Factors Influencing Revenues and Expenses
Revenues and expenses in the gas business are determined by the increase or the decrease in gas sales volume (volume difference)and the gap between the selling price and the purchase price (price difference). It is necessary to distinguish between factors thatexert influence in the short term and those that exert influence in the medium-to-long term.

Major Factors Influencing Revenues and Expenses in the Short Term

Short term

Higher income

Temperature

Temperature changes influence demand for hot water and consequently
sales volumes.	‌Lower income

Lower
temperatures
Highertemperatures

Gas Sales Volumes
Utilization rates of industrial and commercial facilities influence sales
volumes.

EconomicTrends

Gross Profits

High utilization
rates
Low utilization
rates

The price of LNG is linked to the price of crude oil, meaning that raw
material costs change depending on crude oil prices.

Crude OilPricesRaw MaterialCosts	‌High crude oil
prices

LNG purchase contracts are denominated in U.S. dollars. Accordingly,
yen appreciation against the U.S. dollar causes raw material costs todecline and yen depreciation against the U.S. dollar causes costs to rise.

Exchange
Rates

PensionActuarial
Differences

Low crude oilprices

Actuarial differences arise from differences between expected and actual
investment returns on pension assets as well as from differences between
expected and actual retirement benefits. These costs are written off as alump sum in the fiscal year following the year in which they arise and areposted as operating expenses. Accordingly, actuarial differences influencerevenues and expenses.

Yen appreciation
Yen depreciation

Favorable
differences
Unfavorable
differences

point
Gas Rate Adjustment System’s Medium-to-Long-Term Neutralizing Effect on Crude Oil Price and Exchange Rate Fluctuations
Gas prices are determined using the gas rate adjustment system.
Through this system, average raw material prices over a threemonth period according to trade statistics are compared with theraw material cost that is used as the standard (standard average
raw material cost), and the gas rates are adjusted using a defined
calculation method based on the differences. A time lag of fourmonths on average (called a sliding time lag) exists between thepayment of raw material costs and the reflection of such changes
in gas rates. Consequently, fluctuations in crude oil prices andexchange rates may result in the under-recovery or over-recoveryof raw material costs if this lag cuts across a fiscal year, thereby
affecting income. Looking at the medium-to-long term, however,
the gas rate adjustment system has a neutralizing effect on theincome impacts of fluctuations in raw material costs.

Timing of the Standard Average Raw Material Cost Calculation
and Reflection in Gas Rates

How the Sliding Time Lag in Rates Works
All Japan LNG priceTiming of standard average raw material cost calculation
Jan.

Feb.

Mar.

Apr.

MayJun.

Jul.

Average raw material priceAug.

reflected in gas rate

Sep.Dec.

Average raw
material price
Average raw
material price

Underrecovery

Average raw
material price

Overrecovery

格価the均平本日全GNLpast
The average raw material price overthree months is calculatedmonthandthen
格every
価料原
均平用
適金料スガ
reflected in the gas rate three months later.

Reflection in gas rates

7Tokyo Gas Annual Report 2014

Jun.

Jul.

度年 1+ N

Aug.

FY N

度年 N

FY N+1MEDIUM-to-long term

Major Factors Influencing Revenues and Expenses in the Medium-to-Long Term
Government Policies and Regulations Relating to Energy

For details, see P.9

Tokyo Gas is involved in the city gas business and the electric power business, both of which are subject to regulations.
Revisions to regulations governing these businesses could influence the Company’s earnings.

Fluctuations in Raw Material Prices
Raw material price trends could influence our cost-competitiveness in comparison with other gas providers or suppliers of other forms of energy.
The Company is taking steps to hedge risks related to a decrease or stabilization of raw material prices, such as resolving to import natural gas at
prices based on the Henry Hub index.

Competition with Other Energy Sources
Competition between energy sources occurs with regard to such factors as eco-friendliness and efficiency, and this competition could possibly
influence demand for natural gas.
Tokyo Gas is actively promoting fuel conversion from heavy fuel oil to natural gas through such means as soliciting the environmental benefits of natural gas.

Population Movements and Industrial Development within the Company’s Service Area
Long-term trends, such as population movements and industrial development, within the Kanto region, the Company’s service area, have the potential
of influencing medium-to-long-term earnings.
Population influx into the Kanto region continues, and the number of houses is expected to rise into the future.

Demand and Infrastructure Development by Tokyo Gas
Tokyo Gas is simultaneously developing infrastructure and demand in the Kanto region, its service area.
We are also focusing on nationwide wholesale efforts. Our ability to develop demand could influence medium-to-long-term earnings.

pointExpansion of Industrial Gas Sales Volumes

For details, see P.17

Tokyo Gas aims to increase industrial gas sales volumes going forward. The causes of this expected rise can be categorized based on theabovementioned factors as follows.
 Competition with Other Energy Sources Demand and Infrastructure Development by Tokyo Gas

Fuel conversion from heavy fuel oil to natural gas is proceeding
due to the following benefits of natural gas.
• Natural gas has a very small impact on the environment. Duringcombustion, it emits no sulfur oxide (SOx). Further, nitrogenoxide (NOx) emissions are 60% less than those from coal, andcarbon dioxide (CO2) emissions are 40% lower than when using
coal and 30% lower than when using heavy fuel oil.
• There is no need to store city gas in tanks, which contributes toimproved operational efficiency at factories.
• Dirtying by soot is low when burning natural gas, thereby
reducing equipment cleaning requirements along with associated costs.

Northern Kanto is ripe with latent demand, at the North Kanto
Industrial Zone for example. However, this area currently lacks
pipeline networks, necessitating the use of heavy fuel oil or othernon-gas energy sources. For this reason, the Company is undertaking capital expenditures targeting northern Kanto. In 2016, theconstruction of the Hitachi LNG Terminal will be completed,allowing us to open a pipeline that will run from a terminal to Moka
City, Tochigi Prefecture. Going forward, we will progressively
construct pipelines and develop demand, and we anticipate
expanded gas sales volumes in northern Kanto to result.

Tokyo Gas Annual Report 20148