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

Reuters

By Mari Saito

TOKYO, Oct 7 (Reuters) - Its stock price has nearly trebledthis year, its near-term debt trades at par, banks have extendedcredit, and an enterprise value of $83 billion - a rough guideto how much it could cost to buy - makes it Asia's biggestlisted electricity utility.

Yet Tokyo Electric Power, or Tepco, has lost $27billion since the 2011 disaster at its Fukushima Daiichi nuclearplant, and faces massive liabilities as it decommissions thefacility, compensates tens of thousands of residents forced toevacuate, and pays for decontamination of an area nearly thesize of Connecticut.

Creditors, led by Japan's top banks, have agreed to provideTepco with $5.9 billion - rolling over existing loans andputting in new financing - and the company hasapplied to restart its 7-reactor Kashiwazaki Kariwa facility,the world's biggest nuclear plant, saying a restart would saveit $1 billion a month in fuel costs.

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

"It's all kabuki," said Tom O'Sullivan, founder ofindependent energy consultancy Mathyos Japan, using a Japaneseterm to portray political posturing. "Tepco still facessignificant problems."

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

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

"The timing of the Kashiwazaki Kariwa restart is unclear, soeven if we are not able to restart it in fiscal 2013, we willtake all possible measures, including emergency financialmeasures, 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 stocksafter 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 ofirradiated water held at the Fukushima plant.

The company's debts are almost five times its equity - aratio more than double that of Chubu Electric Power,which services an area near Tokyo that is home to manufacturersincluding Toyota Motor Corp.

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

"The biggest challenge in the Tepco situation is that thetotal liabilities are unknown," said CV Ramachandran, HongKong-based head of Asia business for restructuring specialistAlixPartners. "Estimates vary widely and the latest waterleakage issues are likely to further increase liabilities."

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

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

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

Makoto Kikuchi, CEO of Myojo Asset Management, said Tepcoshares are too risky for institutions, and are only traded byspeculators and hedge funds. "From a fundamental or balancesheet standpoint, there's absolutely no reason to buy Tepcoshares."

ASSET MARKDOWN

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

After touring Fukushima last month, Prime Minister ShinzoAbe told Tepco President Naomi Hirose to scrap two undamagedreactors on the site and allocate another $10 billion to theclean-up, on top of $10 billion already put aside. Hirose saidhe would decide on the reactors by the year-end - by which timenew accounting rules will be in place.

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

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

Tepco books the Daiichi No.5 and No.6 reactors and all fourDaini reactors - none of which have generated any power since2011 - among nuclear-related fixed assets worth 745.5 billionyen. The utility does not give a detailed breakdown of itsnuclear assets, but the ministry estimates Daini's book value at122 billion yen, while the two undamaged Daiichi reactors arereckoned to be worth 200 billion yen.

The head of the Nuclear Regulation Authority has warnedTepco may face a tougher assessment for its Kashiwazaki Kariwarestart given its patchy safety record at Fukushima. Theregulator 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 2million yen six months after the disaster - offering some reliefto debt investors holding over 4 trillion yen of Tepco bonds.

That confidence is reflected in Tepco's near-term bondprices, with bonds due in December, and all thosematuring in 2014, trading around par, implying investors believethey will be repaid their principal in full. But longer-datedTepco bonds still show a significant discount to their facevalue, with 2040 bonds trading at 70 cents on thedollar, up from around 50 cents two years ago.

"There's no legal background to any government support so wehave to say there is some (default) risk," said a Tokyo-basedcredit analyst with a European bank, who didn't want to be namedas she is not authorised to speak to the media. "People arestill not so comfortable on the credit. The financialperformance and balance sheet are not very strong."

COST-CUTTING

To free up money to respond to the immediate contaminationand clean-up problems, Tepco is to strip out another 1 trillionyen from its costs over the next decade - on top of more than3.4 trillion yen in cuts it promised earlier by fiscal 2021.

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

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

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

"They are having an incredibly difficult time retainingstaff, especially those in the planning division at headquarterswho are in charge of mapping out the accident response atFukushima," said a Tokyo-based analyst, who didn't want to benamed as he is not authorised to speak to the media. "Many ofits best employees are headhunted by other utilities."

"ZOMBIE" COMPANY

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

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

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

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

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