Business Risk

1. Risks associated with accidents, disasters, etc.

1. Gas resource procurement difficulties

The Group depends on import from other countries for most of natural gas and other gas resources used to produce city gas. The supply of city gas therefore could possibly be impaired in the event of inability to procure gas resources for a long period of time owing to country risks at import sources, troubles affecting gas fields or LNG liquefaction terminals, difficulties in the process of LNG carrier transport, or restriction on entry into port at Tokyo Bay, which would affect the Group's profitability.

Therefore, the Group has maintained a stable supply of LNG, its main raw material, since the start of receiving it in 1969. Currently it is diversifying suppliers by importing LNG from six countries and 16 projects. It is making efforts to spread procurement risks to achieve stable and adaptable procurement through measures such as allocating ships flexibly using its own LNG ships and engaging in LNG trading.

2. Natural disasters

The Group is engaged in an equipment-intensive industry in which business activities are grounded in facilities for the production and supply of city gas. As a result, the supply of city gas could possibly be impaired in the event of large-scale natural disasters, due to damage inflicted on LNG terminals or other production facilities and pipelines or other supply facilities. In such a case, the cost required for the resumption of normal production and supply may affect the Group's profitability.

Therefore, it has structured major facilities in a way that makes them sufficiently resistant to disasters, even in the event of large-scale earthquakes with a magnitude of the Great Hanshin-Awaji Earthquake or the Great East Japan Earthquake, and it has also prepared contingency plans to prepare for second-wave disasters. Additionally, the Group is implementing measures to minimize risk from disasters, such as establishing an emergency response framework in preparation for natural disasters such as earthquakes, typhoons, and tsunamis, including formulating a business continuity plan (BCP) in preparation for a large-scale earthquake in accordance with Cabinet Office projections. Other measures include holding regular emergency drills and raising resilience to wind damage and flooding risk caused by the recent increase in typhoon activity.

3. Accidents accompanying gas and electricity production and supply, and supply impairments

The Group engages in the production and supply of city gas and electricity that is essential to the life of customers and industries. Therefore, in the event that the production and supply of city gas results in large-scale leakage, explosions, or supply difficulties, it could possibly result in tangible and intangible losses, including in areas such as social responsibility, affecting the Group's profitability. In the event that power supply is disrupted, it would result in the need for procurement from the electricity market and the additional losses incurred responding to this situation may affect the profitability of the Group's electric power business.

As a result, it is implementing measures to prevent such incidents and supply disruptions, such as systematically carrying out security measures including formulating a BCP in preparation for a large-scale disruption to gas supply, as well as establishing an emergency response framework and holding regular response drills. The Group has multiple LNG terminals and as these terminals can complement each other, the risk of a complete halt in gas production is low.

4. Spread of a highly contagious and virulent disease

In the unlikely event that the production and supply of city gas and electricity is disrupted due to Group employees becoming infected by a highly contagious and virulent disease, there is a possibility that it would affect the Group's profitability and result in tangible and intangible losses, including in areas such as social responsibility.

Therefore, although it would be difficult to predict such an event, the Group has taken steps to minimize the effects of the spread of a highly contagious and virulent disease, such as formulating a BCP and establishing an emergency response framework.

5. Unforeseen, large-scale power outages

The Company's plants receive electricity from highly reliable grids, and the possibility of an interruption in the supply of electricity to plants is deemed low. However, if it was to occur, it is possible that the production and supply of gas could be impeded depending on the amount of demand for gas and the status of production and supply equipment, which would affect the Group's profitability.

Therefore, it has taken steps to minimize the effects, such as formulating a BCP in preparation of an unforeseen, large-scale power outage in the Kanto area. Additionally, if the supply of electricity from the grid source were to be interrupted, demand for gas would be expected to decline because of the outage. At the same time, it would be possible to operate production equipment using the Company's own generators and supply a certain amount of gas even in the event of a power outage. Furthermore, even if one of the Company's LNG terminals were to cease operating, the other terminals could act as a backup, making it possible to manufacture and supply roughly the volume of gas required.

6. Problems in securing the safety of city gas and quality of gas appliances

As the Group is responsible for the safety of city gas supply, if an accident involving city gas supply or caused by a gas appliance were to occur, it might result in direct and indirect losses associated with the response to said incident.

Therefore, it is implementing measures that improve safety, including performing regular checks and improving the quality of gas connection for customers, and promoting a switch to safer appliances. It is also steadily reducing the number of major accidents involving gas appliances by selling appliances with improved safety functions through consolidated subsidiaries and cooperating firms.

7. Damage due to rumors caused by city gas accidents at other firms

Although it would be difficult to predict such an event, an accident involving city gas at another firm could potentially cause a significant loss of trust in the entire city gas industry and result in tangible and intangible losses.

Therefore, the Group is constantly strengthening city gas disaster prevention measures and measures that improve the safety of gas appliance and carrying out activities to raise awareness of the Group's initiatives and ways of using gas safely that target, customers, authorities, the mass media, and others. If an accident were to occur, we will share truthful and accurate information related to the incident and work to gain a correct understanding among stakeholders.

2. Market fluctuation risk

1. Risk of changes in market prices and interest rates

In the event of fluctuations in the market price of the Group's assets, including real estate, equity such as stocks, and pensions, or in the event that investment plans are not realized, it is possible that losses could be incurred in accordance with accounting standards. With regard to interest-bearing debt, it is possible that interest payments could increase due to rises in interest rates.

In order to control the impact of such losses, the Group is implementing measures such as acquiring real estate properties that facilitate long-term stable income, successively selling shareholdings once their benefits have become diluted, and managing pensions through diversified investment that limits the impact of fluctuations in specific markets. Additionally, the impact from fluctuations in interest rates is limited by mainly taking on interest-bearing debt that is fixed rate and ensuring that refinancing periods are staggered.

3. Risks accompanying business execution

1. Risks related to existing businesses

  1. Decrease in demand accompanying intensified competition
    In the event that competition from other firms intensifies as a result of the full deregulation of the gas retail market or LNG loses its competitive edge to other sources of energy due to factors such as fluctuations in the price of crude oil, it is possible that demand could fall, which would affect the Group's profitability.
    Therefore, the Group is actively working to enhance its competitiveness by installing environmentally friendly, efficient, and easy-to-use gas-related equipment, improving operations through measures such as strengthening sales structures, and ensuring thorough efficiency.
  2. Changes in gas resource costs
    Changes in terms of contracts and negotiations with suppliers of LNG, which is the primary resource for producing city gas, may affect its profitability. As the price of LNG is linked with that of crude oil, changes in the price of crude oil may affect the Group's profitability. Additionally, as crude oil is denominated in U.S. dollars under the sales contract, fluctuations in Japanese yen and U.S. dollar exchange rates can also have an impact on profitability.
    In the event of such developments as demand exceeding the volume of procurement from LNG projects resting on long-term contracts, incidence of trouble in shipment terminals or transport, and delays in the start of supply from new LNG projects, the gas resource costs associated with spot LNG purchasing undertaken in response may possibly affect its profitability.
    Therefore, the Group is working to ensure low resource costs and stable supplies through measures such as diversifying suppliers, varying agreement conditions, and advancing the development of a global LNG network.
    On the other hand, under the gas rate adjustment system, changes in gas resource prices are reflected in gas tariffs within five months at maximum. However, if the amount of such changes exceeds 160% of the standard resource price, the amount by which it exceeds will not be collected. There are cases in which such changes are reflected in gas tariffs beyond an individual fiscal term, meaning the bottom line of each fiscal term may be affected by uncollected and over-collected amounts of resource costs.
  3. Changes in laws, regulations, and national or local energy policy
    As systematic revisions to the gas and electricity industries advance, including legal separation in the electricity transmission and distribution sector and planned legal separation in the gas pipeline sector following the full deregulation of the respective retail markets, the business environment around the Group is changing significantly. Going forward, it is possible that energy policy trends and intensified competition from other businesses may affect the Group's profitability.
    Therefore, the Group is strengthening the competitiveness of its gas business by thoroughly enhancing efficiency while balancing efficiency and sales growth in its electricity business. At the same time, it is working to meet the diverse needs of businesses and customers' various lifestyles through services that leverage its strengths.
  4. Changes in gas sales due to climate change
    As consolidated net sales of city gas accounts for over half of the Group's sales, the occurrence of abnormal weather such as unusually hot summers or warm winters could possibly affect the bottom line due to the resulting reduction of gas sales in the residential use, where gas is used mainly for heating water and air conditioning, and gas sales for commercial use, where gas is used mainly for air conditioning.
    Therefore, in addition to strengthening sales of city gas for industry and cogeneration, which are resilient to climate change, in Compass 2030, the Group plans to shift the balance of its business in the medium- to long-term by expanding into fields other than city gas sales, such as overseas and solutions businesses.
  5. Decrease in existing demand due to changes in the business environment
    It is possible that some of the existing demand for industrial and commercial use could decrease due to factors such as the medium- to long-term progress of energy-conserving activities and changes in industrial structure. Additionally, developments such as a trend toward smaller households, changes in lifestyles, and wider use of energy-saving appliances could reduce some of the existing demand for residential use.
    In order to respond to changes in the business environment such as those above, in Compass 2030, the Group is planning to tackle medium- to long-term changes in the market, including wider use of energy-saving appliances and changes in industrial structure, by showing leadership in the effort to achieve net-zero CO2 and establishing a value co-creation ecosystem.
  6. Interruption of telephone services at call centers
    The Group receives the majority of its enquiries from customers by telephone. Therefore, an interruption of telephone services, other than for emergency matters, at call centers due to the limiting of operations as a result of factors such as natural disasters could delay the accommodation of customer needs over large areas, reduce sales due to the loss of opportunities to win contracts and provide services, and cause customers to stop using the Group.
    Therefore, in preparation for incidents such as natural disasters, we are enhancing operations for receiving enquiries through channels other than phone calls, including the internet.
  7. Delays in the development of new technologies
    Going forward, social pressure and momentum toward reducing CO2 emissions will rise further and if the Group was to fall behind other firms in the development and practical application of technologies in this area, it would leave the Group unable to use such technologies or increase the intellectual property right purchase and usage costs for using them or costs related to developing alternative technologies. Ultimately this would lessen the competitiveness of the Group and may have medium- to long-term effects, including on financial results.
    Therefore, in Compass 2030, the Group is aiming to show leadership in the effort to achieve net-zero CO2 by developing and applying new environmentally friendly, low-cost technologies that boast high levels of safety. It will achieve this by strategically using open innovation to complement inhouse development, remaining conscious of timing and intellectual property management, and appropriately visualizing the status of development to manage progress.

2. Risks accompanying overseas business development

When developing the Group's overseas business in accordance with Compass 2030, crude oil, gas, and electricity prices and foreign exchange rates are constantly fluctuating, which may affect the Group's profitability. Also, in the event that crude oil, gas, and electricity prices fall by a greater amount than anticipated, there is a possibility that it will impair the value of the Group's investments.

Therefore, in addition to carrying out resource development, the Group is working to spread this risk out by diversifying its business through the development of overseas gas and electricity supply and renewable energy businesses.

3. Delayed cultivation of new markets

There is a risk that the advancement of liberalization and technological innovation may intensify competition concerning existing gas products in the medium-term, reducing the Group's competitiveness. Furthermore, it is possible that changes in systems and policy by national and local governments will further toughen the competitive environment around the Group's existing businesses.

Therefore, the Group has made it a key strategy in its medium-term management plan to promote solutions that combine elements including the development of technologies, such as fuel cells, and photovoltaic power and storage cells. In this way, it plans to differentiate and enhance profitability through the cultivation of new markets.

4. Inability to recover investments

The Group evaluates the profitability and risks of all capital investments, capital contributions, loans, and debt guarantees through an Investment Evaluation Committee, and it makes investment decisions through comprehensive management decision-making based on a conclusion from the committee and deliberation by the Corporate Executive Committee and the Board of Directors if necessary.

However, when making large-scale investments, including the reinforcement of infrastructure for stable supply, such as laying pipelines and constructing LNG terminals, investments related to the electric power business, energy services business, overseas businesses including gas field development, and the LNG transport business, investments in IT and other backbone infrastructure for existing businesses, and investments to make active use of real estate holdings, if the Group becomes unable to make sufficient recoveries from such investments due to factors such as changes in economic conditions, or the intended effects are not realized, the resulting extraordinary losses may affect the Group's profitability.

Therefore, the Group manages its investments throughout the year in accordance with factors such as changes in economic conditions, and if the short- to medium-term impact of these manifests as unrealized risk, this is reflected in financial results.

4. Risks related to information management and system operation

1. Leakage of personal information

In the event that personal information managed by the Group is leaked, consequences such as the direct cost required for a response, the loss of trust from customers who are seriously affected, and damage to the Group's brand image may affect the profitability of the Group's businesses.

Therefore, the Group is working to prevent the leakage of personal information and minimize the impact if a leak were to occur through measures such as establishing a groupwide information security promotion framework, providing education on information security and voluntary monitoring, and formulating thorough escalation management rules for responding to leaks. At the same time, internal auditing checks the establishment and operation of this framework and if needed, human resource-based or organizational countermeasures, such as establishing systems to implement required improvements, and technological countermeasures, such as measures to prevent unauthorized external access or virus attacks on systems, are implemented.

2. Shutdown or malfunction of IT systems

In the event of a malfunction or shutdown of core IT systems, there is a risk of damage to the Group's brand image due to delays or a decrease in the accommodation of customers' needs or breaches of promise, and of additional costs required to continue business operations through different means. Furthermore, there are various possible causes of a malfunction or shutdown of IT systems, including failures in programs, operating systems, databases, or devices.

Therefore, the Group is aiming to prevent such occurrences and minimize the impact when they do occur by taking necessary measures to ensure stable systems operations, such as establishing robust data centers that offer excellent resistance to damage and disasters, implementing various security measures, and holding regular training drills. Additionally, in the unlikely event that such an incident does occur, the Group will take steps to prevent it reoccurring and minimize the impact should it reoccur by thoroughly investigating the root cause of the incident, and sharing information and carrying out inspections that include other systems. Also, in regard to IT systems related to the production and supply of city gas, it is unlikely that the shutdown or malfunction of these system will have any serious impact on the production and supply of city gas because there are security measures in place, including an original backup system and wireless network operated by the Group.

3. Cyber attacks

There is a strong possibility that the risk of sustained cyber attacks will increase during the Tokyo 2020 Olympic and Paralympic Games and beyond. In the event that a cyber attack is more sophisticated and complex than anticipated, it could result in the leakage of personal information and the shutdown or malfunction of core IT systems and systems related to the production and supply of electricity and city gas. Such an event may lead to the halting of customer service, the loss of trust from customers who are seriously affected, damage to the Group's brand image, and tangible and intangible losses, including in areas such as social responsibility, which could significantly affect the Group's profitability.

Therefore, the Group is implementing measures to minimize the impact of cyber attacks, including establishing a cross-division framework, implementing various security measures, and holding incident response drills

5. Risks related to corporate social responsibility

1. Compliance violations

As the world becomes more aware of corporate compliance, the possibility of the manifestation of compliance violations, including overseas where the Group is accelerating its business, is rising, and in the event of an incident such as acts that are improper in the context of laws and regulations, or the Articles of Incorporation, improper acts in information disclosure, or acts in violation of corporate ethics and social norms, it is possible that in addition to the direct cost required for response, there could be tangible and intangible damage such as a loss of trust in the Group by society, which may affect the Group's profitability.

Therefore, the Group has positioned compliance as a fundamental part of operations, and it is working to promote compliance by establishing a Committee on Management Ethics chaired by the president. This committee sets out the basic policies under which the Group executes actions to improve groupwide compliance and thoroughly educate employees regarding compliance with laws and regulations, corporate ethics, and social norms. The progress of these efforts is checked through internal audits.

2. Response to new environmental regulations

In the event of new environmental regulations or additional environmental improvement obligations, revisions to business processes and additional costs incurred may affect business operations and the profitability of the Group. Following the adoption of the Paris Agreement and other initiatives to tackle climate change, movement to realize decarbonization in the second half of the current century is growing stronger. In the event that environmental regulations and the like are strengthened in Japan and other countries, it will weaken the competitiveness of fossil fuels and may affect the profitability of the Group.

Therefore, the Group will respond to movement such as new environmental regulations through measures such as complying with all environmental laws and regulations, and working to save energy and reduce waste. It will also work to tackle climate change by expanding the effective use of natural gas, promoting the introduction of renewable energy, and developing technologies for carbon capture and the decarbonization of gaseous energy.

Furthermore, it will continue to make improvements by further strengthening its environmental management system.

3. Insufficient CS or customer services

If an incident such as a case of improper customer service were to occur, it could easily spread via social media and may result in tangible and intangible damage, such as damage to the Group's brand name and a loss of customers due to a decrease in competitiveness, affecting the profitability of the Group's business. Therefore, the Group has positioned CS (Customer Satisfaction) as one of its key management issues and it is pursuing groupwide CS improvement under the basic policies set out by the CS Improvement Committee chaired by the president.

4. Insufficient response to human rights issues

The Group has positioned respect for human rights in business activities as one of its key management issues, but as the world becomes more aware of human rights in business, the possibility of the manifestation of human rights violation risk, including overseas where the Group is accelerating its business, is rising. While the Group makes every effort to protect human rights across its entire value chain, there is always a risk that a human rights violation is not detected and responded to. In such a case, there could be tangible and intangible damage such as a loss of trust in the Group by society and the incurrence of legal costs, which may ultimately affect the profitability of the Group's business.

Therefore, the Group has established a Central Human Rights Promotional Committee, formulated a Human Rights Awareness Activities Plan, and is implementing activities to raise awareness of human rights.