Japan Takes Control of Tepco in 10-Year Profit Plan

Japan’s government took control of Tokyo Electric Power Co. (9501), the center of the Fukushima nuclear disaster, and agreed to provide 1 trillion yen ($12.5 billion) as part of the nation’s largest bailout since the rescue of the banking industry in the 1990s.

The government will obtain more than 50 percent of the voting rights in the utility known as Tepco under a 10-year plan approved yesterday by Trade and Industry Minister Yukio Edano. The government stake may rise to two-thirds if Tepco fails to meet goals that include cost cuts and compensation payments.

The announcement is the culmination of talks since June between Tepco and the government to help the utility return to profit. Tepco has been on government support since the March 11, 2011 quake and tsunami wrecked the Fukushima Dai-Ichi nuclear station, causing reactor meltdowns and forcing about 160,000 people to evacuate from towns around the plant.

Government control is unlikely to “end within six months, one year or two years,” Edano told reporters yesterday. “It will depend on how well Tepco carries out restructuring measures.”

The government isn’t ruling out lowering its voting rights to below 50 percent should Tepco fulfill the measures.

Under the plan, the utility aims for an unconsolidated profit of 106.7 billion yen in the year ending March 2014, based on an electricity rate increase and the restart of the Kashiwazaki Kariwa nuclear station. Nationalization of Tepco paves the way for the government to restructure the electricity industry monopolized by regional utilities and possibly break up power generation and transmission networks to allow more competition.

‘Liberalized Market’

“Tepco’s power plants and distribution network need to be separated into different units,” Tokyo Metropolitan Government Vice Governor Naoki Inose told reporters at the Foreign Correspondents’ Club of Japan yesterday. “The point is we need to build a liberalized market.”

The government has set aside 9 trillion yen as part of the bailout of Tepco and to pay compensation and cleanup costs related to radiation leaks from the Fukushima nuclear plant.

Corporate turnaround lawyer Kazuhiko Shimokobe, who leads the government-backed Nuclear Damage Liability Facilitation Fund, will replace Chairman Tsunehisa Katsumata, 72. Naomi Hirose, 59, will be promoted to take President Toshio Nishizawa’s job, the company said in a statement May 8.

Katsumata and Nishizawa will officially step down at a meeting of shareholders in June, Tepco said.

‘Sweeping Reform’

“Sweeping reform of the power industry requires tremendous political energy,” Norihiro Fujito, a senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities Co., said by phone before the release of the business plan. “Bureaucrats, particularly the trade and industry ministry officials, would only focus on avoiding the collapse of Tepco.”

Tepco’s unconsolidated net loss for the year ended March is expected to be 708 billion yen, according to the plan. Losses will narrow to 201.4 billion yen in the year ending March 2013, the plan said.

The keys to reviving profitability is getting government permission to restart a nuclear reactor and to raise power rates, Takashi Aoki, a Tokyo-based fund manager at Mizuho Asset Management Co., said before the release of the plan.

Last weekend, Japan shut its last operating reactor, leaving the country without atomic power for the first time in more than four decades. Japan’s nuclear reactors provided 30 percent of its electricity prior to March 11, 2011.

Electricity Rates

Tepco aims to increase electricity rates for households by 10.28 percent, according to the plan. Utilities need approval from the Ministry of Economy, Trade and Industry to raise electricity charges for households.

The utility plans to raise power tariffs for companies and other large users by an average of 17 percent from April, it said Jan. 17. The utility delayed the increase in rates for some corporate customers after failing to explain that they can reject the new rates if their contracts are still effective on April 1.

“Nobody thinks the rate hike both for households and companies would be achieved easily,” Fujito said. “The business plan provides a blueprint at a moment in time and the probability of achieving it is very low.”

The utilities powering Japan, the world’s third-biggest economy, have been forced to turn to coal, oil and gas-fired plants to keep factories, offices and households supplied with electricity.

Fuel Costs

Buying and importing those fuels is driving up costs and may lead to higher electric bills and a further drag on an economy that’s contracted in three of the past four years. Fuel costs in the next three years will be about 2.47 trillion yen a year even if reactors at the Kashiwazaki Kariwa plant are getting restarted after fiscal 2013, according to the plan.

In the Kansai region, which accounts for about a fifth of Japan’s economy, output from the main utility Kansai Electric Power Co. (9503) may be 14.9 percent short of peak demand without nuclear power this summer if the nation experiences a heat wave similar to the one in 2010, according to a government forecast on May 7.

Tepco plans to get 1 trillion yen of additional loans from banks and financial institutions, and aims to resume sales of corporate bonds in the latter half of this decade, according to the plan.

About 722.7 billion yen has been paid out in compensation claims, excluding preliminary payments, as of April 20.

The utility may face 8.6 trillion yen in funding shortages during the next decade if none of its nuclear reactors come back online and electricity rates are not increased, a government panel estimated in October.

Cost Cuts

To gain support from the government and the public, Tepco plans to cut 3.4 trillion yen in costs over 10 years, up from the earlier target of 2.6 trillion yen in an initial business plan announced in November.

The plan, drafted by Tepco and the liability fund, comes more than a year after the March 11, 2011, earthquake and tsunami engulfed Japan’s northeast coast, leaving more than 19,000 dead or missing. The failure of backup power at the Fukushima Dai-Ichi plant caused the worst atomic accident since Chernobyl in 1986.

Right now, “the business plan is nothing but pie in the sky,” Mitsubishi UFJ Morgan Stanley’s Fujito said.

To contact the reporters on this story: Tsuyoshi Inajima in Tokyo at tinajima@bloomberg.net; Yuji Okada in Tokyo at yokada6@bloomberg.net

To contact the editor responsible for this story: Teo Chian Wei at cwteo@bloomberg.net

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Photographer: Tomohiro Ohsumi/Bloomberg

The Tokyo Electric Power Co. (Tepco) headquarters, center, stands at night in Tokyo. The government will obtain more than 50 percent of the voting rights in the utility known as Tepco under a 10-year plan approved yesterday by Trade and Industry Minister Yukio Edano.

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Photographer: Tomohiro Ohsumi/Bloomberg

The Tokyo Electric Power Co. (Tepco) headquarters, center, stands at night in Tokyo. The government will obtain more than 50 percent of the voting rights in the utility known as Tepco under a 10-year plan approved yesterday by Trade and Industry Minister Yukio Edano. Close

The Tokyo Electric Power Co. (Tepco) headquarters, center, stands at night in Tokyo. The government will obtain more... Read More

Photographer: Koichi Kamoshida/Bloomberg

Corporate turnaround lawyer Kazuhiko Shimokobe, center, who leads the government-backed Nuclear Damage Liability Facilitation Fund, will replace Chairman Tsunehisa Katsumata , 72. Close

Corporate turnaround lawyer Kazuhiko Shimokobe, center, who leads the government-backed Nuclear Damage Liability... Read More

Photographer: Koichi Kamoshida/Bloomberg

Naomi Hirose, seen here, will be promoted to take President Toshio Nishizawa’s job, the company said in a statement May 8. Close

Naomi Hirose, seen here, will be promoted to take President Toshio Nishizawa’s job, the company said in a statement May 8.

Photographer: Issei Kato/Pool via Bloomberg

The destroyed top of the No.3 reactor building at Tokyo Electric Power Co.'s (Tepco) Fukushima Dai-Ichi nuclear power plant is seen in Fukushima, Japan, on Monday, Feb. 20, 2012. Close

The destroyed top of the No.3 reactor building at Tokyo Electric Power Co.'s (Tepco) Fukushima Dai-Ichi nuclear power... Read More

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