OSAKA GAS CO.,LTD. Q2 FY2026 earnings call

• 2Q FY26 H1 Earnings Results:

  • Ordinary profit hit 105.4 billion yen, up 33.5 billion yen year-over-year; ordinary profit excluding time lag effects was 86.2 billion yen, up 19.1 billion yen YoY.
  • Parent net profit attributable to shareholders was 94.8 billion yen, up 44 billion yen YoY.
  • Cumulative growth investment reached 101.3 billion yen, 48% of the full-year annual plan, on track.
  • Financial health targets are met: equity ratio above 45%, D/E ratio below 0.8 as of 2Q end.

• Business Portfolio & Growth Strategy:

  • All businesses are expanded leveraging existing infrastructure, brand, expertise, and networks, with a strategy of incremental growth into adjacent markets/areas rather than disjointed large expansion.
  • Domestic power business leverages synergies from LNG trading, existing gas-fired generation adjacent to LNG terminals, and retail customer connections to build a competitive value chain, with ongoing expansion into renewables and storage.
  • Overseas business leverages domestic energy expertise, with accumulated trial-and-error that has grown local talent and market presence; it also provides natural hedging between upstream overseas and domestic downstream operations, and creates cross-selling opportunities across the group.

• Segment Specific Operational Updates:

  • Domestic Energy Retail/Wholesale: Natural gas remains a core energy under Japan's 7th Strategic Energy Plan. Residential segment leverages existing customer base to expand cross-selling of in-home services to improve retention and customer count. Commercial/industrial segment provides decarbonization/low-carbon and labor-saving solutions to add value, with ongoing geographic expansion into the Tokyo metropolitan area and other non-service areas. Customer churn has bottomed out after 10 years of full liberalization, with stabilization and improving predictability.
  • Domestic Energy Generation & Trading: Domestic power demand is growing due to AI data center expansion and growing electrification. The 1.2 million kW Himeji natural gas-fired power plant will launch Unit 1 in January 2026 and Unit 2 in May 2026, adding 1.2 million kW of supply capacity to support power sales expansion. Trading optimizes profit by capturing price spreads between power and gas markets.
  • Overseas US Shale Gas: Natural gas demand remains high driven by LNG exports and growing power demand. The Sabine acquisition has succeeded with a strategy of buying producing assets rather than greenfield exploration, hedging to lock in selling prices, adjusting production based on price levels, and ongoing incremental small-scale acquisitions to expand production efficiently.
  • Overseas US Thermal Power: PJM market capacity prices have risen sharply driven by growing data center demand. Osaka Gas holds 1.3 million kW of equity capacity across 5 gas-fired plants, leveraging domestic generation operational expertise to improve asset value, with ongoing asset rotation to boost returns.
  • Overseas India City Gas & Renewables: The Indian government supports natural gas and renewables as core policy, with strong demand growth projected. Osaka Gas holds exclusive rights to 11 areas, targeting 3.5 billion cubic meters of sales (10x current volume, equal to half of Osaka Gas's domestic city gas sales) by FY31 (ending March 2031), and targets 10 billion yen in ordinary profit from India by the early 2030s via a JV with leading local player Clean Max for renewables expansion.
  • LBS Urban Development & Materials: Urban development focuses on high-demand central Tokyo areas, targeting to increase turnover-based business share to improve capital efficiency, with a target of 100 billion yen in cumulative sales to private REITs by FY31. The materials business is expanding production capacity to meet growing activated carbon demand driven by rising living standards.

1. Domestic Energy: Segment includes gas retail/wholesale (residential, commercial/industrial), power generation, and power/LNG trading. For H1 FY26, the segment contributed to overall earnings growth via expanding gas sales profit, growing non-gas new services, and expanding time lag profit; it is projected to deliver mid-dozens of billions of yen in additional profit for FY27 (ending March 2027), on track to hit the mid-term plan target. 2. Overseas Energy: The segment has grown to be the core profit driver of Osaka Gas, with nearly 70 billion yen in profit projected for FY26. It is projected to deliver over 10 billion yen in additional profit for FY27, driven by strong performance across US shale gas, Freeport LNG terminal, and US PJM power market businesses, plus growing pipeline from India operations. 3. LBS (Life & Business Solutions): The segment is expected to contribute mid-dozens of billions of yen in additional profit for FY27, driven by accelerated asset turnover in real estate urban development, and growing activated carbon demand supporting materials business expansion. Three core LBS subsidiaries have each grown to ~1 billion yen in annual profit. Revenue contribution percentages for each segment were not explicitly provided in the transcript.

• Full-year FY26 (ending March 2026): Management upgraded the ordinary profit guidance from 165 billion yen to 186 billion yen, an upward revision of 21 billion yen. Ordinary profit excluding time lag effects was revised upward from 159 billion yen to 169 billion yen, an upward revision of 10 billion yen. Sales guidance was revised upward by 10 billion yen to reflect strong US business performance.
  • Mid-term target (FY27, ending March 2027): The mid-term management plan targets 5% ROIC and 8% ROE, with over 10 billion yen of additional profit from US operations, and mid-dozens of billions of yen of additional profit from both domestic energy and LBS, to hit the plan target.
  • Long-term target (FY31, ending March 2031): Management targets 200 billion yen in ordinary profit, with targets of ~6% ROIC and ~10% ROE by the early 2030s.
  • Shareholder return: Management raised the target dividend on equity (DOE) from 3% to 3.5%, effective from the FY26 interim dividend. Full-year FY26 annual dividend per share was revised upward from 105 yen to 120 yen, an increase of 15 yen.

• Overseas energy operations carry political and regulatory risk: Energy infrastructure is deeply tied to national policy, with lengthy permitting processes and potential policy changes that can impact profitability; in India, there is specific risk of rising domestic gas wholesale prices that could squeeze margins, though management judges extreme policy change is unlikely given widespread state-owned participation in the sector.
  • US power and shale gas growth requires long-term investment and will not deliver near-term profit gains, with exposure to commodity price volatility, though the current business model uses hedging and flexible production to mitigate this risk.
  • Domestic energy faces structural headwinds of population decline and industrial contraction in the core Kansai service area, which suppresses domestic natural gas demand growth.
  • Improving ROIC via reducing the capital base (denominator effect) has no quick fix, and will require gradual, ongoing effort with no guaranteed outcome.
  • Large-scale growth investment can push free cash flow to negative in the near term, even as management targets positive FCF over the medium to long term.
  • The 2027 change in lease accounting standards will impact balance sheet metrics, requiring adjustment to planning.

Q: The US business is already ~70 billion yen in profit and a core profit driver. Is further growth possible in this and the next mid-term plan, and which segments will drive this? / A: Management sees growth potential across three areas: shale gas (incremental small-scale acquisitions of targeted assets plus operational efficiency improvements to expand production), Freeport LNG terminal (now fully stabilized after post-accident adjustments and performing very well this year), and US power (rapidly rising PJM capacity prices from data center growth, with room to expand existing assets for further profit growth). Gains will be gradual and require a medium-to-long term outlook, but there is sufficient room for upside.

Q: What is the background for raising DOE mid-way through the current mid-term plan? / A: Management had ongoing internal discussions about DOE, balancing growth investment against shareholder returns. Previously there was internal preference for prioritizing growth investment over buybacks, but the team agreed that after committing to 3000 billion yen in total growth and quality improvement investment, excess accumulated equity should be returned to shareholders. With this year's strong outperforming earnings, it would be inappropriate to only adjust earnings guidance without updating the shareholder return policy, leading to the final decision to raise DOE.

Q: What are the details of domestic energy profit growth and outlook to FY31? / A: Profit growth comes from two areas: first, ongoing improvement in pricing for maturing large contracts, which had previously been depressed by intense competition in Kansai. Second, good performance from renovation new business, where a subsidiary renovates and resells used properties, which is benefiting from weak new home affordability amid rising prices. Looking forward, customer churn has bottomed, the company will grow customer count in the Tokyo area, the new Himeji plant will add 1.2 GW of capacity to drive power profit growth, and the company will pursue expansion via LNG bunkering and switching coal to gas in Western Japan industrial facilities.

Q: What key lessons from US business success can be applied to India and future expansion? / A: Early US entry had major failures including a 3 billion+ yen loss from greenfield shale exploration. The company shifted strategy to buying existing producing assets rather than greenfield development, which enabled low-cost entry of Sabine and the 'small birth, big growth' strategy that succeeded. For US IPP, the company endured a decade of low prices before tailwinds from coal retirements and data center growth, plus incremental value improvement, led to current success. Over 30 years of trial and error built deal-sourcing expertise and local talent, which will be applied to India where the company is focusing on strict compliance and leveraging its 120 years of utility operational experience.