And so Moody's wakes up.
Moody's Japan K.K. has downgraded to Baa1 from
A1 the senior secured and long-term issuer ratings on Tokyo Electric
Power Co., Inc. (TEPCO).
Moody's also downgraded the short-term rating for TEPCO's commercial paper to Prime-2 from Prime-1.
All three ratings remain on review for possible downgrade.
The downgrade reflects the significant financial obligations the
company faces as it continues to address multiple challenges resulting
from the March 11 earthquake and tsunami that seriously damaged several
of its nuclear and thermal generating facilities, most notably its
Fukushima Daiichi nuclear plant. TEPCO continues to struggle to control
reactor temperature and limit radioactive leaks at the plant, problems
that appear far from being resolved.
The downgrade takes into
consideration the enormous costs the company will incur as it recovers
from this disaster, including costs for replacement power, the building
of new generation plants to replace the permanently damaged plants, and
the decommissioning of the contaminated plant.
These costs will
inevitably increase TEPCO's already high debt leverage and could result
in substantial rate increases that its residential and industrial
customers may not be able to tolerate over the near term.
These costs could lead to losses for at least the next two years if the company cannot increase the rates substantially.
Furthermore, the radiation that has already been released in and around
the plant could make TEPCO liable for an unknown amount of damages
incurred by local residences, businesses, and farms in the area.
Depending on the magnitude of the damages and the extent to which TEPCO
is found liable, TEPCO's ability to meet these large and potentially
growing obligations could be severely strained.
As a result,
Moody's believes TEPCO will remain highly leveraged and unprofitable for
an extended period of time and will face substantial risk regarding
Although the Japanese government would
typically be responsible for these claims if it determined that the
March 11 events comprised an "unusually severe natural disaster", there
has been no indication that the government is willing to directly absorb
these costs. Recent statements from government officials appear to
indicate that TEPCO may have to shoulder at least part of this
The costs for replacement power are likely to be
significant as a number of the damaged plants were low-cost baseload
nuclear and coal units. In addition to the Fukushima Daichi nuclear
plant, the company's nearby Fukushima Daini nuclear plant, as well as
its Hirono and Hitachinaka thermal plants, have also suffered damage.
Much of this low-cost generation will be replaced by higher-cost LNG
and oil-fired generation, which will substantially increase the
company's fuel costs. Given the likelihood that the entire Fukushima
Daiichi nuclear site may never be brought on line again, TEPCO's
generation costs are likely to be elevated over a longer term, adding to
fuel costs and putting additional pressure on customer rates.
The downgrade of TEPCO's Prime-2 short-term rating for commercial paper
recognizes the severely constrained liquidity position the company faces
over the near term. Although TEPCO had nearly JPY700 billion of cash on
hand as of December 31, 2010, it has lost access to the equity and bond
markets as the nuclear crisis has unfolded.
Although it has
reportedly secured a JPY1.9 trillion loan from several of its major
relationship banks, which will shore up the company's liquidity and
financial viability over the near term, this will only temporarily meet
cash flow needs to build new generation, pay for more expensive
replacement power, and meet upcoming debt maturities.
believes that the company will require additional liquidity support from
other banks, Japanese government lenders, insurance companies, or other
sources, to assist it in meeting its substantial liquidity and cash
flow needs, especially if it is required to provide compensation for the
disaster. However, whether the banking system will extend further
credit without an improvement in TEPCO's financial profile is
The result of these developments is a standalone
credit profile that is not longer consistent with an investment-grade
rating. The current final rating still reflects the expectation that the
Japanese government will ultimately act in a way to preserve TEPCO's
solvency without losses to lenders.
Moody's believes it is
likely the government will consider that TEPCO's ongoing viability is
critical to the reliability and integrity of the power system in the
Tokyo area and that it will continue to recognize the broader financial
implications of allowing a major company like TEPCO to collapse.
The ratings remain on review as the company continues to struggle to
secure the Fukushima Daiichi nuclear plant reactors, and because of the
substantial uncertainty about the magnitude of the company's costs and
ultimate financial obligations for third-party damages. The review will
focus on the company's progress in stabilizing the Fukushima Daiichi
plant site, the potential amount of third-party liability costs, the
costs of cleaning up and decommissioning the nuclear plant site, and
indications of the form of government support for the utility.
Ratings downgraded and remaining on review for possible downgrade include:
TEPCO's senior secured rating, to Baa1 from A1
TEPCO's issuer rating, to Baa1 from A1
TEPCO's short-term rating for commercial paper, to Prime-2 from Prime-1
Moody's last rating action with respect to TEPCO was on March 18, 2011,
when its long-term ratings were downgraded, and the ratings were
remained for further review for downgrade.