This section discusses the main potential risks related to J-POWER's financial position, business results, current and future business operations, and other matters. From the perspective of actively disclosing information to investors, this section also provides information to help investors understand business and other risks that the Company does not necessarily consider significant.
Impact of Reforms to the Electric Power Business Regulations on J-POWER's Wholesale Electricity Rates and Business
J-POWER derives most of its operating revenues from the wholesale supply of power to Japan's 10 electric power companies (EPCOs).
Amid intensifying competition in the electric power business due to the system reforms that include the liberalization of the retail supply, EPCOs have been lowering their retail rates to respond to expectations from society calling for lower electricity rates and to secure customers.
As our contract rates are calculated on a fair cost plus fair return on capital basis for each generating, transmission, and transformation facility, there will be no immediate effect from EPCOs retail electricity rate changes. However, EPCOs have been calling for a reduction in our contract rates, and it is possible that declines in costs or intensifying competition could lead to stronger calls for the Company to lower its contract rates. A reduction in our wholesale contract rates going forward could potentially have an adverse effect on the results of our operations.
Wholesale power trading on the Japan Electric Power Exchange ("JEPX", established in November 2003) commenced in April 2005. J-POWER is currently trading in the wholesale power markets including JEPX. Although we do not expect a large increase in the amount of electricity traded on the exchange in the near term, an increase in the importance of exchange-traded power prices as a price indicator associated with a possible trading volume increase on JEPX could potentially have an indirect effect on our rates. If the rates set in contracts between J-POWER and EPCOs are higher than price indicators, this could potentially have a material adverse effect on the results of our operations.
In addition, there remains the possibility that the business environment surrounding the Company will see drastic changes as a result of reforms in the electric power business regulations. Based on the Cabinet decision on the Policy on Electricity System Reform in April 2013, the Electricity Business Act was amended in November 2013, and the Organization for Cross-regional Coordination of Transmission Operators (OCCTO) was established in April 2015. Following the Electricity Business Act amendments of June 2014 and June 2015, the plan calls for the full liberalization of the retail market and abolition of wholesale regulation (implementation envisaged for 2016) and the legal unbundling of the transmission/distribution sector and revisions to regulations on electricity retail rates (implementation envisaged for 2020). Further details of system reform continue to be explored, and the outcomes of such reforms could potentially have material adverse effects on our business operations and earnings.
Discontinuation of Power Plant Construction Plans
When constructing power plants for wholesale supply to EPCOs, before beginning full-scale construction, we reach consensus with the planned power receiving company with regard to the capacity, the start date of operations, and anticipated construction cost. The consensus is based on the assumption that the EPCOs will receive all the power generated. Later, just before construction is completed, we form a contract with the receiving company determining the rates and other conditions. After operations begin, we recover maintenance and operating costs as well as invested capital through the proceeds of electricity sales.
Changes in growth projections for electricity demand have prompted EPCOs to postpone or cancel some new power plant developments and to shut down underutilized thermal power plants on a long-term or permanent basis. In some cases, we have also postponed the start of commercial operations or cancelled the planned construction of power plants for EPCOs based on consultations with them. In addition, due to difficulties in acquiring sites for power plants, there have been cases wherein plans were cancelled upon consultation with the power-receiving companies. With regard to the costs incurred at the time of cancellation, the Company bears the appropriate amount of expenses arising from cancellations based on consultation with the planned power receiving companies.
Going forward, if revisions to Japan's energy policies and major changes surrounding the electric power business, the occurrence of unforeseen circumstances, or other factors result in the cancellation of construction plans, this could potentially have a material adverse effect on the results of our operations.
J-POWER has a large number of coal-fired thermal power plants, which emit relatively high amounts of CO2 with respect to power output compared with power plants that use LNG and other fossil fuels.
Accordingly, we are taking various initiatives to combat global warming. These initiatives include pursuing such initiatives in Japan as developing nuclear power, which does not emit CO2, developing unused energy sources, such as waste-fueled power, developing wind power, geothermal, and other renewable energy, and working to improve the efficiency of coal-fired power generation. Going forward, if new regulations or other rules related to global warming countermeasures were to be introduced, it could potentially have an adverse effect on the results of our operations.
Overseas Power Generation Business and Other Areas of New Business
J-POWER is pursuing new initiatives in the overseas power generation business and new electric power businesses in Japan, with the aim of creating new profit sources.
Specifically, in the overseas power generation business, we are applying the experience gleaned through our consulting services businesses in various countries in the pursuit of independent power producer (IPP) projects.
In the domestic electric power business, we operate IPPs that supply wholesale electricity to EPCOs, supply wholesale electricity for PPSs, and engage in power generation using renewable energy, including wind power, geothermal, and waste-fueled thermal power.
However, these businesses may not generate the level of profits that we anticipate, due to unforeseeable circumstances, including a major change in operating conditions; weakening demand; and changes in regulations. Moreover, changes in our business plans or the suspension of operations prompted by such circumstances could result in related expenses that could potentially have an adverse effect on the results of our operations. These businesses also include some that the Company operates in the form of joint ventures, in which the Company retains a minority interest. In addition, overseas businesses entail foreign exchange risk as well as country risk due to political instability and other factors.
The Company has invested a very large amount in power plants and other facilities. The funds for these investments have been procured mainly through borrowings and the issuance of bonds payable. We anticipate the need to procure a significant volume of funds to proceed with the Ohma Nuclear Power Plant and Takehara Thermal Power Plant New No. 1 projects, which are in our main development projects over the next 10 years (from fiscal 2015 to 2024), to repay existing obligations, and to proceed with investment in overseas power generation projects. In March 2015, the Company issued new shares and disposed of treasury shares through a public offering to appropriate for a portion of the capital investment funds needed to steadily promote new development projects including domestic new coal-fired thermal power, renewable energy (wind power, geothermal) as well as overseas power generation business and to ensure flexibility of capital funding by reinforcing its financial position. When needing to procure funds in the future, if unable to procure the required funds on acceptable terms and in a timely manner due to the prevailing conditions in the financial markets, the Company's credit situation, or other factors at that time, then this could potentially have material adverse effects on our business development and profitability.
Ohma Nuclear Power Plant Construction Project
With regard to the Ohma Nuclear Power Plant Project, the Japan Atomic Energy Commission concluded in the August 1995 decision that the plant has a policy-oriented role in enhancing flexibility of the plan to use MOX (uranium-plutonium mixed oxide) fuel in light water reactors because the plant adopts an advanced boiling water reactor with a view to using MOX fuel for the entire core (full MOX-ABWR). In addition, the commission expected the implementation of the plan not only by J-POWER who has primary responsibility but also under the auspices of the government and EPCOs. Accordingly, under a government's guideline, the Company receives an R&D grant for the use of MOX fuel for the entire reactor core. Furthermore, the Company has already concluded basic agreements with nine EPCOs, excluding the Okinawa Electric Power Company, that require the nine EPCOs to purchase the total amount of electricity at fair cost.
As a nuclear power plant using MOX fuel for the entire core, the Ohma Nuclear Power Plant Project received consent from the local municipality of Ohma as well as Aomori Prefecture and was included by the Electric Power Development Coordination Council in the national Electric Power Development Master Plan as laid out by the Electric Power Development Promotion Act in August 1999. (The Electric Power Development Promotion Act was abolished in October 2003, and, with it, the system of the Electric Power Development Master Plan ended. The functions of the plan were taken on by the major power development site designation system, under which the project received site designation in February 2005.) In April 2008, the nuclear reactor installation permit was granted, and, in May of the same year, upon the initial approval of the construction work plan by the Minister of Economy, Trade and Industry, construction began. At that time, planned construction costs were ¥469.0 billion. Construction was suspended immediately after the Great East Japan Earthquake struck in March 2011 but was resumed in October 2012.
On December 16, 2014, we submitted an application for permission for alteration of a reactor installment license and an application for construction plan approval to the Nuclear Regulation Authority (NRA) based on the initiative to conform to the New Safety Standards concerning nuclear power plants enforced by the NRA in July 2013. Specific examples of the wide-ranging measures include the raising of assumptions and enhancement of countermeasures with regard to earthquakes and tsunamis as design basis measures to prevent severe accidents, combined with the implementing of measures to prevent damage to the core and the containment vessel as severe accident countermeasures newly drawn up under the New Safety Standards. Furthermore, as terrorism countermeasures, such as the deliberate crashing of an aircraft, we have decided to install the specified severe accident response facility that will enable reactor decompression and other functions to be controlled remotely to inhibit the abnormal release of radioactive material outside due to damage sustained by the reactor containment vessel. The construction work for the additional safety enhancement measures compiled in the above-mentioned application will commence following confirmation that the content of the Company's application conforms to New Safety Standards when reviewed by the NRA. The Company forecasts that the additional construction work will cost approximately ¥130.0 billion. Moving forward, J-POWER will seriously and appropriately respond to the NRA's conformity reviews and steadily implement necessary safety measures or other measures required in a full-scale effort to build a safe power plant.
Please note that the construction work schedule for the additional safety measures may be extended depending on changes surrounding the nuclear power business, the status of reviews by the NRA, and additional correspondence to the New Safety Standards. Also, there is a possibility of increased construction expense in such events. In addition, nuclear power generation involves various risks, such as revisions of plan due to significant change in conditions around nuclear power business caused by review of Japan's nuclear policy or unexpected circumstances, also those associated with the storage and handling of radioactive materials, as well as risks other electric power plants are exposed to, such as natural disasters and unforeseen accidents after operations have commenced. J-POWER intends to ensure that these risks are avoided or minimized. However, if any of these risks should eventuate, it could adversely affect the business performance of the Company.
Fuel for Coal-Fired Thermal Power
J-POWER's coal-fired thermal power plants use imported coal as their main source of fuel. Coal-fired thermal power accounts for approximately 83% of the Company's total electricity sales volume, and payments for coal account for approximately 33% of operating expenses.
In procuring imported coal, the Company purchases coal from diverse sources in Australia, Indonesia, Russia, South Africa, and elsewhere to seek both stable and economical supply. In addition, the Company holds interests in some coal mines aiming for stable coal supply. The Company's imported coal procurement is handled mainly under long-term or approximately one-year contracts, with spot purchasing to fill gaps as necessary. Coal purchase prices under long-term contracts are normally adjusted once per year in light of market prices.
The Company's fuel cost is impacted by such factors as changes in imported coal prices, supply and demand for transport vessels, and problems with the facilities or operations of suppliers. However, fuel prices are reflected in our electricity rates for EPCOs on a cost basis, and these rates are generally revised every two years (though they are subject to annual revision if costs change significantly). As a result, fluctuations in coal prices have a limited impact on business performance of J-POWER. However, if, following a revision to wholesale electricity rates, coal prices rise sharply before the next revision, there will be a delay before the rise in fuel prices is reflected in electricity rates. This could have a temporary adverse effect on the results of our operations. Furthermore, should a significant fall in coal prices have a significant effect on the performance of the mine in which the Company holds an interest, the Company's performance could also be adversely affected.
Natural Disasters and Accidents
Should a natural disaster, human error, terrorist activity, fuel supply stoppage, or other unforeseen circumstance result in a major disruption of one of J-POWER's power plants or transmission or transformation facilities, or should such an event disrupt the information systems that control operations at these facilities, this could potentially hamper our business operations and consequently have an adverse effect on the surrounding environment. To prevent accidents at power plants as well as transmission and transformation facilities, which are important infrastructure for Japan, to ensure the safety of involved parties and to preserve the surrounding environment, J-POWER works to establish security and disaster prevention systems, take accident and disaster prevention measures and emergency response and recovery countermeasures, and implement environmental monitoring.
Nevertheless, if an accident or other events were to halt operations of J-POWER's power plant or transmission or transformation facilities, or if an accident or other events were to negatively impact the surrounding environment, the Company's performance could be adversely affected.
J-POWER's mainstay wholesale electric power business is subject to the Electricity Business Act.
As stipulated by this act, J-POWER, as a wholesale power company, is subject to business and safety regulations, including those related to business licenses (Article 3), approval for assignment and acceptance of business and corporate mergers and demergers (Article 10), notification related to assignment of facilities used for electricity business, etc. (Article 13), permission to suspend or abolish business and approval to dissolve the corporation (Article 14), obligation to supply (Article 18), notification related to rates and other supply conditions (Article 22), notification related to supply plans (Article 29), and notification related to safety regulations (Article 42). The Company is also subject to regulations stipulating orders to change or cease operations and the revocation of business licenses related to these provisions. The Company's business operations are also subject to various other laws and regulations. If the Company is unable to comply with these laws and regulations, or if these laws and regulations are revised, this could potentially have an adverse effect on our business operations and performance. Furthermore, wholesale regulations (the business license system and rate regulations) are to be abolished in 2016 according to the Electricity Business Act amended in June 2014.
On August 10, 2011, the Nuclear Damage Compensation Facilitation Corporation Act was promulgated and enacted. The main purpose of this act is to create a support organization (the Nuclear Damage Compensation Facilitation Corporation, renamed the Nuclear Damage Compensation and Decommissioning Facilitation Corporation in August 2014) to enable compensation for damages related to nuclear accidents in the future, based on the principle of mutual assistance between nuclear operators. In line with Article 38 of the Act, as a nuclear operator, J-POWER will be required to make contributions to the operating costs of the Nuclear Damage Compensation and Decommissioning Facilitation Corporation. Depending on the amount of these contributions, the business performance of the Company could be adversely affected. With regard to the Ohma Nuclear Power Plant Project, should nuclear reactor operations commence, the Company will be required to make such contributions.
High Level of Dependence on a Limited Number of Customers
In fiscal 2014, electric utility operating revenues accounted for 78.4% of total operating revenues, and sales to EPCOs accounted for 95.0% of electric utility operating revenues. Customers who account for more than 10% of electric utility operating revenues are The Tokyo Electric Power Company (20.7%), The Chugoku Electric Power Company (19.8%), and The Kansai Electric Power Company (18.1%). We expect EPCOs to remain our most-important customers going forward, and, accordingly, the results of our operations could potentially be affected by changes in the EPCOs' share of the retail electricity market as well as by changes in demand for electric power in Japan and other factors.
Management of Business Information
J-POWER holds a large amount of important information that must be kept confidential, including personal information. J-POWER controls this information carefully by implementing information security measures, employee training programs, and through other means. However, a leak of sensitive information outside the Company could adversely affect J-POWER's reputation and business performance.