Westinghouse parent Toshiba's decision could shock markets




Today Westinghouse Electric Co. was to learn its fate.

For more than a month, the Cranberry-based nuclear firm has been living with an asterisk since its Japanese parent company, Toshiba Corp., told shareholders to expect a multibillion-dollar impairment in Westinghouse’s value.

Toshiba today said that it would book a $6.3 billion loss related to its U.S. nuclear business, stemming from Westinghouse’s acquisition of a nuclear construction company in 2015.

Toshiba executives were due to deliver the company’s quarterly earnings announcement today — the deadline for the Tokyo Stock Exchange rule to report earnings within 45 days — but they failed to show up. Instead, the company said that it was “not ready” to make the announcement and asked for another month to file.

Late last month, Toshiba’s president and CEO, Satoshi Tsunakawa, told reporters that Toshiba is likely to exit the nuclear construction business outside of Japan, which would return Westinghouse to its role as a technology designer and service provider.

Given that is Westinghouse’s strength, Bloomberg New Energy Finance’s head of nuclear research Chris Gadomski said he thinks the company might be better off with a narrowed mission.

“There's a big difference between building equipment for nuclear power plants and managing the process,” Mr. Gadomski said. “If Westinghouse says, ‘Hey, we're just going to build components’ — that's fine. Actually, that simplifies the process completely.”

But the uncertainty over the company’s future is rattling markets and customers.

On a recent visit to South Carolina, where Westinghouse is building two AP1000 nuclear reactors for the utility South Carolina Electric & Gas Co. — these are multibillion-dollar projects — Mr. Gadomski said the anxiety was palpable.

“They were kind of really scared and concerned what the implications of this whole unraveling is going to be,” he said.

The South Carolina project and a similar effort in Georgia are currently in construction mode.

Construction business

Westinghouse employees are similarly uncertain of what awaits them. The company employs 12,000 worldwide, including, approximately 4,500 in the Pittsburgh region.

The company’s current entanglement in the construction business can be traced back more than a decade, when it partnered with Shaw Group to build the first AP1000 reactors in the United States.

These reactors, which Westinghouse had spent more than a decade designing, were sold as safer and simpler to build than their predecessors. They would be the first new nuclear plants built in the country in three decades, and the pressure to demonstrate a break from history was huge — all previous nuclear construction had been accompanied by significant delays and swelled budgets.

This was a time when the words “nuclear renaissance” weren’t said with cynical inflection. Before shale gas plummeted that fuel’s price, threatening all competing sources of power. Before a massive earthquake and tsunami devastated the Fukushima Daiichi nuclear power plant in Japan in 2011. Before it was clear that the U.S. Congress had no appetite for a carbon tax that would privilege nuclear energy.

In July 2012, Chicago Bridge and Iron announced it was buying Shaw and becoming Westinghouse’s partner on those projects. But before the deal closed, CB&I was suing Westinghouse for the cost of changes to the projects in Georgia and South Carolina. Westinghouse was, in turn, suing CB&I for the same thing. Meanwhile, the utilities that commissioned those reactors were suing their contractors.

By 2015, as the lawsuits and cost overruns cast a $2 billion shadow on the nation’s first nuclear projects in decades, Westinghouse struck a deal to buy CB&I’s nuclear construction division for $229 million. The real meat of the deal was an agreement between all parties to end the litigation.

The move also shifted all the risk for any targets missed in the future to Toshiba.

At the time, Danny Roderick, then Westinghouse’s CEO, said CB&I had between 7,500 and 8,000 workers at the AP1000 projects in Georgia and South Carolina.

He also called the deal “a long-term play” for Westinghouse, expecting the newly purchased division to be the construction arm on future projects, including those pending in the United Kingdom and Turkey.

But the relationship between Westinghouse and CB&I soured over some post-closing calculations. CB&I said Westinghouse owed it $428 million, while Westinghouse thought the debt was on the other foot, to the tune of $2 billion.

This matter has yet to be resolved.

Back to tech

If Toshiba pulls out of nuclear construction, it may also yank its resources from several new nuclear projects that Westinghouse has been working on for years.

In the U.K. county of Cumbria, Toshiba has pledged a 60 percent interest in a project to build three AP1000 reactors in the coming years. If it pulls out, that project would have to find another investor willing to pony up billions of dollars. Without Toshiba, it would be up to the new investor to decide if the project should use Westinghouse technology or pivot to another vendor.

Also in potential danger is an order for six AP1000 reactors on the east coast of India.

Mark Hibbs, senior fellow at the Nuclear Policy Program of the Carnegie Endowment for International Peace, said his sources inside the company and in the U.S. government expect that two AP1000 projects Westinghouse currently is building in China would proceed “business as usual.”

Competing for new reactor projects abroad is a different story. There, Westinghouse is up against state-sponsored nuclear companies from France (Areva), Russia (Rosatom), South Korea and now, China.

“Those are essentially totally integrated companies that provide everything from design to construction to fuel services,” Mr. Hibbs said.

“Westinghouse — their message was always that their business model was radically different,” he said.

Even with Toshiba as a parent, Westinghouse couldn’t compete with the financial backing of government coffers. Nevertheless, the Japanese parent gave Westinghouse resources it wouldn’t have on its own.

“If Toshiba says, ‘We’re out of the business,’ there goes their big pockets,” Mr. Hibbs said.

Mr. Hibbs said it was Toshiba’s task to ensure it was comfortable with the risk of delays and cost overruns that are inherent to nuclear construction.

“In the history of nuclear power, those things happen all the time,” Mr. Hibbs said. “But in this situation, with this kind of market and the expectations of the financial sector, it’s just intolerant of anything like that.”

“There’s a lot more short-term thinking, and it’s driven first and foremost by the financial situation and the concerns about project risk,” he said. “And the short-term view, which is running the world right now, is that [nuclear construction] is a poison pill.”

Mr. Gadomski said paring down Westinghouse’s focus on its core competency — the design of nuclear technology and its fuel and maintenance services, might make sense.

At the same time, he added, if Westinghouse exits the business of building power plants, it will need a strong advocate in the nuclear construction world to bid on projects and champion Westinghouse technology in those bids.

There have been speculations that Toshiba might try to sell Westinghouse or some of its more profitable segments, such as its nuclear fuel business. 

During a conference call with analysts in November, Toshiba’s corporate executive vice president, Masayoshi Hirata, was asked if the relationship between Toshiba and Westinghouse would be maintained.

“Definitely,” he responded. “Nuclear power is one of the core business opportunities and definitely Westinghouse is going to be the main player there. There is no change as for that.”

Anya Litvak: alitvak@post-gazette.com or 412-263-1455.


Correction: An earlier version of this story misstated information about the locations of Westinghouse’s proposed projects in the U.K. and India. The U.K. project is located in the county of Cumbria. The order for six AP1000 reactors is for the east coast of India.

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