Current losses and future liabilities challenge major nuclear reactor vendors

The weeks preceding the U.S. Thanksgiving holiday did not hold a lot of cheer for two of the major nuclear reactor vendors.

  • The Wall Street Journal reported that Toshiba’s shares of stock took a dive as a previously undisclosed financial report showed Westinghouse had booked $1.3 billion in impairment charges.
  • The Financial Times, London, reported that the French government’s bailout of Areva, intended to recapitalize its nuclear reactor business in partnership with EDF, has been delayed based on questions about the resolution of future liabilities.

Westinghouse write-downs

In what the WSJ called an “unusual disclosure” Toshiba reported that in 2012 and 2013 nuclear plant construction business at Westinghouse stalled out as a result of the Fukushima disaster of March 2011. Toshiba said that Westinghouse booked net losses in these two years as a result of the write downs, but did not disclose exact financials raising new questions about its commitment to transparency for investors. Yet, Westinghouse says that its core business turned a paper profit of over $200 million a year for the period 2007-2014.

Toshiba acquired Westinghouse for $5.4 billion in 2007, but later sold a 10% stake to the state-owned uranium combined in Kazakhstan in return for guarantees of nuclear fuel supplies. Financial analysts have criticized Toshiba for paying too much for the US firm.

Westinghouse buys key supplier

In an effort to cut off seemingly endless rounds of claims and counterclaims over unanticipated costs in the construction of four Westinghouse AP1000 nuclear reactors in the US, the firm has purchased its prime supplier and consortium partner CB&I Stone & Webster. In a related move, Westinghouse appointed Fluor Corp. to manage the two projects, one in Georgia and the other in South Carolina.

It’s a case of wrapping up a basket of financial snakes in one package. The deal resolves multiple claims, counter claims, and litigation between Westinghouse, CB&I, and the two utilities involved in the projects – Southern Company and Scana.

Under the agreement Westinghouse will acquire CP&I’s EPC business as well as its nuclear service business for the four US projects and for the construction of eight AP1000 reactors in China. A key element of the deal is that Westinghouse will take over current and future liabilities with these projects.  Cash payments between all the parties involved will resolve some of them. CB&I said it will book a non-cash after tax charge of at least $1.0 billion. CB&I will continue to supply pipe and other components for the Westinghouse projects.

Separately, Fluor said it would immediately begin to take over the role of prime EPC contractor for the Vogtle and V C Summer AP1000 units. The Voglte units are expected to enter revenue service in 2019 and 2020. The V C Summer units are expected to enter revenue service in the same period. Significantly, Fluor said that it would do the work on a cost-reimbursable basis, and would not be liable for any pre-existing conditions related to construction activity to date at both US projects.

Areva faces roadblock in EDF deal

The question of who will assume liabilities for cost over runs and schedule delays in the construction of an Areva EPR nuclear reactor at the Olkiluoto 3 project in Finland has placed a roadblock on the path toward the bailout of the French state-owned nuclear reactor vendor. The problem centers around who, within the French government, will inherit the albatross of dealing with the expectation of additional costs and schedule delays.

All of the parties involved belong to the French government with less than 15% of shares of Areva and EDF owned by institutional investors. It becomes a battle involving bureaucratic politics with little impact on financial markets. The problem is the numbers don’t add up and the French government, which is pursuing a policy of scaling back its commitment to nuclear energy, doesn’t want the public perception of a major bailout of Areva’s nuclear division nor unbounded commitments to pay for future cost overruns. The Olkiluoto project is expected to be completed in 2018 at a cost of 8.5 billion euro.

Areve reported a loss of 4.8 billion euro in 2014. It needs about 7 billion euro to recapitalize the company. However, EDF says it will only offer 2 billion euro for a 75% stake in the firm plus it wants complete immunity from any future liabilities in the Finnish project.

Current liabilities with TVO, the Finnish utility that is the customer for the reactor, amount to 2.6 billion euro against a counter claim by Areva for 3.4 billion euro.

Amid all of the claims and counter claims, and short v. long offers of capital, the ultimate decisions on new capital for Areva and settlement of the claims in Finland will depend on the French government which owns all the pieces on its end. To that end French President Francios  Hollande says he is looking for potential investment in Areva from two places – Japan’s Mitsubishi Industries and the China National Nuclear Corp.

Even if he lands these investors, the French government will still have to offer guarantees for equity investments on this scale. According to a statement by EDF CEO Jean-Bernard Levy, his firm wants to retain a 51% controlling stake in Areva with outside investors having up to a 30% share and Areva retaining the remaining equity along with some institutional investors.

Electrobas posts 3Q15 loss on Angra 3 charges

The construction of Brazil’s third nuclear reactor has been afflicted with project delays, planning mistakes, and allegations of criminal misconduct that put it at the center of a massive corruption scandal. Impairment charges associated with the $3.72 billion effort contributed to $1 billion in losses for the Brazilian state owned Elecrtrobras utility. Some of the losses were run up by unrelated problems with the firm’s hydroelectric generating facilities.

Last July the president of the Electrobras nuclear power unit was arrested and charged with taking bribes of about $2 million from contractors building the reactor. He has resigned from the company and the contractors are no long on the job. Overall, Electrobras stock has declined for than 40% since the arrest of the CEO.

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