), due to the loss of 1,242.8 billion yen (US$11,096.3 million) generated in Westinghouse, its U.S. subsidiaries and affiliates, and Toshiba Nuclear Energy Holdings (UK) Limited, a holding company for Westinghouse Group operating companies outside the U.S."1
Toshiba noted that its subsidiary Westinghouse Electric Company, Westinghouse's US subsidiaries, and Toshiba Nuclear Energy Holdings (UK) Limited, had all filed for Chapter 11 bankruptcy protection under the US Bankruptcy Code on March 29. Those filings "deconsolidated Westinghouse from Toshiba", Toshiba said.1
Toshiba has agreed to meet parent-company contractual agreements with US utilities by paying US$3.68 billion to the owners of the Vogtle AP1000 project in Georgia, and US$2.17 billion to the owners of the VC Summer AP1000 project in South Carolina, in the coming years.1 Thus Toshiba ‒ assuming the company still exists ‒ will be free from the mess of the AP1000 projects in the US when its makes its final payment in September 2022.
And Toshiba hopes to rid itself of Westinghouse altogether: "As part of the Company's plan to offset the negative impact of the ongoing situation, the Company has been reviewing a restructuring plan of Westinghouse Group including deconsolidation by a potential sale of a majority stake in order to eliminate risk in the overseas nuclear power business."1
Auditor dispute
Toshiba had to repeatedly delay releasing its financial figures because of a protracted dispute with its auditor, PricewaterhouseCoopers (PWC) Aarata. The auditor issued an "opinion with qualifications" regarding Toshiba's annual earnings report on August 10, along with an "adverse opinion" on Toshiba's internal controls.2,3 PWC Aarata also said there is an "unfixed significant misstatement" and that Toshiba's figures "are not based on generally accepted corporate accounting levels".2
PWC Aarata believes Toshiba "should have booked a respectable degree or all" of the massive losses stemming from its US-based subsidiary Westinghouse ‒ lead contractor for the VC Summer and Vogtle AP1000 projects ‒ in fiscal 2015 instead of the following year.2 Toshiba claims it wasn't aware of the massive cost overruns with the US AP1000 projects but PWC Aarata evidently believes otherwise.4
If Toshiba followed its auditor's advice, it would have recorded negative net worth for two consecutive years, which would normally trigger a delisting from the Tokyo Stock Exchange.5 That, in turn, would take Toshiba one step closer to bankruptcy ‒ hence the company's reluctance to accept the auditor's advice.
Stock exchange listing
As things stand, Toshiba has avoided a stock exchange delisting – but on August 1 it was demoted to the second tier of the exchange, and will no longer feature in the Nikkei 225 index of Japan's top public companies.6
Toshiba is still under pressure. Japan Times noted that "there are still two scenarios under which it could be delisted from the Tokyo Stock Exchange: by failing to eliminate its negative net worth and failing to show improvement in its internal management controls. TSE rules stipulate that firms must be delisted if they conclude two consecutive business years in a negative net worth. Because Toshiba ended 2016 with a negative net worth, it was demoted last Tuesday to the TSE's second section."7
Financial Times journalist Peter Wells wrote on August 10:8
"The immediate threat to Toshiba may have receded after its auditor signed off its annual results but the broader dangers that still threaten the company's future have not disappeared. Toshiba remains, say people close to the conglomerate, "absolutely devoted" to remaining listed on the Tokyo Stock Exchange.
"But the decision by PwC Aarata, Toshiba's auditor, to add a so-called adverse opinion of the company's internal controls could still bring about its delisting. "I don't see how the TSE can look at the wording of that criticism and decide that Toshiba did have adequate control of its systems at the end of March 2017," says Travis Lundy, an analyst at Smartkarma. The wording, he suggests, lowers the likelihood of Toshiba remaining listed. "I don't see anything that suggests this was a problem in the past, but that it has now been fixed."
"Toshiba's biggest challenge has certainly not gone away. It is still scrambling to fill a $5bn hole in its shareholder equity, punched by a $6.3bn writedown on its US nuclear business, the Westinghouse subsidiary that filed for Chapter 11 bankruptcy protection this year. Japanese companies that report two consecutive years of negative shareholder equity face delisting from the TSE, although the exchange operator is able to exercise some discretion.
"Successfully closing the $18bn sale of its memory chip business by the end of its financial year in March 2018 remains Toshiba's best shot at reversing the shareholder equity deficit and avoiding a forced delisting. But the sale process continues to face numerous obstacles, and bankers, lawyers and other executives involved with the sale have repeatedly described "chaos" in the process. ... Owing to the time any sale agreement would take to pass regulators ‒ as well as the need to smooth out a complicated legal spat with joint venture partner Western Digital ‒ Toshiba has in effect until the end of August to conclude a sale, say bankers and lawyers involved in the talks."
"Even if Toshiba can get the chip unit sale back on track in a timely fashion, the risk of delisting may not subside quickly. Since its [profit padding] accounting scandal in 2015, Toshiba has been under scrutiny from the TSE, and in September last year submitted a report on its internal management controls to the bourse operator. But that was knocked back by the exchange three months later. In March, Toshiba resubmitted the report ‒ its second and final chance to impress the TSE that its controls were up to scratch. Should the TSE at some point decide that Toshiba's internal controls are passable, then it would have to justify how it arrived at a different conclusion from the independent auditor. Such a discrepancy could send investors at home and abroad the wrong signal at a time when Japan is keen to show it is trying to improve corporate governance standards."
Bankruptcy
The small risk of Toshiba going bankrupt will loom much larger if the sale of the memory chip business falls through. There is also a possibility that Toshiba will voluntarily file for bankruptcy protection, much as Westinghouse has done in the US. The Wall Street Journal reported on July 27:9
"A number of creditors and others involved in Toshiba Corp.'s restructuring are pushing for a Toshiba bankruptcy filing as the best path to rebirth after its effort to raise money through a chip-unit sale stalled. People involved in talks over Toshiba's workout, including business partners, lawyers and people with ties to the company's main bankers, said bankruptcy is worth serious study. Some of them said it is the best available option and that they are advocating it in discussions with Toshiba or creditors. They said a bankruptcy filing by Toshiba, the core of an industrial conglomerate, could free it of burdens that include lingering liabilities from the March bankruptcy of its Westinghouse Electric Co. nuclear unit in the U.S."
"Toshiba's chief executive, Satoshi Tsunakawa, said at a recent news conference that seeking debt relief through the courts isn't an option. A Toshiba spokesman reiterated this week that the company has "no specific plan" to seek bankruptcy protection.
"A person familiar with deliberations at one of Toshiba's main lenders compared the conglomerate to a hole that might have treasure at the bottom but also lurking snakes. Bankruptcy, this person said, could kill any snakes and let the lenders access the treasure. ...
"One person directly involved in a portion of the Toshiba recovery plan said "everyone thinks" bankruptcy has to be looked at ‒ but it is difficult to say so publicly."
Westinghouse
On July 31, SCE&G and Santee Cooper announced their decision to abandon the two partially-built AP1000 reactors at the VC Summer plant in South Carolina. Westinghouse wasn't forewarned even though it was formally the lead contractor on the project (though less directly involved since its March 29 bankruptcy filing). Westinghouse has been working on restructuring plans which assumed that the company would play a minor but profitable role in the completion of the VC Summer project ‒ those plans must now be reworked.
In a court filing on July 26, Westinghouse asked a New York bankruptcy judge to allow the company an extra three months to file a restructuring plan.10 Westinghouse said it needs more time given the complicated nature of the business ‒ the company has thousands of vendors, around 37,000 creditors and "five different business lines that serve more than half of the nuclear power plants in the world".10 Bankrupt companies have a 120-day exclusivity period to come up with a reorganization plan, the Pittsburgh Post-Gazette reported, and another 60 days to try to gain approval of it without worrying about creditors or others introducing competing plans.10 Westinghouse is seeking to extend both deadlines until December 6 and February 4, 2018, respectively.
On July 31, Westinghouse said it has submitted a five-year business forecast to its bankruptcy lenders which includes savings of US$205 million over that period and plans to cut 7% of its 14,000-strong global workforce.11,12
In early August, Westinghouse laid off 870 employees who were working on or supporting the VC Summer project.13 That prompted a lawsuit alleging that Westinghouse violated labor laws by laying off hundreds of workers without proper notice. Seeking class-action status, Andrew Fleetwood, a field engineering manager at VC Summer, is suing Westinghouse for violating the Worker Adjustment and Retraining Notification Act, which requires employers to provide at least 60 days of advance notice before a plant shutdown or a mass layoff.13 Westinghouse said it provided as much notice as practicable and that the employees will be permanently laid off on August 31 if no other assignment is identified for them.
On August 7, Westinghouse asked the bankruptcy court to allow it to break thousands of contracts associated with the VC Summer project ‒ contracts cover everything from engineering services and security protection to scaffolding and urine testing.14 These contractors will join the long list of unsecured creditors in Westinghouse's bankruptcy. The company has accumulated debts of around US$9.8 billion.15
Santee Cooper said in late July that it will continue to pursue Westinghouse's assets in bankruptcy court to obtain further payment on top of its share (US$976 million) of the parent-company contractual settlement of US$2.17 billion agreed to by Westinghouse's parent company Toshiba for the VC Summer project.16 Santee Cooper will "continue to pursue Westinghouse ... revenues and assets through bankruptcy court and other legal channels" to further offset its losses, according to chief executive Lonnie Carter.17
On June 27, the Delaware Supreme Court ruled against Westinghouse, and in favor of Chicago Bridge & Iron Co, in a US$2 billion dispute over cost overruns with the four AP1000 reactors under construction in Georgia and South Carolina.18,19
References:
1. Toshiba Corporation, 10 Aug 2017, 'Toshiba Announces Consolidated Results for Fiscal Year 2016, to March 31, 2017', www.toshiba.co.jp/about/ir/en/finance/er/er2016/q4/ter2016q4e.pdf
2. Kyodo, 10 Aug 2017, 'Toshiba submits delayed financial report, avoids immediate delisting', https://english.kyodonews.net/news/2017/08/ba1c8caa4acd-toshiba-submits-...
3. Reuters, 10 Aug 2017, 'Toshiba's auditor gives 'adverse opinion' on governance: filing', www.reuters.com/article/us-toshiba-accounting-governance-idUSKBN1AQ0CN
4. Nikkei Asian Review, 11 Aug 2017, 'Battle between auditors drove Toshiba's earnings delay'', https://asia.nikkei.com/Japan-Update/Battle-between-auditors-drove-Toshi...
5. Reuters, 10 Aug 2017, 'Toshiba wins auditor sign-off, likely avoiding delisting for now', www.reuters.com/article/us-charter-commns-m-a-altice-idUSKBN1AP1QN
6. 2 Aug 2017, 'Cumbria nuclear backer Toshiba sees stock exchange demotion', www.in-cumbria.com/Cumbria-nuclear-backer-Toshiba-sees-stock-exchange-de...
7. Kazuaki Nagata, 10 Aug 2017, 'Toshiba ducks delisting by submitting long overdue financial report', www.japantimes.co.jp/news/2017/08/10/business/corporate-business/toshiba...
8. Peter Wells, 10 Aug 2017, 'Cloud hangs over Toshiba even after auditor sign-off', www.ft.com/content/d6ac9154-7dc1-11e7-9108-edda0bcbc928
9. Kosaku Narioka, Takashi Mochizuki and Peter Landers, 27 July 2017, 'Toshiba Bankruptcy Filing Pushed by Some Involved in Workout', www.wsj.com/articles/toshiba-bankruptcy-filing-pushed-by-some-involved-i...
10. Anya Litvak / Pittsburgh Post-Gazette, 27 July 2017, 'Westinghouse needs more time in crafting bankruptcy plan', http://powersource.post-gazette.com/powersource/companies/2017/07/26/Bri...
11. Anya Litvak / Pittsburgh Post-Gazette, 16 Aug 2017, 'Westinghouse cuts office space in North Hills', http://powersource.post-gazette.com/powersource/companies/2017/08/16/Wes...
12. World Nuclear News, 1 Aug 2017, 'US nuclear construction project to be abandoned', www.world-nuclear-news.org/NN-US-nuclear-construction-project-to-be-aban...
13. Anya Litvak / Pittsburgh Post-Gazette, 11 Aug 2017, 'Westinghouse furloughed 870 employees in fallout from the cancelled South Carolina nuclear project', http://powersource.post-gazette.com/powersource/companies/2017/08/11/Wes...
14. Anya Litvak / Pittsburgh Post-Gazette, 9 Aug 2017, 'Westinghouse: Project canceled 'without warning'', http://powersource.post-gazette.com/powersource/companies/2017/08/09/Sou...
15. Nathan Bomey / USA Today, 30 March 2017, 'Georgia nuclear plant in jeopardy after Westinghouse plunges into bankruptcy', www.11alive.com/money/georgia-nuclear-plant-in-jeorpardy-after-westingho...
16. Steven Mufson, 31 July 2017, 'S.C. utilities halt work on new nuclear reactors, dimming the prospects for a nuclear energy revival', www.washingtonpost.com/business/economy/sc-utilities-halt-work-on-new-nu...
17. Andrew Ward, 1 Aug 2017, 'Westinghouse nuclear project halted in South Carolina', www.ft.com/content/aaaeda90-761d-11e7-a3e8-60495fe6ca71
18. Reuters, 29 June 2017, 'US court rules for Chicago Bridge in Westinghouse dispute', http://asia.nikkei.com/Spotlight/Toshiba-in-Turmoil/US-court-rules-for-C...
19. Anya Litvak / Pittsburgh Post-Gazette, 27 June 2017, 'Court rules against Westinghouse in nuclear acquisition deal', http://powersource.post-gazette.com/powersource/companies/2017/06/27/wes...