22.0 billion m3
FY2020Tokyo Gas Co., Ltd.

Annual Report 2014

15.0 billion m3
FY2011(At launch of “Challenge 2020 Vision”)

Driving
Growththrough the LNG Value Chain
Stock Code9531.TIR Contact

E-mail: tgir@tokyo-gas.co.jp
Tel:+81-3-5400-3888
Fax:+81-3-5472-3849

Characteristics of Tokyo Gas from an Investment Perspective
Point 1

Potential for Gas Sales Volume Growth

The Company’s gas sales volumes are growing rapidly,
particularly for industrial applications. The future extensions of gas pipelines throughout northern Kanto will
enable us to connect with factories using heavy fuel oil andother fuel sources to encourage them to undertake fuelconversion to natural gas.

Capturing Latent Demand in Northern Kanto

North Kanto Industrial Zone
Hitachi LNG
Terminal

Gas Sales Volume by Application
Billion m3
25.0

20.0

1.5 times

3

3.5
3.3

15.0 billion m

3

15.0

Kashima
Waterfront
Industrial Zone

22.0 billion m

Tokyo–
Yokohama
Industrial
Zone

3.5
7.0

10.0

Tokyo–Chiba Industrial Zone
Sodegaura LNG Terminal

2.7
Ohgishima LNG Terminal

3.4
5.0

Negishi LNG Terminal

5.2

 igh-pressure lines (existing)H‌High-pressure lines (constructioncommenced after “Challenge 2020
Vision” launch)
High-pressure lines(under construction / consideration)
High-pressure lines(medium-to-long-term concept)

3.5

Residential
Wholesale

3.0

1.9

0

2011
(Reference value
from November 2011)2020

Commercial

Industrial (power generation)

Point 2

Industrial (general)

Other companies’ pipelines (existing)Tokyo Gas Group supply area
Industrial zones
Factories

FY

Business Expansion Centered on Natural Gas

Our gas business boasts a solid pipeline network thatlinks more than 11 million customers. With this network
as its base, Tokyo Gas is leveraging its natural gasrelated technologies and expertise to develop overseas
and power generation businesses, which it anticipates
will drive future revenue growth.

Changing Business Structure(Consolidated net income ratio by business)

Fiscal 2020

Present
10%(Average forfiscal 2009 –fiscal 2011)

25%
50%

20%

25%

70%

Gas business
LNG sales, electric power business, and other businesses
Overseas businesses

Point 3

Clear Shareholder Return Policies

We have established a clear policy for shareholder
returns that calls for a total payout ratio of approximately 60% of consolidated net income, and we issue shareholder returns accordingly. In addition, the Company
pays stable dividends, and it will maintain consistentdividends going forward while potentially raising payments based on growth levels.

Total Payout Ratio
Dividends
per share

¥7

up

¥8

Total
payout ratio 60.1.%

¥8

¥8

73.6%

63.4%

¥8

up

¥9

60.1%

¥9

¥9

60.9%

61.4%

¥9

¥10
up

¥10

60.7%

60.0%

%
80
60

Stock
repurchases

40
20

Dividends
0

2006

1

Total payout ratio

Tokyo Gas Annual Report 2014

2007

2008

2009

Dividend payout ratio

2010

2011

2012

2013

FY

Basic Information on Tokyo Gas
Tokyo Gas is Japan’s largest gas supplier. By leveraging its strengths pertaining to natural gas, the Company is developing its operations centered on citygas. Over its almost 130-year history, it has constructed a network consistingof 60,000 km of pipelines that links more than 11 million customers whilebuilding a solid operating foundation for serving the Tokyo metropolitan area,
which accounts for approximately 40% of Japan’s gross domestic product(GDP). City gas operations in the Kanto region will remain our focus going
forward. At the same time, we will expand our operating foundations to encompass all of Japan and, eventually, to spread overseas. The scope of operations
will also be broadened from city gas to encompass electric power and energy
services. In these ways, we will position Tokyo Gas for rapid growth.

Composition of Net Sales

Tokyo Gas Supply Area
Tokyo Gas Group supply area
Supply area of wholesale customers

Composition of Gas Sales Volume

Others 8.6%

City gas sales

65.1%

Real estate

1.2%

For wholesale use
2,007 million m3

For residential use
3,450 million m3

14%

23%

Other
energies

15.5%

Total

Total

¥2,112.1 billion

14,735 million m3

FY2013

FY2013

Gas appliances
and installationwork

For industrial use
6,433 million m3

9.6%

For commercial use
2,844 million m3

44%

19%

History of Tokyo Gas
Oct. 1885: Tokyo Gas established.

Aug. 1989: LNG imports from Australia commenced.

Jul.

Jan. 1994: LNG imports from Indonesia commenced.

1893:	Following the enactment of the Commercial Code, name changed toTokyo Gas Co., Ltd.

Sep. 1962:	Caloric value in the Tokyo Head Office service area raised from 3,600 kcal to5,000 kcal.

Oct. 1998: Ohgishima LNG Terminal went into operation.
Dec. 1998: LNG imports from Qatar commenced.

May 1966: Negishi LNG Terminal went into operation.

Dec. 1999:	Keihin Trunk Line and Yokohama Trunk Line went into operation,connecting three terminals.

Nov. 1969: LNG imports from Alaska commenced.

Apr. 2009: LNG imports from Russia commenced.

Jun. 1972:	Caloric value conversion to natural gas begun, from 5,000 kcal to 11,000 kcal.

May 2009:	Tokyo Gas was first in the world to release “ENE-FARM” residential
fuel cell systems.

Jan. 1973: LNG imports from Brunei commenced.
Feb. 1973: Sodegaura LNG Terminal went into operation.
Jan. 1976:	Looped Trunk Line from the Negishi LNG Terminal to the Sodegaura LNG
Terminal went into operation.
Dec. 1977: Tokyo Bay underwater Trunk Line went into operation.

Oct. 2009:	Establishment of new regional energy service
provider—“LIFEVAL”—completed.
May 2010: Chuo Trunk Line went into operation.
Mar. 2012: Chiba–Kashima Line went into operation.

Feb. 1983: LNG imports from Malaysia commenced.
Oct. 1988: Caloric value conversion to natural gas completed.

1960s

1970s

1980s

1990s

2000s – 2014

1million

3 million

5 million

7million

8 million

11million(1955)(1966)(1974)(1989)(1995)(2013)

Head office circa 1902
(Kanda-Nishikicho)

LNG tanker Polar Alaska
headed for Negishi LNG
Terminal

Sodegaura LNG Terminal

Equipment maintenanceat customer residence

Construction of Keihin
Trunk Line

“ENE-FARM” residential
fuel cell system

1885
Customer Numbers

2

Tokyo Gas Annual Report 2014

Basic Information on City Gas
Comparison of Emissions (Coal=100)

Breakdown of Japan’s GDP by Major Area Fiscal 2011
OthersNatural gas

Oil

Coal

0

70

100

NOx

40

70

100

CO2

60

80

100

Tokyo area

34.9%

40.2%

SOx
Total

¥497.4 trillion

Nagoya area

9.3%

Osaka area

15.6%
Source: Cabinet Office, Government of Japan

Prices of Crude Oil and LNG

LNG Terminals in Japan

US$ / MMBtu

US$ / barrel

25

150

20

120

15

90

10

60

5

30
0

0

’06/3

’07/3

’08/3

’09/3

’10/3

All Japan LNG prices (trade statistics) (US$ / MMBtu)
Dubai (US$ / barrel)
WTI (US$ / barrel)

’11/3

’12/3

’13/3

’14/3

JCC prices (trade statistics) (US$ / barrel)

Source: Compiled by Tokyo Gas from various materials

Gas Prices by Region
US$ / MMBtu
18

12

6

0

2008/4

2011/4

Japan (All Japan LNG)
Europe (NBP)
U.S.A. (Henry Hub)
Source: Compiled by Tokyo Gas from various materials

3

Tokyo Gas Annual Report 20142014/4

LNG terminals (operating)
LNG terminals (in the planning stage or under construction)
Secondary LNG terminals for domestic vessels (operating) econdary LNG terminals for domestic vessels
S(in the planning stage or under construction)
Main pipelines
Pipelines in the planning stage or under construction
Source: Data collected from various materials

To Our Shareholders and Other Investors

I will ensure the realizationof the “Challenge 2020 Vision”
and guarantee the Tokyo Gas
Group’s unfaltering growth.
Michiaki Hirose
Representative Director, President

In April 2014, I assumed the role of president of Tokyo Gas Co., Ltd.
The Company is currently facing a major turning point, and I am completely aware of the heavy responsibility this places on me as president.
Nevertheless, I will work to my fullest to guide Tokyo Gas to success.
In November 2011, the Tokyo Gas Group announced “The Tokyo Gas
Group’s Vision for Energy and the Future ~Challenge 2020 Vision~,” also
referred to as the “Challenge 2020 Vision.” As president, I will carry out mymission of ensuring the realization of this vision to guarantee that the Tokyo
Gas Group continues to experience unfaltering growth into the future.
The full deregulation of the electricity retail market is scheduled for 2016,
and further gas system reform is expected. In this manner, the times arechanging at a more rapid pace than could have been imagined. Tokyo Gas
must therefore transform itself to adapt, and it must not lose step with thechanging times in this transformation.
Tokyo Gas views such changes as prime opportunities, and the Company will take advantage of these opportunities with resolute determination. I hope for the ongoing support and understanding of our shareholders
and other investors as we boldly tackle the challenges that lie ahead.

Career History
April 1974

Joined the Company

April 2007	Senior Executive Officer and in charge of Corporate Planning Dept.,
Infrastructure Project Dept., Finance & Managerial Accounting Dept.,
Accounting Dept., and Affiliated Companies Dept.
June 2009	Director, Senior Executive Officer, and in charge of Corporate Planning Dept.,
Corporate Communications Dept., and Affiliated Companies Dept.
April 2012	Representative Director, Executive Vice President, andDivision Manager of Living-Energy Div.
April 2014

President, Representative Director, and Executive President

Tokyo Gas Annual Report 2014

4

Contents

Basic Information
on Tokyo Gas
P. 1	‌Characteristics of Tokyo Gas froman Investment Perspective
P. 2

Basic Information on Tokyo Gas

P. 4

To Our Shareholders and Other Investors

P. 6

Performance in Fiscal 2013

P. 7

Factors Influencing Revenues and Expenses

P. 9

Gas Business Regulations

P.11	Financial Targets /Financial and Capital Policies

Information on
the Tokyo Gas Group’s
Growth Strategy
P.13

Business Domains of Tokyo Gas

P.15

Action Plan Summary

P.21

Other Initiatives

Information on
the Views of Management
P.23

Discussion with the President

More Detailed Informationon the Tokyo Gas Group’s
Growth Strategy
P.27

Focus Story

P.35

FAQ

P.36

Corporate Governance

P.44	Consolidated Subsidiaries andEquity-Method Affiliates
P.45

Our Shareholder Return Policies

P.46

Our Potential

Forward-Looking Statements
This annual report includes various management goals and other forecasts relating to the “Challenge 2020 Vision” announced in November 2011 and other strategies. This information is based on
forecasts, assumptions, and available information when preparing the “Challenge 2020 Vision” and other strategies and does not guarantee the achievement of goals and forecasts or future businessresults. Further, this information may change due to changes in business conditions. Therefore, placing undue reliance on this information is not advised. In addition, the target figures for fiscal 2014
are based on the judgment of management and the information available when the figures were published (April 28, 2014). The Company will disclose the latest information to the Tokyo Stock
Exchange in a timely manner and at the same time publish it in the investor relations section of its website (http://www.tokyo-gas. co.jp/index_e.html).

5

Tokyo Gas Annual Report 2014

Performance in Fiscal 2013
Overview of Performance

Operating Income by BusinessResults in Fiscal 2013:
Increases in Both Sales and Income

City Gas
Operating income in the city gas business increased ¥11.3 billion, or
8.0%, to ¥152.6 billion, because of an improvement of ¥28.8 billion
that resulted from the sliding time lag effect under the gas rateadjustment system as well as a ¥2.8 billion decrease in personnel
expenses following lower amortization of actuarial differences.

Up 1.6%

Gas Sales Volume:

An increase in sales mainly for industrial applications led to a 259
million m3 year-on-year, or 1.6%, rise in gas sales volume, to 16,245
million m3, if the volume of gas deemed to have been used forin-house power generation under the tolling scheme is included(14,735 million m3 if gas deemed to have been used for in-house
power generation is not included).

Up 10.3%

Net Sales:

Net sales were up ¥196.5 billion, or 10.3%, to ¥2,112.1 billion, due toincreased city gas sales as a result of higher unit prices and a rise in
LNG sales.

Up 6.7%Net Income:

Net income was up ¥6.8 billion, or 6.7%, to ¥108.4 billion, following
higher operating income in the city gas business due to contributions
from a beneficial sliding time lag effect (see P.7) as well as strong
electric power business performance and favorable gas appliances
and installation work.

Shareholder Returns in Fiscal 2013

Dividend payments amounted to ¥25.1 billion, with dividends
unchanged year on year at ¥10 per share, and stock scheduled
for cancellation with a total value of ¥40.0 billion was repurchased.
The total payout ratio—60.0% of net income—remained above 60%.

Electric Power Business
Operating income in the electric power business rose ¥5.3 billion,
or 27.7%, to ¥24.4 billion, as higher selling prices offset the slightly
lower sales volumes that resulted from the impacts of periodic
maintenance at Tokyo Gas Group-operated power plants.

Overseas Businesses
Operating income from overseas businesses increased ¥0.4 billion, or
17.8%, to ¥2.8 billion, as the Pluto LNG Project in Australia commenced
full-fledged operation and therefore made larger contributions toincome. These contributions offset a decrease in interest income fromthe subordinated debt attached to the Bajio power plant in Mexicofrom fiscal 2012.

Gas Appliances and Installation Work
Operating income in the gas appliances and installation work segment rose ¥3.2 billion, or 72.7%, to ¥7.6 billion. A major factor behind
this increase was the demand rush that preceded the consumption
tax hike from 5% to 8% in April 2014, which drove a rise in new housing construction and higher sales of “ENE-FARM” residential fuel cellsystems and “Tokyo Gas Ecosystem (TES)” hot water systems.

Non-Operating Income and Expenses
In fiscal 2012, non-operating income of ¥1.8 billion was recorded,
due in part to income from the construction of dedicated pipeline
facilities for specific users outside supply areas. In fiscal 2013, a
decrease in income from this source coupled with foreign exchange
losses recorded in relation to Australian dollar assets held by TOKYOGAS AUSTRALIA PTY LTD, which conducts accounting in U.S.
dollars, due to the impacts of Australian dollar depreciation, resulted
in non-operating expenses of ¥6.4 billion.

Summary of Operating Results

Billions of yen

Fiscal 2013

Gas sales volume (Million m3, 45MJ/m3)
Net sales
Operating expenses
Operating income
Ordinary income
Net income

Change%14,735

15,390–655–4.3

2,112.1

1,915.6+196.5+10.3

1,946.0

1,770.0+176.0

+9.9

166.0

145.6

+20.4

+14.0

159.6

147.4

+12.2

+8.2

108.4

101.6

+6.8

+6.7

Economic Frame

Fiscal 2013
Fiscal 2012

Fiscal 2012

Pension Investment (non-consolidated)
JCC($/bbl)Exchange rate(¥/$)

Averagetemperature (°C)

109.99100.1717.0

113.88

82.91

16.6

Fiscal 2013
Fiscal 2012
Fiscal 2011

Investment yield(costs deducted)
1.61%

1.5%

Year-end assets(Billions of yen)
273.0

6.10%

1.4%

276.0

5.13%

1.7%

254.0

Discount rate

Tokyo Gas Annual Report 2014

6

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.

Economic
TrendsGross 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 Material
Costs

	‌

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 to
decline and yen depreciation against the U.S. dollar causes costs to rise.

Exchange
Rates

PensionActuarial
Differences

Low crude oil
pricesActuarial 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.

May

Jun.

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
GNLpastThe average raw material price overthree months is calculated
month
and
then
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

7

Tokyo 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.

point
Expansion 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. During
combustion, it emits no sulfur oxide (SOx). Further, nitrogen

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.

oxide (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.

Tokyo Gas Annual Report 20148

Gas Business Regulations
1. Overview of Gas Business Regulations• ‌General gas utilities are granted the right to establish regional monopolies within their service area but are subject to regulation under theGas Business Act in order to protect user interests.
• ‌As part of the move toward deregulation, regulations under the Gas
Business Act have been lessened for large-scale users, defined as
those that purchase 100,000 m3 or more a year, whereas users thatpurchase less than 100,000 m3 a year remain fully regulated.
The Gas Business Act imposes restrictions on gas utilities inseveral areas. Significant restrictions can be categorized as follows.

1

meant to allow gas utilities to operate their business in an appropriate manner.
• ‌Approval from the Ministry of Economy, Trade and Industry is
required to raise rates, but lowering rates only requires notification
to be submitted.
2

Obligation to Supply (Scope of Restrictions)• ‌In exchange for receiving monopoly rights within their city gas
supply area, gas utilities are required by principle to supply to any
user upon request. Moreover, once supply has been commenced,
the utility may not cease supply without justifiable grounds.

Gas Rates (Scope of Restrictions)• ‌The Act states that “The rates consist of fair costs incurred as aresult of efficient management and fair profits. (Article 17, paragraph(2), item (i)),” and rates must undergo inspection by the Ministry of
Economy, Trade and Industry.
• ‌The production costs required to supply gas to customers andthe costs required to fulfill safety responsibilities are considerednecessary costs for gas utilities, and these costs may therefore
be factored into gas rates to within an appropriate extent.
• ‌In regard to profits, capital costs related to facilities necessary tooperate a gas business, based on profit figures calculated using
the total of shareholder capital cost and debt cost, may be factored
into gas rates to within an appropriate extent. This provision is3

Safety Responsibilities• ‌Gas utilities are responsible for ensuring the safety of gas facilities,
including users’ assets. “Gas facilities” refers to all facilities installed
for the purpose of supplying gas as well as auxiliary facilities andincludes gas generating facilities, pipelines, gas meters, and gas
taps. Gas utilities are required to maintain all gas facilities at levels
safe for operation.
• ‌If gas utilities manufacture their own gas facilities, they are required
to ensure that these facilities conform to technical standards. Gas
utilities are also obligated to inform users with regard to potential
dangers that could arise from gas usage and conduct inspections
to assess conformity to technical standards of certain gas facilities.

point
Gas Business Act and Deregulation Trends
Gas utilities operate their business in accordance with the Gas
Business Act. The scope of deregulation under the Act has
gradually been expanded. Initially, only large-scale users thatpurchase 1 million m3 or more a year were subject to deregulation.

However, this hurdle has been reduced, and now users thatpurchase 100,000 m3 or more a year are subject to deregulation.
Moreover, discussions are under way to examine the possibility offully deregulating residential sales.

Scope of Deregulation
53%
Prior to 2004
1 million m3 or more
Manufacturers and large-scalecommercial facilities

56%
2004
500,000 m3 or more
Medium-scale factories, etc.

63%
2007
100,000 m3 or more
Small factories, etc.

100%
Being considered for deregulation
Less than 100,000 m3
Residential andsmall commercial users

Regulated areas

9

Tokyo Gas Annual Report 2014

2. Gas System Reform
1

Our Stance2

Gas system reform will result in intensified competition. Conversely,
these revisions will give gas utilities more independence and autonomy. Even should the market become fully deregulated, we believethat this situation will represent a significant opportunity for Tokyo Gas
to grow by responding to customer needs. We are confident in the
Company’s success in this endeavor due to the following strengths,
which are not found among the competition.

Overview of Gas System Reform

In November 2013, discussions regarding the possibility of gas
system reform commenced at a commission meeting held by the
Ministry of Economy, Trade and Industry. While specific frameworks
are still being formulated, hearings have been held with various gas
utilities, and the expansion of the scope of deregulation in the retailmarket is being discussed, with full deregulation proposed asa possible option.

1. Relationship with more than 11 million customers
2.	Advanced energy solution technologies provided as a leader in thefield of natural gas
3.	Robust infrastructure centered on the Tokyo metropolitan area,
including LNG terminals and pipeline facilities

3. Electricity System Reform
1

Our Stance2

Electricity system reform represents a substantial business opportunity for Tokyo Gas. Our ability to take advantage of this opportunity islargely due to three strengths: our superior LNG procurement capabilities; our LNG terminals, pipelines, and other infrastructure; and ourcompetitive power sources—namely, our natural gas-fired thermal
power plants that employ highly efficient combined cycle generation
methods. By leveraging these strengths, we will advance boldly into
the electricity market as soon as the system revisions allow.

Overview of Electricity System Reform

Electricity system reform is being instituted with the aim of ensuring astable supply of power, reducing electricity rates, and providing users
with a wider range of options.
Specifically, revisions are slated to proceed based on the following
schedule.
• Phase 1 (scheduled tentatively for 2015): Establishment of anorganization for operations of wide-area electrical grids• Phase 2 (scheduled tentatively for 2016): full deregulation of theretail market• Phase 3 (scheduled tentatively for 2018–2020): Separation of
power transmission and distribution networks and abolition of retailrate regulations

Generation Costs by Power Source: Variable Costs (representation)

Variable costs (¥ / kWh)

LNG-fired thermal, oil-fired thermal, etc.

High-efficiency
LNG-fired thermal

Coal-fired thermal
Hydro

Nuclear

Supply capacity (MW)Tokyo Gas Annual Report 201410

Financial Targets / Financial and Capital Policies
Tokyo Gas is committed to maintaining a sound financial base supported by stable business growth to ensure that it can keep its highratings while procuring funds at low costs. For shareholder returns, the Company has established a clear target for the total payout
ratio, and it is steadily returning to shareholders the products of success under the “Challenge 2020 Vision.”“Challenge 2020 Vision” Targets
Time of vision’s formulation(Fiscal 2009–fiscal 2011 average)

Tokyo Gas at fiscal 2020

Approx. ¥210.0 billion / year

Approx. ¥250.0 billion / year

ROE

7.3%

Approx. 8%

ROA

3.3%

Approx. 4%

D/E ratio

0.7 times

Approx. 0.8 times (each fiscal year)

Total payout ratio

60.6%

Approx. 60%

Consolidated operating cash flow

Cash Flow Allocation

Efficiency

The gas business requires large amounts of fixed assets, including
LNG terminals and trunk lines. Capital expenditures for the construction of the Hitachi LNG Terminal as well as trunk line networks
in northern Kanto have been incorporated into plans for the periodof the “Challenge 2020 Vision.”

Tokyo Gas evaluates the potential risks and profitability of each
investment candidate while seeking to improve investment efficiency
and utilize shareholders’ equity more effectively. Return on equity(ROE) and return on assets (ROA) are positioned as key management indicators, and the Company has defined targets of approximately 8% for ROE and approximately 4% for ROA to be achieved
by fiscal 2020. Going forward, we will relentlessly pursue improved
investment efficiency as we seek to exceed these targets.

During the period of the “Challenge 2020 Vision,” we are planning
cash outlays of approximately ¥2,480.0 billion, consisting of capital
expenditures of ¥1,680.0 billion, investments and financing of¥380.0 billion, and shareholder returns of ¥420.0 billion. Of thisamount, ¥2,240.0 billion will be funded by inflows from operating
cash flows, which are to be created through the accumulation of net
income and depreciation and amortization adjustments. The
remaining ¥240.0 billion will be procured by incurring external debt.
Capital Expenditures / Investments and Financing /Shareholder Returns
Fiscal 2012–2020 total: Approx. ¥2,480.0 billion
Capital expenditures¥1,680.0 billion

17%

Investments and financing¥380.0 billion
Shareholder returns¥420.0 billion

15%
68%

Consolidated operating cash flow    ¥2,240.0 billion
External debt (interest-bearing debt), etc.
    ¥240.0 billion
Capital expenditures / Investments andfinancing / Shareholder returns    ¥2,480 billion

Use of Capital Expenditures and Investments and Financing
Fiscal 2012–2020 total: Approx. ¥2,060.0 billion(Approx. ¥230.0 billion / year)

7%
13%

35%

29%
16%

11

Tokyo Gas Annual Report 2014

Infrastructure:¥730.0 billion
Overseas businesses:¥320.0 billion
New demand cultivation:¥600.0 billion
Operating foundations:¥270.0 billion
Other investments in affiliates: ¥140.0 billion
Reference: Capital expenditures andinvestments and financing in the mediumterm management plan for fiscal
2009–2013: Approx. ¥180.0 billion / year

ROA and ROE
%
15
10
5

0

2006 2007 2008 2009 2010 2011 2012 2013 2014
(plan)

ROA

ROE

FY

Financial Position

Ratings

Tokyo Gas aims to maintain the soundness of its financial positionand ensure that its capital structure is optimally balanced based onsuch considerations as capital cost. To facilitate this endeavor, the“Challenge 2020 Vision” sets out the goal of achieving a debtequity (D/E) ratio of approximately 0.8 times each fiscal year during
the period of the vision. Moreover, the Company allocates 60% of
net income to shareholder returns, with the remaining 40% of net
income being retained as internal revenues, while conducting
stock repurchases and cancellations to reduce equity capital andprocuring funds through external debt to maintain the leverage
necessary to prevent equity from becoming excessive.
Furthermore, the Company’s stable business strategies andsound financial position have earned Tokyo Gas high ratings fromboth Japanese and overseas rating institutions. As a result of
these high ratings, we are able to procure funds at exceptionally
low interest rates, during fiscal 2013 at 1.6% on average. We
have built a financial constitution that is resilient to interest rate
fluctuations by raising funds, mainly through medium-to-longterm bonds.

Institution

Long-term debt

Short-term debt

Aa3
AA–
AA+
AAA

–
–
a–1+
–

Moody’sStandard & Poor’s
Rating and Investment Information
Japan Credit Rating Agency

D/E Ratio
Times
1.2
0.9
0.6
0.3
0.0

2006 2007 2008 2009 2010 2011 2012 2013 2014
(plan)

FY

Shareholder Returns• Stock Repurchases

In 2006, the Company introduced the total payout ratio as a factor
for determining shareholder returns. This ratio uses the total of
dividends and stock repurchases to calculate the total payout toshareholders, and we target a total payout that is approximately
60% of consolidated net income.
The “Challenge 2020 Vision” adheres to that policy, and therefore calls for us to maintain a total payout ratio of approximately
60% up until fiscal 2020.

The Company conducts stock repurchases with the aim of increasing
the value of each share held by its shareholders. Acquired stock isseen as part of shareholder returns and is promptly cancelled.
We have repurchased our own stock for cancellation in fiscal
2014, paying ¥40.0 billion. On March 31, 2015, the cumulative
total of stock cancellations was 363 million shares*, or approximately 13% of the record high number of issued shares.

• Dividends

Earnings Per ShareTokyo Gas practices the policy of issuing stable dividend payments. Over the medium-to-long term, we aim to gradually increase
dividends as we become able to establish clear forecasts for whensufficient income growth will be achieved. In this manner, we aim
to return the products of the Company’s growth to shareholders.

Going forward, Tokyo Gas will continue to pursue income growth. At
the same time, we will repurchase stock for cancellation to improveearnings per share (EPS) as well as the Company’s stock value.

* Including 70.8 million shares already cancelled this year.

EPS¥

Total Payout Ratio

50

%
80

Dividends per share
¥8
¥8
¥8

¥9

¥9

¥9

¥10

25

¥10

60

Stock
repurchases

4002006 2007 2008 2009 2010 2011 2012 2013 2014
(plan)

20

FY

Dividends

0

2006

2007

Total payout ratio

2008

2009

2010

2011

2012

2013

FY

Expansion of EPS and Shareholder Returns

Dividend payout ratio

Increases in consolidated net income
Total Payout Ratio in Fiscal 2013

Total payout
ratio
60.0%

Dividends paidin fiscal 2013:¥25.1 billion+

Stock repurchases
in fiscal 2014:¥40.0 billion

Consolidated net income
in fiscal 2013:¥108.4 billion

Stock repurchases /cancellations

Total payout ratio of
approx. 60%

Improvement of EPS /ROEGradual increase individends

Tokyo Gas Annual Report 201412

Growth Strategy—Enhancing the LNG Value Chain

Business Domains of Tokyo Gas
Tokyo Gas has developed a comprehensive range of businesses that spans from upstream resource development
and procurement to gas transportation and sales.
We specialize in natural gas, and the technologies and expertise we have accumulated in this respect are being
leveraged to maximize the value we provide and to expand all areas of our operations to fuel future growth.
Upstream Interests

1,390,000 tons equivalent*

LNG Procurement
VolumeCompany Owned /Managed Vessels

12,804,000

12 vessels

LNG carrier Energy Advance

LNG tanker Energy Frontier

tons

Darwin LNG Project

Barnett* The Company’s ownership share of LNG production capacity

Maximize Value

Stable and affordable resource procurement
Diverse and more expansive upstream
initiatives

Overseas Upstream
and Downstream
Businesses

Procurement andTransportation
Expand Area of Operations• Overseas natural gas-fired
thermal power generation• Overseas gas supply

Expand Area of Operations• Overseas engineering• Overseas energy services

Major overseas downstream projects
Existing upstream projects
LNG supply

Cordova

Sakhalin

Belgium, T-Power

Cove PointTokyo

Barnett
Mexico, MT Falcon

Qatar

Mexico, Bajio
Vietnam
Malaysia
Malaysia
Brunei

Brazil, Malhas Project

GorgonPluto

DarwinBrazil, EcogenNorth West Shelf (NWS)

13

Tokyo Gas Annual Report 2014

Ichthys

Queensland Curtis

LNG Terminal Storage Capacity

Generation Capacity

Gas Sales Volume3,615,000 kl

2,400 MW*

14,735 million m

3

For wholesale use

For residential use

2,007 million m314% 3,450 million m3 

Sodegaura LNG Terminal

Ohgishima LNG Terminal

Ohgishima Power Co., Ltd.

“ENE-FARM” residential
fuel cell system

LNG tank lorries
For industrial use

6,433 million m3 
Negishi LNG Terminal

23%

For commercial use

44% 2,844 million m3 

19%

Kawasaki Natural Gas Power
Generation Co., Ltd.

Hitachi LNG Terminal(under construction)* Scheduled for fiscal 2015

Regenerative burner system

Maximize Value

Cogeneration system

Maximize Value

Greater supply security and safety

Broader and more expansive energy solutions• Dispersed energy systems• Smart energy networks• Engineering

Productionand Supply• Natural gas-fired thermal power
generation• Renewable energy• Various energy services, etc.

EnergySolutions

Hitachi LNG
Terminal

Expand Area of Operations• Wider natural gas usage• Engineering• Energy services

Sodegaura LNG Terminal
Ohgishima LNG Terminal
Negishi LNG Terminal

 igh-pressure lines (existing)H‌High-pressure lines (construction commenced
after “Challenge 2020 Vision” launch)‌High-pressure lines(under construction / consideration)

 igh-pressure linesH(medium-to-long-term concept)
Other companies’ pipelines (existing)Tokyo Gas Group supply area

Tokyo Gas Annual Report 201414

Growth Strategy—Enhancing the LNG Value Chain

Action Plan Summary
Overseas
Upstream andDownstream
Businesses

Three Areas of Diversification for Resource Procurement

Diversification
Area

Procuring Resources ina Stable and Affordable
Manner and Expanding
Overseas Operations

1

Resource Suppliers

Diversify resource procurement to break away from reliance on current mainstays
Asia and Australia and procure from around the world
Strategic
Goal

Present

Secure a stable supply while boosting bargaining powerin price negotiations by diversifying resource suppliers• ‌Primarily Asia and Australia

FutureAccelerating Diversificationin Three Areas to Reduce Resource
Procurement Costs
Natural resources are sparse in Japan, and thecountry lacks gas pipelines like those seen in North
America and Europe, which are needed to provide
an alternative for LNG. For these reasons, Japanesebuyers have been unable to leverage significant
bargaining power in price negotiations, forcing themto accept higher LNG prices than would be granted
to North American and European buyers. Always
aiming to procure a stable supply of affordable resources, Tokyo Gas is advancing an LNG procurement
strategy that advocates three areas of diversification.
Under the “Challenge 2020 Vision,” ¥320.0 billion,
or 16% of total capital expenditures, investments, andfinancing, will be directed toward overseas businesses
over the period from fiscal 2012 to fiscal 2020. Throughthis investment, we aim to grow overseas businesses tothe extent that 25% of total net income is generated bythese businesses, a substantial increase from the level of
10% in fiscal 2011. To realize this growth, Tokyo Gas willdevelop operations in upstream resource fields likenatural gas as well as in other fields where the Company
boasts specialties, such as energy services, engineering,and natural gas-fired thermal power generation projects.

Diversification
Area

2• ‌Asia, Australia, and the restof the world

Procurement Contract Conditions

Realize a more diverse range of contract conditions, including prices linked to Henry
Hub and other indexes, as opposed to only crude oil prices, and free shipment
destinations, rather than facing restrictions
Strategic
Goal

Achieve flexibility in procurement prices and in overall LNG
marketing approaches through more diverse contract
conditions• ‌Primarily crude oil pricelinkedPresent • Mostly long term
• Shipment destination
restrictions

Diversification
Area

3

Future• Crude oil price linked• Henry Hub-linked• NBP-linked• Combination of differing
periods• Free shipment destinations

Our Global LNG network

Accumulate gas field and power plant holdings around the world
Strategic
Goal

Present

15

Tokyo Gas Annual Report 2014

Achieve flexibility in LNG marketing by actively strengthening
sales channels and expanding network of LNG users• ‌Transactions between
exporting nations and Japan

Future• ‌Network linking gas fields
and power plants and otherusers around the world

Upstream and Downstream Expansion

Overseas Businesses
Strategic Goals—Upstream Businesses

Strategic Goals—Downstream Businesses• Secure returns on business investments• Secure returns on business investments•	Increase the Tokyo Gas Group’s resilience to crude oil pricefluctuations to stabilize earnings•	‌Leverage the Company’s strengths in regard to energy
services and engineering•	Acquire a diverse range of information by participating in
upstream projects

Investment in Overseas Businesses¥320.016%*

Operating Income from Overseas Businesses¥ billion
9.0

billion

8.3

6.0* Investment amount included in the “Challenge 2020 Vision”
3.0

Major overseas downstream projects
Existing upstream projects
New upstream projects

2.4

2.8

0

2012

2013

2014
(plan)

FY

Cordova

Belgium, T-Power

Cove PointTokyo

Barnett
Mexico, MT Falcon

Mexico, Bajio

Vietnam
MalaysiaBrazil, Malhas Project
DarwinBrazil, EcogenIchthys

Queensland Curtis

Pluto
GorgonTokyo Gas Annual Report 201416

Growth Strategy—Enhancing the LNG Value Chain

Action Plan Summary

Expansion of Natural Gas Usage through Infrastructure Development
Productionand Supply

Potential of Growing to 9.0 Billion m3
General Industrial
Gas Sales Volume

Kanto region (100~200-kilometer radius)

2.0 billion m

3

Developing Productionand Supply Infrastructure
to Cultivate Demand

3.4

FY2011billion m3

Kanto region (100-kilometer radius)

7.0 billion m

3

Capturing Latent Demandin Northern Kanto
Under the “Challenge 2020 Vision,” ¥730.0 billion,
or 35% of total capital expenditures, investments,and financing, will be directed toward infrastructuredevelopment over the period from fiscal 2012 to
fiscal 2020. A particular strategic focus will benorthern Kanto, which is home to several largescale industrial zones and therefore contains
significant latent gas demand. We will capture thisdemand by bolstering supply capacity and creating
pipeline loops that will boost supply stability. Also,
we will encourage fuel conversion from heavy fueloil and kerosene to natural gas while promoting
advanced uses of natural gas. Through these
efforts, we aim to expand gas sales volume to 22.0
billion m3 in fiscal 2020. Specifically, we aim tocultivate an increase in general industrial sales
volume from fiscal 2011’s 3.4 billion m3 to 7.0 billion
m3 in fiscal 2020, effectively doubling these sales.

FY2020Total

7.0

billion m3

9.0 billion m

3

Northern Kanto Containing Significant Latent Demand
Investment in Infrastructure
Development¥730.0 billion

Hitachi–Onahama Line(provisional name)35%*
Ibaraki–Tochigi Line
Hitachi LNG Terminal* Investment amount included in the“Challenge 2020 Vision”
Koga–Moka Line

Hitachi–Kashima
Line(provisional name)
Saito Line
Kashima
Waterfront
Line

Chiba–Kashima Line

Sodegaura LNG Terminal

Ohgishima LNG Terminal
Negishi LNG Terminal

 igh-pressure lines (existing)H‌High-pressure lines (constructioncommenced after “Challenge 2020
Vision” launch)
High-pressure lines(under construction / consideration)
High-pressure lines(medium-to-long-term concept)
Other companies’ pipelines (existing)Tokyo Gas Group supply area

Gas Sales Volumes (“Challenge 2020 Vision” forecasts)
Billion m3
25.0

22.0

20.0
15.0

15.8

16.7

17.2

18.1

2011

2012

2013

2014
(plan)

10.0
5.0
0

17

Tokyo Gas Annual Report 20142020
(plan)FY

Infrastructure Development Plan (Non-consolidated, only disclosed for long-term facilities development plan)
Gas Sales Volume Plan and Infrastructure Development Plan (Non-consolidated)
Billion m3

Koga–Moka Line

17.0
16.5
16.0

Kisarazu Rinkai Line
(2nd phase)

Saito Line
Ibaraki–Tochigi Line
Extended Tochigi Line

16.8 billion m3
16.4 billion m

3

15.5

15.7 billion m3

15.0
14.5

15.1 billion m3

14.0
0

2014

15.2 billion m3

Sodegaura LNG Terminal / Installationof Additional Vaporizer

Ohgishima LNG Terminal / Installationof Additional Vaporizer
Hitachi LNG Terminal
Onahama Satellite Terminal
2015

2016

2017

2018

FY

Total for fiscal
2014–2018

Facility Investment Plans (Non-consolidated)
Billions of yen

Production facilities
LNG-related facilities
Other
Supply facilities
Trunk lines
Other
Business facilities
Subtotal for gas business facilities(reduction entry of land contribution for construction)
Incidental facilities
Total (reduction entry of land contribution for construction)

Fiscal 2013
resultFiscal 2014

Fiscal 2015

Fiscal 2016

Fiscal 2017

Fiscal 2018

28.9
22.6
6.4
90.7
20.5
70.2
18.8

35.3
27.3
8.0
100.0
28.4
71.6
24.4

31.7
23.8
7.9
99.3
28.8
70.5
38.5

8.5
2.6
5.9
83.4
10.7
72.7
53.8

7.0
0.6
6.4
79.1
3.8
75.3
47.5

7.1
1.1
6.1
79.0
0.5
78.5
27.1

89.6
55.3
34.3
440.9
72.2
368.7
190.9

138.6

159.4

169.5

145.7

133.6

113.3

721.4

0.2
138.8

0.5
160.4

0.5
169.9

0.4
146.1

0.4
134.0

0.4
113.7

2.3
723.7

Cultivating Demand Based Out of the Hitachi LNG Terminal

Ibaraki Prefecture

Ibaraki• Advancing Demand Cultivation in Northern Kanto andEstablishing Pipeline Loops to Boost Energy Security
throughout Kanto
Estimating that its gas sales volume will outstrip current supply
capacity by the late 2010s, Tokyo Gas is moving forward with the
Hitachi Project. The Hitachi LNG Terminal, which we began constructing in July 2012, will play a central role in advancing this project. Thisterminal will be connected to the Ibaraki–Tochigi Line that we commenced building on the Tochigi Prefecture side in January 2012, andboth are scheduled to be operational during fiscal 2015.

Capturing Demand in Kanto’s Leading Industrial Zone
The Chiba–Kashima Line was completed in March 2012. The construction of this trunk pipeline enabled us to commence supply to the
Kashima Waterfront Industrial Zone. Situated in Ibaraki Prefecture, thisis one of the Kanto region’s leading industrial zones, and we areworking to capture industrial demand therein. Located in this zone,
the Kashima Thermal Power Station of Tokyo Electric Power Company, Incorporated, replaced all three of its gas turbines with highly
efficient combined cycle turbines in June 2014. Tokyo Gas plans totake advantage of this development to expand gas sales volumes.
Moreover, we aim to cultivate future demand in this zone in the rangeof 1.5 billion m3 to 2.0 billion m3.

Tochigi
Koga–Moka
Line

Hitachi LNG Terminal

New pipeline for
Mito Area
Hitachi–Kashima Line(provisional name)Western Ibaraki
Industrial Area	Natural gas infrastructure(under consideration)
	Tokyo Gas pipelines(under construction)
	Other companies’ pipelines(in service)
Major industrial areas in Ibaraki

Mito–Tsuchiura
Industrial Area

Kashima
Waterfront
Industrial Zone

Chiba

Gas Sales Volumes in the Kashima Waterfront Industrial Zone
Million m3
2,000

1,505

1,500
1,000
500

765
405

0

2012

2013

2014
(plan)FY

Tokyo Gas Annual Report 201418

Growth Strategy—Enhancing the LNG Value Chain

Action Plan Summary

Expanding Power Generation(Natural Gas-Fired Thermal Power Generation)
Energy Solutions

Providing Diverse
Energy Solutions
Stably Supplying Energy to theTokyo Metropolitan Area
Under the “Challenge 2020 Vision,” ¥600.0 billion,or 29% of total capital expenditures, investments,and financing, will be directed toward cultivatingenergy demand over the period from fiscal 2012 to
fiscal 2020. By providing various energy solutions
centered on natural gas, we aim to diversify therange of circumstances in which natural gas is used
and thereby enhance the LNG value chain.

Tokyo Gas is utilizing the insight and expertise it has developed through handling
LNG in the gas business to conduct natural gas-fired thermal power generation
projects, another area where it boasts strength. In addition, we anticipate that
substantial synergies can be generated by developing natural gas-fired thermal
power generation operations in conjunction with the gas business.
For details, see P.33 Focus Story

The scope of the Company’s power generation operations encompasses the
procurement of resources (fuel), generation, and sales. In these operations, wholly
owned subsidiary Nijio Co., Ltd., procures its own fuel (LNG) and then subcontracts power generation using this fuel to four Group-owned power plants that
employ gas turbine combined cycle generation*. These plants have a total combined generation capacity of 2,000 MW (of which, the Tokyo Gas Group’s ownership share is 1,300 MW). Generated power is primarily sold to ENNET Corporation, a power producer and suppliers (PPSs), and on the Japan Electric Power
Exchange, a power wholesale exchange. At present, we are not conducting
retail sales.
* This generation method generally entails combinations of gas turbines and steam turbines. The gas turbine burns fuelto generate electricity, and the heat from this generation process is used to boil water to power the steam turbine. This
two-step generation process realizes high thermal efficiency.

The Group’s Natural Gas-Fired Thermal Power Plants (Fiscal 2015)
Kawasaki Natural Gas
Power Generation Co., Ltd.

840 MW

Ohgishima Power Co., Ltd.

1,221 MWTokyo Gas Baypower Co., Ltd.

100 MW

Tokyo Gas Yokosuka Power Co., Ltd. 240 MW

Under the “Challenge 2020 Vision,” we aim to raise the generation capacity ofthe electric power business from the current 2,000 MW to between 3,000 MW
and 5,000 MW over the period from fiscal 2012 to fiscal 2020. One way we areboosting generation capacity is through the construction of the third unit at the
Ohgishima Power Station. The unit will have a generation capacity of approximately 407 MW and is slated to commence operation in fiscal 2015. In addition, in
March 2014, we reached a basic agreement with Kobe Steel, Ltd., to purchasea total of 1,200 MW of electricity annually from this company’s power station in
Moka City, Tochigi Prefecture, after both Unit 1 and Unit 2 commence operationsin 2019 and 2020, respectively. At the moment, we expect our total power portfolio to have a generation capacity of approximately 3,600 MW in fiscal 2020 after
these power sources are incorporated.
Confirmed Expansions in Generation Capacity (Including other companies’ interests)
MW

Start-up of operation ofboth units of Kobe Steel’s
Moka power station

6,000

4,000

2,000

Start-up of operation of third unitof Ohgishima Power Station

2,000 MW

1.5 to 2.5 times
the current level
3,000~5,000 MW

3,600 MW

2,400 MW

0

2013

19

Tokyo Gas Annual Report 20142015 (plan)

2019~2020 (plan)2020 (plan)

FYAiming to further diversify our power source portfolio, we are examining the possibility of employing power sources other than natural
gas-fired thermal, such as coal-fired thermal. At the same time, wewill continue to develop our electric power business by carefully
monitoring trends in Japan’s supply and demand situation for electricity as well as developments regarding electricity system reform toaccurately evaluate the economic rationality of future ventures.

Supplying LNG throughout Japan
Not limiting its operations to the Kanto region, Tokyo Gas provides theresources that it procures throughout Japan. We thereby meet theneeds of gas companies throughout the country, supplying them with
LNG via tank lorries, large ocean-going tankers, and smaller domestic
vessels. The expansion of our sales channels in this manner is yet
another one of our efforts to enhance the LNG value chain.
As one facet of these efforts, we commenced supply to the Ishikari
LNG Terminal of Hokkaido Gas Co., Ltd., in October 2012. This projectis our first endeavor to provide a domestic gas company with gas
procured by the Company via ocean-going tankers. Through thisventure, the Ishikari LNG Terminal will be supplied with between 300,000
tons and 400,000 tons of LNG per year during the 11-year period
beginning fiscal 2012. Further, we acquired a 20% stake in Hokkaido
LNG Co., Ltd., a consolidated subsidiary of Hokkaido Gas that is the
direct owner of the Ishikari LNG Terminal, to deepen our relationship as
we work to advance the spread of LNG. We also signed an LNG sales
agreement with Saibu Gas Co., Ltd., for the supply of about 300,000
tons of LNG per year over the 16-year period beginning fiscal 2014.

Against the backdrop of increased demand for energy security andbusiness continuity plans, we have been promoting sales of commercial and industrial cogeneration systems, and our cumulative stock ofthese systems has reached 1,810 MW. We plan to raise this cumulative stock to 4,000 MW in fiscal 2020.
Cogeneration System (Commercial, Industrial) Stock Plan
MW
4,000

4,000
3,000
2,000

1,530

1,650

2011

2012

1,810

1,000
0

2013

2020
(plan)

FY

Benefits of Cogeneration Systems
1. Reduced Energy Usage and Costs
As cogeneration systems make effective use of waste heat or direct this heatfor use in air conditioning or water heating equipment, they contribute to
reductions in energy costs.
2. Environmental Preservation Benefits
City gas is a clean source of energy and its systems make effective use ofwaste heat, thereby helping cut CO2 emissions by approximately one-third incomparison with conventional systems.
3. Improved Energy Security
Cogeneration systems enable the usage of several power sources, making iteasier to secure a supply of electricity during times of disaster.

Supplying LNG via Domestic Vessels
and Overseas Ocean-Going Tankers

Hibiki LNG Terminal
Saibu Gas Co., Ltd.
(Supply to commencein fiscal 2014)

Promoting the Proliferation and Expansion
of Dispersed Energy Systems

Ishikari LNG Terminal
Hokkaido Gas Co., Ltd.
(Currently being supplied)
Hakodate Minato
LNG Terminal
Hokkaido Gas Co., Ltd.
(Currently being supplied)
Hachinohe LNG Terminal
JX Nippon Oil & Energy
Corporation(Currently being supplied)
Cogeneration system

LNG tanker Energy FrontierTokyo Gas Annual Report 201420

Growth Strategy—Enhancing the LNG Value Chain

Other Initiatives
Tokyo Gas is advancing a wide range of initiatives other than those introduced thus far.
In this section, we explain four initiatives that contribute to enhancing the LNG value chain.

1“ENE-FARM”“ENE-FARM” residential fuel cell system is a type of dispersed
energy system that is installed at customers’ homes. This highly
efficient system uses city gas to generate electricity while also utilizing
the heat created through the generation process to heat water.
Moreover, “ENE-FARM” is an important strategic product in residential gas sales as customers using this system also consume greater
volumes of city gas.

“ENE-FARM” has continued to evolve since the first unit was
launched in 2009. In April 2014, our “ENE-FARM” stock had risen to
approximately 30,000 units. The “Challenge 2020 Vision” calls for astock of 300,000 “ENE-FARM” units to be accumulated by fiscal
2020, and we will continue to refine these systems and promote sales
with the aim of achieving this goal.

“ENE-FARM” (Residential) Stock Plan

Advances to Date

Thousands units
400

300.0

300

May 2009

First unit sold

Apr. 2011

New “ENE-FARM” model launched, priced approximately¥700,000 less than previous offerings(MSRP: ¥2,630,000 plus tax)

Apr. 2013

New, more affordable “ENE-FARM” model launched(MSRP: ¥1,900,000 plus tax)

Apr. 2014

New “ENE-FARM” system for housing complexes launched

200
100
0

2

9.6

17.2

29.4

2011

2012

2013

45.4
2014
(Plan)

2020(Plan)FY

Hydrogen Business

Recently, hydrogen vehicles have been garnering attention for their
low environmental impact in comparison with conventional gasoline
vehicles. These revolutionary new vehicles propel themselves byreacting hydrogen with oxygen in a fuel cell to run electric motors.
The city gas provided by Tokyo Gas consists primarily of methane(CH4). Therefore, we are able to extract hydrogen from this gas tocreate fuel for hydrogen vehicles.
The Company is constructing two hydrogen refueling stations, one
in the Nerima district of Tokyo and the other in Saitama City, Saitama
Prefecture. The promotion of hydrogen vehicles will require not only
the vehicles themselves to become more technologically advanced
and more affordable but also fuel hydrogen to become more affordable. The Company therefore aims to contribute to the spread ofhydrogen vehicles by helping provide a stable supply of affordable
fuel hydrogen.

21

Tokyo Gas Annual Report 2014

Hydrogen refueling station

3

Smart Energy Networks

Tokyo Gas advocates the creation of “smart energy networks.” These
networks are based on a concept of combining renewable energy
with cogeneration systems and controlling these in an optimal
manner through information and communications technology (ICT).
This process enables electricity and heat to be managed comprehensively throughout the network to reduce energy usage and CO2
emissions. In cooperation with the government and our business

partners, we are advancing a number of projects to complete various
verification tests for these networks and realize practical use. These
projects include energy usage related ventures, such as a network
designed to optimize energy supply and demand management in thearea north of the east exit of Tamachi Station, in Tokyo, and a network utilizing untapped renewable energy in the Toyosu wharf area,
also in Tokyo.

Smart Energy Network

Apartment Buildings

Hospitals• Photovoltaic Power Generation• Fuel Cell

• Photovoltaic Power Generation• Gas Cogeneration• Energy Storage System

LNG Terminal

Biomass
Generation
Waste Disposal
CenterOffice Buildings• Photovoltaic Power Generation• Gas Cogeneration• Energy Storage System

Information andCommunications
Technology
Wind Turbine Generation

Power Plant

4

Detached Houses

Commercial Facilities• Photovoltaic Power Generation• Fuel Cell

• Photovoltaic Power Generation• Gas Cogeneration• Energy Storage System

Overseas Energy Services BusinessAs part of the “Challenge 2020 Vision,” we aim to grow overseas
businesses to the extent that 25% of total consolidated net income
is generated by these businesses. Currently, we expect revenues toprimarily be generated in upstream areas, but we also plan to expand
our overseas energy services business going forward.

Gas usage is still low in Southeast Asia as countries like Thailand,
Malaysia, and Vietnam lack gas pipeline networks. Conversely, Japanese companies are increasingly relocating manufacturing sites to thesecountries. To take advantage of this trend, we are primarily approachingindustrial zones as we propose efficient ways of supplying energy,
mainly through consolidated subsidiary Energy Advance Co., Ltd.

Advances to Date
Mar. 2012: Memorandum of understanding with Petrovietnam Gas, of Vietnam, signed(examples of collaboration include information exchange pertaining to energy services)
Dec. 2012: 100% stake in Ecogen Brasil Soluções Energéticas S.A., a Brazilian provider of energy
services for commercial and industrial facilities, acquired through a joint venture establishedbetween Mitsui & Co., Ltd., and Energy AdvanceMar. 2014: Energy services business joint venture established in Malaysia

Tokyo Gas Annual Report 201422

Discussion with the President

Representative Director, President

Michiaki Hirose

In preparation for the tumultuous time ahead, the Tokyo Gas Groupis accelerating efforts to realize the “Challenge 2020 Vision.”
Michiaki Hirose was appointed the new president of Tokyo Gas Co.,
Ltd., in April 2014. In this section, President Hirose explains his views
on “The Tokyo Gas Group’s Vision for Energy and the Future ~Challenge 2020 Vision~,” also referred to as the “Challenge 2020 Vision.”
He also discusses his thoughts on system reform and other aspectsof the competitive landscape and on the Company’s growth strategies. For an overview of performance in fiscal 2013 and informationon the progress of the “Challenge 2020 Vision,” please refer to thefollowing pages.

Q
Changing Business Structure(Consolidated net income ratio by business)

10%

Present

20%(Averagefor fiscal
2009–2011)

70%

25%
50%
25%
Fiscal 2020
Gas businessLNG sales, electric power business, others
Overseas businesses

23

Tokyo Gas Annual Report 2014

Overview of Performance in Fiscal 2013

P.6

Summary of the “Challenge 2020 Vision”
P.13
		 http://www.tokyo-gas.co.jp/IR/english/manage/vision_e.html
Financial and Industry Data: Investors’ Guide 2014		 http://www.tokyo-gas.co.jp/IR/english/library/invguid_e.html

What do you see as your mission with regard to realizing this vision?
I have confidence in the path laid out in the vision, and my mission is to ensure its
advancement.
After the Great East Japan Earthquake, which devastated Japan on March 11, 2011, we looked forward
toward the coming change in tides. A vision was formulated to display the direction for the Tokyo Gas
Group to advance in the future and the path it would use to get there. That vision is what we call the“Challenge 2020 Vision.” Two and a half years have passed since the vision was formulated. Today, thefundamental order of Japan’s energy supply systems and industries, which has been maintained for morethan 60 years since the end of World War II, is being reconstructed from the ground up. In the wake of thisgreat change, the expectations for Tokyo Gas, which has been a leader in the fields of natural gas anddispersed power systems, are rising. The vision is progressing as planned, even as everything around itchanges, and my confidence in the accuracy of the path laid out has been reaffirmed. My mission now is toensure the advancement of this vision.
The market is moving toward full deregulation, which will give rise to fluidity in terms of the industry—as theabolishment of restrictions on market participation gives greater freedom to electric power companies, gas
companies, and other energy providers—and fluidity in regard to service areas—following the elimination ofregional monopolies. The “Challenge 2020 Vision” has been prepared to deal with this change to the competitive landscape, describing two transformations we must undergo in the future.
The first transformation is to become a comprehensive energy company. This transition will entail
strengthening operating foundations in our core gas business while creating new business pillars in such

fields as power generation, engineering, and energy services. The second transformation is to make Tokyo
Gas a global company. This process will involve expanding our operating foundations out from our footholdin the Tokyo metropolitan area to encompass all Japan and, eventually, to spread onto the global stage. As
we work to undergo these transformations, the composition of our earnings will also change. When thevision was formulated, the ratio of earnings of our various businesses—namely, the gas business; LNG
sales, the electric power business, and other businesses; and overseas businesses—was 7:2:1. Over thecourse of the vision, we aim to change this ratio to 2:1:1.

Q

What are your thoughts regarding the current stage of the “Challenge
2020 Vision”?
This stage is critical for forming the structures that will be needed in the coming periodof tumultuous change.
The “Challenge 2020 Vision” defines the period from November 2011, when it was announced, to the endof fiscal 2014 as a “hop,” the period from fiscal 2015 to fiscal 2017 as a “step,” and the period from fiscal
2018 to fiscal 2020 as a “jump.”
The energy industry of the future will be unlike anything we have seen before and will be characterized byunprecedented competition to acquire customers. In this difficult operating environment, we will not be able
to survive on the global stage if we rely on conventional business practices. Rather, we will need a bold,pioneer spirit and a sense of speed. Moreover, the competition of the future will be conducted on the grouplevel, meaning that the Tokyo Gas Group will have to pull together to raise its overall strength. The current
stage has been positioned as a “hop,” and we will use this stage to form the structures that the Tokyo Gas
Group will require in the coming period of tumultuous change by transforming employee awareness andrevising organizational and wider Group systems. Fiscal 2014 is the final year of this stage, making it
especially crucial. In 2014, the schedule for the deregulation of the market has become clearer, and wemust accelerate our advance toward realizing the vision to respond.

Q

What are the Company’s polices for procuring resources?
With its world-leading customer base, Tokyo Gas is well positioned to reduce resource
procurement costs and give form to the potential that lies beyond.
At present, resources, namely LNG, are primarily procured through contracts with rigid conditions that linkgas prices to crude oil prices, require long-term agreements, and forbid changes in shipping destination andreselling. Japan suffers particularly as it is dependent on imports for resources and is currently limited inchoices for power sources. For this reason, the country is forced to purchase LNG at higher prices thanother countries to meet its needs for thermal power generation fuel. Key to reducing resource procurement
costs is greater bargaining power. We can achieve this by utilizing a wide range of procurement options,such as procuring resources from a wider range of regions, including Asia and Oceania, and utilizing bothconventional and unconventional natural gases. And, to those ends, Tokyo Gas employs a procurement
strategy that advocates “three areas of diversification” for resource procurement, by which I mean thediversification of resource suppliers, the diversification of procurement contract conditions, and the diversification of our global LNG network. A large step forward in all areas of diversification can be seen in our
involvement in the Cove Point LNG Project, which is on the eastern coast of the United States and features
procurement prices linked to this country’s natural gas market through the Henry Hub index.
Tokyo Gas is a public utility. Accordingly, we have traditionally viewed resource procurement as a task
necessary to supply our service, with natural gas being nothing more than the resource used in this service.
For this reason, we only procured the amount of gas that would be necessary to meet the projecteddemand. However, the Company’s potential expands greatly when we depart from this preconception,
shrugging of the limits of demand to view natural gas as a product and our gas business as just that: abusiness. For example, the procurement of LNG volumes that exceed the demand in our service area will
enable us to utilize economies of scale to capture substantially more beneficial procurement conditions. We
will be able to make such bold moves if we find ways to use the surplus LNG to satisfy demand outside ourservice area. Furthermore, if we supply procured LNG throughout Japan, and even throughout the world,
the fluidity of the global LNG market will increase, possibly creating new business opportunities for Tokyo
Gas at the same time. This is the potential that lies beyond our current procurement practices.
Needless to say, the procurement of LNG in quantities that exceed demand carries significant risks.
We will also face difficulties in accumulating the knowledge, securing the human resources, andbuilding the networks that will be essential to this undertaking. However, with its customer base of
more than 11 million users, Tokyo Gas is well positioned to take on this challenge.

Tokyo Gas Annual Report 201424

Discussion with the President

Q

What are the Company’s policies with regard to production and supply
infrastructure?
Infrastructure development will be advanced steadily while considering the potential for
creating new demand.
Infrastructure development plans are generally formulated with projected demand as the prerequisite.
However, infrastructure development can also be used to create new demand. For example, the opening of
the Chiba–Kashima Line created demand to the extent of approximately 800 million m3 in the Kashima
Waterfront Industrial Zone during fiscal 2013, with total demand of 1,500 million m3 expected to be seen in
fiscal 2014. In consideration of this potential, we will steadily advance infrastructure development in line withthe “Challenge 2020 Vision,” realizing that these efforts will build the foundations for future growth.
Currently, our infrastructure network is centered on three LNG terminals in Tokyo Bay, from which we
primarily move natural gas in a northward direction. While the Tokyo Bay area is ripe with demand, theoverconcentration of LNG terminals in this area represents an energy security issue that needs to beaddressed. Furthermore, the Company estimates that latent demand in the range of 9 billion m3 exists in
the Kanto region, which represents the area within a 200-kilometer radius around Tokyo. However, themajority of this demand resides in Gunma Prefecture, Tochigi Prefecture, Ibaraki Prefecture and other partsof northern Kanto. Looking at this situation, there is a clear need for the Company to construct LNG
terminals along the eastern coastline of Japan to create a flow of natural gas that heads from north tosouth. This is a major goal of the construction of the Hitachi LNG Terminal in Ibaraki Prefecture, and pipelines that connect this terminal to Tochigi Prefecture and to Saitama Prefecture. While the route is currently
being investigated, we also plan to build a pipeline connecting the Hitachi LNG Terminal to Kashima, also in
Ibaraki Prefecture, to create a wide-area pipeline loop that encompasses all the Tokyo metropolitan areaand supplements our current pipeline loop centered on the Tokyo Bay area. In this way, we aim to install
redundancy into our pipeline loops by 2020.

Q

What are the Company’s gas sales policies?
As well as industrial and commercial demand, we will also address demand in theresidential sector, which is expected to be stable going forward, while providing lifestyle
improvement proposals.
When the “Challenge 2020 Vision” was formulated, gas sales volumes were around 15.0 billion m3. The
vision calls for us to raise the gas sales volume to 22.0 billion m3 by fiscal 2020, and we are making steadyprogress toward this goal, with the sales volume reaching17.2 billion m3 in fiscal 2013. Looking ahead, we
foresee no change in our policy that positions industrial demand, including both general industrial demandand demand for power generation purposes, as the main driver for sales volume expansion. Demand forcommercial applications is also expected to increase accompanying a rise in the production of ready-to-eat
meals, and we believe it will be possible to respond to customer needs by providing solutions.
The residential sector is expected to see stable demand going forward. Moreover, we believe that this
sector offers even greater quantities of demand for us to reap by leveraging the Company’s strengths tocreate additional value, or in other words by providing lifestyle improvement proposals, such as measuresfor preventing heat shock. Of course, increasing the number of residential households we serve will continue to be a priority. However, we will also actively provide lifestyle improvement proposals to expand thevolume of gas sold per household.
Gas Sales Volumes (“Challenge 2020 Vision” forecasts)
Billion m3
25.0

22.0
20.0
15.0

15.8

16.7

17.2

2011

2012

2013

18.1

2014
(Plan)

10.0
5.0
0

25

Tokyo Gas Annual Report 2014

2020
(Plan)FY

Q

What policies is the Company considering for the electric power businessafter market deregulation?
This development is seen as a significant opportunity, and we are examining it fromvarious angles.
Even looking just at the Tokyo metropolitan area, electricity demand greatly exceeds natural gas demand.
For this reason, we see the deregulation of the electricity market as a significant opportunity for Tokyo Gas.
We are currently developing electric power generation and wholesale businesses, and we are eagerly
examining the possibility of entering the retail electric power business. In this endeavor, I believe our operating foundation in the Tokyo metropolitan area as well as our experience and expertise in relation to power
generation projects and dispersed power sources will be invaluable assets. Needless to say, acquiring
customers will be no easy task. We established the Business Restructuring Project Department in April
2014 to address this concern. This department is currently examining various ideas for future participationin electric power businesses to determine whether or not these ideas can be transformed into realistic andappealing businesses. At the same time, we will need to look at the overall management of electric powerbusinesses, considering such decisions as to what field limited power sources will be allocated and how
alliances will be pursued when base power sources are needed. Discussions are currently being advancedwith the aim of commencing retail electric power business in April 2016.

Q

How will the Company address deregulation in the gas business?
Our accumulated management resources will be a major advantage, but we still cannot
afford to drop our guard.
In the gas business, we will be the one facing new participants after the deregulation. We are formulating
projections for the deregulated market through a multifaceted examination based on such considerations
as how deregulation will proceed, what companies will participate and in what capacity, and what pricing
schemes will appear.
The main factor behind customer choices will likely be price, and I am confident that Tokyo Gas will beable to provide competitive service while matching the average price. Aside from pricing, over our years ofoperation, we have accumulated substantial expertise along with management resources in the forms of
our safety, reliability, and services. These resources will no doubt prove to be a major advantage for theCompany. Nevertheless, we cannot afford to drop our guard. We must remain vigilant and act with speed
as we advance preparations for the market’s deregulation.

Q
Capital Expenditures /Investments and Financing /Shareholder Returns
Fiscal 2012–2020 total: Approx. ¥2,480.0 billion

17%
15%

68%

Capital expenditures¥1,680.0 billion
Investments and financing¥380.0 billion

What are the Company’s policies with regard to shareholder returns?
In light of market deregulation in the medium-to-long term, it is necessary to consider
the most appropriate way of issuing shareholder returns.
Our shareholder return policy calls for a total payout ratio of around 60%, including dividends and repurchases of stock scheduled for cancellation. Our first priority is to provide shareholders with stable dividends.
After this task is accomplished, we will gradually increase dividend payments as a result of developing ourbusiness and improving managerial efficiency. At the same time, we will repurchase stock to ensure that the
total payout ratio remains at around 60%. However, in light of the deregulation of the gas market in themedium-to-long term, it is necessary to consider the most appropriate way of issuing shareholder returns
through a multifaceted and ongoing approach. In fiscal 2013, we made dividend payments of ¥10 per
share, the same as in fiscal 2012. In addition, we repurchased stock for cancellation, paying ¥40.0 billion
for 70,773 thousand shares of stock. In fiscal 2014, we forecast a dividend of ¥10 per share.
Our “Challenge 2020 Vision” calls for total consolidated operating cash flow of ¥2,240.0 billion between
fiscal 2012 and fiscal 2020, and we will also procure a total of ¥240.0 billion from outside the Company.
Of this amount, 17%, or ¥420 billion, is earmarked for shareholder returns; 68%, or ¥1,680 billion, for
capital expenditures; and 15%, or ¥380 billion, for investments and financing.

Shareholder returns¥420.0 billion
Consolidated operating
cash flow¥2,240.0
billionExternal debt
(interest-bearing debt), etc.

¥240.0billionCapital expenditures,
Investments and financing,
Shareholder returns¥2,480.0
billionTokyo Gas Annual Report 201426

Focus Story

1

Steady Advances in Three Areas of Diversification
for Resource Procurement—Preparations for Importing LNG from the United States

Procurement from the Cove Point LNG Project
In April 2013, Tokyo Gas entered into a Heads of Agreement for Sale and Purchase that enables it toprocure LNG from the Cove Point LNG Project in Maryland State, in the United States. This agreement
marked the conclusion of the Company’s first long-term LNG procurement contract to have procurement
prices linked to the U.S. natural gas market through the use of the Henry Hub index. The Cove Point LNG
Project is being developed jointly with Sumitomo Corporation. Natural gas procured from the U.S. market
through this project will be liquefied and then exported out of the country as LNG. Cove Point is a project ofparticular significance to Tokyo Gas as it represents a large step forward in the three areas of diversification
described in the Company’s resource procurement strategy. In this section, we explain in detail the significance of this project.

The Company’s Three Areas of Diversification
Tokyo Gas is advancing an LNG resource procurement strategy that defines three areas of diversification.
These areas are: diversification of resource suppliers; diversification of procurement contract conditions;and diversification of our global LNG network. By pursuing these types of diversification, Tokyo Gas willseek to secure stable supplies of affordable resources into the future.

 Diversification of Resource Suppliers
Currently, Tokyo Gas has long-term procurement agreements toimport LNG from 10 projects in five countries. By further diversifying the range of resource suppliers, the Company aims toincrease its options, boost bargaining power, and mitigate risks
through dispersion. We are not limiting ourselves to conventional
LNG projects in this pursuit. Rather, floating LNG projects andother projects employing new technologies are also being
considered as options for advancing the diversification of
resource suppliers.

27

Tokyo Gas Annual Report 2014

Tokyo Gas LNG Imports by Country
Thousands of tons

Location

FY2011

2012

2013

Composition

Malaysia

4,479

4,409

4,767

(37.2%)

Australia

2,264

3,379

3,992

(31.2%)

Brunei

1,362

1,439

962

(7.5%)

Indonesia

1,011

835

614

(4.8%)

Russia

1,678

1,682

1,813

(14.2%)

Qatar

290

235

325

(2.5%)

Other

826

734

330

(2.6%)

Total

11,91012,712

12,804(100.0%) Diversification of Procurement Contract Conditions
Previously, LNG procurement was mainly conducted through traditional contracts with prices linked to theprice of crude oil. Going forward, however, we will also employ procurement contracts with prices linked to
U.S. and European natural gas indexes. We are also pursuing diversification in terms of contract periods
and other detailed conditions. Specifically, short-term and medium-term procurement contracts are now
being considered, when long-term contracts used to be the main focus, and contracts with free destination
clauses are being concluded, a departure from the traditional contract conditions that forbade reselling
procured LNG to a third party without the permission of the seller. This diversification in contract conditions
will enable the Company to stabilize procurement prices by building a portfolio that includes contracts
linked to different indexes. In addition, more flexible contract conditions will open the door for LNG to be
sold to different markets when our supplies are in surplus.

 Diversification of Our Global LNG Network
At present, there is a disparity between LNG prices in different parts of the world. However, the impacts ofthis disparity can be lessened by constructing sales channels that link Asia to North America and Europe.
Furthermore, by linking overseas upstream businesses with such downstream businesses as power
generation, we will be able to divert LNG intended for generation purposes to be used as city gas when the
supply and demand situation is tight. In this manner, we aim to create a framework for realizing the flexible
trade of resources.

Background for Three Areas of Diversification
Currently, it is common for LNG to be procured through a pricing
framework that links the price of LNG to the price of crude oil,which means that a rise in the price of crude oil will result in a
subsequent rise in the price of LNG. This situation is compoundedby Japan’s lack of alternative energy sources and Asia’s lack ofpipeline networks, like those used to supply natural gas in North
America and Europe without using LNG. Due to this situation, LNG
buyers in Asia suffer from a lack of bargaining power, and theregion has thus been forced to accept LNG prices higher thanthose in the United States and Europe, creating an “Asia premium”
on LNG. Even faced with such pressures, Tokyo Gas has continued to strike hard bargains with LNG sellers with the aim ofprocuring more affordable gas.

Gas Prices by Region
US$ / MMBtu
18

12

6

0

2008/4
Japan (All Japan LNG)

2011/4
Europe (NBP)

2014/4

U.S.A. (Henry Hub)

Source: Compiled by Tokyo Gas from various materials

Significance of the Cove Point LNG Project1

The procurement of LNG from the United States, wherelong-term contracts are not concluded at the moment,
will advance the diversification of resource suppliers.

To Japan

Cove Point LNG Project2

Contract agreements provide for LNG prices linked to the Henry Hub
U.S. natural gas price index, which is holding stable at approximately
US$4 / MMBtu, allowing LNG to be procured at prices that are lower
than previously available, even if liquefaction and transportation costs
are added on top of the LNG prices. Also, the diversification away fromcrude oil price linked contracts will allow procurement prices to bestabilized under various circumstances.

To other markets

3

Contract conditions allow for procured LNG
to be resold to third parties. Supply to Japan
will remain our first priority; however, should
LNG stocks in Japan be in surplus, this LNG
could be sold to other markets in need.

Due to these factors, the Cove Point LNG Project is advancing diversification in all three areas.

Tokyo Gas Annual Report 201428

Focus Story
Steady Advances in Three Areas of Diversification for Resource Procurement—Preparations for Importing LNG from the United States

Future Outlook
As there are currently no free-trade agreements between the United States and Japan, in order to procure
LNG from Cove Point, Tokyo Gas was required to receive LNG export approval from the U.S. Departmentof Energy. This approval was received on September 11, 2013 (EDT). Going forward, we will advance thenecessary measures to get the project producing and to commence export to Japan in 2017.
Cove Point LNG Project

Deeper Project Involvement
In February 2014, joint venture company ST Cove Point LLC was established through the respective
subsidiaries of project partner Sumitomo Corporation and the Company. ST Cove Point will also be responsible for contracting liquefaction to Dominion Cove Point LNG, LP. The investment by Tokyo Gas in ST Cove
Point represents a deeper level of project involvement for the Company. Whereas our role has previously
been limited to purchasing or holding a partial stake, we will participate in the Cove Point LNG Project bydealing directly with liquefaction facility operators and arranging transportation vessels. Through suchhands-on involvement, we aim to procure LNG more stably and with greater transparency with regard to
the price of shipments.
Scheme of Cooperative
Ventures with Sumitomo

U.S. Gas Market

Dominion Resources

2.3 million
tons/year(Tolling operator)

Pacific Summit Energy(Gas procurement)

ST Cove Point(Tolling customer /LNG seller)

1.4 million
tons/year

TG PLUSTokyo Gas

(LNG buyer/seller)(LNG buyer)(Wholly owned subsidiaryof Tokyo Gas)

Kansai Electric Power

Sumitomo
0.9 million
tons/year

Natural gas tolling agreement  

Natural gas sale and purchase agreement  (LNG buyer/seller)

0.8 million
tons/year(LNG buyer)

LNG sale and purchase agreement

Acquisition of Upstream Shale Gas Interests
In April 2013, Tokyo Gas acquired a interests in a shale gas development project in the Barnett basin, in the
U.S. state of Texas. These interests were acquired from Quicksilver Resources Inc., the operator of the
project, and represents our first upstream interest in the United States. At present, the Barnett basin projectis producing approximately 275 million cubic feet per day (natural gas equivalent) of shale gas and natural
gas liquids to be marketed in the United States. A total of US$485 million was paid to acquire 25% working
interests in this project through TG Barnett Resources LP (TGBR), a wholly owned subsidiary of Tokyo Gas
America Ltd., and it is estimated that these interests will entitle the Company to receive between 350,000
tons and 500,000 tons of gas resources a year in LNG equivalent. Roughly one year has passed since wecommenced participation in this project. We continue to see smooth production at gas fields, and we are
accumulating a great deal of knowledge through our involvement.
Upstream areas are positioned as a core focus of overseas businesses. In addition to generating stable
returns, upstream investments also help increase resilience to resource price fluctuations, thereby stabilizing
the overall earnings of the Tokyo Gas Group. Specifically, the price of resources procured from the Cove PointLNG Project and the natural gas sold by TGBR are both tied to the Henry Hub index. This situation makes ourearnings more resilient to fluctuations in the Henry Hub index as any change in the price of procuring LNG
from the U.S. market will be offset by an equal change in the price at which TGBR sells natural gas in thismarket. In addition, as the project advances, we are actively sharing information with operators through suchvenues as monthly meetings regarding operations, natural gas sales, or other matters. For this reason, ourinvolvement in this project is enabling us to develop expertise in this upstream area.

29

Tokyo Gas Annual Report 2014

Shale gas development project in the Barnett
Basin

On-Site Progress toward Realizing the “Challenge 2020 Vision”
Resource
Procurement

General Manager,
Energy Resources
Planning Section,
Gas Resources
Department

Satoshi Tanazawa
I am persistent in negotiations, always aiming tocapture better procurement conditions.
Tokyo Gas procures more than 12 million tons of LNG each year. At theEnergy Resources Planning Section of the Gas Resources Department,
we strive to procure resources flexibly as necessitated by fluctuating gas
demand. In this endeavor, we coordinate with relevant divisions, such as
those related to LNG receiving terminal operations and sales. Always
committed to receiving more affordable and flexible procurement conditions, we persistently negotiate with various sellers. The three areas ofdiversification for resource procurement advocated by the “Challenge
2020 Vision” are at the forefront of our minds in these negotiations.
Traditionally, procurement contracts have been centered on Southeast
Asia and Australia and were generally long-term agreements that camewith crude oil linked prices. However, we are broadening our view toinclude the entire world, seeking out new projects and negotiating withnew sellers to capture procurement contracts with a more diverse range

Overseas
Businesses

Tokyo Gas America Ltd.
Director,
General Manager of
Houston Office

Koji Yoshizaki
I will create new, upstream business opportunities
for natural gas.
At Tokyo Gas, upstream businesses are advanced through coordination
between the Tokyo Head Office and local subsidiaries in Australia andNorth America. As the Company’s U.S. subsidiary, Tokyo Gas America ismainly responsible for developing and managing the Company’s upstream resource interests in the United States. Here, the shale gas
revolution is expected to result in the majority of the country’s natural gas
being supplied through shale gas by 2040. The price of this gas is
expected to remain consistently stable over the long term as well.
Furthermore, natural gas demand is anticipated to grow substantially inthis country for various applications, including generation and industrial
applications, as well as for export as LNG.
Currently, the operation and management of the shale gas development project in the Barnett basin is progressing without a hitch. In
addition, we are leveraging the location utility of our office positioned in
Houston, Texas, the energy capital of the world, and coordinating withof conditions. We are persistent in negotiations regarding existing contracts as well, making strong pushes toward revised agreements that
grant us better conditions.
For example, we have concluded a natural gas tolling agreement andan LNG sale and purchase contract with the U.S. Cove Point LNG
Project. We later received approval from the U.S. Department of Energy
to export LNG to countries with which the United States does not havefree-trade agreements. Japan is one such country. This is a stride forward
in all three areas of diversification. After the project commences operations in 2017, we anticipate that it will be an invaluable asset in our efforts
to stably acquire affordable LNG.
We also must look at the possible electricity and gas system reforms.
These reforms will potentially agitate demand fluctuations, and wetherefore feel the need to strengthen coordination with relevant divisions
to prepare for these changes. As demand fluctuations become more
pronounced in the future, flexible procurement alone will not be a sufficient response. We will need to be able to employ a wider range ofoptions that includes reselling resources should our stock exceed thedemand in our service area. From this perspective as well, the creation ofan optimal procurement portfolio is an urgent task for Tokyo Gas, and weare constantly pursuing progress in this area.
Japan is forced to procure LNG at higher prices than other regions,which is no doubt a factor behind the country’s growing trade deficit. For
this reason, the procurement of a stable supply of affordable LNG is not
only crucial for the Company’s operations; it also represents an important
obligation toward society. While I recognize that these issues will not be
resolved overnight, I will remain vigilant and work to procure economicallysound energy, in order to contribute to economic development in Japan.

LNG Upstream Sect. to uncover new candidate projects for investment.
However, even faced with appealing projects, we take a cautious approach. By tapping our experience and human networks, we scrutinize
such projects to identify hidden risks and other pitfalls.
Our participation in the Barnett basin project is a result of informationacquired through our human network. We had initially planned to invest ina different project, but the negotiations led us to consider Barnett with
Quicksilver Resources Inc. and finally resulted in us choosing this project
instead. This experience reaffirmed to me the importance of constantly
expanding such networks, in addition to one’s view field, while considering a wide range of options.
In the shale gas development project in the Barnett basin, approximately 1,000 shale gas wells are currently in operation, and we expectthat several additional wells will be opened each year, gradually expanding production volumes at this project. Participation in new well openings
is left to the discretion of each participant. We make these decisions
quickly and after careful evaluation of the business feasibility of each well.
We currently contract Quicksilver Resources to sell natural gas produced
at this project in the U.S. market, but we are considering the possibility of
conducting sales directly in the future.
The number of opportunities to participate in upstream resource
projects is growing in North America. Globally as well, chances forparticipating in natural gas projects are expected to increase as resource
development commences in new regions, such as Africa, and throughnew development methods, such as floating LNG projects. The “Challenge 2020 Vision” defines the goals of reducing resource costs, constructing a global LNG value chain, and growing overseas businesses tothe extent that they account for 25% of total net income. I hope to create
new business opportunities to move us closer toward achieving thesegoals, and I will do this through close coordination with our team in Japan.

Tokyo Gas Annual Report 201430

Focus Story

2

Fuel Conversion as Promoted by Tokyo Gas

Tokyo Gas is cultivating demand for city gas by promoting fuel conversion to natural gas.
In this section, we introduce an example of how we are accelerating demand cultivationin the Kashima Waterfront Industrial Zone.

Asahi Tostem Exterior Building Materials
Co., Ltd.’s Kashima Plant

Kashima Plant, Asahi Tostem Exterior Building Materials Co., Ltd.

Obstacles to Fuel Conversion
Ceramic siding is a material commonly used in the outer walls of housing. It is also the main product ofAsahi Tostem Exterior Building Materials Co., Ltd., a company that we recently guided through theprocesses of fuel conversion. Ceramic siding is made by sterilizing raw clay materials in a high-temperature,high-pressure steamer known as an autoclave and then by molding and drying these materials. Afterdrying, the clay is glazed and dried again. This process is repeated to finish products. A gas-fired furnace
is used in the drying process.
Asahi Tostem’s Exterior Building Materials’ Kashima Plant had originally used LPG to fuel its drying
furnace. After the opening of the Company’s Chiba–Kashima Line, however, the plant began considering
fuel conversion to city gas in light of a proposal we had made. The maintenance processes associated withusing LPG were expensive and time consuming, and the plant’s facilities were in need of replacement.
These were factors considered in the decision to undertake fuel conversion.
The troublesome maintenance and other procedures associated with LPG created significant costs andtime losses in plant operations. As LPG was stored in tanks and then supplied as gas to furnaces, appropriate management of LPG stocks and orders was necessary. Tanks, gasification equipment, pipes, andother facilities also had to undergo daily inspection with legally mandated inspections sometimes required.
The Kashima Plant had high expectations that the introduction of city gas would alleviate these issues.
However, the plant also faced a number of obstacles in undergoing this fuel conversion. For example,
several kilometers of piping needed to be installed, and production line downtime had to be minimized so
as not to interfere with the plant’s duty of supplying products.
“It was a daunting task,” recalls Section Chief Nakata, manager in charge of the project. Through extensive discussions, Asahi Tostem Exterior Building Materials and Tokyo Gas sought out a solution to the issues.

31

Tokyo Gas Annual Report 2014

From left: Kimijima (Tokyo Gas), Section Chief
Nakata (Asahi Tostem Building Materials),
Kashima Plant Manager Kokubo (Asahi Tostem
Building Materials), and Aihara (Tokyo Gas)

Drying furnace

Concentrated Effort of More Than 200 Workers
The solution came in two parts. First, we would use the existing LPG pipes in order to minimize renovations
to the drying furnace and limit costs. Second, we would finish the conversion through a concentrated effort
over a period of roughly 10 days. With this decision made, we began conducting the various preliminary
studies and tests that were necessary, a process that took a year and a half. “My greatest concern wascalorie adjustment,” reflects Kashima Plant Manager Kokubo. In March 2013, a coordinated team of morethan 200 workers, consisting of gas supply and facility modifying teams from Tokyo Gas as well as specialists we had recommended for the project, jumped into action at the command of Section Chief Nakata.
City gas flowed into the drying furnace 10 days later, right on scheduled, allowing all production lines to berestarted simultaneously. The cost of the conversion was also 20% less than would normally be required.
Section Chief Nakata had praise for our efforts, saying, “This success was a result of the people at Tokyo
Gas and their masterful installation techniques.” Meanwhile, Kashima Plant Manager Kokubo offered wordsof encouragement, “The benefits of the maintenance cost reductions were just as I had anticipated. In the
future, I hope Tokyo Gas will be able to seek out more affordable natural gas to reduce the price of LNG.”
For the Kashima Plant, planning this undertaking while continuing normal operation would have been aherculean task to surmount with their limited manufacturing staff. However, by outsourcing the planning,scheduling, and implementation of this project to Tokyo Gas, the plant was able to undergo fuel conversion
without incurring additional labor requirements. This fact is significant in and of itself.
For Tokyo Gas, this project serves as a prime example of how we can muster our collective strength toremove obstacles to fuel conversion and provide comprehensive support in areas ranging from energy
provision to consumption.

Siding is a manmade building material primarily
created from cement that is applied to theouter walls of houses. Common types of siding
include ceramic siding and metal siding(photograph is an example of ceramic siding).

Asahi Tostem Exterior
Building Materials Co., Ltd.
Asahi Tostem Building Materials is
an external building material manufacturer created through the integration of the exterior building
material operations of Asahi GlassCo., Ltd. and Tostem Corporation(currently LIXIL Corporation). The
company provides various functional and ascetically pleasing
products—ranging from ceramic
and metal sidings to other exteriorbuilding materials and roofing materials—that create comfortableliving environments.

On-Site Progress toward Realizing the “Challenge 2020 Vision”
Sales

General Manager,
Energy Service
Promotion Section,
Industrial Gas Sales
Department

Shingo Nagashima
I will drive the transformation from a gas supplierto an energy solutions partner.
To contribute to the realization of the “Challenge 2020 Vision,” theIndustrial Gas Sales Department is advancing three priority measures:
encouraging fuel conversion, spreading the usage of cogeneration
systems that match customer needs and feature high total efficiency, andexpanding operations in the new field of energy services.
In the near future, it can be expected that a number of new players willenter the gas market. As such, we will have to abandon the assumptionthat customers who want to use gas will naturally select Tokyo Gas. In my

department, we aim to have users choose Tokyo Gas as a solutions
partner, and therefore we are putting incredible effort into providing energy
services that combine energy provision with solutions. One such solution
is “TG Miru Net”*. This service helps track energy consumption rates andfacility efficiency to contribute to energy savings and cost management.
Customers using this service have offered very high opinions. We also
hope to have customers view our technologies firsthand at the “AsuTimes Laboratory”, and we are steadfastly promoting visitation. Createdthrough a combined effort by sales and technology divisions, this permanent exhibit enables people to view the combustion and other technologies used by Tokyo Gas. Numerous visitors have expressed how they
view Tokyo Gas as a partner that provides solutions to their problems.
I therefore believe that the Company is successfully cultivating a corporate
culture that equates good service with earnings.
Going forward, we will develop a deep understanding of customers’
production processes and future refine “TG Miru Net” to create more valuable solutions for contributing to quality improvements and cost reductions. In addition, we are investigating the possibility of constructing abusiness model that combines the supply of gas and electricity withenergy solutions. In these ways, we are preparing for the impending fullderegulation of the market. By expanding high-value-added services andutilizing these services in sales, we aim to grow Tokyo Gas into the No. 1
energy solutions provider in Japan, a company that can win out against
any rival.

* TG Miru Net:	This energy traceability service tracks the flow rate and pressure of gas and steam and uses this data to measure energy usage levels, equipment operating rates, and energy consumption rates offactories and facilities. Reports can be prepared based on user needs, making this system a viable tool for helping conserve energy and maintain facilities.

Tokyo Gas Annual Report 201432

Focus Story

3

Continually Growing Electric Power Business—Ohgishima Power Station

Characteristics of the Ohgishima Power Station
 State-of-the-Art GTCC Generation Method
The Ohgishima Power Station’s gas turbines use the state-of-the-art
gas turbine combined cycle (GTCC) generation method. Under thismethod, exhaust heat from a gas turbine’s generation process isrecovered and used to power a steam turbine to generate additional
power. As a result, generation efficiency is significantly higher (record
high of 58% realized at the Ohgishima Power Station) than simple cycle
generation, which cannot utilize steam power.

 Close Proximity to High Demand Areas
The Ohgishima Power Station is situated in Kawasaki City, in Kanagawa
Prefecture. The prefecture and the surrounding Kanto region are densely
populated by industrial zones, such as the Tokyo–Yokohama Industrial
Zone, and electricity demand is robust as a result. Electricity differs fromgas in the fact that it cannot be stored, and it is therefore necessary toadjust generation levels in conjunction with demand fluctuations.
Electricity also incurs large losses during transmission. For thesereasons, a location close to high demand areas is a great advantage foran electric power business.

Combined Cycle Generation
Generator

Steam turbine

Steam Turbine
Generation
Steam
Exhaust heat collection boiler
Exhaust heat

Gas Turbine
Generation
Generator

Gas turbine

Kanto Region

 Neighboring LNG Terminal
The Ohgishima Power Station neighbors the Company’s Ohgishima
Terminal. The close proximity to this LNG receiving terminal means thatthe power station can be easily supplied with the natural gas it uses asfuel. In addition, the Ohgishima Terminal can be contracted to conduct
generation within its facilities, thereby ensuring efficient operation withlow costs.

Ohgishima Power Station‌Tokyo Gas
Group supplyarea‌Industrial zones
Factories

33

Tokyo Gas Annual Report 2014

Ohgishima Power Station’s Third Unit
 Construction of the Third Unit
In addition to the two units already operating at the Ohgishima Power Station, Tokyo Gas is constructing athird unit. Scheduled to commence operation in fiscal 2015, this unit will have a generation capacity of 407
MW, which will raise the overall generation capacity of the power station from the current 814 MW to 1,221
MW. As the supply and demand situation for electricity remains tight in the Tokyo metropolitan area, thehighly competitive power we supply will continue to benefit from robust demand, enabling us to contributeto a stable supply of electricity.

 Continuation of Tight Electricity Supply and Demand Situation after Fiscal 2015

Variable costs (¥ / kWh)Some stakeholders have expressed concern that the construction of a third unit at the Ohgishima Power
Station could result in a supply glut. The basis for this concern is the possibility of Japan’s nuclear power
plants being restarted, which would likely result in an easing of theGeneration Costs by Power Source: Variable Costs (representation)
supply and demand situation for electricity.
The Company’s highly efficient natural gas-fired thermal power
plants boast incredible cost competitiveness when compared with
LNG-fired thermal,
oil-fired thermal, etc.
older oil-fired and LNG-fired thermal power plants. It can be
expected that buyers will choose to fill demand by first using
High-efficiency
LNG-fired thermal
lower-cost power sources. For this reason, we anticipate thatdemand will be lost for older model thermal power plants should
Coal-fired
thermalnuclear power plants be restarted. It is difficult to imagine
NuclearHydro
a situation in which we could not find buyers for the electricity
from the Company’s highly efficient natural gas-fired thermal
Supply capacity (MW)power plants.

On-Site Progress toward Realizing the “Challenge 2020 Vision”
Electric
Power
Business

General Manager,
Power Strategy Section,
Total Energy Business
Department

Shinya Nishigata
I will be both bold and calculating in advancing theelectric power business.
The Company’s “Challenge 2020 Vision” defines the goal of raising ourdomestic generation capacity to between 3,000 MW and 5,000 MW. Our
first step toward realizing this goal is the construction of the Ohgishima
Power Station’s third unit, which is scheduled to commence operations infiscal 2015. Going forward, we will examine various options for achieving
the vision’s goal.
In expanding generation capacity, the strength of Tokyo Gas lies in its
ability to use its LNG procurement capabilities as well as its LNG terminals,
pipelines, and other infrastructure to develop and operate natural gas-fired
thermal power plants that utilize highly efficient combined cycle generation
methods. While leveraging this strength to its full extent, we will also build
a strong power supply portfolio to boost the competitiveness of theelectric power business, with base power sources like coal-fired thermal
included among the options. Collaboration with capable partners will also
be considered as a way of advancing this quest in the future.
However, expanding the scale of our power generation operations will
not be easy. Currently, the environment surrounding energy in Japan ishighly opaque, particularly with regard to trends in electricity and gas
regulatory systems, the possible timing for the restart of nuclear power
plants, and medium-to-long-term electricity demand growth. In all honesty,
it is difficult to project what the electricity supply and demand situation andmarket prices for electricity will look like even a year down the line.
In this unclear environment, we must make difficult decisions regarding
the construction of large-scale power plants, which entail massive
investments and require a period of seven or eight years before a plantcan be brought on stream. Even looking at the large-scale natural
gas-fired thermal power plants Tokyo Gas is currently operating, we will
see that circumstances surrounding energy changed substantially after
their construction was approved. Moreover, there are a variety of opinions
and perspectives within the Company, and the decisions themselves are
not easy.
Nonetheless, I believe that no matter how the operating environment
for energy may look, there will be business opportunities to be foundtherein. In seeking out these opportunities, it is crucial to develop scenarios based on various projected changes in the environment, and thesescenarios will need to be carefully examined. We must then formulate
strategies that will allow us to respond flexibly, even if a serious riskmaterializes. In the coming age of unprecedented uncertainty, this typeof bold and calculating approach will be more important than ever todeveloping business operations.

Tokyo Gas Annual Report 2014

34

FAQ
In this section, we respond to frequently asked questions from our stakeholders.

Q

1

A

1

Q

A

‌
The
Company has entered the third year since thelaunch of the “Challenge 2020 Vision.” Does it haveany plans to revise targets?
‌Circumstances surrounding energy after the Great East
Japan Earthquake and other basic conditions are generally
in line with our forecasts, and we therefore see no need torevise targets at this point in time. In the “hop, step, jump”
progression of the “Challenge 2020 Vision,” fiscal 2014 ispositioned as the last year of the “hop” stage during which
we will form the structures that the Tokyo Gas Group will
require going forward. After these structures have beensolidified, we will reconsider the necessity of target revisions.

‌
Would
it be best for Tokyo Gas to focus on the gas
business? Specifically, why is the Company investingin the Barnett basin project and other upstream
businesses?
‌
2 Investment in upstream businesses not only enables us tosecure returns; it also brings other benefits. For example,

Q

3

A

3

structure, and thereby we aim to expand gas sales volume
to 22.0 billion m3 by fiscal 2020. To date, growth in gas
sales volumes has been consistent with the forecasts of the“Challenge 2020 Vision.”			 In addition, while developing infrastructure, we haveseen cases in which the installation of pipelines has
resulted in the appearance of new demand that we had
not initially anticipated.

2should resource procurement costs associated with theCove Point LNG Project increase due to a rise in the Henry
Hub index, the revenues generated by upstream interestsin the Barnett basin will also increase. This is because we
could sell gas procured from the Barnett basin within the
United States at the higher price dictated by this index. In
this manner, investment in upstream businesses helps
stabilize the earnings of the entire Tokyo Gas Group.

‌ would appear that Tokyo Gas is investing aggresIt
sively in northern Kanto. To what extent do you thinkgas demand can be cultivated in this area?
‌There is significant latent demand in northern Kanto (seeP.17). We will cultivate this demand by developing infra-

Q

4

A

4

Q

5

A

5

‌
What
are the Board of Directors’ policies toward
corporate governance?
‌	Aiming to protect shareholder interests in management, theCompany began appointing outside directors in 2002 to
improve corporate governance systems, and managementtransparency has improved as a result. Going forward, we
will continue to practice accountability toward stakeholders
while actively conducting information disclosure.
‌
The“Challenge 2020 Vision” calls for the Tokyo Gas
Group to conduct aggressive investment. What is thelikelihood that this will result in excessive investmentin projects with insufficient profitability?
‌Our basic approach toward investment is to make decisions based on economic rationality, and we will only invest
in projects from which we can expect appropriate returns.
The Investment Evaluation Committee is responsible for
evaluating projects and making judgments regarding
economic rationality.

Investment Evaluation Committee
Overview To evaluate the economic rationality of investments, theCompany has established the Investment Evaluation Committee.
This committee conducts objective, multifaceted evaluations ofestimates formulated by planning departments.
Before investment proposals are presented to the Corporate
Executive Committee for deliberation and approval, the Investment
Evaluation Committee evaluates their economic rationality from aquantitative perspective. It then reports these findings to the
Corporate Executive Committee.
Scope of Evaluations The Investment Evaluation Committee
evaluates investments targeting increased profitability or businessdevelopment in a wide range of areas.
Evaluation Methods The conditions required to generate future

cash flows are evaluated, and net present value (NPV) and theinternal rate of return (IRR) are calculated based on projected cash
flows. The committee also formulates withdrawal standards thatconsider whether or not investments are producing the anticipatedresults. Prior to investment, the committee considers possible

35

Tokyo Gas Annual Report 2014

measures that could be implemented should the projects comeinto conflict with these standards while also evaluating investment
risk factors.
Post-Investment Monitoring In addition to evaluating projects
before investment, the Investment Evaluation Committee continues to evaluate investments periodically after they are concluded
to ensure that they are properly managed. Should a project comeinto conflict with withdrawal standards, the likelihood of achieving
the initial goals of the investment is reevaluated. When deemednecessary the committee will propose withdrawal to the Corporate
Executive Committee.
Committee Membership The Investment Evaluation Committee
is chaired by the executive officer in charge of finances and its
members include the general managers of the Corporate Planning
Department and the Finance Department. Based on the nature of
the projects being discussed, Tokyo Gas Group members that areknowledgeable on the subject may be asked to participate.

Corporate GovernanceTokyo Gas works to ensure continued development while consistently earning the trust of customers, shareholders, and society. Based on this philosophy, we aim to achieve a continuous increase in our corporate
value through enhancing corporate governance systems. We are endeavoring to develop systems with acommitment to management legality, soundness, and transparency. Tokyo Gas continues to emphasize theimportance of accurate and prompt decision making, efficient business operations, strengthening of auditing
and monitoring functions, and clarification of management and executive responsibilities.

Board of Directors
In principle, the Board of Directors meets once a month to discussand decide important matters regarding business operations. Directors must submit reports to the Board of Directors regarding thestatus of execution of their duties periodically and when deemednecessary, allowing the board to monitor the performance of directors.
The Board of Directors comprises 11 directors, 3 of whom areoutside directors. In addition, the term of directors is set at one yearwith the goal of further clarifying managerial responsibility.

Outside Directors
In accordance with their individual experience and knowledge, theoutside directors strive to secure the soundness and appropriatenessof deliberations and decisions regarding business execution. From an
independent viewpoint, the outside directors monitor the performanceof duties by the directors and exercise their authority at meetings ofthe Board of Directors. In this way, the outside directors contribute to

the improvement of the rationality and objectivity of the Company’sbusiness execution and of the deliberations and decisions of theBoard of Directors.
In making judgments about matters related to the independenceof outside officers, such as capital, transactions, and relationships,
we comprehensively verify that they are unlikely to have conflicts ofinterest with general shareholders and they are in a position thatenables them to be objective and neutral, and on that basis we makea judgment on their independence. The Advisory Committee has
confirmed that none of the outside officers has a material conflictof interest with the Company—in regard to capital, transactions,or relationships—and has confirmed their independence in accordance with the above standards. The committee’s decision has beenreported to the Board of Directors, which has designated themas independent officers and reported that designation to the stock
exchanges on which the Company is listed.

Outside Director’s Reason for Appointment
Name

Yukio Sato
Ryuichi Tomizawa

Major concurrent positions

Reason for appointment

Vice Chairman of The Japan
Institute of International Affairs

The Company’s management will benefit from Yukio Sato’s international way of thinking nurtured throughdiplomacy, wide perspective, and in-depth knowledge.

—

The Company’s management will benefit from Ryuichi Tomizawa’s international way of thinking nurtured in
the aggressive overseas penetration of the chemical industry, wide perspective, and in-depth knowledge.

—

The Company’s management will benefit from Yoshihiko Nakagaki’s management way of thinking nurtured
in a wide range of business development activities, including electric power source development andelectric power wholesale supply, and his advanced capabilities in management, such as the implementationof reforms reflecting changes in the operating environment.

Yoshihiko Nakagaki

Realizing Accurate, Rapid Decision Making and Efficient
Business Execution
The Corporate Executive Committee, which meets weekly as a
general rule, deliberates on provisions stemming from Board of
Directors’ resolutions and important management-related issues. The
Company has introduced an executive officer system for businessexecution in accordance with decisions of the Board of Directors.

Substantial authority has been delegated to executive officers in theirdesignated areas of responsibility, while directors, as appropriate,
receive reports on the status of execution from executive officers andmonitor the executive officers. In addition, executive officers report to
the Board of Directors as needed. (To clarify management responsibility and executive responsibility, the terms of office of directors andexecutive officers have been fixed at one year.)

Audit & Supervisory Board Members
The audit & supervisory board members meet once a month as a
general rule and otherwise as needed. The five members of theboard, which include three outside audit & supervisory board members, conduct deliberations and make reports.
In line with the Corporate Auditor’s Audit Standards, each audit &supervisory board member conducts effective audits through thefollowing principal initiatives.

• ‌The audit & supervisory board members attend meetings of theBoard of Directors, the Corporate Executive Committee, andother important meetings. They state their opinions relating tolegality and other perspectives when necessary.

• ‌The audit & supervisory board members conduct research into
the state of operations at the head office, business offices, andsubsidiaries and hold discussions with directors to exchange
opinions, both on a regular basis and otherwise as needed.

• ‌The audit & supervisory board members cooperate closely with
the Internal Audit Department, which is the internal audit organization, and with the independent auditors and strictly audit theexecution of duties by the directors, targeting the establishmentof a high-quality corporate governance system.

• ‌In regard to the internal control system for financial reporting,the audit & supervisory board members receive evaluations ofinternal control and reports on the status of audits from theBoard of Directors, etc., and KPMG AZSA LLC.
Tokyo Gas Annual Report 201436

Corporate GovernanceOutside Audit & Supervisory Board Members
The outside audit & supervisory board members conduct audits /monitoring from an independent viewpoint and contribute to improving the rationality and objectivity of the Company’s business execution and of the deliberations of the Board of Directors through theirstatements at meetings of the Board of Directors. In addition, throughtheir statements & the exercise of their majority voting rights atmeetings of the Audit & Supervisory Board, the outside audit &supervisory board members contribute to assuring and improving thelegality, appropriateness, rationality, and objectivity of the audits by
the audit & supervisory board members. In addition, with the objective of assuring the effectiveness of audits by the audit & supervisoryboard members, the Company invites outside audit & supervisoryboard members who have a substantial degree of knowledge about
finance and accounting.

In making judgments about matters related to the independence ofoutside officers, such as capital, transactions, and relationships, we
comprehensively verify that they are unlikely to have conflicts ofinterest with general shareholders and they are in a position thatenables them to be objective and neutral, and on that basis we makea judgment on their independence. The Advisory Committee has
confirmed that none of the outside officers has a material interest with
the Company—in regard to capital, transactions, or relationships—
and has confirmed their independence in accordance with the above
standards. The committee’s decision has been reported to the Boardof Directors, which has designated them as independent officers andreported that designation to the stock exchanges on which theCompany is listed.

Outside Audit & Supervisory Member’s Reason for Selection
Name

Yoshihiko Morita

Major concurrent positions

Reason for appointment

President of Japan Institute forOverseas Investment Outside Directorof Kawasaki Heavy Industries, Ltd.

The Company’s auditing will benefit from Yoshihiko Morita’s expansive international way of thinking
and deep insight nurtured through work in the fields of international finance and overseas
economic cooperation.

—

The Company’s auditing will benefit from Kojiro Otani’s abundant experience of organizational
management acquired in local government as well as his deep insight.

—

The Company’s auditing will benefit from Wako Tojima’s wealth of expertise and deep insight asa science journalist.

Kojiro Otani
Wako Tojima

Officer Remuneration
In 2005, the Company formulated the basic policy on officer remuneration, which outlines the method of remuneration for directors, etc.
At a meeting of the Board of Directors in February 2012, the policy
was revised as follows.

(3) Remuneration of outside directors shall comprise monthly remuneration and bonus. Monthly remuneration shall comprise only fixed
remuneration, while bonus shall be the same as that of inside directors.
4 Remuneration of Audit & Supervisory Board Members

1 Role of Officers and Remuneration

The role demanded of officers is to seek to enhance short-, medium-,and long-term corporate value, and officer remuneration shall serveas an effective incentive for them to perform that role.
2 Level of Remuneration

The level of officer remuneration shall be suitable for the role, responsibility, and performance of the officer.

and Its Composition(1) Remuneration of audit & supervisory board members shall be paid
within the scope of the remuneration limit approved at the General
Shareholders’ Meeting determined through discussions among audit& supervisory board members.
(2) Remuneration of audit & supervisory board members shall comprise only fixed monthly remuneration.
5 Assurance of Objectivity and Transparency

3 Remuneration of Directors and Its Composition(1) Remuneration of directors shall be paid within the scope of the
remuneration limit approved at the General Shareholders’ Meeting.
(2) Remuneration of inside directors shall comprise monthly remuneration and bonus. Monthly remuneration shall comprise fixed remuneration paid in accordance with the post of each individual andperformance-linked remuneration. The amount of bonus to be paid
shall be determined in accordance with the post of each insidedirector after performance evaluation.

37

Tokyo Gas Annual Report 2014of Remuneration System
The Company shall assure the objectivity and transparency of thesystem of officer remuneration by establishing and operating theAdvisory Committee comprising a number of outside directors,
outside audit & supervisory board members, and inside directors togovern the system of personnel affairs and remuneration of officers.

Total Remuneration for Directors and Audit & Supervisory Board Members (Fiscal 2013)
Millions of yen
TypeRemuneration for directors (excluding outside directors)

10*1

Remuneration for audit & supervisory board members(excluding outside audit & supervisory board members)

3*1

Remuneration for outside officers(outside directors and outside audit & supervisory board members)

7*1

Thousands of U.S.dollars*2
Type

Total value of
remuneration

Base

Bonuses

Base

Bonuses

¥436

¥385

¥51

$ 3,775

$500

¥ 74

¥ 74

—

$

725

—

¥ 64

¥ 58

¥ 6

$

569

$ 59

*1	The number of officers included in the total value of remuneration for directors, audit & supervisory board members, and outside officers includes two directors and two audit & supervisory board members(of which one was outside officer) who retired upon the conclusion of the 213th Annual Shareholders’ Meeting.
*2	Equivalent U.S. dollar amounts are included for the convenience of readers outside Japan and are converted at a rate of ¥102 per U.S. dollar, the prevailing exchange rate at the end of March 2014. These
conversions should not be construed as representations that the Japanese yen amounts have been, could have been, or could in the future be, converted into U.S. dollars at this or any other rate of exchange.

Corporate Governance System
Customers

Local Community

Shareholders / Investors

General Shareholders’ Meeting
Appointment

Appointment

ReportReport submission

Answer*3

Collaboration

Advisory Committee*2

Board of Directors*1
Inquiry

Audit, etc.

Collaboration

Internal Audit Department

Independent Auditors

ReportAudit & Supervisory Board

Appointment

General Shareholders’ Meeting
Stakeholders
Tokyo Gas Co., Ltd.
Business Operations

Management Ethics Committee

President(Corporate Executive Committee*4)

ReportApproval

Deliberation
and report

Safety Committee
Customer Satisfaction Promotion Committee
Investment Evaluation Committee
Environmental Committee

Settlement andmonitorCollaboration

Audit

Report submission

MonitorReport submission

Corporate Communications Promotion Committee
Risk Management Committee

Audit

Other In-House Committees

Business Departments /Subsidiaries and Affiliates

Add to agenda and report
Decision and monitoring*1	‌Board of Directors: 11 directors (3 outside directors and 8 internal directors)*2 Advisory Committee: 3 representatives from outside directors and outside audit & supervisory board members, Chairman (1), and President (1)*3 Audit & Supervisory Board: 5 audit & supervisory board members (3 outside auditors and 2 internal auditors)*4	Corporate Executive Committee: President, 2 Executive Vice Presidents, and 11 Senior Executive Officers (3 of the representative directors also serve as President and Executive Vice Presidents)

Overview of Corporate Governance SystemAs of June 27, 2014

Number of directors
Average age of directors

11
65.4

Number of outside directors

3

Number of independent officers

6

Number of audit & supervisory board members

5

Number of outside audit & supervisory board members

3

Participation of outside directors / outside audit & supervisoryboard members in determination of remuneration

Yes

Participation of outside directors in determination of director
candidates

Yes

Number of meetings of Board of Directors*

12

Attendance rate of outside directors at meetings of Board of
Directors*
Term of office of directors

Working to Promote Transparent Management
and Create a Flexible and Open Corporate Culture
In fiscal 2002, the Company established the Management Ethics
Committee, chaired by the President. We also formed in-housecommittees to address issues that are important from a management
perspective, such as compliance, safety, customer satisfaction, andrisk management. This structure facilitates the sharing of information
within the Group as well as deliberations and adjustments regarding
the Group’s overall direction.

97%
One year

Results-linked remuneration

Yes

Share purchase system to reflect the perspective of shareholders
in management

Yes* Total for the period from April 2013 to March 2014

Tokyo Gas Annual Report 201438

Corporate Governance

Advisory Committee
In February 2005, we established the Advisory Committee. It has
been defined that this committee will have no more than six members
consisting of no more than three representatives from outside of theCompany and no more than three internal representatives, and that
one of the outside representatives will serve as the committee’schairman. Today, the Advisory Committee has five members—three
representatives from the outside directors and outside audit &supervisory board members as well as the Chairman and the President. The committee works to assure objectiveness and transparency
in management. In accordance with inquiries from the Board of
Directors, the Advisory Committee deliberates on officer candidates
and officer remuneration in a fair and appropriate manner and makes
reports to the Board of Directors. The committee also deliberates on
the independence of outside officer candidates.

Independent Auditors
The Company has concluded an auditing contract with KPMG AZSA
LLC for auditing services based on the Companies Act and auditing
services based on the Financial Instruments and Exchange Act, as
well as internal control audits based on the Financial Instruments andExchange Act, and the Company is being audited on that basis. The
Company’s audits are handled by three certified public accountants—
Teruhiko Tanaka, Shuichi Ikeya, and Masaru Miura. For each of theseauditors, the number of consecutive years of auditing service is sevenyears or less (as of June 27, 2014).

Compensation for Independent Auditors (Fiscal 2013)
Millions of yen

Thousands of
U.S.dollars*Compensation for auditing services¥263$2,578Compensation for non-auditing services¥ 39$  382

Total

¥302

$2,961*	Equivalent U.S. dollar amounts are included for the convenience of readers outside Japan, andare converted at a rate of ¥102 per U.S. dollar, the prevailing exchange rate at the end of March
2014. These conversions should not be construed as representations that the Japanese yenamounts have been, could have been, or could in the future be, converted into U.S. dollars at
this or any other rate of exchange.

Internal Control System
To secure management legality soundness and transparency and torealize its management philosophy, the Company has formulated the“Basic Policy on Development of Corporate Structures and Systems
for Ensuring Appropriateness of Operations (Internal Control System)
for the Tokyo Gas Group,” and the Company is applying this policy inan appropriate manner.

compliant to relevant laws and regulations, the articles of incorporation, and other rules. In addition, crisis management provisions havebeen formulated to limit losses from risks related to investments andnatural disasters. The Company also defines guidelines for ensuring
the independence of audit & supervisory board members and guaranteeing the effectiveness of the Audit & Supervisory Board.

Specifically, the Company has established systems to ensure that
directors and their assistants perform their duties in a manner that isCompliance
The Company has identified the following three points as its basic
policy and is promoting compliance on that basis.
• Fostering of a compliance oriented mentality• Compliance efforts by each workplace based on the Group policy• Establishment of the compliance PDCA cycle

we promote a thorough awareness of ongoing activities related to ourcode of conduct that was revised in 2004. We are also moving
forward with a compliance casebook designed for applying the codeof conduct to various problems in the workplace, so as to achieve thepermeation of compliance.

Compliance Risk Management
Compliance Structure
We have established the Management Ethics Committee, chairedby the President. This committee discusses at the management levelbasic compliance policies and all aspects of compliance initiatives
by the Company, monitors the implementation of compliance-related
measures, and confirms activity programs from the following year andthereafter. We have also established the Compliance Department tolead compliance-related activities for each unit. These include development of compliance promotion systems, encouragement awareness and educational campaigns about the code of conduct, compliance risk reduction measures, maintenance of advisory systems, andbroad-based distribution of information within and beyond the Tokyo
Gas Group companies. To cultivate an understanding of compliance,

39

Tokyo Gas Annual Report 2014

Through the effective operation of internal and external advisorysystems, we are endeavoring to ensure that compliance-related
problems are discovered and resolved quickly so that our corporate
self-regulatory processes will continue to function effectively.
We monitor the effectiveness of Group compliance promotion
activities by conducting regular compliance awareness surveys of all
employees. The results of these surveys are reflected in initiatives forthe following years. The Compliance Audit Sect., the Internal Audit
Department conducts audits of the Company, its subsidiaries, and its
affiliates from the viewpoint of strict compliance with laws, corporate
ethics, and social norms. When concerns are identified, the Group
conducts follow-up audits in the following year to verify progress intackling those concerns.

Risk Management System
Enterprise Risk Management System
In fiscal 2003, the Company established an enterprise risk management (ERM) system and drew up risk management regulations, which
include documented rules concerning major risks faced by the Group.
The Risk Management Committee was established in fiscal 2008
with the aim of tracking progress regarding the establishment and theoperational status of the ERM system as well as improving the level ofERM. The committee periodically undertakes risk assessments andchecks on the status of the ERM system. It also reports to the
Corporate Executive Committee and obtains the necessary approvals.

Moreover, in fiscal 2011, the risk management function was made theresponsibility of the Corporate Planning Department, and there has
been a framework in place for implementing unified ERM in conjunction with operational management.
Under the framework, around 120 Risk Management Promotion
Officers are deployed in the business departments of Tokyo Gas andits subsidiaries and affiliates in order to promote ERM. Each year, we
assess risks and the implementation and improvement status ofcountermeasures. This system facilitates the steady implementationof the ERM-PDCA (Plan-Do-Check-Act) cycle.

Enterprise Risk Management (ERM) System
Corporate Executive Committee
Confirmation of major Group risks
Reflection of results ofrisk assessment

Securities Markets and Other Stakeholders
Disclosure of risk information through Securities
Report, Financial results, Annual report, CSR report

Report / proposal for plan for assessment of major Group risks /other essential matters

Clear statement of risk
management policies

Risk Management Committee(Executive Office: Corporate Planning Dept.)
Identifying and confirming Group risk management
Report regarding results of risk assessment, status of implementation of countermeasures, status of improvement, etc.

Feedback of evaluation results /improvement proposals
Clear statement of risk
management policies

Business Departments / Subsidiaries and Affiliates(1) Identifying and evaluating risks, formulating and implementing risk
countermeasures(2) Improvement of risk assessment, countermeasures

Crisis Management System
Because the Company provides public services that comprise alifeline, for many years it has also had a crisis management systemthat serves as a response system in case an accident or otherrisk-related event actually occurs. Specifically, we have formulated
Emergency Response Organization Regulations. In case of crises,
including major natural disasters, such as earthquakes, or production
or supply disruptions arising from major accidents at pipelines or
terminals, as well as influenza, terrorism, failures in mission-critical IT
systems, and compliance problems, the Emergency Response
Organization responds to the situation immediately in accordancewith the Emergency Response Organization Regulations. Periodic
training is conducted in relation to major risk response measures.
Moreover, the Company has also formulated a business continuity
plan (BCP), outlining its responses in the event of a major earthquakeof the magnitude assumed by Japan’s Cabinet Office, a major
accident disrupting gas supply, a widespread blackout, an outbreakof influenza, etc. This plan is in place to reinforce the Company’s risk
management system.

Emergency Response Organization
Suggestion of establishment of Emergency Response Organization, etc.

President (Organization Leader)
Instructions /ordersReportBusiness Departments* The organizational unit in charge of the executive office
is determined in advance in accordance with the typeof the emergency.

Executive Office

Collaboration

Corporate Planning Dept.

(Groupwide coordination)

Tokyo Gas Annual Report 201440

Corporate Governance

Board of Directors and Audit & Supervisory Board Members As of June 27, 2014
Directors

Director, Chairman

Tsuyoshi Okamoto
Joined the Company

Shigeru Muraki

April

1970

July

1972

Joined the Company

June

2004	Director, Senior Executive Officer, and Division Manager of Strategic Planning Div.

April

2004

Senior Executive Officer and Division Manager of R&D Div.

April

2007	Representative Director, Executive Vice President, and in charge of Personnel
Dept., Secretary Dept., General Administration Dept., Compliance Dept.,
and Internal Audit Dept.

June

2007	Director, Senior Executive Officer, Division Manager of Energy Solution Div.,and General Manager of Volume Sales Dept. of Energy Solution Div.

April

April

2010

President, Representative Director, and Executive President

2010	Representative Director, Executive Vice President, Division Manager of Energy
Solution Div., and General Manager of Volume Sales Dept. of Energy Solution Div.

April

2014

Director and Chairman of the Board

April

2014

Representative Director, President

Michiaki Hirose

Joined the Company

Director, Vice Chairman of the Board

Representative Director

Matsuhiko Hataba

April

1974

April

2007	Senior Executive Officer and in charge of Corporate Planning Dept.,
Infrastructure Project Dept., Finance Dept., Accounting Dept., and AffiliatedCompanies Dept.

April

2009	Senior Executive Officer and Division Manager of Living Energy Div.

June

2009	Director, Senior Executive Officer, and in charge of Corporate Planning Dept.,
Corporate Communications Dept., and Affiliated Companies Dept.

June2012	Director, Senior Executive Officer, and in charge of Corporate Planning Dept.,
TG-Group Reorganization Project Dept., and Affiliated Companies Dept.

April

2012	Representative Director, Executive Vice President, andDivision Manager of Living Energy Div.

April

2013	Director, Senior Executive Officer, and in charge of Corporate Planning Dept.
and Affiliated Companies Dept.

April

2014

April

2014	Representative Director, Executive Vice President, and Division Manager ofResidential Sales and Service Div.

President, Representative Director, and Executive President

Representative Director

Yutaka Kunigo

Joined the Company

April

1976

April

2006	Executive Officer and General Manager of Personnel Dept.
of Business Support Div.

Joined the Company

Director

Kazuo Yoshino

April

1977

April

1975

April

2007	Executive Officer and General Manager of Gas Resources Dept. of Energy
Resources Div.

April

2005	Executive Officer and General Manager of Finance Dept.
of Strategic Planning Div.

April

2009	Senior Executive Officer and in charge of Investor Relations Dept.,
Finance Dept., and Accounting Dept.

June

2011	Director, Senior Executive Officer, Division Manager of Information Technology
Div., and in charge of Finance Dept. and Accounting Dept.

April

2010	Senior Executive Officer and Division Manager of Energy Resources Div.

June

2013	Director, Senior Executive Officer, and Division Manager of Energy Production Div.

April

2014	Representative Director, Executive Vice President, Division Manager of Energy
Solution Div., and General Manager of Volume Sales Dept. of Energy Solution Div.

Director

Masahiro Mikami

Joined the Company

Director

Hiroaki Kobayashi

April

1975

April

1980

Joined the Company

April2008	Executive Officer and General Manager of General Administration Dept.

April

2009

Executive Officer and General Manager of Customer Safety Dept.

April

2011	Senior Executive Officer and in charge of Purchasing Dept., Real EstateManagement Dept., Major Site Development Dept., andGeneral Administration Dept.

April

2012

Senior Executive Officer, and Chief Executive of Technology Development Div.

June

2014	Director, Senior Executive Officer, Chief Executive of Technology Development
Div., and in charge of Smart Energy Business Development Dept.

June

41

Director, Vice Chairman

Joined the Company

2013	Director, Senior Executive Officer, and in charge of Secretary Dept., General
Administration Dept., Corporate Communications Dept., Environmental Affairs
Dept., and Compliance Dept.

Tokyo Gas Annual Report 2014

Outside Directors

Outside Director

Outside Director

April

Joined the Ministry of Foreign Affairs

April

September 1998	Permanent Representative of Japan to the United Nations(Ambassador of Japan to the United Nations)1965	Joined Mitsubishi Kasei Industries Corporation(Current Mitsubishi Chemical Corporation)

April

2000	President of Mitsubishi-Tokyo Pharmaceuticals, Inc.
(Current Mitsubishi Tanabe Pharma Corporation)

June

2002	Member of the Board, President, and Chief Executive Officer of Mitsubishi
Chemical Corporation

Yukio Sato

February

1961

2003

President of The Japan Institute of International Affairs

December 2004

Commissioner of National Public Safety Commission

February

2009	Vice Chairman of The Japan Institute of International Affairs (Current position)

June

2010

Outside Director of the Company

Ryuichi Tomizawa

October 2005	Member of the Board, President of Mitsubishi Chemical Holdings Corporation
April

2007	Member of the Board, Chairman of Mitsubishi Chemical Holdings Corporation

June

2011

June

2012	Senior Corporate Advisor of Mitsubishi Chemical Holdings Corporation(Current position)

Outside Director of the Company

Outside Director

Yoshihiko Nakagaki
April

1961

June

1996	Director and Department Director of Corporate Planning Dept. of Electric Power
Development Co., Ltd. (J-POWER)

Joined Electric Power Development Co., Ltd. (J-POWER)

June

1998	Managing Director of Electric Power Development Co., Ltd. (J-POWER)

June

2000	Vice President and Representative Director of Electric Power Development
Co., Ltd. (J-POWER)

June

2001	President and Representative Director of Electric Power Development Co., Ltd.
(J-POWER)

June

2009	Corporate Advisor of Electric Power Development Co., Ltd. (J-POWER)

June

2012

June

2014	Honorary Counselor of Electric Power Development Co., Ltd. (J-POWER)(Current position)

Outside Director of the Company

Audit & Supervisory Board Members

Audit & Supervisory
Board Member

Manabu Fukumoto
April

1975

April

2006	Executive Officer and General Manager of General Administration Dept.
of Corporate Communication Div.

Joined the Company

Audit & Supervisory
Board Member

Tsutomu Oya
April

1975

Apri

2004	Executive Officer, General Manager of Urban Energy Business Dept. of Energy
Sales and Service Div., and Acting General Manager of Volume Sales Dept.
of Energy Sales and Service Div.

Joined the Company

June2009	Senior Executive Officer and in charge of Purchasing Dept., Real EstateManagement Dept., Major Site Development Dept., and Internal Audit Dept.

April

2006

June

2011

June

2009	Director, Senior Executive Officer, and Division Manager of Energy Resources Div.

Audit & Supervisory Board Member of the Company

Senior Executive Officer and Division Manager of Energy Resources Div.

April

2012	Director, Senior Executive Officer, and Division Manager of Energy Production Div.

June

2013

Audit & Supervisory Board Member of the Company

Outside Audit & Supervisory Board Members

Outside Audit & Supervisory
Board Member

Outside Audit & Supervisory
Board Member

April

March

1971

Joined Yokohama City Hall

April

2003

Director General of General Affairs Bureau of Yokohama City Hall

Yoshihiko Morita
1969

Joined Export-Import Bank of Japan

Kojiro Otani

October 2004	Deputy Governor and Managing Director of Japan Bank for International
Cooperation

April

2006

Director General of Waterworks Bureau of Yokohama City Hall

June

2012	President of Japan Institute for Overseas Investment (Current position)
Outside Audit & Supervisory Board Member of the Company

July

2008

Vice President of Kanagawa Water Supply Authority

June

2013

June

2013

Outside Audit & Supervisory Board Member of the Company

Outside Director of Kawasaki Heavy Industries, Ltd. (Current position)

Tokyo Gas Annual Report 201442

Corporate Governance

New Outside Audit & Supervisory Board Member

Outside Audit & Supervisory
Board Member

Executive Officers
President

Michiaki Hirose

Executive Vice
Presidents

Matsuhiko Hataba

Division Manager of Residential Sales
and Service Div.

Yutaka Kunigo

Division Manager of Energy Solution Div.,
General Manager of Volume Sales Dept.
of Energy Solution Div.

Kazuo Yoshino

Division Manager of Information Technology
Div., in charge of Finance Dept. andAccounting Dept.

Masahiro Mikami

In charge of Secretary Dept., General
Administration Dept., Corporate
Communications Dept., Environmental Affairs
Dept., and Compliance Dept.

Hiroaki Kobayashi

Chief Executive of Technology Development
Div., in charge of Smart Energy Business
Development Dept.

Koichi Aonuma

Division Manager of Housing Development
Dept., Residential Sales and Service Div.

Hideaki Obana

In charge of Personnel Dept., Purchasing
Dept., Real Estate Planning Dept., andInternal Audit Dept.

Takashi Uchida

Division Manager of Energy Resources Div.

Satoru Yasuoka

Division Manager of Regional Development
Marketing Div.

Fumio Murazeki

Head of Sales Marketing, Energy Solution Div.

Hideaki Arai

Division Manager of Pipeline Network Div.

Shin Yamagami

Division Manager of Energy Production Div.

Masaru Takamatsu

In charge of Corporate Planning Dept. and
Affiliated Companies Dept.

Hidefumi Takahashi

General Manager of Sales Marketing 1 Dept.,
Residential Sales and Service Div.

Yoshihiro Tanabe

General Manager of Finance Dept.

Michiharu Takahashi

Coordinator of Energy Solution Div.

Fumihiko Hara

General Manager of LIFEVAL ProjectManagement Dept., Residential Sales andService Div.

Kiyotada Den

General Manager of Corporate
Communications Dept.

Takahiro Saito

Supply Control & Disaster Management
Dept., Pipeline Network Div.

Isao Nakajima

General Manager of Residential Sales Planning
Dept., Residential Sales and Service Div.

Kunio Nohata

General Manager of Gas Resources Dept.,
Energy Resources Div.

Shinichi Takagi

General Manager of Industrial Gas Sales
Dept., Energy Solution Div.

Toshiyasu Ishi

General Manager of Total Energy Business
Dept., Energy Solution Div.

Satoru Sawada

General Manager of Corporate Planning Dept.

SeniorExecutive
Officers

Wako Tojima
July1983	Participated in Student Exchange Program of Japan’s Ministry of Education
at Department of Political Science of University of Kansas, United StatesMarch1985	Graduated from College of Comparative Culture of University of Tsukuba

April

1985

Joined The Yomiuri Shimbun

March 1991 Retired from The Yomiuri Shimbun
		 Freelance journalist
April

2007	Part-time lecturer at School of Social and International Studies of Universityof Tsukuba (Current position)

June

2014

Outside audit & supervisory board member of the Company

As an outside auditor, I strive to help Tokyo Gas realize higher corporate value, aiding the Company in responding carefully and flexibly tovarious risks while leveraging its inherent strengths.
As a science journalist, I have seen various operating sites of different energy companies, both in Japan and overseas, and I haveparticipated in national committees. Based on this experience, there
are three areas I focus on in my duties.
The first is the degree to which the Company is incorporating thecustomer’s perspective, particularly when providing a stable supplyof energy, improving safety and service quality, and creating new value for people’s lifestyles. The second is the level of communication.
In this regard, I look at the openness of communication throughout
the organization and whether or not thorough explanations areprovided to society. The third area of focus is the ability to create
innovation. Specifically, I pay attention to efforts pertaining to

Executive
Officers

technological development, human resource cultivation, and theempowerment of female employees.
The transfer of operations closely related to customers to Group
companies can realize efficiencies. However, such transference can also
result in a gap between management and operating sites and in differences in how they see and respond to customer needs. To prevent
gaps from appearing, I also turn my attention to the corporate governance and risk management systems of the entire Tokyo Gas Group.
Tokyo Gas has defined the management philosophy of ensuringcontinued development while consistently earning the trust of customers, shareholders, and society. I perform my audits to provide an
extra pair of eyes to make sure this philosophy is being practiced.

43

Tokyo Gas Annual Report 2014

Consolidated Subsidiaries and Equity-Method Affiliates
As of March 31, 2014

Main Consolidated Subsidiaries
Capital(¥ million)

Equity owned
by Tokyo Gas(%)

Net sales(¥ million)

Operatingincome(¥ million)

Tokyo Gas Urban Development Co., Ltd.

Real estate leasing, management, brokerage andnon-life insurance agent, etc.

11,867100.0

27,8884,886

Ohgishima Power Co., Ltd.

Generation and supply of electricity

5,350

75.0

9,066

377

Tokyo Gas Site Development Co., Ltd.

Real estate leasing and management

5,000

100.0

2,778

814

Nagano Toshi Gas Co., Ltd.

City gas business in Nagano Prefecture

3,800

89.2

14,567929

Energy Advance Co., Ltd.

Energy service, district heating and cooling, cogeneration orders,and maintenance

3,000

100.0

83,544

2,026

Gastar Co., Ltd.

Production, sales, and maintenance of gas appliances

2,450

66.7

36,934

2,945

Tokyo LNG Tanker Co., Ltd.

LNG and LPG transportation and chartering of carriers

1,200

100.0

23,606

4,177

Tokyo Gas Energy Co., Ltd.

Sales of liquefied petroleum gas (LPG)

1,000

66.6

43,027505

Capty Co., Ltd.

Installation of gas supply lines, water supply and drainage lines,
air conditioning systems, new construction, and construction ofgas mains and service lines

1,000

100.0

56,118

1,016

Tokyo Gas Chemicals Co., Ltd.

Sales of gas for industry and chemicals and development of LNG
cryogenic utilization technology

1,000

100.0

24,900317

Tokyo Gas Yokosuka Power Co., Ltd.,

Independent Power Producer for TEPCO

980

75.0

11,464541

Chiba Gas Co., Ltd.

Supply of city gas to Yachiyo City, Narita City, and surrounding cities

480

100.0

20,683575

TG Information Network Co., Ltd.

Information processing services, software development,
and sales of computer equipment, etc.

400

100.0

20,394

133

TOKYO GAS PLUTO PTY LTD

Participation in Pluto LNG project

202

100.0

14,6593,399

Tokyo Gas Engineering Co., Ltd.

Comprehensive engineering services with a particular focus onenergy-related work

100

100.0

54,002

2,061

Nijio Co., Ltd.

Procurement and sales of natural gas and electricity

47

100.0

104,727

6,688

Company

Business

Number of consolidated subsidiaries: 69 (As of March 31, 2014)

Other Subsidiaries
TOKYO GAS AUSTRALIA PTY LTD, Tokyo Gas International Holdings B.V., Tokyo Gas Bajio B.V., TOKYO GAS DARWIN LNG PTY LTD,
Park Tower Hotel Co., Ltd., Tokyo Gas Shale Investment Ltd., Tachikawa Toshi-Center Co., Ltd., Tokyo Gas Lease Co., Ltd.,Tokyo Gas Baypower Co., Ltd., Tokyo Gas-Mitsui & Co. Holdings Sdn. Bhd., Tokyo Gas Yamanashi Co., Ltd., Tokyo Oxygen and Nitrogen Co., Ltd.,Tokyo Gas Lifeval Chiba Co., Ltd., Tsukuba Gakuen Gas Co., Ltd., Tokyo Carbonic Co., Ltd., TOKYO GAS QCLNG PTY LTD,Tokyo Gas Lifeval Sagamihara Co., Ltd., TOKYO GAS GORGON PTY LTD, TOKYO GAS ICHTHYS PTY LTD, Japan Super Freeze Co., Ltd.,
Miho Gas Co., Ltd., Tokyo Gas Telemarketing Co., Ltd., Tokyo Gas LPG Terminal Co., Ltd., Shoei Gas Co., Ltd., Kawasaki Gas Pipeline Co., Ltd.,Tokyo Gas Auto Service Co., Ltd., Living Design Center Co., Ltd., Tokyo Gas Remodeling Co., Ltd., Tokyo Gas Lifeval Minami-Tama Co., Ltd.,TOKYO GAS ICHTHYS F&E PTY LTD, Washinomiya Gas Co., Ltd., Urban Communications, Inc., Tochigi Gas Co., Ltd., Capty Tech Co., Ltd.,Tokyo Gas Pipeline Co., Ltd., Tokyo Gas Facility Service Co., Ltd., Tokyo Gas Lifeval Minami-Setagaya Co., Ltd., Tosetz Co., Ltd.,Tokyo Kiko Co., Ltd., Enelife Carrier Co., Ltd., Tokyo Gas Lifeval Kazusa Co., Ltd., Tokyo Auto Gas Co., Ltd., Showa Unyu Co., Ltd.,Tokyo Rare Gases Co., Ltd., TGE (Shanghai) LNG Engineering Co., Ltd., Capty-Livelic Co., Ltd., TG Europower B.V., Tokyo Gas America Ltd.,TGBI 1. LLC, TG Barnett Resources LP, TGBI 2. LLC, NICCHO OPERATION CO., LTD., TG PLUS Co., Ltd.

Equity-Method Affiliates
TOKYO TIMOR SEA RESOURCES INC.
GAS MALAYSIA BERHAD
East Japan Housing Evaluation Center Co., Ltd.
Bajio Generating VOF
MT Falcon Holdings Company, S.A.P.I. de C.V.
T-Power NV

Tokyo Gas Annual Report 201444

Our Shareholder Return Policies• The Company’s financial policies call for Tokyo Gas to issue shareholder returns through dividends and stock
repurchases and to target a total payout ratio (ratio of dividends and stock repurchases to consolidated net
income) of approximately 60% each year until fiscal 2020.

• In regard to dividends, we aim to maintain stable levels while potentially raising dividend payments based on
growth levels.

• In fiscal 2013, we issued the following shareholder returns in accordance with the aforementioned policies,
making for a total payout ratio of approximately 60%.
1. Issued dividend payments of ¥10 per share, the same as in fiscal 2012.
2. Paid ¥40.0 billion to repurchase 70.8 million shares to be cancelled

Total Payout Ratio and Dividend Amounts
Dividends per share
Total payout ratio

¥7

¥8 up

60.1%

¥8

¥8

73.6%

63.4%

¥8

¥9 up

60.1%

¥9

¥9

60.9%

61.4%

¥9

¥10 up
60.7%

¥10
60.0%

¥ billion
120

100

100.6

108.4

101.6

95.4

80

60

40

53.7

46.0

42.4

41.7

10.0

5.0

21.6

21.3

21.4

24.3

24.1

2006

2007

2008

2009

2010

Dividends

Stock repurchases

39.0

20

36.0

40.0

23.3

25.7

25.1

2011

2012

2013

34.0
7.9

5.0

0

Consolidated net income

FY

Calculating the Total Payout Ratio (For fiscal 2013)

Total payout ratio

60.0%

Dividends paidin fiscal 2013:¥25.1 billion

Stockrepurchases
in fiscal 2014:¥40.0 billion

Consolidated net
income in fiscal 2013:¥108.4 billion

The cumulative total of stock cancellations as part of shareholder returns was
363 million shares (13% of record high number of issued shares) on March 31, 2015.
* Including 70.8 million shares already cancelled this year.
* Number of issued shares, including stock, as of March 31, 2014: 2,517,551,295

Tokyo Gas Annual Report 201445

Our Potential
The Kanto region, the Company’s service area, is ripe with latent demand for natural gas present in such areas as industrial
zones populated by factories using heavy fuel oil. By extending our pipeline network into these areas, we will be well placed tocapture this latent demand.

Energy demand concentration in the Kanto Region
 igh-pressure lines (existing)H‌High-pressure lines (construction commenced after“Challenge 2020 Vision” launch)‌High-pressure lines(under construction / consideration)‌High-pressure lines
North Kanto(medium-to-long-term concept)
Industrial Zone
Other companies’ pipelines (existing)Tokyo Gas Group supply area
Industrial zones
Factories

Hitachi–OnahamaLine(provisional name)

Ibaraki–Tochigi Line

Hitachi LNG Terminal

Koga–Moka Line
Hitachi–Kashima
Line(provisional name)

Kashima
Waterfront
Industrial Zone

Saito Line

Kashima
Waterfront
Line

Chiba–Kashima Line

Tokyo–Yokohama
Industrial Zone

Tokyo–Chiba
Industrial Zone
Ohgishima LNG
Terminal

Sodegaura LNG
Terminal

100km

Negishi LNG
Terminal

Potential for Industrial and Commercial Demand in
the Kanto Region (200-kilometer radius around Tokyo)

Breakdown of Japan’s GDP by Major Areas
Other

100~200-km area

34.9%

100-km area

2.0 billion m

7.0 billion m

3

40.2%
Total
¥497.4 trillion

Cogeneration system /Power generation
0.3 billion m3

Fuel conversion
1.7 billion m3

Tokyo area

3

Total
9.0 billion m3

Cogeneration system /Power generation
1.9 billion m3

Fuel conversion
5.1 billion m3

Nagoya area

9.3%

Osaka area

15.6%

Tokyo area:	Tokyo, Kanagawa, Saitama, Chiba, Ibaraki, Tochigi, Gunma,
Yamanashi, and Nagano prefectures
Osaka area: Osaka, Hyogo, Kyoto, Shiga, Nara, and Wakayama prefectures
Nagoya area: Aichi, Gifu, and Mie prefectures
Source: Cabinet Office, Government of Japan

46

Tokyo Gas Annual Report 2014

Financial and Industry Data
(EXCEL Spreadsheet Data Available)

Investors’ Guide
http://www.tokyo-gas.co.jp/IR/english/library/invguid_e.html

Quarterly Financial Results
Earnings Announcements
http://www.tokyo-gas.co.jp/IR/english/event/earn_e.html

Consolidated Financial Results Bulletin
http://www.tokyo-gas.co.jp/IR/english/library/earn_e.html

Details of Challenge 2020 Vision
The Tokyo Gas Group’s Vision for Energy and the Future ~Challenge 2020 Vision~(Released November 2011)
http://www.tokyo-gas.co.jp/IR/english/manage/vision_e.html

CSR Activities
Tokyo Gas Group CSR Report
http://www.tokyo-gas.co.jp/csr/index_e.html

For inquiries regarding planning and editing of this report:
Investor Relations Sect., Finance Dept.,
Tokyo Gas Co., Ltd.
1-5-20 Kaigan, Minato-ku, Tokyo 105-8527, JapanTel:+81-3-5400-3888

Fax:+81-3-5472-3849

E-mail:tgir@tokyo-gas.co.jp

Published on July 23, 2014

This annual report is printed on Tokyo Gas Recycled Paper (made from recycled paper from Tokyo Gas offices, trimmings from afforestation activities,
and reused and unused wood materials) using vegetable oil ink that contains low levels of organic solvents.

Printed in Japan