Tokyo Electric Power Co could face compensation claims topping $130 billion if Japan's worst nuclear crisis drags on, Bank of America-Merrill Lynch estimated, fuelling expectations Japan's government will step in to save Asia's largest utility.

Investor concern about the future of Tokyo Electric has been mounting after its president, Masataka Shimizu, was admitted to hospital and the company said on Wednesday that 2 trillion yen ($24 billion) in emergency loans from Japan's major banks would not cover its mounting costs.

Liabilities for compensation claims alone could be up to 11 trillion yen ($133 billion) -- nearly four times TEPCO's equity -- if the nuclear crisis drags on for two years, an analyst at Bank of America Merrill Lynch wrote in a report.

The company, also known as TEPCO, has come under fire for its handling of the emergency at its Fukushima Daichi nuclear complex, triggered by the March 11 earthquake and tsunami that left more than 27,500 people dead or missing.

A series of missteps and mistakes, combined with scant signs of leadership, have further undermined confidence in the company. Poor communication has led to some heated exchanges in media conferences as journalists demanded information.

The government and TEPCO conceded on Wednesday that there was no end in sight to the crisis.

I think in the current situation the government has very few options left, said Ravi Krishnaswamy, Asia-Pacific vice president of Frost & Sullivan's Energy and Power Systems Practice in Singapore.

Nationalization isn't a good move for the stakeholders but at the end of the day if the government steps in then at least creditors know their liabilities will be met, he added.

Shares in TEPCO jumped as much as 12 percent in intraday trade on Thursday, rebounding from three straight sessions when the stock has hit its limit-lows.

Traders said a buy order around 40 million shares, or about 2.5 percent of all outstanding TEPCO shares, was detected at the end of Wednesday's session, but they were unable to confirm who placed it.

The stock ended the day unchanged from Wednesday and down almost 80 percent since the disaster.

BIG HIT

Bank of America-Merrill Lynch said shareholders were very likely to take a big hit and a rapid resolution of the crisis was the only way to keep costs down.

If the situation can be turned around within the next two months, compensation costs may be less than 1 trillion yen. Costs will rise to 3 trillion yen if it drags on for six months, analyst Yusuke Ueda wrote.

Experts, however, say a final resolution of the nuclear disaster is likely to take decades and there could be many further setbacks.

TEPCO could burn through 2 trillion yen in about a year, said CLSA equity analyst Penn Bowers, as it pays extra for fuel to run its thermal plants, among other costs.

The U.N. nuclear watchdog, the International Atomic Energy Agency, suggested on Thursday that Japan consider widening an evacuation zone around the Fukushima plant, which would force more people and businesses to move and potentially increase compensation claims.

More than 70,000 people have been evacuated from a 20-km (12 mile) exclusion zone and another 130,000, who live in a 10 km (6 miles) band beyond the exclusion zone, have been advised to leave, or to stay indoors.

Prime Minister Naoto Kan, facing mounting criticism for not expanding the evacuation zone, has said he was seeking advice. Experts say an extension may be inevitable.

SPLITTING THE BILL

Still, some or all of the compensation claims may be picked up by the government in order to limit the liability imposed on TEPCO, a move that may avoid the need for nationalization.

Even without nationalization, there is a way for the government to help TEPCO pay for damages, said Akihito Murata, a credit analyst at Deutsche Securities in Tokyo. When the total costs have not been established and there are some other ways to discuss, it's just too early to talk about nationalization.

Under Japanese law the operator of a nuclear facility can be granted an exemption from damages caused by a reactor if the accident was deemed to have been triggered by a grave natural disaster of an exceptional character. The government has not yet decided whether it would classify the 9.0-magnitude earthquake and tsunami as an exceptional disaster, even though total damages could exceed $300 billion to make it the world's costliest disaster.

Depending on the cause of a nuclear accident, either the government or insurers can be required to provide the first 120 billion yen ($1.47 billion) in liability coverage.

Tokyo Electric would be liable for all damages exceeding that amount if the exemption is not granted. If threatened with financial ruin, however, it could ask the government for assistance.

In any event, we think it is very unlikely that TEPCO will end up in legal bankruptcy, considering its importance as a provider of a key part of the infrastructure, electricity, Ueda wrote.

TEPCO has around $91 billion in debt including some $64 billion in bonds. That excludes about $24 billion recently secured in loans from domestic lenders.

At the end of December, TEPCO had equity of about $35 billion, its accounts show.

The cost of insuring TEPCO's debt against default narrowed sharply on Wednesday. Five-year credit default swaps dropped 72 basis points (bps) from Tuesday to 320 bps, financial information company Markit said. The CDS hit its widest spread on record at 475 bps earlier this week.

($1=82.875 Japanese Yen)

(Additional reporting by Taiga Uranaka, Junko Fujita, Hideyuki Sano, Mia Stubbs and Rachel Armstrong; Writing by Tim Kelly and Lincoln Feast; Editing by Rodney Joyce)

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