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For "zombie" Fukushima operator, fresh financing masks long-term woes

The logo of Tokyo Electric Power Co (TEPCO) is pictured at its headquarters in Tokyo May 14, 2012. REUTERS/Yuriko Nakao
The logo of Tokyo Electric Power Co (TEPCO) is pictured at its headquarters in Tokyo May 14, 2012. REUTERS/Yuriko Nakao

By Mari Saito

TOKYO (Reuters) - Its stock price has nearly trebled this year, its near-term debt trades at par, banks have extended credit, and an enterprise value of $83 billion - a rough guide to how much it could cost to buy - makes it Asia's biggest listed electricity utility.

Yet Tokyo Electric Power <9501.T>, or Tepco, has lost $27 billion since the 2011 disaster at its Fukushima Daiichi nuclear plant, and faces massive liabilities as it decommissions the facility, compensates tens of thousands of residents forced to evacuate, and pays for decontamination of an area nearly the size of Connecticut.

Creditors, led by Japan's top banks, have agreed to provide Tepco with $5.9 billion - rolling over existing loans and putting in new financing [ID:nT9N0GD01Q] - and the company has applied to restart its 7-reactor Kashiwazaki Kariwa facility, the world's biggest nuclear plant, saying a restart would save it $1 billion a month in fuel costs.

All of which has prompted Tepco, which supplies electricity to 29 million homes and businesses in and around Tokyo, to say it could make a profit this financial year.

"It's all kabuki," said Tom O'Sullivan, founder of independent energy consultancy Mathyos Japan, using a Japanese term to portray political posturing. "Tepco still faces significant problems."

"You have the trade minister ... saying the utility is fine. You have Tepco's president ... applying for restarts, and you have banks falling in line to roll over loans. It's very much an orchestrated presentation."

Tepco is expected to lose 21 billion yen ($216 million) at an operating level in the year to end-March, according to Thomson Reuters StarMine SmartEstimates, which places greater emphasis on top-rated analysts' forecasts. But, at a net level, Tepco - which was nationalized last year - is seen posting a 409 billion yen profit, boosted by booking as one-off gains funds provided by a state-backed entity for compensating evacuees.

"The timing of the Kashiwazaki Kariwa restart is unclear, so even if we are not able to restart it in fiscal 2013, we will take all possible measures, including emergency financial measures, that would defer costs, allowing us to make a profit," Tepco said in response to Reuters queries for this article.

BLUE-CHIP DUMP

Investors dumped Tepco from among Japan's blue-chip stocks after its inept response to the earthquake and tsunami disaster, and the utility has since lurched from crisis to crisis, struggling to contain hundreds of thousands of tonnes of irradiated water held at the Fukushima plant.

The company's debts are almost five times its equity - a ratio more than double that of Chubu Electric Power <9502.T>, which services an area near Tokyo that is home to manufacturers including Toyota Motor Corp <7203.T>.

Japan has given Tepco a 5 trillion yen credit line for compensating 160,000 evacuees and damaged businesses, but Tepco has already said that's not enough. The Japan Center for Economic Research, an independent think-tank, reckons total decontamination costs could be at least $100 billion.

"The biggest challenge in the Tepco situation is that the total liabilities are unknown," said CV Ramachandran, Hong Kong-based head of Asia business for restructuring specialist AlixPartners. "Estimates vary widely and the latest water leakage issues are likely to further increase liabilities."

Tepco said last week that a tank holding contaminated water at Fukushima overflowed and likely spilled into the Pacific Ocean, the second such breach in less than two months.

While the big banks managed to corral reluctant smaller lenders into Tepco's refinancing, lenders still have reservations about just how viable the utility is.

"There remain lingering problems. We don't know what kind of company Tokyo Electric is going to be, and ... whether we should continue lending to them," said a senior executive at one of Japan's big three banks, who didn't want to be named due to the sensitivity of the issue. "Can we keep lending money when we can't see this company's future?"

Makoto Kikuchi, CEO of Myojo Asset Management, said Tepco shares are too risky for institutions, and are only traded by speculators and hedge funds. "From a fundamental or balance sheet standpoint, there's absolutely no reason to buy Tepco shares."

ASSET MARKDOWN

Tepco may soon have to mark down some of its stated assets as liabilities.

After touring Fukushima last month, Prime Minister Shinzo Abe told Tepco President Naomi Hirose to scrap two undamaged reactors on the site and allocate another $10 billion to the clean-up, on top of $10 billion already put aside. Hirose said he would decide on the reactors by the year-end - by which time new accounting rules will be in place.

Previously, any decision to decommission meant Tepco had to write-off the value of the reactor in the same financial year. The new rules allow utilities to spread those write-offs over 10 years, and pass on some of the cost to ratepayers.

Industry Minister Toshimitsu Motegi has also indicated that Fukushima Daini, a four-reactor facility 10 kms south of the wrecked Daiichi plant, may need to be dismantled.

Tepco books the Daiichi No.5 and No.6 reactors and all four Daini reactors - none of which have generated any power since 2011 - among nuclear-related fixed assets worth 745.5 billion yen. The utility does not give a detailed breakdown of its nuclear assets, but the ministry estimates Daini's book value at 122 billion yen, while the two undamaged Daiichi reactors are reckoned to be worth 200 billion yen.

The head of the Nuclear Regulation Authority has warned Tepco may face a tougher assessment for its Kashiwazaki Kariwa restart given its patchy safety record at Fukushima. The regulator will also look closely at Tepco's finances.

DEBT INSURANCE

The cost to protect 10 million yen of Tepco debt for 5 years has dropped to around 350,000 yen from nearly 2 million yen six months after the disaster - offering some relief to debt investors holding over 4 trillion yen of Tepco bonds.

That confidence is reflected in Tepco's near-term bond prices, with bonds due in December, and all those maturing in 2014, trading around par, implying investors believe they will be repaid their principal in full. But longer-dated Tepco bonds still show a significant discount to their face value, with 2040 bonds trading at 70 cents on the dollar, up from around 50 cents two years ago.

"There's no legal background to any government support so we have to say there is some (default) risk," said a Tokyo-based credit analyst with a European bank, who didn't want to be named as she is not authorized to speak to the media. "People are still not so comfortable on the credit. The financial performance and balance sheet are not very strong."

COST-CUTTING

To free up money to respond to the immediate contamination and clean-up problems, Tepco is to strip out another 1 trillion yen from its costs over the next decade - on top of more than 3.4 trillion yen in cuts it promised earlier by fiscal 2021.

The utility has said it will sell more than 700 billion yen in assets by end-March. It has already shed over 900 properties since 2011, including a corporate headquarters building in Ginza, Tokyo's upmarket shopping district.

The cost-cutting is doing little to bolster morale among Tepco's 37,000 workers - a workforce that has been vilified in Japan. A job at Tepco used to be among the most prestigious and well-paid in Japan, but staff are now harangued by protesters with megaphones when they exit the firm's Tokyo headquarters.

Since the 2011 disaster, managers have seen their pay cut by a quarter, and many salaried employees are now paid a fifth less than then - and more than 1,400 workers have left.

"They are having an incredibly difficult time retaining staff, especially those in the planning division at headquarters who are in charge of mapping out the accident response at Fukushima," said a Tokyo-based analyst, who didn't want to be named as he is not authorized to speak to the media. "Many of its best employees are headhunted by other utilities."

"ZOMBIE" COMPANY

Tepco should be focused on the immediate containment and clean-up work at Fukushima rather than cutting costs to meet a profit target, said O'Sullivan, a former investment banker. "It's troubling that this organization is talking about 2021 when what they need to be focused on is the next 2-3 years."

While Tepco's bankruptcy looks to have been taken off the table as an option, there are calls for the government to take over the Fukushima clean-up project through a national "decommission agency". Another idea in circulation is to split Tepco in two, with one spin-off taking charge of the clean-up and the other taking control of its working power stations.

"The best option is to separate the company and have Tepco concentrate on what it's good at: simply generating power for the region," said Penn Bowers, a CLSA research analyst in Tokyo.

"It seems they're OK with a zombie company for now because there's no better alternative."

($1 = 98.10 Japanese yen)

(Additional reporting by Umesh Desai in HONG KONG, and Taiga Uranaka and Taro Fuse in TOKYO; Editing by Aaron Sheldrick and Ian Geoghegan)

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