US industry on tenterhooks over Westinghouse 28 April 2017
The "30-day window which ends imminently" on the fate of Westinghouse's US nuclear power plant projects is "critical" to the national interest and to the interest of the industry as a whole, Dan Lipman of the Nuclear Energy Institute (NEI) has told the World Nuclear Fuel Cycle (WNFC) conference in Toronto, Canada. Westinghouse said it would no longer spend money on the Summer and Vogtle projects, but reached an agreement with the utilities involved to allow them to pay costs during a 30-day interim period.
Westinghouse filed petitions for reorganisation under Chapter 11 of the US Bankruptcy Code in the US Bankruptcy Court for the Southern District of New York on 29 March, to enable strategic restructuring amid financial and construction challenges in its US AP1000 projects. Pittsburg, USA-headquartered Westinghouse is majority owned by Japanese electronics corporation Toshiba.
Toshiba, which bought Westinghouse in 2006, warned in December last year that it might have to write off "several billion" dollars because of Westinghouse's purchase in 2015 of US construction firm CB&I Stone & Webster (S&W). Upon closing of that transaction, Westinghouse assumed full responsibility for all AP1000 projects and the nuclear integrated services business. Westinghouse is constructing eight AP1000 pressurized water reactors (PWRs) - four in the USA (two each at Vogtle and VC Summer) and four in China (two each at Sanmen and Haiyang) - with S&W as its consortium partner.
Lipman, who is vice-president at the NEI's Suppliers, New Reactors and International Programs department, said utilities associated with VC Summer 2 and 3 and Vogtle 3 and 4 had agreed to finance construction activities for a period of 30 days.
"That takes us to the end of this week, at which time a decision needs to be taken, at the very least on Vogtle and Summer," Lipman said on 25 April. "After bankruptcy declared by Westinghouse, the principals, Toshiba, Southern, Westinghouse, and Scana were going to decide really the future of the projects all the while the utilities continue to pay for construction of the stations.
"NEI's position is very, very clear. We've articulated this to the US government. We've articulated it to the Japanese government. And I'm articulating it now. We want these projects to be completed. We think it's critical in the national interest, in other words the US interest, but we think it's critical in the interests of our industry. We need to have these projects done. And we also expect Westinghouse and Toshiba to stand behind their responsibilities to the employees of Westinghouse, both past and current."
Stephen Byrne, COO at South Carolina Electric & Gas Company (SCE&G), said yesterday the interim agreement to continue construction at Summer 2 and 3 that was due to expire today, is likely to be extended by 60 days. Byrne told analysts during a conference call on SCE&G's financial results for the first quarter of 2017 that he believed an extension to the agreement could be agreed to the end of June. Vote of confidence
Lipman told delegates at WNFC: "I happened to be in Pittsburgh the week of the bankruptcy - and I was told by some old colleagues that there were three different syndicates in Pittsburgh with financing ready as soon as bankruptcy was announced. And I think it was a real vote of confidence that within a day after bankruptcy about $1 billion of financing was made available for Westinghouse.
"So, in the operating plant side of the business, which is of most interest - certainly of keen interest - for many of you here who rely on Westinghouse for fabrication and storage and other services, that part of the business is open for business as usual. But it's a very important situation. It's one that's critical."
Westinghouse Electric Company designed PWRs based on US submarine power plants. Its technology supplies about half of the USA's nuclear electricity - 65 US units are PWRs - and undergirds France's PWRs, and in turn, China's. Its technology is the basis for half of the world's operating nuclear plants.
The company was bought by the UK's BNFL in 1999 from US CBS Corporation for $1.1 billion, with ASEA Brown Boveri being added the following year. This amalgamation included Combustion Engineering whose designs have flowed to South Korea and now the United Arab Emirates. BNFL then sold Westinghouse in 2006 to Toshiba and The Shaw Group. Toshiba then sold 10% to KazAtomProm in 2007, and in 2013 it bought Shaw's 20% share so ending up with 87%.
Toshiba, which said that it bought Westinghouse in 2006 as "a global leader in the nuclear industry", itself has had a major role in Japan's nuclear design and construction.
The 1100 MWe-class Westinghouse AP1000 received final design certification from the US Nuclear Regulatory Commission (NRC) in December 2005. This was the culmination of a 1300 man-year and $440 million design and testing program. Westinghouse then applied for UK generic design assessment and this process was completed recently.
However, in 2008, the NRC accepted an application from Westinghouse to amend the AP1000 design, and this review was completed with revised design certification at the end of 2011. This included assessment "to ensure it could withstand damage from an aircraft impact without significant release of radioactive materials". This design change increased costs substantially.
Westinghouse and The Shaw Group signed engineering, procurement and construction (EPC) contracts for both the Vogtle and VC Summer projects in 2008. S&W was Shaw's nuclear construction business. Combined construction and operating licences (COLs) for both projects were issued early in 2012 and construction started in March 2013. These were the first new reactors to be licensed for construction in the USA since 1978, and were - apart from the four being built in China - essentially 'first-of-a-kind'. Westinghouse said that the design changes called for by the NRC added $1.5 billion to each project.
US loan guarantees totalling $6.5 billion were issued to Georgia Power and Oglethorpe Power in 2014 for Vogtle, while a further $1.8 billion in loan guarantees were issued to three subsidiaries of the Municipal Electric Authority of Georgia in June 2015.
The Shaw Group was bought by Chicago Bridge & Iron in 2013. Then in 2015, to resolve contract disputes on the two projects, Westinghouse bought S&W, the nuclear construction and integrated services business of CB&I, for $229 million after CB&I had incurred major losses on it. S&W as the contract successor to The Shaw Group was already engaged with building the four reactors.
Toshiba in February said that the cost blowout to complete these US AP1000 projects was now $6.1 billion. Of that, $3.7 billion is for underestimated direct and indirect labour costs, and $1.8 billion related to increased equipment prices and procurement costs. Chapter 11
Westinghouse listed assets of $4.3 billion and liabilities of $9.4 billion among about 35,000 creditors in the Chapter 11 filing at the end of March. Toshiba said it anticipated a new entity - to be founded by Westinghouse - would take a leading role in bringing Westinghouse out of bankruptcy, and that its own control of Westinghouse had ended. Interim debtor-in-possession financing of $800 million was provided by parent company Toshiba and a New York private equity company - Apollo Capital Management.
Westinghouse's largest creditors were US construction company Fluor Enterprises - which was brought into the US projects in 2015 to take over construction management and is owed almost $194 million, and Chicago Bridge & Iron, which is owed $145 million in connection with the acquisition of the S&W construction business in late 2015.
Toshiba now says Westinghouse overpaid for the company and that information material to the acquisition - specifically cost overruns, delays and the impact these would have on S&W's bottom line - were not disclosed properly or accounted for.
Beyond supplying the technology as reactor vendor, it had taken over the construction functions in 2015 by purchasing S&W. This led to the $6.1 billion write-down by Toshiba for cost overruns on the four US reactors. Toshiba said it would not provide additional funding without collateral, hence the development of the debtor in possession financing, under which Westinghouse is funding continuing operations.
The owners of the Vogtle and VC Summer plants have agreed to pay costs to continue construction themselves for 30 days while a final arrangement on future plant work is developed. They have said that Westinghouse is being very cooperative within its obvious constraints.
Earlier this month, Westinghouse said that about $1.5 billion was required to complete construction of both Summer units, and apparently $2.5 billion for both Vogtle units. The latest total cost estimates are about 50% over the original budgets.
Westinghouse's nuclear fuel business had revenue of $1.48 billion in fiscal 2015 (to end-March 2016), while its operating plant business had revenue of $1.65 billion in the same period, while the new nuclear plant services business lost money.
Westinghouse's shares are split between Toshiba (87%), KazAtomProm (10%) and IHI Corporation (3%). KazAtomProm, Kazakhstan's state-run uranium producer, is entitled to sell its 10% equity holding in Westinghouse pursuant to put option agreements that can be exercised on or after 1 October, Toshiba has said.
The U.S. administration has told India that Westinghouse Electric Co will emerge from bankruptcy and be sold by the year end, industry and diplomatic sources have said, raising the prospect of a Washington-supported sale or bailout for the nuclear firm.
India, like other nuclear nations, has been closely watching the fate of Japanese-owned Westinghouse, which filed for Chapter 11 in March after an estimated $13 billion of cost overruns at two U.S. projects, casting a shadow over the nuclear industry.
There has been debate over potential U.S. support for the reactor maker since owner Toshiba (6502.T: Quote), the laptop-to-chips conglomerate, announced the blow-out at Westinghouse last year.
Some form of U.S. backing or involvement, industry experts say, could avoid a Chinese or Russian buyer unpalatable to Washington, which would prefer to keep Westinghouse's advanced nuclear technology out of the hands of its foreign rivals.
Toshiba Corp. plans to raise 600 billion yen ($5.4 billion) by selling new shares and will explore divestment of its Westinghouse-related assets in a bid to avoid being delisted from the Tokyo Stock Exchange.
Toshiba’s board approved the transaction on Sunday and expects it to close in early December, the Tokyo-based company said in a statement. It will sell 2.28 billion new shares at 262.8 yen apiece, about 10 percent less than Friday’s closing price, it said in a separate statement in Japanese. Toshiba shares fell 5.8 percent in Tokyo trading.
If the transactions are successful, Toshiba expects the consolidated negative 750 billion yen on its balance sheet will be erased by the end of the fiscal year in March. About 60 funds, including Effissimo Capital Management Pte and David Einhorn’s Greenlight Capital, are planning to make investments, it said.
Toshiba is struggling to recover from multibillion-dollar losses in the Westinghouse nuclear operations in the U.S. The company has agreed to sell its memory-chip unit to raise funds, but feared the deal wouldn’t be completed by the end of March as it needs to clear competition laws in different countries. Toshiba needs to reverse its negative shareholders equity by the end of its fiscal year to avoid violating the TSE’s listing requirements.
“Eliminating excessive debt and bolstering capital can certainly be seen in a positive light,” said Masahiko Ishino, an analyst at Tokai Tokyo Securities. “But dilution is still something to be reckoned with.”
Toshiba is selling its memory chip unit to a consortium led by Bain Capital. The sale has been complicated by legal action from Western Digital Corp., which has argued it should have veto rights because of its partnership with Toshiba. The U.S. company has filed for arbitration to resolve the dispute, a process that may drag out and complicate the closing.
Toshiba Share Sale Opens Door to Einhorn, Loeb, Other Activists
Private equity firms Blackstone Group LP and Apollo Global Management LLC have teamed up to bid on Toshiba’s Westinghouse unit and others are considering offers, people familiar with the situation said in September. The nuclear unit, which was contracted to build two power projects in the U.S. that were both billions of dollars over budget and years behind schedule, filed for bankruptcy in March.
Selling its holding in the nuclear-power business Westinghouse, and any liability for claims, will let Toshiba “significantly reduce” resources required to rehabilitate that unit, funds that can be focused on new businesses, the company said in the statement Sunday.
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Toshiba aims to use the capital it gains from the share sale for a full payment of so-called "parent-company guarantees" related to its Westinghouse unit, according to the statement. If Toshiba settles obligations to Westinghouse creditors, it will then be able to request reimbursement from the U.S.-based reactor-maker. Toshiba will then sell the claims against Westinghouse and focus on rebuilding its remaining business units.
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