When Westinghouse Electric filed for Chapter 11 bankruptcy protection on Wednesday morning, few were surprised as the outcome was the only one which allowed the company's troubled, and near-insolvent Japanese parent, Toshiba, to continue operating, even if it meant the bankruptcy of the iconic company. Westinghouse was one of the originators of the nuclear age, building the world’s first commercial nuclear reactor 60 years ago. Its pressurized water reactor design is in 430 power plants and accounts for 10% of electricity generated in the world.
However, few were prepared for the unexpected aftermath of this particular bankruptcy, which has set off a showdown between Toshiba and a major U.S. utility, has left the fate of four half-finished nuclear reactors and is threatening to drive a wedge between the US and Japanese governments over the fate of industries each considers vital.
The Vogtle Unit 3 and 4 site, a Westinghouse project, near Waynesboro, Ga., in February
For those who have missed our previous discussion on the underlying cause for today's default, Westinghouse incurred billions in runaway cost overruns related to four nuclear reactors it is building in the southeastern U.S. These costs from the half-finished reactors had spiraled so large, they threatened the viability of its Japanese parent company, Toshiba, which in turn has been engulfed in a series of accounting and fraud scandals in recent years, has seen its profitability plummet and whose precarious finances have attracted attention of Japan’s government.
Admitting defeat in the nuclear business, Toshiba CEO Satoshi Tsunukawa said that “this is a de facto withdrawal from the overseas nuclear business for us. Therefore, we don’t see any more risk."
Others, however, see substantial risk now that their claims against Westinghouse are reduced to the status of a prepetition unsecured claim. First and foremost, is Toshiba's now former, and quite angry customer, Tom Fanning, CEO of Southern Co., the Atlanta power company and primary owner of two of the reactors being built in Georgia, who on Wednesday characterized the completion of the reactors as an international political issue, calling it a test of Prime Minister Shinzo Abe’s commitments with President Donald Trump at a summit in February to help create American jobs.
“The commitments are not just financial and operational, but there are moral commitments as well,” Mr. Fanning said in an interview from Tokyo, where he had traveled to lobby for a resolution to the mounting dispute. Quoted by the WSJ, Fanning said there are 5,000 jobs directly at stake at the two Georgia reactors, jobs that could be lost if Toshiba doesn’t commit to paying billions in future costs, which it won't now that it has severed ties with its insolvent subsidiary.
Westinghouse designed the reactors and also is building them for Southern, and contractually had agreed to shoulder cost overruns, at least until its Chapter 11 filing this morning.
Perhaps unaware of the ramifications, Trump administration officials were quiet on the bankruptcy Wednesday.
According to the WSJ, the U.S. Department of Energy, which has provided an $8 billion loan guarantee for the Georgia reactors, said it was in discussions with various companies. “We are keenly interested in the bankruptcy proceedings and what they mean for taxpayers and the nation,” said Lindsey Geisler, an agency spokeswoman.
Ironically, based on a new Westinghouse design, the reactors, the first to be constructed in the U.S. in nearly four decades, were supposed to be an answer to cost overruns and delays that have dogged the nuclear power industry. We say ironically, because it is cost overruns and delays that eventually led to the company's bankruptcy. Worse, these plants are already years behind schedule in addition to causing huge losses for Toshiba.
Toshiba said it expected to lose about $9 billion in the fiscal year ending March 31, largely because it guaranteed nearly $6 billion in Westinghouse’s obligations to Southern and Scana Corp.—the company for which Westinghouse is building the other two reactors in South Carolina.
What happens next is unclear. After the bankruptcy filing, Southern and Scana have said they would finance continued construction of the reactors for 30 days, but weren’t clear where construction funding would come from after that time. Scana also said, for the first time, that it would consider abandoning the two reactors underway if costs changed dramatically.
More problematic are the potential political implications: Southern's CEO has made it clear he intends to escalate this to the level of an international conflict if he must. Fanning, who said he has spoken to Vice President Mike Pence, Commerce Secretary Wilbur Ross and Energy Secretary Rick Perry about the importance of completing the reactors, argued that more was at stake economically than the direct future of the facilities.
“Westinghouse declaring bankruptcy has national security implications,” said Mr. Fanning, who also happens to be chair of the board of the Atlanta Fed.
Fanning said the estimated cost of the entire project was roughly $16 billion, but cautioned that the companies were unsure of how much more was needed to finish the partially built reactors. The current target dates for completion of the Georgia reactors are 2019 and 2020, three years behind the original schedule.
Richard Nephew, a fellow at the Center on Global Energy Policy at Columbia University, said Mr. Fanning appeared to be using the Trump administration’s reputation for defending U.S. jobs and taking a tough stance even with allies, to his advantage.
“This is someone who knows what the triggers are for this administration,” Mr. Nephew said. “Everyone now has a sense of what the president’s triggers are and I wouldn’t be surprised if a lot of companies use those triggers to gain an advantage in negotiations with foreign companies.”
Another problem is the overall viability of nuclear energy. Toshiba casting away Westinghouse is merely the latest indication of an industry in turmoil, demonstrated recently by Siemens' decision to abandon the industry, Areva SA’s financial and safety problems, the falling market value of China General Nuclear Power Group and the junk-bond status of Russia’s Atomenergoprom.
“I don’t see how this can mean anything but even greater cost growth for the plants under construction and an unacceptable risk for any that are under consideration,” said Fred Beach, assistant director of the Energy Institute at the University of Texas at Austin.
Meanwhile, the biggest threat from the bankruptcy is fallout in the already tense diplomatic relations between the US and Japan.
A Japanese government official said the U.S. had not raised Mr. Fanning’s complaints with the Abe administration and that there had been no request for help to keep the projects alive. “This is a private company’s business and operation,” the person said.
It will hardly remain that way, and it remains to be seen what will happen if and when Trump demands that Japan make whole the US companies that were cheat by Toshiba's decision.