Tokyo Electric Set to Profit From Forecast for Colder Winter

Tokyo Electric Power Co. and other utilities in Japan could get a bump in earnings this winter as temperatures are forecast to be colder than average, driving up heating demand just as the stronger yen cuts fuel import costs.

Tokyo Electric, Asia’s biggest power company, said today August sales rose 9 percent and marked the eighth consecutive month of a year-on-year gain. The company may raise its annual profit forecast for a second time since April, according to Deutsche Bank AG. The winter weather forecast follows Japan’s hottest summer in at least 113 years that benefited the company, along with Tokyo Gas Co., as electricity demand surged to run air conditioners.

“A cold snap would push gas suppliers’ shares higher and power utilities will also benefit given that households increasingly rely on air-conditioners for both heating and cooling homes,” said Tomohiro Jikihara, a Tokyo-based analyst at Deutsche Bank. “Utilities may outperform the Nikkei 225 Stock Average.”

The temperature fluctuations come from a weather phenomenon known as La Nina, which occurs when surface temperatures are cooler in the eastern equatorial Pacific Ocean and warmer in the west. This is likely to become more pronounced in November and December, said Koji Yamazaki, an atmospheric scientist at Hokkaido University.

La Nina

“The La Nina that began in the fall of 2005 and lasted until spring of 2006 had a big impact on Japan’s weather,” said Ikuo Yoshikawa, a forecaster at the Japan Meteorological Agency in Tokyo. Temperatures in Japan averaged the lowest in 20 years in December 2005 and nine observation sites in the country had record snowfall for the month, according to data compiled by the agency.

Tokyo Electric shares have gained 1 percent this year and Tokyo Gas has risen 4.9 percent, compared with a 8.7 percent drop in the Nikkei 225 Stock Average. Tokyo Electric’s stock has eight buy recommendations, four holds and one sell, Bloomberg data show.

JX Holdings Inc., Japan’s biggest oil refiner which supplies fuel to utilities, increased sales to regional power companies by 47 percent in August, the first year-on-year increase in two years. JX, the biggest gainer in the 9-member TOPIX Oil and Coal Product Index today, rose 3.1 percent to close in Tokyo at 472 yen.

Better Than Cash

“Utility stocks tend to be used as an alternative for keeping your money in cash so, in an environment like this, they usually benefit,” said Kiyoshi Ishigane, a strategist in Tokyo at Mitsubishi UFJ Asset Management Co., which oversees about $65 billion. “The heat wave has benefited them and the strength of the yen is also giving them a boost.”

Tokyo Electric expects profit of 65 billion yen ($780 million) for the year ending March, according to a July filing to the stock exchange, compared with a forecast of 10 billion yen in April.

The company may report profit of 103 billion yen, according to the average of 12 analysts estimates compiled by Bloomberg. The estimate is less than the 134 billion yen net income reported in the previous financial year as the company will book one-time charges for accounting changes.

Strong Yen

Jikihara at Deutsche Bank says Tokyo Electric may raise its annual profit outlook again, because the 8 percent gain in the yen against the dollar this year will reduce fuel import costs.

Japan’s 10 power utilities produced the highest volume of electricity in the two months ended Aug. 31 since 1972 as households and businesses turned up their air-conditioners.

Tokyo Electric supplied 31.59 billion kilowatt hours of electricity in August, the company’s second-highest monthly figure, spokesman Tetsuo Takahashi said by telephone this week.

Temperatures were 1.64 degrees Celsius higher than the summer average between 1971 and 2000, the Japan Meteorological Agency said this month.

It was the hottest summer since records began in 1898, with temperatures peaking at 39.9 degrees Celsius (103.8 Fahrenheit) on Sept. 5 in Kyoto. Almost 170 people died of heatstroke between May 31 and Sept. 5, according to the government.

Record Summer

“La Nina, which kicked in during spring, was one of the main driving forces behind the heat this summer,” said Yamazaki, who is a member of the agency’s extreme weather study committee. An unusual pattern in the Jet Stream, a band of strong winds high in the atmosphere, contributed to the hotter temperatures, he said.

La Nina brings strong high-pressure systems and sunny days to Japan in summer, the agency explained on its website. In winter, the phenomenon increases atmospheric pressure north of Japan, bringing colder-than-normal temperatures to the country.

The La Nina in the Pacific has strengthened over the past two weeks, the Australian Bureau of Meteorology said in a statement this week. The bureau closely monitors La Nina weather events as they typically bring higher rainfall to many parts of Australia as well as an increase in cyclones. Trade winds, which increase during a La Nina, are the strongest since 1998, the bureau said.

Warmer Ocean

La Nina, which translates from the Spanish as “little girl,” brings opposite weather effects from the better known El Nino or “little boy.” El Nino was coined by Peruvian fisherman to describe warmer ocean currents that appeared around Christmas.

Tokyo Electric has said a 1-degree drop in temperatures on a winter day may bolster power demand by as much as 700 megawatts, or the equivalent to requirements of about 140,000 homes.

Tokyo Gas, which supplies more than 10 million customers in the capital and surrounding areas, will call on its contracted suppliers in countries including Australia to increase shipments of liquefied natural gas should a cold snap produce higher-than- projected demand, said spokesman Naoyoshi Oogake.

Buying LNG on the spot market is also an option to supplement the company’s supply, Oogake said.

Hisashi Nakamura, an atmospheric scientist at the University of Tokyo who in July correctly predicted the heat wave this summer, agreed with Yamazaki that Japan may experience a colder winter.

“The ocean phenomenon is one big element and provides a definite impact in the atmosphere,” Nakamura said.

To contact the reporters on this story: Shigeru Sato in Tokyo at ssato10@bloomberg.net; Yuji Okada in Tokyo at yokada6@bloomberg.net.

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