Toshiba scrambles to stem further bleeding from Westinghouse
Chapter 11 bankruptcy filing would cap losses but present other risks
TOKYO -- Toshiba is considering having subsidiary Westinghouse Electric file for Chapter 11 bankruptcy protection to limit liability for future cost overruns on long-delayed U.S. nuclear projects. Yet loan guarantees and potential compensation claims could still prove costly if progress remains slow.
Westinghouse signed fixed-price agreements in the fall of 2015 for two ongoing nuclear power projects in the U.S. The power companies operating the plants agreed to pay more for construction work in exchange for the Toshiba unit covering any additional costs.
Less than a year and a half later, Toshiba announced an estimated 712.5 billion yen ($6.18 billion) impairment loss on its American nuclear operations for the nine months through December, stemming from sluggish demand and soaring costs to comply with higher safety standards. Liabilities will likely exceed assets by 150 billion yen when the company closes its books for the fiscal year this month.
Though a senior Toshiba official said the write-down is based on "very conservative estimates," the fixed-price contract still leaves the conglomerate on the hook for any further losses if the projects face further delays. Toshiba is weighing a bankruptcy filing for Westinghouse to head off this risk.
The Japanese company also hopes to take Westinghouse off its consolidated books by selling much of its stake. Limiting the subsidiary's losses would make it easier to attract investors.
Not out of the woods
That said, this option would expose Toshiba to the risk of losses beyond the 712.5 billion yen write-down. The company has guaranteed 793.4 billion yen of Westinghouse's liabilities, of which roughly 90% is related to nuclear operations. A bankruptcy filing would leave the U.S. unit unable to meet these obligations, putting the onus on Toshiba to repay the debt.
CB&I Stone & Webster, an American nuclear services company acquired by Westinghouse in late 2015, is also working on the two reactor projects. Westinghouse has already laid out new schedules calling for construction to wrap up in 2020. But the turmoil that bankruptcy proceedings would likely cause could throw a wrench into these plans.
If Westinghouse cannot finish the projects, the plant operators would probably seek compensation for lost income from the reactors. Toshiba would bear these costs in its subsidiary's stead.
The company may also face compensation claims if the projects fall further behind schedule. The U.S. offers tax credits on reactors put in service by the start of 2021. If this deadline is not met, the operators would be unable to benefit from the break.
Taxpayer dollars at risk
Another issue is U.S. government guarantees on $8.3 billion in loans for one project in Georgia. If Westinghouse cannot finish the job, repayment of these loans will likely be delayed, in which case the government would take on the debt.
It remains unclear how Washington and Toshiba would split the costs in this case. But the possibility that American taxpayers could bear some of the burden has spurred negotiations involving the U.S. and Japanese governments to settle the matter.
Toshiba is in talks to sell its mainstay memory chip operations, hoping to use the 1.5 trillion yen to 2 trillion yen the business is expected to fetch to absorb any further nuclear-related losses. The conglomerate is also drawing up plans to reinvent itself as a social infrastructure company focusing on such areas as elevators.
Though Toshiba plans to release earnings for the nine months through December on Tuesday, along with a restructuring plan for its nuclear operations, the announcement could be pushed back again. The earnings release, originally slated for Feb. 14, was postponed to allow time for an investigation into possible problems with internal controls at Westinghouse. American and Japanese auditing firms handling the probe have yet to reach a consensus on their findings.