An Interview with the President

Q: The previous medium-term management plan ended in fiscal 2005. How would
Having largely achieved the targets for our five-year plan (fiscal
2003–fiscal 2007) in the first three years, we have now

you characterize that year?
Torihara We continued to make steady progress with policies contained in our “Frontier 2007”, theTokyo Gas Group’s medium-term management plan for the period from fiscal 2003 to fiscal 2007.

formulated a new medium-term management plan that allows

Fiscal 2005 was the third year of that plan, but our primary management targets were already within

Tokyo Gas to maintain its impetus and capitalize onreach, and we also needed to adapt to market changes and utilize the business opportunities. We

business opportunities in a rapidly changing businesstherefore decided to bring forward the transition to our newly formulated medium-term management

environment. Our aim is to pursue further growth by creatingplan. Fiscal 2005 in effect became the final year of “Frontier 2007”. It was an extremely challenging

and cultivating new markets for natural gas.

year, mainly because of continuing deterioration in the external environment.
Net income decreased by ¥21.9 billion from the previous year to ¥62.1 billion. The main factor

Mitsunori Torihara President

for this decline was a significant rise in the cost of gas resources compared with levels in fiscal 2004,
resulting from an upward trend in LNG prices in step with dramatic increases in crude oil prices.
However, we achieved significant successes in our sales operations. Growth in all sectors boosted
gas sales volumes by 7.1% year on year to 13.1 billion m3. This expansion was led by the growth of theindustrial and commercial cogeneration stock, which increased by 12% year on year to 1,340 MW.
Another impression from the previous year is that customers now have dramatically higher

Q: Your appointment as President of Tokyo Gas coincided with the announcement of

expectations for natural gas as a fuel providing greater economic and environmental benefits thana new medium-term management plan at the start of the current year, 2006. You

crude oil, which has remained very expensive for the past year. We also made significant progress

must be very determined to ensure that the plan's targets are achieved.

with our preparations for this expansion of demand, including the announcement of new pipeline

Torihara Competition is intensifying in the Japanese energy market. There is competition between

expansion plans. One of these projects is the Chiba-Kashima Line, which is scheduled to start opera-

different forms of energy, and between different companies within energy segments. I am confident

tion in fiscal 2010.

that Tokyo Gas can continue to achieve growth and success in this business environment by further
enhancing its strengths, including its outstanding technological and solid marketing capabilities.
As President, I intend to heed the wishes of all stakeholders, including shareholders and investors.
My aim is to build a dynamic management approach based on trust. I am confident that we will beable to maximize our corporate value and enhance the attractiveness of the Tokyo Gas Group.
In April 2006, we took our first step on the path to this future by launching a new medium-term

Q: Your previous five-year plan was scheduled to end in fiscal 2007 but was completed in just three years. Please tell us about your achievements under the plan.
Torihara Under the previous medium-term plan, we set quantitative targets for Tokyo Gas

management plan for the period from fiscal 2006 to fiscal 2010. As Executive Vice President, I was

Economic Profit, or TEP, which is our version of EVA®, and for ROA, free cash flows and interest-

deeply involved in the formulation of this plan, the content of which has been refined through repeat-bearing debt. Despite the serious erosion of profit levels by sharply higher gas resource costs led by

ed cycles of debate and discussion. My involvement in IR activities also dates from my time asappreciated crude oil costs, we had largely reached our final targets by fiscal 2005, the third year of

Executive Vice President. I have attended numerous meetings with institutional investors in Japanthe plan. In fact, we exceeded our target for the reduction of interest-bearing debt, and our D/E ratio

and overseas, and I have had many opportunities to hear the views of investors about our manage-in fiscal 2005 was significantly improved at 0.77.

ment policies. I believe that those views are properly reflected in our new medium-term management
plan. Our new plan is the product of long debate and thought. That process is now over, and the time
has come to turn the plan into action.
Tokyo Gas must never betray the expectations and trust of its shareholders and investors. My task
is to provide the leadership to ensure that the plan is implemented steadily.
This plan is an important step in our long-term strategy and I will use it to lead the Tokyo Gas
Group to sustainable growth in the second decade of the 21st century.

We also achieved our target of reducing fixed costs per m3 of gas sold by around 20%, throughcorporate restructuring measures designed to improve our cost structure.
“Frontier 2007” also stipulated the purposes for which free cash flows were to be allocated for use.

Statistics for the three-year period show that approximately 17% of free cash flows were used for dividends, approximately 20% for stock repurchases designed to prevent dilution resulting from CB conversions, approximately 13% for new investments to expand our business in energy-related areas, andapproximately 50% for the reduction of interest-bearing debt.
Compared to when we formulated the five-year plan, we allocated a smaller percentage to new business investment and larger percentages to shareholder returns in the form of dividends and stock
repurchases, and the reduction of interest-bearing debt. Reasons for these changes include the fact that
we were able to increase the dividend after it became apparent at the end of fiscal 2003 that free cash

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flows would exceed the level targeted in the plan, and the fact that investment in the electric power business, which accounts for a relatively large share of our business expansion in energy-related areas, was

Q: What are the key strategic points of your new medium-term management plan?

scheduled for the second half of the plan period. There has been no change in policy on the allocation of

Torihara Our vision of the Tokyo Gas Group as the leading company in a total energy businessfree cash flows.

beyond 2010 will require sustainable growth driven by solid competitiveness. To achieve this, we will

The greatest achievement of “Frontier 2007” was theuse the strength of our global LNG value chain, which encompasses all stages from upstream torealization of our vision of Tokyo Gas as an energy fron-downstream, to provide our customers with wide-ranging value and services. We also intend totier business group capable of generating added value notexpand our services across an area within a 200 km radius around Tokyo in the Kanto region.

only from natural gas, but also from other energy forms

Specifically, we will work to meet the diverse needs of our customers through a multi-energy sup-and energy-related activities. I believe that we have built aply including city gas and electricity. We also aim to establish a one-stop energy service structuresolid foundation for our future growth. Of particular sig-

capable of providing the optimal mix of appliances and systems. By further expanding and enhancing

nificance in the energy service business was our decision to

our presence in the LNG value chain, we will transform the Tokyo Gas Group into a business struc-integrate the operations of ENERGY ADVANCE Co., Ltd., with those of Tokyo Gas Co., Ltd. By theture with a broad earning base and the ability to translate a competitive advantage in the energy sec-end of fiscal 2005 we had signed 125 contracts for capacity amounting to 226 MW, which is thetor into profitability and high growth.

highest performance in Japan.

On the earning side, we estimate a 15.3% growth in total sales by fiscal 2010, as compared with

In addition to this expansion of our energy-related business operations, we have also enhanced our

fiscal 2005, and we also aim to achieve further cost savings. Our target is a 20% reduction in fixed

presence throughout the natural gas value chain through our involvement in upstream projects, trans-

costs per m3 of gas sold by fiscal 2010, as compared with fiscal 2005*. We estimate that by achiev-

portation and other areas. Tokyo Gas has made significant progress toward its next stage of development.

ing these goals we can lift our EPS to ¥38.2 by fiscal 2010, the final year of the current mediumterm management plan. Of course, there can be no final goal for cost reductions. We will strengthen
our corporate structure, build a more robust earning base and maximize our profits will continue
after 2010.

Q: What factors led to the formulation of the Tokyo Gas Group’s new medium-term*Compared with projections of fiscal 2005 made in the medium-term management plan.

management plan, and what are the aims of the plan?
Torihara We have already made significant progress toward the realization of our vision for the
future of Tokyo Gas under “Frontier 2007.” However, the environment in which Tokyo Gas operates
has changed dramatically over the past few years.
Natural gas is seen increasingly as an environmentally friendly form of energy to combat global

Q: What are your views on cash flow allocation strategy and financial strategy?
Torihara Financial strategy is as important to our future as business strategy. We will allocate cash

warming, and the relative advantage of the price of natural gas have increased because of risingflows of ¥1,190 billion to the implementation of our business strategy, including total operating cash

crude oil prices. The geographical extent of energy market is expanding, and new areas of demandflows of ¥1,120 billion over a five-year period, as well as ¥70 billion in other cash flows.

are apparent. At the same time, deregulation has caused further intensification of competition
between energy forms and companies in the market for large-volume energy supplies. We also face

We will invest ¥860 billion in the whole of our core total energy business. Approximately 39% of
this amount will be allocated to demand development, including investment in pipelines to increase

greater challenges in the market for regulated supplies for residential and commercial sectors. In
addition to the decreasing trend of gas sales of each household due to decline of the number of people
Meeting Management Targets Ahead of Schedule

per household as well as more energy efficient appliances, aggressive all-electric promotion has intensified sharply.
Our medium-term management plan for the period from fiscal 2006 to fiscal 2010 is an action
plan designed to enhance our competitiveness by anticipating changes in our business environment sothat we can capitalize on business opportunities. The aim of the plan is to create and cultivate new

TEP

Operating Cash Flow

ROA

ROE

(¥billion)(¥billion)

(%)

(%)

51.0
1,000

50

37.8

in the energy sector.
I see this plan as an important step in a long-term strategy focusing on the future of the Tokyo Gas
Group in the second decade of the 21st century. We need to concentrate our management resources
and focus our efforts on aggressive investment. I am convinced that by achieving the goals of thisplan we can ensure a future of sustainable growth for the Tokyo Gas Group. To do this, we must

995.0

5.5

6

4.8

5

12
10

3.7

800

4

600

3

6

20

400

2

4

10

200

1

2

0

0

0

40

markets for natural gas. We will go beyond “Frontier 2007” to create a broad-based profit structure

1,120.0

1,200

60

30

22.9

FY ’05’06
Projection’10

FY ’03–’07 Total(Frontier 2007
Target)’06–’10Total

TEP (Tokyo Gas Economic Profit)
Operating cash flow = net income += net operating profit after tax prior to interest depreciation
payments – cost of capital

11.0

10.9

’06

’10

9.0

8

0

FY ’05’06’10

FY ’05

Projection

Projection

ROA = net income/total assets(average of positions at startand end of fiscal year)

ROE = net income/total shareholders’ equity (average of positions atstart and end of fiscal year)

build up the abilities of the entire Tokyo Gas Group in a determined drive to strengthen our competitiveness at the organizational, marketing, technological and service levels.
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the gas sales volumes and the expansion of electric power business and energy services business. We
will also invest in infrastructure development in readiness for future demand growth. Investment allo-

Q: What are your thoughts on shareholder dividend allocations?

cations will include 20% for infrastructure for pipelines and safety and approximately 17% for par-Torihara We intend to allocate a total of ¥270 billion to shareholder returns over the five years

ticipation in upstream interests, LNG tanker construction and other priorities. We plan to allocate acovered by our current medium-term management plan. For the first time we have announced thetotal of ¥270 billion to shareholder returns over the next five years in order to regulate the total pay-concept of a “total payout ratio” as an indicator of ourout ratio to our shareholders (dividends plus stock repurchases divided by current net income). The

position on profit distribution. Our target for this ratio,

reduction of interest-bearing debt was a key management issue under our previous medium-term man-

which is calculated by dividing the sum of dividends andagement plan. As a result, our D/E ratio had reached 0.77 by the end of fiscal 2005. From a finan-stock repurchases by net income*, is 60%. We aim tocial leverage perspective, I believe we have emerged from the rigorous reduction stage, and we aremeet shareholder expectations by raising both our prof-

aiming for a reduction of ¥60 billion under the new medium-term management plan.

it level and per-share value. We have reached this posi-

We have set four management targets: (1) ROA of 5.5% by 2010, (2) ROE of 10.9% by 2010,tion after talking to numerous shareholders and(3) Tokyo Gas Economic Profit (TEP, the Tokyo Gas version of EVA®) of ¥51 billion by 2010, andinvestors and considering how to meet their expecta-(4) total operating cash flows of ¥1,120 billion for the five-year period. During periods of active

tions as a company involved in a regulated utility business. I believe that, at present, this is the best

investment, maintaining a good ROA is an indicator of our ability to raise assets efficiency throughway to meet the expectations of all stakeholders, including our customers and shareholders.

investment while also placing appropriate weight on profitability. We aim to raise this indicator by

Stock repurchases have traditionally been used as a way of counteracting the dilution effect that

1.8 points from the fiscal 2005 result of 3.7%. Our ROE target represents an increase of 1.9 points

occurs when convertible bonds are converted into shares. In the future, we intend to use thisfrom the fiscal 2005 result of 9.0%. Our aim is to build an appropriate capital structure, despite themethod primarily as a way of achieving a genuine improvement in corporate value, including theconversion of convertible bonds during the period covered by the plan. Our TEP target will require an

redemption of stock.

increase of ¥28.1 billion compared with the figure for fiscal 2005. Capital costs will remain a key*Total payout ratio of year n = [(dividends from unappropriated profit in year n) + (amount of treasury stocks acquired in year n + 1)]/ (consolidated net income in year n)

focus as we work to achieve this. To generate operating cash flows of ¥1,120 billion during the fiveyear period, we will work tirelessly to increase our income.
To enhance our financial soundness, we intend to maintain and improve our fund procurement
ability. At the same time, we will seek to reduce our D/E ratio to 0.51 by fiscal 2010. However, wehave already made considerable progress with the reduction of our interest-bearing debt, so I am pre-

Q: Tell us about your vision for Tokyo Gas in the approach to the second decade of
the 21st century?

pared to be flexible with this numerical target.

Torihara As President of Tokyo Gas, my task is not only to implement our new medium-term management plan effectively and reliably, but also to maintain the status of Tokyo Gas as a company thatis trusted and preferred by shareholders and investors, as well as customers, society and communities.

Basic Policy on Cash Flow Allocation (5 years)

My vision is based not just on short-term economic value, but on sustained long-term growth achieved
through the continuing enhancement of our brand value, which is built on our long-accumulated
Operating Cash Flow ¥1,120 billion
Other Cash Flow

Operating Cash Flow ¥995 billion
Other Cash Flow

1,200
1,000
800

expertise in security, safety and reliability. In addition to accelerated growth driven by the steady¥70 billion¥(122 billion)

Five-year total:¥1,190 billion
60
Five-year total:
270¥873 billion
100
860
181

600

592

implementation of the business and financial strategies that I have outlined, I believe our reliability
as a company is also extremely important to our future success.
Reduction of Interest-bearing Debt: ¥60 billion
Shareholder Benefits: ¥270 billion
Investment and Financing: ¥860 billion

I aspire to make Tokyo Gas corporate culture even more transparent and open. The changes madelast year to our officer remuneration systems were part of this process. Meetings of our Board of

Breakdown of Investment and Financing in
Total Energy Businessensure prompt, appropriate management decision-making, we have established an investment assess-

400

12%

200

17%

Upstream/Overseas

ment committee to screen each investment proposal thoroughly.

Infrastructure

12%0FY2003–FY2007*

Directors, which includes outside corporate directors, have become forums for lively debate. To

FY2006–FY2010

20%
39%

Demand development
Business Facilities
OthersOperating Cash Flow=Net Income+Depreciation* “Frontier 2007” Target

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Our new medium-term management plan includes strategies
Deregulation has started to drive escalating competition across industry segments in thedesigned to create a foundation forstrong growth performance in the
period to 2010 and beyond. We
began to put these strategies into
effect on April 1, 2006, and must
now maintain this momentum.
I intend to focus my greatest
efforts on the following areas: First,

market for industrial and commercial use. Tokyo Gas also faces increasing

Creation andCultivation of
New Natural Gas
Marketscompetition in the residential energy market. We see the advent of free competition as
an opportunity for the Tokyo Gas Group to evolve into a total energy company. We aim to
use the economic and environmental advantages of natural gas as the basis for the creation and cultivation of new markets. Our strategic assets include our strategic LNG
value chain, which covers all stages from resource development to supply and services,and our advanced technology and solutions.

we will target overall Group optimization. All of our business segments are linked to the LNG value chain, and I intend to ensure thatGroup optimization remains a continual focus in relation to the allocation of management resources,
including personnel and money, so that we can achieve our full potential as a company.
Second, the Tokyo Gas Group will restructure its marketing scheme by strengthening the local
roots. Our greatest asset is a customer base consisting of over 9.8 million customers. We aim to
improve our services and reliability by building an integrated operational structure encompassing thevarious tasks handled by Tokyo Gas itself, its local agents, such as Enesta and Enefit, and Group
companies involved in customer service and other areas.
Third, as President of Tokyo Gas, I am determined to ensure our success in this rapidly changing
environment by making sustained progress toward the creation of a broad-based profit structure forthe decade after 2010. We will also work to maximize our business opportunities by evolving from a
conventional gas business into a total energy company, and seek to create and cultivate new markets
for natural gas.
The path ahead will not be smooth. However, I am convinced that we can achieve sustainablegrowth by living up to the expectations and trust of all stakeholders. I approach my management rolewith a strong determination and commitment to the future success of Tokyo Gas.

Mitsunori Torihara, President

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