20-D-0064 April 20, 2020 Japan Credit Rating Agency, Ltd. (JCR) announces the following credit rating. JCR's Rating Review of City Gas Companies Issuer Code Long-Term Issuer Rating Outlook TOKYO GAS CO., LTD. 9531 <Affirmation> AAAp Stable OSAKA GAS CO., LTD. 9532 <Affirmation> AA+p Stable TOHO GAS CO., LTD. 9533 <Affirmation> AA+p Stable HOKKAIDO GAS CO., LTD. 9534 <Affirmation> A Stable HIROSHIMA GAS CO., LTD. 9535 <Affirmation> A Stable SAIBU GAS CO., LTD. 9536 <Affirmation> AA- Stable Issuer Code Short-term Issuer Rating/CP HOKKAIDO GAS CO., LTD. 9534 <Affirmation> J-1 HIROSHIMA GAS CO., LTD. 9535 <Affirmation> J-1 SAIBU GAS CO., LTD. 9536 <Affirmation> J-1+ (See page 5 and beyond for details about ratings on individual bonds, etc.) Rating Viewpoints (1) As a result of reviews of ratings on city gas companies (TOKYO GAS CO., LTD., OSAKA GAS CO., LTD., TOHO GAS CO., LTD., HOKKAIDO GAS CO., LTD., HIROSHIMA GAS CO., LTD. and SAIBU GAS CO., LTD.), JCR affirmed ratings on all of the city gas companies with the same rating outlook as before. (2) JCR considers that stability of business bases under regulations and protection by the government is important in ratings on utility including city gas companies, and has not changed this perspective even after full liberalization of retail city gas market in April 2017. Although the scope of regulations has been reduced by progress of gas system reforms, JCR sees that there have been no significant changes that can cause changes in their ratings. With no change to the expansion of gaps among regions in competitive environment, there are companies which aim to diversify their business portfolios into overseas energy business or real estate business. Going forward, JCR will understand the effects of these changes on their business bases in a substantial manner for each company to be reflected in the rating. (3) Three years have passed since full liberalization of retail city gas market, and shifts of customers to new entrants for household use city gas have been continuing in regions where the local electric power companies newly entered the market. However, the shift seems to have slightly subsided due partly to the end of such shifts of customers with high price sensitivity. The impact of decreased gas sales volume as a result of such shifts on their profits is being reduced by factors such as development of new demands, cost reduction, and increase of revenue from wheeling service, and the decline of earnings capacity of city gas business has been limited. For electricity retail sales business, city gas companies have been steadily acquiring customers, but some companies failed to fully increase their profits due to heavy sales promotion expenses associated 1 / 6 https://www.jcr.co.jp/en/ with competition. JCR sees keeping their customer bases by offsetting the customers’ shifts in the city gas business by the electricity retail sales business is very important from a middle- and long- term perspective. (4) City gas companies are continuing maintenance and expansion of pipeline network including investments in trunk lines in domestic gas business, core business for them. All city gas companies have a certain potential demand, although there are differences in regions. Therefore, demand development using new pipeline network can be expected. There are also companies which plan to aggressively invest for diversification of their business portfolio in the areas of overseas energy business or real estate business. JCR sees that there is little concern about a possibility of a significant worsening of the current financial balance, but it is necessary to carefully assess such investments, as companies will be exposed to risks in areas that are different from the regulated areas where certainty of investment recovery is high. (5) The current business environment has significant changed due to coronavirus disease (COVID-19) pandemic and fall of crude oil price and others. Corporate production activities will significantly shrink, causing industrial-use gas sales to weaken, due to the COVID-19 pandemic. JCR sees that the fuel cost adjustment system can level off the effects of weak crude oil price on the city gas business, but there is a possibility that risks will occur from perspectives of assessment of investments in the overseas energy business, etc. Although JCR sees that there will be no significant changes to fundamental creditworthiness of city gas companies even with these changes, JCR will monitor the future developments for the time being, partly because the end of the pandemic and extent of the subsequent recovery of demand cannot be forecast. Rationale Issuer: TOKYO GAS CO., LTD. <Affirmation> Long-term Issuer Rating: AAAp Outlook: Stable (1) TOKYO GAS CO., LTD. (the "Company") is a city gas company in Japan with Tokyo metropolitan area as its service area. Covering businesses from raw materials procurement and overseas upstream business to gas sales in an integrated manner, it has strong business base and high competitive strength as the largest company in the city gas industry. With large potential demand in the service area, the Company is actively working on new demand development mainly in northern Kanto region by strengthening the production and supply infrastructure. Focusing its attention on businesses other than city gas such as electricity, services and overseas businesses, it is making efforts to raise profit ratio of these businesses. (2) The shifts of its gas customers to new entrants have been continuing due to competition with TEPCO Group and others, but the negative impact on the profit has been limited. On the other hand, its earnings bases of electricity and overseas businesses have been steadily strengthened, and JCR sees that the Company will be able to maintain the high cash flow generating ability as a whole. On the financial side, despite the expected high level investments in growth areas, etc., JCR assumes that it will keep the good financial structure. Taking the above into consideration, JCR affirmed the rating on the Company with Stable outlook. (3) While the current gas sales are slightly weakening due to factors including effects of the customers’ shifts and decrease of industrial-use gas demand, the Company has been steadily expanding the sales volume in the electricity retail business. Its overall competitive strength has not been weakened. It is promoting growth strategies in the services and overseas businesses. JCR will confirm developments on investments in these areas and effects of them as well as the gas customers’ shifts and trend of acquisition of electricity customers from a medium- and long- term perspective. Issuer: OSAKA GAS CO., LTD. <Affirmation> Long-term Issuer Rating: AA+p Outlook: Stable (1) OSAKA GAS CO., LTD. (the "Company") is the 2nd largest city gas company in Japan with 6 prefectures in Kinki region as its service area. Mainly engaging in gas business, which covers from 2 / 6 https://www.jcr.co.jp/en/ raw materials procurement to gas sales in an integrated manner, as its core business, the Company has diversified its income sources into businesses such as electricity, international energy and life & business solutions (“LBS”). (2) The shifts of its gas customers to new entrants have been continuing due to competition with The Kansai Electric Power Company, Incorporated, but the negative impact on the profit has been limited. With progress of acquisition of electricity customers, on the other hand, the Company has been maintaining its earnings base. JCR sees that the Company will be able to maintain the high cash flow generating ability as a whole in light of support by the LBS business and others. On the financial side, despite the expected high level investments for electric power development and overseas investments, JCR assumes that it will keep the good financial structure without easing its financial discipline. Taking the above into consideration, JCR affirmed the rating on the Company with Stable outlook. (3) The current gas sales are slightly weakening due to factors including effects of the customers’ shifts and decrease of industrial-use gas demand. Although the impact of the weakening sales on the profit based on the profit excluding effects from slide time lag is being reduced partly by its efforts for more efficient costs, it is necessary to continue watching the competitive status. While the Company expects the overseas projects, in which it has been investing to date, to contribute to the profit going forward, JCR will pay attention to whether the investment recovery can steadily move ahead, in the face of weakening prices of resources. Issuer: TOHO GAS CO., LTD. <Affirmation> Long-term Issuer Rating: AA+p Outlook: Stable (1) TOHO GAS CO., LTD. (the "Company") is the 3rd largest city gas company in Japan with parts of Aichi Prefecture centering on Nagoya City as well as parts of Gifu and Mie prefectures as its service area. It enjoys large demand, as its service area is one of the nation's three major metropolitan regions. The service area also includes the Chukyo industrial zone, resulting in a large ratio of industrial-use gas sales with users centering on automotive-related industries to the total sales volume. (2) The shifts of its gas customers to new entrants have been continuing due to competition with Chubu Electric Power Company, Incorporated and others, but the negative impact on the profit has been limited. Although control of the shifts of its gas customers is an issue, JCR sees that the Company will be able to maintain the current level of cash flow generating ability in light of the expected new demand development by expanding the service area and by fuel conversion with the relatively large potential demand, as well as the expected profit contribution from the acquisition of electricity customers.