MHI Requests Arbitration Against Hitachi In Relation To South Africa Projects
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On July 31, 2017, Mitsubishi Heavy Industries, Ltd. ("MHI") submitted a request for arbiration to the Japan Arbitration Commercial Association ("JCAA") in Tokyo, relating to the demands against Hitachi, Ltd. ("Hitachi") to pay the price adjustment and other payments for ongoing projects in South Africa. The price adjustments and other payment issues were previously announced by MHI on February 9, 2017 ("Regarding MHI's Request for Payment from Hitachi, Ltd. Related to South Africa Project").
On February 1, 2014 (the "Effective Date of Company Split"), MHI and Hitachi integrated their businesses centered on thermal power generation systems into Mitsubishi Hitachi Power Systems, Ltd. ("MHPS"), a consolidated subsidiary of MHI, through a spin-off in the form of an absorption-type company split.
As part of this business integration, the assets and liabilities, contracts with customers and others, and rights and obligations thereunder, regarding the boiler construction projects for Medupi and Kusile Power Stations (the "South African Projects"), for which Hitachi Power Africa Proprietary Limited ("HPA"), a consolidated subsidiary of Hitachi in the Republic of South Africa, and other companies received orders in 2007, were transferred (the "South African Asset Transfer") from HPA to Mitsubishi Hitachi Power Systems Africa Proprietary Limited ("MHPS-Africa"), a consolidated subsidiary of MHI.
At the time the contract for the South African Asset Transfer was concluded, MHI was aware that major losses were probable and asserted this to Hitachi.
Therefore, it was agreed in the contract that Hitachi and HPA would be responsible for contingent liabilities arising from events that occurred prior to the Effective Date of Company Split as well as for any claims that had already accrued as of the said date, while MHPS and MHPS-Africa would be responsible for the execution of the projects on and after the Effective Date of Company Split. On that basis, it was also agreed in the contract to first retrospectively refine the project schedule and the cash flow estimates, as of the Effective Date of Company Split, then to determine the definitive price of the South African Asset Transfer based on them, and then to adjust the difference between the tentative price and the definitive price.
On March 31, 2016, MHI demanded that Hitachi pay ZAR 48,200 million (equivalent to approximately 379.0 billion yen when converted at a rate of 7.87 yen to 1 ZAR) to MHPS-Africa as part of the difference between the tentative price and the definitive price (the price adjustment and other payments) according to the contract (the "Part of Demands for Payment on March 2016"). In the Part of Demands for Payment on March 2016, MHI explicitly stated to Hitachi that the amount that Hitachi and HPA were obliged to pay under the contract for the South African Asset Transfer significantly exceeded ZAR 48,200 million and that MHI reserved the right to make additional demands.
Then, on January 31, 2017, MHI demanded that Hitachi pay ZAR 89,700 million (equivalent to approximately 763.4 billion yen when converted at a rate of 8.51 yen to 1 ZAR) as the price adjustment and other payments (the "Demands for Payment on January 2017"), which included the aforementioned Part of Demands for Payment on March 2016. In the Demands for Payment on January 2017, MHI retrospectively refined the project schedule and the cash flow estimates, as of the Effective Date of Company Split in accordance with the contract for the South African Asset Transfer, and thereby demonstrated that the amount that Hitachi and HPA were obliged to pay significantly exceeded ZAR 48,200 million as stated in the Part of Demands for Payment on March 2016.
However, given that MHI and Hitachi have been unable to reach agreement as of July 31, 2017, being extremely unfortunate, MHI decided that it has become necessary to submit a request for arbitration to JCAA as stated in the above contract, and submitted a request for arbitration which states demands against Hitachi for the payment of ZAR 90,779 million (equivalent to approximately 774.3 billion yen when converted at a rate of 8.53 yen to 1 ZAR) as the price adjustment and other payments relating to the South African Projects.
Given that it was already expected as of the Effective Date of Company Split that the South African Projects would incur a loss, MHPS-Africa has the right to receive the price adjustment payments and other payments from Hitachi or HPA in the amount calculated under the above contract. Furthermore, there is a discrepancy between the amount of anticipated losses included in the assets and liabilities regarding HPA's South African Asset Transfer immediately before the Effective Date of Company Split (January 31, 2014) and the amount of the losses that MHI believes were already expected at the time. Presently, there is yet to be agreement on the assets and liabilities.
Meanwhile, the request for arbitration is just to start proceedings, and does not affect MHI's financial forecasts. MHI will announce promptly if there are further developments which require disclosure relating to the interim process or the results of this arbitration.
As part of this business integration, the assets and liabilities, contracts with customers and others, and rights and obligations thereunder, regarding the boiler construction projects for Medupi and Kusile Power Stations (the "South African Projects"), for which Hitachi Power Africa Proprietary Limited ("HPA"), a consolidated subsidiary of Hitachi in the Republic of South Africa, and other companies received orders in 2007, were transferred (the "South African Asset Transfer") from HPA to Mitsubishi Hitachi Power Systems Africa Proprietary Limited ("MHPS-Africa"), a consolidated subsidiary of MHI.
At the time the contract for the South African Asset Transfer was concluded, MHI was aware that major losses were probable and asserted this to Hitachi.
Therefore, it was agreed in the contract that Hitachi and HPA would be responsible for contingent liabilities arising from events that occurred prior to the Effective Date of Company Split as well as for any claims that had already accrued as of the said date, while MHPS and MHPS-Africa would be responsible for the execution of the projects on and after the Effective Date of Company Split. On that basis, it was also agreed in the contract to first retrospectively refine the project schedule and the cash flow estimates, as of the Effective Date of Company Split, then to determine the definitive price of the South African Asset Transfer based on them, and then to adjust the difference between the tentative price and the definitive price.
On March 31, 2016, MHI demanded that Hitachi pay ZAR 48,200 million (equivalent to approximately 379.0 billion yen when converted at a rate of 7.87 yen to 1 ZAR) to MHPS-Africa as part of the difference between the tentative price and the definitive price (the price adjustment and other payments) according to the contract (the "Part of Demands for Payment on March 2016"). In the Part of Demands for Payment on March 2016, MHI explicitly stated to Hitachi that the amount that Hitachi and HPA were obliged to pay under the contract for the South African Asset Transfer significantly exceeded ZAR 48,200 million and that MHI reserved the right to make additional demands.
Then, on January 31, 2017, MHI demanded that Hitachi pay ZAR 89,700 million (equivalent to approximately 763.4 billion yen when converted at a rate of 8.51 yen to 1 ZAR) as the price adjustment and other payments (the "Demands for Payment on January 2017"), which included the aforementioned Part of Demands for Payment on March 2016. In the Demands for Payment on January 2017, MHI retrospectively refined the project schedule and the cash flow estimates, as of the Effective Date of Company Split in accordance with the contract for the South African Asset Transfer, and thereby demonstrated that the amount that Hitachi and HPA were obliged to pay significantly exceeded ZAR 48,200 million as stated in the Part of Demands for Payment on March 2016.
However, given that MHI and Hitachi have been unable to reach agreement as of July 31, 2017, being extremely unfortunate, MHI decided that it has become necessary to submit a request for arbitration to JCAA as stated in the above contract, and submitted a request for arbitration which states demands against Hitachi for the payment of ZAR 90,779 million (equivalent to approximately 774.3 billion yen when converted at a rate of 8.53 yen to 1 ZAR) as the price adjustment and other payments relating to the South African Projects.
Given that it was already expected as of the Effective Date of Company Split that the South African Projects would incur a loss, MHPS-Africa has the right to receive the price adjustment payments and other payments from Hitachi or HPA in the amount calculated under the above contract. Furthermore, there is a discrepancy between the amount of anticipated losses included in the assets and liabilities regarding HPA's South African Asset Transfer immediately before the Effective Date of Company Split (January 31, 2014) and the amount of the losses that MHI believes were already expected at the time. Presently, there is yet to be agreement on the assets and liabilities.
Meanwhile, the request for arbitration is just to start proceedings, and does not affect MHI's financial forecasts. MHI will announce promptly if there are further developments which require disclosure relating to the interim process or the results of this arbitration.