Tepco Wins Approval for Post-Disaster Plan to Rebuild

Jan 21, 2014 5:02 am ET

(Corrects date of NHK’s poll in 18th paragraph of story published on Jan. 16)

Jan. 16 (Bloomberg) -- Tokyo Electric Power Co. won the support of the government and banks for a plan to rebuild its business, the latest step in the recovery from the nuclear disaster three years ago that almost destroyed the company.

The agreement between the utility, now under government control, and its biggest lenders includes more than 1 trillion yen ($9.6 billion) in cost cuts. The plan hinges on the restart of two reactors at the Kashiwazaki-Kariwa nuclear plant, the world’s biggest, as early as July. Most of the public oppose restarting Japan’s 48 reactors, which are all offline for safety checks.

Hirohiko Izumida, governor of the prefecture where the Kashiwazaki-Kariwa plant is located, suggested it’s too early to discuss reactor restarts, broadcaster NHK reported. Naomi Hirose, president of the utility known as Tepco, said he will meet with Izumida today.

“As an electricity utility, we’d like to have nuclear power as an option to sustain a stable power supply,” Hirose told reporters in Tokyo yesterday. “If the Kashiwazaki-Kariwa plant restarts, the company will be able to generate electricity from sources that will allow us to cut rates.”

Nuclear plants produced more than 25 percent of Japan’s electricity before the disaster, leaving it to rely on oil, coal and gas-fired plants to make up the difference. The cost of importing those fuels has driven the country into a trade deficit for 17 straight months while the current-account shortfall widened to a record in November.

Idle Plants

Tepco burned twice as much coal for power generation in 2013 than it did in 2012, according to calculations based on data from the company’s website.

The company’s shares were up 1.6 percent at 505 yen as of 12:02 p.m. in Tokyo trading, having earlier risen as much as 4.4 percent.

“If the plant remains idled, losses will incur, and the public won’t agree on increases in electricity charges when the utility tries to cover losses,” said Mana Nakazora, the chief credit analyst in Tokyo at BNP Paribas SA. “The company faces a risk that its plan won’t work if resumption of the Kashiwazaki- Kariwa plant is delayed.”

Other items in the turnaround plan announced by the company yesterday evening in Tokyo include slashing fuel costs by 650 billion yen a year and setting up a joint venture with other utilities to purchase as much as 40 million metric tons of liquefied natural gas annually.

Shed Jobs

The utility will cut 2,000 jobs as part of its cost reductions and will shift to a holding company structure by 2016. As of Nov. 18 last year, Tepco had more than 37,000 employees, according to its website.

Its consolidated operating profit target in the year ending March is 134 billion yen, compared with analyst estimates of 112.2 billion yen. Sales for the same period are forecast at 6.62 trillion yen compared with 6.5 trillion yen estimated by analysts.

The state-run Nuclear Damage Liability Facilitation Fund that controls Tepco may reduce voting rights to less than 50 percent following a review at the close of the fiscal year ending March 2017. Tepco’s spend for the next 10 years will include more than 1 trillion yen on safety at the Kashiwazaki and Fukushima plants, and 750 billion yen for strategic investments.

The company delivered the business targets in a 92-page report given to reporters at a briefing in Tokyo.

Abe’s Public

Prime Minister Shinzo Abe has backed away from the previous government’s plan to end the country’s use of atomic power, saying some reactors will be needed to provide lower cost power to keep the economy growing. That puts him in disagreement with polls showing a majority oppose restarts.

It also puts him at odds with several predecessors across political parties who held the prime minister’s job.

Abe’s mentor from the Liberal Democratic Party and former Prime Minister Junichiro Koizumi has said Japan should end use of nuclear power. Naoto Kan, who held the top job representing the Democratic Party of Japan at the time of the 2011 Fukushima disaster, has said the same.

Koizumi has also backed another anti-nuclear former prime minister, Morihiro Hosokawa, who is running for Tokyo governor, according to Kyodo News. The Feb. 9 election will be a mandate on nuclear power, Koizumi said, according to Kyodo.

Responsibilities

A poll released yesterday by national broadcaster NHK showed 42 percent oppose nuclear power, 21 percent support, and 33 percent are undecided. NHK said it surveyed 1,066 people with a 66 percent response rate for three days from Jan. 11. No margin of error was given.

An earthquake and tsunami in March 2011 caused the meltdown of three reactors at Tepco’s Fukushima Dai-Ichi atomic plant, the worst civilian atomic disaster since Chernobyl in 1986. About 160,000 people were forced to evacuate because of radiation fallout, handing the utility billions of dollars in compensation and cleanup costs.

The responsibility for those costs is made clear in the business strategy based on a plan from the Nuclear Emergency Response Headquarters, which makes the government responsible for decontamination costs, while Tepco will handle compensation claims. That gives clarity to potential investors, Nomura Holdings Inc. said on Dec. 17.

Junk

Tepco last month secured 300 billion yen in new loans and 200 billion yen to refinance existing debt from its creditors, spokesman Yusuke Kunikage said today by phone. The company’s turnaround plan assumes 2 trillion yen in new loans to fund reorganization and growth over the long term, without giving a specific time frame.

The utility has junk credit ratings from Moody’s Investors Service and Standard & Poor’s. It had total debt of 7.7 trillion yen as of Sept. 30, 2013, according to earnings data.

S&P said in a Sept. 6 statement that its ratings outlook on Tepco was negative despite a 1 trillion yen capital infusion from the government in 2012 and the company’s success that year in raising electricity rates 8.46 percent for regulated household customers and an average of 17 percent for industrial and commercial customers.

“The company’s business situation remains difficult because it continues to incur heavy fuel costs to replace lost nuclear power generation,” S&P said. “We believe Tepco faces a tough task to stabilize its profitability without restarting some of its Kashiwazaki-Kariwa nuclear reactors.”

The utility has the equivalent of 4.1 trillion yen in bonds outstanding, including 667 billion yen in securities maturing this year, according to data compiled by Bloomberg.

Tepco Debt

Tepco last sold bonds publicly in September 2010 in a 30 billion yen offering paying an interest rate of 1.155 percent. The bonds, maturing in 2020, traded at 85 yen of their 100 yen face value yesterday. The yield premium investors demand to hold the notes has risen to 334 basis points over government debt from 7 at the time of sale.

The restart of one reactor at the Kashiwazaki-Kariwa plant would have cut Tepco’s annual costs by about 78 billion yen, according to the previous version of the company’s turnaround plan, which was approved by the government in May 2012. The state-run Nuclear Damage Liability Facilitation Fund then took control of the utility, which was on the brink of insolvency.

The new version of the turnaround plan announced yesterday was necessary because Tepco was unable to win approval to restart the Kashiwazaki-Kariwa reactors in April 2013 as intended. Tepco applied to the Nuclear Regulation Authority in September for safety checks on the reactors. The regulator has declined to say when those checks will be completed.

--With assistance from Tsuyoshi Inajima, Emi Urabe and Pavel Alpeyev in Tokyo. Editors: Iain Wilson, Jason Rogers