Tokyo nuclear firm protected, but not shareholders

March 24, 2011

By John Foley
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

HONG KONG — The owner of Japan’s stricken nuclear reactors should emerge from the wreckage intact. But shareholders in Tokyo Electric Power, whose Fukushima complex was damaged by this month’s earthquake, could lose their entire investment. Tepco has just turned to Japanese banks for 2 trillion yen ($25 billion) in emergency funding which should at least prevent a nuclear crisis turning into a financial crisis. Investors are already pricing in losses, but if further big claims arise — as seems possible — the company’s equity could be wiped out.

Tepco shares have dropped almost 60 percent since the quake, destroying almost 2 trillion yen of value. The losses will come in three kinds. First is the cost of rebuilding, and writing down the value of the worst-hit plant. That may come to 580 billion yen, according to Nomura.

Then there is the cost of maintaining output. With reactors knocked out, Tepco will have to turn to alternatives like coal or oil to keep customers switched on. Assume half of the company’s annual nuclear output, or 40 terawatt hours, is gone. With oil around $100 a barrel, the equivalent fuel purchases could reach 185 billion yen, according to a Breakingviews calculation — or 550 billion yen over three years.

Investors have done the maths. Before the crisis, analysts expected Tepco to make 1.1 trillion yen in EBITDA this year. On a multiple of 10, that would leave the company’s enterprise value at 11 trillion. After repaying borrowings due this year and next, Tepco should have 8 trillion of net debt, leaving 3 trillion of equity. Deduct the above costs, and the shares should be worth 1.9 trillion yen, or 945 yen a piece — about 30 percent more than their value on March 24.

That leaves little room for the third slug of costs: damages claims. How big those may be is imponderable. Government nuclear insurance should cover the first 240 billion yen, but beyond that, Tepco itself is liable unless the government deems the earthquake was an “exceptional” disaster. In Japan, earthquakes are anything but. Assuming Tokyo has little appetite for getting further into debt, investors assuming they have priced in the worst may be in for another nasty surprise.

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