Work was still under way at the two US nuclear construction sites that have forced Westinghouse into bankruptcy, but the future of the projects has been thrown into doubt.
Underlying Toshiba’s decision to seek Chapter 11 bankruptcy protection for Westinghouse, its US nuclear engineering division, is the idea that a line can be drawn under the financial damage that can be done to the parent company.
But while bankruptcy may help limit the liabilities that Toshiba faces for the troubled plants, where costs have soared past their original budgets, it is just the start of what is likely to be a long argument over the future of the projects. The certainty that Toshiba is hoping for still looks a long way off.
On Wednesday evening in Tokyo, Satoshi Tsunakawa, Toshiba president, offered the message that the conglomerate has rid itself of all threats related to Westinghouse. He stressed there was little danger the Japanese group would be forced to foot the bill for any future disruptions at the two US projects.
“The risk from our overseas nuclear business is eliminated,” he declared.
1. April 2016: Toshiba plans a $2.3bn writedown on Westinghouse
2. Dec 2016: Group warns of another big charge on US nuclear unit
3. Feb 2017: Toshiba unveils a $6.3bn writedown on Westinghouse
4. Mar 2017: Group says it wants to sell its Westinghouse stake
5. Mar 2017: Westinghouse files for US bankruptcy protection
However, that is not a view shared by many of Toshiba’s stakeholders, including some of its creditor banks. There is little clarity on how talks between Westinghouse and the owners of the US nuclear projects will play out during the restructuring process.
All sides say they are still determined that the new Westinghouse AP1000 reactors being built at the Vogtle plant in Georgia and the VC Summer plant in South Carolina will be completed. The first of the reactors is scheduled to come online in 2019, with the others following the year after.
The joint ventures that own the plants, led by Georgia-based Southern Company at Vogtle, and South Carolina-based Scana at VC Summer, say they have been preparing for a possible bankruptcy at Westinghouse, and are exploring options for ensuring that work can go on.
Tom Fanning, Southern’s chief executive, said at the CERAWeek energy conference earlier this month: “Were Westinghouse unable to fulfil its obligations under the contract . . . we have some 400 people on site [and] I think we could step up and pick up the rest of the work required, were Westinghouse unable to.”
In the bankruptcy proceedings, Southern and Scana have agreed that, for an “interim assessment period”, the plant owners will help cover the costs of continuing construction by paying subcontractors and suppliers.
But, as Westinghouse explained in its bankruptcy court filing in the southern district of New York, they are still arguing over ”a long-term solution to the issues related to the construction of the US AP1000 projects”.
In a statement to the court, Lisa Donahue, leader of the turnaround and restructuring group at AlixPartners, a consultancy working for Westinghouse, explained the company’s view.
“Unforeseen challenges” had delayed construction at Vogtle and VC Summer, she wrote, exposing Westinghouse to billions of dollars either in cost overruns to complete the projects or penalties and liabilities if it abandons them. It could not afford either option.
The cost overruns last month caused Toshiba to warn of a $6.3bn writedown on its US nuclear business.
On Wednesday Toshiba said its net loss for the 2016 fiscal year could be as much as ¥1tn — which would rank as the largest recorded by a Japanese manufacturer — and the result would stem partly from guarantees on Westinghouse’s contingent liabilities. These stood at ¥650bn at the end of February and relate to potential future cost overruns on the two US projects.
The plan, Ms Donahue told the bankruptcy court, is to isolate the troubled AP1000 projects from the rest of Westinghouse’s business, which is financially healthy, and then “explore the continued feasibility of those [AP1000] projects in a manner that is cost-neutral and cash-neutral to the Debtors [Westinghouse]”.
She added: “The ultimate resolution of the Debtors’ involvement in these projects remains uncertain.”
Southern and Scana have both indicated that they will not let Westinghouse and Toshiba just walk away, however.
They have made public pledges about limiting the impact on their customers of any further cost overruns, and face financial pressures of their own. Morgan Stanley analysts have estimated $5.2bn in additional construction and delay-related cost overruns for Scana and $3.3bn for Southern in relation to the projects.
Mio Kato, analyst at Smartkarma, says that, assuming the two US plants were between 30 and 50 per cent finished, a simple calculation would suggest they would not be completed until 2025: five years after their scheduled start-up.
That calculation might be excessively pessimistic, adds Mr Kato, but it shows that any company taking on responsibility for the plants could still face “threatening levels of losses”.
The lack of clarity provided by the Chapter 11 filing, say people close to Toshiba’s major creditor banks, has raised fears that it will not, in fact, ringfence the Japanese conglomerate against further problems at Westinghouse.
One analyst, who declines to be identified, says: “There is a strong sense among the creditors that this will not be the end of it because they are beginning to understand just how blurred some of the edges are in the US nuclear business. Do they think there is a huge black hole they still don’t know about? No. But they are definitely nervous that, even now, they don’t have the full picture.”
If the stated plan in Chapter 11 to split the financially sound operations of Westinghouse from the toxic US projects succeeds, then some parts of the company could be attractive to buyers.
But offloading Westinghouse is not expected to be enough to shore up Toshiba, and it is planning to sell its Nand memory chip business, its flagship technology asset.
“The balance sheet has deteriorated significantly and the hurdle to repairing it is much higher,” says Toshiyasu Ohashi, analyst at Daiwa Securities.
Further coverage of Toshiba and Westinghouse
Nick Butler: Toshiba — Japan’s nuclear challenge
Westinghouse history: illustrious US group that has run aground