If you want to understand why Toshiba Corp. (IW 1000/68) is about to report a multibillion dollar write-down on its nuclear reactor business, the story begins and ends with a one-time pipe manufacturer with roots in the swamp country of Louisiana.
The Shaw Group Inc., based in Baton Rouge, looms large in the complex tale of blown deadlines and budgets at four nuclear reactor projects in Georgia and South Carolina overseen by Westinghouse Electric Co., a Toshiba subsidiary.
On Tuesday, Toshiba is expected to announce a massive write-down, perhaps as big as $6.1 billion, to cover cost overruns at Westinghouse, which now owns most of Shaw’s assets. The loss may actually eclipse the $5.4 billion that Toshiba paid for Westinghouse in 2006 and has forced the Japanese industrial conglomerate to put up for sale a significant stake in its prized flash-memory business. Toshiba had to sell off other assets last year following a 2015 accounting scandal.
Toshiba made a big bet on a nuclear renaissance that never materialized, in part because it couldn’t build reactors within the timelines and budgets it had promised. The company had anticipated that Westinghouse’s next-generation AP1000 modular reactor design would be easier and faster to execute -- just the opposite of what happened. Now the Japanese company may exit the nuclear reactor construction business altogether and focus exclusively on design and maintenance.
“There’s billions and billions of dollars at stake here,” says Gregory Jaczko, former head of the U.S. Nuclear Regulatory Commission (NRC). “This could take down Toshiba and it certainly means the end of new nuclear construction in the U.S.”
Toshiba confirmed it will unveil a “huge loss” on Tuesday; a spokeswoman declined further comment. In January, Satoshi Tsunakawa, Toshiba’s president, said the company may sell shareholdings, real estate or other assets if needed to strengthen its balance sheet. “We will keep considering all options as needed and promptly, and take all necessary steps,” he said at a briefing in Tokyo.
Restarting Dormant Nuclear Industry
When Toshiba bought Westinghouse a decade ago, the U.S. Congress had just started dangling loan guarantees and other incentives aimed at restarting a dormant nuclear industry. In 2008, Westinghouse signed deals to build four new reactors for utilities Southern Co. and Scana Corp., the first U.S. nuclear plants since the 1979 accident at Three Mile Island to be approved for construction by regulators.
In a 2015 interview with Bloomberg Businessweek, Southern Chief Executive Officer Thomas Fanning said his utility’s two reactor projects at Plant Vogtle in Georgia were “going to be one of the most successful mega-projects in modern American industrial history.”
To build that mega-project, Westinghouse turned to Shaw, a newcomer to nuclear work. Shaw was founded in 1987 by James Bernhard Jr., who distinguished himself through his deal-making acumen. He got his start paying $50,000 for the assets of a bankrupt pipe fabricator, and grew via one acquisition after another. In 2000, Bernhard swooped in at a bankruptcy auction and, during an 18-hour bidding war, bought Stone & Webster Inc., a once-venerable engineering firm that had already agreed to a deal with a much bigger rival.
Stone & Webster had built the Massachusetts Institute of Technology’s campus and many of the country’s nuclear plants from the 1950s to the 1970s, but it was a shell of its old self when Bernhard bought it. Still, the name gave Shaw new credibility in the nuclear field, which it capitalized on to win all of Westinghouse’s contracts. “They weren’t necessarily qualified, but they had the heart and the go-get-them to take it on,’’ says Jeffrey Kellerman, a retired construction project controller who worked for Shaw at its nuclear sites.
Bernhard declined to comment for this story.
Building nuclear reactors is a tall order, given the regulatory complexity and consortium of contractors required to get the job done. And in fairness to Westinghouse and Shaw, plenty of other companies have missed deadlines. “Nuclear construction on-time and on-budget? It’s essentially never happened,’’ said Andrew J. Wittmann, an analyst who covers the industry for Robert W. Baird & Co.
Modular Design for Efficiency
It’s easy to see why Shaw wanted Toshiba’s business, but harder to understand why Toshiba chose Shaw. More established contractors simply may not have wanted the work, but Bernhard also used his deal-making skills to sweeten the agreement by taking on a chunk of Toshiba’s debts temporarily. “If you want to have a business, you have to get plants up and running, so they went forward even if it wasn’t a perfect match-- that was the calculation for Toshiba,” says David Silver, an analyst at Morningstar in Chicago.
Westinghouse executives hoped its AP1000 reactors’ main components, or modules, could be built efficiently at specialized work yards, then shipped to a plant site and snapped together like enormous steel-and-concrete Legos.
On top of that, the U.S. government in 2005 gave nuclear developers a package of tax credits, cost-overrun backstops, and federal loan guarantees. In the next few years, U.S. utilities filed dozens of applications to build new reactors.
After Westinghouse hired Shaw to handle construction in 2008, it wasn’t long before the company’s work came under scrutiny. By early 2012, NRC inspectors found steel in the foundation of one reactor had been installed improperly. A 300-ton reactor vessel nearly fell off a rail car. The wrong welds were used on nuclear modules and had to be redone. Shaw “clearly lacked experience in the nuclear power industry and was not prepared for the rigor and attention to detail required,’’ Bill Jacobs, who had been selected as the state’s monitor for the project, told the Georgia Public Service Commission in late 2012.
The troubles were only starting. At Southern’s two new reactors in Georgia -- a massive construction site on the edge of the Savannah River-- thousands of workers have logged more than 25 million man-hours, yet the project is years behind schedule.
0riginally planned to open in 2016 and 2017, they’re now slated for 2019 and 2020--and that may be a stretch. To hit the new targets, Westinghouse would have to accelerate the pace of work to “over three times the amount that has ever been achieved to date,” Jacobs, the state’s project monitor, told the utility commission last year.
In November, Westinghouse said 33.4% of the construction was complete, but a utility supervisor with Southern who asked not to be identified said he’s skeptical. The hardest part of the project – the reactor’s center – has just started, he said.
Just as problems began to surface, in July 2012 Shaw agreed to sell itself for $3.3 billion to Chicago Bridge & Iron Co., a much larger engineering firm that wanted in on the envisioned nuclear renaissance. But three years later, with little progress to show for itself, CB&I decided to cut its losses. It sold the bulk of Shaw’s assets to Toshiba for $229 million, accepting the significantly lowered price in exchange for shedding liabilities related to the projects.
But in April 2016, four months after the deal closed, Toshiba concluded it had miscalculated and accused CB&I of inflating Shaw’s assets by $2.2 billion, and asked to renegotiate. CB&I balked and sued Toshiba for breach of contract last July. A preliminary decision in December ruled in favor of Toshiba’s request to renegotiate. CB&I has appealed that ruling. “We remain confident this issue will come to a resolution favorable to CB&I,” said Gentry Brann, a spokeswoman for the company. CB&I has argued that at least some of the reactor problems have been because of Westinghouse and its AP1000 designs.
Westinghouse has turned to another construction contractor, Fluor Corp., to help get its projects back on track, but it’s too early to say how much progress they’re making. Meanwhile, the NRC continues to press Westinghouse about problems with its AP1000 design after a neutron shield block, which contains radiation, failed during testing. Regulators will hold a hearing this week at which Westinghouse is expected to explain its work on the issue; Toshiba meanwhile declined to comment.
Those troubled projects in the American South are now threatening the Japanese icon’s foundations. The value of Toshiba shares has been cut in half over the last six weeks, wiping out more than $7 billion in market value.
And what of the U.S. nuclear renaissance? Westinghouse’s projects for Southern in Georgia and Scana in South Carolina had once been viewed as part of a rebirth of the U.S. atomic power industry. However, stumbles with those projects, the nuclear disaster in Fukushima and a flood of cheap natural gas that lowered U.S. power prices made new reactors increasingly expensive and risky. Of the 30-odd applications for new reactors that started in the mid-2000s, only the four Westinghouse units have gone forward.
One figure who seems to have come out of the Westinghouse mess pretty much unscathed is Shaw founder Bernhard. He completed the sale of his firm to CB&I in 2013, pulling in $3.3 billion for himself and other shareholders. Bernhard, whose stake was worth about $50 million at the time of the sale, now runs a private equity firm in Baton Rouge. On his website, Bernhard touts his 25-year experience at Shaw and says his new fund “seeks to create sustainable value.”
"They got out whole and then some,” said Silver, the analyst with Morningstar. “It was a good deal for them but only because they were able to unload the hot potato.”
By Jason Clenfield and Yuji Nakamura