04 Discussion with the President
Discussion with the President

Tsuyoshi Okamoto
President and Representative Director

Through “enhancement of the LNG valuechain,” we will achieve sustainable long-term
corporate growth.
In the aftermath of the Great East Japan Earthquake, which struck on March 11, 2011, society and the Tokyo
Gas Group’s operating environment have changed. Against the backdrop of the nuclear power plant accident,
the need to respond to the electrical power supply–demand issue has grown more pressing, and the situation
has brought about a reexamination of the country’s energy policies. Under these conditions, natural gas hastaken on an even greater role than in the past, and expectations of the Tokyo Gas Group have mounted. To
meet these expectations, in November 2011 we formulated and announced “The Tokyo Gas Group’s Vision
for Energy and the Future: Challenge 2020 Vision.” This vision describes how the Tokyo Gas Group will pull
together to achieve “enhancement of the LNG value chain.” Through achieving this objective, we aim to fulfill
our role as a company that meets society’s requirements by contributing to the supply of energy, as well as
meeting our customers’ needs. At the same time, we will achieve sustainable long-term growth and satisfy theexpectations of our shareholders and investors.
In the following pages (pages 5–8), the president of Tokyo Gas explains the Company’s thoughts concerning items of particular interest to investors. Please refer to the following pages for a report on operations
during fiscal 2011 and an overview of the vision, including details on the state of its progress.
Fiscal 2011 in Review

Operating Performance in Fiscal 2011— A Three-Minute Overview (performance highlights) ___________ P.02
Management’s Discussion and Analysis (Detailed Analysis) ____________________________________________________________ P.40
Overview and Progress on the “Challenge 2020 Vision”

Growth Strategy ____________________________________________________________________________________________________________________________ P.17

Discussion with the President

What are some highlights of the “enhancement of the LNG value chain?”Okamoto: Diversity is the keyword for our initiatives. Let us look first at

However, our diversification is not limited to resource procurement

our diversification of resource procurement. Tokyo Gas imports moreand upstream interests. Another thrust of our diversification activities

than 11 million tons of LNG per year, the majority from such locations

involves stepping up our involvement in overseas electric power gen-as Southeast Asia and Australia. We are planning to expand our sourc-eration, energy services, and the expansion of engineering businesses.

es to include a broader global base, including supply from North

Through these efforts, we are deepening our involvement in theAmerica and Africa. Another aspect of diversification involves the waycommercial distribution of natural gas, spanning upstream to down-

we participate in LNG projects. Going beyond the conventional ap-stream operations. These moves will enable us to increase the value

proach of procuring resources from sellers on the basis of long-term

we add to the LNG value chain and expand the areas in which wecontracts, we are now acquiring upstream interests and participating

develop our operations as we work toward “enhancement of the LNG

proactively in liquefaction plants and in transportation aspects. In thesevalue chain.”ways, we aim to achieve more diverse terms of trade, including pricing.

Enhancement of the LNG Value Chain
Increasing added value
Reduce resource prices
Expand overseas business

Provide a safe andstable supply of energy

Deliver energy solutions
that meet various needs

Procurement, transportation

Production and supply

Energy solutions

Expanding the LNG value chain from Japan to the world

Expanding the LNG value chain
from the Tokyo metropolitan area
to all of Japan

Expanding area coverage■

Overseas natural gas-fired
thermal power generation■

Overseas gas supply■

Overseas engineering business■

Overseas energy services■

Expand the useof natural gas■Engineering■

Energy services

What is the scenario for reducing resource prices?
Okamoto: Reducing resource prices is one of our top priorities, butwe expect to see mutual benefits from these projects in the future. To

there is no simple solution. Achieving each of our diversification initia-

strengthen our grip on resource procurement, we intend to expand ourtives will open up a host of future possibilities. Rather than looking at

destinations for the resources we procure—not only extending our op-

the measures that we are pursuing as individual cases, we consider

erations from the Tokyo metropolitan area to other parts of Japan, butthem to be interrelated initiatives that will have a major combined effectalso including the cultivation of global markets.

on lowering resource prices for us in the future. For example, we have

If prices in the Pacific market continue to be below those in thecommenced negotiations regarding LNG procurement from the U.S.

Atlantic market, for instance, market logic dictates that this difference

Cove Point LNG Project. This move exemplifies efforts to expand ourmust be resolved in some way or another. Once exports of inexpensive

overseas procurement locations and will pave the way to increase

U.S. shale gas get fully under way, I believe that this should place

future access to different areas than those from which we have pro-

ample downward pressure on international LNG market prices.

cured resources in the past. Our vision also calls for us to aggressively

Through our involvement in commercial distribution of fuel supplies indevelop business other than upstream operations. In this category, wethe Atlantic to organizations such as T-Power N.V., which operates ahave participated in natural gas-fired power generation in Mexico andnatural gas-fired power station in Belgium, we are arbitraging price dif-Belgium. In addition, we are cooperating in the construction of an LNG

ferentials with the Asia–Pacific market. Such efforts will alleviate thevalue chain in Vietnam and taking part in an electricity and heat supply“Asia premium” on LNG and should serve to reduce gaps in interna-system in Thailand. The common thread running through all of thesetional market prices. We aim to become a major, influential player in theactivities is that they are businesses to which natural gas is core, andglobal LNG market.

05

06 Discussion with the President
What is your approach toward acquiring upstream interests?
Okamoto: In the future, we will employ new technologies and intro-

viable options. Using floating LNG for pipeline distribution on projects

duce new approaches even on small and medium-scale LNG projects

that previously were not considered economically feasible is one ex-to improve their economic performance and increase our range ofample of this approach. A host of feasibility studies are under way indifferent parts of the world, which are also helping to attract interest in
our company. In the past, we have typically taken upstream interests ofaround 1–5%. To strengthen our grip on LNG procurement going forward, we aim to take a larger percentage interest in small andmedium-scale LNG projects of around 20–30%. If conditions are right,
we would even consider taking a majority stake.
Naturally, the larger the position we take, the larger our risk becomes, so we will evaluate such projects on the basis of their internalrate of return (IRR), judging projects carefully from many angles andtaking into consideration country risk, interest retention risk, and thereliability of our partners. We will look seriously at such projects after
weighing such risks against their return.

What is your policy on unconventional natural gas?
Okamoto: With regard to unconventional natural gas, in addition to theCanada centering on shale gas. Whether projects are considered

U.S. Cove Point LNG Project, in 2010 we commenced negotiations on“conventional” or “unconventional,” the main point for us is that they

participating in the Queensland Curtis LNG Project in Australia, making

provide methane (CH4). Of primary importance is whether such proj-

us the first Japanese energy company to cultivate a procurement

ects are solid economically and whether they allow a stable supply. On

channel involving coal bed methane. Such activities are examples ofthis basis, we will continue to consider projects in the same way we

our efforts to take part in upstream businesses. In 2011, we partici-

have in the past.

pated in a natural gas development project in British Columbia in

What is the scenario for augmenting your gas sales volume?
Okamoto: We expect residential gas sales volume to remain flatof around 4%, including supplies to customer generation plants andthrough fiscal 2020. We believe commercial volume will expand due

fuel for our own power generation business. As a result, we forecast

the use of gas in such applications as cogeneration and gas air con-demand will expand from 3.5 billion m3 in fiscal 2011 to 5.2 billion m3

ditioners, but this demand is expected to increase at a rate of onlyin fiscal 2020.

around 2% per year. What we do anticipate will drive a rise in gas

Going forward, in addition to focusing on our own supply area wesales volume through fiscal 2020 is industrial demand, including forare forging LNG purchase/sale agreements with such companies aspower generation. By continuing to cultivate general industry demand,

Hokkaido Gas and Saibu Gas, thereby promoting the supply of LNG

centering on fuel conversion and the introduction of cogeneration, wegas providers throughout Japan.

expect demand to rise around 8% per year on average between fiscal
2011 and fiscal 2020, from 3.4 billion m3 to 7.0 billion m3. Owing toGas Sales Volume, by Use

the completion of the Chiba–Kashima Line in March 2012, we fore-Billion m3

cast an increase from the Kashima waterfront industrial zone, rising

25.0

by 0.3 billion m3 in fiscal 2012, compared with the preceding fiscal
year. We estimate potential demand in the Kanto region—the area
within a 200-kilometer radius around Tokyo—at 9.0 billion m . We are3

20.0
15.0

working to meet this potential demand by completing the Hitachi

10.0

LNG Terminal, which is currently under construction, and augmenting

5.0

our pipeline network.
To meet the rapid increase in the demand for natural gas for powergeneration, we expect demand to increase at an average annual rate

0

1.5 times the current level

22.0 billion m3

15.2 billion m3

2011
Residential
Commercial
Industrial (power generation)

2020
Industrial (general industrial)
Wholesale

FYDiscussion with the President

What are your conditions for making decisions on infrastructure investmentsthat have not yet been determined?
Okamoto: One major prerequisite to making a decision is to confirmon this project followed confirmation of potential demand in northernthat demand is sufficient to warrant investment. Once this is estab-Kanto and recognition of the need to increase supply stability through-lished, other factors include a project’s ability to increase supply

out the Tokyo metropolitan area.

stability and its value from a security standpoint. We have resolved to

Other projects that we plan to consider include the tentatively

build a new high-pressure trunk line from the Hitachi LNG Terminal innamed Hitachi–Kashima Line (provisional name)—a major prerequisite

Ibaraki Prefecture, which is scheduled to commence operations inbeing whether central line demand will justify our investment—whichfiscal 2015, to the city of Moka in Tochigi Prefecture, Koga in Ibaraki

would increase energy security through a wide-area loop. On the ten-Prefecture, and Soka in Saitama Prefecture, thereby connecting thetatively named Hitachi–Onahama Line (provisional name), we expect

loop line around the Tokyo metropolitan area. Our decision to embark

central line demand to be a major factor in our investment decision.

Please explain the background behind the scale of your electric power generation business.
Okamoto: The current scale of our power generation business, includ-

Including this project, projects in which the likelihood of our participa-

ing the interests of other companies, is around 2 million kW. In addition,

tion is high should expand the scale of our business by 1 million kW, to

we have already begun considering participation in such projects asa total of 3 million kW. Investment decisions on increasing our partici-

Ohgishima Power Station Unit 3, for which a construction decision ispation even more will involve deliberations on improving the electrical

expected around autumn 2012 and that would generate 407,000 kW.

power system and judgments on the economic feasibility of projects.

When will “ENE-FARM” begin contributing to profits?
Okamoto: We expect to sell around 7,100 units in fiscal 2012, but be-should reach 300,000 units. Assuming that their use continues tocause of development costs and upfront investments focused on

steadily gain in popularity, residential gas sales to supply these units

popularizing the units, we do not anticipate any contribution to profits inshould become a major pillar of sales. Please understand that we are

the short term. By fiscal 2020, however, the stock of installed units

looking at this business from a long-term perspective, into the 2020s.

What are the chances of these results surpassing your forecasts?
Okamoto: We recognize that the small-volume segment, a regulated

Specifically on overseas business, at the present we include in our fore-area, is unlikely to contribute to ongoing profit increases, and accordingly,

casts only those projects on which we have made a decision to

our plans in this area are conservative. Going forward, we expect to derive

participate. Similarly for the power generation business, we expect ourhigher profits from the large-volume segment, where margins are firm.

business to expand to up to 5 million kW, but our income and expense

Looking at our profit structure, we plan to boost profits from theplans assume that our scale of generation is 3 million kW. Our forecasts

overseas and power generation businesses, but our plans are on thepresume that expenses will rise, but we are conservative in our revenue

conservative side; they include only projects on which profits and rev-forecasts. Consequently, we will do our very best to push performanceenues are firm but incorporate expenses that are not yet certain.

beyond our planned figures.

Fiscal 2011
Consolidated operating
cash flow¥194.5 billion

Fiscal 2020

Approx. ¥250.0 billion/year(FY2012–2020 total: ¥2,240.0 billion)

ROE

5.4%

Approx. 8%

ROA

2.5%

Approx. 4%

Current Situation

Future Vision(Average for fiscal
2009–2011)(Fiscal 2020)

25%

10%
20%

50%
70%D/E ratio

0.75

Total payout ratio

61.4%

Approx. 0.825%(each fiscal year)

Approx. 60%

Gas business
LNG sales, Electric power business, others
Overseas business07

08 Discussion with the President
Please outline your projection in cash flow distribution (shareholder returns and capital expenditures), results for fiscal 2011, and your forecast for fiscal 2012.
Okamoto: Our “Challenge 2020 Vision” calls for total consolidated op-um-term management plan, our current plan calls for us to examine

erating cash flow of ¥2,240 billion between fiscal 2012 and fiscal 2020.

revenue/expense and funding plans on the basis of our balance sheet

Of this amount, 68%, or ¥1,680 billion, is earmarked for capital expen-structure, forecasts a D/E ratio of approximately 0.8 times, and aims forditures; 15%, or ¥380 billion, for investments and financing; and 17%,

us to maintain a total payout ratio of roughly 60%.

or ¥420 billion, for shareholder returns.

For fiscal 2011, we maintained dividends at ¥9 per share, as in theOur shareholder return policy calls for a total payout ratio of aroundpreceding fiscal year. We repurchased a maximum number of our own

60%, including dividends and repurchases of stock scheduled for retire-shares, paying ¥5.0 billion for 14 million shares, and these shares havement. We aim to maintain a stable dividend that increases gradually overalready been retired. In fiscal 2012, we forecast a dividend of ¥9 per

the long term. Whereas the vision called investment to increase at ashare.

pace of roughly ¥50 billion per year compared with our previous mediCapital Expenditures, Investments and Financing,
Shareholder Returns

Trends in the Total Payout Ratio%

Fiscal 2012–2020: Approximately ¥2,480 billion
Capital expenditures¥1,680.0 billion
Investments and financing ¥380.0 billion
Shareholder returns¥420.0 billion

17%

Consolidated operating
cash flow

15%
68%

80
60

Stock repurchase40¥2,240.0 billion

External debt
(interest bearing debt), etc.

Dividend

20¥240.0 billion

Capex., Investments and¥2,480.0 billion
financing, Shareholder returns

006

07

Total payout ratio

0809

1011

FY

Dividend payout ratio

What is your forecast for fiscal 2012?
Okamoto: Owing to a change in our method of selling fuel to subsid-framework, we assume a crude oil price of US$120 per barrel, and aniaries in the power generation business, we forecast a 304 million m3,

exchange rate for the full fiscal year of ¥85 to the U.S. dollar.

or 2.0%, decrease in our consolidated gas sales volume comparedwith fiscal 2011, to 14,886 million m3. Measured on the same basis,
however, the volume amounts to a 0.6% increase. We expect consolidated net sales to rise 9.1%, to ¥1,914.0 billion, owing to an increasein gas unit prices under the gas rate adjustment system and a rise insales of “other energy,” including higher LNG and other sales.
Although resource costs will increase in line with higher crude oil
prices, and income will be affected by the gas tariff revision, we anticipate a ¥31.3 billion improvement resulting from the slide time lag. As aresult, we expect operating income to rise 28.4%, to ¥99.0 billion. We
also forecast net income of ¥63.0 billion, up 36.8% year on year. Regarding resource prices, which form the basis for our economic
Million m3, 45MJ/m3, Billions of yen

Fiscal 2012

Gas sales volume

Fiscal 2011

(Forecasts announced onApril 27, 2012)

Change%15,19014,886–304–2.0

Including gas used at electric power business

15,28815,383+95+0.6

Net sales

1,754.2

1,914.0+159.8+9.1

Operating expenses

1,677.1

1,815.0+137.9+8.2

Operating income

77.0

99.0

+22.0

+28.4

Ordinary income

75.6

96.0

+20.4

+26.9

Net income

46.063.0+17.0+36.8

Slide time lag effect (non-consolidated)–47.3–16.0

+31.3

–

Amortization of actuarial differences (non-consolidated)

–2.7

–4.0

–1.3

–