/

Toshiba stuck with billions in unsold gas on top of nuclear troubles

Bloomberg

Toshiba Corp., already reeling from a crisis over its nuclear business that has sent its market value down by almost half, is seeking help from one of the world’s biggest buyers of liquefied natural gas to avoid billions of dollars in potential losses if it can’t sell American gas it holds.

Toshiba is working with Japan’s Jera Co. to help it find buyers for gas that it has a contract to liquefy in the U.S. starting in 2019, said company spokesman Hirokazu Tsukimoto by phone. Since Toshiba hasn’t yet secured long-term contracts, it may be forced to sell the LNG in spot markets at a loss, or opt not to process gas at Freeport LNG Development LP’s plant in Texas, Tsukimoto said. Either way, it will pay a fixed tolling fee.

The potential for having unsold gas is another blow to Toshiba, which is already facing billions of dollars in losses at its nuclear business following a profit-padding scandal in 2015. The Japanese conglomerate said in a June filing it could face potential losses of ¥971.4 billion at its power and infrastructure division, which the spokesman said is mostly due to its LNG contract in the U.S.

“Finding new buyers is difficult in the current market structure,” said Junzo Tamamizu, managing partner at Clavis Energy Partners LLC in Tokyo, by phone. “Toshiba could optimize its LNG sales by swapping cargoes and accessing various markets.”

When Toshiba struck the LNG deal with Freeport in September 2013, the outlook for profit seemed bigger. Gas was selling in Asia at a larger premium over U.S. prices back then, making potential future American shipments more attractive.

A global gas glut has narrowed the price spread between the U.S. and Asia by more than half since Toshiba agreed to buy the right to liquefy 2.2 million tons a year of LNG for 20 years from the Freeport project.

Toshiba has conditional agreements with multiple buyers to sell more than half of its output from the Freeport project, but none of them are legally binding, according to Tsukimoto. The company hopes to finalize its first deal “as soon as possible,” he said.

Buyers of U.S. LNG, including Jera and Gail India Ltd., are seeking to resell or swap the fuel amid narrower profit margins. Jera signed a flexible contract to resell up to six LNG cargoes a year to the U.K.’s Centrica PLC last month. Tokyo Gas Co., Japan’s second-biggest LNG buyer, is in talks with European firms to swap the super-cooled gas it exports from the U.S.

Jera, a joint venture between Tokyo Electric Power Co. Holdings Inc. and Chubu Electric Power Co., is helping Toshiba market LNG from the Freeport project, said spokesman Atsuo Sawaki. Jera has a separate contract to buy the fuel from another facility at the Freeport plant starting in 2018 and the two Japanese companies could further cooperate in their LNG operations, he said.

Under LNG tolling agreements like the one Toshiba signed with Freeport, buyers typically pay fixed fees for the ability to liquefy natural gas, regardless of the amount they export. The charge can range from $2.25 to $3.50 per million British thermal units, according to a November report published by Columbia University’s Center on Global Energy Policy.

Toshiba’s fixed tolling fees over 20 years could be as much as $8.2 billion, according to calculations by Bloomberg, based on the Columbia University figures. Tsukimoto declined to disclose Toshiba’s Freeport tolling charge.

“It’s a bloody disaster,” said Amir Anvarzadeh, Singapore-based head of Japanese equity sales at BGC Partners Inc. “It’s another source of additional losses which the market had not been anticipating. The known unknown had been in the nuclear-related losses.”

Last month, Toshiba surprised investors with the disclosure that a U.S. nuclear construction unit may result in billions of dollars in losses. Kyodo News reported the loss may reach ¥700 billion. The unexpected writedown follows a profit-padding scandal in 2015 that led to record losses and prompted the company to cut staff numbers and sell off businesses.

Toshiba has said it is considering raising funds by spinning off its memory chip unit. Private equity firms Bain Capital LP and Permira may be interested in purchasing a stake, which could be as much as 30 percent, Kyodo News reported, citing people it didn’t identify. Flash memory for smartphones and solid state disk drives is one of the few bright spots in Toshiba’s sprawling business portfolio, accounting for more than half of total operating profit in the first half of the fiscal year.

Toshiba is in talks with its auditor on the appropriate way to provision for the potential loss on its Freeport LNG, such as booking it incrementally over the 20-year lifetime of the fuel contract, according to Tsukimoto.