Bloomberg News

Tepco Faces Post-Fukushima Future Dictated by Bureaucrats

March 25, 2012

The crippled Tokyo Electric Power Co. (Tepco) Fukushima Dai-Ichi nuclear power station is seen through a bus window in Okuma Town, Fukushima Prefecture, Japan. Photographer: David Guttenfelder/Pool via Bloomberg

The crippled Tokyo Electric Power Co. (Tepco) Fukushima Dai-Ichi nuclear power station is seen through a bus window in Okuma Town, Fukushima Prefecture, Japan. Photographer: David Guttenfelder/Pool via Bloomberg

Tokyo Electric Power Co. (9501), facing a $20-billion-and-counting compensation bill for the Fukushima disaster, has a week to produce a business plan that includes a request for government aid and will lead to nationalization of what was once the world’s biggest private power producer.

Since the reactor meltdowns at Tokyo Electric’s Fukushima plant last year, Chairman Tsunehisa Katsumata has watched $37.5 billion in market value evaporate. He sits atop a business that once proudly powered Japan’s postwar recovery, only to see it now surviving on government handouts and its last operating reactor goes offline today.

Nationalizing the utility, known as Tepco, may portend a breakup of Japan’s 10 regional power monopolies that ring up combined sales of 15.7 trillion yen ($190 billion) a year to produce, transmit and distribute electricity, according to data compiled by Bloomberg. Breaking off Tepco’s transmission business from power generation would end its monopoly in Tokyo and may provide a model for the rest of the country, said Penn Bowers, who tracks utilities at CLSA Asia-Pacific Markets.

Tepco’s Katsumata, who turns 72 this week and may step down, has been publicly snubbed by Trade and Industry Minister Yukio Edano. The 47-year-old former patent lawyer turned politician controls the funds Tepco needs to stay solvent and has stated the government wants a stake and a “sufficient” say in running the utility in exchange for a cash injection of almost 1 trillion yen.

Money Rules

“The government has the dominant bargaining position because Tepco needs money,” Tomohiro Jikihara, a Tokyo-based electricity and gas utility analyst at JPMorgan Chase & Co. (JPM), said in a phone interview.

Bailout funds for Tepco will be funneled through the government’s Nuclear Damage Liability Facilitation Fund. The fund was set up after the Fukushima disaster with a mandate to manage compensation payments for the 160,000 people displaced by radiation fallout and others affected. It’s also charged with releasing funds to ensure stable power supplies.

The fund already has moved into Tepco’s headquarters in Uchisaiwaicho in central Tokyo and taken an office on the seventh floor. It has seven working groups in the building each day poring over Tepco’s operations, checking the books, finance management, cost cutting and monitoring compensation payments, according to two people familiar with the operations. Part of its task is to draw up the road map to rebuild Tepco.

Attractive Tepco?

“You want to create something that people in the credit and equity markets are willing to fund in the long term,” CLSA’s Bowers said in a telephone interview. “The government is more interested in making Tepco profitable than anyone else.”

The utility has “basically” accepted a plan under which the government acquires about half of voting rights and raises it to more than two-thirds if Tepco fails to make progress in restructuring, the Yomiuri newspaper reported March 14, without saying where it got the information.

Under such an arrangement, Tepco’s existing shareholders will be swamped by the government stake and their holdings could be diluted by as much as sevenfold, Hiroyuki Sakaida, a Tokyo- based analyst at Goldman Sachs Group Inc., wrote in a March 15 report.

Tepco shares fell 1.4 percent to 212 yen as of 11:02 a.m. on the Tokyo Stock Exchange. The stock has plunged 90 percent since the day before the March 11 quake and tsunami caused the disaster.

Shareholder Dilution

“The new issue price would need to be low enough to avoid erosion of the public funds used for a capital injection,” Sakaida said. The market consensus expecting a dilution rate of as much as four times is “optimistic,” Sakaida wrote.

In a report on March 22, the Yomiuri said Tepco’s business recovery plan includes hiring most directors, including the chairman, from outside the utility, as well as renovating or selling aging oil and gas power plants. It will also establish in-house corporations to export power-generating technology. The paper didn’t say who provided the information.

Tepco and the nuclear damage fund aim to have the business rehabilitation plan approved by March 31, the end of Japan’s fiscal year, as they are concerned a delay will cause further downgrades in Tepco’s long-term credit rating from B+, two people familiar with the negotiations said.

Two issues that could cause delay are thrashing out what voting rights the government gets and finding a replacement for Katsumata, because candidates approached so far have all refused, the people said.

Rating Risk

On March 22, Standard & Poor’s Ratings Services reiterated it is keeping Tepco on the creditwatch it announced on Feb. 20 with the same revised implications to negative from developing.

“The change in the implications to negative from developing reflects our opinion that the potential to upgrade Tepco has diminished because we expect the company to post huge operating and net losses in fiscal 2012,” Hiroki Shibata, a Tokyo-based credit analyst for S&P covering power producers, said in the latest report.

“We could lower the ratings on Tepco if government approval of a restructuring plan is significantly delayed beyond the due date of March 31,” the rating company said in the Feb. 20 report. S&P plans to review the rating after the government approves the business plan, it said.

S&P has downgraded Tepco’s long-term credit rating by 10 notches from AA- to B+ since the March 11 earthquake and tsunami crippled the Fukushima plant.

On a Tightrope

Tepco will revise its estimates for compensation payments based on updated guidelines from the Ministry of Education, Culture, Sports, Science and Technology. The utility raised the estimate for compensation payments to 1.7 trillion yen from 1 trillion yen in December.

It may request as much as 900 billion yen in additional funds for compensation based on the updated guidelines, the Asahi newspaper reported March 21.

Residents who can’t return home for more than five years because of high radiation levels may receive as much as 6 million yen each under the new guidelines, the Nikkei newspaper reported. Compensation for about 20,000 people who lived in the highly contaminated zone would total about 120 billion yen, the Nikkei said.

While Tepco will get government aid to compensate victims of radiation fallout, it’s still threatened by insolvency from having to shoulder the cost of dismantling and decommissioning the Dai-Ichi reactors, said Jikihara at JP Morgan.

“Tepco is walking a tightrope,” he said.

To contact the reporter on this story: Tsuyoshi Inajima in Tokyo at tinajima@bloomberg.net

To contact the editor responsible for this story: Andrew Hobbs at ahobbs4@bloomberg.net


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