#19 OSAKA GAS Investor Presentation Meeting Osaka Gas Co., Ltd. 3rd Edition 1#29 OSAKA GAS Contents 1. "2010 Vision" Medium Term Management Plan P.2- 2. 3. 4. 5. 6. + + Financial forecasts P.8- Mid-term gas sales plan P.14- Cash flow management and SVA P.23- Deregulation and convergence of electricity and gas P.31- Deregulation P.32- Competition in the gas business P.35- Reference material P.38- 2#39 OSAKA GAS 1. "2010 Vision" Medium Term Management Plan 3#49 OSAKA GAS "2010 Vision" Medium Term Management Plan In October 1999, Osaka Gas adopted a long-term management policy called the "2010 Vision" which had 'value creation management' at its core. In January 2000, we decided to implement a medium-term management plan (the Gate Plan) from year ending March 2001 to y/e March 03. The main aim is to increase corporate value, through enhanced value to customers, shareholders and society at large. We divided our business into 9 core units in energy and non-energy. Each company is autonomous and self-driven, but acts within the overall strategic framework of the group. The goal of the energy business is to establish a natural gas value chain and a one-stop service for energy. H ודו Value Chain: continued expansion into upstream and generation business and increased profitability at each stage. One Stop Service: meeting the needs of customers with several kinds of energy including by gas, electricity or LPG. 4#59 OSAKA GAS Value creation management Shareholder value: [targets for consolidated results year ending March 03) Income before tax > ¥75 billion, Net Income > ¥40 billion EROE over 9.0%, ROA 3.5% achieved in y/e March 02- almost 1 year ahead of plan Free cash flow > ¥38 billion, a large increase on the previous year Customer value (examples): Over 95% of calls to our customer call center to be answered within 10 seconds (before March 03) Next day equipment repair completion rate of 85% (before March 03) Customer death rate from gas accidents to be reduced to zero (by March 2011) * Value to society (examples): ◉CO2 emissions per cubic meter of gas reduced to 10% below 1997 level Annual contribution of 0.5-1.0% of pre tax profit to corporate citizenship activities To set internal standards and raise awareness of disclosure and compliance, and strengthen the quality of information disclosed. 5#699 OSAKA GAS Our approach to the energy business Setting up a complete natural gas value chain and a one-stop service Making overseas investment judgments based on business risk/ exchange risk/ country risk Results of new investment in energy business (year ending March 2001) TI Profit from the acquisition of overseas off-shore gas fields in Australia's Northern Territory Ownership of LNG tanker, “Jamal”, commissioned in September 2000 Capital participation in the Nissho Iwai Petroleum Gas Group Bid for the Guandong LNG project Start of an electrical retailing business, “Ennet" 6#7Group operations: Outline of the G10 system Energy Business Non-energy business The Osaka Gas Co., Ltd. group head office OSAKA GAS G1- Gas Business Group (33 companies)- Includes gas business, gas construction, gas equipment sales G2- Liquid Gas Group (11)- Sales of LPG and gas to industry G3- Nissho Iwai Petroleum Gas Group (17)- Import and Sales of LPG G4- Gas and Power Investment Group (3)- Electricity industry (generation/retail), ESCO G5- Harman Group (17)- Production and sale of gas appliances G6- Urbanex Group (9)- Sale/lease of real estate G7- Kinrei Group (2)- Food production/ sale and restaurants G8-OGIS Research Group (3)- Information processing and system development/ sales G9- Osaka Gas Chemicals Group (5)- Production/ sale of carbon fibers and activated carbon materials G10- OG Capital Group (17)- includes other business sectors not covered above (Excluding OG&G3, year end March 00.) Gross sales 314 billion yen, Pre tax income 11, Net income 4, ROE 3.2%, ROA 0.8% 7#82. Financial forecasts 9 OSAKA GAS 8#99 OSAKA GAS Summary of financial forecasts (consolidated results) Number of subsidiaries: FY00-03 25 companies, FY01/E- 35, FY02/E- 42 Units: ¥1 billion, $/bbl and ven/$ FY00/R FY01 FY02 FY03 FY01/E FY02/E Gross sales 849 928 920 950 955 1,000 Operating income 63 60 70 80 62 75 Pre tax income 46 57 65 75- 57 72 Net income 27 32 35 40- 32 43 ROA 2.3% 2.4% 2.7% | 3.5%- 2.6% 3.2% ROE 6.8% 7.7% 8.2% 9.0%- 7.1% 8.7% SVA - - - - 4 11 FCF 19 4 31 38 34 45 Capex 106 126 100 99 96 110 Depreciation 81 95 93 91 95 90 Crude oil price ($/bbl) 20.9 22.0 22.0 22.0 29.0 28.0 Rate of exchange (yen/$) 111.6 103.0 103.0 103.0 108.6 118.0 9#10Strengths of Osaka Gas Co., Ltd. ◆ Plan to keep stable growth of gas sales in the future Consistent cost cutting management Judged best Japanese utility (non-consolidated in FY2000) 99 OSAKA GAS % OG TG TEPCO KEPCO ROE 6.71 5.37 5.72 3.86 ROA 2.44 1.55 0.65 0.62 Shareholders equity ratio 38.05 29.68 12.24 16.67 10 10 Our strengths in energy competition Sales strength- We understand the current needs of our customers and can offer the most suitable tailor-made energy packages Technical strength- We ensure speed and high technical standards through our integrated system of guaranteeing and maintaining equipment from our manufacturers#11OSAKA GAS Tariff policy Details of tariff revisions H T 02/99 Osaka Gas reduced tariffs by 3.61% on average 12/99 Tokyo Gas Co., Ltd. reduced tariffs by 2.00% on average 10/00 Kansai Electric Power reduced tariffs by 4.20% on average 02/01 Tokyo Gas Co., Ltd. reduced tariffs by 3.02% on average Our evaluation of current tariff levels H Influence of tariffs is slight in the areas of switch to all-electric households and industrial use Leading to an intensification of competition in air conditioning/ cogeneration business for commercial use Our thinking on future tariff revision, and its influence on income and expenditure H We will examine the situation once our goals for the year ending March 03 have been achieved We have not incorporated future tariff revisions in our current financial estimates (A 1% decrease in tariff is equivalent to a sales decrease of around ¥6 billion a year.) 11#12Capital expenditure forecasts (billion yen) 120 110.0 9 OSAKA GAS Administration 103.0 95.5 100 -95.7 92.5 93.5 29.3 91.0 16.8 30 30 25.5 Subsidiaries 80 0.1 21.9 1.3 30.9 31 0.1 15.6 0.9 21.9 0.1 8.2 60 09 7.7 8.1 Incidental business 0.1 40 40 20 10 49.9 52.9 49.5 52.6 49.2 47.7 47.2 Distribution 14.8 8.9 12.1 9.5 9.8 7.7 7.5 Production FYOOR FY01/E FY02 FY03 FY04 FY05 FY06 12#13OSAKA GAS Cost cutting Reduction of employee costs Due to natural wastage (recruitment policy and retirement) we plan to reduce the number of employees from 9,569 to 8,750 or under in 2002 and to 8,000 by March 2007 We plan to introduce an MBO (Management by Objectives) pay system and reduce employment costs per head Capital Expenditure reductions Review of manufacturing time and methods for facilities, developing R&D and rationalization of purchasing policies Investment in plant and equipment 1999-2010: total, from ¥323 billion to ¥258 billion (20% decrease) Investment in trunk pipelines 1998-2003: total, from ¥104 billion to ¥83 billion (20% decrease) Cost reductions in unit costs of pipes . Non-excavation method of construction • Shallow pipe-laying 13#143. Mid-term gas sales plan Stable increase of natural gas demand Residential sales: Growth of floor heating units sales Commercial sales: Growth of air conditioning demand Industrial sales: Expanding cogeneration sales 9 OSAKA GAS 14#15Forecasts of gas sales by use (million m3(46MJ/m3)) 9 OSAKA GAS 01=>06 9,000 Wholesale. 173 170 166 8,000 7.0%/year 124 133 ·163⋅ 109 7,000 Industrial 6,000 3.526 3,652 3,700 3,766 3,867 4,001 4,157 2.6%/year 5,000 4,000 3,000 1,312 1,363 .397 1,440- 1,472 Commercial 1,504. 2.4%/year 1,533 2,000 Residential 1.4%/year 1,000 2.213. 2,228 2.249 2,279 2,314 2,350. 2,386 0 FY00Results FY01/E FY02 FY03 FY04 Total amount 7,160 7,367 7,479 7,648 7,819 FY05 8,025 FY06 8,249 2.3%/year 15#16Gas floor heating sales 120,000 100,000 80,000 OSAKA GAS Newly built houses: number of contracts Existing dwellings: number of shipments Units: number of control units 89,375 100,835 10,875 6,020 61,469 5,090 60,000 40,000 29,672 40,071 Existing dwellings 1,980 89,960 $3,355 18,527 1,895 $6,379 1,584 20,000 38.091 27,777 Newly built houses 16,943 0 FY97 FY98 FY99 FYOO FY01/E FY02 16 16#17❤OSAKA GAS Gas air conditioning (cooling) capacity and GHP equipment sales (Capacity; 1,000RT) 3,500 ☐ 1,000RT 3,000 →― Number of equipment sales 2,500 2,000 1,500 1,000 500 (Number of equipment sales) 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 17#18❤OSAKA GAS Gas air conditioning shares (number of establishments 1995-99) By floor area- the larger the area, the greater the share 1,500-3,000m2 226 300 Gas 5,000-8,000m2 By type of building- examples: Government office Hospital 61 10,000m2- 44 139 Gas Gas 187 School 64 142 127 188 183 105 Gas Gas Gas Source: Osaka Gas Survey 18#19OSAKA GAS Cogeneration sales forecasts (1,000kW) (million m3) 2,500 1,800 1,000kW 1,600 million m3 1,400 1,200 1,000 800 600 400 200 2,000 1,500 1,000 500 0 0 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 19#20❤OSAKA GAS Long-term energy share forecasts We expect natural gas usage to increase because: T The government has declared natural gas a primary energy source for Japan Natural gas is an important plank of the environmental strategy to reduce costs of emissions 100% 90%+* 19 18 80% 13 15 70% 60% 50% 40%-* 67 68 30% 20% 10% 0% 2000 Coal 10 11 15 17 443 36 43 96 Fuel oil 35 30 36 32 Electricity 26 69 30 26 24 23 23 23 14 31 34 +4 Gas 36 33 24 24 27 2010 2000 2010 2000 2010 2000 2010 Commercial Industrial Total Residential Source: Osaka Gas Survey 20 20#21Development of new applications: fuel cells for residential use Development goals 500W 1kW Generation efficiency ratio Heating efficiency ratio Longevity Target price 10 years ¥550,000 Over 35% Over 35% Over 30% Over 35% 10 years ¥600,000 99 OSAKA GAS Osaka Gas's technological strength: high-performance desulfurization catalyst (global standard) Expected date of commercialization: 2005 Impact on our gas sales per installation In the case of 1kW PEFCs for homes with a floor area of over 150m2, an increase from around 800m3 per year to 1,600-1,800m3 per year 21#229 OSAKA GAS Other new applications: new technology ♦ 9.8kW micro cogeneration In 1999 sales to 81 establishments including restaurants, nursing homes etc Gas micro engines Developing 1kW units. Due for commercialization by 2002 ♦ Hydrogen gas supply plant Participating in a national project to develop hydrogen manufacturing system for hydrogen vehicles, by 2004 → Carbon nanotubes Developing nanotubes which increase the strength and absorption of hydrogen gas, based on our carbon fiber technology Working on hydrogen storage for fuel cell vehicles 22 22#239 OSAKA GAS 4. Cash flow management and SVA 23 23#2499 OSAKA GAS Strategy to increase future free cash flow In general, we shall use free cash flow in a way that brings the best results for improving shareholder value The way to spend free cash flow Keep the rate of investment return higher than capital costs Measures to strengthen the financial position of the whole group Focus investment on high growth areas Set group-wide investment standards Use for debt capacity 24 24#25OSAKA GAS Distribution of free cash flow Focus investment on high growth areas in the medium term (year ended March 02-04) About ¥50 billion/year New investment 35% (Excluding ordinary capital expenditure) 35% to cover lowering tariffs etc Dividends 30% 25 25#26❤OSAKA GAS Setting group-wide investment standards 1. 2. 3. 4. 1. 2. 3. 4. Background and aims Maximize shareholder value (creation of shareholder premium) Optimum resource allocation to all business fields (selectivity and centralization) Improve efficiency of gas business investment (more competitive in energy field) Increase in M&A activity and overseas Joint Ventures New standards Awareness of costs of capital/business risk (including investor expectations) Cash flow base Introduction of PDC cycle Setting yearly unit gross investment targets (micro) and profit targets (macro) 26 26#27OSAKA GAS Framework for standards Individual investment standard (NPV) 1. Setting a hurdle rate (WACC) which considers risk in each business 2. 3. 4. 1. 2. 3. Investment: NPV to be positive within 10 years Setting a yearly unit gross investment framework Applicable from November '00 Profit standards for OG business units (SVA; Shareholders' Value Added) - SVA = NOPAT – (interest bearing debt on book value + book value capital) X WACC By March 2003 all divisions from G2-G10 aim to have SVA>0 After a trial period in 2001, the standards will be introduced from year end March 03. 27 22#28OSAKA GAS Investment plans Debt leverage Possibility to leverage interest bearing debt from ¥520 billion in y/e March 01 by ¥80 billion to ¥600 billion Free cash flow Investment of ¥20 billion These measures will allow us to make new investments of around ¥40 billion per year from y/e March 02 to 04 Main investments in 2000 . Acquisition of rights in offshore gas field in Australia's Northern Territory • Acquisition of Nissho Iwai Petroleum Gas Corporation Group Investment in "Ennet" 28#29❤OSAKA GAS Forecasts for consolidated free cash flow (billion yen) 80 71.0 68.9 السيد FY00Results FY01/E Premises: 28$/bbl, 118 yen/$ Subsidiaries: FY00- 25 companies, FY01- 35, FY02- 42 70 60 50 29 29#30❤OSAKA GAS Main factors behind the increase in free cash flow (billion yen) FY00/R FY01/E FY02 FY03 FY04 FY05 FY06 Free cash flow 18.9 34.4 45.0 50.0 50.0 68.9 71.0 FCF increase/decrease compared with previous year Breakdown +15.5 +10.6 +5.0 0 +18.9 +2.1 1. Influence of increase in gas sales +5.1 +6.2 +8.4 +7.9 +7.7 +8.8 2. Increase/decrease in depreciation +14.4(*) -4.9 -0.6 +3.2 +2.6 -1.5 3. Increase/decrease in capital expenditure (offset accounted in +3.0 +4.3 -7.5 +10.5 -9.5 -2.5 incidental facilities) * Included accelerated depreciation 5.7 billion yen of Senboku #18 tank 30 30#319 OSAKA GAS 5. Deregulation and convergence of electricity and gas 5-1. Deregulation 5-2. Competition in the gas business 5-3. Competition in the electricity business 31#32❤OSAKA GAS Liberalisation of electricity and gas markets Supply Regulations Gas Phase 1 (1995-) Phase 2 (1999-) Liberalization of market Threshold: 2 market Threshold: Liberalization of million m3 Electricity Introduction of IPP, Restricted Power Distribution Business 1 million m3 Liberalization of sales to users of 2,000kW & 20,000 volts Transmission Gas/Electricity Allowing third party Establishing access to transmission lines connection rules Tariffs Gas/Electricity Introduction of Ease the yardstick formula and fuel cost adjustment system setting, choice of tariffs regulations on rate- Phase 3: forecasts (2002-) Further liberalization Equal footing of third party access to transmission lines Account dividing of network business Ease third party access to LNG terminals 32 32#339 OSAKA GAS Present direction of deregulation Research Committee investigating basic gas market problems on organization including the Ministry of Economy, Trade and Industry (METI) and industry leaders Starting in January 2001, investigations leading to a third phase of deregulation in 2003 ◆ Key points concerning the 10 year plan for market regulation: T Methods of import, storage, gasification, pipeline transport, wholesale and retail in the gas chain ◉Integrated approach to security of supply, consumer protection and a competitive environment ודו Ways of guaranteeing security, etc 33#3499 OSAKA GAS Our thoughts on deregulation ◆ On the premises that a plus-sum competitive market has been created in the wake of the increased use of natural gas, and that conditions of fair competition with other energy sources are well established, Osaka Gas presents the following scenario: Phased liberalization of markets other than the residential market (commercial and industrial markets) The scope of use of pipelines expands due to participation of new players in the markets The use of LNG terminals is determined through negotiations between parties concerned The management form will not be specified institutionally, but left to the discretion of the utility Further transparency of access fee by account dividing between network (pipeline distribution) business and others Simultaneous system reformation in both electricity business and gas business 34 =4#35LNG supply costs/terminal costs, compared with electricity companies Supply costs OSAKA GAS Both electricity and gas companies mainly purchase supplies via long term contracts, so there is no major cost difference Our own cost cutting strategy T Individual purchase (Oman) Lower costs thanks to our tanker ◉Re-sale of LNG Terminal costs ◆ We use the same processes of transportation, storage and gasification Our costs are already low thanks to our completed pipeline structure; our depreciation is proceeding well Our facilities can cope with higher sales in the future, as KEPCO's new terminal will create excess capacity 35#36Gas transport costs, developing demand Gas transport costs Supply connection fees are the same But, for connections electricity companies have to bear additional costs (equipment for odorization and stabilization are included) → Developing demand Strengths of gas companies Strengths of electricity companies Technological strength in maintenance of cogeneration equipment Ability to meet customers' overall needs Strong purchasing power in supplies 36 36 OSAKA GAS#379 OSAKA GAS Our entry strategy into electricity markets 1. IPP Torishima IPP plant 150,000 kW(starts from April 2002) 2. Electricity retailing (Ennet) 3. Н T From April 2001, starting 9 or 10 business, supplying 24,000kW We aim to supply 10% of the total electricity contracts awarded by KEPCO and TEPCO, i.e. 10% of 11 million kW and 24 million kW respectively (= 3.5 million) Onsite generation of electricity ― Promotion of in-house generation + ESCO From January 2001, onsite generation of 9,000 kW at Mycal, Ibaraki From April 2002, at Osaka mothers & children health center Building up a network of existing cogeneration customers (666 cases, 1 million kW) 37#386. Reference material 9 OSAKA GAS 38#39OSAKA GAS Areas of demand for gas cogeneration and new technology Electricity as % of energy demand 100 90 80 70 60 50 40 30 20 10 I I I I I I I I PEFC, gas micro engine Micro gas turbine High-efficiency gas engine, turbine Small scale commercial Large scale commercial Industrial Use institutions institutions Convenience stores Offices & stores Industrial factories (metal, machinery) Industrial factories (paper mills, food) Residential Use Fast food restaurants Hospitals & hotels District heating and cooling Public baths Expected future Current areas of demand areas of demand 1 10 100 1,000 10,000 Generation capacity (kW) 39#4099 OSAKA GAS Case studies in the industrial market Gas engines for steel pipes: In the past: used for steam and hot water in factories Now: in addition to the above, in washing steel pipes we recycle waste hydrochloric acid Using steam from gas engines, we recycle waste hydrochloric acid Not only do we supply engines, but we also solve the corrosion problem that goes with the use of hydrochloric acid Burner systems for chain production: Because we offer 50% energy saving, we are competitive with fuel oil We can further reduce costs by offering improvements to furnaces and cooling systems 40 40#4199 OSAKA GAS Share buy-backs ♦ Thinking on share buy-backs This is one way of rewarding our financial position We did and will select from a number of methods of shareholder return, including increase dividends, building up internal reserves, new investment etc, and use buy-backs if the situation on the capital market seems suitable Results to date In the past 2 years we have had 3 share buy-backs. Our board has authorized a further 151 million shares. Period Shares bought back Value of purchases Price per share 99.2-3 27.7 million 10 billion yen 361 yen per share 00.2-4 38.6 million 9.6 billion yen 00.11-12 32.3 million 10 billion yen 248 310 41#42❤OSAKA GAS Hydrogen saving technology using carbon nanotubes (compared with other 3 methods) In the case we achieve to success to save hydrogen with 10wt% 1. Compared with hydrogen saved compound metal CNTs tank 2. Compared with hydrogen compression method ** CNTs tank 500km Tank weight: 100-180kg 500km Compound metal tank when saved 5kg hydrogen Tank weight: 300kg 500km Compressed hydrogen tank 170km ** Presuming the same capacity of tanks and same level of pressure (I.e. if CNTs tanks save 5kg hydrogen) 3. Liquefied hydrogen method has problems about high liquefication cost and vaporization of liquefied hydrogen (Reference) 5kg hydrogen allows fuel cell vehicles to run about 500km 42#43OSAKA GAS E-business E-cube net dot com *A JV with Mitsubishi Trading Company, established in 1999 Internet EC/EDI Home portal T A specialist Internet site catering for the home DIY/refurbishment market, starts from 2001. This was the first such portal in Japan. ♦ Recipe site which generates business ♦ Local information offered on mobile phones Information on local restaurants and events based on an information sheet published by our group company L-net, available via mobile phones (i-mode) 43 43