Risks of Businesses
The major risks that have the potential to impact the Group’s results of operations and financial condition are described below. Forward-looking statements are based on information available to management as of March 31, 2024.
1. Impact of change in demand
The sales volume and profitability of the city gas, LPG and electricity businesses may be affected, positively or negatively, by social and economic conditions in this region as well as by changes in temperature, such as extreme heat, warm winters, and irregular water-temperature conditions. Also potentially affecting our businesses is the changes in the competitive environment that happens in the wake of full liberalization of the gas market, progress in energy conservation, changes in industrial structure, and changes in customers' energy preferences.
The Group is working to expand its total energy share in the region by developing new demand, providing added value through new services, and utilizing digital technology.
2. Impact of fluctuating fuel costs
LNG is the primary resource for gas production. The supply-demand balance as well as fluctuating crude oil prices and exchange rates can impact the cost of LNG and other resources. Fluctuations in the LNG price are offset whithin a certain level by adjustments in the gas sales price made in accordance with the fuel cost adjustment system, which mitigates the impact on the results.
However, since there is a time lag until the adjustment is made, the operating results for a given year may be affected by such fluctuations in LNG price. Operating results and financial conditions may be affected by the development of the negotiation of LNG prices.
The Company uses commodity swaps and foreign exchange forward contracts only for the purpose of mitigating the risk of fluctuations in market prices of raw materials.
On March 1, 2023, the Company revised some of its selective clauses in which eliminated the upper limit of the average raw material price used in the calculation of the gas rate adjustment amount effective from gas rates for meter readings in April 2023.
3. Impact of fluctuating electricity procurement prices
The Company procures electricity from a combination of power-generation operators, wholesale electricity markets, and its own power sources, but fluctuations in procurement prices may affect the Company business performance.
The Company is working to improve the resilience of relative contracts with power-generation operators and to optimize the procurement ratio in order to achieve a balance between procurement at reasonable prices and stabilizing revenues and expenditures.
4. Impact of changing interest rates and other market conditions
Trends in market interest rates will cause the cost of debt to fluctuate, which may affect income and expenses. However, most of Toho Gas’ interest-bearing debt comprises long-term loans and corporate bonds acquired at fixed interest rates. By steadily reducing interest-bearing debt, the Company limits the risks inherent in changing interest rates.
The value of assets held by our group, such as stocks and pensions, may change because of possible fluctuations of stock prices and interest-rate trends. Consequently, profitability of our businesses may be affected, positively or negatively.
Variable interest rates on some of liabilities are fixed by interest rate swap contracts.
5. Impact of revisions in governmental policies, laws and statutory systems
If the movement toward carbon neutrality in 2050 spreads and additional measures and costs are incurred due to the introduction of new environmental regulations and systems, the Toho Gas Group's business performance may be affected.
The Group established “Toho Gas Group 2050 Carbon Neutrality Initiative” in July, 2021 and “Toho Gas Group Vision” and “Toho Gas Group medium–term management plan (2022-2025)” in March, 2022 which indicate the course and specific measures for realizing Carbon Neutrality.
During the period of medium-term management plan, the Company will put forward the following actions: fuel switch from oil to city-gas, advanced energy utilization by leveraging co-generation systems and thermal storage materials etc., procurement and sales of carbon neutral LNG, development and procurement of renewable energy sources from solar power, biomass power and wind power. In addition, we will provide one-stop services for supporting customers' efforts toward carbon neutrality. Furthermore, along with advancing the technology development of CO2 separation/recovery and methanation, we will work on the construction of a hydrogen supply chain based on the Chita Midorihama Plant and implementation of hydrogen utilization technology.
6. Impact of natural disasters
Large-scale natural disasters may have impact on the operating results of the Toho Gas Group, as such disasters may cause damages to the production/supply facilities of the Group and customers’ business sites. Unexpected large-scale power failure may also have negative impact on the operating results of the Toho Gas Group.
To prepare for large-scale natural disaster and to minimize resulting damage, the Company has installed in-house power generation facilities, fire-fighting equipment and other disaster control facilities and systems. The earthquake resistance of gas pipes and supply and production facilities has also been improved.
7. Gas resource procurement difficulties
The Toho Gas Group depends on import from other countries for LNG used to produce city gas. In case of procurement failure over a long period caused by the country risk of LNG exporting country or operational troubles in the equipment of producing and liquefying LNG or in LNG vessels, these may have negative impact on the operating results of the group, since the Company imports LNG, a primary raw material for city gas, from abroad.
For the stable LNG procurement at reasonable prices, the Company is working to expand the distribution of procurement areas and working on flexible operation of the shipping and receiving bases.
Through such endeavors as investing in upstream rights and interests, midstream business operations, and LNG carriers, we are also strengthening our involvement in the value chain for the LNG we purchase.
8. Accidents accompanying gas production and supply impairments
The event of a major disruption in the production and supply of city gas due to large-scale equipment trouble caused by an accident or other reasons may have negative impact on the operating results of the Toho Gas Group.
The Group is striving to further reduce risks by repairing older facilities such as plants and gas piplines, preventing damage caused by other construction work, conducting regular inspections of gas pipelines and establishing an emergency security system.
9. Impact of mission-critical information system
Mission-critical information system such as system failure or cyber attack may have negative impact on the operating results of the Toho Gas Group.
To ensure cyber security, the Toho Gas Group maintains and manages the system, implements various security measures, conducts cyber attack countermeasure training, and continuously conducts checks based on security regulations.
10. Impact of serious problems involving customers’ gas equipment and appliances
Serious problems involving customers’ gas equipment and appliances may result in tangible or intangible damages, including social liabilities, being incurred by the Company.
The Toho Gas Group is working to improve the quality of its gas-consuming equipment through surveys, safety inspections, and maintenance services, as well as to inform the public about safe use and promote replacement with safe equipments.
11. Impact of quality of products handled and services provided
Problems involving the quality of products handled and services offered by the Toho Gas Group and companies entrusted to sell them on the Group's behalf may result in tangible or intangible damages, including social liabilities, being incurred by the Company.
The Toho Gas Group is working to improve the quality of products and services handled by the Group and its contractors through internal and external training.
12. Impact of delays in delivery of products, equipment, etc.
In case of significant delay in delivery of goods, materials, equipment, etc. due to the suspension of factory operations of the supplier, there is a possibility that the Toho Gas Group may have negative impact on the operating results.
The Group verifies the progress of production and delivery dates in cooperation with suppliers, and it also conducts surveys and examinations of alternative suppliers for diversifying the procurement.
13. Impact of changes in investment conditions
Depending on changes in market conditions such as oil prices, economic trends, there is a possibility that the Toho Gas Group's business performance may be affected by inappropriate recovery of domestic and overseas investments due to a decline in future profitability.
Regarding overseas investments, changes in rules and laws, and business practices in countries where Group companies are to commence business may cause delays and stall their business operations, and lead to additional business expenses.
The Toho Gas Group makes necessary investments after carefully examining the profitability, risks and other business aspects of each project.
In addition, the Group closely monitors changes in market conditions, economic trends and other factors. If there is any indication of impairment, the Toho Gas Group makes a judgment regarding the necessity of recognizing and measuring an impairment loss.
14. Impact of non-compliance
If the Company or any related party to the Company breaches any law, agreement or conducts any act against corporate ethics or social norms, this may result in tangible or intangible damages, including social liabilities, being incurred by the Company.
The Toho Gas Group has set up a Compliance Board to check the progress of compliance activities and identify issues. The Group has also promoted education and enlightenment, inspection and survey activities to ensure thorough compliance. The Group has also established a compliance consultation service (internally and externally).
On March 4, 2024 ,the Company received a warning based on the Antimonopoly Act from the Fair Trade Commission regarding its electricity and gas sales activities. In order to prevent the recurrence of similar incidents, the Company will ensure compliance with laws and regulations and prevent recurrence.
15. Impact of information leak
If customers’ personal information kept and managed by the Toho Gas Group leaks outside the Group, this may result in tangible or intangible damages, including social liabilities, being incurred by the Company.
The Toho Gas Group has established the Personal Information Protection Committee to deliberate on activity plans and other matters related to the protection of personal information, as well as to promote education, enlightenment, and self-auditing activities to ensure thorough information management.
16. Impact of pandemic of infectious disease
The spread of infectious diseases such as COVID-19 may have negative impact on the operating results of the Toho Gas Group.
By thoroughly implementing infection prevention measures, the Toho Gas Group is working to fulfill the mission of a gas operator to ensure stable supply and assurance of security, etc.