1 Overview of the Kyuden Group 2 Value Creation Story 3 Strategy and Performance 4 Creating Value through Business 5 A Foundation for Creating Value 6 Data Section
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KYUDEN GROUP INTEGRATED REPORT 2023
Kazuhiro Ikebe
Member of the Board of Directors
President & Chief Executive Officer
Message from the President
Having all preparations for growth in place,
we will make great strides toward achieving
sustainable improvements to our corporate value
as an industry leader in decarbonization.
Message from the President
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Message from the President
Where are we heading?
The Kyuden Group’s top priority right now is achieving carbon neutrality.
All of the Group’s strategies are focused on becoming carbon neutral,
and by executing these strategies, we will enhance our corporate value
in financial and non-financial terms.
The Kyuden Group aims to achieve carbon neutrality by 2050 and plans
to achieve "carbon negativity" as early as possible before 2050. The
latter is realized by both reducing greenhouse gas (GHG) emissions from
business activities across the entire supply chain to net zero, as well as
by undertaking activities that help reduce GHG emissions across society,
such as promoting electrification and other measures. P08 This year
we became the first major energy company in Japan to be certified
under the Science Based Targets initiative (SBTi) for our GHG emission
reduction targets, which were set based on the level of our environmental
targets for FY2030. P42 We intend to continue to lead Japan and the
industry as a whole as an industry leader in low-carbon and carbon-free
efforts.
In order to achieve carbon neutrality, we will do our utmost to advance
the two pillars of carbon reduction / decarbonization in power
sources, i.e., producing electricity with technology that does not emit
CO2, and promotion of electrification, i.e., using energy in the form of
electricity.
To promote power generation that does not emit CO2, we must first
expand renewable energy and work steadily to ensure the safe and stable
operation of nuclear power plants. Doing so will enable us to cover about
60% of our energy mix with power sources that do not emit CO2, such as
nuclear power and hydro, geothermal, solar, and wind, including those
promoted under Japan’s renewable energy feed-in tariff (FIT) scheme.
Going forward, we will continue to proactively utilize power sources that
do not emit CO2.
■しかく Kyushu EP’s Ratio of Zero-Emission or FIT Energy Sources*1
(FY2019*2)On the other hand, thermal power generation is essential to compensate
for fluctuations in output from renewable energy sources such as solar
power, which cannot be generated at night and is affected by weather
conditions. At our company we are continuously working to maintain and
improve overall thermal efficiency from the perspective of reducing CO2
emissions and fuel consumption. In addition, we are exploring measures
such as co-firing of hydrogen/ammonia and biomass, as well as carbon
capture and storage (CCS) technologies. P44
In order to increase the use of electricity and advance electrification,
Japan needs to push ahead with policies to promote electrification
nationwide, and such policies are just beginning to take effect. Thanks
to government subsidies, tax incentives for heat pumps and all-
electric homes, and other measures, electrification is advancing rapidly
in all sectors of Japan. This transition is not only happening in the
transportation sector, where we see a shift to electric vehicles, but also
in the industrial, commercial, and household sectors.
Given this push for electrification and other factors, it is certain that
the share of electricity in the final energy consumption will grow from its
current level, which is now at around 25%. Regarding Japan’s overall
electric power demand, I personally believe that by 2050, it will be about
double the current level, and in fact may well exceed it. Furthermore,
as digitalization gains speed and the amount of electricity required to
process this data grows exponentially, there may even be concerns
about a shortage in the electricity supply. This is particularly relevant
in Kyushu, as in the prefecture Kumamoto there will be a concentration
of semiconductor fabrication plants along with business facilities and
in the area of Kitakyushu one of Kyushu’s largest data centers will be
constructed. If demand for electricity outgrows supply, it is not as if
power plants and power lines can be built overnight. The construction
of a new power plant can take anywhere from several years to several
decades. Yet another key factor in ensuring a stable supply of electricity
is creating an attractive business environment for new entrants in the
power generation sector. For this reason, I believe that it is critical for the
government to present a vision for the next 20 years or so, based on how
it plans to encourage Japan’s future electrification through policy means.
I am confident that this path to carbon neutrality not only have a direct
impact on the expansion of electricity demand but also lead to enhanced
corporate value for the Kyuden Group, considering our extensive
experience and expertise in the power supply sector.
Nuclear
power35%Other 2%
58% (incl. FIT electricity)Coal29%LNG11%
Renewable
energy23%FIT
electricity14%*1: Ratio includes energy produced and
purchased by Kyushu EP and represents
the value before Non-Fossil Certificate
trading
*2: During this period all four nuclear
reactors were operating (82.0%
utilization rate)
Note: For amounts for which Non-Fossil
Certificates were not used, there is
no value for renewable energy or
zero-CO2-emission energy sources, and
so these are counted as national average
CO2 emissions for electricity production,
including that generated from fossil fuels
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Toward Sustainable Enhancement of
Corporate Value
We will continue to make management efforts by outlining our corporate
value through sustainable growth and improvement of capital efficiency,
while taking into Tokyo Stock Exchange’s request for companies to take
"action to implement management that is conscious of cost of capital
and stock price" by analyzing their cost of capital and market valuation,
and to disclose their targets and plans for improvement. Although the
Kyuden Group’s price-to-book ratio (PBR) is currently close to 1, we
believe there is room for improvement.
PBR can be broken down into return on equity (ROE) and price
earnings ratio (PER). We believe that improving ROE, an indicator
of capital efficiency, and PER, an indicator of confidence in our
performance and growth potential, is essential for our shareholders and
investors to evaluate the Group’s corporate value, and for us to achieve
sustainable improvements to our corporate value (a PBR above 1) over
the medium to long term. P24
First, with respect to improving capital efficiency, we will achieve
a return on capital higher than the cost of capital by promoting
management that is conscious of return on invested capital (ROIC). With
respect to improving confidence in our performance and growth potential,
we will use the current turnaround in business performance to improve
financial stability and thoroughly return the profit to our shareholders.
At the same time, we will communicate to our investors that we as a
corporate group will do our utmost toward decarbonization while creating
further growth over the long term. Making improvements in each of
these areas will enable us to achieve sustainable improvements to our
corporate value (a higher PBR).
ROIC-Based Management
Last year we introduced ROIC as a new management indicator. In April
2023, we announced the Group-wide ROIC targets of 2.5% or higher for
FY2025 and 3.0% or higher for FY2030 (consolidated basis). P25
As we work towards achieving our target of 150円 billion in
consolidated ordinary income by 2030 (as outlined in our Management
Vision 2030), we are investing in expanding our Growth Businesses.
However, reducing interest-bearing debt to restore and strengthen our
damaged financial foundation is also a challenge. By implementing
ROIC, we aim to enhance corporate value through capital-efficient
management, meet the expectations of the capital market, and achieve
a balance between expanding our Growth Businesses and strengthening
our financial foundation.
In the short term, we are focusing on improving capital efficiency by
ensuring that employees are aware of its importance and can incorporate
it into their specific tasks. Each business department has created and
analyzed ROIC trees, and investment decisions are made with a focus on
ROIC for each project. I noticed that ROIC-based practices are starting to
be implemented on the ground level.
From a medium to long term perspective, ROIC also serves as a
decision criteria for making changes to our business portfolio. One of
our management targets in our vision is to earn half of the 150円 billion
in consolidated ordinary income from Growth Businesses. We can
focus on the more profitable business areas by promoting ROIC-based
management. We would also like to explore building a business portfolio
that goes beyond the framework of electricity, so that everyone will be
able to recognize that our company is engaged in more than just the
electricity business.
Management Vision 2030 and Growth Businesses
In terms of progress towards the realization of the Management Vision
2030 and the steady expansion of our Growth Businesses, we have
set an interim target for FY2025 of achieving a consolidated ordinary
income of 125円 billion or more (Domestic Electricity Business: 75円
billion; Growth Businesses: 50円 billion). P21 Regarding the Domestic
Electricity Business, we have completed installation work of Specific
Safety Facilities (SSFs) at nuclear power plants, and can expect to
generate income from high utilization of nuclear power plants in the
future. As for our Growth Businesses, we expect to achieve our targets
through income from investment projects that we have already initiated
in our Overseas Business and Renewable Energy Business. Therefore,
I believe that it is very likely that we will achieve our financial objectives
for FY2025, and then our management targets for FY2030, in terms of
income.
Message from the President
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More specifically, in our Renewable Energy Business, we are making
steady progress toward reaching our target of developing 5,000 MW
by FY2030. If we include projects we have already invested in, we have
achieved close to 80% of our interim target (4,000 MW by FY2025).
Furthermore, by integrating hydro and geothermal power generation
into Kyuden Mirai Energy, the Group’s renewable business arm, and
strengthening our business operation structure, we aim to accelerate our
efforts to make renewable energy our main source of power generation,
as the only operator in Japan that owns all five renewable energy
sources (solar, wind, hydro, geothermal, and biomass), and one of the
top operators in terms of capacity owned domestically.
In our Overseas Business, more than 70% of our interim target (4,000
MW by FY2025) has already been secured, and we are moving forward
with projects with the aim of reaching 5,000 MW in equity output by
FY2030. We are actively working to lower the carbon intensity of and
decarbonize the energy sources in the areas in which we operate through
subsea transmission projects and collaboration with other renewable
energy developers.
As for our ICT Service Business, in the rapid digitalization of society,
we will reinforce services such as digital transformation (DX) proposals
for enterprises and municipalities in addition to our core services in fiber
optic broadband internet and data centers.
As for our Urban Development Business, in addition to reinforcing our
overseas operations, we will grow our earnings by developing high value-
added urban development projects that leverage the Group’s collective
capabilities in decarbonization and digital technology. At the same time,
we will help to sustainably develop local communities and society by
creating vibrant communities and to increase their pull factor.
Meanwhile, with regard to our financial foundation, we issued 200円
billion of Class B preferred shares in August 2023, and are currently
in the process of building up capital. I believe we are within reach of
achieving a 20% equity ratio, one of our financial objectives, as long
as we maintain a high level of profit under our four nuclear power
units and use our resources efficiently to reduce interest-bearing debt
through ROIC-based management. Once we are on a clear path to
reaching an equity ratio of around 20%, we intend to enhance returns to
shareholders, including promptly resuming dividends of 50円 per share.
Enhancing Our Human Capital
The key players in achieving sustainable improvements to our corporate
value is talent. In order to keep growing sustainably despite constant
changes in the business environment, it is essential to maximize the
potential of our talent and to improve our productivity and capabilities as
an organization. P67
Our people are also the driving force that will lead the way in an
era characterized by a drastically changing business environment that
calls for disruptive innovation. A company in which each employee
enthusiastically takes initiative to act autonomously in which the
organization harnesses employees’ energy to enhance productivity and
generate innovation. I am determined to transform the Kyuden Group
into such a company. To achieve this, under the strong leadership of our
senior management, we are building an organization in which diverse
talent can thrive and innovate continuously.
Organizational flexibility and flexible thinking, as well as the innovation
that springs from it, will be key as we tackle carbon neutrality and other
future challenging issues. The Kyuden Group has launched the KYUDEN
i-PROJECT, a project led directly by the president, to provide employees
with opportunities to consider new businesses and services inspired by
flexible ideas that go beyond the framework of our existing organization
and operations. P69 In other words, part of the significance of this
Our rugby team Kyuden
Voltex was promoted
to Division 2 in the
Japan Rugby League One
Message from the President
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project is nurturing flexible mindsets. I believe that the employees who
participated in this project will be able to apply what they learned through
the project at their respective workplaces, leading to greater innovation
throughout the organization. We are already seeing the results.
As competition for talent intensifies, we must manage our businesses
with the assumption that there will be increased upward pressure on
Japan’s per-capita labor costs, which have been lagging behind other
countries. It will therefore be essential to promote DX and leverage
generative AI to fundamentally change the way we work and alter our
business processes to achieve greater productivity.
The Kyuden Group has been working to develop frameworks to
promote DX. In FY2022, we established the DX Promotion Division
and announced the Kyuden Group DX Vision, with the aim of bringing
about corporate transformation. Looking ahead, we will accelerate the
development of digital talent and implement measures to improve labor
productivity and value added per employee. P71
It is true that in order to ensure a stable supply of electricity, some
departments require technology and skills that have been acquired over a
long period of time. However, on the flip side, an organization that lacks
diversity and fluidity becomes stagnant and will reach a dead end due to
its rigid way of thinking. While we often refer to employees as "human
capital," I believe that rather than confining talent within a company and
making them fixed "capital," a better approach would be to increase the
mobility of talent throughout society and allowing individuals with diverse
experiences to circulate.
The fact that other companies want to hire people trained at our
company is gratifying, and it is equally wonderful to have talented people
who were trained at other companies join us and play an active role.
Moreover, people who we have trained at our company are hired by other
companies, and then return to our company once again with additional
experience. I believe this is the best scenario.
We need to actively recruit experienced personnel and acquire
outside perspectives and knowledge. I think we should flip the term
"human resources" into "resourceful humans". My vision of human
resources development is to nurture specialists with talents and abilities
in their respective fields in order to boost the competitiveness of the
organization as a whole.
Review of the Past Fiscal Year and
Management Vision 2030
FY2022 was a year marked by significant impacts from the external
environment, such as rising fuel prices and the rapid depreciation of the
yen. As there is a three-month lag between the increase in fuel prices
and its reflection in electricity charges through the fuel cost adjustment
system, we experienced a negative turn in profits for the fiscal year. In
addition, external factors, such as an increase in the price of electricity
purchased from other companies due to higher wholesale electricity
market prices, have impacted us significantly. Another factor that
contributed to the deterioration of our finances was the increase in fuel
costs as we could not fully utilize nuclear power due to the installation
work of SSFs at Genkai Nuclear Power Plant. For the first time in eight
fiscal years, the company posted a net loss.
The installation of SSFs at Unit 4 of Genkai was completed in
February 2023, marking the end of installation work at all of our nuclear
power plants. Looking ahead, we expect stable operation of all four
reactors, which allows us to secure profits on an ongoing basis. In
addition, FY2023 will see a significant improvement and a V-shaped
recovery from the previous year’s losses due to delayed gains from the
fuel price adjustment system. I consider FY2022 to have been a year in
which we have been setting the foundation for recovery, making all the
preparations necessary to make the jump toward exponential growth in
FY2023 and beyond.
On the other hand, Kyushu EP and Kyuden Mirai Energy received
cease and desist orders and a surcharge payment order based on the
Antimonopoly Act from the Japan Fair Trade Commission (Kyuden Mirai
Energy received only a cease and desist order). After carefully reviewing
and confirming the details of each order, we concluded that "there was
no agreement regarding the cartel activities," and filed a lawsuit seeking
the revocation of the order. We will explain our position in the revocation
lawsuit and seek a fair judgment from the court going forward.
Nevertheless, we take these orders very seriously. We are steadily
implementing measures to ensure compliance with the Antimonopoly Act
so that we will never again invite such allegations in the future.
There was also an incident involving the improper handling of
customer information. We regard this incident as a serious problem that
could undermine fair competition, which is the basis of the liberalization
of the electricity market. The fundamental cause was the lack of
awareness on the part of senior management at the time of the spin-off,
as they decided on business operations that had the potential to cause
problems. In addition to establishing systems to prevent recurrence, it
is critical that we create a workplace culture that refuses to overlook
inappropriate behavior and enables whistleblowing. Senior management
will take the lead in ensuring compliance with laws, regulations, and
rules, and will work to create a workplace with an atmosphere of
openness and trust. P83-85
Message from the President
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working together with local communities to solve social issues, while
maintaining a mutually beneficial relationship with our business partners
through our Partnership Declaration.
In order to achieve our management vision and carbon neutrality,
we will continue to meet the expectations of all of our stakeholders by
promoting various initiatives together with our employees, the Group’s
important and closest stakeholders.
We look forward to your ongoing support as we move forward.
Factors such as Russia-Ukraine conflict and the effects of a weak yen
have caused fuel and wholesale electricity market prices to soar. This
has had a significant impact on our income and expenditures, and
the possibility of a power crunch has made securing a stable supply
of energy a major priority for the entire country. Precisely because of
these circumstances, we are reaffirming the Kyuden Group’s Mission
to Enlighten Our Future. We have long been committed to the electricity
business as a social infrastructure company that supports people’s lives
and contributes to the local community by ensuring a stable supply of
electricity. After WWII, we were the first company in Japan to achieve
a stable demand-supply balance, and we have cultivated our strengths
by helping to solve social issues while maintaining a stable supply.
With these strengths at our core, I am confident that we can transform
unprecedented changes in the business environment into opportunities
that will lead to future growth. P17-19
Having said that, I would like to reiterate that we have been able to set
forth a solid strategy that draws on our strengths our Management Vision
2030, providing a direction for our efforts toward growth. P08
Strategy I in this management vision is Developing the Energy
Service Business, and there is no doubt that energy services will be a
major driver of growth within the overall picture. Based on the strengths
we have cultivated through our energy service business centered in
Kyushu, namely stable supply technology and a high ratio of zero-
emission energy sources, we are now making steady progress toward
achieving the challenging goal of carbon negativity as soon as possible.
Strategy II, Building a Sustainable Community Together, is about
working to resolve local community issues together with everyone in the
community. I think that Strategy II will be the most important strategy
for the Kyuden Group for the future. Since our work is originally in the
infrastructure business, we have strong networks and relationships
of trust that we have fostered by supporting the lives and economies
of local communities and developing together with them. For this
reason, I believe that we are well positioned to work together with
communities to solve local issues. For example, we are participating in
airport management projects to increase the number of visitors, and
we have concluded partnership agreements with local governments
to cooperate in local carbon neutral initiatives. In this way, we hope to
think together with the local community and contribute to solving social
issues. I have always said, "Without the development of Kyushu, there
can be no development of the Kyuden Group". Co-creation with the local
community is at the heart of realizing our management vision.
To Our Stakeholders
I would like to remind our shareholders and investors that although we
recorded an ordinary loss for FY2022, our efforts to date have left us
well prepared for growth in FY2023 and beyond. Regarding dividends,
we will continue to strive to resume dividend payments of 50円 as soon
as possible within the financial objective period (ends in FY2025).
Our senior management will also take the lead in actively engaging in
dialogue with the market regarding our efforts to sustainably improve our
corporate value, as outlined in this message. Through such dialogue, we
hope you will come to appreciate how the Kyuden Group is transforming
into a new format by expanding beyond the Domestic Electricity Business
to include Growth Businesses such as renewable energy, overseas
business, ICT services, and urban development.
We will contribute to the development of Kyushu and other regions by
Message from the President