Unit's Woes Stun Toshiba Toshiba Missed Unit Woes -- WSJ

By Kosaku Narioka Features Dow Jones Newswires

Trouble at U.S. nuclear arm Westinghouse seems to have surprised its parent, court records indicate

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TOKYO -- Toshiba Corp. didn't know its U.S. nuclear subsidiary was preparing for a bankruptcy filing even after the unit had hired lawyers for the task, according to court records and Toshiba's official timeline.

In a Nov. 30, 2016, letter, a lawyer at New York firm Weil, Gotshal & Manges LLP wrote that Toshiba unit Westinghouse Electric Co. had engaged the firm to work on "the potential filing and administration of a chapter 11 proceeding under the United States Bankruptcy Code."

A Toshiba spokesman, reiterating earlier statements by company executives, said this week that no one at Tokyo headquarters was aware of the potential for major losses or bankruptcy at Westinghouse until early December 2016. Toshiba Chief Executive Satoshi Tsunakawa learned of the problem in mid-December, the spokesman said.

At a news conference on Dec. 27, Mr. Tsunakawa said Toshiba was facing a multibillion-dollar loss in connection with cost overruns at Westinghouse nuclear projects in the U.S. but didn't discuss a possible bankruptcy.

If Toshiba's timeline is accurate, it suggests poor communication between parent and subsidiary contributed to letting the problems at Westinghouse get out of hand. Toshiba, one of Japan's biggest and oldest conglomerates, has said it has doubts whether it is a going concern because of its unit's bankruptcy.

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Conversely, if Toshiba did know about the unit's bankruptcy plans ahead of time but failed to disclose them promptly, it could worsen trust among investors at a time when stock-exchange officials in Tokyo are weighing whether to delist Toshiba shares.

Cost overruns and delays have long plagued nuclear-reactor projects undertaken by Westinghouse in Georgia and South Carolina. Some analysts had speculated for years that Toshiba might take a large hit on its Westinghouse holding. The Japanese company announced a write-down of some Westinghouse goodwill in April 2016 but maintained the nuclear unit had a bright future until revealing the larger losses at the Dec. 27 news conference.

The Toshiba spokesman said the company began to consider a bankruptcy filing by its U.S. subsidiary around the time of that news conference -- about a month after the U.S. unit had already hired lawyers to prepare the filing.

Westinghouse filed for protection from creditors under chapter 11 on March 29. Toshiba, which owned 87% of Westinghouse at that point, has estimated that Westinghouse-related write-downs led to a loss of Yen950 billion ($8.65 billion) in the year ended March 31, 2017.

A Westinghouse spokeswoman declined to comment. Lawyers at Weil Gotshal didn't respond to requests for comment.

The November letter was part of court records released in April, but it didn't get wide notice at the time.

In 2016 and early 2017, a key executive on the nuclear issue was Shigenori Shiga, who was chairman of Toshiba and long responsible for the company's energy business including Westinghouse, where he had earlier served as chairman of the board.

Toshiba's account suggests either that Mr. Shiga didn't know Westinghouse had hired lawyers for a possible bankruptcy filing or, if he did know, that he didn't immediately convey news of the preparations to board colleagues in Tokyo including Toshiba's CEO. Toshiba declined to make Mr. Shiga available for comment and he couldn't be located.

Toshiba didn't get its auditor's approval for October-December 2016 quarterly results and has yet to release audited results for the full fiscal year ended March 2017, citing a dispute with its auditor over whether its internal controls were adequate in accounting for Westinghouse.

A self-regulatory body at Japan Exchange Group Inc., which operates the Tokyo Stock Exchange, is reviewing Toshiba's status for possible delisting after a previous accounting scandal.

Naoki Fujiwara, a fund manager at Shinkin Asset Management, said any evidence that Toshiba knew about Westinghouse's problems earlier than it has acknowledged "would give a bad impression in terms of appropriate disclosure" and could affect the exchange's review. Others said Toshiba's reputation was already tarnished and its listing was being kept alive by political considerations such as the company's large workforce in Japan.

An exchange spokesman declined to discuss specific issues in the review but said outside influences wouldn't affect the outcome.

--Takashi Mochizuki, Russell Gold and Peg Brickley contributed to this article.

Write to Kosaku Narioka at kosaku.narioka@wsj.com

(END) Dow Jones Newswires

June 09, 2017 02:47 ET (06:47 GMT)