Business Risk

1. Risks related to the impact on the company group due to revision of the Electricity Business Act

We are running our business based on the Electricity Business Act. When a revision is made to the Electricity Business Act, it will surly impact our company in many ways such as adjusting system designs in the separation of power transmission and distribution, etc., which is already planned to take place in 2020. It is highly probable that additional amendments will be made from this time on. Thus it is difficult to deny the possibility that it will impact our group’s financial situation, management results and cash flow status.

2. Risks related to the impact on the company group due to revision of regulations and laws

The power stations we own and operate has been acquired a certification by the Act on Special Measures Concerning Procurement of Electricity from Renewable Energy Sources by Electricity Utilities’ (FIT, Feed-in Tariff: fixed electricity price system for buying renewable energy). Under the current system, once the purchase price has been fixed, it could not be changed within the procurement period stated in the preceding Act. However, depending on the results of the Feed-in Tariff which Ministry of Economy, Trade and Industry, Agency of Natural Resources and Energy is considering, it might impact the company group’s financial situation, management results and cash flow status. In the event of changes made to even other laws and regulations which relates to our company’s business, again it might impact the company group’s financial situation, management results, as well as cash flow status.

3. Risks of weakening in price advantage due to resuming nuclear power plant operation

Although additional security expenses are expected in result of the Fukushima Daiichi Nuclear Power Plant accident, the power cost of nuclear power plant is relatively inexpensive compared with other power sources. In case the nuclear power plant operation resumes, the sales unit price for electricity should become highly competitive for retail electricity business providers who have nuclear power plants. This implies that the price advantage will become weak for our group company which is a competitor of them. We believe that by providing a stable and competitive supply of electrical power as well as implementing sales policies with various services and ingenuity for our products should keep the effect to a minimum,
However, it might impact the company group’s financial situation, management results, as well as cash flow status.

4. Risks seen in business performance due to seasonal variations

Seasonal conditions (temperature, weather, humidity, etc.) has an impact on customers’ electricity consumption which consequently has an effect on the company group’s sales. Also, premium unit price is applied for some supply units of relative power sources in the summer season (from July to September), which might impact the company group’s financial situation, management results and cash flow status.

5. Risks due to fierce competition

To start running our retail electricity business, the company group needs to proceed with the application based on the Electricity Business Act, and the registration by the Minister of Economy, Trade and Industry is required. Due to low barriers to entry, new companies entering the market are rapidly increasing in recent years. This might cause an increase in the electric power purchase prices and a decrease in the electric power sales prices, which might impact the company group’s financial situation, management results and cash flow status.

6. Fluctuation risks seen in transaction price at the electric power wholesale exchange market.

The company group’s electric power wholesale business is mainly the electric power sales to the Japan Electric Power Exchange (JEPX) while the company group supplies electric power from JEPX. Transactions with JEPX changes due to various causes such as crude oil prices, demand trends of electricity depending on the season and time zone, the situation of the operation of solar power generation, and a full-scale resumption of the nuclear power plants, etc. If the transactions of JEPX widely changes, it might impact the company group’s financial situation, management results and cash flow status.

7. Risks for adjusting supply and demand balance

The retail electricity business providers, including our company, supply electric power through the power transmission network of the General Electricity Utility, based on the Wheeling Service provisions, etc. This is provided by the General Electricity Utility, having the duty of matching power generation plans and the actual power generation amount. They also have the duty of matching demand assumption and the actual demand amount every 30 minutes (the system of matching the planned amount so it is the same amount at the same time). The difference between the planned supply and demand amount and the actual supply and demand amount will be adjusted between the General Electricity Utility as imbalance (price). The company group uses the supply and demand managing system to optimize the supply and demand balance every hour. However, if the results of the equal time and amount are not achieved and a large price imbalance which needs to be adjusted occurs, this might impact the company group’s financial situation, management results and cash flow status.

8. Risks which electricity suppliers may give to the company’s revenue

Our company purchases electric power from former General Electricity Utilities and the companies which possess power generation equipment. Most of the power plants, from which our company purchases electric power, operate thermal power generation using fossil fuels. In cases of having fuel adjustment agreements stated, electric power purchasing price from the power plants might change due to the change of imported fossil fuel prices. In this event, it might impact the company group’s financial situation, management results and cash flow status.
If electric power companies who are suppliers etc. cancel agreements, postpone updating agreements, changing agreement conditions, or if the amount of power generation declines due to troubles in power plants of the electric power suppliers, etc., it might impact the company group’s financial situation, management results and cash flow status.

9. Risks related to PKS import sources

PKS are biomass fuels used in the power plants that the company group operates, are mainly imported from Indonesia and Malaysia. If embargoes are taken in these countries because of the changes on regulations and laws, political instability or any other possible reasons and if exporters cannot export PKS due to natural disasters, etc., it might impact the company group’s financial situation, management results and cash flow status.

10. Risks of biomass fuel price hike

PKS is a biomass fuel that are used in the power plants that the company group operates. PKS is a residue that occurred from palm oil production and currently is treated as a low utility value resource.
In the future, if there is an industrial structural reform or technology extension, or prices rise due to the increase in demands from a revision of regulations and laws, etc. in the producing countries, material costs might rise. This might impact the company group’s financial situation, management results and cash flow status.

11. Risks of exchange rate fluctuations

The power plants that the group company operates, run the electric power business using the imported PKS from abroad so exchange rates do matter. The drastic fluctuations in exchange rates might impact the company group’s financial situation, management results and cash flow status.

12. Operation risks of the power plants that the company operates

The company group pay close attention to securing a safe operation and maintaining safe facility for the power plants we operate. We carry out maintenance and security operating based on consultation with power generation equipment manufacturers and maintenance companies, not limited only to our employees. However, if our operation cannot be carried out as planned due to unexpected equipment failure, etc., it might impact the company group’s financial situation, management results and cash flow status.

13. Output control risks of the power plants that the company group owns

The electric power output of variable renewable energy like solar power generation and wind power generation is impacted by climate. In order to keep balance of the electric supply and demand, we made a revision to this system in January 2015 saying that accepting the unlimited and uncompensated output controls after the operation begins will be the requirement to connect to the output system.
Based on the Services for Electricity Transmission Policy by the Organization for Cross-regional Coordination of Transmission Operators, Japan (OCCTO), as a general rule, biomass power generation receives output controls as electrical power in proportion to thermal power generation. In the future, if output controls exceeding our plans are carried out, it might impact the company group’s financial situation, management results and cash flow status.

14. Risks related to a large amount of equipment investment

Not only retailing electrical power as a retail electricity business provider, but we have also established our own biomass power plants to secure basic electrical power which enables to provide customers a reasonably priced electric power. We will continue this on.
The company group will not change its position and decide equipment investment carefully considering market trends, competitors’ movement as well as comprehensively taking business strategies and investment profitability, etc into consideration. However, since it is difficult to predict the economic trends and market trends precisely, and as a result, the demand volume does not expanded as we predicted despite the large amount spent on equipment investment, the burden on depreciation expense, etc. might put pressure on profits and cause elimination or impairment of the equipment for use. This might impact the company group’s financial situation, management results and cash flow status.

15. Risks of a large amount of loans payable and conflict to financial covenants

In the loans payable by the company group, the loans payable based on the loan agreements (syndicate loan) are subject to financial covenants. In the event of conflict, if lenders request, the company loses benefit of term. So the funds for the payment to the liabilities are required, which might impact the company group’s financial situation and financing.
The financial covenants are mentioned in the annual reports ‘The fifth accounting situation 1. Consolidated financial statements, etc. (1) Consolidated financial statements, Notes in relation to the consolidated balance sheets, 4. Financial covenant.