TOKYO GAS ANNUAL REPORT 2018

CFO’s message

Tokyo Gas is committed
to maintaining competitive
shareholder returns
and making necessary
investments required forsustainable growth, with theawareness of achieving an
8% ROE
Senior Managing Executive Officer, CFO

Isao Nakajima

Achieving a balanced operating cash flow
distribution based on our business strategy
As Senior Managing Executive Officer, I participate in theprocess of determining company-wide management strategy.
At the same time, as CFO, I am in charge of financial andcapital policy. Tokyo Gas’s basic policy for its financial
strategy is to achieve a balanced distribution of operating
cash flow between (1) full and stable shareholder payouts, (2)growth investments, and (3) maintaining sound financial
health. We will continue to review and adjust this balance asneeded, based on factors such as our medium to long-termbusiness strategy and capital market trends at the time.
With regard to shareholder returns, we have announced ourcommitment to maintaining a total payout ratio of 60% until
fiscal 2020. If you look at our track record over the past 12years since fiscal 2006, when we set the target of a 60% total
payout ratio, you can see that we have consistently maintainedthat payout ratio by steadily increasing dividends incombination with appropriate share repurchases. We areconfident that this 60% total payout level remains competitive,
not only amongst companies in the Japanese electric powerand gas sectors, but in capital markets overall.
In terms of growth investments for the future, we will continue
to focus our investments into the expansion of our natural gas

13and LNG value chain, which will continue to play an importantrole into the 2020s, and in other areas that will contribute to
the advancement of the Greater Tokyo Area, which continues
to exhibit high growth potential.
In addition to expanding its electric power business bybuilding its own high-efficiency gas-fired thermal power
plants, Tokyo Gas will also continue to take a proactive
approach to challenges in new fields; for example, such as byincreasing added value by combining those conventional
power sources with renewable energy sources.
Meanwhile, with regard to financial health, which is our basis
for minimizing financing costs, ensuring stable management
and securing the trust and confidence of customers, we havealready secured a certain level.
Based on the assumption of consistent shareholder payouts
and proactive growth investments for the future, by fiscal 2020,
our D/E ratio is expected to rise from the current level of 0.64 toaround 0.9, which we consider to be within acceptable levels.

Seizing opportunities for growth throughappropriate investments
Adding a few words about growth investments, natural gas is
an excellent source of energy in terms of the global
environment and other such perspectives, and significant

20

15150

1075

50
1996.3

2000.32005.32010.32018.3Chiba-Kashima Line,Hitachi LNG Terminal, IbarakiTochigi Line, etc.

Ohgishima LNG Terminal,
Keihin Line, etc.

*1 Non-consolidated basis up to fiscal 1998; consolidated-basis from fiscal 1999
*2 Gas sales volumes from fiscal 2011 are on a 2020 Vision basis.
(Including the gas volume used in-house under tolling arrangement and the LNG sales volume.)(¥ billion)

Share repurchases

80
63.4%

40

34.0

58.2

45.1

41.040.0
33.8

28.3

7.9

24.1

23.3

20.0

7.0

5.0

5.0

24.3

36.0

67.3

65.1

32.3

32.2

21.4

61.7

25.7

25.1

24.4

26.3

25.3

25.1

0
2009.3 2010.3 2011.3 2012.3 2013.3 2014.3 2015.3 2016.3 2017.3 2018.3

Financial data

58.1

20

Total payout ratio

60.1% 60.9% 61.4% 60.7% 60.0% 60.8% 60.1% 60.7% 60.2%

60

26.4

Dividends paid

In addition to multi-faceted and comprehensive overall
debates, I believe that making our business strategies more
fruitful and rewarding will also demand logical judgement,
without denial of inconvenient facts. Achieving this will requirea mechanism for supervising and checking its appropriatenessof how our business is operated, and I believe that is exactly
what corporate governance represents.
I place particular importance on constructive dialogues (or“engagement”) with shareholders and investors. Shareholders
and investors each have their own various ways of thinking,and their own decision-making criteria, and are by no means
one unified group. But we endeavor to listen constantly andhumbly to their opinions. Together with the CEO and ourinvestor relations (IR) representative, I work to create numerous
opportunities for such engagement, totaling around 250 times
per year, covering main themes that include the backgroundand future outlook of our investment strategy, and the impactof the deregulation of the electric power and gas markets.
Tokyo Gas has been selected in three ESG assessment
indexes used by Japan’s GPIF (Government Pension
Investment Fund: the FTSE Blossom Japan Index, the MSCIJapan ESG Select Leaders Index, and the MSCI Japan
Empowering Women Index (WIN). I also regard our inclusion inthese indexes as an achievement of these initiatives.
Next year, it will be 50 years since Tokyo Gas became the firstcompany to import LNG to Japan. Moving forward, we willcontinue working to increase our corporate value by drawing
out the maximum value of natural gas. We ask for thecontinued understanding and support of our shareholders.

Invisible assets

Shareholder Returns

Paying thorough attention to corporate
governance in management

Corporate governance

0As CFO I act as chairman of the Investment Evaluation
Committee. We have set a hurdle rate (a standard for judging
profitability) that reflects a conscious awareness of our capitalcosts, and are striving to ensure disciplined investments, witha view to achieving our FY2020 ROE target of 8%. However,
we also believe that achieving sustainable growth amidst theuncertainty of the future business environment will require
strategic thinking from a medium to long-term perspective
and carefully-considered risk taking. For this reason, recently,
we are investing particular energies into identifying issues thatwill contribute to overall management decisions andfundamental debates.

Business overview

225

3

Maintain sound financial health, asa basis for stable management andsecuring the trust and confidenceof customers

Overall image after
full deregulation

300

2

Steadily implement growthinvestments, with consideration
given to investment efficiency andawareness of achieving an 8% ROE

GPS2020(billion m 3 )Capital expenditures (LH)
Gas sales volume (RH)(¥ billion)

1

Continue to maintain competitive
shareholder returns (total payout
ratio of 60%)

Message

Capital Expenditures and Gas Sales Volume

Basic Financial
Strategy Policy

Introduction

growth in demand is still expected to continue in the Greater
Tokyo Area, which is our main business area.
With the completion of the Hitachi LNG Terminal expansion
and the Ibaraki Line (currently under construction), we willachieve a complete loop in our Greater Tokyo high-pressure
pipeline network, thereby further increasing the stability of our
natural gas supply infrastructure. Based on this, we want tounleash the maximum potential of natural gas. As one
technology development initiative to help achieve this, we will
actively incorporate methods such as open innovation, withour sights also set on the arrival of “Society 5.0.”
When making decisions with regard to significant investments,
in addition to making multi-faceted evaluations and analysesof the profitability and risks involved in the preliminary stagesof each project, we also hold Investment Evaluation Committee
meetings to verify the strategic significance of the investment.
After the decision has been made to proceed with aninvestment, the Committee periodically validates theperformance and future outlook of each project. In this way,
we are making efforts to ensure appropriate and timely
judgments with regard to the future of each investment project.

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