Toshiba considers sale of Westinghouse

15 March 2017

Japan’s Toshiba, facing large cost overruns on flagship projects and continuing fallout from a financial scandal, delayed publication of its financial results for a second time on 14 March and said it would consider selling its controlling stake in  it’s Westinghouse US subsidiary. Toshiba also suggested  that Westinghouse could file for Chapter 11 bankruptcy protection. Acknowledging its worst ever financial crisis, Toshiba announced a three-year growth plan including  proposals to improve its management.

Toshiba’s president Satoshi Tsunakawa said: "We are working on nurturing our growth businesses to return to stable growth by fiscal years 2018 and 2019." He told a press briefing: “We need further reforms to overcome the difficulties resulting from the accounting scandal and losses in the nuclear business. That’s something myself the management and employees have to take responsibility for and work toward bringing the company back on the path of growth.”

He added: “We will fundamentally review Westinghouse’s position and aggressively consider strategic alternatives.” While bankruptcy was one of the possible options, he that stressed no decisions had been made. However, Westinghouse has hired bankruptcy lawyers to assess the merits of a Chapter 11 filing in the USA, the Financial Times reported, citing two people familiar with the appointment.

Bloomberg said Westinghouse appears to be assembling a team of lawyers and advisers to help with restructuring. The company has hired PJT Partners Inc, people with knowledge of the matter have said. Lisa Donahue of AP Services, an affiliate of AlixPartners, will lead the Pittsburgh-based company’s operational restructuring efforts, according to a spokeswoman at Westinghouse. It also brought in bankruptcy attorneys from Weil Gotshal & Manges LLP, Reuters reported earlier.

Westinghouse’s problems stem primarily from cost overruns and delays relating to the construction of US NPPs in Georgia (Vogtle) and South Carolina (Summer), both of which are building two Westinghouse AP1000 reactors. Toshiba said an investigation was launched after a Westinghouse manager claimed to have been dismissed after refusing to yield to pressure from certain senior colleagues to play down additional costs for building the US plants. However, the company said it found the allegations to be incorrect and that the group had accurately reflected new expense estimates for Westinghouse’s projects in its preliminary figures for the third quarter, which were issued last month.

The investigation also looked at allegations that some senior managers at Westinghouse exerted “inappropriate pressure” in relation to accounting about the US company’s purchase in 2015 of nuclear construction company Stone & Webster. Reportedly, a revised agreement reached during the Stone & Webster acquisition locked Westinghouse into fixed prices for completing the projects in Georgia and South Carolina. Toshiba said it needed another four weeks to examine Stone & Webster’s accounts before it could sign off on the latest set of results. Toshiba has estimated it will need to take a writedown of JPY712.5bn ($6.2bn).

As to potential buyers for Westinghouse, the leading contender appears to be state-controlled Korea Electric Power Corporation (Kepco), which would be acceptable to the US from a political and national security perspective. China is another possibility but sale of Westinghouse to state-run Chinese companies would face challenges in the USA and Japan, according to George Borovas, the global head of the nuclear group at New York-based multinational law firm Shearman & Sterling.

Kepco has reportedly said that it would consider an approach by Toshiba, but would need to review the overall company. Toshiba has pointed out that 80% of Westinghouse’s revenues come from stable services such as its fuel business, which could be an attractive to a prospective buyer.

However, the uncertainty about Westinghouse is calling into question the future of the planned Moorside NPP in the UK. Toshiba owns 60% of the NuGen consortium which hopes to build the plant by the mid-2020s. The project is currently planning to use the Westinghouse AP1000 reactor and if Toshiba pulls out, it could mean restarting the lengthy approval process for a new design.

Analysts argue that only state-backed companies in China, Russia and South Korea could sustain the costs involved. The NuGen consortium also includes France’s Engie, formerly known as GDF Suez, which is also considering leaving the project. 

Although Toshiba announced in February that Westinghouse would not longer take on any new projects for the construction of nuclear units abroad, negotiations appear to be continuing with India, which is planning to build six AP1000 reactors at a designated site in Andhra Pradesh, Reuters reported, citing people with direct knowledge of the matter. Westinghouse would only provide reactors for the six units but would not carry out civil engineering work to build the entire project. However, this is precisely the arrangement which led to the cost overruns at its US projects. Westinghouse CEO Jose Gutierrez visited India earlier in March for talks with state-run National Power Corp of India Ltd (NPCIL) and the Department of Atomic Energy, Reuters said. “We still have daily meetings and things are going to plan,” a source said. It remains to be seen exactly what that plan might be, given the current turmoil surrounding Toshiba and Westinghouse.



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