Remarks at First Half of FY2023 Regular Press Conference2023/06/02

JERA Co., Inc. (“JERA”) held a regular press conference by Yukio Kani, Chairman of the Board, Global CEO and Hisahide Okuda, President, Director, CEO and COO on Wednesday31 May.

1.Agenda

Yukio Kani (Chairman of the Board, Global CEO)

• our new board of directors

• our new executive lineup, and

• our renewable energy business

Hisahide Okuda (President, Director, CEO and COO)

• a review of electricity supply and demand and our efforts to ensure a stable supply going forward

• the state of our income and expenditures and our progress in achieving synergies ahead of schedule, and

• the establishment of the JERA Transaction Monitoring Committee

Material  :

Document 1  Press release: Changes to Directors, Corporate Auditors, and Managing Executive Officers

Document 2  Briefing Materials for the Regular Press Conference.pdf

Document 3  Press release: Establishment of JERA Transaction Monitoring Committee

2. Remarks 

■Yukio Kani (Chairman of the Board, Global CEO)

Today I would like to talk about

• our new board of directors,

• our new executive lineup, and

• our renewable energy business.

New Board of Directors

Two months have passed since we started the co-CEO system in April.

The first thing to work on—the most important issue—has been management teambuilding. Our ability to engage in quick decision-making, centered on the two of us, over the past two months has been, I think, very important for JERA’s growth going forward.

Please look at Document 1.

At the board of directors meeting today we decided on the new board of directors to be presented at the shareholders meeting in June and the new executive lineup to take effect on 1 July.

Stepping back a moment, at the press conference we held when I assumed the role of Global CEO, I spoke about the importance to achieving our mission and vision of building optimal mechanisms from a global perspective and then investing those mechanisms with life through teambuilding.

At JERA, we have a skill matrix listing the skills and experience our board of directors should have to achieve our mission and vision. This is one kind of mechanism. We applied that mechanism as we built our team this time. Let me describe three main points related to the selection of the new members of the board.

First is domestic thermal power. The foundation of JERA’s business is the safe, stable operation of domestic thermal power. We must steadily move forward in constructing new sources of power while also safely operating aging thermal power plants. Sano, Watabe, and Sakai, each of whom has long experience in domestic thermal power, being as new members of the board of directors positions us to exercise governance over domestic thermal power operations from a variety of angles.

Notably, I expect Director Watabe, who is being promoted to vice president on the executive side, to play an important role in bridging between oversight and execution.

Next is procuring fuel from global markets. Due to the growth of renewable energy and the situation in Ukraine, procuring LNG and coal from global markets has become especially difficult in the last few years. This makes our trading business even more important.

For the board of directors to provide appropriate governance, I felt it was essential that it include people with a wealth of experience managing global trading firms. From that perspective, I have invited John Rittenhouse, who founded EDF Trading, always a top-flight player in global markets, and who has long years of experience as its CEO, to join the board.

The third and last point is Asia. I believe Japan is a part of Asia and I want us to grow together, so I thought it would be effective, in order to share our vision leading to decarbonization and to realize efforts that fit the conditions in each country, for us to be reinforced by outside talent well-acquainted with the geopolitics, business practices, and culture of Asia.

From that perspective, I have invited Lim Hwee Hua, who is deeply knowledgeable about Asian political and economic conditions and has held ministerial and other important government posts in Singapore as its first female cabinet member, to join the board.

The new board of directors constitutes a highly diverse team in terms of professional expertise and experience, gender, and nationality, with more than 50% outside representation, 20% female, and 30% non-Japanese. I look forward to working proactively to build a flat corporate culture that values diversity starting from the board.

New Executive Lineup

Next, please turn to page 3 of Document 1 for our new executive lineup. At JERA, to be able to retain the optimal personnel to realize our strategy, we have drawn up job descriptions that spell out the skills, experiences, and mindsets needed for key positions. We have mechanisms for appointing optimal talent based on these job descriptions, and these were applied as we made merit-based choices this time, too.

Adopting the chief officer system in earnest this time, we more clearly delineated the rights and responsibilities for each position and committed ourselves to the merit system.

Under the new board of directors and new executive lineup I presented today, I hope to achieve JERA’s mission of providing cutting-edge solutions to the world’s energy issues.

Renewable Energy Business

Next, I’ll talk about our business. In the last two months we have announced two large offshore wind M&As. Today I’ll explain the background to that from the perspective of building mechanisms for our renewable energy business.

At the press conference we held when I assumed my current position, I said I wanted to prepare for an uncertain future by cultivating the three pillars of LNG, renewables, and hydrogen/ammonia, and sought to solve energy issues by building as many energy supply options as possible.

As a result of strategically strengthening our business projects in renewable energy—one of these three pillars—over the last six years, today we are involved in offshore and onshore wind power, solar power, and battery projects primarily in Japan, Taiwan, the United States, India, and the United Kingdom.

Please turn to page 3 of Document 2: Briefing Materials.

For the offshore wind power business, we have aimed to quickly gain expertise in Taiwan, Asia’s leading region for offshore wind power, that can then be applied to other regions, focusing on Japan where the weather and oceanic conditions are similar.

In 2019 we participated in Formosa 1, Asia’s first large-scale offshore wind power project, and then led the follow-up Formosa 2 project from the construction stage as its largest shareholder.

Participating not merely as a financial investor, JERA put people on the ground and, as we would for our domestic thermal power business, engaged by looking closely at everything from project development, construction, and operation to decommissioning and even the contribution to the local community.

In fact, we experienced tremendous difficulties with both projects in Taiwan, and especially Formosa 2, due to project delays and increased costs due to the pandemic. Fortunately, by taking an active, leading role in construction and working in cooperation with the others involved, we managed to finish construction and held a completion ceremony on 16 May with Taiwan President Tsai Ing-wen in attendance.

We learned a great deal from this experience. One thing we learned is that further developing offshore wind power domestically and abroad will require a group of offshore wind power professionals who can cover the project development, construction, operation, and decommissioning I mentioned before. Such talent is overwhelmingly concentrated in Europe, the center of the offshore wind power business.

Well then, what mechanisms and systems do we need to build? The direction management has discussed over the last few years has been to establish a renewable energy headquarters in Europe, utilize M&As to assemble a group of professionals from European companies, and then, in cooperation with local units in Japan, Taiwan, India, and the United States, build out a global structure that covers major global and local markets.

Following this strategy, and as a result of utilizing M&As over the last few years, we decided to go ahead and acquire Parkwind. Page 4 contains an overview.

We’ve had many discussions with the company’s management and confirmed their commitment to safety and compliance, their ability to move projects forward as professionals, and their flat corporate culture conducive to the open exchange of ideas.

There is a great deal to do regarding the upcoming integration of Parkwind, including the merging of our corporate cultures, but we are positioning the company not as just an offshore wind power business in Europe but as an indispensable part of JERA’s global strategy, so we will be devoting all our energy to the post-merger integration. 

Japan

In addition, on the 18th of this month we announced the joint acquisition, together with NTT Anode Energy, of Green Power Investment (GPI).

Our objective in acquiring the company is to strengthen business development in our mother market of Japan. Notably, with the start of domestic large-scale offshore wind power projects operation still some way off at around 2030, our involvement with GPI’s offshore wind business will enable us to gain experience operating in Japan that will be meaningful as we look to future domestic projects.

Progress Toward Development Goals

To review, page 5 summarizes where we will stand after the M&A activity with Parkwind and GPI has been completed.

Under the business plan we announced in April 2019, we set the ambitious goal of developing 5GW in renewable energy by fiscal 2025, and this objective is now well within range.

Our plan is to build out a global structure by positioning Parkwind as a wholly owned subsidiary of JERA Green, our existing UK corporation, then gathering other renewable energy businesses developed domestically or abroad under the JERA Green umbrella going forward.

Once our renewable energy businesses have been brought together under JERA Green, including current M&A activity, we will become one of the leading renewable energy players in Asia with more than 3 GW in operation or under construction, more than 10 GW of pipeline, and roughly 300 talented professionals both in Japan and overseas.

In addition, looking only at offshore wind power, we will have 9 large-scale projects in Japan and overseas—2 in Taiwan, 1 in Japan, and 6 in Europe—and I look forward to a marked increase in the depth of our expertise in construction and operation.

Toward Making a Global Push

Utilizing such mechanisms, I want to take on the challenge of developing a second round of domestic offshore wind power.

Overseas, meanwhile, while maintaining Parkwind’s development in Europe as before, I want to achieve large synergies by leveraging the capabilities of JERA Green for the renewable energy business opportunities needed for global expansion and to develop green hydrogen and ammonia.

Through our ability to offer compound solutions—not just our renewable energy business but also renewables in combination with our other two pillars of LNG and hydrogen/ammonia—I want us to contribute to global decarbonization by offering solutions that are a good fit for actual regional and national conditions.

■Hisahide Okuda (President, Director, CEO and COO)

There are three things I’d like to talk about today:

• a review of electricity supply and demand and our efforts to ensure a stable supply going forward,

• the state of our income and expenditures and our progress in achieving synergies ahead of schedule, and

• the establishment of the JERA Transaction Monitoring Committee.

Looking Back on Electricity Supply and Demand and Looking Ahead to a Stable Supply

I’ll start by talking about electricity supply and demand.

Kilowatts (Securing Power Sources)

Please turn to page 8 of Document 2: Briefing Materials. I’ll talk first about kilowatts (about securing power sources).

Looking back over recent years, many of the thermal power plants constructed during Japan’s period of high economic growth are aging. The intensifying competition brought by electricity deregulation and the spread of renewable energy makes it difficult to maintain uncompetitive aging thermal power.

As described in the diagram on page 8, JERA is investing more than a trillion yen to replace thermal power sources. At the same time, we are seeking to renew our sources of power by decommissioning old thermal power plants that have been in operation for more than 50 years.

As a result, Taketoyo Unit 5 and Anegasaki New Unit 1 began operation in fiscal 2022, and Anegasaki New Unit 2 in April of fiscal 2023. In addition, Anegasaki New Unit 3 and Yokosuka Unit 1 are scheduled to begin operation during fiscal 2023. By steadily moving forward with such construction, we are making every effort to secure kilowatts.

Kilowatt Hours (Securing Fuel)

Next, please turn to page 9. Needless to say, even if we have secured kilowatt capacity we cannot generate electricity without fuel, so we must make every effort to procure fuel. In recent years, the popularization and expansion of renewable energy has led to fluctuations that make fuel consumption difficult to predict. In addition, seasonal discrepancies have also grown larger. These are the major recent changes.

Please look at the diagram on page 9. The wavy line in the line chart shows seasonal fluctuations in LNG demand. The orange area indicates volume procured through long-term contracts. In other words, because long-term contracts provide only a fixed volume throughout the year regardless of the season, the result is a surplus of LNG during spring and fall when electricity demand is low, which requires us to re-sell LNG to bring supply and demand into balance. At the same time, when demand for electricity is at its peak in summer and winter, we need to secure a considerable volume through spot procurement. This is the most difficult aspect of fuel procurement today. Furthermore, the discrepancy becomes larger as more renewable energy comes into play, so addressing this is a major issue.

The first way to do so is to build out our LNG portfolio. It is important to put together a mix of long- and short-term contracts combined with spot procurement to skillfully cope with such fluctuations. In addition, the ability to trade skillfully, selling at the right time and buying on the spot market at the right time, is also important. JERA has a trading arm in Singapore, JERA GM, and we will cope with such huge fluctuations by steadily expanding its capabilities. We aim for fuel procurement that ensures a stable supply while also generating profit.

Looking Back on 2022

Looking back on 2022 in terms of fuel procurement, concerns about interruptions to the supply of pipeline gas from Russia to Europe drove the JKM—the spot price index for LNG in Asia—to an all-time high of $84/MMBtu in March 2022 and it remained high thereafter. Looking to Japan, as uncertainty grew regarding the supply of LNG from Russia’s Sakhalin-2 project, in terms of both price and supply we faced an “emergency” unlike any we have experienced before.

Amid these conditions, we carried out our largest ever spot procurement of LNG at 7 million tons, making up a quarter of the total 28 million tons of LNG procured for fiscal 2022. In fact, given the uncertainty around the supply of LNG from Sakhalin 2, we prepared a certain amount of LNG to address this risk. Ultimately, the risk did not materialize so this LNG went unused and was resold. Optimally timing resale and procurement of LNG through JERA GM as we kept an eye on everyday electricity supply and demand and tank operating status, we worked to procure LNG as economically as possible and managed to make it through.

Please look at page 10, which shows the differences in the fuel procurement environment for fiscal 2022 and fiscal 2023. As it turned out, LNG demand fell in the winter of fiscal 2022 due to China’s “zero COVID” policy and an unexpectedly warm winter in Europe. The good fortune continued with a warm winter in Japan such that, in the end, we were able to make it through without using the LNG we had procured to address risk.

For a Stable Supply Going Forward

Nevertheless, things have changed for fiscal 2023. In Europe, LNG receiving terminals have been built and are beginning to operate. Changes to China’s “zero COVID” policy are expected to influence LNG demand. In Japan, there is no guarantee that warm winters will continue, so I think the fuel procurement situation remains highly unpredictable.

As we set out to secure energy, we need to think about “ordinary times” and “emergencies” separately. During ordinary times, by committing ourselves to fair and equitable competition that fully leverages electricity deregulation and electricity markets, we seek through competition to secure a balance between supply and demand and to shape market price, thereby ensuring that enterprise profits are returned to customers through market mechanisms.

At the same time, because it is impossible for the private sector to block all risk during emergencies, it is important for the government and private sectors to cooperate in building schemes to ensure reliable and economical fuel procurement even during emergencies.

Last year a Strategic Buffer LNG scheme was formulated but government and the private sector still need to work out details such as how large the Buffer LNG should be and who will manage it. JERA hopes to be active in cooperating with this effort.

JERA will continue to work toward stable supply, carrying out reliable fuel procurement in cooperation with the national government and working to secure supply capacity through efforts such as moving steadily forward in carrying out replacement.

Income and Expenditures and Achieving Synergies Ahead of Schedule

Next, I’ll talk about our income and expenditures.

Income and Expenditures

Please turn to page 12. Released on 28 April, our 2022 financial results showed 17.8 billion yen in profit when including the effect of the fuel cost adjustment time lag and 200.3 billion yen in profit when excluding it.

The biggest changes since fiscal 2021are related to the relationship between supply and demand as I discussed earlier. Excluding the time lag effect, profit for fiscal 2021 was 248.5 billion yen.

• There was a loss of 89.6 billion yen due to LNG spot procurement related to the fire at Freeport LNG terminal.

• We recorded 71.9 billion yen in constructive obligations. In fiscal 2022, we adopted International Financial Reporting Standards (IFRS). JERA has decided to remove thermal power plants at five locations. Under Japanese accounting standards the expenses would be recorded at time of the removal, while under IFRS the future expenses are recorded at the time the decision is made. Recording the lump sum of estimated expenses for the removal of these thermal power plants, therefore, depressed profits but will have the effect of boosting future profits.

• Increased profits at JERA GM led to a gain of 74.1 billion yen. Amid the fuel market instability caused by Russia’s invasion of Ukraine, JERA GM received inquiries from Europe because it had already developed a good reputation as a supplier with overseas customers, and this led to increased profits.

• Profits related to the sale of LNG led to a gain of 73.4 billion yen. This was from the resale of LNG that, as I mentioned earlier, had been secured to address risk but ultimately went unused. Using JERA GM to resell well at a good time led to gains that increased profits.

In addition, there were losses on the valuation of coal and other contracts. JERA GM generally procures coal at market prices and sells to Japan at a fixed price. Derivative trading is used to change from a variable to a fixed rate. Derivative trading is accounted for at fair market value. Because the price of coal dropped sharply in February and March, fair market value fell resulting in losses on valuation. The reduction in losses due to the time lag resulted in a year-on-year drop in profits of 48.2 billion yen when excluding the time lag effect to 200.3 billion yen. Profits declined compared to last year, but to generate more than 200 billion yen in profit (when excluding the time lag effect) in a very difficult environment during a time of emergency seems, I think, to have been a pretty good performance.

Next, I would like to describe income and expenditures for fiscal 2022 by business segment. At JERA, we organize revenue and income or loss by three business segments: fuel, overseas power generation, and domestic thermal power and gas. Please look at the second column from the left (net income/loss) on page 13.

• Profits in the fuel-related segment were 201.3 billion yen, reflecting the increase in profits at JERA GM I discussed earlier.

• The overseas power generation segment was 6.5 billion yen in the red, reflecting poor performance in the US IPP business.

• The domestic thermal power and gas supply segment was 154.8 billion in the black when excluding the effect of the time lag and 11.0 billion in the red when including it. Profits from the sale of LNG procured to address risk, which I discussed earlier, are accounted for in this segment.

• The loss on valuation of coal contracts is included below that under “adjustments.” Since this is fixed to stabilize profit in the fuel or domestic thermal and gas segment, it might be more proper to apply this to one or the other of those segments. We are considering how to improve the appropriateness of our disclosures by next fiscal year.

Achieving Synergies Ahead of Schedule

Now please turn to page 14.

In 2019, when we completed the integration of the existing thermal power businesses of TEPCO and Chubu Electric, we announced our goal of creating synergies of at least 100 billion yen within five years. We have been monitoring this year by year, with fiscal 2023 to be the final year, but we confirmed 120 billion yen in synergies for fiscal 2022, meaning we were able to achieve our goal a year ahead of schedule.

These synergies include cost reductions of 70 billion yen and new sources of revenue of 50 billion yen for a total of 120 billion yen.

Four years have passed since JERA’s final integration, and I believe we have now completed our integration phase. I am convinced that we have now entered a new stage of growth going forward as a unified whole.

Establishment of the JERA Transaction Monitoring Committee

Finally, please turn to Document 3. I’d like to talk about the JERA Transaction Monitoring Committee.

To continue acting in line with our responsibilities as an energy company that delivers electricity and gas domestically, JERA respects market competition and engages in trading and other business activities that comply with the law, of course, but that are also fair and equitable.

Now we have established the JERA Transaction Monitoring Committee, a body that reports directly to the president and includes outside experts, to further increase transparency by checking and verifying such trading and other activities from a third-party perspective.

More specifically, members including outside lawyers and accountants will regularly check and verify:

• the legality and propriety of wholesale market electricity and gas transactions,

• the internal and external non-discrimination and propriety of wholesale electricity and gas sales (including PPAs), and

Through the establishment and operation of this in-house committee, JERA aims to take the lead in building a fair and equitable domestic market for trading electricity and gas.

Further committing ourselves to fair and equitable trading will ensure that enterprise profits are returned, through market competition, to the end consumers who are our customers, and in this sense, too, we will run the committee steadily going forward.