Electric utility TEPCO faces long, painful recovery from nuclear disaster

Tokyo Electric Power Co (TEPCO) has such a dominant market position that Japan's government will ensure it survives, but Asia's No. 1 utility faces a long and punishing struggle to recover.

Investors dumped shares in TEPCO on Monday as engineers at its Fukushima plants in northeast Japan pumped in corroding seawater in a desperate attempt to cool atomic fuel rods that threaten a catastrophic meltdown.

"It appears TEPCO won't be able to use its Fukushima nuclear power facility forever," Hiroshi Arano an adviser at Mizuho Asset Management in Tokyo said. "As a company, TEPCO will be facing an extremely difficult time ahead."

However, a government worried about keeping homes lit and factories churning is not going to let the monopoly giant fail even if damage to its plants by Friday's temblor and tsunami proves too extensive for TEPCO to cope, analysts and investors said.

Even after TEPCO regains control of its nuclear facilities, lengthy repairs and inspections could mean long expensive shutdowns.

In the meantime, it will have to burn more oil and gas at its other plants to make up for lost generation. About a quarter of TEPCO's generation comes from nuclear plants.

Nomura Holdings analyst Shigeki Matsumoto estimates that TEPCO's bill for alternative fuel may be as high as 98 billion yen ($1.1 billion) a month.

"It's hard to predict when the reactors will be restarted,"  Matsumoto said in a report, noting that it took almost two years for the first reactor to return to operations at TEPCO's Kashiwaki-Kariwa plant after an earthquake there halted power generation in 2007.

Goldman Sachs's analyst, Hiroyuki Sakaida in a separate report predicted the Fukushima reactors will be out of action for more than a year.

TEPCO, which employs 40,000 workers and provides electricity to around a third of Japan's population, was not available for comment for this article.

Shares plunge
Investors punished the struggling utility on Monday, but the glut of sell orders kept it untraded for much of the day.

Shares of TEPCO slumped by 24% at the close, its biggest one day fall since 1987. About 17% of the company is owned by foreign investors.

With a hefty repair bill TEPCO risks bleeding cash, which may force it to tap some of the 450 billion yen it raised last year in its first share issue in 29 years, money earmarked to cut shrink its carbon foot print.

A squeeze on revenue resulting from radiation leaks at its Fukushima plant may also make it difficult for it to keep up the normally high levels of spending which for the industry overall is twice what automakers spend on new plant.

Over the past five years capital investment to maintain and add capacity has ranged between $5 billion and $6 billion a year, equivalent to more than 10% of revenue. That was set to rise to more than $8 billion annually over the next couple of business years before Friday's disaster.

And then there is debt to roll over. TEPCO has to repay $4.8 billion of bonds this year, rising to $5.6 billion in 2012. Overall its 96 outstanding issues amount to 46.7 billion yen.

Widening spreads suggest that investors will want TEPCO to pay more for its new debt.

On Monday, the spread on TEPCO's five-year credit default swap spreads was quoted at 112130 basis points, tripling from 40 basis points at the end of last week, according to data from Markit, a jump that suggest a possible cut in its credit ratings.

It means friendly regulators will matter more than ever to the Japanese utility.

So far, they have proved forgiving to TEPCO, even after discovering falsified nuclear inspection records in 2002, 2006 and most recently in 2007.

"It won't go bankrupt because the government would probably do something like save it with public money," Makoto Kikuchi, CEO of Myojo Asset Management Japan said on Monday.

Authorities could also let TEPCO raise rates to reflect the much higher fuel cost mix said Penn Bowers, an analyst at CLSA Asia-Pacific Markets in Tokyo. Its customers, with little or no access to alternative suppliers, would have no choice but to pay.

Even so, investors were likely to steer clear of the company for the time being.

"It's impossible to say what will happen next at TEPCO, but it's not a company to invest in now," noted Myojo's Kikuchi.