Note: There is an important information update at the end of this post.
Westinghouse is “unlikely to carry out actual construction work for the future nuclear power plant projects to eliminate risk.”
Satoshi Tsunakawa, President and CEO of Toshiba, the Japanese company that owns Westinghouse and its CB&I Stone Webster subsidiary, made that statement during a recent press conference. The event, held on January 27, was called to provide a status report for restructuring actions first announced on December 27, 2016.
Computing Magnitude Of Lost Goodwill
The restructuring is required as a result of the growing realization that the value of Westinghouse’s CB&I Stone and Webster subsidiary is probably several hundred billion yen (several billion dollars) less than its current book value. Adjusting the company’s stated value with its real value will require taking a write off of “goodwill.”
The reduction in goodwill value is based on CB&I’s existing and predicted future liabilities associated with completing four nuclear plant construction projects, two at Plant Vogtle in northeast Georgia and two at the V.C. Summer site in northwest South Carolina. This is an excerpt from the company’s Jan 27 press release.
Determination of the goodwill requires verification of enormous data and considerable time for scrutiny. Given this, Toshiba will announce the goodwill and others, and its earnings result for the third quarter of FY2016, on February 14th, 2017, the deadline for submission of the quarterly report. In the earnings announcement, Toshiba will explain the impact of the current issue, its causes and countermeasures, and the revised forecast for the full fiscal year.
Midori Hara, a spokesperson from Toshiba’s Public Relations office, stated via email that “we are reviewing future of our nuclear power business outside Japan, but nothing has been decided at this time.”
During the Jan 27 press conference Mr. Tsunakawa said that the restructuring solution may include a move to separate the “nuclear business from the Energy Systems and Solutions Company, and position it as an organization directly under the control of the President and CEO, as a measure to strengthen risk management. This will allow smoother reporting and decision-making and promote more information sharing, and also support us in our goal of securing stronger management of U.S. nuclear project costs and enhanced governance of Westinghouse.”
Hara deferred any comment on the fate of Danny Roderick, President and CEO of Toshiba’s Energy Systems & Solutions Company.
We cannot comment on the responsibility of Danny Roderick at this moment as well.
Hara’s email also explained the preliminary understanding of root cause of the company’s current financial stress.
Initially, the construction for the U.S. two projects were carried out by CB&I by its subsidiary called Stone & Webster, however, since there were disputes related to cost increase from change in NRC’s regulation, Westinghouse acquired Stone & Webster in 2015 that resolved all the disputes and moved on for construction.
This acquisition is becoming the issue now, which Toshiba has announced on Dec. 27 2016, that it could result in making several billion US dollar loss (write-down).
More Liability Than Expected
A reasonable translation of that statement is that Westinghouse determined that disputes about project costs and determining who would pay for them threatened to halt construction. To avoid that situation, Westinghouse purchased the construction company so it could move forward.
That put Toshiba – through Westinghouse and CB&I Stone and Webster – on the hook for all project construction costs beyond the agreed contract price.
Though there is plenty of blame to go around for the cost overruns, several major regulatory changes have been significant drivers. Some of those decisions are so far in the past that they have been largely forgotten.
Major Impact From NRC Imposition Of Aircraft Impact Rule
One of those changes happened more than a decade ago, soon after the contracts were signed for the four AP1000 units currently under construction. The NRC determined that all reactors whose construction had not already started would be required to meet the newly issued Aircraft Impact Rule.
That decision, which regulators apparently justified based on a belief that design changes before construction actually starts are cheap, inserted an unexpectedly large uncertainty into the project. The contract terms, pricing and schedule were based on the design that had received NRC certification in May 2006.
The design revisions required to meet the Aircraft Rule changes involved at least three more design revisions that did not get final approval until Jan 2012. Completely different construction techniques needed to be invented, tested, litigated and approved.
No reasonable and experienced construction estimator would fail to recognize the impact on project costs and schedules resulting from such a major change. Unfortunately, there were apparently few such people involved in the high-level contract negotiations, corporate strategic decisions and in the public communications effort.
Fewer Firm Sales Than Expected
Though reluctance on the part of utility customers is understandable, the lack of follow-on sales has to be a contributing factor in the reduced value of Toshiba’s Westinghouse subsidiary.
It has a dominant and potentially bankable position as the most experienced and certified vendor of large nuclear plants in the U.S., but that position has no stock market value if there is no apparent market for large nuclear plants in the U.S.
There are at least three two-unit projects in the U.S. that are nearly ready – with COLs either in hand or close to completion – to begin construction. There is an expensively trained and project hardened workforce ready to begin those projects. If customers maintain their wait and see plan too much longer, the workforce and the supply chains will disappear, making the licensing effort worth far less than what was invested.
Don’t Know Who Is Going To Pay The Bill
The Vogtle and Summer projects’ utility company customers, pressured by their public utility commissions and the antinuclear activists who are always ready to point fingers, have held fast to their firm-priced contracts. They have held their suppliers responsible for the delays and cost increases. Not surprisingly, COL holders are reluctant to push too hard in public to convince the NRC to accept its share of responsibility for the delays.
COL holders know that they will have to deal with NRC regulators for many decades after the vendors’ work is complete. Pointedly criticizing regulators that have the power to halt operations and revenue generation is a risky path to take.
Unfortunately, vendors don’t have a customer base or an adjustable revenue stream that can prevent financial collapse in the event of a large and growing construction project liability. Even a white knight would be challenged in any attempt to resolve disputes and finish the project.
Without some immediate efforts to forthrightly explain the reasons that the first new U.S. nuclear plants in more than 30 years have been delayed and cost more than initially agreed upon in early 2006, it appears likely that they will become both the first and last of a kind.
There is even a significant possibility that the projects will fail to be completed at all. Parties that are pointing fingers have a hard time operating cranes and welding torches.
Where Do We Go From Here?
Maybe Atomic Insights contributors can provide some ideas for the best way to get out of the current situation. Please keep your suggestions within reasonable bounds recognizing the investments that have already been made and the reality of already completed construction phases.
The established nuclear industry, the U.S. Government, and the states of Georgia and South Carolina have made a huge investment in the AP1000. To a lesser extent, so have the states of Florida and North Carolina. Will a stubborn desire to press future loss risk oneto others result in a complete loss of that investment?
Update: (Posted Feb 6, 2017 at 9:48 AM EST) Another issue that has plagued the AP1000 is the design and manufacturing of the canned reactor coolant pumps supplied by Curtiss Wright.
There are four of these massive, 91 ton pumps in each AP1000 unit. They are several times larger than any other similar pump in existence. Atomic Insights has published a couple of articles that documented the lengthy story of their behind-schedule production and testing.
We thought that the story was over and that the pumps had been satisfactorily tested.
On January 12, 2017, Curtiss-Wright submitted a Part 21 Report of a Substantial Safety Hazard associated with the pumps.
The defect was found on November 15, 2016; the report was submitted within the 60 day limit for notifying the NRC for components that are not yet in service. So far, there has not been any corrective action identified and analysis of the operational effects of the defect is still in progress.
Curtiss-Wright plans a visit to the VC Summer site this month for a visual inspection and to obtain detailed dimensions for the safety analysis. The company expects that it will complete its analysis by June 30, 2017. Sixteen of the pumps with the defect have been delivered to customers in the U.S.
Sixteen have been delivered to customers in China. At least four of those pumps have been installed and operationally tested in Sanmen 1, which is expected to be the first AP1000 in commercial operation. As of last summer, Sanmen 1 was scheduled to be operational before the end of 2016.
Note: A version of the above was first published at Forbes.com under the same headline.
Atomic power Review – New Large Light Water Construction, USA and France
ANS Nuclear Cafe – “Building Nuclear” – A Guide For Writers
Previous Articles On AP1000 Reactor Coolant Pumps
Aug 29, 2015 – Reactor Coolant Pumps for AP1000 still a problem