Toward realizing the “Challenge 2020 Vision”

Tokyo Gas will
confidently and boldly
persist dealing withchallenges
Michiaki Hirose
Representative Director, President

TOKYO GAS ANNUAL REPORT 201605

President’s message

My mission is to create new Tokyo Gas corporate value.
Since 1885, Tokyo Gas has provided a stable and reliable supply of gas to industries and households in
the Greater Tokyo Area to support its economic development and quality of life of its people. While doing
so the company has also raised its corporate value.
We believe we are in the midst of an era we call the second foundation of the company as the fullderegulation of the electric power and gas markets draws near. In this context, we are pledged to makeour "Challenge 2020 Vision" adopted in 2011 a reality and ensure the unfaltering growth of the Tokyo Gas
Group in the years to come.
Fiscal 2016 will be a year to form a solid base for
future growthIn fiscal 2015, ended March 31, 2016, we achieved a record
high in operating income, ¥192 billion (up 11.8% year-onyear). This was mainly due to a lagged benefit from lower oil
prices, and adjusted for such extraordinary factors,operating income was estimated to be similar to that of theprevious year.
For fiscal 2016, ending March 31, 2017, assuming the exchange
rate of ¥115 per U.S. dollar and an oil price of $37.5/bbl ($35 in
the first half and $40 in the second half), operating income(initial forecast) is expected to be ¥48 billion (down 75% y-o-y).
Major factors for this profit decline will be an absence of thelagged benefit of last year, pension actuarial difference, and anincrease in depreciation burden following the start-up of
domestic large infrastructure projects. Excluding such
extraordinary factors, we do not think that our operating
performance is significantly deteriorating this year. With theadvent of completion of the deregulation of the electric powerand gas markets, we have identified this year to be a criticalyear for Tokyo Gas to become a “total energy” company and atruly global company. We will make investments and implement
measures for enhancing our mid- and long-term corporate
value to form a solid base for our future growth.

We are making steady progress in the second“Step” stage measures of our Challenge 2020 Vision
Fiscal 2015 was the first year of the second “Step” stage of ourChallenge 2020 Vision. We made steady progress in its threemain measures: to evolve into the total energy business ; toaccelerate global business development; and to reconstruct thecorporate group. We will continue our progress in fiscal 2016.

Evolving into the total energy businessTo evolve into the total energy business, we have established
our base for expanding sales of gas in the future. Specifically,
we began operation of our Northern Kanto Area
infrastructure, including the Hitachi LNG Terminal, our firstreceiving terminal located ouside of the Tokyo Bay area aswell as the Ibaraki-Tochigi Line. In addition, we have decided
to construct the Ibaraki Line to connect Hitachi area andKashima area, as a last component to complete ourinfrastructure in the Greater Tokyo Area. Upon completion ofthe Ibaraki Line and pipeline loops, we can surely
accommodate future additional gas demand in the GreaterTokyo Area.
Concerning the electric power business, the third unit ofOhgishima Power Station (Tokyo Gas generation capacity:300 MW) started operation in February 2016, ahead of the fullderegulation of the retail electric power market in April 2016.
In January, we commenced pre-order sales of electricity toresidential and commercial customers and have been steadilybuilding up the number of customers. Our plan for the initial
year is 400,000 customers but we are making group-wide
efforts to achieve and exceed the target as soon as possible,
with the aim of becoming the No. 1 new power entrant.

Accelerating global business development
In the context of accelerating global business development,
we have established new business operation sites andincreased our workforces in the past two years. Specifically,
our office in Houston, Texas increased the workforces toaround 20 persons, while we opened new offices inSingapore, Jakarta, Bangkok, and Hanoi to make a fiveoffice network in Southeast Asia, including the existing
office in Kuala Lumpur. Having bases like these enables us
to collect valuable and timely information. From fiscal 2016,
we have launched two initiatives based on our enhanced
new network. First, leveraging our strength as an LNG
importer, we decided to get involved in upstream projects inNorth America. Making use of our past lesson in being
forced to record impairment loss in a downward phase of oiland gas prices, we will cautiously select prime projects
while carefully focusing on commodity price trends. Second,
capitalizing our long-accumulated total energy businesstechnology and know-how, with an emphasis on LNG in
Japan, and through alliances with local energy companies inSoutheast Asian countries, we want to take up the challengeof developing an LNG value chain business from receipt andsupply to use of LNG. We recognize that it will take time toestablish a deep-rooted local network. Nonetheless, with afocus on North America and Southeast Asia, we would liketo develop and promote business from a medium- to longterm perspective.

06

TOKYO GAS ANNUAL REPORT 2016

Reconstructing our corporate group
Concerning the reconstruction of our corporate group, we
aim to integrate functions and operations, including thoseat subsidiaries and affiliates, through the selection andconcentration of businesses. Specifically, we withdrew
from manufacturing and sales of gas appliances by sellingshares of Gastar Co., Ltd., our group company, to Rinnai
Corporation, and decided to enhance sales business,
which brings us closer to customers and leverages ourGroup’s strength. In April 2016, we established Tokyo Gas
Liquid Holding Co., Ltd. to control our liquid gas business,such as LPG gas and industrial gas. By having Tokyo Gas
Energy Co., Ltd., Tokyo Gas Chemicals Co., Ltd., andJapan Super Freeze Co., Ltd. under the new company, theliquid gas business structure has been restructured toenhance group management.
Triggered by the fully deregulating the retail electric powerand gas market, we are carrying out the reconstruction andconsolidation of the Tokyo Gas Group and other structuralreform, where none has been done up to now. The city gas
business will always be our core business. Going forward,
however, we will shift away from management focused on
one dominant business in city gas, corresponding to Mt. Fuji,
to management of several large businesses, including theelectric power business, overseas, engineering, liquid gas,and real estate businesses, corresponding to an entire
mountain range.
Going forward, to boldly and speedily promote our measuresof the “Step” stage, we expect that investment in resources
will temporarily have priority over establishing infrastructure,

TOKYO GAS ANNUAL REPORT 201607

acquiring customers in the electric power market, andachieving other objectives. This is a requisite, however, for
our next “Jump” stage. I firmly believe that Tokyo Gas willcontinue to grow by steadily implementing the measures,
looking toward the future beyond the Challenge 2020 Vision.

Deregulation of the retail electric power andgas markets is regarded as a major business
opportunity.
The electric power market is immense, at ¥3 trillion in theGreater Tokyo Area alone, and we regard the opportunity toaccess this market as a major business opportunity for TokyoGas. In addition to wholesale and large-scale customer
markets, we are focusing on the sale of electricity to households
and small commercial customers, the sectors that are subject
to deregulation. We have a very challenging objective of
satisfying 10% of demand for electricity, equivalent to 30 billion
kWh, in the Greater Tokyo Area by 2020. Regarding the power
supply required for electricity sale, the third unit of theOhgishima Power Station began operation in February 2016
and power generation capacity has been raised to 1,600 MW.
Moreover, due to purchase of the electricity generated at Kobe
Steel's Moka Power station and other factors, we plan toexpand our supply capacity to 3,000 MW by 2020. Further, in
addition to competitive gas-powered thermal power sources,
we will also implement renewable energy initiatives, withconsideration to addressing to the issues of the climate change.
As we have a clear prospect of securing adequate powersources, the next challenge is how to build a customer base,which we believe incorporates two important points. First isPresident’s message

Tokyo Gas is carrying out structural reforms,
looking ahead to the full deregulation of theelectric power and gas businessour policy on pricing. Tokyo Gas has long accumulated added
value, namely reliability, safety, and trust through its 130-year
history in the gas business. It is certainly important to makecertain competitive pricing relative to our competitors.
However, we believe a considerable strength of Tokyo Gas
lies in its direct contact with its customers with whom thesolid relationship of trust has been established and throughLifeval companies engaged in maintenance, inspection, saleof gas appliances, and others. We intend to get maximum
leverage out of it.
The second important point is how to think about earnings.
We hope to be widely recognized that Tokyo Gas will be theNo. 1 new power entrant from the beginning of the fullderegulation of the retail market and will steadily acquire asignificant market share. Then after a few years, we expectthat new players will be reorganized and consolidated into afewer number. Along with such scenario, at the initial stage,
costs to enter the small-scale-user electricity sales market
will temporarily increase. However, as the infrastructureindustry leverages economies of scale, at a stage when acertain scale of demand is acquired, our management focus
can be shifted into acquiring profitability.
In April 2017, the retail gas market will be deregulated. In myview, the purpose and objectives of the Gas System Reform
is slightly different from the Electricity System Reform. TheElectricity System Reform aims at 1) stable supply ofelectricity; 2) lower electricity prices; and 3) more options ofsuppliers for customers, while the Gas System Reform aims
at 1) stable supply and expansion of diffusion of gas use; 2)lower gas prices and higher customer satisfaction; and 3)
more options of suppliers for customers and enhanced
customer safety. Differences are to include “expansion ofdiffusion of gas,” “higher customer satisfaction,” and“enhanced customer safety” for the gas reform’s purposes.
Use of environmentally-friendly natural gas which generates
low CO2 emissions displaced other fuel and conversion togas use is still advancing. While electricity is relatively easy tohandle, gas requires safety to be secured up to the point ofuse at customers. As safety know-how is indispensable forthe safe use of gas, we believe that now is precisely the timethat our accumulated relationship of trust with customers will
be tested. Moreover, in Japan, a country poor in natural
resources, Tokyo Gas can stably procure energy resources
by procuring as planned approximately 14 million tons of LNG
annually, equivalent to 15% of Japan‘s LNG procurement,
and can utilize its existing LNG terminals and othercomponents of its infrastructure.
As a managerial risk scenario, we need to prepare for thepossibility of a certain share to be taken away by ourcompetitors if the full deregulation triggers renewed
competition in the already-deregulated large-scale customer
segment of the market, in addition to competition in satisfying
household gas demand. This makes us even moredetermined to increase profits in absolute value terms by fully
utilizing our relationship of trust with customers andenhancing our unique services, and at the same time by
expanding our business in the electricity market, which isbigger in size than that of gas, at an early stage.

Gas Sales Volume

Electric Power Sales Volume(billion m3)(billion kWh)25

30

An increaseof approx.
3.4 billion m3

30.0

An increaseof approx.
19 billion kWh

22.0

20Approx.

24
17.2

18.4

18.6

151810

12

11.0
9.7

5

600
2014.32015.32016.32021.32014.3

10.6

2015.32016.3082021.3

TOKYO GAS ANNUAL REPORT 2016

customers’ trust, the metropolitan network of Lifeval as service
companies and others, and various business partners.
We are determined to enhance such “invisible value” andrealize a sustainable growth as a corporate group throughthree avenues of contribution.
First, as a progressive public-interest energy corporate groupin Japan’s energy sector, the Tokyo Gas Group stably
supplies internationally-competitive energy in Japan andmakes a constant contribution to people’s safe, reliable lives
and Japan’s economy.
Second, Tokyo Gas will evolve into a unique total energy
business to better respond to everyday needs for customers’
lives, by making use of its bonding with over 11 million
customers, maintenance system and know-how, ICT andother advanced technology, and over 200 Tokyo Gas Group
shops in the Greater Tokyo Area.
Third, we will contribute to economic development andpeople’s level of life elsewhere in Asia, by making use of ouraccumulated technology portfolio and know-how in Japan torespond to increasing demand for natural gas and otherenergy resources in Asia, and by establishing an intra-region
infrastructure and value chain.

Enhance “invisible assets” and take up challengesof our second round of foundation
In the midst of an era of the full deregulation of the retailelectric power and gas markets, we think of ourselves as beingin our second foundation era. Eiichi Shibusawa, a Japaneseindustrialist and financier in the 19th century, who foundedTokyo Gas and established its business base, wrote in his
book Rongo to soroban (The Analects and the Abacus) the
importance of balancing the pursuit of common good andprofit. For 130 years since foundation, we have kept thisforemost and consistently have endeavored to contribute tosociety by safely and stably supplying energy, which isindispensable to people’s lives, and have achieved sustainableprofit growth of the company. This dedication is shared by allof our employees and is the ultimate source of our corporate
value. This underlying principle will remain unchanged when
we handle not only gas but also electric power and otherenergy sources and when we do business not only in the
Greater Tokyo Area but also Japan and the World.
Since our foundation in 1885, we have accumulated “invisiblevalue” which do not appear on financial statements, whilebeing engaged in the stable supply of gas to industries andhouseholds and in supporting economic development andprosperous lives of people in the Greater Tokyo Area. Our
sources of competence include accumulated knowledge andknow-how, richly experienced human resources, a trackrecord in stable supply, LNG procurement capacity, ourGive our full attention to the stakeholders andcommitted to enhance corporate value
Tokyo Gas will be open to all of our stakeholders, including ourcustomers, shareholders, business partners, local communities,

Hitachi LNG Terminal
Ibaraki–Tochigi Line

Tokyo Gas Group pipelines
Tokyo Gas Group pipelines

Koga–Moka Line

(under construction and planning)(Scheduled for 2018.3)

Ibaraki Line (Scheduled for 2020)
North Kanto
Industrial Zone

Kashima Waterfront
Industrial Zone

Kashima Waterfront Line

Chiba–Kashima Line
Tokyo–Chiba
Industrial Zone

Sodegaura LNG Terminal
Ohgishima LNG Terminal
Negishi LNG Terminal

TOKYO GAS ANNUAL REPORT 2016

09

100km

Tokyo Gas Group Supply Area
Industrial zones

Saito Line

Tokyo–Yokohama
Industrial Zone

Tokyo Gas Group Supply Area

President’s messageand employees, and contribute to enhance value for each ofthem. This will ultimately enhance our own corporate value.
Concerning shareholder return, we intend to maintainunchanged the amount of dividend per share in fiscal 2016
despite expecting a significant decline in profit. Our policy
continues to be a gradual increase in dividends over time inline with earnings growth. In addition, by combining share
repurchase (assuming subsequent cancellation), our basic
policy to target a total payout ratio of approximately 60% will
be maintained up to 2020.
Given the strong public service nature of our business, ourmanagement stance to date has emphasized a well-balanced
approach to our customers, our most important stakeholders,in our returning the company’s achievements in management
efficiency. Our customers benefited from the lowering of gas
prices, in December 2013 and December 2015, and ourshareholders benefited in the form of an increase of ¥1 individend per share to ¥11 in fiscal 2015. Our corporate andbusiness philosophy will not change in principle even in thisera of deregulation. Nevertheless, we will continue to steadily
grow earnings after 2020 and seek to return our achievement
to our shareholders.
Lastly, I will manage Tokyo Gas to keep it a growth company.
First, the gas business is a growth business. While Japan’s
economic growth rate is now not as high as in the past, there
is a potential demand for natural gas in the Greater Tokyo
Area that waits to be satisfied, and continual sales growth
can be projected with a high degree of confidence.
Second, Tokyo Gas will evolve into a total energy company,including the electric power business, and foster businesses
that have the potential to become earnings pillars alongside
the gas business.
Third, we will explore overseas business opportunities,
leveraging the strengths accumulated in Japan in the totalenergy business.
While the Gas System Reform in 2017, mainly the deregulationof the retail gas market, is likely to intensify competition, I amconvinced that Tokyo Gas will make continued growth by
evolving into a total energy company and by accelerating
global operations over time.
The full deregulation of the retail electric power and gas
markets is reshaping Japan’s energy industry. At the center ofthis tumultuous change, the Tokyo Gas Group is transforming
itself, and confidently and boldly faces challenges as theindustry enters virgin territory.
I ask for the continued understanding and support of ourstakeholders, including our customers, shareholders,business partners, and local communities.
Representative Director, President
Michiaki Hirose

10TOKYO GAS ANNUAL REPORT 2016