Why Did J-Power Succumb to TCI’s Demands to Increase Dividend?


Electric Power Development, Japan's largest electricity wholesaler, said it will raise its dividend after repeated demands by a U.K. hedge fund that the utility increase payouts to shareholders.

J-Power, as the utility is known, will pay 40 yen (39 cents) a share for the six months ended March 31, compared with the 30 yen it proposed earlier, the Tokyo-based power producer said. Annual payout for the year ended March 31 will increase to 70 yen from 60 yen.

The Children's Investment Fund Management, J-Power's biggest shareholder, this month urged the utility to double the annual payout to 120 yen, or alternatively raise it to 80 yen. The fund sought a vote on the proposals at a shareholder meeting in June and said it would oppose President Yoshihiko Nakagaki's reappointment if the recommendations aren't heeded.

“It isn't the right time for J-Power to boost returns to shareholders because the utility is right in the middle of big investment in nuclear and thermal power plants,” Hirofumi Kawachi, a senior energy analyst at Mizuho Investors Securities in Tokyo, said.

J-Power has said it will increase capital spending on power lines and plants, including its first nuclear plant, by 53 percent to 172 billion yen in the year that started April 1. Commercial operations are slated to begin March 2012 at the plant in the northern prefecture of Aomori.

The government cited the atomic plant project earlier this month when it rejected TCI's bid to double its 9.9 percent stake in the utility. The state can block foreign investors from buying more than 10 percent of companies judged vital to national security, including utilities and arms manufacturers.

TCI rejected the verdict, accusing the government of manipulating public opinion to justify invoking the national security law for the first time to block an acquisition.
Japan's trade and finance ministries responded by asking TCI to give its reasons for persisting. Under the country's administrative procedure act, TCI is entitled to explain its position before the government orders it to withdraw the bid.

The $10 billion fund took out an advertisement in the Nikkei newspaper April 28 asking J-Power shareholders to support its demand for higher returns at the June meeting. President Nakagaki had ‘failed to treat the proposals with sincerity,’ according to the advertisement. In the proposal, TCI urged the utility to appoint outside directors and spend as much as 70 billion yen to buy back shares.

Nakagaki said J-Power will consider hiring an outside director in fiscal 2009 or later to strengthen corporate governance. He denied the move was prompted by TCI's demands. For the year ended March 31, J-Power’s net income fell 17 percent to 29.3 billion yen from 35.2 billion yen a year earlier, the utility said. Sales rose 2.5 percent to 588 billion yen from 573 billion yen.
Flooding in Australia’s state of Queensland this year and port bottlenecks helped drive coal prices to a record $142 a metric ton at Newcastle harbor, the benchmark for Asia, according to the McCloskey index.

J-Power imports about 20 million metric tons of coal annually to produce electricity at its thermal plants. Japan’s thermal coal imports totaled 101 million tons in 2007, according to data compiled by the trade ministry.The utility predicts net income of 42 billion yen for the year ending March 2009 on revenue of 712 billion yen.

J-Power fell 0.5 percent to 3,960 yen in Tokyo trading and shares have lost 25 percent in the past 12 months compared with a 27 percent decline in the Topix Electric Power & Gas Index, which tracks 17 companies.

Was the Decline in Share Prices an Indication of Market Sentiment with regards to the Rising Costs of Operations Coupled with the Increased Expenditure in Dividend Spending?