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November 2021
Kyushu Electric Power Company Inc.
Q&A between Investors and the President during the IR Meeting (November 11, 2021)Q・ First, regarding dividends, the President has mentioned before that the company was keen to
return to a dividend level of 50円 again in a short period of time. What milestones would
Kyuden have to reach, in order for it to decide to resume 50円 dividends? During this meeting,
the President talked a lot about profit standards, but what does he consider to be the most
important factors in deciding on a 50円 dividend: the ability to make profits or financial
strength? What level would be required for the President to consider a 50円 dividend?
・ Second, it was explained that Kyuden’s profit level based on true capabilities would exceed
100円 billion when disregarding the time lag inherent to the fuel adjustment system and
Growth businesses would make steady progress, taking into account that for this year the
availability factor for nuclear power stations is 90%, which is much higher than recent years.
Does the President think that Kyuden can earn more than 100円 billion as profit level based
on true capabilities, if the nuclear power stations’ base utilization rate was 80%? Furthermore,
if Sendai Nuclear Power Station is going to extend its operational life, will it require any special
construction work that may reduce its availability factor? Is that a concern? I want to hear
more about the availability factor of nuclear power stations and profit level based on true
capabilities from a mid-to-long term perspective.A・ First, as per financial targets, we hope to return to 50円 dividend by 2025 or as soon as
possible. While we are aiming for 20% equity ratio, we consider that a general milestone to
keep an eye on and will not necessarily start issuing 50円 dividends just because we’ve
achieved that milestone. In terms of profit targets, we have set a goal of 125円 billion for 2025
and I think the major factor in our decision will be whether or not we are on track to meet
that target. The projected dividend for this year is 40円 and we currently believe that we will
be able to deliver a 50円 dividend in the not-so-far future without disappointing our investors.
・ Second, we believe this fiscal year’s profit level based on true capabilities will be around 100円
billion. Of course, this figure is based on our current situation, and we believe there are other
positive factors on the horizon. For example, we are aware that the base utilization rate for
nuclear power stations has reached above 80%, but we hope to improve this by increasing
efficiency in the implementation of periodic Inspection. I think we are capable of generating
100円 billion even with the utilization rate of at least 80%. At this point we have not decided
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to extend the operational life of the units at Sendai from 40 years, but if we were to apply for
an extension, it is possible that the NRA may decide that additional work is necessary after
having reviewed the application. However, we are being able to continue operating the units
in a safe and stable manner so far, and if there are no problems identified during the special
inspection, I believe that no major additional work will be required.Q・ First, the volume of electricity sold in the first half of the year has increased, even when
excluding the impact of COVID-19. How is the competition? Looking at the step chart, it does
not look like you have reduced unit prices. Why do your sales efforts seem to be successful?
・ Second, you have included the effects of streamlining in the full-year forecast. Is this primarily
driven by the effects of rising fuel prices being carried over? Or are the effects of this
streamlining structural and will they continue into the next fiscal year and beyond?A・ First, we think that our strong sales are the result of our efforts to work alongside our
customers in the Kyushu area and I believe that these efforts are starting to bear fruit as we
see customers switching back to our company following the liberalization of the market.
On the price side, if the experience of last winter’s market price hike due to the tight supply-
demand conditions has had an impact on competitors’ proposals and bid, then I think you
could say that our competitiveness has increased. We will continue to improve our price
competitiveness and make proposals that meet the needs of our customers in areas other
than price. Amid an increasing demand among our customers for carbon neutral initiatives,
we have been promoting sales activities such as energy savings assessments and other efforts,
which I believe played an important factor in our current success.
・ Second, we have not been able to analyze the effects of streamlining in the current fiscal year
in terms of temporary and permanent factors. While some part of the 7円-8 billion
improvement due to streamlining stems from the carried over rising fuel prices, we have
been working on streamlining from a completely new perspective through DX and I think
this is making a difference as well.Q・ First, you mentioned that you are considering the use of ROIC, but I would like to hear more
about your perception of the current situation. ROIC for the last fiscal year was 1.34%
(including the time lag effect), but is the current ROIC higher than WACC? Kyuden’s ROE has
historically been around 5%, but it is difficult to evaluate given the current low equity ratio. I
think the ROIC must be raised to improve the ROE in improving the equity ratio.
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・ Second, regarding corporate governance, what is the President’s position on separating
management and execution, taking into account the examples of KEPCO and TEPCO? Also
with regard to external directors, the corporate governance code, which was revised this
spring, included a recommendation regarding the establishment of an external board
director. Is Kyuden doing anything to address this? At briefings held by other companies, I
have been asking other companies to create opportunities for external board members to
talk to shareholders, and I appreciate that Kyuden is actively engaging with this issue.A・ First, ROIC, on a consolidated basis, based on this year’s earnings projection is around 1.5%,
which is around the same level as WACC. We have been internally discussing the use and
disclosure of ROIC, but in terms of existing frameworks, we are ensuring capital efficiency by
using a hurdle rate based on the cost of capital for each individual investment as a basis for
investment decisions. We are aiming for an ROE of around 8% in the mid-term range along
with the financial targets announced previously. We would like to consider ROIC going
forward.
・ Second, regarding corporate governance, the President and below execute and the Chairman
and the board supervise. The effectiveness of the Board of Directors, which I believe is
functioning very effectively, because in response to the opinions of external directors, we are
holding roundtable discussions, separate from the Board of Directors meetings, to analyze
matters regarding risk and management and to develop a shared understanding of
important strategies. We will also consider creating opportunities for dialogue with external
board members should there be any requests from investors. Under our current structure,
we have two non-audit external board members and three external audit members. The two
non-audit members have a wealth of experience outside the company and overseas, and we
hope that they can both provide guidance to our company.Q・ First, you mentioned the periodic inspections of nuclear power stations. How do you intend
to approach the regulatory authority about extending the inspection interval to 13 months?
Does the NRA seem receptive?
・ Second, what are the insights if any from your analysis of internal carbon pricing in the
context of Kyuden’s business activities?
・ Third, what does the President currently intend to do when or if the ROIC of each division is
calculated?A・ First, regarding the periodic inspections of nuclear power stations, we were talking about
shortening the time required to conduct inspections in order to increase the overall
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utilization rate. However, as you mentioned, I am aware that it is possible under the rules
that planned inspection intervals can be extended from 13 months to 18 months. In the
dialogue between utilities and the NRA, I have felt that the chairman of the NRA is not against
the idea. Increasing the utilization rate of nuclear power stations is an important issue that
we need to tackle as it will contribute significantly to reducing CO2 emissions. Both reducing
the inspection period and extending the intervals are both important measures to pursue
when increasing the utilization rate of nuclear power stations and we believe that the NRA is
also not completely against either of these ideas.
・ Second, internal carbon pricing is being used to make internal investment decisions. However,
this is not yet being used in all of our business areas and I think that this is a challenge that
we need to discuss going forward. Carbon free opportunities have a high potential for future
profit growth and the risk of them becoming unusable is low and we take this into account
in our investment decisions.
・ Third, we have been discussing the use of ROIC in existing businesses. We recognize that
there are many issues to consider such as which businesses to bundle into units when
measuring ROIC and how to consider synergies among businesses.Q・ I can understand how Kyuden’s competitiveness can comparatively increase within the
Kyushu area. However, I am concerned that Kyuden Mirai Energy’s competitiveness could
decrease due to rising procurement costs and other factors.
・ Are there any specific areas, which showed an improvement in profit governance, or where
there has been a positive response compared to last year’s projection? Are there any stories
you could share that would illustrate this?A・ First, in terms of rising fuel prices, our competitiveness is increasing when fuel prices are
rising because of our use of nuclear power and renewable energies. Looking at the unit price
for fuel cost adjustment, our margin of increase in fuel cost adjustment fees per unit amount
is small, and our advantage in this area compared to our competitors can be easily seen.
Kyuden Mirai Energy does not have the same advantages over competitors as its positioning
within Kyushu but I don’t think it is less competitive than other companies. It is hedging risk
by considering various electricity procurement methods, including negotiated transactions,
and will continue to strengthen its sales activities.
・ Second, in profit governance, we have revised our earnings projection multiple times in the
past, but the most memorable instance for me is the withdrawal of the earnings projection
in January of 2021. We were thoroughly criticized over this but our intention was to disclose
information accurately and we felt that it would not be fair to keep the forecast unchanged
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while the future was uncertain. I am sure that the initial earnings forecast to come true is the
best-case scenario for investors, but I hope that you will consider this as a testament to our
honesty. This term, we have also worked on strengthening communication with group
companies and related internal organizations on income and expenditures management. As
a result, we have not had to revise our earnings projection as of yet and we will continue to
strictly manage our income and expenditures to ensure this projection can be maintained.Q・ How did fluctuations in the JEPX market price affect earnings levels in and outside the area
during the first half of the year? I can understand how Kyuden may be more competitive
compared to other utilities in the area, but I fear that the opposite may hold true for areas
outside the Kyushu area.
・ There seems to be a large discrepancy in the performance of the transmission and
distribution business among the general transmission and distribution companies, which are
spin-offs from the 9 utilities. How has the establishment of the supply and demand
adjustment market affected Kyuden’s earnings for the first half of the year and full-year
forecast? Some transmission and distribution companies are experiencing losses so is the
FEPC taking any actions such as petitioning the national government or addressing these
issues as an industry?A・ The first question is difficult to answer. Looking at it from the perspective of the Kyushu area ,
high prices in the wholesale electricity market mean that we can sell our electricity at a high
price, but it has a negative impact on our purchases and renewable energy subsidies that are
calculated in conjunction with market prices. In terms of the competitive environment, while
we are less likely to be affected by increases in fuel prices due to our renewables and nuclear
power generation, new operators who often procure electricity from the spot market are
heavily impacted by such increases. As a result, the impact for Kyuden will be relatively
positive. Outside of Kyushu area, I cannot share any details of how Kyuden Mirai Energy sets
prices based on the responses of other companies and how it hedges risk as it is part of the
management strategy. In responding to our competition, I can say we are acquiring new
customers by leaning on our mutual connection to Kyushu, in addition to competing on price.
・ Second, regarding the supply and demand adjustment market, the bidding process will
enable Kyuden, which has been responding flexibly to rapid changes in renewable energy
output, to obtain compensation in a transparent way, which is a good thing for Kyuden.
Meanwhile, renewable subsidies, which is a source of income for the transmission and
distribution business, has been scarce this fiscal year, and We have not been able to collect
all of the consideration paid. In that sense, there have been negative effects. I have heard
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that other utilities have been impacted but I think that this is something that the TDGC
(Transmission and Distribution Grid Council) needs to address with the Agency for Natural
Resources and Energy, and not the FEPC.Q・ Under the current circumstances the volatility of the electricity business is increasing, with
regard to fuel procurement and other factors, and therefore we expect to see a difference in
the earnings per utility, depending on their position or approach on these matters. I want to
hear more about Kyuden’s policy or approach in hedging against volatility.A・ Because of our well-balanced portfolio of power sources, we have the ability to hedge on
our own to some extent against rising fuel prices, and therefore we do not feel a strong need
to fix the electricity procurement price through futures for example. New operators who do
not have their own power sources usually cannot handle the kind of spot price volatility that
took place in January this year. Kyuden Mirai Energy is hedging its exposure against this kind
or risk by using various procurement methods.Q・ I personally respect your decision to withdraw the earnings projection in January. People may
disagree but I think fundamentals should be disclosed and if they are bad, the stock price
should go down, and if they are good, it should go up. Meanwhile, and this can be said for
the industry overall, I think that utilities should disclose fluctuations in profit margins to allow
for the discussion based on hard numbers: otherwise, you cannot breakdown and analyze
the price factors and quantity factors when faced with reduced profits in a worsening
competitive environment. Although this is a request, I would like to see Kyuden to do more
in-depth discussions on profit governance and information disclosure, and then roll out its
efforts to other utilities if possible.
・ Announcing the goal to become carbon negative is a bold, decisive step that other utilities
can only hope to follow. In the official announcement, I hope that you will disclose more
information appropriately in the general sense of direction as it was explained today. I think
that this could create a ripple effect throughout the industry if it can be framed from the
perspective of S+3E.A・ Thank you for understanding our stance on disclosure. Electricity as a product is difficult to
differentiate, compared to cars for instance, in which you could differentiate on design
among other factors. We hope to do business based on the effects of electricity rather than
on electricity itself, through sales activities and by providing added value such as proposals
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and technical advice on energy conservation. So, it is very difficult to have our performance
analyzed in terms of quantity and price. We will consider how to disclose information in a
way that does not compromise our competitiveness, but I think rolling this out to other
utilities will be difficult.
・ Thank you for your comments on our goal of becoming carbon negative. In addition to
reducing our greenhouse gas emissions by transitioning from fossil fuels to renewable
energy, we are working on activities to reduce emissions in Japan by promoting electrification.
For example, the entire group is working hard on EV utilization projects and proposals to
companies and industries for electrification. Our aim of becoming carbon negative does not
restrict to our power sources only, but our aim is also to contribute significantly to the carbon
neutrality of Japan as a whole by 2050.Q・ Kyuden Mirai Energy has been growing its sales and its profits to some extent. What are the
factors driving sales and the factors behind the profits? We heard that the risk of rising fuel
prices was being hedged but I think it also needs to be looked at in terms of competition.
Electricity procurement at peak times looks to be especially tough this year and Kyuden Mirai
Energy still faces the challenge of procuring electricity during times of demand. In such a
situation, I want to know the reasons and context to why Kyuden Mirai Energy’s sales is
growing.
・ Regarding fuel procurement, how have rising spot prices of coal affecting earnings for the
first half of the year and the full-year? The rising spot price of LNG must have both positive
and negative effects: how is that being reflected in the earnings? I also would like to hear
about LNG resale measures and how much have been factored in the business performance.A・ First, Kyuden Mirai Energy has been offering a broad scope of plans, including plans based
on business partnerships with JAL and other companies mainly located in Tokyo, and has
been successful in winning bids. Their strengths lie in their active sales activities but also their
ability to sign contracts with people who have their roots in Kyushu, as many companies in
the Tokyo metropolitan area originate from Kyushu or have presidents who were born in
Kyushu. We are conducting in-depth analysis and diversifying sources on the procurement
front, but I am sure other new operators are doing similar things, so I think the main
differentiating factor is our sales force.
・ Second, regarding the effects of the rising fuel prices, the spot price for coal soared past the
250ドル mark at one point but we have been working on procuring coal at different points in
time and mixing different types of coal to ensure that the effects of these rising prices do not
impact us directly. Recently, prices have settled a bit which is a relief. We use long-term
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contracts to procure LNG. Stable supply is our top priority and we may consider reselling
after having carefully examined the demand and supply situation and determined that there
is sufficient supply. Everything depends on the demand and supply this winter, but looking
at the prices right now, I think if we were to resell, it could contribute to our full-year earnings.Q・ The President mentioned that profit level based on true capabilities is around 100円 billion or
more but in the last meeting I remember him saying that it was around 90円 billion. How did
it increase by 10円 billion in 6 months?
・ My understanding of the Kyuden Group’s interpretation of becoming carbon negative is that
they will actively promote electrification throughout the society and count the reduction in
emissions in society at large as part of Kyuden’s carbon emissions reduction, thus
contributing to reducing emissions for society at large and not just for Kyuden’s own supply
chain. Is this accurate? On a separate note, looking at the long run, are there any talks of
construction of new nuclear power plants and replacement of existing nuclear power
stations?A・ The volume of electricity sold has been growing this term. I am adding a portion of that profit,
about 10円 billion worth, in the calculations for the company’s true profit levels. Personally,
when looking at the amount that Kyushu Electric Power Transmission and Distribution Co.
have not been able to collect all of the consideration paid in the supply and demand
adjustment market, I think this estimate is on the conservative side.
・ Our efforts to be carbon negative is as you described: we are aiming for "negative" emissions
when adding the effects of emission reductions from the promotion of electrification and of
renewables outside Kyushu area. Nuclear power is a very important factor in achieving carbon
neutrality.
As FEPC Chairman, I’ve been saying that the industry will promote the use of renewables as
a main power source, the use of hydrogen, ammonia and CCUS in thermal power generation,
and nuclear power, as three principle areas of action. Among them, nuclear power, which is
technologically well established, and which allows for electricity to be generated in a planned
manner, is critical. The 6th
Strategic Energy Plan did not mention construction of new nuclear
power plants and replacement of existing nuclear power stations, but I have been asking the
government and our Diet members to include it in the plan. There are a couple of reasons
for this: the first reason is the effect on human resources. Without talks of construction of
new nuclear power plants and replacement of existing nuclear power stations, we will not be
able to attract human resources or implement long-term training plans. The second reason
is a supply chain problem: without talks of construction of new nuclear power plants and
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replacement of existing nuclear power stations, we may not be able to maintain supply of
the steel and parts necessary for building and maintaining nuclear power stations. Another
reason is that the people of the region, where the plant is located, may feel uncertain about
the future. Kyuden believes in continuing to operate all four operating power plants safely
and in a stable manner. Looking to the international stage, the French President Macron
announced a policy to restart the development of nuclear power stations. The EU is also
recognizing that nuclear power is becoming more and more necessary due to reducing the
rise in electricity prices and increase in CO2 emissions. As the world continues to gradually
change, and if Japan can domestically continue to engage in the discussions, I think a
common understanding can be reached that nuclear power is necessary and an important
power source in achieving carbon neutrality.
Although this document contains forward-looking statements, these
statements are not guarantees of future performance and are subject
to risks and uncertainties. Please note that future performance may
vary if assumptions about the business environment change.