Toshiba is facing multibillion-dollar write-down that sent its stock plunging more than 40% this week
SANMEN, China— Toshiba Corp.’s ambitions to make nuclear power a centerpiece of its future have instead led to an accounting scandal and billions of dollars in potential losses.
For clues to what happened, the reactor being built by its Westinghouse Electric Co. division in this seaside town south of Shanghai offers an illuminating Exhibit A.
The Sanmen reactor was meant to be the showcase of a new technology that Westinghouse hopes will revolutionize the nuclear industry by making power plants safer, less labor-intensive and quicker to build.
Instead, the first so-called AP1000 reactor has been bedeviled by delays. In one instance, a critical component in its cooling system failed, slowing work by more than two years. Meanwhile, Westinghouse struggled for years to complete its design work for the AP1000, adding to delays and angering its Chinese state-owned customer. The reactor is now at least three years behind schedule.
Westinghouse said Thursday it aims to load enriched uranium fuel in the reactor early next year, pushing back its previous year-end goal.
The troubles in Sanmen mirror those at nuclear projects around the world—including four by Westinghouse in the U.S.—that led to this week’s announcement by Toshiba that it is looking at billions of dollars in potential losses, triggering a massive selloff by investors.
Engineers are now pushing to complete final work for the first Sanmen AP1000 reactor to start up by spring. Even if all goes smoothly, the company’s failure to deliver on schedule has undermined its standing.
Jeff Benjamin is well aware of the problems at Sanmen. He was hired as Westinghouse’s senior vice president for new plants in 2013 as problems in China multiplied.
Although an experienced nuclear engineer, Mr. Benjamin had never actually overseen construction of a new nuclear-power plant. A day spent with Mr. Benjamin at the plant this fall offered a window into the sheer complexity of building a new reactor, and the many thousands of challenges big and small that cause projects to fall behind.
Even though the Sanmen reactor was nearing completion, engineers were still grappling with a number of technical problems. One was particularly vexing: Why a layer of shielding that surrounds the reactor pressure vessel—which houses the reactor’s nuclear core—had expanded far more than expected during testing. That had caused some of the shielding material to seep out through the vents of its casing.
Mr. Benjamin wanted a closer look. The 54-year-old executive grabbed a flashlight, passed two checkpoints of heavily armed Chinese police, and crawled on hands and knees deep into a narrow opening of the AP1000. He peered up at the mess caused by the swollen substance.
“It’s disappointing,” he said. Company officials said they fixed the problem in recent weeks by changing the shielding material.
Under a deal with China to build four AP1000 reactors in the country, Westinghouse agreed to provide the designs for the AP1000 to its Chinese partner, State Nuclear Power Technology. In return, it hoped to win lucrative fuel and maintenance contracts for dozens of plants it envisioned would be built in China based on its technology—becoming the backbone of the country’s reactor fleet for decades to come.
Founded in the 1880s in Pittsburgh, where it is still based, Westinghouse once made everything from household appliances to streetlights, and even owned the CBS television network. A string of bad investments eventually led to the conglomerate’s dismantling. Toshiba agreed to buy a majority stake in Westinghouse’s nuclear business in 2006 for about $5.4 billion.
Toshiba’s stock dropped by more than 40% in a three-day span this week after the company announced it was looking at billions of dollars in losses related to its nuclear division. The stock however, remains at levels similar to that of a year ago: Before this week’s plunge, Toshiba’s shares had risen steadily in 2016, as investors cheered an aggressive turnaround plan.
Toshiba’s disclosure this week comes as the Tokyo-based company tries to move past its 2015 accounting scandal, in which the nuclear unit featured prominently. An investigation by Toshiba found executives had tried to play down tens of millions of dollars in rising costs at Westinghouse.
On paper, the AP1000 is revolutionary, offering a dramatic rethink of how nuclear-power plants should work. It cuts the numbers of valves, pumps and other components needed to operate, and the simpler design was supposed to make it easier and quicker to build.
Westinghouse also innovated on safety. The AP1000 uses safety systems that rely on natural forces like gravity to keep the reactor safe, such as the giant tanks that can release water automatically in an emergency to keep the plant cool.
ENLARGE By contrast, nuclear plants by French competitor Areva SA rely more heavily on human operators or computer systems to intervene in an emergency.
Safety is one of the many factors contributing to delays at Sanmen. After Japan’s Fukushima disaster in March 2011, China halted new plant approvals pending a broad safety review, slowing work at Sanmen, according to Westinghouse.
A more fundamental challenge later emerged: construction at Sanmen was moving ahead faster than the company was completing its engineering work, a decision Westinghouse now concedes was a mistake.
Several times, Westinghouse had to rip out equipment that had already been installed and start again or undertake lengthy re-examinations of engineering work.
By January 2013, Westinghouse then-CEO Danny Roderick had lost patience. He reached out to Mr. Benjamin, an old acquaintance who at the time was leading the nuclear-services unit of Rolls-Royce Holdings PLC.
On the phone with Mr. Roderick, pacing in his kitchen, Mr. Benjamin pressed to know whether he would have the authority to shake up the flagging nuclear giant before taking the job. “Missing dates just became too accepted,” Mr. Benjamin said.
When he first toured Sanmen in 2013, Mr. Benjamin recalls being shocked to see construction workers chiseling up newly poured concrete. Engineers had discovered that the steel supports for the plant’s pressurizer—a 50-foot-tall, 115-ton apparatus which helps control pressure levels—weren’t strong enough, so they had to be replaced.
As a new design, the AP1000 includes many first-of-a-kind components. One of the most important is the reactor coolant pump, which rises 20 feet high inside the AP1000 and weighs more than 200,000 pounds. The four pumps essentially serve as the reactor’s heart, circulating coolant to regulate temperature around the reactor core to prevent dangerous levels of overheating.
In early 2013, the company found that an internal blade—whose rotation helps to circulate the reactor coolant—had cracked during testing. That forced an examination of the entire pump to determine what went wrong. Ultimately, it led to design changes and fixes that took two years to complete.
The company says the re-engineered coolant pumps, which were shipped back to China in late 2015, are working well at the Sanmen unit and another Chinese plant under construction. None have yet been installed at the U.S. plants.
Westinghouse hopes that a successful launch of the first AP1000 will allay concerns in China and put it back on track to be a major player in its nuclear buildout.
But China’s government hasn’t said much on about future projects for the AP1000 or the larger version, called the CAP1400, that China is developing from the technology transfer.
State Nuclear Power Technology assistant president Zhang Fubao said in an interview that the company is committed to working with Westinghouse.
Mr. Benjamin said he knows proving that the AP1000 works in China is vital to the company’s future.
“The eyes of the world and the eyes of the industry are watching what’s happening here at Sanmen,” Mr. Benjamin reminded workers at a recent gathering.