Discussion with the President

The Tokyo Gas Group is seeking
out sustainable growth while
taking up the challenge oftransforming itself.
Ahead of the full liberalization of the retail sectors
for electricity and gas, the fabric of the energy
industry itself is changing in Japan. At the centerof this tumultuous change, the Tokyo Gas Groupis transforming itself in a bid to sustain growth as
the industry enters virgin territory.
In November 2011, we formulated “The Tokyo
Gas Group’s Vision for Energy and the Future~Challenge 2020 Vision~.” My mission is to makethis “Challenge 2020 Vision” into a reality andensure the unfaltering growth of the Tokyo Gas
Group into the future.
From our base of operations in the Tokyo
metropolitan area and core gas business, we aim
for further growth by expanding our businessfields and strengthening our operating foundation.
In these endeavors, we may encounter theoccasional failure or setback, but we intend tominimize the impact of these missteps throughrisk management. I believe it is vital that wecontinue to boldly take on new challenges
without hesitation in order to become a truly
global company—a total energy company thatflourishes in the coming new era of deregulation.
I ask for the continued understanding andRepresentative Director, President

Michiaki Hirose

support of our stakeholders, including ourcustomers, shareholders, local communities andbusiness partners.

Tokyo Gas Annual Report 201508

Discussion with the President

Q. What are your impressions of the fiscal year ended March 31, 2015?
A

Although performance was adversely affected byexternal factors such as the decline in crude oil prices,
we were able to lay the groundwork for taking the nextstep.
Japan’s energy industry is undergoing its biggest transformation sincethe 1950s, and I was appointed to the position of president in April
2014 in the midst of this transformation. While emphasizing continuity
amid these unprecedented changes and rapidly shifting landscape, I
have served as president with a keen understanding of my role as abanner-bearing leader responsible for steering the Company in a newdirection.
Looking back on the fiscal year ended March 31, 2015, Tokyo
Gas’s performance was impacted in no small way by considerable
changes in external conditions, such as the sharp drop in crude oiland gas prices through the second half, as well as the consumption

tax hike in April 2014. Normally, earnings in the gas business do notfluctuate that much over the short timeframe. The impact from thedrop in crude oil and gas prices was especially significant, leading toimpairment losses of ¥29.5 billion in the overseas upstream businessduring the fiscal year.
Fiscal 2014 was also the final year of the initial three-year “hop”
stage of the “Challenge 2020 Vision.” In autumn 2014, we put
together the principle measures for the “step” stage over the next
three years. We are pleased that the Company has already gotten off
to an excellent start in the “step” stage during fiscal 2014, as evident
in a number of performance indicators. For example, Tokyo Gas Asia
Pte. Ltd. was established in Singapore as our regional headquarters
for business and investment activities in Southeast Asia. Centered on
this new company, we intend to create a group formation overseasthat encompasses bases in Vietnam, Indonesia and Thailand.

Q. How is progress toward “Challenge 2020 Vision,” and what measures
are being implemented?

Over the next three years, we will focus on evolving
into a total energy business, accelerating global
business development, and constructing a new groupformation.
Our Vision aims to further enhance value in the LNG value chain byfollowing an action plan that entails three components: (1) diversify
and expand resource procurement and overseas business; (2)ensuring a safe and reliable energy supply; and (3) provide energy
solutions that meet customer needs. On all these fronts, we havemade steady progress in line with initial plans. In light of these results,
we are transitioning to the “step” stage of the Vision from fiscal 2015,and these three very important years will prepare us for the next
“jump” stage.

AThe primary measures for the “step” stage are threefold: evolve intoa total energy business, accelerate global business development, andconstruct a new group formation.
With regard to the evolution into a total energy business, TokyoGas has made progress diversifying sources for resource procurement, entering into agreements to purchase LNG from the Cameron

LNG Project in the U.S. and signing a memorandum of understanding
with Korea Gas Corporation for mutual cooperation on strategicinitiatives. At the same time, Tokyo Gas continues to upgrade
infrastructure centered on the Hitachi LNG Terminal Project, whichaims to spread the use of natural gas further. With an eye on the April
2016 deregulation of the electricity retail sector, we aim to attainapproximately 30 billion kWh in electric power sales by 2020,
equivalent to about 10% of electricity demand in the Tokyo metropolitan area. Tokyo Gas is focusing its efforts on the provision of optimalenergy solutions that combine value added from both gas andelectricity.
Changing Business Structure(Consolidated net income ratio by business)

As of the time theVision was put in place(Average for fiscal 2009 – fiscal 2011)

Overseas business10%

LNG sales, electric powerbusiness, others
20%

09Tokyo Gas Annual Report 2015

Fiscal 2020

Overseasbusiness25%

Gas business70%

Gas business50%

LNG sales, electric powerbusiness,others25%

In the context of accelerating global business development, Tokyo Gas
has been concentrating management resources specifically in thetargeted regions of North America in the upstream business and ofSoutheast Asia and North America in the midstream and downstream
businesses, including engineering solutions. We intend to swiftly
promote overseas business, but will take cautious steps due to thesignificant risks involved.
Thirdly, we seek to construct a new group formation. I have alreadytouched on overseas group formation above, and in Japan, we areadjusting the direction of each business with the aim of integrating
functions and operations, including at subsidiaries and affiliates,
through the selection and concentration of businesses. The gas
business will always be our core business. Going forward, however,
we will pivot toward fostering a second and third pillar of operations
to complement the gas business in a bid to shift away from management focused on one dominant business, like Mt. Fuji, to management of several large businesses, like an entire mountain range.

Q. Please describe the Company’s policies for the core gas business.
We emphasize a balance of stability, economic
viability, and flexibility in our procurement of resources, while continuing to upgrade infrastructure in thenorthern Kanto area.
Infrastructure must be upgraded to satisfy expanding demand forgas. Our existing gas infrastructure consists of pipelines extending
northward from three LNG terminals in Tokyo Bay. Farther to thenorth in Japan, Tokyo Gas is constructing the Hitachi LNG Terminal,from which pipelines are being constructed southward to compete
the connection to its supply network. Tokyo Gas plans to begin
operations of the Ibaraki-Tochigi trunk line that links up with theHitachi LNG Terminal in the second half of fiscal 2015. This trunk line
will improve the reliability of its natural gas supply infrastructure andshould play a major role as the Company taps into the potential for
considerable demand in the north Kanto area. As one example of thispotential demand surfacing, Tokyo Gas has already entered into anagreement with Kobe Steel, Ltd., one of the largest independent
power producers (IPP) in Japan, to supply gas to its gas-fired thermal
power plant that will be constructed near Moka City, Tochigi

APrefecture.
Resource procurement is another key aspect of the gas business.
When forming a strategy for resource procurement, reliability is themost important factor, but so is economic viability with competitive
sources, as well as flexibility in being able to adapt to changes. How
best to balance out these three factors is the conundrum weconstantly face. While economic viability has been main focus for thepast few years, we now aim to diversify procurement sources, pricing
benchmarks and destination clauses through more flexible arrangements with a variety of market players inside and outside Japan.
Levering economies of scale, we intend to ensure the stable andinexpensive procurement of resources.
Learning from the lessons of the Great East Japan Earthquake,
Tokyo Gas is stepping up efforts to prevent damage from natural
disasters, focusing on making its facilities more resistant toearthquakes.
The Tokyo Gas Group will continue to make every effort to ensure areliable and safe supply infrastructure, the foundation of its gasbusiness.

Tokyo Gas Annual Report 201510Discussion with the President

Q. What is Tokyo Gas’s strategy for the electric power business inlight of deregulation?

Tokyo Gas is making preparations to begin sellingelectricity pre-order sales, with the objective of acquiring
10% of demand for electricity in the Tokyo metropolitan
area by 2020.
In the power generation business, with the full-scale liberalization of
the retail electricity sector in April 2016, Tokyo Gas is focusing on thesale of electricity to households and small commercial customers, thesectors that are subject to deregulation, in addition to wholesale andlarge-lot customer markets. By 2020, Tokyo Gas aims to acquire a
10% or so share of the electric power market in the Tokyo metropolitan area, a very ambitious target.

AIn 2017, the retail gas sector is due to be fully deregulated, putting
Tokyo Gas in a defensive position over its current 100% market
share. Since the electricity market is considerably larger than the gas
market, the Tokyo Gas Group regards the liberalization of the retailelectricity sector as a major business opportunity.
While developing the power generation business, we are putting inplace a value chain for electric power, from power plants to retailsales. In this endeavor, we can leverage our base of 11 million
customers in the Tokyo metropolitan area, the nerve center of Japan,
as well as the close customer relationships that have been built up
locally through Tokyo Gas Lifeval subsidiaries, our gas sales channels.
Tokyo Gas is in the final stages of preparations for the start ofelectricity pre-order sales this autumn, including system updates, rate
structures and service options. We now aim to win market share andgenerate synergies through advertising in mass media and community and customer-focused marketing through Tokyo Gas Lifeval
subsidiaries. I believe the true value of our relationships with customers
to date will be reflected in the number of customers that choose topurchase electricity from Tokyo Gas.
We plan to expand our own power generation capacity toapproximately 3,000 MW by 2020 from the current capacity of 1,300
MW. We also aim to build an even more competitive power source
portfolio by adding power sources to our current base of gas-fired
thermal power plants.

Q. Please explain plans for overseas business development and expansion.
Tokyo Gas is concentrating management resources in
specific target regions with upstream business in North
America and midstream and downstream business inSoutheast Asia and North America.
Above, I described how Tokyo Gas is dividing its overseas businessstrategy by region forupstream business andmidstream anddownstream business.
In the upstreambusiness, which canbe regarded as aresource business,
Tokyo Gas pursues
growth through theacquisition of upstream
beneficiary rights
alongside traditional
LNG procurement, as
well as the acquisitionof gas field beneficiaryrights in North America
and other regions

A

11

Tokyo Gas Annual Report 2015

without rights for procurement. Moreover, Tokyo Gas aims to diversify
the ways it participates in projects, such as by participating in small
and medium-scale LNG projects as well. In North America, we are
aggressively seeking out promising projects while expanding andenhancing our management team based in Houston, Texas. Since
upstream business is exposed to short-term trends in crude oilprices, we are balancing it with expansion in the midstream anddownstream business, which should bring in more stable revenues.
Our midstream and downstream business is centered on Southeast Asia. If countries in Southeast Asia follow the same path taken
by Japan in terms of population growth and economic development,
we see the need to create an LNG value chain in the region. TokyoGas aims to contribute to the creation of energy infrastructure andprovide energy solutions, such as for factories and commercialfacilities, in Southeast Asian countries by leveraging the Group’s
accumulated technologies and expertise in the total energy businesscentered on LNG. Through alliances with local energy companies,
Tokyo Gas is taking on the challenge of developing value chains fromthe import of energy resources to its supply and consumption. We
intend to grow this business by contributing to the development ofcountries in Southeast Asia while fostering personnel with insight inlocal conditions, such as local legal systems and business practices,even if it takes time.

Q. What impact will reforms to electric power and gas systems
have on the business structure of Tokyo Gas?

Through trial and error, management will do its utmost tosteer Tokyo Gas through tumultuous change while
making preparations for every scenario imaginable amid
a strong likelihood of corporate restructurings and mergers.
The gist of reforms to the electric power and gas systems goes to theroots of these two businesses, tearing down regional barriers in boththe electric power and gas sectors. Throughout the process ofreforms, corporate restructurings and mergers are expected to pickup. In April 2015, Tokyo Electric Power Co., Ltd. and Chubu ElectricPower Co., Ltd. formed an alliance that established JERA Co., Ltd., anew company with operational scope ranging from upstream
business and fuel procurement through to power generation. This
was a ground-breaking event for the energy industry in Japan.

AAs a country poor in natural resources, Japan must import most of
its energy, making it imperative to address the significant issue ofnegotiating lower LNG prices. JERA Co., Ltd. plans to procure 40
million tons of LNG annually, one of the largest procurement
mandates in the world. If this company is able to gain bargaining
power through economies of scale, we would expect positive

ripple-down effects for not only Tokyo Gas, but for Japan as a whole.
As Japan moves for the first time toward the full liberalization of its
electric power and gas markets, Tokyo Gas has been preparing forevery scenario imaginable by examining similar cases overseas aswell as cases of deregulation in other sectors, such as finance andtelecommunications. However, we have limited visibility on how theindustry will look after deregulation takes effect. By taking a flexible
approach through trial and error, we will spare no effort in charting apath of growth for Tokyo Gas throughout this period of tumultuouschange that only happens once in a lifetime.

Schedule for liberalization of electric power andgas markets (plan)
Full deregulation ofelectric retail sector

2015

2016

Full deregulation ofgas retail sector

2017

Q. What are the Company’s policies with regard to shareholder returns?
Tokyo Gas aims to maintain a total payout ratio of 60%
by striking a balance between returns for shareholders
and customers, given the strong public nature of its
business.
Tokyo Gas intends to increase dividend step by step over the longterm in tune with profit levels without cutting dividends. Moreover, ourbasic policy is to maintain a total payout ratio of 60% to shareholders
through the buyback and retirement of shares.

AThe introduction of the Corporate Governance Code has focused
attention more than ever on return on equity (ROE). Tokyo Gas has
traditionally emphasized efficiency indicators like ROE in addition tostability and growth indicators. Ever since we set a medium-termtarget for ROE of 8% in 2011, there have been a number of years
where ROE has been higher than this level. Tokyo Gas must gain theunderstanding of its customers in the course of operations, because
this is a heavily regulated industry that serves local communities andsociety as a whole. For this reason, our management stance to datehas emphasized a well-balanced approach our customers, ourbiggest stakeholders, and our shareholders. By making our operations more efficient, our customers benefit from lower gas prices, andour shareholders benefit in the form of higher dividends. I think thatan ROE target of 8% should be regarded as the level of commitment
we can make to shareholders, in light of the nature of our business.
Our corporate and business philosophy will not change in principle
after deregulation. As deregulation progresses along the timeline forfull liberalization, there may be a time when management revises its
approach to ROE. However, I believe we will stay with our current
approach until 2020, while looking for room for improvement.
Total payout ratio¥ billion

60.9%

61.4%

60.7%

120100

101.6

95.4

60.0%
108.4

60.8%
95.8

80
60

46.0

40
20

58.1

0
2010
Consolidated Net Income

28.3
2011

61.7
2012

65.1
2013

58.2
2014

FY

Shareholder returns (Dividends and Stock repurchases)

Tokyo Gas Annual Report 201512