9501 - Tokyo Electric Power Co. (TEPCO)

[mloub]

So, I realize there has been a lot of talk about undervalued Japanese securities, but it occurs to me that there is one out there that is sort of the elephant in the room: TEPCO.

 

TEPCO has a monopoly to supply electricity to the Metropolitan Tokyo area (which accounts for 33% of Japan's Electricity consumption) and is the type of business we'd all love to own (stable earnings, huge moat, etc) under normal circumstances.

 

That being said, TEPCO has had a long history of shoddy management (previous management faked safety reports at nuclear plants) and has nuclear plants that are situated on some of the world's most dangerous sites. For those who may not know, this is the second time TEPCO has had issues with earthquakes knocking out their nuclear reactors; the first being the 2007 Niigata-Chuetsu-Oki Earthquake which hit their Kashiwazaki-Kariwa Nuclear Power Station and shut it down for 2 and a half years. And of course, now we have the Fukushima-Daichi situation, which is far more serious.

 

So is it possible to value TEPCO with so much uncertainty still swirling around?

 

Well, the assets have earned an average net income of Y200b over the past 10 years, and thrown off FCF of about Y400b over that time as well. TEPCO has tended to trade at PE multiple of 15, which strikes me as reasonable for a stable low growth business like this, and would give us a value of Y3,000b on a good day.

 

Now of course from this value we would have to subtract TEPCO's liability for the Fukushima-Daichi disaster and make sure that the company is also liquid enough to cover any losses.

 

This is where the thesis gets a bit murky. There is a real possibility that TEPCO will be nationalized and the Common would be wiped out. The Japanese Government could sort of usher TEPCO into bankruptcy and then take over the equity in return for backstopping the liabilities. This is the largest risk in my mind, and if the political environment became toxic enough, this may well happen.

 

That being said, nationalization would be no picnic for the Japanese government who would have to carefully consider how to get their pound of flesh from TEPCO. TEPCO's largest shareholders are individual Japanese investors, and large chunks of it are owned by the Tokyo Metropolitan authority, a large Japanese pension fund, and some of the premier Japanese financial institutions. Nationalization may be a case of cutting off your nose to spite your face. With that in mind, the Japanese government may well decide to make an example of TEPCO management, but leave the company more or less as it is.

 

In theory, the Japanese government could have an out in the form of a 1962 Act on compensation for nuclear damages that indemnifies Nuclear operators from liability if the damage caused by the reactor was due to “a grave natural disaster of an exceptional character or by an insurrection”.

 

And finally, if the liability were to be in the Y500bn to Y1,000bn ball park, there is every chance that TEPCO would be able to cover it, especially if it were spread out over many years, as it almost certainly will be. During that time, TEPCO will have to rely on more expensive thermal power, but ultimately, as contracts reset, this cost will passed on to the end consumer as it was with the Kashiwazaki-Kariwa Nuclear Power shut down.

 

That leaves us with a chance of a zero (let's call it 10%) and a chance that TEPCO's value is Y2,000bn (Y3,000b less Y1,000b in liabilities), or a probabilistic value of Y1,800b. (At current prices, TEPCO's market cap is Y780b, which I think overstates the risk of nationalization).

 

Admittedly, this should not be a keystone holding, but in my opinion would be a neat little special situation.

 

What do you guys think?

 

m.

[Myth465]

 

What do you guys think?

 

m.

 

Similar to BP I think its a bad bet. If there should be any loser here, its got to be them. I would rather just buy Uranium, or beat up Nuclear in the US.

 

This is the bathwater. I look for the baby.

 

 

What do I know - Given the BP situation you will likely make money.

[Ballinvarosig Investors]

Have you looked at the annual report? For me, this is one to avoid. Tepco have a debt-load of $80 billion (7 times ebitda), most of which is financed at ultra-low rates (interest rate cover is 1.9% per annum). The scary thing about the debt is that most of it is very short-term, and will have to be re-financed over the next few years. From what I can see, the only way that this won't go to zero, is if the Japanese government can give them a sweetheart financing deal.

[BargainValueHunter]

The liabilities for this particular company seem to be infinite.

 

If you can make money investing anywhere in the TEPCO credit structure then God bless you.

[mloub]

Ballinvarosig, I didn't think their debt repayment structure was especially honorous.

 

From the annual report the debt repayments are -

2011 - Y420B

2012 - Y570B

2013 - Y750B

2014 - Y600B

Total - Y2,340B

 

Remember they just secured Y2,000b in financing at attractive rates from major Japanese banks, which gives one a sense of comfort they have not been shut out of the credit markets.

 

BargainValueHunter, why do you say that their liabilities are infinite? Let's recount what has actually happened. A 20Km exclusion zone has been declared - those people will surely need to be compensated (thankfully the exclusion zone is in one of Japan's least populated areas). Some farmers nearby have destroyed their crop, also would be compensated. Manufacturers farther a field have had to reduce their production because of electricity shortages - something that TEPCO is unlikely to be held liable for. After all, they didn't just lose production from Fukushima Daichi, but also from 20% of their generating capacity because of the Tsunami, a force majeur if I ever saw one. 

 

High levels of radiation have been detected in some of the reactors and at sea near the plants. All of the expert opinions, I have read suggests that the contamination at sea with the I131 would not harm marine life, and that it has a half life of 8 days (i.e. it is quickly dissipated).

 

There has been no widespread release of radiation in populated areas to this point, which were it ever to happen would be the death of TEPCO. So as I see it, at the moment things are bad, but perhaps not cataclysmic.

 

That being said, I have looked at TEPCO's entire capital structure and personally find the common more interesting. The Debt which on average trades 0.8% above benchmark government debt just doesn't have enough of a margin of safety.

 

The common on the other hand would work out even with a major (let's say 51%) dilution. Although if TEPCO can pay for its claims using FCF things would work out fantastically.

 

Like I said, not a keystone holding, but I would say with the risk/reward balance a reasonable special situation.

 

m.

[Parsad]

I would not touch it with a 1000-foot aluminum foil covered pole!  Cheers!

 

http://www.bloomberg.com/news/2011-03-30/tokyo-electric-investors-may-be-wiped-out-after-nuclear-radiation-crisis.html

[mloub]

Perhaps it is the perma-contrarian in me (a trait that I will admit has been self-harming at times), but I still do not see the doomsday scenario here.

 

Sanjeev, the Merrill Analyst mentioned in the article predicted 1 trillion Yen in liabilities if the crisis is resolved within two months (by which I presume he means the threat of meltdown is averted and people are free to move back into their homes). With 400B of FCF TEPCO could easily cover that.

 

Ofcourse if it takes them years to resolve this, and the 20km zone is rendered permanently uninhabitable, they are sunk.

 

There is a big difference between Chernobyl and Fukushima in my mind, mainly that in Chernobyl large quantities of radioactive material were dispersed into the atmosphere, whereas in Fukushima small amounts were vented off, and particles from the partially melted fuel rods contaminated the reactor water. Don't get me wrong it is a huge mess, but one that is far more localized and easier to clean up.

 

Like I said before there are definitely some unknowns. But if Mr. Market is willing to offer me a Utility in one of the largest Energy markets in the World at a PE of 3, I want someone to definitely prove to me that there is serious and widespread radioactive fall-out before I decide to pass.

 

M.

 

[Myth465]

Perhaps it is the perma-contrarian in me (a trait that I will admit has been self-harming at times), but I still do not see the doomsday scenario here.

 

Ya you seem pretty wedded to the idea. Thats what makes a market. It may not go to zero but why would you want to focus on this crap when there are probably significantly more than 20,0000 securities world wide and 97.334% of them arent tied to a pending possible nuclear meltdown?

 

 

Warren Buffett - "The important qualities you need are intelligence, patience, and interest, but the biggest thing is to be rational. In 97-98, people weren’t rational. People got caught up with what other people were doing. Don’t get caught up with what other people are doing. Being a contrarian isn’t the key, but being a crowd follower isn’t either. You need to detach yourself emotionally. You need to think about what is going on around you."

 

Is it rationale to buy a company exposed to nuclear meltdown regardless of the legalize predicted by analysts and lawyers? Or is there simple better low hanging fruit.

 

This reminds me of a greenblatt quote though the whole quote doesnt fit. This is like running through a dynamite factory with a burning match. There are no points for style and I am a bit slow. I stick to low hanging fruit.

 

----

 

This recks of CCME. Prove to me why it sucks. Thats not how this game works. Prove to my why this is worth my time. I can find a PE at 3 without nuclear risks or pending meltdown talk. Prove to my why this is better than ATSG, FFH, or a host of other securities.

 

Thats how the game works for me. I dont go digging through the trash pile asking why this or that doesnt suck.

 

If this doesnt go in the too hard pile then what does? Plenty of ways to make money, and you likely will, call me lazy though - I prefer the easy ones. I see no salad oil here, just doom and gloom. You are hoping for the best and exposing yourself to the worse.

 

Thats my 2 cents, significantly overvalued as always.

[Uccmal]

Yeah, its definitely in the too hard pile. 

 

The liability is absolutely unlimited.

 

The company will probably survive but is it worth the heartache getting there.  Sometimes I think that we (value investors) try to find the most esoteric things to invest in just because. 

[netnet]

This reminds me of a greenblatt quote though the whole quote doesnt fit. This is like running through a dynamite factory with a burning match. There are no points for style and I am a bit slow. I stick to low hanging fruit.

 

You don't get points for difficulty either.  (Although as WEB and Munger have both noted, one does feel proud of oneself for doing the work, but the market doesn't care or your returns don't reflect your hard work!)

[mloub]

Your points about this being in the too hard pile are all well taken.

 

Certainly everyone  who has said so is far smarter than I am judging by your previous posts, so I take the comments seriously.

 

In that vein, this recent announcement may be of interest:

 

http://www.reuters.com/article/2011/03/31/japan-tepco-idUSL3E7EV45U20110331

 

Japanese government officials have revealed that they are taking an up to 50% stake in TEPCO but are trying to avoid a majority ownership position. This may of course change, and as with AIG, they could always need to inject more money and increase their stake.

 

Things are playing out, and I suspect even when the liabilities start to firm up, lets say over the next 4-6months, a discount may remain because of people's gutteral aversion to nuclear mishaps.

 

What keeps me interested is the company's monopoly position in a great market and an industry that has room to grow (think electric cars, all electric homes, etc due to green house gas concerns).

 

I'm not willing to toss it in the too hard pile yet. Now is the time to get as much info as I can, and wait and see.

 

m.

 

 

 

 

 

 

[Myth465]

mloub honestly this is what makes the market and thats why I love this game. We will find out relatively soon (a year or two).

 

I came across this - http://www.bloomberg.com/video/68165516/

 

I predict TEPCO's assets and monopoly will continue for quite a while and will be quite profitable. I have no idea though if it will be in the same capital structure or with the same shareholders  ;D.

 

[mloub]

For those still following the situation at TEPCO, it seems the liabilities are starting to firm up. A recent Daily Yomiuri (a national Japanese Newspaper) piece maps out a tentative Japanese Govt plan for dealing with the accident's liabilities.

 

Be warned, that the piece references a draft plan, and nothing is set in stone. Nevertheless, the direction that the discussions are taking is encouraging, and refreshingly pragmatic.

 

http://www.yomiuri.co.jp/dy/national/T110413005848.htm

 

According to the draft plan, TEPCO would pay Y2,000-3,000bn in compensation over 10-15 years and all utilities, including TEPCO, would pay a levy based on the number of Nuclear reactors that they own. As far as shareholders are concerned, this arrangement would be pretty close tot he best case scenario, and would still leave about Y200-300bn of FCF for the common which is now trading at Y806bn. The arrangement is tot unlike the final arrangement for 3 mile island.

 

M.

[jch548]

If the government bails out Tepco the banks should benefit. MFG looks cheap.

 

I read an article this morning but couldn't find the link. Property damage in the radiation zone could total $25 billion dollars. It also stated the annual decommissioning costs could alone total 1 trillion yen per year.

[mloub]

More info on the TEPCO situation.

 

http://www.asahi.com/english/TKY201105120190.html

 

Cabinet has just approved a compensation plan that involves setting up a third party body that would help fund compensation claims for the disaster. The body will ultimately be funded half by TEPCO and half by the remaining power utilities who also run nuclear plants. The Japanese government would provide up front financing to help pay compensation costs that TEPCO would pay back over time.

 

This takes the liquidity pressure off of TEPCO, although how much the compensation ends up coming up to is still an open question. At least now TEPCO will be able to spread out whatever claims it has over a more manageable 13 year period by paying Y200bn per year (or half of its historical FCF/Yr).

 

There is also talk of allowing TEPCO to access an Y18.8Tn reserve fund that the industry has established for decommissioning nuclear power plants. This ought to help with some of the costs of the current plant decommissioning.

 

The encouraging part is that the government seems to - at least for the moment - favor financing TEPCO through a shareholder friendly third party vehicle rather than force-feeding it capital and wiping out the common.

 

It is important to bear in mind, that TEPCO has a remarkable monopoly, and with the government's permission can essentially tax every electricity user in the Tokyo Metropolitan area over time to meet its liabilities.

 

M.

 

 

 

 

[oddballstocks]

Why would you buy TEPCO when there are other Japanese utilities selling at dirt cheap prices with the same monopoly and advantages of TEPCO but no liabilities? 

 

I agree with others in this thread, low hanging fruit is where the money is at.  Personally I've been buying up some net-net's in Japan, stocks selling for well less than liquidation value, FCF positive, growing revenue, dividend payers.  What's not to like?  I get exposure to Japan, buy with a margin of safety and sit and wait. 

 

I look at investing in a very depressed market two ways.  The first is buy high quality businesses cheap, if they sell off with the market you might not see them as cheap in the future, and if they're decent businesses with a nice moat you can sit back and wait as they grow and increase intrinsic value.  The second is the liquidation approach, buy sub liquidation stocks that are growing as well.  In both cases you get a margin of safety in either the brand/business strength or in asset value.

 

The worst strategy is to go into a depressed market and buy the junk.  Why would you do that?  There are much better solid companies selling cheap as well.  If you had the choice of a BMW and a Kia at the same price would you buy the Kia?

[mloub]

"Why would you buy TEPCO when there are other Japanese utilities selling at dirt cheap prices with the same monopoly and advantages of TEPCO but no liabilities?"

 

Quite simply because those other utilities are not selling for 3-4 times their go-forward FCF.

 

The financing mechanism I mentioned will allow TEPCO to handle up to $20-30bn of liabilities in small incremental payments over 10-13 years. This still leaves 2-3bn of FCF per year once we get past the first year of adjusting rates to account for the higher cost of generating power without the downed nuclear plants using more nat gas, oil and coal generation. (TEPCO's current market cap is $8.4bn).

 

While I can not be certain, I have a high degree of confidence that the liability will not surpass $20-30bn.

 

I may be out to lunch, and this may be a "Kia" purchase when there are "BMWs" all around. Time will tell.

 

I'll stop posting on this idea.

 

M.

 

 

 

 

[Myth465]

I think you should keep posting. You are neither right nor wrong cause a bunch of guys on the internet agree or disagree with you. TEPCO elicits a strong visceral reaction which is typically the start to a decent value idea. Either our loss, or your lesson only time will tell.

[Josh4580]

Why would you buy TEPCO when there are other Japanese utilities selling at dirt cheap prices with the same monopoly and advantages of TEPCO but no liabilities? 

 

I agree with others in this thread, low hanging fruit is where the money is at.  Personally I've been buying up some net-net's in Japan, stocks selling for well less than liquidation value, FCF positive, growing revenue, dividend payers.  What's not to like?  I get exposure to Japan, buy with a margin of safety and sit and wait. 

 

I look at investing in a very depressed market two ways.  The first is buy high quality businesses cheap, if they sell off with the market you might not see them as cheap in the future, and if they're decent businesses with a nice moat you can sit back and wait as they grow and increase intrinsic value.  The second is the liquidation approach, buy sub liquidation stocks that are growing as well.  In both cases you get a margin of safety in either the brand/business strength or in asset value.

 

The worst strategy is to go into a depressed market and buy the junk.  Why would you do that?  There are much better solid companies selling cheap as well.  If you had the choice of a BMW and a Kia at the same price would you buy the Kia?

 

Oddball, what do you think of Chubu Electric?

http://www.bloomberg.com/apps/quote?ticker=9502:JP

 

They lost 11% of their electricity generation with loss of its Hamaoka plant being forced to shut.  However the stock trades at only a 12X P/E and a 4.5% dividend yield.  This 1338 yen stock traded around 3500 yen in 2007, for a decline of 62%. 

[Myth465]

So far no good.

 

http://online.wsj.com/article/SB10001424052702304432304576368560749979564.html?mod=googlenews_wsj

 

 

TOKYO—Shares of disaster-hit Tokyo Electric Power Co. were down as much as 28% in Monday's morning trading session, following a weekend report that the company faces a ¥570 billion ($7.1 billion) loss in the current financial year, even before massive compensation costs are taken into account.

 

[mloub]

So will TEPCO be allowed to slip into bankruptcy? Mr. Market certainly seems to think so. This seems like a gut reaction given the stories of radiation leaks, and melted fuel rods, but a closer examination, in my opinion, shows this is not likely.

 

The whole purpose of bankruptcy is for an entity to dispose of some of the liabilities it possesses in excess of it's assets. TEPCO has a long line of secured lenders, and the claims of residents, farmers and fishermen would rank lower on the list. In a bankruptcy, the nuclear disaster liabilities would be the first to go, and those affected by the disaster would be left standing last in line (well, maybe second to last in line since they would stand ahead of shareholders). If that were to happen the Japanese government would have to absorb all the compensation to maintain social order. This is a lose-lose situation.

 

Hence the government's current compensation plan. (They certatinly are not doing it out of the kindness of their hearts). In this plan, the government would set up a fund made up of contributions from TEPCO and all the other utilities. The government itself would use its credit to finance the entity in the short term and over time, TEPCO's profits would be used to repay the government. Explicitly stated in this plan is that TEPCO is to remain solvent. If TEPCO became insolvent, the problems described above would occur and those harmed by the disaster would suffer further from a bankruptcy.

 

So I think we can safely assume that bankruptcy is out of the question. And if we accept that the compensation plan will be enacted the last remaining piece is how much will TEPCO ultimately pay in compensation and clean up costs? Estimates range anywhere from Y2-10tn.

 

In this regard, it might be worth looking at what has been spent so far. The Fishing cooperatives in the affected prefectures have asked for Y3.4bn (http://www.japantoday.com/category/national/view/tepco-begins-to-pay-compensation-to-farmers-fishermen). The evacuated residents were paid Y1m per household, or about Y50bn in total (www.bloomberg.com/news/2011-04-20/tepco-will-start-compensating-evacuees-from-near-nuclear-plant.html). And Farmers' cooperatives have so far asked for Y13.4bn in compensation (http://online.wsj.com/article/BT-CO-20110531-709062.html). So the total compensation bill 3 months out is Y66.8bn.

 

While costs will rise the payments both paid and demanded by the different constituencies are moving towards the lower end of the range. I can't find the exact source now, but I recall reading a BOJ estimate that TEPCO's cost of buying all the land in the 20km exclusion zone was something like Y4tn, which is still at the low end of some of the compensation estimates some of the banks have circulated, which leads me to wonder how they arrived at their numbers.

 

It is worth recalling that the Japanese government has a great deal of control here. They can both limit liabilities by exerting influence on the committee determining compensation criteria, and increase TEPCO's ability to pay those liabilities by approving rate increases for TEPCO. If liabilities are in the Y2-3tn range, this government control will be exerted to make sure TEPCO has little or no profits for the next few years while ensuring it can fund its share of the claims through the state-backed compensation fund. After a few years, as public anger dies down, TEPCO will be slowly rehabilitated and profitability will return - allbeit at reduced levels.

 

The flip side of this government control is that it exists within limits. If the government limits compensation too much, the public will be outraged. If TEPCO's rates are allowed to rise too far, too fast, the public will be outraged and the economy will be irreparably damaged. The compensation mechanism acts to smooth things out, but if liabilities rise too far above Y3tn then even this smoothing mechanism will fail, at which point, the government will have to inject capital directly into TEPCO in the form of Preferred, and Common equity. If this happens, existing shareholders may be effectively wiped out by the dilution, a la AIG.

 

So will the disaster related liabilities exceed Y2-3tn? That is the question people should be asking, not whether TEPCO will go bankrupt, something the government has repeatedly stated they will not let happen.

 

At this point in the game, enough information is out there to make a fair assessment of what the liabilities are likely to be.

 

M.

 

 

 

 

 

 

[mloub]

For those still following the situation in Fukushima, I thought you might find this recent article interesting.

 

http://www.nature.com/news/2011/110712/full/475154a.html

 

Some of the first independent research has started to come out on the degree of radioactive contamination in the area around Fukushima, and so far it looks promising. It appears no land was found that was seriously contaminated, and that farming will not need to be suspended. Even in the most highly contaminated areas, the radionuclides seem to be isolated to the top 5cm of soil (i.e. should be easier to remediate).

 

It would be interesting to see the full scientific paper that the news piece was based on, which is due to be published in the Japanese Journal, Radioisotopes, in August.

 

For those who are interested in Government Data of the radiation levels around the plant, you can find it here:

http://www.mext.go.jp/english/incident/1303962.htm

 

The annual allowable limit for radiation is 20mSv, which for reference is one fifth of the scientifically established amount that is known to increase one's lifetime cancer risk(100msv/year raises the cancer risk over a lifetime by 1%). The wide gap between the amount known to cause harm and regulatory limits, is a margin of safety, so to speak, because epidemiological studies looking at the incidence of cancer in large populations are full of confounders.

 

At present, one would need to live in an area with about 5 microseiverts per hour of background radiation (1 milli seivert = 1000 micro seiverts), and spend 8-10 hours a day out in the environment, 365 days a year to receive an annual dose of 20mSv. It is interesting to note how small the area is where this would be the case on the latest radiation maps in and around Fukushima.

 

The government has already begun discussing narrowing down the exclusion zone in late August, now that TEPCO has established stable cooling of the reactors, which is a promising development (http://www.yomiuri.co.jp/dy/national/T110714005085.htm).

 

To-date total compensation claims now stand at Y115Bn ($1.44Bn), which is just a bit below the Y120bn coverage that the Nuclear law provides for all nuclear operators (In other words, TEPCO hasn't started spending shareholders' money on compensation yet). The number will rise as small business claims from tourism operators, and other Small/Medium enterprises come in, but with evacuation costs, and most farm and fishery claims already paid out, it is hard to see the claims hitting the Y10tn estimates that some analysts floated around at the beginning of the crisis.

 

This was an interesting situation early on, but as the plants approach cold shutdown and a trend for compensation expenses became more clear, it has just became down right undervalued. Those who speculated that there would be a radioactive wasteland have turned out to be plain wrong. It helps that people have a natural aversion to the word "radioactive" and all rationality goes out the door when it enters the discussion. Those who fret that their annual background radiation dose has gone up from a few mSv to 10-15mSv probably wouldn't bat an eyelash when having a barium enema (15mSv) or the increasingly popular Cardiac CT angiogram (7-13 mSv).

 

M.

[mloub]

Hehehe..I realize I am essentially just replying to myself, but what the heck.

 

For those still following, a deal has been struck between Japan's 3 main parties to pass the TEPCO compensation bill. This was the only rational thing to do, but it is nice nonetheless to see it happen so quickly. (The U.S. Congress could learn something here about the importance of addressing difficult choices sooner rather than later).

 

http://online.wsj.com/article/SB10001424053111903591104576465422278417978.html?mod=googlenews_wsj

 

I also wanted to point out an interesting change that I have seen when it comes to predictions of the expected compensation for the disaster. As you can see in the following quote from this article, the upper limit of compensation being discussed in the media has shifted from Y10Tn to Y1tn, without any explanation:

 

"...the cost of compensating evacuees and other victims of the nation's worst nuclear accident, triggered by the March 11 earthquake and tsunami, is expected to be well over ¥1 trillion ($12.7 billion)."

 

The truth of the matter is the Y10tn number was a wild over-estimate in the early days, based on very little hard evidence, and over time it became less and less defensible. Rationality is slowly starting to creep into the discussion of compensation, which is helpful. It is worth noting that Y1tn is 2 years of TEPCO's normalized FCF, and to date TEPCO has only had to pay out Y118bn of compensation.

 

M.

 

[BargainValueHunter]

http://www.houseofjapan.com/local/tepco-accept-comp-claims-sept

 

Tepco said it will pay each evacuee up to Y120,000 per month between March and August for the mental pain they suffered because they had to flee from their homes.

 

Since late April, Tepco has already given around 50,000 households within a 30-kilometer radius of the stricken plant payments of up to Y1 million each. It has also paid an additional compensation of Y100,000-Y300,000 per nuclear accident evacuee.

 

As of Aug. 30, the utility has paid about Y112.2 billion in compensation on a provisional basis to evacuees, farmers, companies and others that were negatively affected by the accident.

 

http://www.foxbusiness.com/industries/2011/09/25/japan-government-panel-10-rate-hike-would-still-leave-tokyo-electric-without/

 

While the troubled utility has been considering the possibility of a 15% rate hike, the panel has looked at a 10% hike under three scenarios, depending on whether there is a resumption of idled nuclear reactors by 2013, a delay, or no resumption at all, the report said. Looking at revenue over the next 10 years, the panel concluded that in all three cases, Tepco's outlays would exceed its income, the report said. If none of the reactors are put back online, the utility's liabilities will actually exceed its total assets, the report added.

[mloub]

BVH,

 

Thanks for resurrecting the thread. It is worth pointing out that the panel you quoted is tasked with overseeing TEPCO's cost cutting to ensure that TEPCO does everything possible before considering raising electricity rates. Remember, in the end the cost of this disaster will be a cost added on to the electricity consumer, this panel's goal is to minimize that.

 

If the costs of fuel and compensation are astronomical, then the panel and the government may force banks to write down their loans to TEPCO and in the process probably wipe out shareholders as well (a cost the electricity consumer will bear over the long-term in the form of higher financing costs for TEPCO). Both scenarios, raising rates just high enough to support TEPCO, or demanding loan forgiveness are hard to swallow in the current economic climate in Japan, but in my opinion the later is less likely and has the potential to be far more destabilizing. That is why the government went to so much trouble to create the compensation fund - a kind of Electricity TARP for Japan. TEPCO is after all Japan's largest non-financial corporate credit.

 

I still maintain - and this in my opinion is the critical part of the thesis - that while the numbers are large, the compensation costs will be nowhere near the Y10tn predicted by some. In fact, a close reading of the provisional and final compensation guidelines leads me to believe it will be in the neighbourhood of Y1-Y1.5tn after deducting the government's reimbursement of Y120bn as stipulated in Japan's Nuclear Liability law. The compensation fund set up by the government with pay-in from the other Electric Co's can easily finance this amount with TEPCO paying it back over a number of years. (A liquidity problem not a solvency problem?).

 

As for the electricity rate rise issue, the choice seems to be either to allow the nuclear plants to restart (Kashiwazaki-Karu and potententially Fukushima Daini) or pay up for higher fuel costs. The way I read your highlighted quote is - 'if we don't restart the power plants, we will have to raise rates higher than 10%' and not as 'if we do not restart the nuclear power plants TEPCO will fail'.

 

In my opinion, an ideal scenario would be the restart of TEPCO's Kashiwazaki-Karu plant (currently stuck in maintenance limbo while the country grapples with the issues of nuclear power), which has 7 reactors and is one of the world's largest, this spring coupled with an early cold shutdown of Daichi, which may happen in a matter of days. The provisional evacuation zone has already been lifted, and after the shutdown the most densely populated parts of the Emergency evacuation zone - within 20km of the plant - will be lifted. The area that will require some work before letting people back in is much less densely populated, and the early reports suggest that decontamination may be simpler than many thought. For example, in the wooded areas, which make up the largest part of the contaminated area, removing fallen leaves and branches has been found to reduce contamination by 50-90% depending on the tree types in the area and when their leaves first appeared. And of course, the government could always limit access to these wooded areas without inconveniencing too many people.

 

M.