Hokkaido Electric Power Company,Incorporated FY2026 FY Earnings Report

Financial Highlights

• Net Sales: ¥855.98B
• Operating Income: ¥73.24B
• Net Income: ¥33.72B
• EPS: ¥207.40

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

Verdict: Solid operational resilience with margin preservation, but headline profit declined on lower extraordinary gains and a higher interest burden; balance sheet remains highly leveraged with tight liquidity. Revenue was 8,559.83 (100M JPY, -5.1% YoY) and operating income was 732.38 (100M JPY, -3.4% YoY). Ordinary income was 613.48 (100M JPY, -4.2% YoY), while net income attributable to owners of the parent fell to 439.98 (100M JPY, -31.5% YoY). Operating margin expanded modestly to 8.6%, up about 15bps from 8.4% a year ago, reflecting better cost discipline despite lower sales. Net margin compressed to 5.1% from 7.1% (down ~198bps), primarily due to the sharp drop in extraordinary income versus the prior year and a higher interest expense. EBITDA was 1,452.38 (100M JPY), with an EBITDA margin of 17.0%, broadly stable and consistent with a regulated utility profile. Cash generation was strong: operating cash flow was 1,145.45 (100M JPY), equating to 2.60x net income, signaling high earnings quality. However, free cash flow was -985.24 (100M JPY) on elevated capex (purchase of noncurrent assets 2,175.61 vs depreciation 720), indicating front-loaded investment. Leverage remains elevated: D/E is 4.22x and Debt/EBITDA is 4.03x, with EBIT interest coverage of 4.95x and EBITDA interest coverage of 9.82x. Liquidity is tight: current ratio is 0.92 and quick ratio 0.80, though cash covers short-term borrowings 4.15x, mitigating near-term refinancing risk. Segment-wise, Hokkaido Electric Power (retail and generation) saw revenue decline and margin compression, partially offset by improved profitability in Hokkaido Electric Power Network (T&D). Comprehensive income remained healthy at 730.88 (100M JPY), supported by gains in OCI (notably pension remeasurements and securities). The cash conversion ratio (OCF/EBITDA) of 0.79x is below the 0.9x excellence threshold, reflecting working capital/timing effects and heavy capex, but still acceptable for a capex-heavy utility. Forward-looking, management guides to higher revenue but materially lower profit next year, implying margin compression and a cautious earnings outlook as subsidies taper and pass-through dynamics normalize. Dividend payout remained conservative (DPS 32 JPY; payout ratio ~15%), but FCF coverage is negative due to growth capex. Overall, the company executed well operationally, but the capital structure is stretched and investment needs will keep FCF negative near term, warranting close monitoring of leverage and liquidity.

Profitability Analysis

ROE (9.3%) = Net Profit Margin (5.1%) × Asset Turnover (0.346) × Financial Leverage (5.22x). The largest change came from the net profit margin, which declined from the prior year as extraordinary income dropped significantly and interest expense rose, despite a slight improvement in operating margin. Business drivers include the normalization of one-off gains versus last year and a higher interest burden reflecting a larger bond/loan base. The operating margin expansion (+15bps YoY) indicates some cost pass-through/efficiency gains, but the net margin compression (-198bps YoY) is not structural on the operating side; it chiefly reflects financial and non-recurring items, suggesting partial recoverability if financing costs stabilize. Sustainability: operating-level efficiencies appear sustainable; however, financial leverage keeps the interest burden elevated, capping net margin. Concerning trend: SG&A and other operating costs were contained relative to revenue, but interest expense (+3.8 (100M JPY) YoY) outpaced operating income growth, pressuring bottom-line leverage.

Growth Assessment

Top line declined 5.1% YoY to 8,559.83 (100M JPY), with retail/generation volumes and subsidy normalization as likely headwinds. Operating income decreased 3.4% to 732.38 (100M JPY), but the operating margin improved to 8.6%, indicating cost control and relatively effective fuel/pass-through management. Ordinary income fell 4.2% to 613.48 (100M JPY), reflecting higher non-operating costs (notably interest). Net income to owners declined 31.5% to 439.98 (100M JPY), due primarily to the sharp decline in extraordinary income vs last year and increased financial costs. EBITDA margin held at 17.0%, consistent with regulated utility economics. Equity-method income increased to 0.79 (100M JPY), a modest positive. Outlook: management’s next-year guidance (net sales 9,700 (100M JPY), operating income 480 (100M JPY), ordinary income 300 (100M JPY), NI to owners 220 (100M JPY)) implies revenue growth with significant margin compression, indicating cautious expectations for cost pass-through and potential withdrawal of government support effects.

Financial Health

Liquidity is tight with a current ratio of 0.92 and quick ratio of 0.80; this is a warning threshold for short-term coverage. Working capital is negative at -378.42 (100M JPY). Maturity profile risk is mitigated by cash and deposits of 1,846.07 (100M JPY) covering short-term loans of 445.00 (100M JPY) by 4.15x; however, current liabilities overall exceed current assets. Leverage is high: D/E is 4.22x and Debt/EBITDA is 4.03x, consistent with a highly levered utility capital structure. Interest-bearing debt totals 5,848.28 (100M JPY), with bonds payable at 8,592.30 (100M JPY) and long-term loans 5,403.28 (100M JPY). Interest coverage is adequate at the operating level (EBIT/interest 4.95x), but ordinary income is more sensitive to interest rate moves. Capital adequacy ratio is 18.5%, improved YoY alongside total equity at 4,736.36 (100M JPY). No off-balance sheet obligations were indicated in the provided data.

Notable B/S Changes

Total Assets: +227.05bn JPY (+10.1%) - Expansion driven by higher noncurrent assets; reflects elevated capex program. Noncurrent Liabilities: +168.52bn JPY (+12.5%) - Increased long-term funding for investments raises future interest burden. Total Liabilities: +160.75bn JPY (+8.8%) - Broad-based liability growth consistent with investment financing. Bonds Payable: +135.83bn JPY (+18.8%) - Heavier reliance on bond market; monitor refinancing and rate risk. Noncurrent Assets: +201.00bn JPY (+11.0%) - Tangible/intangible asset build consistent with grid and generation projects.

Cash Flow Quality

OCF of 1,145.45 (100M JPY) is 2.60x net income, indicating strong earnings cash backing. Free cash flow was -985.24 (100M JPY) due to elevated capex (purchase of noncurrent assets 2,175.61 vs depreciation 720; Capex/Dep ~3.0x), consistent with grid and generation investments. Cash conversion (OCF/EBITDA) of 0.79x is below the 0.9x excellence mark but within a reasonable range for a capex-intensive utility with working capital seasonality (inventories +88.4 (100M JPY) on OCF classification). No signs of aggressive working capital manipulation are evident; tax and interest cash outflows explain much of the OCF bridge. Dividend cash payments of 65.38 (100M JPY) are small relative to OCF but not covered by FCF given the investment cycle.

Dividend Sustainability

Declared DPS totals 32.0 JPY (interim 15.0, year-end 17.0). With EPS of 207.4 JPY, the payout ratio is approximately 15.4%, conservative and aligned with utilities’ preference for stable dividends. However, FCF coverage is negative (FCF coverage ~ -14.3x), meaning dividends are effectively funded by operating cash while capex is debt-financed. Given high leverage and planned investments (Capex/Dep ~3.0x), dividend growth is likely to track earnings and capex cadence; maintaining current DPS appears manageable on OCF, but upside is constrained until FCF inflects.

Risk Assessment

Business risks include Fuel cost and commodity price volatility affecting procurement costs despite adjustment mechanisms, Regulatory and tariff-setting risk impacting allowed returns and pass-through timing, Volume risk from demand fluctuations and competitive dynamics in retail post-deregulation, Operational risk from severe weather and natural disasters in Hokkaido affecting generation and grid reliability.

Financial risks include High leverage: D/E 4.22x and Debt/EBITDA 4.03x increase sensitivity to rate rises and refinancing, Tight liquidity: current ratio 0.92 and negative working capital heighten short-term funding pressure, Interest burden: EBIT interest coverage 4.95x with rising interest expense constrains net margin and flexibility.

Key concerns include Margin compression at the net level due to higher financial costs despite stable operating margin, Negative FCF driven by elevated capex, keeping reliance on external financing high, Guidance indicates lower profits next year despite higher revenue, signaling tougher pass-through economics.

Investment Implications

Key takeaways include Operational execution solid: operating margin +15bps YoY to 8.6% despite revenue decline, Bottom-line pressure is financial/non-recurring: net margin -198bps YoY on lower extraordinary gains and higher interest, Earnings quality is high: OCF/NI 2.60x; accruals ratio -2.9%, Capex cycle is intensive (Capex/Dep ~3.0x), resulting in negative FCF, Leverage elevated (D/E 4.22x), liquidity tight (current ratio 0.92) but near-term cash/short-term debt coverage is ample, Segment mix: retail/generation softness offset by improving T&D profitability, Management guides to revenue growth but substantial profit decline, implying margin pressure ahead.

Metrics to watch include Interest expense trajectory and refinancing rates, OCF/EBITDA cash conversion and working capital movements, Capex execution vs depreciation and its impact on FCF, Tariff revisions and pass-through timing under regulatory mechanisms, Debt/EBITDA and EBIT interest coverage trends.

Regarding relative positioning, In the Japanese utility peer set, Hokkaido Electric Power shows typical regulated EBITDA margins and improving T&D profitability, but it operates with higher financial leverage and tighter liquidity than conservative peers; near-term outlook is more cautious due to anticipated margin compression despite revenue recovery.