Business Risk

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.

The Group engages in the production and supply of city gas and power generation 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, the Group 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 the supply of gas is low.

In the unlikely event that the production and supply of city gas and power generation is disrupted due to Group employees becoming infected by a highly contagious and virulent diseases, there is a possibility that it would affect the Group's profitability and result in tangible and intangible losses, including incurring social responsibilities.

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.

Although our LNG terminals are located on a highly reliable power receiving system and it is unlikely that the electricity supply to the LNG terminals will be disrupted, the production and supply of gas may be disrupted depending on the volume of gas demand and the condition of the production and supply facilities, which may affect the balance of payments of the business.

The Group has developed a BCP and other measures to minimize the impact in the event 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, thanks to LNG terminals redundancy, even if one LNG terminal were to shut down, it would be possible to supplement the gas production between terminals, making it generally possible to produce the required gas.

In addition, gas supply can be continued even in the event of a major power failure, as the pressure regulators are powered by the pressure differential of the gas itself and do not require electricity. On the other hand, equipment for monitoring and controlling the gas pressure and/or flow as well as security base building designated for disaster response are powered by commercial power. In the event of a power failure, the power supply is switched from commercial to emergency power and therefore can continue to be used.

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 has set out measures that improve safety, including performing regular checks and improving the quality of gas connection for customers, and promoting a switch to safer appliances. The sale of gas appliances with safety functions and gas alarms that can be monitored at all times, as well as the free installation of commercial ventilation alarms, through consolidated subsidiaries and partner companies, has steadily reduced the number of serious gas appliance accidents.

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.

In the event of fluctuations in the market price of the Group's assets, including real estate, equity such as stocks, etc., or in the event that investment plan about pensions are not realized due to the impact of the fluctuations, 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.

Electricity market and LNG price fluctuation may possibly affect the profitability. Therefore, the Group is working to manage risks in terms of both demand and supply.

a. Decrease in demand accompanying intensified competition
In the event that LNG loses its competitive edge to other sources of energy due to factors such as fluctuations in the price of crude oil, intensified competition with competitors post full deregulation of the gas retail market, or shift in system and customer orientation driven by decarbonization trend,it is possible that demand could fall, which could then affect the Group's profitability.
Therefore, the Group is 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.

b. 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, decrease in demand by hindering economic activity due to spread of an infection, etc., 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 additional spot LNG purchasing and resale undertaken in response to the market condition may possibly affect its profitability.
To this end, the Group is working to reduce and stabilize LNG costs by diversifying its suppliers, contract terms as well as strengthening global LNG trading.
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 average gas resource cost (per ton) calculated under the gas rate adjustment system exceeds the adjustment limit, the excess amount 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.

c. Changes in laws, regulations, and national or local policy
As systematic revisions to the gas and electricity industries advance, including legal separation in the electricity transmission and distribution sector and 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.

d. Changes in gas sales due to climate change
As consolidated net sales of city gas accounts for the majority 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 sales of city gas for industrial use and cogeneration, which are less susceptible to the effects of weather conditions, the Group will work to change the business balance by expanding solution businesses, real estate and overseas businesses, other than city gas sales, as set out in Compass 2030 and the Tokyo Gas Group 2023-2025 medium-term management plan.

e. 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 the changes in the business environment described above, as indicated in Compass 2030 and the Carbon Neutral Roadmap 2050, we will expand decarbonisation-related solutions to drive the seamless transition to a carbon-neutral society and establish a new revenue base after gas and electricity by providing solution products that respond to customers' new lifestyles and values under the solution business brand "IGNITURE".

f. 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 order to drive the seamless transition to a carbon neutral society as set out in the Carbon Neutral Roadmap 2050, decarbonisation will be promoted mainly by introducing e-methane (synthetic methane) for gas, and expanding renewable energy for electricity. It will be achieved by strategically using open innovation to complement in-house development, remaining conscious of timing and intellectual property management, and appropriately monitoring the status of development to manage progress.

Development of the Group's overseas business in accordance with Compass 2030 are affected by crude oil, gas, and electricity prices and foreign exchange rates that constantly fluctuates, and therefore possibly affect the Group's profitability.

Therefore, the Group allocates business risk by diversifying business scopes from LNG upstream business, LNG infrastructure business to decarbonization filed encompassing renewable energy, and simultaneously by replacing assets.

In particular, the Group acquired a new natural gas development and production company through TG Natural Resources in December 2023, which, due to the nature of the business, has a structure that is more susceptible to Henry Hub price (gas price) fluctuations. The risks are mitigated through the use of hedges and production cost reductions. In addition, risks will be dispersed through business diversification and asset replacement, such as to LNG infrastructure business and decarbonisation business including renewable energy.

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 existing businesses.

To this end, as indicated in Compass 2030 and the Carbon Neutral Roadmap 2050, the Group will drive the seamless transition to a carbon-neutral society, and as part of its efforts to build an ecosystem for value co-creation, we expand its business area by utilizing its digital marketing capabilities and also by providing digital solutions and low-carbon products. The Group will also promote the expansion of services in the last mile, and develop new markets to differentiate itself and generate revenue.

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, renewable energy, energy services business, overseas businesses including gas field development, and the LNG transport business, investments in IT 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.

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.

To this end, the Group deploys various measures such as establishment of an information security promotion system to the entire Group, conduct of information security education, education on the Personal Information Protection Act and self-inspections, thorough escalation rules in the event of a leakage incident, as well as a system to check the establishment and operation status through internal reviews and make the necessary improvements. The Group further works to prevent leaks of personal information and minimize the impact of any incidents through human and organizational measures and technical measures, such as measures to prevent unauthorized external access and computer virus attacks on the system.

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.

These days, the risk of sustained cyber attacks is increasing. 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 city gas and power generation. 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.

To this end, the Group has established a cross-departmental system and implements measures to minimise the impact of cyber-attacks, such as implementing various security measures and incident response training, as well as responding appropriately as a critical infrastructure operator in accordance with various laws and regulations, including the Cyber Security Basic Act and the Economic Security Promotion Act.

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 plan of compliance promotion activity under which the Group executes actions to improve group-wide 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.

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 initiatives to tackle climate change, movement to realize decarbonization is growing stronger and it will weaken the competitiveness of fossil fuels and may affect the profitability of the Group.

Therefore, as a means of responding to evolving environmental regulations, the Group ensures to complying with all environmental laws and regulations, and works to save energy and reduce waste. Furthermore, as a response to climate change issues, as indicated in the Carbon Neutral Roadmap 2050, the Group continues to promote the use of distributed resources such as renewable energy in parallel with the advanced use of natural gas, as well as introducing gas price table with an adjusted emission factor of zero in the greenhouse gas emissions calculation for the purpose reporting and publication system (SHK system). Decarbonisation technologies such as innovative methanation technology, low-cost hydrogen production technology and floating offshore wind power technology be implemented and expanded in the 2030s. Through the reinforcement of its environmental management system, the company aims to reduce CO2 emissions by 60% by 2040 compared to 2022. and to make 50% of the gas and electricity it supplies to customers in Japan carbon neutral by 2050.

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.

For this reason, we have positioned the improvement of customer satisfaction ( CS ) as a key management issue, and are promoting the improvement of CS throughout the Group , for example by promptly delivering customer feedback to the relevant department and taking measures for improvement.

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. If it does not detect and respond to a human rights violation, there could be tangible and intangible damage such as a loss of trust in the Group by society and the incurrence of legal costs and a loss of trust in the Group by society, etc., which may ultimately affect the profitability of the Group's business.

To this end, the Company has established the Tokyo Gas Group Human Rights Policy, based on the UN Guiding Principles, and disseminate it within the Group, as well as established a mechanism for human rights due diligence to identify human rights risks in the Group and prevent or mitigate them. In particular, respect for human rights in the supply chain is positioned as one of the Materialities, and efforts to identify and improve the actual situation of human rights issues will be strengthened through awareness of the Sustainable Procurement Guidelines (revised in March 2024), which include a human rights perspective, implementation of questionnaires and relief mechanisms.

In addition, we established the Central Human Rights Awareness Promotion Committee, chaired by the officer in charge of the Compliance Department, at which the Group's Human Rights Awareness Activity Plan is set out in order to promote human rights awareness.