The Chugoku Electric Power Company,Incorporated FY2027 Q1 Earnings Report

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Executive Summary

Despite higher revenue, operating income swung from a profit in the previous year to a loss, highlighting a marked deterioration in core earnings capacity. Revenue increased to ¥3439.4B (+4.4% YoY), while Operating Income fell to ¥-53.9B (¥395.9B in the previous year), Ordinary Income to ¥-32.9B (¥339.3B in the previous year), and Net Income (net income attributable to owners of the parent; hereinafter the same) to ¥-37.7B (¥268.0B in the previous year), with all three turning negative. The primary factor was deteriorating profitability in the Integrated Energy Business, which accounts for 83.6% of revenue. Although dividend income and equity-method gains provided support, they were more than offset by interest expense, preventing a return to profitability even at the ordinary income level.

Factors Driving Earnings Changes

【Revenue】Revenue increased to ¥3439.4B, up +4.4% YoY. By segment, the Integrated Energy Business, which accounts for 83.6% of the revenue mix, grew to ¥2876.2B (+3.5%), while the Power Transmission and Distribution Business, accounting for 13.3%, increased to ¥458.8B (+11.6%). Meanwhile, the Information and Communications Business declined slightly to ¥82.1B (-1.0%). The relatively strong growth in the Power Transmission and Distribution Business was one factor behind the increase in revenue.

【Profit and Loss】Operating Income was ¥-53.9B, reversing from the previous year's profit of ¥395.9B to a loss. The Integrated Energy Business plunged from Operating Income of ¥357.6B in the previous year to ¥-50.0B, becoming the primary driver of the deterioration in company-wide earnings. The Power Transmission and Distribution Business also swung to a loss of ¥-3.9B. Although only the Information and Communications Business secured a profit of ¥6.0B, this was insufficient to offset the overall deterioration. Ordinary Income was supported by non-operating income of ¥119.7B, including dividend income of ¥19.2B and equity-method gains and losses of ¥24.5B; however, non-operating expenses of ¥98.7B, centered on interest expense of ¥78.8B, offset this support, resulting in an ordinary loss of ¥-32.9B. No extraordinary gains or losses were recorded, and Net Income was ¥-37.7B after reflecting income taxes and other taxes of ¥5.2B in ordinary income. The defining feature of the current period was higher revenue but lower earnings—or, more precisely, a shift from a profit to a loss despite higher revenue.

Segment Analysis

The Integrated Energy Business recorded revenue of ¥2876.2B (+3.5%), while operating profit and loss deteriorated sharply to ¥-50.0B (¥357.6B in the previous year, -114.0%), causing its margin to fall to -1.7%. The move into the red of this core business, which accounts for more than 80% of company-wide revenue, was the primary cause of the deterioration in company-wide Operating Income. The Power Transmission and Distribution Business increased revenue to ¥458.8B (+11.6%), but operating profit and loss fell into the red at ¥-3.9B (¥35.8B in the previous year, -110.9%), resulting in a margin of -0.9%. Although the Information and Communications Business declined slightly to ¥82.1B (-1.0%), it secured Operating Income of ¥6.0B (¥8.8B in the previous year, -31.6%) and maintained a margin of 7.4%, the only positive margin among the 4 segments. Differences in margins among the segments have widened, clearly highlighting the contrast between deteriorating profitability in the highly regulated energy and power transmission and distribution businesses and the relatively stable information and communications business.

Key Financial Indicators

【Profitability】The Operating Income margin was -1.6%, deteriorating by approximately 13.6pt from 12.0% in the previous year. The Ordinary Income margin also declined to -1.0% (10.3% in the previous year), while the Net Income margin fell to -1.1% (8.1% in the previous year). Double-digit-point deterioration in margins was observed at every earnings level, indicating a rapid decline in core earnings capacity. 【Cash Quality】Cash and deposits amounted to ¥2983.8B, down ¥1249.8B (-29.5%) from ¥4233.6B in the previous year, while short-term borrowings increased ¥728.9B (approximately 10 times) from ¥70.0B to ¥798.9B. With operating profit and loss in the red, the company is in a situation where cash-generation capacity is likely to face headwinds. 【Investment Efficiency】ROE was -0.5%, with the deterioration in capital efficiency directly reflecting the shift of Net Income attributable to owners of the parent into a loss. 【Financial Soundness】The Equity Ratio was 17.0%, slightly improving from 16.8% in the previous year. However, interest-bearing debt (the total of short-term borrowings, long-term borrowings, and bonds, amounting to ¥3兆1260.8B) reached approximately 4.0 times equity of ¥7752.1B, indicating that both interest-bearing debt and reliance on it remain high. Since interest expense of ¥78.8B exceeded Operating Income, equivalent to EBIT, of ¥-53.9B, interest coverage was negative at -0.68 times, indicating limited resilience to interest expenses.

Cash Flow Analysis

As no cash flow statement has been disclosed, trends in funding can be assessed from changes in the balance sheet. Cash and deposits declined ¥1249.8B (-29.5%) from ¥4233.6B in the previous year to ¥2983.8B in the current period, reducing liquidity on hand. Meanwhile, short-term borrowings increased ¥728.9B from ¥70.0B to ¥798.9B, indicating greater reliance on short-term funding. Long-term borrowings edged down from ¥1兆8198.6B to ¥1兆8044.9B, while bonds increased ¥250.0B from ¥1兆2166.9B to ¥1兆2416.9B, indicating a shift in the composition of funding between short- and long-term sources. Given the operating loss, the company appears to be in a position where funding for working capital and interest payments depends more on borrowings and bond issuance than on operating activities.

Quality of Earnings

Against an operating loss of ¥-53.9B, non-operating income of ¥119.7B, including dividend income of ¥19.2B, equity-method gains and losses of ¥24.5B, and interest income of ¥4.2B, provided some support. However, non-operating expenses of ¥98.7B, centered on interest expense of ¥78.8B, offset this support, leaving an ordinary loss of ¥-32.9B. No extraordinary gains or losses were recorded, and pretax income and Ordinary Income were at the same level. The gap between Ordinary Income and Net Income was limited to income taxes and other taxes of ¥5.2B, indicating little qualitative distortion. Meanwhile, comprehensive income was positive at ¥28.1B, including ¥28.5B attributable to owners of the parent, creating a ¥66.2B gap versus Net Income attributable to owners of the parent of ¥-37.7B. The primary factor was a significant improvement in the share of other comprehensive income of equity-method affiliates, from ¥-55.9B in the previous year to ¥+64.9B in the current period. This suggests that the deterioration in overall corporate value was not as severe as the size of the Net Income loss.

Earnings Forecast and Guidance

The Q1 progress rate against the full-year company plan was 23.1% for revenue, nearly equivalent to the simple progress benchmark of 25%, based on a plan of ¥14900.0B and Q1 revenue of ¥3439.4B. In contrast, progress on earnings was negative across the board: -10.4% for Operating Income, based on a plan of ¥520.0B versus ¥-53.9B; -8.2% for Ordinary Income, based on a plan of ¥400.0B versus ¥-32.9B; and -12.2% for Net Income, based on a plan of ¥310.0B versus ¥-37.7B. All progress rates were negative and significantly below the simple progress benchmark. The fact that revenue progress was close to plan while earnings progress diverged suggests that cost increases or a time lag in passing through prices were concentrated at the beginning of the fiscal year. No revisions were made to the earnings forecast or dividend forecast.

Shareholder Returns

The full-year dividend forecast remains ¥30.00 per share, with no revision from the previous quarter. Based on the approximately 3億5957.5 million average number of shares outstanding during the period after deducting treasury shares, the annual total dividend is estimated at approximately ¥107.9B, implying a Payout Ratio of approximately 34.8% against the full-year Net Income plan of ¥310.0B. As of Q1, both operating profit and loss and net profit and loss were negative, but the dividend plan was maintained, indicating that the company continues to pursue a stable dividend policy based on its initial full-year plan.

Risk Factors

1. Risk of deteriorating profitability in the core segment: Operating profit and loss in the Integrated Energy Business, which accounts for 83.6% of the revenue mix, fell from a profit of ¥357.6B in the previous year to a loss of ¥-50.0B. Most of the deterioration in company-wide Operating Income was attributable to this business, making progress in improving profitability a key determinant of company-wide performance.

2. High leverage and interest expense risk: Total interest-bearing debt amounted to ¥3兆1260.8B, approximately 4.0 times equity of ¥7752.1B. Interest expense of ¥78.8B exceeded Operating Income of ¥-53.9B, resulting in negative interest coverage of -0.68 times. This is a level requiring attention to the potential increase in the burden during periods of rising interest rates.

3. Changes in the short-term funding structure: Short-term borrowings increased ¥728.9B from ¥70.0B to ¥798.9B, while cash and deposits declined ¥1249.8B from ¥4233.6B to ¥2983.8B. Liquidity on hand has contracted and reliance on short-term funding has increased, making funding stability an area requiring monitoring.

Industry Benchmark (Reference; Compiled by the Company)

Both profitability metrics were significantly below the industry median, placing the company in the lower tier of the industry.

The revenue growth rate also fell below the industry median, with revenue growth remaining relatively modest compared with peers.

※Source: Compiled by the Company

Key Points from the Earnings Results

1. Despite higher revenue (+4.4%), the shift in operating profit and loss from a profit to a loss was the most significant point in the earnings data. Deteriorating profitability in the core Integrated Energy Business has spread to company-wide earnings, widening the divergence between revenue growth and profitability.

2. Progress against the full-year plan diverged significantly, with revenue progress at 23.1% versus negative earnings progress (Operating Income -10.4%, Ordinary Income -8.2%, Net Income -12.2%). The gap from the simple progress benchmark of 25% is substantial, and changes in the earnings structure between the beginning of the fiscal year and the second half and thereafter could become a turning point for earnings recovery.

3. The dividend forecast remains unchanged at ¥30.00, implying a Payout Ratio of approximately 34.8% based on the full-year plan. Although earnings were negative as of Q1, the dividend plan itself was not revised, confirming the continuation of the shareholder return policy based on the initial full-year plan.

Theoretical Share Price (Reference Value)

This is a mechanically calculated reference range based solely on publicly disclosed data using a residual income model (Ohlson type, explicit 5-year fade). It is not a forecast of the market share price or a recommendation of any specific investment action.

Sensitivity: ¥1,816–¥1,922 at ±1% for the cost of equity, and ¥1,859–¥1,874 at ±0.1 for ω.

Notes:

• Because forecast ROE is below the cost of equity, the theoretical value is below net assets per share.
• Net assets as of the quarter-end are used (there is a timing difference from the full-year forecast).
• Because net assets include non-controlling interests, the theoretical value may be calculated somewhat higher.

(Calculation model: Residual Income Model / Interest Rate Reference Month: 2026-06 / This value does not predict or guarantee future share prices.)

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This report is an earnings analysis document automatically generated by AI based on XBRL earnings summary data. It does not recommend investment in any specific security. The industry benchmarks are reference information compiled by the Company based on publicly disclosed earnings data. Investment decisions should be made at your own responsibility, after consulting with a professional as necessary.

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