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A Bankruptcy of Nuclear Proportions
Summary
In any given year, a handful of companies file for Chapter 11 bankruptcy in the United States. Rarely, however, does one of these filings reverberate beyond the boardroom and into the realm of geopolitics. Those that do — Lehman Brothers in 2008, or several U.S. automakers in 2008-10 — usually involve hundreds of billions of dollars. But the next big geopolitically relevant bankruptcy may be on the horizon, and the amount of money involved is tiny next to the collapses of the past decade.
Analysis
On March 29, Westinghouse Electric Co., a subsidiary of Japanese conglomerate Toshiba, filed for bankruptcy. The U.S.-based nuclear power company has been building two state-of-the-art nuclear power plants in Georgia and South Carolina, but it has been plagued by delays and cost overruns. The filing sent Toshiba scrambling to cut its losses by March 31, the end of Japan’s fiscal year. The Japanese conglomerate ended up writing down over $6 billion on its nuclear reactor business. But Toshiba’s troubles don’t end there; the firm is also working to sell off a portion of its chip manufacturing holdings.
The U.S. government is worried about what the sale of Westinghouse could mean for the future of traditional nuclear power in the United States and for nuclear power in China, which is keen to learn the secrets of a Western firm such as Westinghouse. The Japanese government, meanwhile, is wary of how Beijing could benefit in the long term, should a Chinese firm acquire Toshiba’s semiconductor unit.
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What A Westinghouse Bankruptcy Could Mean For U.S. Utilities
What A Westinghouse Bankruptcy Could Mean For U.S. Utilities
International news services now report that Japan’s Toshiba Corporation (9502.T) is preparing to make a chapter 11 bankruptcy filing for its Westinghouse Electric subsidiary as soon as this Monday, March 27. For most of our readers this news evokes little surprise. This is merely another chapter of a slow moving financial and accounting train wreck involving nuclear design and construction firm Westinghouse and its troubled Japanese parent, Toshiba. But like an old, leaky garbage scow there is much to clean up in its wake.
The two U.S. utilities with the most at risk are Southern Company and SCANA Corp. Westinghouse is presently constructing two unit, AP 1000 nuclear power stations for each utility. These projects are over-budget and behind schedule. It appears that Westinghouse offered both utilities a fixed price contract for these new nuclear plants. Our best guess is that this fixed price construction guarantee has doomed Westinghouse and prevented other potentially willing buyers from stepping in. No one it seems is willing to take on this seemingly open-ended nuclear construction liability.
What does this mean for the two domestic utilities embroiled in this international financial quagmire?
First, we expect that they will complete both nuclear construction projects. The bulk of heavy capital expenditures for both utilities seem to be in the 2017-2019 period.
Second, it is in all interest of all potential litigants to see these plants completed. Westinghouse/Toshiba, for one, would at least get to showcase the AP 1000 design and its successor entity could advocate for additional sales of this reactor design. A working design has value. (What happens in the UK is another matter where Toshiba hoped to build several plants). The utilities, which need new power stations, get large, rate based, non-fossil base load power generating resources for the next 40-60 years.
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Japan Inc Rocked By Massive Accounting Fraud: Toshiba CEO Quits After Admitting 7 Years Of Cooked Books
Japan Inc Rocked By Massive Accounting Fraud: Toshiba CEO Quits After Admitting 7 Years Of Cooked Books
While Abenomics has been an unmitigated disaster for Japan’s ordinary population, where the soaring stock market has benefited the top decile of the population while everyone has been slammed by a record 25 consecutive months of declining real wages and soaring input costs, there had been one bright spot: corporate earnings, which unlike in Europe or even the US, have been growing at a steady double-digit clip. What was surprising is that Japan was perhaps the one place where currency debasement was leading to an immediate flow through to rising EPS.
Then on Friday, a report out of Reuters caught our attention when news hit that 140 year old electronics conglomerate, and “pillar of Japan Inc“, Toshiba had inflated profits by a stunning $1.2 billion for a whopping 7 years, with fabricated figures amounting to 30% of the company’s “profits” since 2008!
Suddenly we saw Japan’s profitability “renaissance” in a very different light as Toshiba’s scandal suggested that, if endemic, Japan Inc’s house of soaring profits was built on nothing more than fabricated foundations.
And while we await to see which other companies will admit they too had been cooking their books in the past few years, we will have to do it without Toshiba’s CEO Hisao Tanaka, who together with five members of his senior staff, resigned earlier today.
According to the FT, “Tanaka said on Tuesday at a news conference, following a 15-second bow of contrition, that he “felt the need to carry out a major overhaul in our management team in order to build anew our company.” “We have suffered what could be the biggest erosion of our brand image in our 140-year history.”
