Tohoku Electric Mulls Using Forward Contracts to Hedge Yen Risk

Tohoku Electric Power Co., which uses thermal power to generate nearly 90 percent of its electricity, is considering forward exchange contracts to hedge against a weaker yen that is pushing up imported fossil fuel costs.

The Miyagi-based company may use the contracts because it can’t pass on part of the higher costs resulting from the loss of nuclear power generation to consumers, Katsuyuki Takahashi, deputy general manager at Tohoku’s accounting department, said in a phone interview last week. The size of the contracts and the timing of purchases hasn’t been decided, he said.

Japanese power companies had combined losses of about 1.6 trillion yen ($16.4 billion) in fiscal 2012 as the yen’s decline raised the cost of imported natural gas, crude and coal to fill the gap left by the nuclear power shutdown after the March 2011 Fukushima disaster. The yen has fallen 18 percent against the dollar in the past year, making it the biggest decliner among Group of 10 currencies tracked by Bloomberg.

The weaker yen will raise imported fuel bills for power companies by 700 billion yen this fiscal year compared with the previous year, according to an estimate by a government advisory board released in April. At the same time, Japanese manufactures ranging from Toyota Motor Corp. to Sony Corp. stand to benefit from the currency’s slide because it makes their products more competitive and boosts overseas earnings.

Tohoku Electric’s four atomic reactors, which are capable of generating 3,270 megawatts, produced no electricity in fiscal 2012 for the second consecutive year. The company’s fiscal 2012 fuel cost rose by 8.3 percent to 555 billion yen, or one-third of its ordinary expenses, from a year earlier partly because of the yen, it said last week.

Yen Impact

Profit fell by 6 billion yen for every 1 yen drop against the dollar in fiscal 2012, according to Tohoku Electric. It had a net loss of 103.7 billion yen last fiscal year, a period when the yen declined about 15 percent.

Forward exchange contracts were used “on a trial basis” between 2000 and 2007, spokesman Takashi Suzuki said by phone. He declined to comment on details, including why the company stopped using the contracts.

Under a forward exchange contract, two parties agree to buy or sell one currency for another at a future date at a fixed rate.

All but two of Japan’s 50 reactors are offline and must pass new safety rules, which will take effect in July, before resuming operations. Tohoku Electric expects to restart its Higashidori plant in July 2015 and three reactors at the Onagawa station in fiscal 2016 or later, it said in February.

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