Toshiba Corp. (PC) (USOTC:TOSYY)
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After billions in losses, Westinghouse unit will focus on selling reactor designs
By Russell Gold and Takashi Mochizuki
Toshiba Corp. plans to stop building nuclear power plants after incurring billions of dollars in losses trying to complete long-delayed projects in the U.S., a move that could have widespread ramifications for the future of the nuclear-power industry.
The Japanese industrial conglomerate is set to announce plans to exit nuclear construction by the middle of February, according to a Toshiba executive familiar with the matter. The executive also said Toshiba's chairman, Shigenori Shiga, and Danny Roderick, a Toshiba executive and the former head of its Pittsburgh-based nuclear power unit, Westinghouse Electric Co., are expected to step down.
Toshiba's decision deals a fatal blow to its ambitions to become a major player in the nuclear construction business. The company has bet aggressively on Westinghouse's AP1000 reactor design, which it hoped would anchor a new generation of nuclear power plants that were supposed to be easier to build and to deliver on time. But signs emerged that the AP1000 wasn't as easy to build as hoped, and yet Toshiba remained confident and took on added financial risk, according to legal filings and interviews with people involved with the construction process.
Toshiba declined to comment. The company previously said it would disclose the size of Westinghouse's losses on Feb. 14. In December, it said it was likely to take a write-down of several billion dollars, and people familiar with the situation say the losses could approach $6 billion -- plunging the company into a new crisis just as it was seeking to move away from an earlier accounting scandal.
Westinghouse will continue to design nuclear reactors, the Toshiba executive said, and is expected to complete construction work at two U.S. nuclear facilities it is still in the process of building -- in Georgia and South Carolina, commissioned by utilities Southern Co. and Scana Corp., respectively.
Toshiba's future involvement with nuclear plants will be limited to selling its designs; it will let other companies handle the risk of building the facilities, an approach it already takes in China.
"We are closely monitoring [Westinghouse's] financial status, as well as that of Toshiba," a Scana spokeswoman said.
Southern officials said they are confident shareholders and customers are protected through a $920 million letter of credit from Westinghouse and a fixed-price contract which transfers responsibility for cost overruns to Westinghouse.
In October 2015, as Toshiba faced a very public accounting scandal centered on its computer business, it was quietly dealing with another crisis in nuclear power-plant construction -- and made a series of bold moves in an attempt to fix it.
The company bought out a partner in a nuclear-construction consortium, settled lawsuits and renegotiated contracts with Southern and Scana, which put Toshiba overwhelmingly on the hook if the two construction projects continued to run over budget.
Toshiba's decision to exit the nuclear construction business could have widespread ramifications. Nuclear power appears to be "too big, too expensive, and most of all, too slow to compete effectively in what is an increasingly ferocious competition," said Mycle Schneider, a nuclear expert based in Paris.
The nuclear construction business, led by a General Electric Co.-Hitachi Ltd. venture and France's Areva SA, has been under pressure since the 2011 Fukushima nuclear-plant meltdowns in Japan.
Toshiba plunged into the business in 2006, when it won a bidding war to acquire Westinghouse. Analysts worried at the time that it had overbid. But within a couple of years the bet appeared to be paying off: Southern chose Westinghouse's design for the first new nuclear plant to be built in the U.S. in 30 years, and the next month Scana also chose the AP1000 for a plant in South Carolina.
The U.S. government approved the designs in early 2012 and work began. Within a few months, legal disputes arose between Westinghouse, its construction consortium partner, Stone & Webster, and Southern over who would pay for unexpected costs resulting from post-Fukushima tougher safety standards, according to filings.
Relations between Westinghouse and Stone & Webster's owner, Chicago Bridge & Iron NV, broke down by 2015, according to filings. William Jacobs, the independent construction monitor for the plant Southern is building, said Westinghouse and CB&I were "incurring very large costs beyond those being publicly reported" due in part to having so many employees for a project that was years behind schedule.
In March 2015, CB&I broached a possible sale of Stone & Webster to Toshiba. As the talks intensified, Toshiba became mired in the accounting scandal, prompting it to acknowledge it padded profits in its personal computer and other businesses.
Toshiba worried that if the lawsuits with Southern and CB&I over the Fukushima-related safety-cost overruns continued, Toshiba might have had to acknowledge that Westinghouse faced big liabilities, according to company executives. A large write-down at that stage threatened to wipe out the company's capital.
To end the litigation, Toshiba made several deals in October 2015. It acquired Stone & Webster for $229 million in deferred payments and became the only guarantor on the engineering contract, releasing CB&I. Scana agreed to push back the completion date for the South Carolina plant, but negotiated a deal where it would pay Toshiba $505 million in exchange for switching to a fixed-price contract. Toshiba agreed.
Southern faced up to $1.5 billion in liability in the lawsuits over post-Fukushima safety-cost overruns, and settled for about $350 million in October 2015. The deal restricted Westinghouse's ability to "seek further increases in the contract price," Southern said -- meaning that if the nuclear plant couldn't be completed in a timely manner, Toshiba would shoulder the costs.
As problems continued, Westinghouse and CB&I last year sued each other in a dispute over the Stone & Webster sale. Then Toshiba said it might need to take a write-down of several billion dollars related to the value of Stone & Webster, caused by cost overruns.
While Southern said it is insulated from cost overruns, it is unclear if the $920 million line of credit from Westinghouse would be sufficient to complete its two generating units if Westinghouse's financial problems prevent it from fulfilling its contract.
"I don't see how Southern and Scana are confident they won't be responsible for any further cost increases," said Sara Barczak, a critic of the projects who works for the Southern Alliance for Clean Energy, a nonpartisan advocacy group.
Write to Russell Gold at [email protected] and Takashi Mochizuki at [email protected]
(END) Dow Jones Newswires
February 01, 2017 02:47 ET (07:47 GMT)
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