The Chugoku Electric Power Company,Incorporated FY2026 FY Earnings Report

Financial Highlights

• Net Sales: ¥1.44T
• Operating Income: ¥90.22B
• Net Income: ¥59.83B
• EPS: ¥190.61

Income Statement

Balance Sheet

Cash Flow Statement

Profitability Ratios

Year-over-Year Comparison

Share Information

Dividend Information

Segment Information

Full Year Forecast

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AI Financial Analysis

Executive Summary

FY2026 results show a clear deceleration: revenue fell 5.7% to ¥14,423.0bn and operating income declined 30.1% to ¥902.2bn, with ordinary income down 37.6% to ¥802.3bn and profit attributable to owners down 30.4% to ¥685.4bn. Operating margin contracted to 6.3% from 8.4% YoY, a compression of roughly 220bps, reflecting weaker profitability in core energy and transmission businesses. Net margin slipped to 4.8% from 6.4%, compressing about 170bps, weighed by higher interest expense and a softer operating result. EBITDA was ¥2,293.6bn with a margin of 15.9%, evidencing still-solid gross cash earnings despite lower spreads. DuPont analysis yields ROE of 8.8% (NPM 4.8% × ATO 0.312 × leverage 5.96x), down markedly from last year’s stronger equity return. Asset turnover eased as assets expanded faster than sales, and financial leverage edged down from last year, jointly dampening ROE. Cash generation was a bright spot: operating cash flow rose to ¥2,372.9bn, 3.46x net income, and OCF/EBITDA of 1.03x indicates strong cash conversion. Free cash flow was slightly positive at ¥10.4bn as higher capex (purchase of noncurrent assets of ¥2,671.5bn) offset robust OCF. The balance sheet remains highly leveraged (D/E 4.96x; Debt/EBITDA 8.0x), typical for a utility but elevated versus investment-grade benchmarks. Liquidity is adequate with a current ratio of 127% and substantial cash (¥423.4bn), while short-term debt is minimal. Segment-wise, Comprehensive Energy (83% of revenue) and Transmission & Distribution both saw margin pressure, whereas Telecommunication improved slightly. Extraordinary items were a net loss of ¥346.3bn, including impairment losses of ¥69.7bn, but did not dominate the earnings picture. Management guides FY2027 revenue +3.3% but operating income down 42% to ¥520bn and EPS 86.2, signaling a cautious outlook amid normalization of spreads and cost structures. The dividend was raised to ¥27 (payout ~15%), with guided DPS of ¥15 next year, implying a reset aligned with lower earnings. Overall, quality of earnings is high on cash metrics, but profitability headwinds and leverage keep the risk profile elevated into FY2027.

Profitability Analysis

ROE (8.8%) = Net Profit Margin (4.8%) × Asset Turnover (0.312x) × Financial Leverage (5.96x). The most material YoY change is the decline in net margin (about −170bps) alongside lower asset turnover (0.312x vs ~0.351x last year), while leverage slightly decreased (5.96x vs ~6.18x). The margin compression stems from weaker operating profitability in Comprehensive Energy and Transmission & Distribution (op. income −26% and −52% YoY, respectively), plus higher interest expense (¥258.0bn vs ¥144.8bn). These reflect narrower retail/wholesale spreads and higher financing costs. The turnover decline is tied to asset growth (capex and cash build) outpacing revenue. Margin pressure could persist near term given management’s FY2027 guidance (OI −42%), suggesting normalization rather than a one-off. SG&A specifics are not the primary driver; operating leverage and cost pass-through timing in the regulated/competitive mix are more impactful.

Growth Assessment

Top-line contracted 5.7% on lower fuel pass-through and softer demand, while operating profit fell 30.1% as spreads normalized from the prior year. Ordinary income contracted 37.6% on higher interest costs and lighter non-operating gains. Equity method income was ¥78.6bn and stable in scale, providing modest support to below-the-line profits. EBITDA margin of 15.9% indicates resilient underlying cash earnings despite lower operating margin. Capex remained elevated (capex/depreciation ~1.9x), focused on grid and generation assets, positioning for medium-term stability but near-term profit drag. With management guiding FY2027 revenue up 3.3% but OI down 42.4%, growth is expected to be earnings-light as regulated returns and competitive margins calibrate lower. Longer term, investment in transmission efficiency and energy transition should underpin steady asset-based earnings, but ROIC (3.1%) remains below a 5% threshold, pointing to gradual, not rapid, value accretion.

Financial Health

Liquidity is adequate: current ratio 127% and quick ratio 113% supported by cash and deposits of ¥423.4bn versus current liabilities of ¥652.5bn. Leverage is high: D/E 4.96x and Debt/Capital 70.2% with Interest-Bearing Debt at ¥1,826.9bn, consistent with capital-intensive utilities but above conservative thresholds. Covenant metrics are stretched: Debt/EBITDA 8.0x (high) while EBITDA interest coverage at 8.9x and EBIT-based coverage at 3.5x are acceptable but not robust in a downturn. Maturity profile risk is contained near term: short-term loans are only ¥7.0bn and bonds payable are sizable at ¥1,216.7bn, implying reliance on long-term funding. Working capital is positive at ¥177.3bn, reducing liquidity stress. Off-balance sheet obligations were not highlighted. Notable YoY balance sheet shifts include a sharp reduction in short-term loans, higher cash, and stronger retained earnings, improving liquidity buffers despite overall leverage.

Notable B/S Changes

Short-term Loans: −692.9bn (−90.8%) – De-risked near-term refinancing; lowers liquidity stress. Cash & Deposits: +1,366.3bn (+47.7%) – Strengthened liquidity buffer amid volatile earnings. Retained Earnings: +570.1bn (+12.7%) – Profit accretion supporting equity base. Total Assets: +2,260.9bn (+5.2%) – Asset build from capex and cash; weighs on asset turnover. Long-term Loans: +206.1bn (+12.8%) – Higher structural leverage to fund investments. Bonds Payable: −25.0bn (−2.0%) – Net redemption modestly offsets loan growth.

Cash Flow Quality

OCF of ¥2,372.9bn vs net income of ¥685.4bn (OCF/NI 3.46x) indicates high earnings quality and robust cash realization. Cash conversion is strong with OCF/EBITDA at 1.03x, supporting the durability of cash earnings. Free cash flow was slightly positive at ¥10.4bn as capex (purchase of noncurrent assets ¥2,671.5bn) nearly absorbed OCF; FCF did not fully cover dividends (¥115.3bn), implying reliance on financing for shareholder returns alongside growth capex. Working capital movements were mixed but favorable overall for cash: receivables declined (cash inflow), payables decreased (cash outflow), and inventories were modestly higher. No signs of aggressive working capital manipulation are evident given the strong OCF relative to EBITDA and NI. Sustaining both elevated capex and dividends will require continued access to long-term funding and stable OCF.

Dividend Sustainability

FY2026 DPS totaled ¥27, implying a payout ratio of ~15.3% against EPS of ¥190.6, comfortably within sustainable thresholds. However, FCF coverage was about 0.10x, indicating dividends exceeded residual cash after capex and were effectively supported by financing and cash on hand. FY2027 guidance implies DPS of ¥15 versus EPS 86.2 (payout ~17.4%), aligning the dividend to a lower earnings base while improving FCF coverage if capex moderates or OCF remains resilient. Policy appears oriented to stability with sensitivity to earnings normalization. Given elevated leverage and capex needs, maintaining dividends will depend on steady OCF and capital market access rather than FCF alone.

Risk Assessment

Business risks include Regulatory and pass-through timing risk in fuel cost adjustment mechanisms affecting margins, Demand variability and retail competition impacting Comprehensive Energy spreads, Execution risk on large capex programs affecting ROIC and future tariff recoveries, Commodity price and LNG/coal procurement cost volatility despite hedging frameworks, Operational risk from natural disasters impacting generation and grid assets.

Financial risks include High leverage (D/E 4.96x; Debt/EBITDA 8.0x) heightening sensitivity to interest rate and earnings shocks, Interest expense rising to ¥258.0bn, compressing interest coverage to 3.5x on an EBIT basis, Refinancing concentration in bonds payable (¥1.22tn) necessitating stable market access, FCF shortfall relative to dividends and capex, implying dependence on financing.

Key concerns include ROIC at 3.1% below a 5% threshold, implying limited value creation versus cost of capital, Operating margin down 220bps YoY with FY2027 guidance for further OI contraction, Concentration risk: Comprehensive Energy accounts for 83% of revenue, amplifying sensitivity to sector margin shifts.

Investment Implications

Key takeaways include Earnings normalized: revenue −5.7%, OI −30.1%, NI to owners −30.4%; operating margin down 220bps to 6.3%, Cash quality strong (OCF/NI 3.46x; OCF/EBITDA 1.03x) but FCF near breakeven given elevated capex, Leverage high (D/E 4.96x; Debt/EBITDA 8.0x) with acceptable but thinning coverage, FY2027 outlook cautious: OI guidance −42% and EPS 86.2; DPS guided to ¥15, Capex intensity (capex/dep ~1.9x) supports long-term asset base but depresses near-term ROIC (3.1%).

Metrics to watch include Fuel cost adjustment pass-through timing and retail margin trends, Interest expense trajectory and refinancing calendar for bonds, Capex execution vs budget and resultant rate base/allowed returns, OCF sustainability and FCF coverage of dividends, Segment profitability, especially Transmission & Distribution recovery.

Regarding relative positioning, Positioned as a highly leveraged, asset-heavy regional utility with solid cash conversion but below-peer ROIC and margin pressure; risk profile above average due to leverage and capex intensity, partially mitigated by stable liquidity and regulated earnings components.