April 13, 2011 / 9:32 AM / in 7 years

SCENARIOS-Tokyo Electric struggles to meet swelling nuclear costs

(Updates item that first ran on March 30)

By Rie Ishiguro and Taro Fuse

TOKYO, April 13 (Reuters) - Tokyo Electric Power , the company at the centre of the world’s worst nuclear disaster in 25 years, faces huge funding requirements as it struggles to contain the accident, keeping markets guessing on the fate of the firm, its stock and its corporate bonds.

Shares of Tokyo Electric, commonly known as TEPCO, have lost about three-fourths of their value since the March 11 earthquake and tsunami tore through the Fukushima Daiichi nuclear complex, causing it to leak radiation.

Analysts say shareholders would at best suffer a severe cut in the value of their holdings, or could be entirely wiped out, if TEPCO is nationalised, as has been mooted by some in the government.

As of March last year, the company had consolidated assets of 13.2 trillion yen ($158 billion) and net assets of 2.5 trillion yen, according to its financial statements.

Below are steps it could take in coming months:

FINANCIAL FIRMS KEEP ASSISTING

Likelihood: Likely

TEPCO secured 2 trillion yen in loans from lenders led by Sumitomo Mitsui Financial Group last month and some in the government hoped this would help keep the company afloat.

But its chairman, Tsunehisa Katsumata, has warned that this amount is not enough given fuel and other costs. [ID:nL3E7EU01N]

Costs of compensating businesses and households affected by leaking radiation could also be massive. JP Morgan estimates 2 trillion yen in related special losses in the year to March 2012, while Bank of America-Merrill Lynch estimates 11 trillion yen if the crisis drags on. [ID:nL3E7FB3NH] [ID:nL3E7EV039]

The company’s liabilities could easily exceed assets when it decommissions the four damaged nuclear reactors at the crippled Fukushima Daiichi plant. Analysts and government sources say the cost to decommission the reactors could run at least one trillion yen per unit.

In addition, the company needs to redeem bonds worth 549 billion yen in fiscal 2011/12.

The utility, which provides power to about one-third of the Japanese population, had 432 billion yen in cash and equivalents at the end of December, according to its financial statements.

TEPCO and the government are working out a plan to cap the plant operator’s liabilities at as little as 2 trillion yen for damages stemming from the crippled nuclear plant, the Yomiuri newspaper reported. [ID:nL3E7FD01V]

TEMPORARY STATE CONTROL

Likelihood: Possible

The government could inject public money into the utility to recapitalise it if liabilities balloon to an amount exceeding assets.

The Yomiuri newspaper has reported that some members of the government had proposed a plan for the state to take a majority stake in TEPCO and help it pay for damages stemming from the nuclear accident.

If history is any guide, nationalisation cases in the recent past had varying impacts on investors with the worst case being Japan Airlines Corp (JAL), one of the nation’s two major carriers, which declared bankruptcy in January last year.

While JAL’s equity was completely wiped out, it was exempted from redeeming 87.5 percent of its corporate bonds.

But the government could preemptively inject public money into TEPCO as it did with Resona Bank in a 2003 bailout, in which case no damage would be done to shares and corporate bonds, although it could anger ordinary taxpayers.

NATIONALISATION OF TEPCO‘S NUCLEAR BUSINESS ONLY

Likelihood: Possible

One government source has told Reuters a plan being floated was to spin off TEPCO’s nuclear business into a separate company and nationalise that.

“The possibility is small that TEPCO continues on in its current state,” said the source, who was not authorised to speak publicly on the matter.

This could help TEPCO avoid delisting and repay its debts if the nuclear business to be spinned off takes on the costs of paying compensation claims and fixing or decommissioning the damaged reactors.

Partial nationalisation also could prove less costly for the government than full nationalisation.

“Given the high risks and the need to take heavy safety steps, there are emerging views that the nuclear business should not be handled by the private sector,” said another source.

Before the disaster, the government’s position was to let private companies handle nuclear power generation under strict regulation.

GOVERNMENT BAIL-OUT, NO NATIONALISATION

Likelihood: LESS LIKELY

The government could shoulder part or all of the compensation claims on the company without nationalising it, based on a law on nuclear power station damages enacted in 1961.

The law holds the nuclear power operator accountable for paying claims, but the government would pay up to 120 billion yen under an insurance contract.

If the claims become too big for the operator to manage, the government would debate further assistance in parliament, such as extending low-interest loans or paying interest on borrowings from financial institutions on the operator’s behalf or in the worst case, providing money.

The law also spells out an exceptional rule for events such as abnormally large natural disasters and riots, in which case the government shoulders all claims.

The government is likely to propose new legislation particularly for compensation claims made to TEPCO as the existing law does not draw a clear line between the costs the government and plant operators should shoulder, a different government source said.

The law on nuclear damages has been applied only once, in 1999, following an accident at the Tokai nuclear fuel plant operated by JCO Co., a subsidiary of Sumitomo Metal Mining Co. , though no government assistance was involved.

CUSTOMERS HELP FOOT BILL VIA PRICE HIKES

Likelihood: Probable

Tokyo Electric will need more money to procure fuel and to repair its thermal power generation facilities towards the season of peak demand in the summer and it could in theory make use of a formula that reflects increased costs in electricity bills.

But this is likely to further anger the public, already critical of Tokyo Electric’s preparedness and handling of the disaster.

GOVT LETS TEPCO FAIL

Likelihood: Very unlikely

The government is unlikely to let TEPCO fail for fear of the tremendous impact this would have on the lives of Japanese people and the economy.

TEPCO provides power to about one-third of the population and serves the capital, a role that would not easily be substituted by other utilities, while bonds it issues are held widely by financial institutions and individual investors because of their previous near-government-bond safe-haven status. ($1 = 83.625 Japanese Yen) (Editing by Chris Gallagher)

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