Japan: Tepco Speculation Sends Market Lower

Fancy a punt?

Only for the strong at heart or incredibly stupid.

Try Tokyo Electric Power Co in Tokyo: the shares are down more than 90% from before the March 11 quake, tsunami and Fukushima nuclear power station disasters.

And yesterday the shares dropped another 28% in morning trading on another burst of selling. The stock traded around 206 yen, below the previous all time low of 282 yen last Thursday.

The shares ended down 27.6% at 207 yen. Unwanted.

The slump contributed heavily to the 1.2% drop in the Nikkei 225, the market's main index.

But one thing is certain, the Japanese government will step in and become the backstop of the company sometime in the next year because no one else has the resources to allow the company to cover the losses, keep trading and start meeting the huge and rising compensation costs for the disaster.

The catalysts were, a suggestion at the weekend by the head of the Tokyo Stock Exchange that Tepco should liquidated and rebuilt (i.e. a form of Chapter 11 used in the US) like Japan Airlines was revamped after building a huge debt burden.

Tokyo Stock Exchange head Atsushi Saito, who used to head a government-backed turnaround body, said the temporary nationalization of Tepco should be considered and that creditors would likely have to forgive loans.

"It would be good if Tepco could be handled in the same way as JAL," Saito was quoted as saying in an interview with Asahi Judiciary, an online magazine owned by the Asahi newspaper.

After filing for bankruptcy last year, Japan Airlines was delisted and has since completed a court-led restructuring, similar to the Chapter 11 process in America.

Such a move would see shareholders lose, as well as creditors, many of whom are the country's biggest banks which lent the crippled power giant 2 trillion yen ($US24 billion) in early April to help it survive the impact of the disasters.

The talk of legal liquidation saw the shares of the country's other listed power companies also fall.

The other catalyst was a report from Japan's Kyodo News that Tepco would lose 570 billion yen for the current Japanese financial year (to March 2012), excluding compensation to those affected by the Fukushima Daiichi disaster.

That's around $US7 billion and the appearance of this document seems to suggest a softening up process for government involvement in Tepco's affairs, despite the growing instability of the current DPJ government.

The Kyodo report said the power company is facing an extra 830 billion yen (around $10 billion) in higher fuel costs due to the suspension of operations at the Fukushima and the need to move to thermal power for make up for the shortfall. The $US24 billion lent by the banks at the end of March/early April was to cover this higher charge.

The company suffered an unconsolidated net loss of 1.258.5 billion yen for the year to March, or around $US15 billion.

The report said Tepco was chewing up its cash reserves, which are expected to be below the 100 billion yen mark next March, from 2.1 trillion at the end of last March.

Banks provided that 2 trillion yen in emergency loans to Tepco in April but the company's cash holdings will fall to 1.6 trillion yen at the end of this month and 95 billion by the end of March 2012.

Tepco plans to sell assets totalling 600 billion yen to help raise funds while reducing personnel costs by more than 50 billion to 375 billion yen.

It is expected to become necessary for Tepco to seek further loans from banks and support from the government to cover the nuclear crisis-related compensation, which is said to reach several trillion yen (around $US60 billion).

The company's sales for the current year are estimated to fall 1% from the previous year to 5,105 billion yen, or more than $US62 billion.

The company will be looking to recover 460 billion yen via a price rise for power, but that will still leave it short of the estimated 495 billion yen fall in power sales for the full year.

Tepco's future is now bound up in the future of the government. Prime Minister Naota Kan is being pushed towards the exit later this year and significantly there was talk of a so-called grand coalition between the DPJ and the opposition LDP.