TEPCO Posts Biggest Loss in Japanese Corporate History

TEPCO's Nuclear Winter

After postponing the announcement of its 2010 annual financial results from 28 April 2011, perhaps to gauge the impact of the 11 March earthquake and tsunami on its operations, Tokyo Electric Power Co. (TEPCO) finally announced its results today. While the clarity on the company's financial situation was welcomed, the results themselves were astonishing, and reflect the cataclysmic impact of the disaster on Japan's leading utility generation company.

TEPCO posted a breathtaking JPY1,247.3-billion (USD15.28-billion) net loss for the financial year (FY) ending in March 2011, the largest in Japanese corporate history and far surpassing the previous record holder Nippon Telegraph & Telephone Corp., which posted an JPY835-billion loss in FY 2001/02. TEPCO's consolidated earnings per share also plummeted, to -JPY846.64, from JPY99.18 in 2009, reflecting the huge loss of market confidence in the company. TEPCO did manage to post an increase in operating revenues—largely due to a 4.7% year-on-year (y/y) increase in electricity demand within the company's service area, due to a hot summer and the recovery of the economy. Nevertheless, this minor boost was overshadowed by the impact of the earthquake and tsunami, which caused the company to post an extraordinary loss of JPY1,017.5 billion, largely derived from expenses and losses related to trying to cool the Fukushima Daiichi nuclear reactors, and from scrapping the facilities. The announcement of the financial results was followed by news that TEPCO's embattled president, Masataka Shimizu, and the head of the firm's nuclear division, Sakae Muto, had both resigned, in a gesture of responsibility for the crisis. Shimizu will be replaced by managing director Toshio Nishiwaza, who declared it was his fate to lead TEPCO during this difficult time.

Expectations of dire financial results already caused credit default swaps on TEPCO's debt to jump 221 basis points to 726 on 20 May 2011, beating BP's record of 577.5 basis points set on 29 June 2010 following the Macondo well blowout in the Gulf of Mexico. The high cost of insuring TEPCO's debt from default will reduce incentives to protect the company's finances, thereby severely curtailing its ability to raise capital from the financial markets to deal with the ongoing nuclear crisis and power plant repair costs. However, TEPCO's decision to pursue loans from its major shareholders already signified that TEPCO had given up on the markets as a source of capital following the crisis. Nevertheless, there are now uncertainties over whether TEPCO can rely on its major shareholders for financial support. TEPCO's shareholders are feeling the repercussions of its poor performance, with Daiichi Life Insurance Co. stating today (20 May) that its net profit for FY 2011 came to JPY19.14 billion compared with JPY55.67 billion last year, a drop driven by a huge valuation loss related to its equity holding in TEPCO. Other major shareholders in TEPCO, such as Sumitomo Mitsui Financial Group, Mitsubishi UFJ Financial Group, and Mizuho Financial Group could also suffer financial fallout from TEPCO's results announcement.

Shareholders have already been hit by TEPCO's decision to withdraw its basic dividend policy, but even worse for them, Japan's chief cabinet secretary Yukio Edano has indicated that shareholders who provided huge loans should now waive TEPCO's debts to them and provide further financial support to help the stricken utility to meet its financial obligations. Yukio's comments have already hit the stock prices of TEPCO shareholders, spreading the repercussions of the crisis across Japan's financial sector. Indeed, TEPCO's practice of issuing large amounts of corporate bonds, and the fact that a number of large Japanese players have exposure to TEPCO shares, mean that the utility's financial issues do provide a wider threat to corporate solvency in Japan.

Outlook and Implications

In the short term, the results mean TEPCO will need to accelerate its own internal cost-cutting plan, which will involve the selling off of real estate assets and securities not essential to its power-supply business, while the company has suspended all investments except those critical for maintaining power supplies. Research and development budgets, salaries, and bonuses will be reduced and staff streamlined, while capital raised for implementation of TEPCO's "low-carbon society" is now being redirected to maintaining stable power supplies. TEPCO will pursue these plans rigorously—knowing their importance as conditions for government financial support. The huge scale of the loss has caused TEPCO to express concerns about its ability to keep operating, which is partially a covert overture to the government to put aside its reservations about further heavy financial assistance to the utility.

Chief Cabinet Secretary Edano, however, has stated that TEPCO may first have to try and secure additional loans from the private sector before asking for government financial assistance, which can only be provided on the condition of support from the Japanese people. Japan's government has approved a plan under which a state-backed institution would be created to keep the utility solvent. The institution will borrow funds from the Japanese government for a loan to TEPCO, and would be partially funded by other Japanese utilities. However, there was a lot of debating among lawmakers over to what extent TEPCO should have to pay for the accident, and divisions could potentially lengthen the amount of time needed for the compensation bill to be passed by the Japanese Diet. It is certain that the Japanese government will not allow TEPCO to fail in its current state—it provided similar financial support to Tohoku Electric following the 11 March earthquake—and is certain to do the same for TEPCO, at least to ensure the company can continue dealing with the crisis at Fukushima Daiichi and providing electricity to the Tokyo metropolitan area and Kanto region. In this sense, Edano's comments are probably aimed at ensuring TEPCO maximises its own efforts to save money rather than relying on the government as a financier.

Nevertheless, looking further ahead, TEPCO continues to face dark days. Bringing the reactors at Fukushima Daiichi into cold shutdown is not now expected until January 2012, while compensation claims are mounting against the utility, which also faces high import costs from bringing in oil, gas, and coal to generate electricity. TEPCO also faces potentially huge reactor decommissioning costs, which although partially supported by an internal reactor decommissioning fund will also require significant outside assistance. Because of the monumental problems facing the company going forward, it will not be easy for TEPCO to gain further financial support from the private sector, which has already voiced opposition to government calls for loan waivers. The prospect of further heavy losses going forward suggests more rigorous government cost-cutting measures might need to be taken, with TEPCO potentially having to sell all of its transmission and distribution (T&D) assets to other utility companies to concentrate resources on cooling operations. Buyers of TEPCO's T&D business could then invest in boosting frequency-converter capacity between Japan's transmission grids to improve electricity supply flexibility.