Message from the CFO on Financial StrategyInvestor Relations
My Commitment to Enhancing Corporate Value as CFO
Kazuo Sakairi
Corporate Vice President, Managing Executive Officer, Director, and Chief Financial Officer (CFO)
Significant shifts are taking place in the electric power industry that is changing the business landscape around JERA. The manifestation of
geopolitical risks has brought to the fore the vital importance of ensuring a stable electricity supply, and there has also been a rising sense of crisis regarding climate change as abnormal weather events occur around the world, accelerating a global movement toward decarbonization. Given these dynamics, along with the importance of fulfilling our mission and vision, FY2022 made us acutely aware that navigating a course for the company has grown increasingly difficult from year to year. I would therefore like to raise two points that I think will help in making good decisions on management issues under these circumstances.
The first is that the scope of responsibilities of the CFO is expanding and diversifying as our operations continue to grow around the world.
Prior to joining JERA as CFO in April 2019, I served as an advisor to financial institutions and an independent M&A advisory firm, working on the establishment of governance structures and decision-making processes in M&A and integration, not only for Japanese businesses but also for foreign companies. Throughout my career, I've come to understand that the CFO of a global company should be more than just an expert in finance and accounting. They must also act as a strategic aide to the CEO or even as a representative, engaging with stakeholders both inside and outside the company to enhance its corporate value.
Since its establishment, we have aimed to become a global company rooted in Japan that can compete on an even footing with the world's leading energy companies. In the four years or so since I joined JERA, we have accelerated efforts to realize this global strategy, investing in Asian companies, upstream assets overseas, and startups on the west coast of the United States and in Germany; we have also acquired a large European renewable energy company. In Singapore, we own a two-thirds stake in one of the world's largest trading companies, which specializes in asset-backed trading, through a joint venture with EDF Trading, a subsidiary of the prominent French electricity company EDF. This is part of our commitment to ensuring a stable electricity supply for Japan. Furthermore, we have established a skills matrix for essential management personnel. Aligned with this, we have recruited numerous professionals from diverse sectors and fields internationally to fill positions—including as outside directors, executive officers, and senior executives. Through this process, it has become clear that the role of CFO at JERA covers a broader spectrum of responsibilities in the context of being a global company. I am deeply attuned to this evolving CFO role and committed to spearheading our company's value enhancement.
The second point is in regard to the need to strengthen our human resources and organizational capabilities.
Enhancing corporate value and implementing the CFO's role, as I discussed earlier, are not things I can accomplish entirely on my own. To compete globally, it is essential that we assemble teams of personnel who bring vitality and diversity and are equipped with the necessary skills and experience. Moreover, I believe it is crucial to transform our organizational structure. We must eliminate the vertically divided way of working and foster a flat, open working environment where teams can freely collaborate and generate synergies to exceed their expectations.
Based on this belief, I have explicitly set a vision for Financial and Accounting where I call upon the nearly 160 talented individuals in the JERA headquarters' Finance and Accounting to aspire to become professionals who can be held in high regard by the diverse stakeholders that surround us, both inside and outside the company. This ambition is clearly articulated in the department's two-fold mission: One, to communicate with internal and external stakeholders and provide financial and accounting intelligence to support management in making strategic decisions; and two, to play a role in corporate governance from the liability side (the right side of the balance sheet), contributing to the enhancement of corporate value. In more tangible terms, we aim to protect JERA against damage to corporate value and instead contribute to decisions that boost its value. We aim to do this through a sustainable management foundation, a management compass, and spokesperson proposals. We also emphasize to our personnel the value of relationships with colleagues internally and stakeholders externally. By actively listening to the information and feedback they offer and leveraging our financial and accounting expertise, we can maximize the potential of our people and the organization.
To maximize our potential in Finance and Accounting, it is essential to foster an organizational culture that values diversity and allows every person, from employees to corporate officers, to use their abilities to the fullest. In addition to transfers from the shareholder companies, the Finance and Accounting actively recruits professionals regardless of nationality or gender. As of July 1, 2023, mid-career hires account for about 60% of the nearly 160 members in the Finance and Accounting at JERA headquarters. Apart from personnel at headquarters, around 90 individuals handle finance and accounting roles abroad, predominantly at JERA Americas, JERA Australia, and the recently acquired Parkwind. This includes approximately 10 individuals who were dispatched from our headquarters. This initiative is part of our regular practice of sending mid-level and younger staff eager to embrace new challenges to our overseas sites, subsidiaries, and investees for the chance to gain a broad range of experience. Moreover, the gender ratio for the entire Finance and Accounting, combining headquarters and overseas sites, is just over 30% (just under 20% at headquarters). We will continue to actively recruit female employees for managerial roles and strive to increase the gender ratio, which currently stands at slightly over 20% (about 10% at the headquarters). Alongside these endeavors, we plan to establish several international project teams to function across borders, aiming to unite and integrate them as One Team.
As Global CFO, I place great importance on these two points, striving to propel growth and development for the JERA Group. At the same time, I aim for management that consistently takes into account the cost of capital to maximize corporate value.
Personnel from JERA Americas' Finance and Accounting Department
Review of FY2022 and Progress on Management Targets
In April 2019, we set a target of 200 billion yen in consolidated net profit by FY2025 (excluding time lag), and in May 2022, we also established new management targets for profitability, capital efficiency, growth potential, and financial health with the aim of achieving disciplined growth and maximizing corporate value. While our progress toward these targets is on track overall, we will continue to pursue a range of initiatives and make every effort to meet these targets.
Consolidated Net Profit
In FY2022, gains emerged despite setbacks from the fire incident at the Freeport LNG terminal affecting LNG spot procurement and from recognizing estimated liabilities. The gains can be attributed to the expansion of JERA Global Markets' (JERAGM) transactions primarily in Europe amidst the unstable fuel market situation stemming from the Russia-Ukraine situation, securing a consolidated net profit of 200.3 billion yen (excluding time lag).
We view the profit boost from JERAGM as a temporary gain. Though we anticipate such transient gains to diminish starting FY2023, we remain committed to reaching our FY2025 target of a consolidated net profit of 200 billion yen.
Synergies
In line with the business plan we unveiled in April 2019, which called for the creation of synergies exceeding 100 billion yen annually within five years (by FY2025) following the integration of our existing thermal power generation and other businesses, we were able to generate 120 billion yen in synergies as of FY2022, one year ahead of our initial target. Four years have passed since the completion of the asset and business integration of our shareholder companies. We have now completed the post-merger integration (PMI) and have transitioned to the phase of implementing the management targets declared in 2022.
Balance Sheet Management
Total Assets
Our total assets have reached a high level due to the impact of the market value of unsettled balances in transactions, which, in the context of JERAGM's fuel quantity adjustments, are recorded as derivative receivables and payables. Continued monitoring is warranted because subsequent changes in resource prices may cause the amount to fluctuate widely.
Interest-Bearing Liabilities and Net Assets
In FY2022, due to the effects of surging resource prices and the increased demand for operational capital resulting from spot procurement to ensure a stable electricity supply, we had to secure a large amount of financing to be used until our operating cash flow recovers. Besides primarily focusing on short-term loans and issuing corporate bonds, we also pursued diversified financing methods such as issuing transition loans and foreign currency-denominated corporate bonds. As a result, we believe we were able to enhance our future fundraising base and diversify our procurement markets.
On the other hand, while we had set a target of reducing net DER to 1.0 or less by 2025, interest-bearing debt increased to 3.5 trillion yen by the end of September 2022, causing the net DER to deteriorate to 1.66. Given the instability in the fuel market and the anticipated risk of prolongation, we issued hybrid corporate bonds worth 96.5 billion yen in December 2022 and secured a perpetual subordinated loan of 200 billion yen in March 2023 to improve our net DER. Subsequently, with conditions improving in the fuel market and operating cash flow on a recovery trajectory, our net DER improved to 1.01 as of March 31, 2023. Additionally, our ROIC, which represents capital efficiency, stood at 4.4% for FY2022, approaching our target for FY2025.
Personnel working in corporate finance to secure and diversify funding
New Management Targets
| Performance indicators | FY2022 | FY2025 target | |
|---|---|---|---|
| Profitability | Net profit* | 200.3 billion yen | 200 billion yen |
| EBITDA* | 574 billion yen | 500 billion yen | |
| Capital efficiency | ROIC* | 4.4% | Approx. 4.5% |
| WACC | — | Approx. 3.5% | |
| Growth potential | CFI | 369.4 billion yen | Cumulative total for FY2022–2025: approx. 1,400 billion yen |
| Financial health | Net debt-to-equity ratio | 1.01x | 1.0x or lower |
| Net debt-to-EBITDA ratio* | 3.7 years | 4.5 years or less |
- *Excluding time lags after fuel cost adjustments
Capital Allocation
In FY2022, the cash flow situation changed significantly between the first and second half of the year. In the first half of FY2022, operating cash flow deteriorated significantly due to an increase in the loss from the time lag caused by soaring resource prices and other factors, resulting in a negative free cash flow of approximately 900 billion yen. In the second half of FY2022, operating cash flow improved to about 450 billion yen for the full year due to better fuel market conditions, resulting in a final positive free cash flow of about 80 billion yen.
At the time of our strategy and target announcement in May 2022, we planned to actively allocate about 1.4 trillion yen to CAPEX over a total of four years from FY2022 to FY2025, with a cash flow of 1.6 trillion yen, primarily from operating cash flow. Most recently, we have been actively pursuing initiatives aimed at growth as well as decarbonization, including the acquisition of Parkwind, a leading offshore wind power generation company in Belgium, and the decision to invest in GPI, a renewable energy power generation company in Japan. We have a history of basing investments on the premise of maintaining a sound financial base, and we believe that the effective functioning of our financial strategy targets played a role in these investments. At present, we believe that both operating cash flow and CAPEX are generally in line with the plan announced in May 2022.
Toward the Realization of Medium- and Long-Term Strategies
The progress we are making toward reaching our targets is generally on track, though we must stay alert to changes in the business environment. We will announce our next growth targets when we are more certain of achieving them, but in line with our medium-to-long-term strategy, we intend to continuously invest for growth post-2025, mainly in the areas of renewable energy, hydrogen, and ammonia. Given the expected demand for capital to ensure robust growth, we will steadily increase our profitability and create a cycle that leads from investment to growth and then to further investment. We will continue to review our financial strategy for FY2025 and beyond, and as CFO, I will do everything I can to facilitate the steady strengthening of our financial base to support growth investments, aiming to further enhance corporate value.