TEPCO Update: WTF Is With Japanese Law

May 17th, 2011 by Potato

I don’t understand what’s happening with TEPCO – the Japanese power utility that is the owner of the damaged Fukushima nuclear power plant.

I made a small speculative bet on it a few months ago, based on the theory that it was oversold based on nuclear fear. I figured the weak point in my analysis was the clean-up cost, as there was a Japanese law to protect nuclear operators from liability in the event of a natural disaster such as the tsunami.

Then in the wake of the disaster, the government seemed to be avoiding the implementation of that law, and I couldn’t figure out why. Sure, the optics weren’t great, but the lawmakers surely knew that a nuclear accident as a result of a natural disaster would be messy — that’s exactly what the law was for. The government seemed to be groping around in all directions: on the one hand trying to create bailouts and schemes for TEPCO and other nuclear operators, and on the other hand trying their darndest to sink them.

One less-important point in my analysis was that with the nuclear plants off-line, TEPCO was surely going to make higher margins on their thermal plants as power prices rose. Instead, the government has not allowed the prices to increase, forcing TEPCO to eat the loss (as fuel costs for thermal plants increased).

Anyway, I probably should have bailed when my initial thesis looked like it might not be true (legal protection to limit the risk of bankruptcy). It’s down over 20% this week, and based on the action in Japan last night, will probably open down another 10% today, putting me at a 60% loss. It’s a small position — I knew it was speculative from the start — but still hurts.

One big factor making me consider bailing is this recent article, which I simply cannot wrap my head around. It makes no sense for the government to be calling for loan forgiveness at this point, to try to pass the burden off to third-party lenders when there are other tools available (e.g.: direct government assistance, as per the previously-mentioned law). If a step as drastic as debt modification is needed, then that’s an indication the common shares are worthless, and it’s time to bail. Unless they’re also modifying that section of the law, where debt holders come before equity holders.

“Tokyo Stock Exchange President Atsushi Saito struck a slightly more incisive tone, and was quoted in the Nikkei business press as saying that Edano’s comments regarding debt waivers were “illogical.” “

But like I said, the government can’t seem to make up its mind on what to do, and it’s not yet clear how much this will cost TEPCO — we’re still largely in the period where fear reigns supreme over information, so it’s hard to say what the value is. Maybe months from now when the spotlight has moved on, the government can “do right” by TEPCO. Maybe it is doomed to bankruptcy and the banks will have to shoulder losses.

I just can’t tell anymore with this one what’s crazed government officials saying stupid, nonsensical things (which is often an opportunity for mis-pricing), and what’s an actual risk of total loss (which is to be avoided). My gut is telling me that this is perhaps the moment of maximum pessimism, and that this is a chance to buy, not sell. But, my brain is saying that the initial reasons for buying have been proven wrong, so it’s time to cut the losses, and that’s what I’ll do.

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