TOKYO GAS ANNUAL REPORT 2018

CEO’s message

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achieve the goals of The Tokyo Gas GroupFY2018-2020 Management Plan (GPS2020)
ensure further advancement andbreakthroughs for the Tokyo Gas Group into
the 2020s.
By making innovations based primarily
around natural gas, which is superior interms of stability of supply, economic value
forward in improving our corporate value, by
evolving from the top city gas supplier in the
Greater Tokyo Area into a truly global“energy frontier” company.

Invisible assets
Financial data

Takashi Uchida

Corporate governance

Representative Director, President and CEO

Business overview

and environmental friendliness, we will move

I was appointed President and CEO of Tokyo Gas this April(2018). My appointment comes at a time when not only the city
gas industry but the energy industry as a whole is experiencing
major changes, and I feel tense to take on the role ofmanaging the Tokyo Gas Group. Since joining the company in
1979, I have experienced working in both field and management
positions in a wide range of areas, including gas transportation(pipelines), human resources, corporate planning, raw materials
procurement, overseas business operations and household(consumer-oriented) services. Going forward, I will seek tomake effective use of my past experiences in improving thecorporate value of the Tokyo Gas Group.
In November 2011, in the aftermath of the Great East Japan
Earthquake, we developed the Challenge 2020 Vision; aroadmap for achieving our vision of what kind of company
we want to become in the long-term. I was involved indeveloping the plan in my position as General Manager of
the Corporate Planning Department.
The vision outlines our corporate stance of contributing tosociety—specifically the energy industry, which is a key
element of basic infrastructure supporting the lives of the public
and all industrial activities—by advancing our LNG value chain.
Following on from our previous “Hop” (FY2012-2014) and“Step” (FY2015-2017) management plans implemented overthe past six years, the greatest role that has been entrusted
to me in taking up the management baton is to ensure thesure and steady implementation of the policies raised in our
GPS2020 medium-term management plan, which represents
the final three-year “Jump” stage of our Challenge 2020
Vision; and to solidify our foundation for futureadvancements and breakthroughs in the 2020s by achieving
the plan’s targets as far ahead of schedule as possible.
What we aspire to achieve is not only to be the top city gas
supplier in the Greater Tokyo Area, but to remain a company
that carves out new energy frontiers globally, as a total energy
corporation. Achieving the goals of GPS2020 represents
achieving the realization of our corporate philosophy of
becoming an “energy frontier” company. Now that the full

Overall image after
full deregulation

as far ahead of schedule as possible, and to

Achieving the goals of GPS2020 as far ahead ofschedule as possible

GPS2020of managing Tokyo Gas, it is my role to

Message

Having taken up the baton and responsibility

Introduction

Carving out
Energy Frontiers with
Innovation

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TOKYO GAS ANNUAL REPORT 2018

CEO’s message
deregulation of the electric power and city gas retail markets
has begun, securing electric power supply agreements withas many customers as possible will also play a role inprotecting the foundations of our core gas business.
Promoting and expanding the use of natural city gas throughour electric power and gas operations will contribute toimproving convenience for customers and to achieving a
low-carbon society overall. I therefore want us to achievethese targets as far ahead of schedule as we possibly can.

We recorded an increase in sales and profits
for the previous fiscal year, and achieved
targets for securing electric power contracts
ahead of schedule
In fiscal 2017 (the year ended March 31, 2018), which was the
final year of the “Step” stage of our Challenge 2020 Vision, weposted operating profit of ¥116.3 billion. With this figure we
greatly exceeded the original planned figure of ¥82 billion, andachieved a 99.3% increase in comparison with the previous
year. We also achieved increases in profits for our city gas,
electric power and overseas business operations. Although
the alleviation of temporary factors that caused a decrease inprofits for the previous year (which included sliding time lag
effects and actuarial differences) contributed partly to theincrease in profits for the year, we recognize the fact that wewere able to achieve an increase in sales and profits despite
the loss of some major wholesale gas supply contracts as theresult of great efforts on the part of all our employees.
For fiscal 2018 (the year ending March 31, 2019), assuming an
exchange rate of ¥110 per U.S. dollar and an oil price of $65/
bbl, we plan to achieve operating profit of ¥93 billion (adecrease of 20% y-o-y). The main factors behind thisdecreased profit plan are time lags in the reflection of crude
oil prices and gas rates, and transient cost increases such as
those associated with data transfers due to the startup of newcore mission-critical systems. We ask that shareholders
understand that it does not indicate a decline in our basic
earning capacity. (Please refer to page 55.)
Naturally, this does not mean that we are satisfied with thisprofit level, and we will endeavor to enable the addition of
extra profits, and work to improve this profit level in themedium-term.
With regard to the retail sale of electric power, at the end of
March 2017 we set the target of receiving applications from
1 million customers during fiscal 2017. This target wasachieved ahead of schedule in October 2017, and as the endof March 2018 this figure had reached 1.25 million customers
and is still rising.
In our overseas business operation, too, we are steadily
making investments midstream and downstream business,such as power plants and city gas distribution businesses.

Evolving into a global total energy
corporation with our GPS2020 medium-term
management plan
Tokyo Gas Group currently stands at a turning point, an ageof change unlike any that is has experienced before during its
history of over 130 years. Although the city gas business was
originally a regulated industry, since the time of our founding
we have competed intensely with the electric power industry
in areas such as lighting, hot water, heating and kitchenutilities. With the progression of the full deregulation of theelectric power and gas retail markets, competition withelectric power companies has become more directly, and webelieve that market participation by other major energy
companies and competitors from other non-energy industries
is likely to increase in the future.
Tokyo Gas has summarized its awareness of the coming new
era in terms of the following three perspectives—which also
constitute prerequisites for the GPS2020 management plan—Gas Handling Volume (based on the Vision)

Electric Power Sales Volume(billion m3)(billion kWh)

25.0

30.0

31.0
Increase
16.3 billion
kWh

Increase
1.6 billion m3

20.7

20.0

22.5

19.1

15.0

15.3
15.0

14.7

10.0

7.5

8.3

5.0

0

0
2012.3
Launch of the Vision 202009

2018.32021.32012.3
Launch of the Vision 20202018.32021.3

Corporate governanceInvisible assets
Financial data

As we head towards the era of next-dimensional innovation, we
have established a Digital Innovation Division, for the two key
purposes of (1) improving operational efficiency and laborsaving and (2) creating new businesses.
Firstly, in terms of efficiency and labor saving, there are several
areas in which there is significant room for improving efficiency,saving labor and reducing costs through the effective use of
ICT. For example, these include improvements that will enable
regular maintenance patrol visits when customers are at home
(improving work rates for maintenance inspections withapproximately 1,000 personnel), improving work efficiency for
telephone-based contract-acquisitions (efficient operation withapproximately 1,000 operators), and improving capacity
utilization rates for thermal power stations.
We believe that this will also have major benefits in terms ofpassing on skills—which until now have depended on individual
experience and intuition—and improving work quality.
With regard to creating new business operations, we will work tolink new technologies on to achieving the realization of new
possibilities; such as by improving the performance of ENEFARM
residential fuel cells by leveraging the power of IoT, achieving
efficient operation of heating appliances by integration of floor
heating and air-conditioning systems, selling electricity generatedusing photovoltaic (solar) power generation to other households,
and payment settlement using blockchains.
Currently, we are investing in venture capital and engaging in
information gathering and open innovation through the activities

Business overview

Creating a Silicon Valley location and advancing
a program of digital innovation

Overall image after
full deregulation

The most significant background difference between the new
management plan and past medium-term management plans
is that we are now able to deliver not only gas but also electric
power to our customers in a set package, due to the fullderegulation of the electric power and city gas retail markets.
This allows us to propose optimal energy solutions to our 11
million customers to match their actual state of energy usage.
By 2020, we aim to deliver Tokyo Gas Group electric power to
2.2 million customers (equivalent to approximately 10% of theGreater Tokyo Area), and will be investing in power stations tomatch this target. Through these investments, we will aim to
expand our current power generation capacity of 1.6 million kW
to 3.0 million kW by fiscal 2020, and to a scale of around 5.0
million kW during the 2020s. With regard to renewable energy
sources, too, we will aim to develop 0.4 million kW during theearly half of the 2020s. In terms of promoting and expanding
widespread use of natural gas, we have completed our Ibaraki
Line for developing demand in the Northern Kanto area, andare strengthening our partnerships with nearby city gas and LP
gas suppliers, who are our wholesale customers. We will also
be building alliances with energy suppliers and other partners
across our entire LNG value chain, and engaging in activities
such as LNG financing and trading of raw materials with thesepartners, in order to create an optimal energy supply structure.
One service that we will be offering to residential customers, asa priority business, is the provision of support services forvarious problems faced around the home—including plumbing,house cleaning and other such services—in combination withgas and electric power.
For commercial customers, we will offer support with regard to
optimal supply of gas and electric power, such as in the installation

GPS2020

GPS×G: Strengthening our gas (G), electric
power (P) and services (S) operations globally (G)of commercial-use fuel cells aimed at convenience stores, familyoriented restaurant chains and other such customers.
For industrial customers, we will aim to supply not only gas andelectric power, but batch supply of all necessary utilities,
including heat and water for industrial use.
In North America and other such markets, where there is great
demand for energy, and where deregulation and energy market
transactions are progressing ahead of Japan, we will continue
to participate in upstream business operations, with a primary
focus on shale gas, and midstream and downstream
operations such as power stations; seeking to acquire andutilize expertise that will contribute to future operations both inJapan and overseas, while at the same time strengthening ourrevenue base. In the Southeast Asia region, where risingdemand for natural gas and growth of LNG imports are
expected as a result of rapid economic growth, we will seek
to contribute to the construction of LNG value chains in local
regions by building energy infrastructure and introducing
natural gas, while working in partnership with national
governments and local companies.

Messageas “The Era of Natural Gas,” “The Era of Single-Source
Providers of Electricity and Gas,” and “The Era of NextDimensional Innovation Fueled by the Rapid Digital Evolution.”
GPS2020 is a plan that aims to deliver gas (G), electric power(P), and services (S) to customers as a total package. We plan
to deploy this system not only in the Greater Tokyo Area, but
on a nationwide and—ultimately—global scale. What we areaiming for is to evolve from being “the Greater Tokyo city gas
company” or “Japan’s leading city gas company” to being “aglobal total energy corporation.” In terms of financial
aspects, in fiscal 2020 (the year ending March 31, 2021), we
aim to achieve a total of ¥130 billion in operating profit andequity income of subsidiaries , operating cash flow of ¥280
billion—an upward adjustment from the original figure of¥250 billion set in the Challenge 2020 Vision—and ROE ofapproximately 8%.

Introduction

In order to carve out energy frontiers with
innovation, we will create a Silicon Valley location, and advancea program of digital innovation

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TOKYO GAS ANNUAL REPORT 2018

CEO’s message
of seven to eight overseas representatives based in Silicon
Valley. Through these activities, we seek to deepen the level ofcollaboration between our head office technical division andother business divisions, in areas such as the development of
IoT sensors.

Our strength is in our invisible assets
I believe that Tokyo Gas’s strength lies in the fact that we
possess a wide range of tangible and intangible assets, from
top-level upstream natural gas assets (i.e. gas fields) to thedownstream assets (installation and maintenance ofhousehold equipment). In particular, I think that our greatest
strength is the trust of our customers and business partners,
who believe that “if Tokyo Gas says so then it must be right.”
This trusting relationship was developed by our predecessors
over the course of our approximately over 130-year history,
through a track record of safe and stable supply. This
relationship, along with the human resources and technologies
that support it, are a major advantage for Tokyo Gas.
One thing that is important in order to prevent our GPS2020
strategy from ending as a “pie in the sky” vision is the powerof the workplace. For our business operations, whichconstitute a lifeline supporting people’s everyday lives andvital infrastructure for industrial activities, achieving a safe andstable supply is something that is taken for granted, but theday-to-day activities in the field that support this supply are
not visible to our end users.
With my experiences of gas transportation (pipelines), both in
the field and in management, I truly understand andappreciate the importance of on-site capabilities.
When I was involved with reconstruction and recovery work in
the aftermath of the 2004 Niigata Chuetsu Earthquake, I saw gas
providers come together and join forces to achieve the recoveryof city gas supplies in the region within the short space of around
one month. Seeing that made me feel and appreciate strongly

the importance of capabilities in the field. I am particularly struck
by, and proud of, the strength of Tokyo Gas’s on-site capabilities,
and our ability to come together when it is necessary.
This is the kind of strength that does not appear in our
financial statements. By continuing to refine this strength, wewill create a more robust foundation for sustainable growth,and utilize it in improving our corporate value.

ESG: We believe that developing energy
frontiers is a form of social contribution
In his book Rongo to Soroban (The Analects of Confucius
and the Abacus), the Meiji-period industrialist Eiichi
Shibusawa—who built the foundation of our business—
advocated the importance of achieving a balance between
both moral philosophy and profit. LNG is the cleanest sourceof energy amongst fossil fuels. Tokyo Gas is driving anenergy shift away from fuels such as petroleum and coal,and contributing to society through the stable supply ofclean energy that is essential to everyday life. At the sametime, we are achieving sustainable growth of our own profits.
This sentiment, which is instilled in all of our employees, isthe starting point for our ESG activities, and the source ofour corporate value. Moving forward, we will continue tocontribute to the creation of a low-carbon society throughour business operations, by not only supplying city gas, bututilizing LNG thermal power generation, heat-recycling
cogeneration systems, district heating and cooling, fuel cells
and renewable energy.
Working on the basis that active and energetic work by eachand every employee increases corporate value, we arepromoting diversity and advancing a program of workflow andworkstyle reforms leveraging the power of IT. In the past, ourgas business operations have involved extensive on-site
maintenance work, and our workforce has consisted primarilyof male employees. However, through revisions to our work

What we are aiming for is to evolve from being “the Greater
Tokyo city gas company” or “Japan’s leading city gas
company” to being “a global total energy corporation.”
What I want to tell you
We will aim to achieve the goals of our GPS2020 medium-term management plan as far
ahead of schedule as possible.
We are already achieving our targets for numbers of electric power contracts after
deregulation of the electric power retail market ahead of schedule.
GPS×G: We will strengthen our gas (G), electric power (P) and services (S) operations
globally (G) and evolve from being “the Greater Tokyo city gas company” or “Japan’s
leading city gas company” to being “a global total energy corporation.”
We will carve out energy frontiers with innovation. We will create a Silicon Valley
location, and advance a program of digital innovation.
Our strength lies in our invisible assets, such as the trust of our customers and business
partners, and the human resources and technologies that support it.
ESG: We believe that developing energy frontiers is a form of social contribution.

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Introduction
Message
GPS2020
Overall image after
full deregulation
Invisible assets
Financial data

One historical figure that I am particularly drawn to is
Toshiakira Kawaji, kanjo-bugyo (the Commissioner ofCorporate governanceRiding out the waves of deregulation andaiming to achieve breakthroughs as a totalenergy corporation

Finance in the Edo period), who played an active role in thesigning of the Treaty of Commerce and Navigation between
Japan and Russia during the Bakumatsu period, whichmarked the final days of the Tokugawa Shogunate.
Despite being part of the historical organization that was the
Shogunate, and in the face of demands from foreign powers
for opening up Japan to foreign trade and the signing oftreaties with harsh terms and conditions, Kawaji made valid
and justifiable arguments from the perspective of ensuring
the survival of his country that earned him the respect of his
negotiation partners, and built new relationships by
diplomatic means. I think that there are many things that we
can learn from him.
For my part, even in the face of the massive surging waves
of deregulation, I want us to push through without losing
sight of our pride and mission as a public utility company,
developed over our 130+ year history, and to build afoundation for future development and advancement as a
total energy corporation.
Finally, I want to say that I regard the run-up to 2020 as aperiod for preparing for future breakthroughs in the coming
decade. We are still in the investment stage, but we will still
continue to generate solid profit and maintain a total payout
ratio of at least 60%. Through dialogues with our
stakeholders, we will aim to achieve further improvements in
our corporate value.
I ask that our stakeholders will continue to support the Tokyo
Gas Group, as we continue in our challenge to become atotal energy corporation.

Business overview

practices and our proactive promotion of female employees,
for two consecutive years we have been selected as aNadeshiko Brand—an enterprise that actively promotes andencourages the empowerment for women—in a joint scheme
run by Ministry of Economy Trade and Industry (METI) and theTokyo Stock Exchange (TSE).
With regard to corporate governance, we have modified thebalance between executive and monitoring functions byincreasing our ratio of outside to internal directors, with 5internal directors—one of whom does not have executive
authority— and three outside directors (compared witheight internal and three outside directors up until last year.)
Although Tokyo Gas is not a “Company with Committees”(as provided for under the Companies Act), we do have an
Advisory Committee which deliberates on personnel andremuneration for company officers. The Advisory
Committee consists of five members: two outside directors,
one outside Audit and Supervisory Board member, theChairman (executive director with no additional role) andmyself (executive director with additional role). In this way,
we maintain a balance by having the majority of members
as outsiders, and everyone besides myself as nonexecutive officers.

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