JAPAN | TEPCO teetering on financial edge

Posted on August 11, 2011

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JAPAN | YOMIURI | 11 August 2011

TEPCO President Toshio Nishizawa speaks at a press conference in Tokyo on Tuesday.

The harsh business environment facing Tokyo Electric Power Co. has been brought to the fore after the utility posted a record quarterly group net loss, logging a 571.7 billion yen deficit for the April-June period due to the crisis at its Fukushima No. 1 nuclear power plant.

TEPCO will receive financial support from a new organization to be set up later this month by the government, which will be tasked with securing funds for the utility to pay compensation to people affected by radiation from the crippled plant.

Yet the utility’s business operations will be precarious, with fuel costs and expenses involved in decommissioning the plant’s reactors sure to hang heavy on the company.

The massive loss came as TEPCO allocated 397.7 billion yen for compensation–a figure the utility described as a reasonable estimate–as part of a 503.2 billion yen extraordinary loss in the April-June period.

The compensation estimate was calculated on the basis of an interim guideline, drawn up Friday by a government panel, for determining which businesses and individuals are eligible for compensation.

TEPCO President Toshio Nishizawa told a news conference Tuesday that the biggest concern held by auditors had been whether a bill on the creation of the new organization would pass the Diet. The bill passed into law on Aug. 3.

According to a source close to TEPCO, the utility was told by auditors to wait for the panel to release its interim guideline, so that the largest possible amount could be allocated to compensation costs in the quarterly account.

The massive quarterly loss put the TEPCO group’s net worth at 1.009 trillion yen as of the end of June, down 548.7 billion yen from the figure registered at the end of March.

Had the creation of the new organization not been confirmed, TEPCO’s net worth might have gone into the red.

Hiroki Shibata, an analyst at ratings agency Standard and Poor’s, said TEPCO’s financial strength has been deteriorating markedly and its profits are likely to continue on a downward trajectory.

The utility is having a hard time in its core electricity business, which posted an operating loss of 61.3 billion yen, compared to the operating profit of 54.2 billion yen booked a year earlier.

Its electricity sales in the April-June quarter were down 12 percent from the corresponding period last year, due to widespread energy-saving efforts and reduced output by manufacturers whose supply chains were disrupted in the aftermath of the March 11 disaster.

In addition, the utility has had to deal with higher fuel expenses. To make up for the power-supply shortfall caused by the suspension of operations at some nuclear plants, it began operating more thermal plants while prices of fuel, such as liquefied natural gas and crude oil, were rising sharply.

The firm’s fuel expenses for the quarter were 404.7 billion yen, up 28.7 percent from a year earlier.

It will be difficult for TEPCO to improve its earnings in the electricity business even if sales increase, as that would see the utility outlay more on fuel.

In the coming months, attention will focus on whether the utility implements a rate hike to help cover its costs.

While emphasizing the company’s intention to further streamline its operations, Nishizawa declined to comment on the subject of rates.

Support to be provided by the new organization means the utility will not have to worry about the possibility of bankruptcy for the time being. Nishizawa reiterated TEPCO’s plan to begin making full-fledged compensation payments as early as October.

Financial support from the new organization is conditional on TEPCO adopting plans for corporate restructuring and management reform. Those plans are to be based on a report that an independent governmental panel will compile by the end of next month.

“We’ll use the financial support [from the new organization] to pay compensation. But we’d like to do our utmost and be able to manage our business on our own,” Nishizawa said.

By asking for the new organization’s support, TEPCO will effectively go under public administration, with its management independence greatly restricted.

Also likely to affect the management of TEPCO is the future development of the central government energy policy–which might include the suspension of nuclear power generation for a protracted period–and discussions on separating the businesses of power generation and power transmission.

Chiaki Toyoda and Tadaaki Inoue / Yomiuri Shimbun Staff Writers

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