Net Profit Decreases by 65% - Strong Performance in North America, Sluggish Domestic Market: Tokyo Gas Financial Results Reflect Two Sides

The consolidated financial results for the first quarter of the fiscal year ending March 2027, covering April to June 2026, announced by Tokyo Gas, were enough to make investors cautious just by looking at the headlines.

While sales increased by 4.0% year-on-year to 673.4 billion yen, the quarterly net profit attributable to the parent company's shareholders was 35.5 billion yen, a 65.0% decrease from the same period last year. Despite the increase in revenue, the final profit shrank to nearly one-third.

However, judging this financial result solely by the figure "65% decrease in net profit" could lead to a misunderstanding of the essence. The main reason for the significant decrease in profit is the absence of a large one-time profit recorded in the same period last year. Meanwhile, operating profit and segment profit, which are closer to the core business, also decreased, so it cannot be dismissed as merely a "special factor."

While the domestic gas and electricity businesses struggled with raw material prices, electricity procurement costs, and timing discrepancies in reflecting these in rates, the North American shale gas business recorded a significant increase in profit. From this financial result, it emerges that Tokyo Gas is transforming from a traditional city gas company into a composite energy company combining domestic energy and overseas resource businesses.

Increased sales but decreased core business profit

The first quarter sales were 673.4 billion yen, an increase of 26.1 billion yen from 647.3 billion yen in the same period last year. The increase in revenue from the North American shale gas business compensated for the decrease in domestic gas and electricity sales volumes.

On the other hand, operating profit decreased by 11.4% year-on-year to 55.4 billion yen, segment profit including equity method earnings decreased by 4.9 billion yen to 56.8 billion yen, and ordinary profit decreased by 13.3% to 49.5 billion yen.

In other words, not only the final profit but also the operating stage, which indicates the company's continuous earning power, saw a decrease in profit. While sales increased by 4%, operating expenses increased by 5.7%, with the growth in costs and procurement expenses exceeding the growth in sales.

Particularly severe was the Energy Solutions segment, which includes city gas, electricity, and energy services. The segment profit of this division decreased from 55.5 billion yen in the same period last year to 26.9 billion yen. The profit reduction rate reached 51.4%, significantly dragging down the company's overall profit.

Most of the "65% decrease" is due to the absence of last year's special profit

The biggest reason for the 65% decrease in net profit is the absence of special profit recorded in the same period last year.

Last year, Tokyo Gas recorded a special profit of 68 billion yen from the reversal of the foreign currency translation adjustment account due to the resolution to dissolve its Australian subsidiary. This was the transfer of accumulated foreign exchange differences in the process of converting the assets and liabilities of overseas subsidiaries into yen to profit and loss due to the dissolution of the subsidiary.

In the current period, gains on sales of investment securities of 6 billion yen and gains on sales of fixed assets of 2.2 billion yen were recorded due to the sale of policy-held stocks and some renewable energy subsidiaries. However, it did not reach the scale of 68 billion yen from the previous year.

Special profit and loss decreased from 74.8 billion yen in the same period last year to 8.3 billion yen. The decrease in net profit of 66.2 billion yen is almost the same scale, and most of the 65% decrease can be explained by the absence of one-time profit.

Therefore, interpreting this financial result as "Tokyo Gas's business itself deteriorated by 65%" is not accurate.

However, since operating profit also decreased by 7.1 billion yen and segment profit by 4.9 billion yen, it is not that the core business was doing well. It is important to separate the profit decrease due to special factors from the actual deterioration in profitability occurring in the domestic business.

Time lag in rate reflection pressured domestic business

As a factor for the decrease in profit in the domestic energy business, Tokyo Gas emphasizes the "time lag effect."

There is a system where changes in the prices of crude oil, LNG, coal, wholesale electricity, etc., are reflected in the rates of city gas and electricity after a certain period. Even if raw material prices rise, customer rates do not necessarily increase in the same month. Companies procure fuel or electricity at higher prices first and then pass it on to rates later.

During periods of rising prices, this time lag can cause temporary losses. Conversely, during periods of falling raw material prices, rates reflecting previous high raw material prices remain, potentially creating temporary profits.

According to Tokyo Gas's explanatory materials, a significant factor for the decrease in profit was caused by the time lag effect of gas and electricity. Due to complex movements in exchange rates, crude oil prices, and LNG prices, discrepancies arose between the prices reflected in rates and the actual procurement prices.

The company explains that since most LNG is procured through long-term contracts, the price surge in the spot market does not affect the entire volume directly. However, yen depreciation, rising crude oil prices, and the time lag in price calculations pressured the profits of the domestic business.

Part of this loss may be recovered as rate reflection progresses in the future. However, if raw material prices rise further, new time lag losses may occur, so it cannot be assumed that profits will automatically return.

JEPX price increase burdened the electricity business

In the domestic business, the price increase in JEPX, the wholesale electricity market, also became an issue.

Tokyo Gas owns power plants, but it does not supply all the electricity to retail customers solely from its own generation. To fill the gap between demand and generation, it sometimes purchases electricity from the market.

If JEPX prices rise, the cost of electricity procured from the market increases. On the other hand, in situations where surplus electricity is sold to the market, price increases can lead to profits. Some contracts with specific corporate customers include items linked to JEPX prices, allowing some offset on the sales price side.

In this financial result, even including such positive factors, the rise in JEPX prices negatively impacted the entire electricity business. The segment profit of electricity significantly decreased from the same period last year.

Additionally, an increase in fixed costs due to large-scale repairs at power plants coincided. Electricity sales volume decreased by 7.4% year-on-year, with both a decrease in sales volume and an increase in costs occurring simultaneously.

Even if electricity demand increases due to heatwaves in the future, if market prices surge, procurement costs will also rise. The difficulty of the electricity retail business is that an increase in electricity sales volume does not necessarily lead to an increase in profit.

Warm spring lowers city gas demand

In terms of quantity, high temperatures in early spring also affected the domestic business.

In households, stores, and offices, if temperatures are high, the amount of gas used for heating and hot water decreases. Tokyo Gas's household gas sales volume significantly decreased from the same period last year.

For energy companies, temperature is an important variable that cannot be managed solely by business efforts. A warm winter reduces gas demand, and a cool summer weakens electricity demand. While heatwaves or severe winters may boost sales volume, if market procurement prices rise simultaneously, the profit from increased volume may be offset.

Tokyo Gas has a large customer base centered in the Tokyo metropolitan area. However, factors affecting revenue, such as fuel prices, temperature, competition after liberalization, and power plant repairs, have increased compared to before.

The traditional image of infrastructure companies earning stable profits every year is gradually becoming misaligned with the actual business structure.

North American shale gas compensates for domestic profit decline

In contrast to the domestic business, the overseas segment performed well.

The segment profit of the overseas division increased from 11.9 billion yen in the same period last year to 34 billion yen, approximately 2.9 times. The increase reached 22.1 billion yen, largely compensating for the decrease in profit from the domestic energy business.

The main contributor was the North American shale gas business. The financial results of the North American business reflect the performance from January to March 2026, and the cold wave in late January 2026 in the U.S. raised U.S. natural gas prices, boosting sales prices.

Additionally, the start of production from new wells and improved production efficiency led to production volumes exceeding the company's plans. Tokyo Gas explains that the main factor exceeding expectations was production volume rather than price.

The North American business did not simply make a profit by chance due to market conditions rising, but the resource development investments and production capacity expansions that have been advanced are also reflected in the numbers. It is a result that symbolizes Tokyo Gas's transformation from a domestic gas company to an energy company including overseas.

However, it is not guaranteed that North American profits will continue at the same level as the first quarter.

The first quarter profit of the overseas division was 34 billion yen against the full-year plan of 76.9 billion yen, reaching a progress rate of 44%. Still, the company did not raise its full-year forecast. This is because U.S. natural gas prices have declined after the cold wave, and they do not expect high prices to continue until the second half of the year.

The improvement in productivity of new wells is a positive factor in the medium to long term, but the profit from rising resource prices has a temporary aspect. While the North American business is a growth area that supplements the domestic business, it also brings new fluctuation risks such as resource prices to the group.

Company's decision to maintain full-year forecast

In this financial announcement, Tokyo Gas did not change its full-year forecast for the fiscal year ending March 2027.

They expect sales of 2.947 trillion yen, operating profit of 186 billion yen, ordinary profit of 173 billion yen, and net profit of 137 billion yen.

The plan is for net profit to decrease by about 40% from the previous year's 226.8 billion yen, but this also includes the impact of the absence of last year's special profit. The forecast for segment profit, which is closer to the core business, is 195 billion yen, with a relatively small decrease from 201.1 billion yen in the previous year.

The company states that the first quarter segment profit is progressing smoothly against the plan shown in April.

While the North American business exceeded the plan, domestically, the time lag losses and electricity procurement costs worsened more than expected. However, other price difference factors and the North American business's upside offset these, and overall, they judge it to be within the scope of the annual plan.

Going forward, it is expected that while North American business profits will settle down, domestically, price reflection in rates will progress, and profitability will improve. To achieve the annual plan, these two changes need to progress as scheduled.

Will the gas rate revision from October lead to revenue improvement?

Tokyo Gas plans to revise gas rates in the Tokyo area and other regions from October 2026.

The aim is to reflect increases in labor costs, equipment maintenance costs, and interest rates in rates and improve the revenue structure of the domestic gas business. The first quarter explanatory materials also cite rate optimization as a future profit growth factor.

Gas rates are directly connected to living and business activities, so the company cannot freely repeat significant rate hikes. On the other hand, to maintain infrastructure safety and stable supply, it is necessary to earn profits required for capital investment and securing human resources.

Whether revenue improves due to the rate revision or the effect is diluted by demand reduction or customer attrition will depend on sales volume and customer numbers from the second quarter onwards.

Maintaining an annual dividend of 120 yen despite significant profit decline

Despite being a year of declining profits, Tokyo Gas has not changed its shareholder return policy.

The annual dividend is expected to increase from 110 yen per share in the previous year to 120 yen. An interim dividend of 60 yen and a year-end dividend of 60 yen are planned.

Tokyo Gas advocates a progressive dividend policy, aiming to increase dividends in line with the medium- to long-term growth of earnings per share, and as a principle, avoiding dividend cuts. They emphasize the stability of dividends even amid short-term profit fluctuations.

Furthermore, they maintained the policy to conduct a share buyback of up to 50 billion yen in the first half of fiscal 2026. If the number of outstanding shares decreases due to share buybacks, earnings per share and capital efficiency are likely to improve.

However, high dividends and share buybacks do not automatically increase corporate value unconditionally. Growth investments in areas such as North American shale, power plants, energy services, and decarbonization-related businesses are also necessary.

Tokyo Gas plans to allocate funds obtained from asset and business sales to both growth investments and shareholder returns. The question is whether they can continue returns while making sufficient investments in businesses that will generate future profits.

The stock price did not plunge 5% in the Tokyo market

The original article explains that the stock price fell by more than 5% on Friday following the financial results.

However, looking at the closing prices on the Tokyo Stock Exchange, it was 6,290 yen on July 29, 6,263 yen on the financial announcement day of July 30, a 0.43% decrease from the previous day. On the following 31st, it was 6,219 yen, a 0.70% decrease from the previous day.

At least on a closing price basis in the Tokyo market, a plunge of more than 5% cannot be confirmed.

In the European exchanges displayed in the original article, Düsseldorf was down 4.09%, and Stuttgart was down 4.62%. In overseas markets with low trading volume, larger fluctuation rates than the Tokyo market may be displayed due to differences in trading times, exchange rate fluctuations, and price differences between buyers and sellers.

Therefore, it should be cautious to interpret uniformly that "the market was hit by a disappointment sell-off of more than 5% following the financial results."

The relatively small reaction in the Tokyo market is considered to be because the absence of last year's one-time profit and the plan for a decrease in full-year net profit were already somewhat known as of April.

However, it is true that the stock price weakened after the financial announcement. While the market did not move to