Japan Takes Control of Tepco in 10-Year Profit Plan

Japan Takes Control of Tepco in 10-Year Plan to Revive Profit
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. Photographer: Tomohiro Ohsumi/Bloomberg

Japan took control of Tokyo Electric Power Co., owner of the stricken Fukushima nuclear plant, 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 get 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 said yesterday. “It will depend on how well Tepco carries out restructuring measures.”

Tepco rose 15 percent, the most since Jan. 10, to 211 yen at the midday break on the Tokyo Stock Exchange. The stock has plunged more than 90 percent since the day before last year’s earthquake.

Government Takeover

The government-backed compensation fund will acquire Tepco’s stock with voting rights in exchange for the capital injection after a shareholder meeting in June. It will also get convertible shares without voting rights to secure an option to increase its stake to more than two-thirds, it said.

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

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 power industry monopolized by regional utilities and possibly break up generation and transmission networks to allow 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 the meeting of shareholders in June, Tepco said.

The plan, drafted by Tepco and the liability fund, comes more than a year after an 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.

‘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.

Tepco will release its earnings and a list of new directors on May 14, Shimokobe said May 8.

The key 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.

The plan assumes the utility’s Kashiwazaki Kariwa nuclear plant, the world’s biggest, would be gradually restarted after April 2013. The restart of one Kashiwazaki Kariwa reactor will cut Tepco’s annual costs by about 78 billion yen, according to the business plan.

Nuclear Restart

“I approved the business plan to ensure payments for compensation and decommissioning reactors and stable electricity supply,” Edano said yesterday. The decision to allow the restart of the Kashiwazaki Kariwa plant is a “different matter,” said Edano, who oversees the power industry.

Tepco would need to revise the business plan if the plant is not restarted as planned, Shimokobe told reporters yesterday.

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.

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 will file the request to increase the rates by the end of this week to the government, Shimokobe said yesterday.

Blueprint in Time

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. It delayed a rate increase 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 in the next three years will be about 2.47 trillion yen a year even if reactors at the Kashiwazaki Kariwa plant restart, 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. 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.

Additional Loans

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.

The utility is in talks with banks and life insurers for loans and a commitment line totaling 1.07 trillion yen, three people with direct knowledge of the matter said in February. The financing would include a 500 billion yen term loan, a commitment line of 400 billion yen and a 170 billion yen portion to refinance an existing facility, the people said.

The approved plan includes 845.9 billion yen in extra aid to help Tepco pay compensation to those affected by the disaster. The utility requested the additional aid in March after it raised the estimate to 2.55 trillion yen. The total compensation costs may rise further, the plan said.

Compensation Payments

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

Tepco will select a supplier to build or replace thermal plants as part of cost-cutting measures, with the first auction expected by March next year, according to the plan. The utility will also sell or lease thermal plants, the plan said.

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.

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.

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

Before it's here, it's on the Bloomberg Terminal. LEARN MORE