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Japan’s Utilities Lose $46 Billion as End of Era Nears

Japan’s atomic power industry lost a record $46 billion since the Fukushima tsunami and meltdown last year, wiping out seven years of profit. Then came the bad news.

The government is preparing to force regional monopolies to spin off transmission assets from generation, under a July 13 announcement that helped cut 1.3 trillion yen ($17 billion) in market value in three weeks at the nine utilities from Tohoku Electric Power Co. to Kansai Electric Power Co. (9503) The overhaul, designed to spur competition, is the industry’s biggest in post- war Japan.

Breaking the electricity model that powers the world’s second-biggest economy, an experiment tried with some success by nations including Germany and Spain, risks shareholder value. The utilities will lose guaranteed access to distribution grids just as they struggle to replace idled nuclear reactors, a scenario threatening dividend payments that were 46 percent above the average of Nikkei 225 Stock Average companies in the five fiscal years to 2010.

“The big assumption about the electricity business was the utilities were guaranteed to generate a certain level of dividends,” Takashi Aoki, a Tokyo-based fund manager at Mizuho Asset Management Co., said by phone. “It was expected that the utilities would resume dividends once reactors are restarted, but that prospect has dimmed.”

Chugoku Electric Power Co. (9504) was the only nuclear plant operator that provided a dividend payout forecast for this fiscal year in its latest earnings. Tokyo Electric, which lost reactors in meltdowns and was effectively nationalized on July 31, expects to pay no dividend and the others left their payout forecast “undecided.”

Average Yield

The average annual dividend yield of Japan’s nine nuclear power plant operators in the year ended March 31, 2011, was 2.62 percent, compared with 1.5 percent of the Nikkei 225 Average, according to data compiled by Bloomberg.

Kansai Electric has a 9.1 percent dividend yield at the current share price, should it pay its 30-yen semiannual dividend this year. Bloomberg’s dividend forecast says it may be maintained.

Shikoku Electric has declined 29 percent to Aug. 10 since July 13, the fourth-worst performer among 1,672 members of the Tokyo Stock Price Index, whose drop was led by Sharp Corp. Kansai Electric lost 26 percent. The benchmark dropped 0.1 percent over the period, with four utilities among the 10 worst performers.

Dividend Concern

“Long-term investors are walking out on utilities as the dividend payouts will not be maintained” if the government splits up generation and transmission, Hidetoshi Shioda, a Tokyo-based energy analyst at SMBC Nikko Securities Inc., said by phone.

The utilities have lost a combined 3.6 trillion yen since Fukushima, about equal to aggregate profit from the year ended March 31, 2004 to the year ended March 31, 2010, according to data compiled by Bloomberg.

The Japanese government is considering three options for the ratio that nuclear energy should provide by 2030 -- zero percent, 15 percent, or 20 percent to 25 percent. At hearings held by the government to gauge opinion on the Japanese long- term energy policy, about 70 percent supported the zero option, the Asahi newspaper reported.

National Policy Minister Motohisa Furukawa indicated today that the government may delay drafting the energy policy until after September. The Japanese government originally planned to outline it by the end of August.

Anti-Nuclear Rallies

Another concern for investors is months of anti-nuclear rallies, marches and street protests that have attracted tens of thousands of people in Tokyo. A regular Friday rally has besieged the residence of Prime Minister Yoshihiko Noda. Noda and his government have become a target after he approved the restart of two reactors closed for safety checks after the Fukushima disaster.

Kansai Electric, Japan’s second largest power company by generation capacity, fell 6 percent to 553 yen, the lowest at least since September 1974, on Aug. 1 on the Tokyo Stock Exchange. Similarly, shares of seven other regional utilities sank to the lowest levels in decades during the week to July 29.

Electric power generated about 86 percent of revenue last year for Kansai Electric, based in Osaka, though the business group lost money at the operating level, according to data compiled by Bloomberg.

Meti Enemy?

“The only way left for the utilities is to regain lost ground in the detailed design process” of the reform framework led by the Ministry of Economy, Trade and Industry, SMBC’s Shioda said. “Meti is not their enemy. Ministry officials wouldn’t draw up a policy to trample down the power industry.”

Japan should spin off power generation from transmission and distribution operations or form an independent operator to take over the networks, an advisory committee under the trade and industry ministry said July 13.

The panel also proposed abolishing the nation’s electricity pricing system, under which utilities may pass on to households the costs to supply power and a certain level of business returns, which is used to pay dividends and interest expenses.

All but two of Japan’s 50 reactors remain shut after the magnitude-9 temblor and ensuing tsunami crippled the Fukushima Dai-Ichi nuclear station, causing meltdowns and radiation leaks that left areas around the plant uninhabitable for decades. Kansai Electric restarted No. 3 reactor on July 1 and No. 4 unit on July 18 at its Ohi nuclear plant, northeast of Osaka, after the government’s approval.

Oil, Gas

With most reactors off line, utilities have increased their dependence on oil- and gas-fired units at thermal plants to meet electricity demand. Ten power companies, including Okinawa Electric Power Co., which doesn’t own a nuclear power plant, increased fuel-oil use 64 percent to 1.25 million kiloliters in July from a year earlier while consumption of crude oil and liquefied natural gas rose 59.5 percent and 5 percent respectively, according to data released today by the Federation of Electric Power Companies.

Another factor that drove down the power companies’ shares was rising concerns about the safety of nuclear power, said Shioda

Quake and tsunami experts at a July 17 hearing held by the government’s Nuclear and Industrial Safety Agency suggested fractured zones under sites of Kansai Electric’s Ohi plant and Hokuriku Electric Power Co. (9505)’s Shika station may be active fault lines. If an active fault is confirmed, the plant operators may be forced to decommission reactors that are standing on the zone.

To contact the reporter on this story: Tsuyoshi Inajima in Tokyo at tinajima@bloomberg.net

To contact the editor responsible for this story: Jason Rogers at jrogers73@bloomberg.net

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