Message from the CFOInvestor Relations
Reflecting on the Five Years Since 2019
Kazuo Sakairi
Corporate Vice President, Managing Executive Officer, Director, and Chief Financial Officer (CFO)
Five years have passed since the fuel, power generation, overseas operations, and other assets of both shareholder companies were fully integrated into JERA in 2019 to form the current company. As Japan’s largest power generation company, supplying approximately 30% of Japan’s total electricity, we have a great responsibility to provide a stable supply of electricity to Japan. Against this backdrop, the Russian invasion of Ukraine began in 2022, compounding the stagnation of renewable energy generation in Europe that started around 2021. Consequently, LNG prices (JKM: S&P Global’s spot LNG price index for Northeast Asia) surged to a historic high of $84.8 on March 7, 2022, creating a significant crisis in fuel procurement for Japan, which relies almost 100% on overseas sources for its power generation fuel. In response to this situation, with the collaboration of the Japanese government, we boldly and swiftly implemented initiatives to prevent major power outages in Japan. These included the spot procurement of seven million tons of LNG through our Singapore subsidiary, JERA Global Markets (JERA GM). In addition, together with fuel procurement, we have secured the power generation capacity to meet electricity demand by proceeding with the reconstruction (replacement) of power plants as planned.
Meanwhile, in October 2020, JERA announced “JERA Zero CO2 Emissions 2050,” which aims to decarbonize power plants and the entire value chain to achieve the carbon dioxide (CO2) reduction targets Japan has committed to under the Paris Agreement. This includes hydrogen conversion at the Linden Gas Thermal Power Station in the US and ammonia conversion at the Hekinan Thermal Power Station, where demonstration tests aimed at CO2-free power generation are being conducted in Japan. We also started collaborating with energy companies across the globe, including through international tenders for the procurement of low-carbon fuels such as hydrogen & ammonia.
Furthermore, in the field of renewable energy, in addition to participating in offshore wind power projects in Taiwan and the UK, the company acquired Parkwind, a major Belgian offshore wind power producer, and Japan’s Green Power Investment (GPI) in 2023, as well as winning a domestic offshore wind power tender. In April 2024, we established JERA Nex, a company focused on renewable energy development and operations, in London. UK. By concentrating all our skills, talent, and management resources related to renewable energy at this Center of Excellence (COE), we aim to achieve our 2035 target of 20 GW and will drive development efforts globally.
In addition, we are pursuing a platform-based strategy that aims to expand our profit base while contributing to the provision of electricity and decarbonization in Asia, which is experiencing rapid economic growth. We have invested in Summit Power, the largest power generation company in Bangladesh, and Aboitiz Power in the Philippines. These initiatives have been well received in Asian countries that have difficulty relying solely on renewable energy to meet their growing electricity needs, and we have been commissioned by Southeast Asian countries to create a roadmap for their decarbonization.
While the environment around our company has been changing significantly each year, we are steadily carrying out our mission of providing cutting-edge solutions to the world’s energy issues. To enhance understanding, we have presented these initiatives at international conferences such as the Davos Forum and engaged in direct dialogue with more than 350 investors, governments, and other key players.
Next, regarding the status of profit and loss, finance, and synergies, we are making steady progress toward achieving the 2025 profit and loss targets and the financial KPIs set in 2019. Moreover, the synergistic effect of integrating the businesses carved out from the two shareholder companies has resulted in the early achievement of the initial five-year target of 100 billion yen, one year ahead of schedule, through the efficiency improvement of power plants, standardization of operations, and investments in new business fields, creating approximately 120 billion yen in effects to date.
The net profit (excluding time lag) was targeted at a cumulative 550 billion yen over the five years up to FY2023. Despite the decrease in profits due to special factors such as the sharp rise in LNG spot prices and the recording of estimated liabilities following the introduction of International Financial Reporting Standards (IFRS), the actual results reached 799.4 billion yen (140% of the target). In addition, cash flow has steadily increased from around 300 billion yen per year at the time of planning to consistently exceeding 500 billion yen.
With regard to ROIC, which indicates the efficiency of invested capital, we are targeting 4.5% by 2025. This level is designed to ensure that we enhance our corporate value by achieving a return on our weighted average cost of capital (WACC) of at least 1%. Our business often requires a considerable amount of time from investment decision to return, making it challenging to achieve results within a single fiscal year. However, we are committed to strengthening our earning power to meet this goal and further enhance corporate value.
Lastly, with respect to the investments that demonstrate our growth potential, we almost achieved the target of 1.45 trillion yen for the three-year period from 2019 to 2021. This was due to the significant funds required to respond to the surge in resource prices triggered by the aforementioned invasion of Ukraine and the inability to carry out discovery projects as expected due to the COVID-19 pandemic. However, we expect to exceed the investment target of 1.4 trillion yen planned for the four years from 2022 to 2025.
CFO Sakairi speaks at a town hall meeting in Perth, Australia, JERA’s largest LNG procuring country
Net Profit (excluding time lag)
In FY2023, despite an increase in profits from the Overseas Power Generation and Renewable Energy Business and improvements in the write-down on coal and other contracts at the end of the period, there was a decrease of 51.6 billion yen compared with the previous year to 148.7 billion yen (excluding time lag) due to factors such as the impact of fuel procurement prices and the unit cost of fuel inventories at the beginning of the period, and a decrease in fuel business profits. (The profit for the period, which includes time lag, increased by 381.7 billion yen year-on-year to 399.6 billion yen due to time lag turning from a loss to a profit.) Although there was a decrease in profit starting in FY2022, we believe the temporary increase in profits in FY2022 was due to the expansion of transactions centered on Europe by JERA GM amid the unstable fuel market conditions caused by the Russia-Ukraine invasion. We assess that we are on track to achieve the target consolidated net profit of 200 billion yen for FY2025.
We have reliably met our previously established profit targets and are determined to uphold the profit target for FY2025
- The target for net profit for the period 2019–2021 is based on the business plan announced in April 2019, the target for 2022 is based on the value announced in October 2022, and the target for 2023–2025 is based on the new management target announced in May 2022.
Balance Sheet Management
Total Assets
Total assets decreased by approximately 600 billion yen compared to the previous year due to a significant decrease in derivative assets and liabilities*. This was triggered by a decline in resource prices despite an increase in assets following the acquisition of Parkwind, a major offshore wind power generation company in Belgium, and investment in GPI, a domestic renewable energy power generation company.
- The outstanding balance of transactions recorded as offsetting entries in the fuel volume adjustment initiative at JERA GM
Aiming to achieve a financial structure that is valued by the capital market
- Excluding time lags after fuel cost adjustments
Interest-Bearing Liabilities and Equity
Interest-Bearing Liabilities and Equity In FY2023, borrowings and commercial paper decreased due to factors such as a significant change in time lag resulting from an improvement in the fuel market compared to the previous year. As a result, the balance of interest-bearing liabilities was about 3.1 trillion yen, a decrease of about 400 billion yen from the previous year.
Capital increased by approximately 600 billion yen from the previous year to about 2.6 trillion yen, mainly due to an increase in net profit and foreign currency translation adjustments. As a result, the net debt-to-equity ratio, a financial health indicator, has also improved to 0.6x, in line with the target of 1.0x or less in FY2025.
In addition, although ROIC, which indicates capital efficiency, has deteriorated compared with the previous year due to factors such as a decrease in net profit (excluding time lag), we are committed to improving profitability and achieving our target of 4.5% set for FY2025.
Capital Allocation
I would like to explain our future capital allocation as presented in “Financial Strategy and Financial Target Levels Targeted for by 2035,” published in May 2024. We expect to generate 5.5 trillion yen in operating cash flow (OCF) in the cumulative period from 2024 to 2035, and we plan to use these funds for investments totaling 5 trillion yen. As a breakdown, we will invest 1 to 2 trillion yen in each of our three strategic positionings (LNG, renewable energy, and hydrogen & ammonia) listed in our growth strategy. Over the long term, until 2035, we aim to flexibly change the allocation of these three strategic positionings in response to market conditions, technological innovations, and policy trends. This will enable us to become a corporate company that can grow sustainably regardless of changes in the environment or policy. At the same time, we aim to achieve an LNG transaction volume of more than 35 million tons, a cumulative renewable energy development capacity of 20 GW, and a hydrogen & ammonia transaction volume of approximately seven million tons.
- Flexibly allocate investments to the three strategic positionings (SPs) set out in the growth strategy while monitoring market conditions, technological innovation, and policy trends, using OCF as the source of funds.
- This will enable us to achieve a corporate structure that can grow sustainably regardless of changes in the environment or policy.
- 1 Cumulative estimate for FY2024 to FY2035
- 2 Investment decisions will be made with discipline, focusing on high-quality projects while monitoring market conditions
- 3 This initiative will be gradually detailed, considering the underlying policies and other assumptions. Should these assumptions change significantly, a revision will be made.
Strengthening the Finance Group Function to Enhance Corporate Value and Reduce Capital Costs
JERA aims to become a global company rooted in Japan and join the ranks of the world’s leading energy companies. As CFO, I have been working to enhance corporate value while assisting the CEO. Specifically, over the past five years, I have been pursuing initiatives in the following four areas to support growth.
First, I have worked on strengthening our operational infrastructure to support prompt and accurate decisionmaking. As the business environment surrounding our company becomes increasingly complex, I am working on building a financial infrastructure system aimed at data-driven management, enabling us to quickly obtain and analyze a wide range of reliable data for simulations. We have also finalized the implementation of IFRS to enhance transparency and earn the confidence of our stakeholders both domestically and internationally. These efforts have helped standardize and streamline our business processes, allowing our employees to focus on higher- value-added work.
The second area I have focused on is proper capital management and financial governance. JERA requires substantial investment capital for its operations, making effective financial risk management crucial. This involves ensuring that procured funds align with our mission, vision, and growth strategy, contribute to building a portfolio that enhances corporate value, and that each investment generates returns exceeding the cost of capital.
Third is my role as a trusted business partner for management and business divisions. I provide advice on investments, loans, business acquisitions, and divestitures in each division based on my expertise in accounting, taxation, M&A, and project finance. Through the activities of JERA Ventures, which launched in 2023, I also contribute to discovering technological innovations and investment opportunities.
Finally, the fourth area of my focus has been appropriate and active engagement with external stakeholders, particularly investors. By engaging in dialogue, I aim to ensure that our initiatives are correctly understood by stakeholder communicating them to management.
These four areas are supported by a highly diverse team of professionals, including mid-career hires in the finance and accounting departments and staff at overseas sites. When I joined in 2019, the Finance and Accounting Department in Japan consisted of just over 40 people. However, as of July 2024, it has grown to a team of over 210 members, with approximately 70% being mid-career or new graduate hires and about 30% women, bringing together talent with diverse backgrounds. On a consolidated basis, we also have around 100 finance and accounting professionals, mainly within our key domestic and international subsidiaries, and we aim to achieve integrated global management by working closely with these teams.
The business environment is undergoing rapid transformation, driven by geopolitical risks, climate change issues, and the liberalization of the electricity market. Despite these changes, JERA’s Finance and Accounting Division remains focused on adopting innovative approaches, leveraging global talent, and fostering a flat organizational structure and a culture of innovation—all without losing sight of JERA’s mission and vision.
Leading the Growth Strategy Toward 2035 Globally as CFO.
As JERA’s CFO, I am committed to supporting our global initiatives by managing our profit and loss, maintaining a sound balance sheet, and building a company that earns the trust of our many stakeholders, including investors and financial institutions. At the same time, I badly want to create a workplace where every employee feels proud of the company and can share a sense of happiness and well-being with their families.
Executing a growth strategy that supports our mission and vision is one of our great challenges. I believe that it is an essential part of my role as CFO to occasionally apply the brakes to ensure that our investments do not involve excessive risk. With this in mind, I will remain focused on the financial KPIs we have set for 2035, helping to maintain financial discipline and enhance corporate value.