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November 2023
Kyushu Electric Power Company Inc.
Q&A between Investors and the President during the IR Meeting (November 13, 2023)
Mr. Ikebe, Member of the Board of Directors, President and Chief Executive Officer
Mr. Nakano, Senior Managing Executive Officer, Director of Operation Division within Business
Solutions Headquarters
Mr. Kido, Executive Director of Corporate Strategy DivisionQ・ First, regarding nuclear power. Have the regulatory risks associated with backfitting and the
extension of the operation of the Sendai Nuclear Power Plant largely been overcome? For
example, in the case of backfitting, there is the deadline of next spring, but is it correct to
say that because of the review the risk of a temporary loss of stable operation of nuclear
power plants has largely been eliminated? Is there a possibility that the safety work will
reach a major peak in the medium to long term and lead to a lower utilization rate than the
ideal level?
・ Second, regarding electricity demand. Based on the location of the plant, to what extent is
there a possibility that demand for electric power will increase? If so, will your company's
current power generation facilities be able to handle the increase? Or will it be necessary to
develop new power sources?
・ Third, regarding PBR measures, is there room for an approach to increase ROIC by
streamlining assets and getting closer to achieving financial targets? I suppose this would
involve sorting out core and non-core assets, but are you considering such an approach?A・ Mr. Ikebe: I think it is very significant that the Nuclear Regulation Commission approved the
extension of the operation of Sendai 1 and 2 from 40 to 60 years on November 1. The ability
to continue operating Units 1 and 2 at the Sendai Nuclear Power Plant for an additional 20
years is not only advantageous for our management, but also contributes to stable supply
by utilizing nuclear power, which emits no CO2. We have reported to Kagoshima prefecture
and the city Satsumasendai that we have received approval for the project from the NRA
(Nuclear Regular Authority) , and we will continue to work diligently on this matter. With
regard to backfitting, we are proceeding according to the schedule for approval of seismic
motions that do not specify the epicenter, and we believe that we will meet the deadline of
April next year. However, the extent of the grace period set for actual construction beyond
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that point is the subject of discussion not only within Kyushu Electric Power but also with an
organization called ATENA and the NRA, and we are working to ensure that we receive
sufficient time for this period.
・ Second, regarding electricity demand, TSMC and other factories are currently being built,
and we do not think there will be a problem for the next 10 years or so. I would like to
refrain from commenting on specific figures on how much demand will increase.
・ What concerns us the most is the longer-term outlook. Due to population decline and
energy conservation, the nationwide assumption is that electricity demand for the next 10
years will remain flat or slightly decrease. However, Kyushu, with its demand for
semiconductors and data centers, may experience slightly stronger demand. In addition,
the promotion of electrification is expected to drive demand further upwards. Since the
current electrification rate is about 26% in terms of final energy consumption, the remaining
three-quarters is supplied by oil and gas, which leaves room for electrification. In the
current GX promotion (Green Transformation), subsidies for heat pumps and whole house
insulation are on the way, and I am more concerned about how much the demand for
electricity will increase as electrification progresses in these areas. Therefore, we want to
carefully monitor the speed of future electricity demand growth, as it is currently being
discussed by wide-area organizations.
・ Third, in terms of ROIC management, each department will consider how to increase profits
and slim down assets in order to achieve a PBR of 1x. Looking at the whole picture, ROIC
management will help us determine which businesses we should invest in and which
businesses should not focus on, so we would like to utilize ROIC to achieve a PBR of more
than 1x.Q・ First, regarding the financial target of returning to a dividend of 50円 per share. Is it higher
than at the time of planning at the beginning of the fiscal year? Or are you aware that there
are many market factors that make it difficult to predict?
・ Second, regarding the review of the standard menu that was published in August. The
market adjustment factor was introduced without changing the basic fees and unit charges
for electricity usage in the standard menu. How was the coefficient of this market
adjustment factor 0.3 determined? From a market principle perspective, it might seem
better to raise prices according to demand. Could you please explain the thought process
behind this?AMr. Kido: Regarding the first point, the 50円 dividend, even with poor performance last year,
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we achieved 47円 billion in growth businesses, and our forecast for the current fiscal year is
170円 billion in ordinary income. Excluding the time lag effect, the amount is in the range of
the 120円 billion level. Looking at this we are fairly confident that we can pay a dividend of
50円 in the period up and including 2025.
Mr. Ikebe: Adding on to the dividend, we have not announced any future plans, so we have
not committed to anything beyond that point, but what we are saying now is that we will
resume the dividend of 50円 as soon as possible within the period covered by our financial
targets. As for nuclear power, we have completed the installation of the SSF (Specified
Safety Facilities), and we believe that we can continue to operate four nuclear reactors in a
stable manner. I believe our message to your question is that we have not withdrawn our
target to return to the 50円 dividend as soon as possible in the period up and including
2025.
Mr. Nakano: Regarding the second point on setting the market adjustment factor of 0.3 in
the standard electricity tariff menu. As you can see from last year's financial results, we
incurred significant losses due to soaring fuel costs and corresponding increases in the
wholesale market. Additionally, amidst extreme difficulty in securing additional supply
capacity, we ceased accepting contracts for high-voltage customers around February of
this year. While we have now resumed acceptance as the market has started to stabilize,
we cannot provide specific figures due to business strategy reasons. However, we have set
the menu prices to ensure that a stable balance is achieved if we have to purchase the
required supply capacity from the market at an appropriate price.
We believe the market adjustment factor will be helpful in times of extreme high prices The
market is relatively low and stable at the moment, and with the resumption of application
for the standard menu, we feel that many customers are still hesitant. We expect
evaluations of our new prices to come in the future.
Q (which is a follow-up question regarding the dividend)
・ In the discussion on PBR of 1x, you mentioned low expected growth rate as a reason for
the low PBR. Considering the so-called signaling effect of dividends, it seems to me that
your company has not shown confidence in its ability to grow or maintain current profits,
rather than that the market does not have high expectations.A・ Mr. Ikebe: I understand the aspect you're pointing out, but on the other hand, I think it is
possible to understand that we have a large area of growth potential and would like to use it
internally for investment in growth. In fact, we have also presented an image of profit
accumulation in our growth businesses, so if you look at the overall picture (domestic electric
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power business and growth businesses), I think our PBR could be a little higher. As for the
signaling effect of the dividend, we have not yet returned to a dividend of 50,円 and our
primary statement is that we are aiming to do this as early as possible.Q・ First, I believe that your company has been curbing sales promotion expenses (reviewing
sales prices), and I would like to confirm the progress of this. I believe that you have made
more progress than expected, but I would like to confirm whether there is room for further
reduction.
・ Second, in the current company plan, ordinary income is expected to be 121円 billion,
approaching the midterm target of 125円 billion significantly. Is this 121円 billion guaranteed
for the following fiscal year as well, and can it be considered as a baseline? Or are there
some one-time factors involved, and should we imagine that profits will be slightly lower
and gradually grow until 2025?
・ Lastly, I would like a brief explanation of the acquisition of a 6.67% stake in JERA's Goi
Thermal Power Plant and to confirm whether this will be used to strengthen sales outside
the region with this acquisition.A・ Mr. Ikebe. First, the move to bring selling prices closer to the standard menu (i.e., to reduce
sales promotion expenses) is progressing well. It is evident that our electricity rates are
relatively low nationwide, a fact that is well understood by corporate customers throughout
Japan, particularly those with nationwide operations. In addition, the recent market inflation
has had a significant impact on customers previously contracted with new electricity
providers, a memory that is still fresh. Therefore, our standard menu proposals have been
well-received. While I cannot provide a clear answer on how much room for further reduction
exists as it also involves sales information, it is understood that the standard menu has been
gradually gaining acceptance.
・ Second, regarding the profit level, the question is quite close to the actual profit situation.
Currently, our Genkai and Sendai nuclear power plants are operating stably. As we have
been able to bring our price levels closer to the standard menu, the current level is not
excessive. However, there is a systemic issue with the fuel cost adjustment time lag. It is
difficult to make a commitment when taking into account the impact of the fuel adjustment
time lag, and it is also necessary to consider the impact of procurement costs from the
wholesale electricity market. It would be possible for us to say that we will be able to secure
the current level "under normal conditions", such as no abrupt increases in fuel costs due to
time lag effects and sudden geopolitical influences, like at the start of the Russia-Ukraine
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situation, or events like the current Middle East situation.
・ Thirdly, one of the major strengths of the Goi thermal power plant is the ability to secure
power sources outside of the Kyushu region. Currently, we are building a 600 MW-class
power source in Hibikinada, Kitakyushu, in cooperation with Saibu Gas, and in addition to
that, we are participating in the Goi thermal power plant. I believe that the value of power
generation will increase in the future. The price of electricity is determined by supply and
demand, and in a situation of extremely high demand, having the ability to supply electricity
is extremely valuable. In this sense, I believe that participating in the Goi thermal power
plant will be beneficial. In addition, we have long-term LNG contracts and have secured
enough LNG to possibly have a surplus, so we have decided to participate in the Goi
thermal power plant because we believe it will play a role in making effective use of thatLNG.Q
・ First, regarding the business review that was mentioned earlier, is there a possibility of a
drastic business review, that result in a reduction in total assets and an increase in the
equity ratio, achieving the target equity ratio of 20% by 2025? Should it be assumed that
such business reviews would not happen within that time frame, and from the perspective
of improving ROIC through business selection and abandonment, could you provide
insight?
・ Secondly, I think that the fact that your nuclear power plant is operating is very competitive
not only in terms of electricity rates but also in terms of GHG reductions. However, I believe
that this is only a strength of Kyushu Electric Power's power generation sector, and I am
concerned that if you become thoroughly non-discriminatory regarding your internal retail
and the retail of other companies, there could be a development where this is not a
strength of the retail sector. Or even if this were to happen, would it mean that retail would
have these strengths? What is your current understanding of how the competitiveness of
nuclear power, or the competitiveness of your power sources, and the non-discrimination
between internal and external retailers will be linked in the future?
・ Thirdly, in terms of nuclear power, looking at the current government policies, it seems
there seems to be a discussion about the possibility of constructing new next-generation
nuclear power plants. I understand that this may be a sensitive topic, but as the president
of Kyushu Electric or as chairman of the Federation of Electric Power Companies of Japan,
if there are any updates regarding the potential construction of new nuclear power plants, I
would appreciate if you could share them.
- 6 -A・ Mr. Ikebe: First, regarding achieving the target equity ratio of 20% by 2025. The target date
is only two years away, so I don't think it is something that can be easily achieved in the short
term. Even if we were to scrap a business, achieving this in two years would be challenging.
Therefore, our focus is currently on accumulating internal reserves, which have increased to
around 15% by the end of the recent second quarter. We hope to approach or achieve this
target through the accumulation of internal reserves.
・ Second, I believe that at this point, we are already in a state of non-discrimination of internal
and external retail. If our retail sector is strong within this undifferentiated approach, I believe
it's because the retail sales department has a strong connection with customers, which
serves as a strength in the business. While this may seem slightly off-topic from your
question, as the chairman of the Federation of Electric Power Companies of Japan, we
receive from the government a request that the sector should make all efforts not to
discriminate between internal and external. For example, although each electric company
receives electricity wholesale from Japan Atomic Power, the contract is that each company
will support the company if something goes wrong. True non-discriminatory internal and
external would mean requesting a 20-year contract and demanding the payment of basic
tariffs even when nuclear power is halted due to lawsuits or administrative issues. Thus, the
current non-discriminatory internal and external created state seems to be very unfavorable
for the retail sector. I believe the strength of retail will continue to be strong, but the strongest
bond still comes from the interactions between salespeople and customers, solving issues
together, and addressing their concerns. We aim to continue this approach in the future.
・ Third, regarding nuclear energy, Mitsubishi Heavy Industries is leading the advancement of
next-generation nuclear power plants, such as high-temperature gas reactors (HTGR) and
fast reactors. We are willing to cooperate with them as much as possible, and we believe
that this will continue to progress in the future. The HTGR extracts hydrogen through the
thermal decomposition of steam at high temperatures, and in view of the coming hydrogen
society, I think it is a key technology in the sense that hydrogen can be extracted as a by-
product. In addition, Small Modular Reactors (SMRs) is still going forward as an overall
trend, although there has been recent news about the cancellation of plans for SMRs in the
United States. As for what will be the most difficult challenge in the future, of course it will
take more than 10 years to build a power plant, and it will be difficult, but a power plant can
be built as long as the local government at the location can be properly consulted. On the
other hand, building a transmission line is even more difficult than building a power plant.
While many in Japan are willing to collaborate on public interests, globally, there are voices
expressing the difficulty of constructing transmission lines. In such times, I wonder if it is
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really possible to build a large-scale power plant and a large-scale transmission line. In that
case, I think that one option would be to build SMRs that do not emit CO2 and supply
electricity to nearby core cities on a scale of 200,000 or 300,000 kilowatts. I think it is
possible, and we should continue our research and development on this as well.Q・ I was pleasantly surprised by the positive developments in this financial report. The equity
ratio has risen from 10% to 15% over the past six months, and the absolute amount of
equity has increased significantly, it went from about 580円 billion at the end of March this
year to about 850円 billion at present. This is a welcome improvement in terms of equity
capital, but on the other hand, the PBR has fallen. Since your company's market
capitalization is approximately 500円 billion, a PBR of 0.9 is correct for shareholders' equity
of 580円 billion at the end of March. However, based on the current 850円 billion, the PB
ratio is about 0.6 times. We would like the company to aim for a capital adequacy ratio of
20%, but we estimate that when the capital adequacy ratio reaches 20%, the company's
shareholders' equity will probably be around 1円 trillion. With an ROE in the mid-term
currently set at 8-10%, I believe raising this to 10% would be beneficial. Given the rapid
pace of equity accumulation, I am concerned that there may be a risk of the company's
ROE falling below 8% in the coming years. When you were discussing ROIC earlier, I
believe that you will take the ROIC approach for ROE of 8% to 10%. From my perspective,
rather than maintaining an 8-10% focus, setting a higher bar with a 10% perspective for
ROIC and considering downsizing existing businesses or investment in growth areas within
the business portfolio would be prudent. As the conversation shifts to ROE falling below
8%, it could signal a diminished corporate value, and it may be regrettable from your
company's current strong position. Therefore, I believe that the current pace of equity
accumulation should be maintained, while the focus on ROIC should be raised.A・ Mr. Ikebe: Regarding aiming for a PBR of 1, if the book value reaches 1円 trillion and we have
issued about 500 million shares, the effort is synonymous with achieving a stock price of
2,000円. Sendai Units 1 and 2 will be operated for 60 years instead of 40 years, which is an
increase of 20 years in operation. If we explain this well, I believe they will be valued at a
very present value. If we consider this in the context of aiming for a PBR of 1x or more, Japan
has over 2,000円 trillion in financial assets, about half of which is in deposits. If this amount
is invested in stocks or investment trusts (through NISA (Nippon Individual Savings Account)),
and the likelihood of Sendai Units 1 and 2 to be operated for 20 years, this will push up the
stock price. While our WACC (Weighted Average Cost of Capital) is currently low and allows
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us to acquire funds, I do not want to accept it as a trade-off. From the perspective of ROIC
goals, it seems that we need to exceed the current WACC. I intend to continue making these
efforts, and it is also necessary to focus on making more efforts to raise the stock price by
limiting the dialogue to PBR. It is essential that we continue providing appropriate and timely
disclosures to ensure that investors understand the situation.Q・ From a PBR perspective, it will be interesting to see how close your company can
approach or surpass the share prices of KEPCO and Chubu Electric Power when the
dividend reaches 50,円 and I look forward to seeing you do this sometime in the near future.
・ Also, in the earlier discussion of equity capital, if ROE is set at 10% and equity capital is 1円
trillion, 100円 billion of net income needs to be generated on a stable basis. We would be
grateful if you could continue this over the span of the next five years or so.
・ I would like to discuss this with your company starting next year, but assuming that an equity
ratio of 20% is in sight, what level of equity ratio do you plan to achieve over the next 10
years? According to the old-fashioned common sense theory of electric power, the goal is to
achieve an equity ratio of 30%, but considering your company’s position, these practices
might not belong to this era anymore. I have a question about whether there are any positive
aspects on the financial side due to the improvement in the equity ratio. Before delving into
a detailed discussion about equity, I would like to know if there are any positive aspects
observed from the stock market’s perspective resulting from the improvement in equity.A・ Mr. Nakano: When the equity ratio is 20%, which, if I do the math, means that the equity
capital is 1円 trillion. Since we also issue a large number of bonds for fundraising, this ratio
is much lower than that of other electric power companies, which creates a bottleneck in
fundraising when it comes to stable fundraising. Therefore, we believe that raising this ratio
will have a significant effect. In addition, the company's assets are in excess of 5円 trillion,
and it is also important to consider how much it should be prepared for business risks in
developing these assets. Although we believe that a certain level of equity capital is
desirable, we have decided to maintain 20% for the time being, based on a balance
between the amount of risk invested on the left side of the balance sheet and the financial
buffer on the lower right side of the balance sheet. The situation may change in the future,
but at present we believe it will have that effect.
・ Mr. Kido: I think there is a debate about whether the equity ratio after achieving 20%
should be 25% or 30% referring to the before mentioned theory, but I think it is necessary
to sort it out based on the merits (of 25%, 30%, etc.) The point that the target is about 20%
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in FY2025 is as I explained earlier, it is based on the relationship between business risk
and financial buffer, and the stability of financing, but to be honest, we have not thought
beyond that at present.
・ Mr Ikebe: I think that an equity ratio of 20% is fine. I think it is a very good thing (from the
perspective of capital efficiency) to borrow money, and moreover, to pay back that debt as
well, so that with less capital, we can earn more money from the funds received from our
shareholders, and this is something we will discuss in the coming year.
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.