Tokyo Gas will maintain financial
health and appropriate andtimely shareholder returns, andsteadily implement growthdriven investments to achieve
continuous profit growth.
Isao Nakajima
Senior Executive Officer, CFO

As CFO, I participate in setting management strategy and am
also in charge of financial strategy, capital policy, and businessadministration. Based on the premise of assuring appropriate
shareholder returns each year, I firmly believe that the way torespond to this mandate by the company, it being entrustedwith capital from its shareholders, is to realize continuous profit
growth into the future. I therefore aim at well-balanced
allocation of operating cash flow to growth investments,
maintenance of a healthy financial position, and policy formedium- to long-term shareholder return.
For that purpose, return on equity (ROE) is an indicator we
focus on. As ROE is return on assets (ROA) multiplied byfinancial leverage (assets divided by equity), it is critical toraise ROA in order to improve ROE. Therefore, we regularly
assess the group’s assets and businesses, and try tocompress total assets by sale or disposal of assets orbusinesses which make less sense to own, when appropriate.
At the same time, we strictly review the purpose and businesspotential of our investments.
Financial leverage is another way to improve ROE but weshould not be short-term oriented. Rather we find it importantto balance “accumulated retained earnings to be used for
growth investments and in ensuring financial health” with“return to shareholders”. In order to secure fund sources for
medium- to long-term shareholder return, continuous growthinvestments are critical. Financial health is indispensable forsustaining high credit ratings (Aa3 by Moody’s and AA- by
S&P), and will eventually lead to restrain funding costs andbecome more trusted by our customers. By keeping thesethings in mind, we will continuously and aggressively strive fordividend payment and share repurchases.
From the viewpoint that it is important to clearly communicate
our views and policy on shareholder return to shareholders, wehave set a target for a total payout ratio (ratio of dividends andstock repurchases to consolidated net income) ofapproximately 60% and have steadily been implementing it. In
regard to dividend payment, we aim to maintain stable levels
while carrying out a gradual increase in dividends. Since fiscal
2000 when we raised the annual dividend from ¥5 per share to¥6, and we have gradually raised it to ¥11 in fiscal 2015, up ¥1from the previous year. In fiscal 2016, we intend to maintain ¥11in dividend despite expecting a significant decline in profit
mainly due to an increase in gas resource costs.

Capital Expenditures and Gas Sales VolumeShareholder Returns

Triple promotion of growth strategy, financial
health, and shareholder return(¥ billion)

Capital expenditures (LH)

Gas sales volume (RH)

(billion m3)

Share repurchases (¥ billion)

2080

225

1560

60.6

58.1

150

1040

39.0

34.0

300

31.2

75

5

20

000

10.0

21.6

1994.3

2000.3

Ohgishima LNG Terminal,
Keihin Line, etc.

2005.32010.32016.3Chiba-Kashima Line,
Hitachi LNG Terminal, IbarakiTochigi Line, etc.

*1 Non-consolidated basis up to fiscal 1998; consolidated-basis from fiscal 1999

TOKYO GAS ANNUAL REPORT 2016

1121.3

32.2
26.4
5.0
21.4

61.7

67.3

65.1
58.2

36.0

40.0

25.7

25.1

41.0
33.8

28.3

7.9

24.3

Dividends paid (¥ billion)

5.0

24.1

23.3

24.4

26.3

2007.3 2008.3 2009.3 2010.3 2011.3 2012.3 2013.3 2014.3 2015.3 2016.3
Total payout ratio

60.1% 73.6% 63.4% 60.1% 60.9% 61.4% 60.7% 60.0% 60.8% 60.1%*2 Gas sales volumes from fiscal 2011 are on a 2020 Vision basis. (Including the portion used in tolling and the LNG sales volume.)

CFO’s message

Basic Financial Policy123

Steadily
implement growthinvestments

Ensure financial
healthClarify shareholder
return policies

Aiming to realize continuous profit
growth in the years ahead, growthinvestments are to be appropriately
prioritized and implemented from a
medium- to long-term perspective.

We will keep the D/E ratio at
approximately 0.8 and credit rating
at the AA-level to maintain funding
capacity and creditability.

Under the policy of aiming at a total
payout ratio of approximately 60%
to shareholders, profits are to be
distributed to them appropriatelyand timely.

Continuous investment to grow as a total energy
company
Our focus for realizing sustainable growth is to evolve into thetotal energy business and to accelerate global businessdevelopment. We seek to move away from management
focused on one dominant business in city gas, corresponding
to Mt. Fuji, to management of several large businesses,including the electric power business and the overseas
business, corresponding to an entire mountain range. While weare prudent in investment assessment, we will not hesitate tomake growth investment once it is determined to be needed.
With regard to the evolving into the total energy business, it isindispensable to establish and expand the production andsupply infrastructure of city gas. Investment recovery tends
to take substantial time in our business and we may have tobear temporary declines in profit if production and supply
capacity (increase in depreciation burden) exceeds demandacquisition (increase in revenues) for some time after
construction is completed.
Nevertheless, such investment will lead not only to acquire
hidden demand but also to stimulate and create new potential
demand. For example, Kobe Steel is currently constructing
Moka Power station with operation scheduled to commencefrom 2019 and Tokyo Gas will supply city gas to this state-ofthe-art 1,200 MW gas-fired thermal power station. This mega
project has been set up after the Hitachi LNG Terminal
construction was completed in fiscal 2015 and the IbarakiTochigi Line was scheduled to be built to connect thisterminal with Moka City in Tochigi Prefecture. Tokyo Gas
plans to purchase all of the electricity generated at thisstation and expects it to become our main electricity sourceand support our electricity business in the future.
In April 2016, we began doing retail electric power business.
Among about 300 new suppliers, we have so far received thehighest number of customers, which has given us someconfidence toward the future. The backdrop for this outcome
must include our long-nurtured bonding with our customers in thegas business and our brand power in reliability, safety, and trust.

Also, we believe that our careful and cautious advance in retailelectric power business will protect our city gas customers. As wehave identified fiscal 2016 as an important year to solidify our No.
1 position as a new power entrant, we are investing significant
management resources in establishing arrangements forcustomer services and sales. Although earning profits will bedifficult, we will heavily invest our group power in the retail electric
power business, with the spirit of “First come, first served.”
Regarding global business development, we will make carefulassessment of feasibility of each potential project and the oil andgas market trend, and intend to steadily expand our business toaccumulate favorable businesses. In addition to the LNG and shale
gas businesses in Australia and North America, we plan to invest
in power generation and energy service businesses in Southeast
Asia. In fiscal 2016, we decided to invest in a few projects, all ofwhich are joint projects with an excellent local partner. We thereby
intend to reduce risks and grow earnings from them.

Message to shareholders and dialogue withcapital markets
I think it is important to talk about our initiatives to investors
as accurately as possible, without pretending ourselves to bebigger than we actually are. In the last 12 months, we had
about 300 one-on-one meetings with institutional investors inJapan and overseas besides various analyst meetings andfacility visits.
The 130-year history of Tokyo Gas, which originated from gas
lamp business, is a history of continuous competition withelectricity, fuel oils, LPG, and other energy sources. By
providing pleasant living and working environments throughcity gas and our economical and eco-friendly energy system,
we are now supported by over 11 million customers and sell
natural gas which is on the order of magnitude of 18.6 billion m3.
Our customer-first mindset, proven by our long history, andour highly-reliable manufacturing and supply infrastructure,
are our greatest strengths. We will make best of thosestrengths and are determined to create growth opportunities
from the electric power and gas deregulation.

12TOKYO GAS ANNUAL REPORT 2016