NEWS RELEASE Aug 05, 2020 R&I Affirms Ratings: 10 Electric Power Companies R&I Changes Outlook to Positive: Chubu Electric Power Co., Inc. R&I Changes Outlook to Stable: The Chugoku Electric Power Co., Inc., Hokuriku Electric Power Co., Hokkaido Electric Power Co., Inc., The Japan Atomic Power Co. Rating and Investment Information, Inc. (R&I) has announced the following: SEC. COMPANY NAME CODE 9502 Chubu Electric Power Co., Inc. 9503 The Kansai Electric Power Co., Inc. 9504 The Chugoku Electric Power Co., Inc. 9505 Hokuriku Electric Power Co. 9506 Tohoku Electric Power Co., Inc. 9507 Shikoku Electric Power Co., Inc. 9508 Kyushu Electric Power Co., Inc. 9509 Hokkaido Electric Power Co., Inc. 9513 Electric Power Development Co., Ltd. ---- The Japan Atomic Power Co. * Please refer below for rated bonds, etc. * Tokyo Electric Power Co. Holdings, Inc., Tepco Power Grid, Inc., Jera Co., Inc. and The Okinawa Electric Power Co., Inc. are not included in the scope of this review. RATIONALE: The creditworthiness of the former general electricity utilities (major power companies) and so forth plummeted in the aftermath of the Great East Japan Earthquake. Since then, it has been recovering at a moderate pace, as the electricity system reform and the business environment for nuclear power generation have developed almost within the range of R&I's assumptions. R&I has affirmed the ratings for the 10 companies listed above, and changed the Rating Outlook for Chubu Electric Power Co., Inc. to Positive and those for The Chugoku Electric Power Co., Inc., Hokuriku Electric Power Co., Hokkaido Electric Power Co., Inc. and The Japan Atomic Power Co. to Stable, reflecting improvements in their earning capacities and financial bases, among others. As regards the electricity system reform, the impact the full liberalization of the electricity retail market and the spin-off of transmission and distribution divisions had on power companies' business bases has been comfortably within the range that was factored into their ratings. Conduct regulations imposed on transmission and distribution divisions do not affect a group's unity. In FY2019 (the year ended March 2020), growth in the market share of Power Producers and Suppliers (PPSs) somewhat slowed nationwide, and transaction volumes in the baseload market, the centerpiece of the government's new measures to promote competition, were very small in the first fiscal year of the market. Following the enactment of the Act of Partial Revision of the Electricity Business Act and Other Acts for Establishing Resilient and Sustainable Electricity Supply Systems in June 2020, the government started to discuss details of the transmission charge system reform. It is considering allowing transmission and distribution divisions to retain part of the cost they have saved. Such factors may positively affect their earning capacities. There remain uncertainties over the prospects for nuclear power generation, as exemplified by the unexpected suspension of plant operation resulting from courts' temporary injunctions. Meanwhile, progress has been made in creating a favorable business environment, particularly through the ■Contact : Sales and Marketing Division, Customer Service Dept. TEL. +81-(0)3-6273-7471 E-mail. [email protected] ■Media Contact : Corporate Planning Division (Public Relations) TEL. +81-(0)3-6273-7273 Rating and Investment Information, Inc. TERRACE SQUARE, 3-22 Kanda Nishikicho, Chiyoda-ku, Tokyo 101-0054, Japan https://www.r-i.co.jp Credit ratings are R&I's opinions on an issuer's general capacity to fulfill its financial obligations and the certainty of the fulfillment of its individual obligations as promised (creditworthiness) and are not statements of fact. Further, R&I does not state its opinions about any risks other than credit risk, give advice regarding investment decisions or financial matters, or endorse the merits of any investment. R&I does not undertake any independent verification of the accuracy or other aspects of the related information when issuing a credit rating and makes no related representations or warranties. R&I is not liable in any way for any damage arising in relation to credit ratings (including amendment or withdrawal thereof). As a general rule, R&I issues a credit rating for a fee paid by the issuer. For details, please refer to https://www.r-i.co.jp/en/docs/policy/site.html. ©Rating and Investment Information, Inc. NEWS RELEASE decommissioning accounting system. In July 2020, major power companies, excluding The Okinawa Electric Power Co., Inc., and The Japan Atomic Power Co. submitted applications to the Minister of Economy, Trade and Industry to recover nuclear power-related costs (decommissioning facilitation contributions and compensation contributions) through transmission charges and obtained approval in the same month. Their transmission and distribution subsidiaries will recoup the costs over a long period of time by reflecting in transmission charges the remaining book value of decommissioned plants and payments to a compensation reserve that should have been set aside before the accident at the Fukushima Daiichi Nuclear Power Station. The government's support measures to facilitate nuclear power generation have been steadily put into practice. With respect to environmental, social and governance (ESG) factors, environmental regulations are the most important for power companies. The government began considering introducing new regulatory measures and initiatives to phase out insufficient coal-fired power sources that operate at supercritical or sub-supercritical pressure. Power companies that are more dependent on such power sources will see a greater impact on their supply capacity and cost competitiveness. That said, the government intends to promote a shift to high-efficiency coal-fired power generation by giving due consideration to stable supply and regional circumstances, among others. A decrease in inefficient coal-fired power will also help tighten the supply-demand balance of electricity. R&I will keep a close eye on details of the government's measures, including how power sources to be suspended/closed are specified and when the measures are implemented, as well as companies' supply capacity with their nuclear power sources taken into account. A sound governance structure is indispensable for an electricity business, particularly in gaining local residents' understanding, which supports stable operation of nuclear plants, and maintaining customer bases. The Kansai Electric Power Co., Inc. needs to overhaul its corporate culture and regain the trust that was lost through a graft scandal. Demand for electricity declined in the wake of the novel coronavirus, but bottomed out in May. Given the recent resurgence of infections, however, future developments remain uncertain. Even so, the electricity industry has been less affected than other industries because of its vast customer base. Although power companies' near-term revenue/expenditure will be strained, a significant deterioration in their business bases and financial bases is unlikely. Chubu Electric Power Co., Inc. Chubu Electric Power Co., Inc. generates relatively stable profits even when its nuclear plants are off-line, because its dependence on nuclear power has been low since before the Great East Japan Earthquake. Upon the integration of its existing thermal power generation business into equity-method affiliate Jera Co., Inc. in FY2019, Chubu Electric Power transferred related debt to Jera, which made its financial profile, one of the strongest among major power companies, even more robust. Jera is expected to make continued profit contributions, given that the government's move to reduce inefficient coal-fired power sources will have only a small adverse impact on the company, whose focus is on liquefied natural gas (LNG)-fired power, as well as that it created a synergy of 25 billion yen in the first year of the integration. Despite lingering uncertainty over the restart of the Hamaoka Nuclear Power Station, it has become more likely that Chubu Electric Power will be able to maintain and continue to strengthen its financial resilience. Based on this view, R&I has changed the Rating Outlook to Positive. R&I will examine electricity sales volumes amid the coronavirus pandemic, developments in the financial burden from growth investments, and their effects on the company's revenue/expenditure and financial position. These factors will be incorporated into the rating. The Kansai Electric Power Co., Inc. With a power mix that highly relies on nuclear power, The Kansai Electric Power Co., Inc. will be able to demonstrate its cost competitiveness if stable operation is ensured at the four nuclear reactors it restarted by FY2018. The regulatory risk associated with carbon dioxide emission mitigation is relatively low, because the company is not heavily dependent on coal-fired power. Its nuclear capacity factor is expected to be slightly low for the foreseeable future due to a delay in the completion of installing ■Contact : Sales and Marketing Division, Customer Service Dept. TEL. +81-(0)3-6273-7471 E-mail. [email protected] ■Media Contact : Corporate Planning Division (Public Relations) TEL. +81-(0)3-6273-7273 Rating and Investment Information, Inc. TERRACE SQUARE, 3-22 Kanda Nishikicho, Chiyoda-ku, Tokyo 101-0054, Japan https://www.r-i.co.jp Credit ratings are R&I's opinions on an issuer's general capacity to fulfill its financial obligations and the certainty of the fulfillment of its individual obligations as promised (creditworthiness) and are not statements of fact. Further, R&I does not state its opinions about any risks other than credit risk, give advice regarding investment decisions or financial matters, or endorse the merits of any investment. R&I does not undertake any independent verification of the accuracy or other aspects of the related information when issuing a credit rating and makes no related representations or warranties. R&I is not liable in any way for any damage arising in relation to credit ratings (including amendment or withdrawal thereof). As a general rule, R&I issues a credit rating for a fee paid by the issuer.