President's message

Michiaki Hirose
Representative Director, President

My commitment to the Second Foundation ofTokyo Gas07

My mission is to create corporate value within the Tokyo Gas
Group. For over 130 years since 1885, Tokyo Gas has
provided a stable and reliable supply of gas to industries andhouseholds in the Greater Tokyo Area and has supported its
economic development and quality of life of its people.
Following the full deregulation of the electric power retailmarket in 2016, the gas retail market was fully deregulated
in April 2017. This thrust us into a new era of competition.
While it is not widely known, in 1872 during the civilizationand enlightenment period, it was the gas lamp whichbrightened the streets at night in Japan. A few years later,
Tokyo Gas was born. Since then, we were the first in Japanto adopt liquefied natural gas (LNG), gas-fired air cooling,
and a large-scale cogeneration system, leading towidespread use of natural gas, clean energy, andexploration at the energy frontier.
I regard the deregulation of the energy market as a great

opportunity for the Tokyo Gas Group to go beyond theregulatory frameworks of the gas business in the Greater
Tokyo Area and to provide electric power retail and various
other businesses and services nationwide and overseas. Iam thrilled and excited to be at the helm during thismomentous time.
I believe Tokyo Gas is in the midst of an era I call the Second
Foundation of the company to create new value, since its
first foundation during the civilization and enlightenmentage. I am fully committed to managing Tokyo Gas at thisimportant juncture.

Shifting management from the Mt. Fuji type to theYatsugatake Mountains type
We have been taking up the challenge of the full deregulationof the electric power and gas markets as a management
challenge not passively but proactively. The Great East Japan
Earthquake of March 2011 prompted us to significantly review
our management as an energy company. Within the same

TOKYO GAS ANNUAL REPORT 2017

I am committed to theSecond Foundation ofTokyo Gas
Taking the deregulation of the energy market in Japan as a great opportunity, I
am thrilled and excited.
I believe Tokyo Gas is in the midst of an era I call the Second Foundation of thecompany, since the first foundation in 1885 during the period when post-feudal
Japan was rushing headlong to become “civilized and enlightened.” At thisspecial time in the company’s history, I am doing my best to enhance
corporate value.

In front of gas lamps of the Tokyo Gas Headquarters

year we drew up the Challenge 2020 Vision, a nine-year plan,in which we have targeted business portfolio reform, inanticipation of a full-scale deregulation.
We aim to shift away from management focused on one
dominant business in city gas, corresponding to Mt. Fuji, tomanagement of several large businesses, including theelectric power business, overseas activity, and various otherbusinesses, corresponding to the Yatsugatake Mountains, anentire mountain range, for achieving sustainable growth.
I personally like the Yatsugatake Mountains and often visit
there. While each of the eight (yatsu) mountains has
distinctive and individualistic features, the range of themountains collectively looks attractive with a variety ofdifferent views, depending on the time and the place fromwhich to view them. I envision the renovation of our businessportfolio in a similar way.

Prioritizing investment that will contribute toraising corporate value

In fiscal 2016, ended March 31, 2017, our operating profit
decreased 70% year-on-year to ¥58.3 billion. This was mainly
due to the absence of the sliding time lag benefits that
occurred in the previous year, an increase in depreciation
burden following the start-up of large domestic infrastructure
projects, and actuarial gain or loss. The results, however, werebetter than initially expected, thanks to a reduction inexpenditures and to better sales efforts.
For fiscal 2017, ending March 31, 2018, assuming the exchange
rate of ¥115 per U.S. dollar and an oil price of $55/bbl,operating profit is expected to be ¥82 billion (up 41% y-o-y),mainly due to the absence of one-off accounting factors.
Despite expecting a significant profit increase from fiscal
2016, I do not think that the current level of profit
indicates our true earnings power. Let me emphasize thatcurrent substandard profits resulted from our forwardlooking investment and implementation of measures,targeted to raise future corporate value, during theSecond Foundation phase of the company, in addition toone-off accounting factors.

08President's message

Challenge 2020 Vision, prompted by the Great East Japan
Earthquake of 2011, is steadily be implemented to realign thebusiness portfolio
Robust securing of user contracts in the first yearof the deregulated electricity market
The electricity market in the Kanto Region alone is as large as¥3 trillion. Its deregulation is certainly posing a great
opportunity to Tokyo Gas. We are targeting acquisition of
about 10% of demand in the Greater Tokyo Area by 2020, by
expanding sales to the deregulated residential and smallcommercial customer sectors, in addition to our existing
wholesale business.
As the development of power supply (power generation)required for electricity sale is proceeding smoothly, our focus
is to acquire customers. As a result of our concerted groupwide efforts, we have acquired 730,000 customers, far
exceeding our plan (400,000) for fiscal 2016, the first year in
the electric power retail business. We were able to start thisnew chapter in our industry’s history as the No. 1 new entrant.
This was supported by our customers’ trust extended toTokyo Gas and efforts by our Group companies, includingTokyo Gas Lifeval, which has a community-based sales
network. We are targeting one million customers, cumulative,in fiscal 2017.

Entering the second year since deregulation, we are
anticipating consolidation or other moves among the electric
power new entrants. Keeping an eye on various possibilities,
we are aiming at non-linear expansion. In this year again, wewill not hesitate to invest the management resources requiredin this business.

Taking an offensive stance toward the fullderegulation of gas retail sales
The retail gas market has also been fully deregulated sinceApril 2017. We are taking an offensive, not defensive stance,by considering deregulation as a great opportunity for theTokyo Gas Group to go beyond the regulatory frameworks ofthe city gas business.
Following our strategy to be a one-stop provider of gas,
electricity, and services, according to customer needs, wewill strive to be chosen by customers based on the overall
energy cost and added value.
As a general gas operator, we are coordinating smoothly witheach gas retailer to ensure transparency, neutrality, andfairness and to enable safe and reliable usage of gas evenGas Sales Volume (based on the Vision)(billion m3 )An increaseof approx.
2.9 billion m3

22.0

Electric Power Sales Volume

22.0

An increaseof approx.
17.3 billion
kWh(billion kWh)30.0

Approx.
30.0

19.1

16.5

22.5
15.3

11.0

15.0
12.7

09

5.5

7.5

00
2012.3
Launch of the 2020 Vision

2017.32021.3

8.3

2012.3
Launch of the 2020 Vision

2017.32021.3

and the Kashima Industrial zone. Upon completion of thesupply and expansion of services, we are strengthening ourIbaraki Line and pipeline loops, we can confidently

natural gas infrastructure. Construction of the Koga-Moka
Line will be completed around the fall of 2017, ahead of theschedule, and construction of the Ibaraki Line will belaunched after the selection of its final route.
Demand for gas, from LNG, a relatively clean energy, hasgrown through conversion from reliance on other energy andis expected to continue to expand. Maintenance know-how isindispensable for safe use of gas. We are in advantageous
position in this regard, as we have strong relationships oftrust, accumulated over many years, with customers.

accommodate future additional gas demand in the Kanto.
In the context of accelerating global business development,
we have established new business operation sites andincreased our workforces. We have established ourselves
mainly in North America and Southeast Asia and havespecific projects in hand. Specifically, in 2017, we purchased
a 30% equity share in Castleton Resources, a company
which has 660km² of leasehold in eastern Texas in May. While
we acquired equity stakes in the U.S. gas development
business in the past, this is the first equity investment in an
upstream company.
Concerning the realignment of our corporate group, in April,
we defined seven business domains: City gas business,
Electric power business, Liquid gas business, Living service
business, Engineering service, Urban development service,and Overseas business. These are seven businesses, noteight as Yatsugatake (literally eight peaks) may indicate, but
retain the potential for us to add other new businesses, aslong as they can contribute to raise corporate value.
In the area of corporate governance, since April, we havemade clearer separation of supervision and execution andhave enhanced a monitoring function of the Board ofDirectors. Meanwhile, the Board is becoming a place to draw
up important strategies for the entire Tokyo Gas Group, notmerely a place to deal with details of each execution. We
have also strengthened our risk management system,
foreseeing an increase in business volatility as the onceregulated industry has become deregulated.

Making steady progress toward realization of ourlong-term vision
Fiscal 2017 is a final year of the second “Step” stage of theChallenge 2020 Vision. We are making steady progress in its
three main measures: to evolve into the total energy business;to accelerate global business development; and toreconstruct our corporate group. We will continue ourprogress in fiscal 2017.
To evolve into the total energy business, we have made agood start in the electricity retail business. Development ofelectricity supply capacity is also proceeding as planned. In
the city gas business, we began operation of our Northern
Kanto Area infrastructure, including the Hitachi LNG Terminal,
our first receiving terminal located outside of the Tokyo Bayarea, as well as the Ibaraki-Tochigi Line. In addition, we havedecided to build the Ibaraki Line between the Hitachi Terminal

TOKYO GAS ANNUAL REPORT 2017

after the deregulation. With the objective of ensuring a stable

10President's message

What I want to tell you
Lighting street lamps, it was the
begining of Tokyo Gas’ history.
We embrace the spirit of our founder,
Eiichi Shibusawa, to balance social
value and economic value.
Since the Company was founded, we
have tackled continuous challenges ofcompetition and need for reform. We
will accelerate self-generated change
during this Second Foundation.
The gas industry is a growth industryfor us. We are based in the highdemand Great Tokyo Area and will
expand into the Northern Kanto Area.
We aim at acquiring one million
customers for electricity within 2017,with a medium-term target of a 10%
share in the Kanto Region.
We are developing overseas activities.
We are shifting away from the Mt. Fuji
type management to the Yatsugatake
Mountains type management.
We make use of our invisible assets.

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Shaping up the management plan for 3-year“JUMP” stage
From fiscal 2018, we will enter the next 3-year “JUMP”
stage, to complete our Challenge 2020 Vision. We will plan
specific strategies and launch them by the fall.
We intend to draw up management strategies, heeding
implications and requirements of the Basic Energy Plan of
the Japanese Government and keeping an eye on moves by
JERA (a joint venture of Tokyo Electric Power and Chubu
Electric Power), our competitor in the energy market. Major
issues to focus include how far we shall expand in theelectric power business, how much we shall invest overseas,and whether we need to scrap and build businesses.
For example, the Challenge 2020 Vision targets expansionof our electric power generation capacity from 1.6 million
kW at present to about 3 million kW by 2020. Aiming toincrease the capacity to 5 million kW by 2025, we will planmeasures of the three years.
Looking ahead, we are likely to need alliances with othercompanies more than ever for the promotion of the totalenergy business and for global development. We havealready established Synergia Power with Tohoku ElectricPower in high-voltage power sales. We will be flexible inconsidering other options in the context of a widerframework.

common good AND profit, which is needed for sustainable

Continuing to enhance “invisible assets”
Since the company was founded in 1885, we haveaccumulated “invisible value” which does not appear on
financial statements. Our sources of competence include
our customers’ trust, accumulated knowledge, richly
experienced human resources, a track record in stablesupply, LNG procurement capacity, a network in the Greater
Tokyo Area of Lifeval and other service Companies, andvarious business partners. In addition, we haveinfrastructure facilities such as pipelines, which appear on
the financial statements but are installed underground andcannot be seen. When we launched retail electricity sales,
we recognized anew the brand value of Tokyo Gas astrustworthy by customers. We consider that undergroundpipes and trust are also invisible assets. We intend totreasure and use such advantages in dealing with the gas
retail market after deregulation.

Balancing social contribution and creation ofcorporate value
Eiichi Shibusawa, the first president of Tokyo Gas and aformidable industrialist and financier in the 19th century,
wrote in his book “Rongo to Soroban (The Analects and theAbacus)” the importance of balancing social value andgrowth. Shibusawa started the company with that prescientconcept present in today’s CSV or Creating Shared Value.
For 130 years, we have kept this concept foremost in ourmanagement and have consistently endeavored tocontribute to society by safely and stably supplying energy,
which is indispensable to people’s lives, and have achieved
sustainable profit growth of the company. This dedication isshared by all of our employees and is the origin of ourcorporate social responsibility (CSR) and the ultimate
source of corporate value. This underlying principle willremain unchanged when we handle not only gas but also
electric power and services to engage in the total energy
business and when we do business not only in the Greater
Tokyo Area but also across Japan and abroad.
Employees are the driver for business promotion. Under theview that business cannot be sustained unless each one ofthem works enthusiastically, we are establishing various
programs and working on raising awareness of various
subjects. Establishing an environment where our people are
motivated to work is resulting in orienting our corporate
culture to respect diversity and human rights.
I believe our “corporate value” is the sum of value we offer
to customers, shareholders, business partners,communities, and all other stakeholders. Concerning
shareholder return, we intend to maintain our basic policy oftargeting a total payout ratio of approximately 60% by
combining dividends with share repurchase (assuming
subsequent cancellation) up to 2020. In fiscal 2016 werecorded a significant decrease in earnings but did not cut
dividends. We intend to gradually increase dividends in linewith growth in earnings.

TOKYO GAS ANNUAL REPORT 2017

economic value. Not common good OR profit. Rather,We will keep growing
Lastly, I will manage the Tokyo Gas Group so as to keep it agrowth company. While gas demand in Japan is expected toincrease, due to a shift into clean and competitive LNG,
Tokyo Gas is aiming at increasing sales in the Northern
Kanto Area where we are establishing infrastructure.
Moreover, we also have growth opportunities, including
electric power business and overseas markets.
We will embrace the values incorporated in our corporate
message, “Supporting you Always and bettering every day.”We will continue dialogues with many stakeholders andraise long-term corporate value through our new system inthis new era. The Tokyo Gas Group is taking up challenges
for the Second Foundation. I ask for the continued
understanding and support of our stakeholders.

Representative Director, President
Michiaki Hirose

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