Scenarios: Tokyo Electric struggles to meet nuclear costs

By Rie Ishiguro and Taro Fuse

TOKYO (Reuters) – Tokyo Electric Power, the company at the center the world’s worst nuclear disaster in 25 years, faces an uncertain future as it struggles to contain the accident and faces huge funding requirements.

Shares in the company commonly known as TEPCO have fallen by more than three-quarters and the cost of insuring its in debt against default has spiked as much as ten times its pre-quake level as it faces huge clean up and compensation bills even as income is cut by capacity constraints.

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

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

Below are steps it could take in coming months:


Likelihood: Most probable

Sumitomo Mitsui Financial Group, Tokyo Electric’s main creditor bank, and other lenders are in talks to provide some $25 billion in loans to the firm to shore up its finances and rebuild its power network.

The banks’ willingness to assist Tokyo Electric, which reflects their concerns about deteriorating confidence in its bonds held widely by financial firms, is likely to help the company stay afloat, one government source said.

Some in the government think the utility can stay afloat without government assistance because of its substantial cash flow and large revenue from power bills, the source said.

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.

However, some analysts say it may need to raise more cash as the costs of compensating businesses and households affected by leaking radiation and the expense of repairing crippled nuclear reactors looked set to soar.

Analysts are loathe to put any estimate on the level of compensation claims that TEPCO might face, because of the uncertainty about insurance and government coverage for such claims.

But the Nikkei newspaper has suggested it could total several trillion yen, dwarfing a 14.6 billion yen ($180 million) bill for about 7,000 cases from a 1999 accident at a nuclear fuel processing plant. That means TEPCO may need further help as it faces potentially huge, but unquantifiable, compensation bill.


Likelihood: Probable

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

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

The government would need to find ways to persuade the public to accept higher prices.


Likelihood: Possible

The government could inject public money into the utility to recapitalize 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 Tokyo Electric and help it pay for damages stemming from the nuclear accident.

Some in the government think that TEPCO needs to thoroughly restructure its operations before it receives public money, sources have said, suggesting the company may sell assets, such as a real estate business it has branched out into.


Likelihood: Possible

One government source told Reuters one plan being floated was to separate TEPCO’s nuclear business into a separate company and nationalize that.

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

What this means for TEPCO investors is not clear as much would depend on the price put on the nuclear assets and whether any debt would be transferred to the nuclear entity.


Likelihood: Unlikely

The government could shoulder part or all of the compensation claims on the company without nationalizing 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 pays up to 120 billion yen under an insurance contract.

If the claims become too big for the operator to manage, the government debates 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 such events as abnormally massive natural disasters and riots, in which case the government shoulders all the claims.

Chief Cabinet Secretary Yukio Edano said last week that he personally did not think this special measure would be used in view of the events leading up to the nuclear crisis and the social situation.

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.


Likelihood: Very unlikely

The government is unlikely to let TEPCO fail for fear of a tremendous impact on 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 near government bond safety status.

A TEPCO bankruptcy would have a much larger impact than the failure of Japan Airlines Corp (JAL), one of the nation’s two major carriers, which declared bankruptcy in January last year and has been rebuilding with the government’s help.

($1 = 82.480 Japanese Yen)

(Editing by Rodney Joyce and Lincoln Feast)

Scenarios: Tokyo Electric struggles to meet nuclear costs