A major Japanese conglomerate with a corporate history of 142 years is on the verge of collapse. The main cause of this crisis is huge losses incurred by its U.S. nuclear subsidiary Westinghouse Electric Company LLC. (WEC). What is happening within Toshiba?
Onset of the crisis
WEC was previously a leading manufacturer of electrical equipment in the U.S. Founded in 1886, it built the nationwide power distribution grid, and played a major role in the broadcasting sector. CBS, one of the three major broadcasting networks in the U.S., was formerly one of its subsidiaries. In the nuclear reactor business, it occupied a dominant position in the supply of pressurized water reactor (PWR) systems.
From the 1970s onward, however, WEC faced a financial crisis and began spinning off parts of its operations and selling them. In 1999, the firm sold the last remaining nuclear arm to a British state-run company, British Nuclear Fuels Ltd. (BNFL), for $1.2 billion.
In 2005, however, when renaissance of the nuclear reactor business was widely anticipated worldwide, BNFL announced that it would sell WEC. Alan Johnson, then the British trade and industry secretary, explained some of the reasons for BNFL’s decision. He said that “Westinghouse is currently putting four nuclear reactors in China. It’s a very high-risk strategy. We don’t think the (British) taxpayer should be taking that risk.”
The General Electric-Hitachi group, Mitsubishi Heavy Industries and several others tendered bids for WEC, but it was decided in 2006 that Toshiba would buy WEC for about $5.4 billion. Eventually, Toshiba acquired a 77% stake in WEC (worth $4.158 billion), the Shaw Group Inc. a major U.S. engineering company based in Baton Rouge, Louisiana, took a 20% stake, and Ishikawajima-Harima Heavy Industries Co., Ltd. (IHI) a 3% stake. As a result of this action, Toshiba was later destined to fall into problems originating with the Shaw Group. Toshiba’s purchase price was three times as high as BNFL’s original estimate of $1.8 billion. Due to the exorbitant price of the acquisition, Toshiba has been forced to make desperate efforts to shore up WEC’s corporate value.
When a firm purchases another company at a price higher than the company’s book value, the difference is recorded as goodwill. In the case of the purchase of WEC, Toshiba posted about $2.93 billion as goodwill. According to the Japanese generally accepted accounting principles (Japanese GAAP), goodwill is regularly amortized at a fixed rate, and if contraction occurs, the goodwill can be further amortized. On the other hand, according to the U.S GAAP, there is no regular amortization of goodwill, and instead, write-offs are conducted whenever necessary.
Toshiba claimed that it adopted the U.S. GAAP and that up till 2016, write-offs against WEC’s goodwill were unnecessary. Despite this claim, the conglomerate conducted goodwill impairment tests in the U.S. in four categories, “new construction,” “automation (introduction and repair/maintenance of its monitoring control system),” “service (maintenance),” and “fuel,” and reported impairments of goodwill totalling 115.6 billion yen ($10.4 billion) in the first two categories. The firm did not do this in Japan.
In April 2016, Toshiba posted a WEC goodwill impairment loss of 260 billion yen ($23.4 billion) in Japan. WEC’s “fuel” and “service” businesses were in surplus, in and after 2006, while its construction business ran losses in many fiscal years.
Problems involving receipt of orders for constructing nuclear reactors in China and U.S.
Before the WEC acquisition, Toshiba held boiling-water reactor (BWR) technology but after the acquisition it also obtained pressurized-water reactor (PWR) technology, the mainstay technology in overseas markets at that time. By this acquisition, Toshiba held most kinds of reactor-related technology ranging over the whole industry from upstream to downstream. Banking on the newly-acquired technology, Toshiba aggressively promoted its nuclear-plant export business. According to the in-house document on its business strategy for fiscal 2008, Toshiba planned to gain orders for a total of 33 units by 2015, and projected the expansion of annual sales of its nuclear business to 1 trillion yen ($89.8 billion) by 2020. It also declared in 2015 that the firm aimed to win orders for a total of 64 units in the global market.
In the same document, Toshiba said it would receive orders for four units of the next-generation AP1000 nuclear reactors from China, and two units each from the U.S. utilities Southern Co., Scana Corp., and Progress Energy. In addition, the conglomerate said it would receive an order for two units of its Advanced Boiling Water Reactor from the South Texas Project (STP). All of these projects, however, are currently facing grave problems. In 2006, WEC won orders for building two AP1000 reactors each at the Sanmen Nuclear Power Plant in China’s Zhejiang Province, and the Haiyang Plant in Shandong Province.
According to the original plans of the projects, the construction work was slated to begin in 2009, the reactors becoming operational in the 2014-15 period. The schedule, however, was delayed due to stricter regulations formulated in the wake of the 2011 nuclear disaster at Japan’s Fukushima Daiichi Nuclear Power Station. Operation of the plants is currently scheduled to begin in 2018.
Similar projects launched in the U.S. are confronted with more serious problems. In 2008, Toshiba concluded a contract with Southern Co. to construct the Unit 3 and Unit 4 reactors at its Plant Vogtle in Georgia. In 2009, it won another contract from Scana Corp. to build Unit 2 and Unit 3 at its V.C. Summer Nuclear Generating Station in South Carolina. These projects, however, are making progress at an extremely slow pace and the original schedule for the start of reactor operations in the 2016-18 period was postponed to the 2019-20 period. Currently, it is said that a mere 36% of the construction work has been completed at Plant Vogtle, and 31% of the work at the V.C. Summer plant. Because of this construction delay, the combined amount in cost overruns from the four projects climbed to $6.1 billion.
Problems involving Stone & Webster
One of the key factors in this delay was Stone & Webster Inc. (S&W), commissioned to construct the four reactors. S&W was previously an affiliate of the Shaw Group Inc., and expanded its nuclear reactor construction business jointly with Toshiba and WEC. In 2013, however, an engineering group, Chicago Bridge & Iron Company, acquired the Shaw Group. (In 2011, Toshiba bought a 20% share in Shaw that was previously held by WEC, later selling 10% to Kazatomprom, Kazakhstan’s state-owned uranium miner.)
Resulting from the huge losses suffered by S&W due to the delays in the nuclear-plant construction projects, a dispute broke out between CB&I and Toshiba over the shares of the massive losses to be shouldered by the respective companies. In addition, the utilities filed suits against Toshiba in view of the cost overruns caused by the construction delays. In 2015, Toshiba decided to acquire S&W through its U.S. subsidiary WEC. As a result, Westinghouse assumed full responsibility for all AP1000 projects and related services involving S&W. The transaction agreement said that CB&I would be absolved from responsibility for the projects, and that WEC would pay some reward to CB&I upon completion of the nuclear plants.
According to the announcement made by Toshiba at the time, the aim of the S&W acquisition was to establish a system that enabled the firm to carry out integrated management and implementation of all its nuclear projects in the U.S. Around the same time, the conglomerate agreed to out-of-court settlements on all unsettled claims and disputes involving its nuclear reactor projects in the U.S., including cases being fought before the court. Toshiba also agreed to review its prices and schedules.
Consequently, WEC received $350 million from Southern, and $286 million from SCANA, as additional costs, although these amounts were far lower than the actual additional costs. That is, the S&W acquisition was carried out to resolve the tangled relations with the two utilities.
Later, in December 2016, the total amount of S&W’s loss was disclosed. At its extraordinary shareholders’ meeting in March 2017, Toshiba announced that it would write-off S&W’s goodwill impairment loss of 625.3 billion yen ($5.368 billion), as well as goodwill impairment losses of other nuclear-related businesses, totaling 87.2 billion yen. As a result, the combined amount of goodwill impairment losses reached 712.5 billion yen. On March 29 of the same year, Toshiba’s U.S. nuclear unit, Westinghouse Electric, filed for Chapter 11 bankruptcy.
Toshiba has expressed its intention of withdrawing from the overseas nuclear plant construction business. Nevertheless, the business management risk of its U.S. projects still remains, for example, the risk involving construction of the ABWR units 3 and 4 at the South Texas Project (STP) in Texas.
In the original STP plan, Nuclear Innovation North America (NINA), 88% owned by US utility NRG Energy and 12% by Toshiba, would construct the two units. NRG Energy, however, withdrew from the project in the wake of the Fukushima nuclear accident in 2011.
Toshiba proceeded with the project, and for the purpose of consuming the electric power from the new reactors in Texas, it bought the right to liquefy 2.2 million tons of LNG a year for 20 years from the Freeport Project. The conglomerate currently faces the risk of running up massive losses of at least 1 trillion yen in this project.
In addition to this risk, Toshiba also carries many risks in other nuclear-related businesses. Indications are that in 2005 the above-mentioned British Cabinet minister correctly predicted the plight currently faced by Toshiba.
Hajime Matsukubo, CNIC