TESS Holdings Co., Ltd.

At the Saga Imari Biomass Power Plant (46.0MW), which commenced commercial operation in April 2025, fuel costs remain elevated due to a combination of rising PKS fuel procurement prices, increased ocean freight rates, and yen depreciation. While the plant is expected to secure profitability over the entire fixed purchase price period (approximately 19.5 years) at ¥24/kWh, continued losses are forecast in the first half of the period due to interest expenses and tax burdens, and profit levels are expected to remain low. As of the end of June 2025, the Company had entered into long-term foreign exchange forward contracts totaling US$525 million in aggregate to secure profitability; however, if fuel prices or exchange rates deteriorate beyond expectations, this could have a material impact on the financial position, including recognition of impairment losses on power plant equipment and other assets.

As of the end of the fiscal year ended June 2025, the ratio of interest-bearing debt to consolidated total assets stood at a high level of 61.3%, primarily due to capital expenditure on renewable energy power generation facilities and working capital requirements related to large-scale EPC projects. If interest rates rise or a decline in creditworthiness occurs due to deteriorating business performance, this could lead to increased interest expenses and constraints on fund procurement. In addition, certain borrowings are subject to financial covenants, and breach of these covenants could result in acceleration of debt or demand for lump-sum repayment (as of the filing date of this document, no breach has occurred).

The Group already operates a total of 69 solar and biomass power plants that have obtained FIT certification, and has a revenue structure dependent on fixed purchase prices. Should a major system change occur, such as a reduction in the fixed purchase price applicable to existing FIT certifications, profitability could decline due to limits on fixed cost reduction, potentially resulting in additional costs associated with business withdrawal or impairment losses on fixed assets. The Group has been partially transitioning from the FIT system to the FIP system since March 2023, but risk remains if the response to system changes is not completed in time.

The areas subject to output curtailment of renewable energy power plants in Japan are expanding nationwide, and the current volume of curtailment is trending upward due to increases in simultaneous curtailment across multiple areas. While the old rule (annual cap of 30 days, uncompensated) applies to the majority of solar power plants operated by the Group, the "TESS Kagoshima Shimofukumoto Solar Power Plant" (approximately 2.3MW) and the "Fukuoka Miyako Mega Solar Power Plant" (approximately 67.0MW), which are subject to unlimited, uncompensated curtailment, will be directly impacted in terms of power sales revenue. A system revision is also planned for FY2026–FY2027 (fiscal years ending March 2026 and March 2027) under which FIT power sources will be given priority in the curtailment order, increasing the risk of a decline in power sales revenue.

The Group continues to receive orders for large-scale EPC projects; however, if construction does not proceed as planned due to increased complexity or prolongation of the construction schedule, timing discrepancies in revenue recognition or unexpected additional costs and delay penalties may arise. In addition, performance in each fiscal period may fluctuate significantly depending on the presence, scale, and revenue recognition timing of large-scale EPC projects, potentially resulting in low levels of revenue and profit. As of the filing date of this document, there have been no new orders received for EPC of solar power facilities utilizing the FIT system, and expanding orders for battery storage systems, self-consumption solar facilities, and energy-saving equipment remains a challenge.

The Group continues to make capital investments in renewable energy power plants, battery storage systems, on-site PPA facilities, and other assets, as well as business investments such as the establishment of joint ventures, resulting in an expansion of the scale of assets including property, plant and equipment and goodwill. If investments do not progress as planned, or if previously unrecognized defects or problems come to light, impairment losses on property, plant and equipment, intangible assets, goodwill, and other assets may occur. In addition, if an increase in the interest-bearing debt ratio due to substantial borrowings coincides with the bankruptcy of an energy supply customer, there are concerns that a compounded impact on both profitability and financial position could occur.

In both the Engineering Business and the Energy Supply Business, fluctuations in the prices of construction materials and fuel pose a risk of affecting order-taking activities and profitability. In electricity retail supply, there is a risk of fluctuation in procurement prices from JEPX (Japan Electric Power Exchange), and if electricity trading prices spike sharply due to a global surge in energy prices or extreme heat or cold waves, risk mitigation measures such as bilateral contracts or price increases may not function effectively. The Group is responding through measures such as offering market-linked pricing plans and securing multiple procurement sources, but if uncontrollable price fluctuations materialize, this could affect business performance and financial position.

If physical risks materialize due to large-scale earthquakes, typhoons, heavy rain, or other natural disasters and climate change, the Group's renewable energy power plants and other facilities may suffer significant damage, resulting in repair costs and loss of power sales revenue due to operational suspension. If damage to power generation facilities causes debris or other materials to affect nearby residents or homes, there is also a risk of administrative sanctions or guidance. The Group promotes climate change response measures based on facility liability insurance coverage and TCFD recommendations, but if losses or damages exceed expectations, insurance coverage may be insufficient.

Execution of the Engineering Business requires specialized personnel, including holders of qualifications under the Construction Business Act, and if competition for talent intensifies due to a deteriorating domestic employment environment, this could result in failure to recruit and train career hires and qualified personnel, outflow of personnel to other companies, and increased labor costs. The Group strives to retain personnel through year-round recruitment of new graduates and experienced hires, development of evaluation systems, and qualification acquisition support systems, but if these measures fail to be effective, business continuity could be affected. If it becomes difficult to secure the qualified personnel necessary to maintain licenses such as the special construction business license, there is also a risk that maintaining the license itself could become difficult.

The Group handles personal information and confidential information of business partners, and if unauthorized system intrusion, information leakage, tampering, or human error occurs, this could result in business disruption, claims for damages from customers, and loss of social credibility. The Group has implemented measures such as building an information security management system compliant with "JIS Q 27001:2023," installing firewalls, encrypting data, and acquiring PC logs, but complete defense is difficult due to the increasing sophistication of cyberattacks. If core infrastructure such as the monitoring equipment at the ICT Solutions Center is damaged, there is also a risk that this could lead to suspension of service provision to customers or loss of monitoring functionality at power plants.