Saibu Gas Co., Ltd

NEWS RELEASE

Apr 23, 2020 R&I Affirms A+/a-1, Stable: Saibu Gas Co., Ltd.

Rating and Investment Information, Inc. (R&I) has announced the following: ISSUER: Saibu Gas Co., Ltd. Issuer Rating: A+, Affirmed Rating Outlook: Stable

Commercial Paper: a-1, Affirmed

RATIONALE: Saibu Gas Co., Ltd. serves major cities of the northern Kyushu region, such as Fukuoka, Kitakyushu, Kumamoto, Nagasaki, and Sasebo. The company is ranked after the three leading players in the industry, with about 1.1 million customer households. Its strength lies in the fact that lucrative residential gas accounts for a large proportion of total sales. Meanwhile, it has difficulty raising sales and transmission efficiency because supply areas are geographically dispersed. Since the full liberalization of the retail city gas market, customers, especially in the residential gas segment, have continued to migrate to services provided by other operators, which is partly due to aggressive marketing efforts by Kyushu Electric Power Co., Inc. Saibu Gas intends to avoid a war of attrition resulting from price competition and retain its customers by, for example, providing gas equipment inspection service for free. In the industrial gas segment, on the other hand, potential demand for fuel conversion is large. Wholesale supply of city gas also keeps increasing. In the retail electricity business, which the company entered in FY2016 (the year ended March 2017), the number of supply contracts is steadily growing. Its operating base centered on the city gas business is unlikely to be undermined. That said, the business environment is becoming challenging, as gas demand from major customers, particularly from industrial customers, is expected to decrease amid the spread of the novel coronavirus. Close eyes will be on future developments. Owing to a series of large investment projects, including the construction of the Hibiki LNG terminal in Kitakyushu City and the northern Kyushu pipeline, Saibu Gas is heavily indebted and its financial base is below the level required for the rating. To effectively utilize the Hibiki LNG terminal, it is now in discussions with a Russian enterprise, aiming to establish a joint venture that sells liquefied natural gas in Asia. R&I will pay attention to the progress of the discussions, focusing on whether or not this pushes Saibu Gas into excessive risk-taking. The company is working to expand businesses other than the city gas business, such as real estate. Its group mid-term management plan formulated in 2019, "Scrum 2022", calls for raising the proportion of the real estate business to approximately 20% in the business portfolio by FY2022. Saibu Gas plans to invest up to 50 billion yen in growth areas including real estate. R&I will closely examine the profitability of such businesses and the extent of the financial burden for the investment. In April 2021, Saibu Gas will separate the group's management and business functions and transition to a holding company structure centered on Saibu Gas Holdings Co., Ltd. (tentative name). R&I will observe developments during the transition period, focusing mainly on how to transfer liabilities and the holding company's double leverage ratio, and incorporate them into the rating.

The primary rating methodologies applied to this rating are provided at "R&I's Basic Methodology for Corporate Credit Ratings" and "City Gas". The methodologies are available at the web site listed below, together with other rating methodologies that are taken into consideration when assigning the rating. https://www.r-i.co.jp/en/rating/about/rating_method.html

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R&I RATINGS: ISSUER: Saibu Gas Co., Ltd. (Sec. Code: 9536) Issuer Rating RATING: A+, Affirmed RATING OUTLOOK: Stable

Shelf Registration (Bonds) ISSUE AMOUNT (mn): JPY 50,000 ISSUE PERIOD: From Aug 30, 2018 to Aug 29, 2020 RATING: A+, Affirmed (Preliminary)

Unsec. Str. Bonds No.9 Issue Date Maturity Date Issue Amount (mn) Oct 22, 2010 Oct 22, 2020 JPY 10,000 RATING: A+, Affirmed

Unsec. Str. Bonds No.11 Issue Date Maturity Date Issue Amount (mn) Jan 25, 2012 Jan 25, 2022 JPY 10,000 RATING: A+, Affirmed

Unsec. Str. Bonds No.12 Issue Date Maturity Date Issue Amount (mn) Dec 13, 2013 Dec 13, 2023 JPY 10,000 RATING: A+, Affirmed

Unsec. Str. Bonds No.13 Issue Date Maturity Date Issue Amount (mn) Apr 14, 2015 Apr 14, 2025 JPY 10,000 RATING: A+, Affirmed

Unsec. Str. Bonds No.14 Issue Date Maturity Date Issue Amount (mn) Mar 16, 2017 Mar 16, 2027 JPY 5,000 RATING: A+, Affirmed

Unsec. Str. Bonds No.15 Issue Date Maturity Date Issue Amount (mn) Dec 13, 2018 Dec 13, 2038 JPY 10,000 RATING: A+, Affirmed

Unsec. Str. Bonds No.16 Issue Date Maturity Date Issue Amount (mn) Dec 13, 2018 Dec 13, 2028 JPY 10,000 RATING: A+, Affirmed

Commercial Paper ISSUE LIMIT (mn): JPY 50,000 SUPPORT: Unsecured RATING: a-1, Affirmed

A preliminary rating is assigned when a provisional credit rating is needed for an individual obligation on which final terms have not been determined. A credit rating finally assigned may differ from the preliminary rating depending on, among others, the details of the actual contract of the individual obligation.