• Bloomberg


Tokyo Electric Power Co.’s bond risk fell to the lowest since the 2011 tsunami wrecked its Fukushima No. 1 atomic plant, as lower fuel costs buoyed earnings of Japan’s utilities.

The cost to insure Tepco’s debt against default dropped to 140 basis points on Feb. 5, the lowest since a record earthquake struck Japan’s northeast region on March 11, 2011, and compared with as high as 1,762 in October 2011, according to CMA prices. The average price for utilities’ credit-default swaps worldwide was 92 basis points, CMA data show.

Tokyo Electric said last month its operating profit increased 29 percent in the nine months through Dec. 31 as crude oil prices at six-year low and cost cuts made up for a weaker yen and the absence of nuclear power capacity. The Chubu and Chugoku regional utilities returned to profit while Hokkaido’s power provider narrowed its net loss. Bank of Japan Gov. Haruhiko Kuroda said last month that sliding energy costs are positive for the economy, boosting corporate profits and increasing the purchasing power of consumers.

“This is a company that can basically make a profit now,” said Hidetoshi Ohashi, the chief executive officer of Japan Credit Advisory Co. in Tokyo. “Tepco’s CDS has tightened a lot, but it will tighten even more. With interest rates this low, there’s strong demand for issues that have good spreads.”

Tepco, the nation’s biggest power utility, saw its net income fall 77 percent to ¥180 billion ($1.5 billion) in the nine months from a year earlier, when it received a government injection into its fund for payouts related to the Fukushima disaster. The company left unchanged its annual profit forecast at ¥521 billion.

The power company suffered net losses totaling ¥2.71 trillion in the three years ending in March 2013, amid the worst atomic crisis since Chernobyl in 1986. All of Japan’s 48 operable reactors remain shuttered pending safety reviews and approvals.

The extra yield on Tepco bonds due September 2020 has fallen four basis points this year to 150 basis points more than sovereign debt, according to data compiled by Bloomberg. The spread was as wide as 699 in November 2011. Japan’s benchmark 10-year government yield was at 0.34 percent on Feb. 6, after plunging to a record low of 0.195 percent last month.

Mayumi Yoshida, a Tepco spokeswoman, declined comment on financial instruments.

“Considering that Tepco’s credit is clearly backed by the government, the spreads in the past weren’t right,” said Mana Nakazora, the chief credit analyst in Tokyo at BNP Paribas SA.

While the drop in energy costs bolster utilities’ earnings, few signs have emerged that its benefits have spread to the economy as a whole. An index of consumer confidence rebounded to 38.8 in December from a seven-month low of 37.7 in November. That was still below 41.3 a year earlier.

Japan’s economy probably grew at a 3.7 percent annualized pace in the fourth quarter, according to the median forecast of analysts surveyed before the government releases the data on Feb. 16. The expansion would follow two quarters of contraction after a sales tax increase battered consumer spending.

Any gains from the decline in oil prices are complicated by the fact that the fuel is traded in dollars. That means that while the utility receives a break when fuel costs drop, it also ends up paying more when the Japanese currency loses in value.

The yen depreciated 13 percent against the U.S. currency from April 1 to Dec. 31 last year. It traded at 117.27 per greenback as of 4:32 p.m. in Tokyo on Feb. 6.

The inactive nuclear reactors have put pressure on the utilities to boost electricity rates to cover the higher cost of fuel. Kansai Electric Power Co. in December applied to raise fees by 10.2 percent from April, the second increase after the 2011 atomic crisis. The city of Osaka opposed the plan, saying it will hurt residents and companies. Tepco won’t push up the rates this year, Chairman Fumio Sudo said in December.

“How much further electricity fee increases will be tolerated is a politically difficult issue,” said Nakazora of BNP Paribas. “Considering that, it might be tough for spreads to continue tightening.”

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