U.S. Companies Financially Affected By Fallout from Fukushima
Thousands of articles and blog postings have come out since the Fukushima disaster. Virtually all deal with the human factor, failure of the controls to prevent the disaster, and the potential effects on the use of nuclear power as an energy source in the future. I deal with the business risk and financial disclosures required by the SEC and potential legal liability of General Electric, the manufacturer of the "Mark 1" nuclear reactor, the primary containment vessel surrounding the reactor. Let's hope the worst does not occur but if a meltdown is imminent and it can be demonstrated that the vessel would probably burst as the fuel rods inside overheated causing dangerous radiation to spew into the environment, then GE may be in financial jeopardy. In early as 1972, Stephen H. Hanauer, then a safety official with the Atomic Energy Commission, recommended that the Mark 1 system be discontinued because it presented unacceptable safety risks. Among the concerns cited was the smaller containment design, which was more susceptible to explosion and rupture from a buildup in hydrogen — a situation that may have unfolded at the Fukushima Daiichi plant. I'll return to GE later on.
U.S. uranium companies are at risk of business interruption and potential financial loss. According to a report on Morningstar (see: http://www.footnoted.com/uncategorized/event/japan-following-the-fukushima-accident/), one of the first 8-K documents (a filing required by the SEC after certain major events) was filed by Uranium Energy Corp. (UEC). After mentioning the recent increase in the spot price of uranium, as well as increased demand across all sectors, the filing added:
“Since then, the uranium spot market has seen seesaw movement with the current trend being down as a result of several factors, the latest being the devastating earthquake in Japan and the resulting unforeseen developments at the Fukushima Nuclear Power Plant. As this news and reaction to it changes very quickly, the uranium market is quite volatile and the Company is waiting to see where prices settle out on a more intermediate basis. Similarly, over the past year, the longer term contract uranium price has risen from $58.00/lb. to $73.00/lb. according to the Ux Consulting Company.”
The volatility in the uranium market is likely to continue for some time as the intent of large consumers such as China and India become clearer. U.S. companies that supply uranium overseas, such as UEC and Camerco Corp (both traded on the NYSE), may experience reduced demand for their product thereby triggering an 8-K disclosure.
ON Semiconductor Corp, a supplier of high performance silicon solutions for energy efficient electronics including power-generating applications, issued a press release attached to its 8-K that stated if problems continued that prevented the reliable delivery of water, electricity, and other necessary services to its Aizu, Gunma, and other Japanese facilities, production may be disrupted. The company disclosed that it "…could potentially see a negative impact to revenues in the first quarter of 2011 " because of the disruption of infrastructure services and the added difficulties of making deliveries within Japan following the disasters. It added:
“The potential negative impact to revenues in the first quarter could be in the range of two to four percent of revenues based on the mid-point of total combined revenue guidance for ON Semiconductor and SANYO Semiconductor of $852.5 million provided on Feb. 3, 2011. We cannot currently predict the impact of the earthquake and tsunami on other guidance provided in our Feb. 3, 2011 earnings release at this time.”
GE must consider the possibility of legal liability creating a contingent liability for the company that should be disclosed in its quarterly (10-Q) and annual (10-K) reports filed with the SEC. No lawsuits have been filed to date perhaps because it is historically difficult to do so under Japanese law that assigns liability for nuclear accidents to the plant operator -- in this case Tokyo Electric Power Company (TEPCO). That doesn't mean lawsuits will not be filed against GE by Japanese citizens injured in the disaster. However, past history would not be on the plaintiffs' side. The most comparable situation is the 1984 Bhopal disaster when in 1987, the U.S. Court of Appeals for the Second Circuit dismissed lawsuits filed against Union Carbide by victims of a toxic gas leak in Bhopal, India, considered one of the worst industrial disasters of all time.
What if GE failed to disclose potential problems with the safety of the Mark 1 containment systems? That appears to be a distinct possibility. Reports have just surfaced that on February 2, 1976, former GE engineers Gregory C. Minor, Richard B. Hubbard, and Dale G. Bridenbaugh "blew the whistle" on safety problems at nuclear power plants. They timed their statements to coincide with their resignations from responsible positions in GE nuclear energy division. In a recent interview on ABC, Bridenbaugh described design flaws of GE's Mark 1 reactors, which account for five of the six reactors at the Fukushima 1 power plant. Bridenbaugh claimed that the design "did not take into account the dynamic loads that could be experienced with a loss of coolant" and that, despite efforts to retrofit the reactors, "the Mark 1 is still a little more susceptible to an accident that would result in a loss of containment." Bridenbaugh did back off a bit when he stated he believed the design flaws had been addressed after he left GE. Still, this can't be good news for GE, a company that is under criticism for paying no U.S. taxes on $14.2 billion profits. You can read my blog about that matter at: http://bit.ly/fjKCr4.
We've been down this road before with companies failing to disclose vital potential public health and safety information until after some event that raises doubt about adequate public disclosure before the fact. I recall the design flaws of the gas tanks in the 1970s Ford Pinto model that were identified in company studies but not disclosed until after injuries and deaths resulted from explosions caused by low-speed accidents. The most egregious example of corporate myopia is the tobacco industry that ignored signs that nicotine was addictive. In that case, whistleblower Jeffrey Wigand, a former vice president of research and development at Brown & Williamson, broke the story on a 60 Minutes segment on February 4, 1996 that tobacco companies had covered up the facts including the intentional manipulation of the tobacco blend to increase the amount of nicotine in cigarette smoke.
The question that must be asked is do Bridenbaugh and his two colleagues know more than they are disclosing and when (not will) someone dig up more on this matter? The situation at the Fukushima plant changes daily and the details are somewhat contradictory; it may be weeks or months before anyone knows how the Mark 1 containment system performed during the disaster that still is unfolding.
Blog by Steven Mintz, aka Ethics Sage, April 4, 2011