Deregulation isreshaping our market.

How arewe responding?

Annual Report 1999 TOKYO GAS

7

Deregulation is reshaping our market. How are we responding?

Honing a Sharper
Competitive Edge
KANTO PLAIN

Negishi LNG Terminal
Commenced operations: 1969
Daily production capacity:
1.0 trillion Btu (21 million m3)
Storage capacity: 1.2 million m3
Special feature: Received Japan’s firstTOKYO

shipment of LNG in 1969

Head Office
Sodegaura LNG Terminal
TOKYO BAY

Commenced operations: 1973
Daily production capacity:
1.3 trillion Btu (29 million m3)
Storage capacity: 1.6 million m3

8Special feature: The world’s largest

Ohgishima
LNG Terminal

LNG receiving terminal

YOKOHAMA

Sodegaura
LNG Terminal

NegishiLNG Terminal

Ohgishima LNG Terminal
Commenced operations: 1998
Daily production capacity:
0.4 trillion Btu (10 million m3)

Length of pipeline: 46,285 km(As of March 31, 1999)

05

1015

High-pressure transmission pipelines
Planned or under construction
Medium-pressure transmission pipelines
Tokyo Gas service area20（km）

Storage capacity: 0.2 million m3(another 0.4 million m3 is presently
under construction)
Special feature: The world’s firstcompletely underground 200,000 m3
LNG storage tank and Japan’s first
offshore LNG receiving berth

20020,000

150

15,000100

10,00050

5,000Capital Expenditures andDepreciation in Relation toGas Sales Volume(1992~2004)(Left scale: billion ¥)(Right scale: million m3, 46.047 MJ/m3)

Capital expenditures
Depreciation

00Mar. 31 92

93949596

9798

9900

01

02

Note: 2000~2004 are projected figures.
The above graph represents non-consolidated data.
TOKYO GAS Annual Report 19990304

Gas sales volume

I. Investing in a Powerful Supply Infrastructure

Demand for natural gas has risen as energy providers look for alternative energy sources other than petroleum and the government looks for solutions to environmental problems. According to MITI’s Long-term Energy Demand and Supply Outlook forJapan (1998), growth is set to continue—the demand for natural gas is expected to rise 18% compared to 1996 by 2010. Overall
energy demand, by comparison, is predicted to increase 3%. We are well placed to benefit further from this trend. Here’s why.

Foresight Set to Pay Handsome Dividends
Recognizing the potential of natural gas, Tokyo Gas invested in a powerful supply infrastructure. With deregulation set tofuel even more demand for gas, our investments are giving us a competitive advantage. Significantly, these large-scale
investments will approach completion in 1999—investments have already passed their peak. We are thus poised to start
recovering on our investments.

Unrivaled Natural Gas Supply Capacity
Just how powerful is Tokyo Gas’ supply infrastructure? Tokyo Gas has Japan’s largest natural gas supply capability and isprogressively upping capacity. Three LNG terminals—each of which plays a prominent role in Japan’s gas industry—are at
the heart of this strength. Our Negishi LNG Terminal received Japan’s first shipment of LNG in 1969. Our Sodegaura facility
is the world’s largest LNG receiving terminal. And then there is the new Ohgishima LNG Terminal, the first phase of whichcame on stream in October 1998. Boasting the most sophisticated technologies, Ohgishima is of particular strategic importance. The terminal’s location in the high-demand Keihin district near Yokohama means lower costs because a new longdistance pipeline is not required. Ohgishima will eventually have a production capacity of approximately 4 billion m3 perannum to respond to increasing demand.

Extensive Transmission and Distribution NetworkInvestments to bolster our transmission capacity are allowing us to take maximum advantage of our competitive edge inproduction. Two new pipelines, the Keihin Transmission Pipeline and the Yokohama Transmission Pipeline, slated for completion by the end of 1999, will augment our supply capability and complete a transmission loop and mutual backup system forour three LNG receiving terminals. What this means is that should an LNG receiving terminal go out of action, supply willcontinue as the other terminals can step in to take up the slack. The result: an even more powerful network for providing
customers with a reliable supply of gas.
With these enhanced infrastructures we will be able to meet growing demand during the next few decades with minimum
additional investment.
LEFT
Ohgishima LNG Terminal
offshore receiving berth
CENTER
Sodegaura LNG Terminal
RIGHT
Part of Tokyo Gas’ transmission pipeline

Annual Report 1999 TOKYO GAS

9Deregulation is reshaping our market. How are we responding?

Honing a Sharper
Competitive Edge

10

Cogeneration system testing laboratory
Increasing the capacity of cogeneration (high efficiency, high reliability)
Promoting the use of gas-fired air conditioning (high efficiency)
Developing gas appliances for residential use (high quality, low cost)
Minimizing environmental impact

Program Objectives andStrategies

Promotingthe use ofnatural gas
Newbusinesses
anddirections

Advancing into new fields of business
Diversifying resources for the production of gas

Strengthening
the foundation ofgas production,supply, andservice
Reducing construction and maintenance costs for plants and pipelinesEnhancing the quality and efficiency of operations through advanced information technology
Ensuring further increases in safety

TOKYO GAS Annual Report 1999

II. Innovative Technology, More Competitive

An extensive and sophisticated supply network for gas is just one way in which we are honing a sharper competitive edge.
Fully aware that a deregulated climate forces us to compete against other forms of energy, particularly electricity, we are
strategically targeting R&D. Our aim is to give customers even more compelling reasons to choose gas over other energy
sources. R&D will be a driver of future growth at Tokyo Gas.

Technologies to Create Demand
1. Gas Cogeneration Systems One of our main research themes is cogeneration systems, which optimize energy use byproviding electricity and recovering thermal energy. The ability of these systems to save energy and reduce greenhouse gas
emissions makes them an attractive alternative for customers. Presently, we are working on micro turbines and fuel cells forresidential cogeneration systems.
2. District Heating and Cooling (DHC) Systems

Tokyo is one of the most densely populated cities in the world. With land

at a premium, building space must be used as effectively as possible. DHCs achieve this goal, in addition to energy savings,
by circulating chilled water, hot water and steam from centralized energy plants via a network of pipes.
3. Gas-fired Air Conditioning National energy policy is now promoting gas-fired air conditioning because of the increasingneed to (1) raise the load factor of both gas production and gas distribution systems throughout the year, and (2) alleviate
the electricity demand peak during the summer period. In this way, Tokyo Gas is helping to balance energy supply anddemand, as well as reduce the overall energy costs of its customers.

Technologies for Enhanced Infrastructure
Our gas infrastructure is underpinned by the development of innovative technologies that improve safety and reliability andyield cost savings. Foresighted investments in technologies such as high-pressure transmission and underground storage systems will ensure a stable, reliable and economic supply of gas to our customers in the future.

Technologies for Future Operations and Profits
Information technology (IT) is playing a vital role in expanding the gas market by helping to forge stronger relationships withcustomers. Our advanced services that draw on IT to establish effective two-way communication with gas users are raisingcustomer satisfaction while adding an extra element of flexibility to our operations.
R&D Budget Allocation by Program Objective(Year ended March 31, 1999)
Others 6%

Cost reduction 10%

New directions 4%
Alternative resources 1%
Information technology

Safety14%

Cogeneration

23%

12%

Environment 6%

Gas appliances 13%
Gas cooling 11%
Total: ¥14 billion

Annual Report 1999 TOKYO GAS11Deregulation is reshaping our market. How are we responding?

High-rise buildings inShinjuku, one of Tokyo’s
liveliest commercialareas, use gas DHCs.
This is the largest DHC
system in the world.

12

Creating New
Sources of Demand
Growth in Capacity of Gas
Cogeneration Systems

800

3,000

Growth in Capacity ofGas Heating and Cooling
Systems(Unit: MW)(Unit: Thousand Refrigeration Tons)
600
2,000
400
1,000
200

00Mar. 3195 96 97 98 99

TOKYO GAS Annual Report 1999

Mar. 3195 96 97 98 99

I. Using Deregulation to Boost Natural Gas Demand

Industrial and commercial users accounted for approximately 54% of our gas sales volume as of the end of March 1999, a26% increase over the last 5 years. In the next 5 years, we expect an over 50% rise. Moreover, deregulation and theJapanese government’s energy policy, supported by our gas-related technologies, promise to fuel this growth even more.

Opportunities Spawned by Deregulation
Deregulation has opened the door to the electric power industry. The first noticeable area of change is that independent power
producers (IPPs) are now free to operate. We see this as an incredible opportunity to supply gas for power generation to these
new large-volume customers. Presently, we have plans to supply three large-volume IPPs. One of these IPPs uses over 150
million m3 of gas a year. Deregulation now allows us to also supply electricity. We will monitor the electricity market closely andconsider entering this market when conditions justify the necessary investments.
The December 1995 amendments to the Electricity Utility Industry Law allowed Tokyo Gas to supply electricity in
specific areas such as redevelopment zones. With this field expected to expand, we are examining the feasibility of entry
into this business.
Supplying gas to large-volume users purchasing 2 million m3 or more of gas per year outside our service area is a new areaof potential growth for Tokyo Gas, and will be even more so when the user threshold is lowered to 1 million m3 in the autumnof 1999. In Saitama Prefecture, we have started supplying gas to a large-volume user that would be supplied by a gas company
operating in that service area.

Government Energy Policy Driving Demand for Natural Gas
Also working to our advantage is the government’s push for the use of certain energy sources as a means of reducing theenvironmental impact of energy consumption. Natural gas is widely recognized as an environmentally friendly fuel. This drive
has been hastened by the adoption of resolutions from COP3.

Technologies to Encourage a Switch to Gas
High hopes are held for gas cogeneration systems; demand is expected to increase approximately 40% by 2002 compared to1997. Gas-fired air conditioning, which was installed at approximately 56% of all new buildings with over 10,000 m2 of floor
space during fiscal 1998, is another illustration of how we give industrial and commercial users more reasons to choose gasover electricity. Reduced running costs and other benefits make this technology extremely attractive.

LEFT
The Nihonbashi main store of Mitsukoshi, a famous Japanese
department store chain, introduced a gas cogeneration systemthat also functions as an emergency power supply.
RIGHT
Gas turbine cogeneration equipment located at the site of anindustrial customer.

Annual Report 1999 TOKYO GAS

13

Deregulation is reshaping our market. How are we responding?

Creating New Sourcesof Demand

14

Residential customers represent one of Tokyo Gas’ most important areas of growth.

Percentage of New
Housing With Gas Floor
Heating Systems in theTokyo Gas Service Area

2015Tokyo Gas Fan Heater Sales

300,000(No. of units)
250,000(%)
200,000

10150,000
100,000

550,000
0Mar. 31096 97 98 99 00

Note: 2000 is a projected figure.
TOKYO GAS Annual Report 1999

Mar. 3195 96 97 98 99

II. Forging Stronger Relationships With Residential Customers

Residential customers are a stable and strategically important source of revenue; in fiscal 1998 they accounted for 36% of
total gas sales volume. To increase the gas sales volume per customer, we are pursuing a two-fold strategy. First is tostrengthen marketing activities. For this we established the Residential Sales and Service Division in our headquarters inJune 1999. The second part of our strategy is to raise customer satisfaction, thereby cementing a loyal customer base.
Activities in this respect are overseen by the Customer Service Division, which was also established in June 1999.

Marketing Initiatives to Spur Residential Gas Consumption
We are already the preferred energy supplier for water heating and cooking in our service area with market shares of 92% and75%, respectively. Now we want to make it that way for space heating by promoting floor heating, demand for which isgrowing rapidly. Targeted mainly at new buildings and some renovations, floor heating is ideally suited to the Japanese
lifestyle—people often prefer to sit on the floor than on a chair or sofa. Floor heating is more than just a clean and comfortable
heating alternative. It also helps control house dust and mold that are blamed for allergies. By promoting these advantages, webelieve we can make floor heating the de facto standard in new homes. For customers living in houses or apartments whereinstalling floor heating is not an option, we have been promoting the use of gas fan heaters. Highly efficient, environmentallyfriendly and inexpensive, gas fan heaters are increasingly popular; sales rose 10.7% in fiscal 1998 on sales of 254,526 units.
Other marketing initiatives include showrooms to promote our products and services, and direct sales activities to building
sub-contractors to get them to install various gas systems in new construction and renovations.

A Customer-Centric Approach
Customer satisfaction is an important key to achieving growth in residential demand. That’s why we are stepping up ourefforts to offer better services from various angles. Improved safety, more attractive rates, low-maintenance appliances andlifestyle ideas are just some of the ways we are working to spur residential gas consumption—and build stronger bonds oftrust with our customers.
Playing a significant role here is our customer service network. Our 18 branches conduct inspections of appliances inhomes once every three years in addition to reading meters. To further deepen relationships with residential customers, weestablished call centers to handle inquiries from customers.
Augmenting our customer service network are roughly 400 Tokyo Gas franchise-based service outlets. Operating under
the names Enesta and Enefit, these outlets provide a broad range of services ranging from gas pipeline works to installation andrepair of gas appliances and household renovations.

LEFT
An Enesta branch outlet in Tokyo.
RIGHT
Gas floor heating is a clean andcomfortable heating alternative.

Annual Report 1999 TOKYO GAS

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