Introduction

Introduction
Contents

CFO’s Message

Senior Managing Executive Officer, CFO

How We Create Value

SATO Hirofumi

CEO’s Message

Achieve sustainable growth and improve enterprisevalue by realizing both a sound financial position andgrowth investments through strengthening businessportfolio management

Business Strategy

target of 140 bn yen in segment profits (operating profit + equity method profit), butwith a tailwind from the global surge in raw material prices, we achieved 417 bn yen,nearly triple our target. Although this result exceeded our expectations, our analysisposits it as a result of our raw material procurement portfolio and the risk control
ability we have built up to date, which have enabled us to appropriately respond toIn FY2023, we are assuming raw material prices on a normal basis, so a significant
decrease in profits is inevitable compared to FY2022, and we are forecasting
segment profits of 154.8 bn yen.

The new mid-term management plan, Compass Transformation 23–25, is a more
concrete implementation of Compass Action, an action plan through 2030, with a threeyear period from FY2023–FY2025. We have positioned these three years as a period for
us to accelerate a transformation, and it will be very important for determining thecertainty of the path to 2030 as depicted in Compass Action.
The profit forecast for the new mid-term management plan appears almost flat, but there
are some changes in the content. As announced in October 2022, we are currently in theprocess of selling our upstream assets in Australia, and we expect to lose the operating
profit from the Australian upstream business during the new mid-term management planperiod. This is a challenging indicator, as we are aiming to reach 150 bn yen in FY2025,
after compensating for this loss with other factors. In addition to profit growth in theelectric power business, we would like to achieve this by selecting projects that can

Financial Datasignificant market fluctuations.

In the execution of the new mid-term management plan, respondflexibly to the drastically changing business environment andexplain the process in detail

Corporate Strategy

In FY2022, the final year of the previous mid-term management plan, we had set aCEO’s Message

How We Create ValueThe Value Creation Process
Promoting Sustainability and Material issues

Business Strategy
Compass2030 & Compass Action
Compass Transformation 23-25
Strategy 1: Achieve both stable energy
supply & decarbonization
Strategy 2: Fully roll out Solutions
business
Strategy 3: Realize a flexible corporate
culture resilient to change
Introduction of Internal Companies
CFO’s Message

Corporate Strategy
Sustainability
Corporate Governance

Financial Data

Web Site
Investor Relations Website
Investors’ Guide(Financial Data and Industry Data)
Financial Results Presentation Materials
Financial Results Bulletin
Corporate Governance Report

38Tokyo Gas Group Integrated Report 2023Sustainability Factbook

We aim to improve the Price Book-value Ratio (PBR) by enhancing
efficiency and profitability through business portfolio management
and increasing confidence in our future growth potential.

ROEPER

Improve PBR by working to improve efficiency and profitability through business portfolio
management (ROE improvement) and aiming to increase stock prices by improving
market evaluation of future growth potential (PER improvement)

ROE
improvement

Efforts to improve ROA and appropriate leverage eveloping a portfolio management system (improving asset efficiency
Dthrough ROA vs WACC by department and business)

Reducing earnings volatility by strengthening market risk management
PER
improvement

Eliminating undervaluation factors and raising growth
expectations through Investors Relations
Improving capital market confidence in the growth story by explaining theprogress and results of investments
Enhancing disclosure of initiatives that contribute to long-term improvementof enterprise value, such as investments in human capital and technologicaldevelopment, through information media such as integrated reports

Financial Data

Reducing cost of capital through stabilizing the profit structure

Corporate Strategy

We have revised the total return ratio from 50% to 40%. Since the rate has just been
lowered from 60% to 50%, we expected to receive severe comments from shareholders
and investors.
We in fact achieved a record profit level of over 400 bn yen in FY2022, but the impact ofmarket price volatility is so great that, depending on the situation, our Group’s earnings
may decline significantly due to external factors. Under these circumstances, we areplanning to invest 1 tn yen during the new mid-term management plan, which is necessary
for decarbonization and sustainable growth. Investment decisions are made with sufficientdiscipline, but important investments need to be made steadily regardless of the status ofoperating cash flow, and depending on the timing and scale of the project, there is a riskthat financial soundness could deteriorate significantly. In order to achieve stable business
operations and increase business value over the medium to long term, we have decided toshift the focus of cash management somewhat to the safe side and to review the level ofthe total return ratio and flexibility in the management.
We want to give back to our shareholders not only through short-term returns, but also
through long-term improvement of enterprise value, such as the sustainable growth of ourGroup and contribution toward a decarbonized society.

PBR

Business Strategy

Increase flexibility in cash management to maintain necessary
growth investments in the face of increasing volatility

How We Create Value

Basic policy for improving PBR

CEO’s Message

In the spring of 2023, we received a request from the Tokyo Stock Exchange to take action
toward realizing management that is conscious of the cost of capital and stock prices forlisted companies with a PBR of less than one. At our company, we consider the factors
contributing to the low PBR to be that our business stability and growth potential has been
perceived as declined due to the liberalization of the gas and electric power businesses
and the expansion of the business domains, and that the levels of ROE and ROA havedeclined on lower profit as well as asset expansion.
PBR can be understood as ROE PER (Price Earnings Ratio), and in order to improve it,
we believe that it is important to raise ROE by applying appropriate leverage while
increasing ROA, as mentioned earlier. At the same time, in order to improve PER, we will
work to lower the cost of capital by stabilizing the profit structure through the initiatives of
the new mid-term management plan, and strive to raise expectations for future growthpotential by enhancing dialogues with shareholders and investors as well as disclosure.

Introduction

contribute to profits at an early stage in each business and making investments.
On the other hand, with regard to the outlook for income and expenditure, we believethat it is difficult to predict three years from now amid such drastic changes in the businessenvironment. During the previous mid-term management plan, there were significant
changes in the business environment, such as a decline in demand due to the impact of
COVID-19 and a fall in crude oil prices, that disrupted the assumptions in the plan. In theactual situation, the effects of this change were carefully examined and reworked for theplan for that year. Based on this experience, we believe it is important in the new mid-term
management plan to respond flexibly and appropriately to changes in the environment,including changes in planned values. When reviewing the mid-term management plan, wewill provide detailed explanations, including the background.
With regard to asset efficiency, although it is inevitable that volatility will cause
performance fluctuations in a single fiscal year, we believe it is necessary to clear an ROAof 4% on average as a financial discipline. As shown in the new mid-term management
plan, it is time to accelerate growth investments, including those related todecarbonization. To prevent a decline in asset efficiency, we will implement full-scalebusiness portfolio management and promote the reduction and replacement of assets thatare not expected to lead growth while confirming the ROA and ROIC against the required
returns on a business-by-business basis. Similarly, with regard to ROE, we will first aim for
8% and proceed with business operations with a strong awareness of capital efficiency.

Introduction
Contents

CEO’s Message

How We Create ValueThe Value Creation Process
Promoting Sustainability and Material issues

Business Strategy
Compass2030 & Compass Action
Compass Transformation 23-25
Strategy 1: Achieve both stable energy
supply & decarbonization
Strategy 2: Fully roll out Solutions
business
Strategy 3: Realize a flexible corporate
culture resilient to change
Introduction of Internal Companies
CFO’s Message

Corporate Strategy
Sustainability
Corporate Governance

Financial Data

Web Site
Investor Relations Website
Investors’ Guide(Financial Data and Industry Data)
Financial Results Presentation Materials
Financial Results Bulletin
Corporate Governance Report

39

Tokyo Gas Group Integrated Report 2023

Sustainability Factbook