Noriyuki Morimoto's Blog
Are Japan's Power Companies Actually With Negative Equity?
Jun 04, 2018
An asset is an asset because there is value in using it. If there is zero possibility for it to be used any more, it is no longer an asset but a lump of waste. So, accounting-wise, you have to book an impairment loss for its total book value.
Supposing that the Japanese people choose to phase out nuclear power generation as early as possible, and all nuclear power stations are to permanently discontinue operations, the power companies that own nuclear power businesses would have to book huge amounts of impairment losses. This would cause the companies a negative equity, which makes it extremely difficult for them to procure funds, putting stable power supply at risk.
In addition, something that has turned into waste is not only retired in accounting books but also physically. The process of physically retiring facilities requires costs, which have to be booked in advance as losses on retirement.
A more serious issue is that no one can tell what the costs needed to retire the facilities would amount to, given that you are scrapping a nuclear power station. If such costs are estimated conservatively and booked in advance, power companies are sure to have a negative equity.
Of course, policy measure can be taken to address such situations, such as introducing a special accounting treatment. But that doesn’t keep the companies’ equities from virtually turning negative.
If power companies with huge liabilities end up having negative equity, that would be an emergency: much confusion and tremendous social costs should arise in the course of protecting stable power supply. It would at least become a hard question from a financial perspective: the financial industry would be facing problems.
If problems are expected from the beginning, they should be prevented from a long-term perspective. This means that phasing out nuclear power has to be a thorough long-term strategy that includes detailed, technical discussions on account processing.
Phasing out nuclear power is essentially a matter of decision by the people, so once it is decided it may as well go forward. But the practical procedures of achieving a nuclear phase-out is another issue. In any case, it would take time and money. Setting a shorter timeline would probably add to the overall cost. Therefore, it is certain that a rational timeline has to be set based on a rational estimate of costs to take planned steps in phasing out nuclear power.
Chief Executive Officer, HC Asset Management Co.,Ltd.
Noriyuki Morimoto founded HC Asset Management in November 2002. As a pioneer investment consultant in Japan, he established the investment consulting business of Watson Wyatt K.K. (Tokyo Office) in 1990, where he was Director & Consultant for 13 years. His responsibilities also included Benefit consulting and Financial Services consulting. Prior to joining Watson Wyatt, he was responsible for foreign fixed income investment, asset allocation and investment strategy at Mitsui Life Insurance Co., where he managed assets for the company’s variable life products and group annuities as a fund manager. He spent 2 and half years in London managing fixed income assets. He started his investment career as Japanese equity analyst at Mitsui Life in 1983. Bachelor of Arts (Philosophy), University of Tokyo (1981)