Discussion with the President

We will steadily implement
measures in accordancewith the “Challenge 2020
Vision” with the aim offurther enhancing the
LNG value chain.
Tsuyoshi Okamoto
President and Representative Director

In November 2011, Tokyo Gas announced its “The Tokyo Gas
Group’s Vision for Energy and the Future~Challenge 2020
Vision~,” also referred to as the “Challenge 2020 Vision.” This
plan is meant to serve as a road map to guide us on our quest
to continue growing the Group while improving the value we
provide to customers and society as a leader in the field of
natural gas. Over the period of a year and a half since thevision was announced, the entire Group has avidly pushedforward with initiatives geared toward enhancing the LNG value
chain. Looking ahead, it is highly likely that conditions in theoperating environment will undergo various changes. However,
we will remain forward looking regardless of these changes,
with the future of energy always in view, as we advance rapidly
toward the vision we have established for the Group in 2020.

Index

8

In this section, the president of Tokyo Gas explains his

Fiscal 2012 in Review

thoughts concerning items of particular interest to inves-

Operating Performance in Fiscal 2012: A Three-Minute Overview

tors. For information regarding performance in fiscal 2012,(Performance Highlights)

P.2

an overview of the “Challenge 2020 Vision,” and a detailed

Management’s Discussion and Analysis (Detailed Analysis)

P.40

look at progress under the vision, please refer to the corre-

Overview and Progress of the “Challenge 2020 Vision”

sponding pages listed on the right.

Growth Strategy—Enhancing the LNG Value Chain

Tokyo Gas

Annual Report 2013

P.13

‌There have been various changes in the operating environment over the year and a half

Q since the “Challenge 2020 Vision” was announced. Have there been any alterations to thescenarios you have envisioned in light of these changes?
Okamoto: Enhancing the LNG value chain is at the very heart of the“Challenge 2020 Vision,” and we are making steady progress in thisenhancement. There have been many changes in the operating
environment, but these all remain within the range of possibilities we
had considered when the vision was formulated, and I therefore see
no reason to revise our assumptions. As was assumed, the shale gas
revolution in the United States has served as a catalyst for change inglobal energy trends. As one such change, in May 2013, the U.S.
Department of Energy granted approval to a Japanese company toexport LNG to countries that have not entered into free-trade agreements with the United States. This is the first time for a

Japanese company to receive such approval.
Further, the yen has been rapidly depreciating, but we did notassume that exchange rates would stay at the level of ¥80 to US$1.
On the contrary, we have assumed that yen exchange rates willremain in a range of between ¥90 and a little over ¥100 to US$1 into
the long term. The impacts of foreign exchange rate fluctuations on
raw material costs will be neutralized over the medium-to-long termby the gas rate adjustment system. Nevertheless, more than ever,customers will expect us to work to reduce resource costs to lighten
their burden, and we will work to live up to those expectations.

In reference to the “LNG value chain,” specifically what “values” are you creating?

Q Okamoto: Specially, we are creating three significant values

with regard to the LNG value chain.
The first value is the maximization of earnings. We believe thatTokyo Gas developing operations spanning from upstream to downstream areas will enable us to improve profitability in each area and,
thereby, maximize earnings. For example, improving investment
efficiency in upstream ventures will allow us to secure earnings fromupstream areas while also producing liquefied natural gas (LNG) at acompetitive price. Further, using this competitively priced LNG in ourdomestic gas operations will in turn help improve the profitability ofthese operations. In this way, it will be possible for us to maximize
earnings throughout the entire value chain.
The second value is the overall optimization of operations, which
will be accomplished by taking advantage of the various perspectives
we will acquire through operations spanning upstream to downstream
areas. Tokyo Gas provides energy in response to demand fromlarge-scale power generators as well as customers in the industrial,commercial, and residential sectors. In each area, demand is moved
in a different manner by conditions specific to that market before it
finally becomes directed at natural gas provided by Tokyo Gas. We
develop our operations while predicting what demand will look likethree, five, or sometimes even 10 years into the future. Being moreclosely connected to markets will help us better predict future market
conditions through operations in downstream areas. If we are able to
make better predictions, we will also be able to make better decisions

regarding future business development. In turn, this will help us
develop production and supply infrastructure in an optimal mannerand also assist us in matching resource development efforts inaccordance with future market conditions. Specifically, we will be able
to alter the types of involvement in projects, supply periods andvolumes, and contract conditions as necessitated by market
demand. At the same time, the ability to secure stable demand overthe long term through involvement in downstream areas is a powerfulnegotiating tool for participation in upstream projects. Participation in
upstream resource development projects helps us acquire volumes of
LNG with greater flexibility and a more diverse range of prices, which I
believe enables us to provide new value when responding to downstream demand.
The third value is created by the fact that having operations thatspread from upstream areas to downstream areas enables us toaccumulate expertise in all of these areas. Clearly, this will be aninvaluable asset in comprehensively developing global operations thatspan the value chain. For example, we are able to serve emerging
countries considering the introduction of natural gas generation byleveraging expertise and business foundations that encompass allareas of the value chain, starting from securing resource supplies andprogressing on to procurement, infrastructure development, andsales. This comprehensive expertise will enable us to contribute to
the development of such countries and will also provide us with anumber of different business opportunities.

How are efforts advancing in the three areas of diversification for resource procurement?

Q Okamoto: The decision to procure LNG from the Cove PointLNG Project in the United States has the possibility of enabling theCompany to import LNG from this country, the world’s foremost
producer of natural gas, into Japan. This decision represents a large
stride forward in all three areas of diversification—diversification of
resource suppliers, diversification of procurement contract conditions,and diversification of our global LNG network. In order to advance theproject, we must first wait to receive approval to export LNG from the
U.S. Department of Energy. Assuming that we are able to acquire thisapproval, we expect to secure 1.4 million tons of LNG per year from
Cove Point. One important element of this project is that it is theCompany’s first long-term LNG procurement contract to have theprice linked to the natural gas market through the use of the Henry

Hub index. Considering the current Henry Hub price, we expect thatthe final cost of delivering this LNG to Japan will be significantly lower
than LNG procurement from other suppliers, even after liquefaction
and transportation costs are accounted for. Another importantelement is the fact that the procurement contract has no restrictions
on shipment destinations*. While we primarily plan to import LNG
from this project into Japan, the option of reselling this resource toEurope or other markets opens the possibility of developing global
LNG sales networks. Of course, we are also considering the possibility of supplying this LNG to other overseas projects in which Tokyo
Gas participates, such as natural gas-fired thermal power plants.
* Pending the receipt of approval to export LNG from the U.S. Department of Energy

Tokyo Gas

Annual Report 20139‌There have been various changes in the operating environment over the year and a half

Q since the “Challenge 2020 Vision” was announced. Have there been any alterations to thescenarios you have envisioned in light of these changes?
Okamoto: Enhancing the LNG value chain is at the very heart of the“Challenge 2020 Vision,” and we are making steady progress in thisenhancement. There have been many changes in the operating
environment, but these all remain within the range of possibilities we
had considered when the vision was formulated, and I therefore see
no reason to revise our assumptions. As was assumed, the shale gas
revolution in the United States has served as a catalyst for change inglobal energy trends. As one such change, in May 2013, the U.S.
Department of Energy granted approval to a Japanese company toexport LNG to countries that have not entered into free-trade agreements with the United States. This is the first time for a

Japanese company to receive such approval.
Further, the yen has been rapidly depreciating, but we did notassume that exchange rates would stay at the level of ¥80 to US$1.
On the contrary, we have assumed that yen exchange rates willremain in a range of between ¥90 and a little over ¥100 to US$1 into
the long term. The impacts of foreign exchange rate fluctuations on
raw material costs will be neutralized over the medium-to-long termby the gas rate adjustment system. Nevertheless, more than ever,customers will expect us to work to reduce resource costs to lighten
their burden, and we will work to live up to those expectations.

In reference to the “LNG value chain,” specifically what “values” are you creating?

Q Okamoto: Specially, we are creating three significant values

with regard to the LNG value chain.
The first value is the maximization of earnings. We believe thatTokyo Gas developing operations spanning from upstream to downstream areas will enable us to improve profitability in each area and,
thereby, maximize earnings. For example, improving investment
efficiency in upstream ventures will allow us to secure earnings fromupstream areas while also producing liquefied natural gas (LNG) at acompetitive price. Further, using this competitively priced LNG in ourdomestic gas operations will in turn help improve the profitability ofthese operations. In this way, it will be possible for us to maximize
earnings throughout the entire value chain.
The second value is the overall optimization of operations, which
will be accomplished by taking advantage of the various perspectives
we will acquire through operations spanning upstream to downstream
areas. Tokyo Gas provides energy in response to demand fromlarge-scale power generators as well as customers in the industrial,commercial, and residential sectors. In each area, demand is moved
in a different manner by conditions specific to that market before it
finally becomes directed at natural gas provided by Tokyo Gas. We
develop our operations while predicting what demand will look likethree, five, or sometimes even 10 years into the future. Being moreclosely connected to markets will help us better predict future market
conditions through operations in downstream areas. If we are able to
make better predictions, we will also be able to make better decisions

regarding future business development. In turn, this will help us
develop production and supply infrastructure in an optimal mannerand also assist us in matching resource development efforts inaccordance with future market conditions. Specifically, we will be able
to alter the types of involvement in projects, supply periods andvolumes, and contract conditions as necessitated by market
demand. At the same time, the ability to secure stable demand overthe long term through involvement in downstream areas is a powerfulnegotiating tool for participation in upstream projects. Participation in
upstream resource development projects helps us acquire volumes of
LNG with greater flexibility and a more diverse range of prices, which I
believe enables us to provide new value when responding to downstream demand.
The third value is created by the fact that having operations thatspread from upstream areas to downstream areas enables us toaccumulate expertise in all of these areas. Clearly, this will be aninvaluable asset in comprehensively developing global operations thatspan the value chain. For example, we are able to serve emerging
countries considering the introduction of natural gas generation byleveraging expertise and business foundations that encompass allareas of the value chain, starting from securing resource supplies andprogressing on to procurement, infrastructure development, andsales. This comprehensive expertise will enable us to contribute to
the development of such countries and will also provide us with anumber of different business opportunities.

How are efforts advancing in the three areas of diversification for resource procurement?

Q Okamoto: The decision to procure LNG from the Cove PointLNG Project in the United States has the possibility of enabling theCompany to import LNG from this country, the world’s foremost
producer of natural gas, into Japan. This decision represents a large
stride forward in all three areas of diversification—diversification of
resource suppliers, diversification of procurement contract conditions,and diversification of our global LNG network. In order to advance theproject, we must first wait to receive approval to export LNG from the
U.S. Department of Energy. Assuming that we are able to acquire thisapproval, we expect to secure 1.4 million tons of LNG per year from
Cove Point. One important element of this project is that it is theCompany’s first long-term LNG procurement contract to have theprice linked to the natural gas market through the use of the Henry

Hub index. Considering the current Henry Hub price, we expect thatthe final cost of delivering this LNG to Japan will be significantly lower
than LNG procurement from other suppliers, even after liquefaction
and transportation costs are accounted for. Another importantelement is the fact that the procurement contract has no restrictions
on shipment destinations*. While we primarily plan to import LNG
from this project into Japan, the option of reselling this resource toEurope or other markets opens the possibility of developing global
LNG sales networks. Of course, we are also considering the possibility of supplying this LNG to other overseas projects in which Tokyo
Gas participates, such as natural gas-fired thermal power plants.
* Pending the receipt of approval to export LNG from the U.S. Department of Energy

Tokyo Gas

Annual Report 20139

Discussion with the President

How are efforts advancing in overseas businesses?

Q Okamoto: In March 2013, we acquired 25% working

interests in the shale gas development joint venture in the Barnett
basin in Texas State in the United States. This is our first time toacquire interests in an upstream project in the United States; therefore, this move has substantial strategic significance. First of all, themove has allowed us to address the overconcentration of our natural
gas resource development projects in Asia and Australia. More
importantly, it enabled us to do this by expanding operations in theworld’s foremost natural gas producing country, the United States. In
addition, our stake will entitle us to sell between 350,000 tons and

500,000 tons of natural gas resources a year in LNG equivalent. By
marketing this gas in the United States, we should be able to expand
earnings by capturing the country’s growing natural gas demand.
Should there be a notable increase in the Henry Hub price, the priceof procuring LNG from the Cove Point LNG Project in the UnitedStates will be impacted. However, our participation in the upstream
Barnett basin project will enable us to hedge against this risk, which
is another significant benefit of our participation. I believe this represents a prime example of our efforts to stabilizing the earnings of theentire Tokyo Gas Group while also pursuing ongoing growth in profits.

What will be the future direction of efforts to reduce resource procurement costs?

Q Okamoto: There has been no change to our policy tosteadily advance initiatives that contribute to diversification in thethree aforementioned areas. However, in doing this, we must
consider the fact that it is growing more difficult to participate in
upstream natural gas resource development projects with eachcoming year. As such, we must carefully develop plans if we aim toachieve profitability and, at the same time, secure a stable supply of
resources. If we concentrate our efforts on specific countries, then it

will be difficult to advance the diversification of pricing schemes andcontract conditions. Therefore, we must explore possibilities inconsideration of a wide range of options as we work to advancebasic business strategies.
The shale gas revolution has brought with it the potential for a
substantial leap in the volume of natural gas supplied on the global
market. In addition, development in Mozambique is advancing on oneof the world’s largest gas fields. This field is so large that it is said tosurpass those in Qatar. We expect that this field will be a major
supply point in the future. Further, the development of natural gas
projects is accelerating in the far east of Russia and in eastern
Siberia. These sellers of natural gas are starting to consider theirvarious options, and as such the range of viable options for buyers
like Tokyo Gas is expanding. For example, should we commence
procurement from Mozambique, it would be possible for us toconclude procurement contracts with prices linked to the National
Balancing Point (NBP) index, which is the standard index in Europe.
Likewise, participation in projects in Russia could enable us to enter
into contracts with conditions differing from those of contracts linked
to the U.S. Henry Hub index. The benefits of such contracts for ouroperations would be immense.
A number of our current procurement contracts are approaching
their renewal periods. With regard to these contracts, I think there isroom to improve contract conditions, even within the traditional crude
oil price linked framework. We plan to suggest new terms duringcontract negotiations with these concerned parties.

While industrial demand for power generation purposes is strong, we have yet to see

Q a recovery in general industrial demand. What is your view on this situation?
Okamoto: Throughout fiscal 2012, power generation demand and theacquisition of new customers were major contributing factors to growth
in gas sales volumes. Conversely, demand from current generalindustry customers remained low, giving reason for concern. To
address this concern, we will work to solicit the environmental benefitsof natural gas as well as its viability as a business continuity planmeasure while, at the same time, reducing resource costs to fueldemand expansion. However, I believe we cannot expect a recovery ingeneral industrial demand until we see a full-fledged recovery in theJapanese economy and the manufacturing industry as a whole.

10

Tokyo Gas

Annual Report 2013

Gas Sales Volume by Use
Billion m3
25.0

1.4 times

20.0
15.0

15.2 billion m3

15.4 billion m3

2011

2012

22.0 billion m3

10.0
5.0
0

Residential
Commercial
Industrial (general industrial)

Industrial (power generation)

2020
Wholesale

FYHave there been any changes in the Company’s plans for the electric power businessQ or the scenario Tokyo Gas has developed for accomplishing these plans?
Okamoto: There have not been any changes in the scenario we haveenvisioned. We are currently in the process of constructing Unit 3 of
the Ohgishima Power Station, which is scheduled to have a generation capacity of 407 MW. Once Unit 3 is operational, the total
generation capacity of our electric power business will rise to 2,400
MW, positioning us within view of a total capacity of 3,000 MW. This
capacity will be further augmented through an alliance with Tokyo

Electric Power Company (TEPCO). The results of alliances underconsideration will affect what part of the 3,000 MW—5,000 MW
range our generation capacity finally falls into. In forming alliances, weare advancing consideration based on the stance that alliances
should contribute to the supply of low-priced electricity, the invigoration of the electricity market, and the expansion of options for use
by customers.

‌What tariff measures will be instituted for large-volume and small-volume customers?

Q Also, it is my understanding that Tokyo Gas will once again lower tariffs for small-volume
customers, as the Company did previously in March 2012. What is the reasoning behind
implementing successive tariff reductions over such a short period?
Okamoto: For the small-volume segment, a regulated area, werevise tariffs in accordance with rate manuals and based on forecasts
established in consideration of fair provision costs. In fiscal 2012,
demand increased to a greater degree than was expected, and webelieve that demand will increase in fiscal 2013 as well. We have also
judged that the reductions to fixed costs that resulted from our efforts
to improve managerial efficiency will be greater than initially anticipated. All of these factors were considerations behind the decision torevise tariffs for small-volume customers. We plan to make the final
decision with regard to the timing and rate of tariff revisions in midfiscal 2013. This decision will be made in consideration of earnings

and provision cost forecasts, which will be formulated based on
projected future trends in the Japanese economy and theelectricity market, including the possible resumption of operationsat nuclear power plants, as well as how these trends will impact
the gas industry.
As the large-volume segment is completely deregulated, ourbasic policy is to decide tariffs though negotiations with customers.
Recently, customers have been suffering under the burden created byyen depreciation, and their overall energy costs have been rising due
to electricity rate hikes and other factors. In recognition of this, we arealways working to lighten their burden.

What scenario are you envisioning for meeting the goal of raising the stock of commercial

Q and industrial cogeneration systems to 4,000 MW in fiscal 2020?
Okamoto: Customers are becoming increasingly aware of thebenefits of cogeneration systems that Tokyo Gas has continued topromote, principally the lack of electricity transmission losses and theability to recycle exhaust heat realized through onsite generation. It
takes a relatively long period of seven or eight years to recover the
initial investment in a cogeneration system. For this reason, it isimportant for customers to consider the energy security and business

continuity benefits of these systems, rather than only focusing on
the economic considerations. We remain steadfast in our quest tocommunicate these benefits. Going forward, we will work to meetthe goal you spoke of by reducing the facility costs associated withcogeneration systems and taking advantage of support from thegovernment and other administrative bodies.

Some of the goals outlined in the “Challenge 2020 Vision” have already been met.

Q Is there any possibility of you revising your plans?
Okamoto: It is true that we surpassed the levels assumed in“Challenge 2020 Vision” for consolidated net income, return on equity(ROE), and return on assets (ROA) in fiscal 2012, and the forecasts
released for fiscal 2013 project that goals will be met in that year as
well. However, at the present moment, there has been no change in

Fiscal 2012

the underlying assumptions of our “Challenge 2020 Vision,” and I see
no need to revise the direction of the vision accordingly. In fact, I do notthink it would be appropriate to change only the numerical targets ofthe vision when only a year and a half has passed since its release.

Fiscal 2020(“Challenge 2020 Vision” targets)¥240.4 billion

Approx. ¥250.0 billion / year
(FY2012–FY2020 total: ¥2,240.0 billion)

ROE

11.5%

Approx. 8%

ROA

5.3%

Approx. 4%

D/E ratio

0.69

Approx. 0.8 (each fiscal year)

Total payout ratio

60.7%

Approx. 60%

Consolidated operating cash flow

Tokyo Gas

Annual Report 201311

Discussion with the President

What are your policies for cash flow distribution? Also, what shareholder returns were

Q issued for fiscal 2012, and what is your forecast for fiscal 2013?
Okamoto: Our “Challenge 2020 Vision” calls for total consolidated
operating cash flow of ¥2,240 billion between fiscal 2012 and fiscal
2020, and we will also procure a total of ¥240 billion from outside of
the Company. Of this amount, 68%, or ¥1,680 billion, is earmarked
for capital expenditures; 15%, or ¥380 billion, for investments andfinancing; and 17%, or ¥420 billion, for shareholder returns.
Our shareholder return policy calls for a total payout ratio ofaround 60%, including dividends and repurchases of stock scheduled
for retirement. After examining revenue / expense and funding plans
leading up to fiscal 2020 on the basis of our balance sheet structure,‌CapitalExpenditures, Investments and Financing,
Shareholder Returns Fiscal 2012– Fiscal 2020: Approx. ¥2,480.0 billion

Trends in Total Payout Ratio%
80

Capital expenditures17%

we believe it will be possible to maintain a debt-to-equity ratio (D/E
ratio) of approximately 0.8 times. We therefore intend to continue
issuing returns in line with our current policy.
Our basic policy is to maintain stable dividend payments, and we
also aim to gradually increase dividends over the medium-to-longterm. For fiscal 2012, we raised dividend payments by ¥1 yen per
share from the previous fiscal year, to ¥10 per share. In addition, we
repurchased our own shares, paying ¥36 billion for 60,368 thousand
shares, and these shares have already been retired. In fiscal 2013, we
forecast a dividend of ¥10 per share.

¥1,680.0 billion

60

Investments and financing

15%¥380.0 billion
68%

Stock
repurchases

40

Shareholder returns

20¥420.0 billion

Dividends

0Consolidated operating cash flow

¥2,240.0 billion

08

External debt (interest bearing debt), etc.

¥240.0 billion

Total payout ratio

Capital expenditures, Investments and financing,
Shareholder returns

09

10

11

12

FY

Dividend payout ratio¥2,480.0 billion

What is your forecast for fiscal 2013?

Q Okamoto: In fiscal 2013, consolidated gas sales volume isforecast to decline 609 million m3, or 4.0%, to 14,781 million m3. Thisdecrease will be largely due to the shift to the tolling scheme for a
portion of the gas sold for power generation purposes. When the
tolling portion is included, gas sales volume is expected to increase
287 million m3, or 1.8%, from fiscal 2012’s level.
For consolidated net sales, we are forecasting a year-on-yearincrease of ¥200.4 billion, or 10.5%, to ¥2,116.0 billion, which will
result from a rise in unit prices under the gas rate adjustment systemand higher LNG sales.
Operating income will rise ¥15.4 billion, or 10.6%, to ¥161.0
billion. This increase is because the slide time lag effect will result in
an improvement of ¥30.5 billion, effectively offsetting the rise inresource prices stemming from yen depreciation.
For details, see P.40 Management’s Discussion and Analysis
Million m3, 45MJ/m3, Billions of yen

Fiscal 2013

Gas sales volume
Including tolling portion
Net sales
Operating expenses
Operating income
Ordinary income
Net income
Slide time lag effectAmortization of actuarial differences

12

Tokyo Gas

Annual Report 2013

Fiscal 2012

(Forecasts announced on
April 26, 2013)

Change%15,39015,987
1,915.6
1,770.0
145.6
1,47.4
1,01.6– 10.5– 4.4

14,781
16,273
2,116.0
1,955.0
161.0
155.0
101.0
+20.0
– 2.2

– 609
+287
+200.4+185.0
+15.4
+7.6
– 0.6
+30.5
+2.2

– 4.0
+1.8
+10.5
+10.5
+10.6
+5.1
– 0.7
–
–