Industrials

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

Radioactive material can generate plenty of energy, used properly. The problem comes when you need to dispose of it.

That parallel must be occurring to Toshiba Corp. as it works out how to deal with its nuclear energy unit, which has already caused a 712.5 billion yen ($6.2 billion) goodwill writedown. The Westinghouse Electric Co. nuclear business may now be headed toward either Chapter 11 bankruptcy or a removal from the parent company's books via a majority stake sale, the Nikkei Asian Review reported Friday. Neither option is likely to provide a worthwhile shield from Westinghouse's radioactive liabilities.

First the Good News
Toshiba's nuclear-servicing business is mostly profitable, unlike its construction unit
Source: Company reports
Note: Shows operating income excluding goodwill impairments.

On paper, there's the nugget of a good business within the nuclear waste. While Toshiba sees no future in the construction of new overseas plants, providing fuel and services to existing generators has churned out a reasonably consistent stream of profits for seven of the past eight years.

The estimated 39 billion yen of operating income from fuel and services in the year through March would in theory outstrip the 26 billion yen underlying loss from building new plants -- at least, if you screw up your eyes and try not to think about that goodwill writedown.

If only it were so simple. While Toshiba can avoid maiming itself further by refusing to take on new nuclear construction work, stanching the bleeding from existing injuries will prove harder.

For example, there's another 15.4 billion yen in goodwill on the balance sheet relating to its Moorside nuclear project in the U.K. Since Toshiba intends to halt overseas plant building, you can mentally write off that number, unless a buyer is found to pay a premium over net asset value.

Environmental and decommissioning liabilities add further risks, which can be fiendishly difficult to estimate. Toshiba's best guess at the time of its 2016 annual report was that the environmental costs would come to 10.4 billion yen, plus another 24.2 billion yen for decommissioning.

Then there's Kazatomprom, Kazakhstan's state-owned uranium miner, which holds a put option over its 10 percent stake in Westinghouse. IHI Corp. will receive about 19 billion yen in May after exercising a similar option over its 3 percent share, Toshiba said last month. Should Kazatomprom make the same decision and get a comparable price, the cost of buying out minority shareholders alone would be enough to wipe out all the nuclear unit's underlying profits since 2011.

Then the Bad News
Toshiba's actual and potential nuclear liabilities dwarf its net assets and operating income
Source: Company reports
Note: Liability figures are already counted against the net asset figure. Moorside goodwill is still an asset at present. Value of Kazatomprom put option not disclosed in Toshiba annual report. Value estimate based on value of IHI put option.

A billion yen here, a billion there, and sooner or later you're talking big money. While the 712.5 billion yen goodwill writedown has been priced in, there's an even bigger elephant in the room: A 793.5 billion yen guarantee for customers of its U.S. nuclear power plants. 

Bankruptcy or a sell-down of the good bits of the nuclear business may be necessary for Toshiba, but neither strategy will make those liabilities disappear.

Buyers for even nuclear-servicing businesses are likely to be wary, given that the International Atomic Energy Agency reckons global generation may barely increase between 2015 and 2030 . They would certainly want Toshiba to indemnify them against any future losses from its existing problems, which more or less defeats the object of selling. U.S. bankruptcy courts are equally unlikely to allow a business to shirk its responsibilities.

The future for Toshiba still depends on the money it can raise from offloading part of its chips business, the real money-spinner. That may provide it with some resources to build up defenses, but it has a long road ahead. The half-life of the liabilities Toshiba has now may be measured not in fiscal quarters, but in decades.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. At the high end, they estimate a 3 percent growth rate is possible -- hardly a growth industry, especially given how much of it will be in China, where domestic businesses can be expected to capture much of the benefit.

To contact the author of this story:
David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story:
Paul Sillitoe at psillitoe@bloomberg.net