This year has definitely not been a lucky one for Taiwan Power Co (Taipower). The utility company is facing a deteriorating financial situation, and Japan’s nuclear crisis — which has raised public worries about nuclear safety and may force the government to delay the commercial operation of the Fourth Nuclear Power Plant for another year — only adds a further blow.
Moreover, the decision by two international ratings agencies on Friday to downgrade the credit rating of Tokyo Electric Power Co (TEPCO), which operates the troubled Fukushima Dai-ichi nuclear power plant, has not only made TEPCO the first Japanese power company to face the possibility of defaulting on its debt, but also exposed a potential risk for Taipower in terms of operational reliability and the potentially massive costs involved in the event of a catastrophe.
For some time people have held concerns about Taipower’s ability to handle a major nuclear accident like the one occurring at the Fukushima plant. Unfortunately, they have not paid much attention to the company’s financial problems.
Last year, Taipower incurred a loss of NT$18.7 billion (US$631.8 million), which was its third--largest deficit in the past 10 years. In 2008, the company had a record loss of NT$100.9 billion. The company has also warned that its deficit could reach NT$60 billion this year, owing to skyrocketing fuel costs. As a result, accumulated losses are likely to total NT$135.1 billion at the end of this year, a figure that represents 40.94 percent of Taipower’s paid-in capital.
Utility companies around the world need continued cash flow and efficient access to financial tools to maintain operations and build facilities. Taipower has long relied on bank loans and corporate bond issuance to raise capital. Actually, the company is the largest issuer of corporate bonds in Taiwan, accounting for 16 percent of the total, and the yield on its bonds usually serves as a benchmark for the country’s corporate bond market. Last year, the company issued NT$89.2 billion in corporate bonds, following NT$58.62 billion issued in 2009.
Ironically, despite Taipower’s weakening financial profile over the past few years because of a -government-initiated cap on electricity rates, its corporate bonds have been warmly received by investors as the debt issues have a very low default risk. This is because Taipower is a government-owned utility and investors believe the company’s triple-A-rated bonds have the same value as the government bonds do.
However, the company’s deteriorating financial situation is a time bomb. When issuing corporate bonds, the company now needs a third-party guarantor to provide a guarantee or partial guarantee over the proposed debt issues, as required under the nation’s corporate law.
Furthermore, if the company’s accumulated losses exceed 50 percent of its paid-in capital, Taipower would, by law, have to request permission from shareholders to increase capital or be forced to close down operations.
This raises the question of where the cash injection would come from. One option is to increase electricity rates to help cut losses. While this is theoretically reasonable, it would likely be political suicide in an election year, and amid inflationary concerns. Barring changes in current electricity rates, an alternative is to ask the government to inject more capital into the company, but this seems equally unfeasible in light of the government’s growing debt.
Privatization, deregulation and cost-cutting reforms would be other options to help Taipower turn around its dire financial situation, but one way or another, Taipower’s financial problem needs to be taken seriously. If not addressed, the state-run utility’s widening losses will only add to existing public-sector debt and impose a burden on future generations of taxpayers.
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