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Got A Toshiba?

Got aToshibaThis article looks at the recent history and fortunes of companies that control what happens at the Springfields Nuclear works at Salwick.

Almost exactly a year ago, we picked up on a situation that we thought could be very serious for the future of Springfields, and, as things are developing, we thought our readers might also like to understand our concerns.

SYNOPSIS
We start with a light-hearted Introduction to a serious matter, then at the Background to recent events, and at Westinghouse in the UK.

We next look at some Concerns raised in Parliament and some developments on the Business Front and the proposed 'purchase' of Westinghouse by a company called Brookfield.

 INTRODUCTION

There was an advert in the 1980s that opened with an automaton-looking 'CAD/Human' figure as an animated blueprint drawing, sporting a vaguely 'sarf London' accent.

The character was inspired by the 'song' popularised by Alexei Sayle - 'Ullo John Gotta A New Motor' - but the Toshiba advert had the earworm phrase "Hello Tosh, gotta Toshiba?" (It might still be available if readers follow this link to YouTube)

Like the catchy "Tell Sid if you see him" campaign for the sale of British Gas shares, the Toshiba advert wormed its way into the consciousness of younger members of the nation (and probably did Toshiba a bit of good on the sales front).

We suspect they could have done with something as effective in recent years, because from what we can see they are in trouble.

And we're worried there may be implications for Fylde - in the form of the nuclear facility at Salwick

 BACKGROUND

We tend to think of Toshiba as makers of consumer electronics (like the old cassette decks and a bit later later, computers  and semiconductors - that sort of thing).

But it seems that successful companies get carried on a wave of enthusiasm to dominate the planet by diversifying into all manner of other businesses, not least - in Toshiba's case - the nuclear industry, where in 2006 - (when they were admired as a successful giant global conglomerate) - they paid a reported $4.15 billion for 77% of a company known as 'Westinghouse' - a nuclear construction business.

Subsequently, in February 2017 the Washington Post reported:

"The chaos at Toshiba, the Japanese corporate giant, deepened Tuesday, with its chairman resigning and the company saying it would book a $6.3 billion loss related to its U.S. nuclear business."

That loss was related to the Westinghouse arm of Toshiba, and Japanese media were said to have reported a disagreement between Toshiba's management and its auditors.

Things were not looking so good anymore. But they were about to get even worse.

In March 2017 it was reported that Toshiba was considering applying for bankruptcy protection for its Westinghouse subsidiary.

And Westinghouse did file for US bankruptcy protection because of what were said to be "multibillion-dollar cost overruns at two part-built nuclear plants in Georgia and South Carolina."

We understand that Westinghouse blamed their vast overspend on safety regulations designed to protect nuclear reactors from terrorist attacks.

It said this forced it to redesign the plants, resulting in what were said to be 'additional, unanticipated engineering challenges' that resulted in increased costs and delays on the American plants.

The protection from bankruptcy proceedings were said to have been taken in order to eliminate risks of losses after its parent company (Toshiba) cancelled or re-negotiated the unfavourable contracts that its subsidiary (Westinghouse), had entered into.

But concern was growing about what impact all of this would have in the UK.

Here. 'The Independent' said it raised doubts about the future of a new nuclear plant in Cumbria (next to Sellafield) that was set to produce 7 per cent of the UK's power. Its article continued:

"Toshiba owns a 60 per cent stake in NuGen the company that is supposed to be building the Moorside plant in Cumbria. Westinghouse was contracted to build the reactors but a spokesperson for Toshiba said that the company [Toshiba] was "uncertain" whether its subsidiary [Westinghouse] would now provide them."

The Independent's report also quoted the GMB trades union's senior organiser Chris Dukes (GMB represents nuclear workers) demanding reassurances saying:

"It is vital that this project is given the certainty it needs and therefore we are calling on an urgent government announcement to give clear and unambiguous clarity for the short, medium and long term future of Moorside," 

The Independent also said:

"In addition to its contract for Moorside, Westinghouse has a 150-year lease on Springfields nuclear fuel plant in Lancashire from the Government's Nuclear Decommissioning Authority. It is unclear what effect the bankruptcy will have on that site."

And, of course, that alerted us to the prospect of an impact in Fylde, so we researched the story so far and began to keep an eye on what was going on as far as we could.

In September, the FT reported that Westinghouse would emerge from bankruptcy protection "very soon" but its future ownership remained shrouded in doubt as Toshiba was said to be "actively considering" a sale of Westinghouse as it battled to prevent Toshiba from dragging down the rest of the Japanese conglomerate.

Speaking for Westinghouse itself, its Chief Executive said they would learn lessons from its US setbacks as well as delays in China, but he remained confident that the technology could win further orders in the US, China and beyond, citing Turkey and India as the most immediate opportunities.

He told the FT that in future, Westinghouse would not construct nuclear plants, but instead focus on its strengths in design, engineering and services.

In December 2017, NuGen (which by now was mostly owned by Toshiba) announced that a South Korean company - KEPCO - was the preferred bidder to acquire NuGen from Toshiba.

It was thought that if the sale to KEPCO went ahead, there would be different reactors to the ones Westinghouse had expected to build.

In January 2018, Toshiba announced that it was selling the outstanding [presumably legal] claims against Westinghouse to a consortium called 'The Baupost Group',

It also reported the sale of all the shares it held in Toshiba Nuclear Energy Holdings (US) Inc. and in Toshiba Nuclear Energy Holdings (UK) Limited, (together with some other Westinghouse related shares),  to a company called BWH, which was an affiliate of a Canadian company called Brookfield Business Partners.

These were to be Westinghouse's proposed new owner.

 ABOUT WESTINGHOUSE IN THE UK

Westinghouse is a member of Britain's Energy Coast Business Cluster, a private sector led organisation, with a wide range of members having business interests in West Cumbria. Their page on the BECBC website says:

"Introduction

Westinghouse is one of the world's leading nuclear energy companies, with three major businesses: nuclear power plants, nuclear fuel and nuclear services. The company is part of the Toshiba Group, and is headquartered in Pittsburgh, in the United States.

In the UK, Westinghouse manages the fuel manufacturing plant at Springfields in central Lancashire, where close to 2000 people are employed. We run this facility, under a newly-signed 150 year lease, on behalf of the Nuclear Decommissioning Authority.

Our AP1000TM nuclear reactor design is one of the leading candidates for selection in the UK, and has already been ordered by customers in the US and China, where the first plant will be operating by 2013.

 Capabilities

 Nuclear Power Plants

Around half of the world's operating nuclear stations are based on Westinghouse technology, and our latest plant - the AP1000 - is leading the nuclear renaissance. The design is currently going through a rigorous assessment by UK safety regulators and is ideally suited for use on sites in the UK - including West Cumbria.

 Nuclear Fuel

The Springfields site in Lancashire has made fuel for a wide range of reactor types, including every nuclear plant to be operated in the UK. We would hope to make fuel for the next generation of AP1000 plants at the site - so securing hundreds of manufacturing jobs for decades to come.

 Nuclear Services

Our services business provides refuelling services - together with maintenance, repair and replacement of equipment - to power plants around the world. We have experience in all aspects of reactor support - including decommissioning.

Underpinning all of our UK activity is a commitment to the development of skilled people - both within Westinghouse and in the UK supply chain. We are leading industry players in the National Skills Academy for Nuclear, and continue to engage actively with potential UK suppliers as part of our 'We Buy Where We Build' approach."

Westinghouse's own website says

"Westinghouse is the world's leading integrated supplier of nuclear fuel products and services. Westinghouse manages the Springfields nuclear fuel manufacturing facility near Preston. Springfields has the technology to manufacture fuel for all major designs of nuclear reactors to support the UK's nuclear new build plans and Westinghouse intends to utilise our UK facility to manufacture the fuel for AP1000 reactors built at Moorside and for future new build projects in the UK and Europe."

So from what we can see, the future of up to 2000 or so folk that work at Springfields site is tied into whatever happens to the success of Westinghouse as a company under what is set to be their new owners.

It will also be impacted in the UK by decisions taken by its former parent - Toshiba, arising from their stake in NuGen - who are building the Moorside plant in Cumbria in association with others.

That's because Westinghouse was contracted through its then parent (Toshiba) to build the reactors there but, as we have seen, a spokesperson for Toshiba said that the company was 'uncertain' whether its (soon to be former) subsidiary would now provide them.

 PARLIAMENTARY CONCERN

We may not have all the records of moves in Parliament, but the following are some notes of what we have picked up on this matter....

On 16 October 2017, Parliament was debating the 'Nuclear Safeguards Bill' that will amend the 2013 Act and replace various existing nuclear safeguards.

As part of the debate, our MP Mark Menzies spoke. We've reproduced what he said from Hansard....

"Madam Deputy Speaker, I am devastated by the news that I have been cut down to a mere six minutes, but I will do what I can.

This nuclear safeguard Bill is of real importance not just to me and to my constituency, but to the 1,200 people who work at Springfields nuclear fuels in my constituency. Springfields is at the heart of the British nuclear industry. We are the only site in the UK to manufacture nuclear fuel. As we have already heard this evening, 21% of the UK's electricity production is produced from nuclear energy, and a great swathe of that is from nuclear fuel manufactured in Fylde.

Whenever I hear the phrase "northern powerhouse", I think not just of the nuclear industry in the north-west, but of the nuclear fuel that is manufactured in my Fylde constituency. I have met both the workforce and the management in recent months. Initially, there were some real concerns over the UK's possible exit from Euratom and what that would mean for the continuity of supply. However, in conversations with the Minister, I have been deeply reassured by the fact that this is a Government who are working towards the possibility of remaining a member of Euratom and, if we cannot do that, of ensuring that we are safeguarding Britain's civil nuclear interests by having these measures firmly in place in this Bill.

This is not just about dealing with trade between the UK and Europe, important though that is. Springfields Fuels is owned by Westinghouse, a company with quite complex ownership-both Japanese and American footprints. Therefore, any deal or legislation must be compliant with what our Japanese and American partners have in place. I am reassured by the Minister's words in our meeting last week and in the debate this evening that this Bill will, indeed, cover that.

The nuclear industry must be able to trade from the first post-Brexit moment. Without implementation of the safeguards in the Bill, the UK would be unable to put the nuclear co-operation agreements in place in the future. Those are currently provided under the Euratom regime and they are vital because this is about not just dealing with Europe, but all our international partnerships. We are not just talking about nuclear fuel in its completed form, but oxides, pellets and the various added-value products that a company such as Springfields Fuels puts into the nuclear supply chain. If we do not get this right, the jobs of British people could ultimately be at risk and moved elsewhere. It is not about keeping lawyers busy. I am delighted that the Minister understands that has looked at all aspects of the UK civil nuclear industry and has made sure that the measures will protect not just the nuclear industry in the abstract sense, but real people and real jobs now and in the future. That is something for which we should be grateful.

Time is working against me, so I will move on to my final point. I ask the Minister to ensure that the measures in the Bill protect future programmes, one of the most important of which is that of small modular reactors. If the United Kingdom gets it right, we could be world leaders in this technology. That would be a game-changer for the nuclear supply chain. Fuel would be manufactured in the UK. In fact, huge proportions of everything-from research and development through to manufacture-could be done in the UK. That would become a highly exportable technology. Rather than importing much of the new nuclear technology from overseas, the United Kingdom can own it and, surely, emerging new nuclear technology must be at the forefront of shaping our post-Brexit destiny. I hope that the Minister can assure me that the Government will think about and protect SMRs in the detail of the legislation. That is also important for Moorside. My hon. Friend the Member for Copeland (Trudy Harrison), who is not currently in her place, is a passionate campaigner for Moorside, and such technology would bring jobs to Cumbria. The fuel from Moorside would also be manufactured at Springfields Fuels nuclear plant. Therefore, the measures in the Bill really are important to ensuring jobs and the futures of all our economies, particularly those in the north-west."

It seemed to us that he was concerned about how Springfields might fare in the future.

In December 2017, he asked the Secretary of State for Business, Energy and Industrial Strategy, what steps his Department was taking to support the nuclear fuel manufacturing industry, and was told:

"The Government engages regularly with new nuclear build developers on their supply chain plans as we seek to maximise UK economic benefit; this includes fuel manufacturing. The Government is also actively involved in advising and supporting UK companies who are pursuing nuclear fuel supply and manufacturing opportunities in overseas markets."

In January, Mr Menzies' column in the LSA Express put some more flesh on the bones, saying...

".....I spoke with bosses at Springfields about the future of nuclear fuel production in the UK this week, and am writing to ministers and fellow MPs to urge the Government to insist on UK fuel being used in any new reactors we build. There are fears international Competitors, such as the Koreans and the French, will use fuel manufactured in their countries, should they build reactors here.

So I am calling for protections to be put in place that require UK-made fuel to be a part of any deal on new reactor builds. To that end, l attended the remaining nuclear safeguard bill debate in Parliament....."

Most recently - (on 13 March 2018). Mr Menzies questioned the Secretary of State for Business, Energy and Industrial Strategy. He asked

"What engagement is the Secretary of State having with a Canadian Company called Brookfield, the likely buyer of Springfields Nuclear Fuels in my constituency which manufactures nuclear fuel for the UK and provides over 1,200 well paid jobs."

The SoS (Gregg Clark MP) replied to say:

"My hon.Friend is a champion of this sector. The Under-Secretary, my hon Friend Richard Harrington, has met the Vice President of Brookfield and expressed our continuing support for Springfields to have a future in providing fuel for plants in this country and overseas."

 DOING THE BUSINESS

We are indebted to the Gazette's business reporter Tim Gavell for more information on this matter.

In January he published a report under the heading '$4.6 bn deal for nuclear group.' It included the following....

"The deal is expected to be funded with approximately $1bn of equity, $3bn of long term debt financing, and the balance by the assumption of pension and environmental obligations. It is also subject to US Bankruptcy Court approval due to Westinghouse being put into Chapter 11 bankruptcy protection in March."

Now, we have to say that we're not experts in the machinations of business and its financing, but if we understand what this is saying correctly the crude position is that:

  • Toshiba paid $4.15 billion for 77% of nuclear company 'Westinghouse' in 2006.
  • About 10 years later they announced a $6.3 billion loss arising from their Westinghouse subsidiary.
  • The scale of that loss threatened to destroy Toshiba itself.
  • So they sought (and were granted) something akin to immunity from prosecution when they were considering defaulting on, or re-negotiating, the loss-making contracts that Westinghouse had entered into for some American nuclear work.
  • Toshiba then put Westinghouse up for sale, but appear to have retained their separate 60 per cent stake in NuGen, the company that was expected to build the Moorside plant next to Sellafield, and where Westinghouse had been contracted to build the reactors.
  • It then became clear that Toshiba was 'uncertain' whether Westinghouse would provide the reactors at Moorside.
  • Toshiba subsequently announced it was selling Toshiba Nuclear Energy Holdings (US) Inc. and Toshiba Nuclear Energy Holdings (UK) Limited, to a company called BWH, which was an affiliate of Brookfield Business Partners for 4.6bn.
  • However, (and we find this a bit odd), Brookfield are planning to 'pay' Toshiba the $4.6bn with
    • $1bn of 'equity.' We understand that to be the technical name for shares in their existing business. The process is not clear, but we imagine they could simply issue new share capital (that would dilute existing shareholder value) rather than having to buy $1bn of their own shares from other Brookfield shareholders in order to give them to Toshiba.
    • $3bn of 'long term debt financing' which, as we understand it, is the technical term for a long term loan they plan to take out.
    • $0.6bn or thereabouts of 'assumed pension and environmental obligations.' Again, we think this is the technical term for taking on the liability of having to meet the costs of Westinghouse's current and future staff pension liability, and, we imagine, the liability of future environmental work - such as decommissioning or whatever - that may be required.

Now, we have a fairly simple view of these things, but if we've understood it correctly, Brookfield are not 'buying' Westinghouse in the sense that most people would understand buying something. They are in the process of buying Westinghouse without putting any of their own 'real' money in.

They could simply be magicking a billion's worth of extra shares more or less out of thin air, and borrowing 3bn from someone else for most of the rest.

Admittedly Brookfield say they would assume the liability for staff pensions, but we've seen all sorts of workarounds for such liabilities in recent years that seem to be legal - even if they are morally indefensible.

And if new owner Brookfield doesn't make Springfields profitable before the bankruptcy protection ends, we wonder if we are at risk of seeing another Carillon disaster, with people's jobs and pensions being lost?

None of this sorry saga makes us feel at all confident about Westinghouse's UK future, and we're not at all surprised that Mr Menzies is active, both in front of, and no doubt behind, the scenes in Parliament to support his constituents.

What seems to us to be a very tenuous 'purchase' is also dependent upon the US authorities approving it anyway, because Westinghouse is either still under bankruptcy protection in the US, or about to become so again. (The Gazette report is unclear which 'March' they are referring to but we suppose it to be March 2017).

We wondered if all of this is considered normal practice in businesses of this scale, and whether we were worrying unnecessarily about the future of Springfields, so we asked a reader who we know who has a better understanding of such matters than we do.

They told us they thought our concern about the funding of the purchase might be a bit of a red-herring,

They thought the main concern for Westinghouse, put simply, was that, after the proposed sale, there was no longer a guaranteed buyer for the product they made - unlike at present. And if they cannot provide it for less cost than importing it, or indeed sell it at all (well transport it) if a Euratom deal isn't sorted out, then they will become immediately bankrupt.

Our reader thought that potential buyers (Brookfield) will most certainly be needing to know what's happening on this score - or they would most likely not proceed with the deal - and they must think there's a good chance of being able to sell at least some fuel, to go as far as they have already.

So perhaps we *are* worrying unnecessarily.

But then again.......

Dated:  19 March 2018

 

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