of its city gas business are fully exploited. These guidelines
call for the reduction of CO2 emissions resulting from gas use
by Tokyo Gas customers by eight million tons by fiscal 2010.

Advanced Disaster Prevention Measures
The supply of energy is vital to the continuation of economic activity and modern life. Throughout its history, TokyoGas has remained keenly aware of its responsibilities as a

Gaslight 24

supplier of energy, including the responsibility to ensure
safety. We continue to fulfill that responsibility through awide range of measures.
Japan is an earthquake-prone country. Tokyo Gas maintains a high standard of safety by ensuring that key gas production and supply facilities are able to withstand major
earthquakes on the scale of the disaster that struck the
Hanshin-Awaji area in 1995. When seismic motion with anintensity of five or higher on the Japanese scale is detected,

Safety Inspections

computerized meters shut off the supply of gas to customers’ sites. At the same time, our Super-Dense Real-timeThis includes the implementation of restoration support sys-

Monitoring of Earthquakes (SUPREME) system instantly

tems, development of equipment and training of personnel.

monitors data from a network of approximately 4,000 seis-

Our day-to-day safety organization including themometers located throughout our service area. In order to“Gaslight 24” team, is ready to respond to gas leaks andprevent secondary disasters, our highly effective safety

other safety-related problems on a 24/7 basis.

Financial
Sectionmeasures include automatic shut-off valves linked to seismometers and systems that allow remote shut-off of gas

Elimination of Carbon Monoxide Poisoning

supply if an earthquake with the potential to cause major

In fiscal 2006 Tokyo Gas announced the expansion of its

damage is detected. In addition to this ability to suspend gas

measures to prevent CO poisoning. We will spend up to

supplies for safety reasons, we have also developed systems¥10 billion on a campaign to encourage customers in thethat allow supplies to be resumed quickly once the situation

Tokyo Gas service area to replace kitchen and bathroom

has returned to normal. We have strengthened our collabora-

water heaters with imperfect oxygen depletion safety shut-tion with group companies and suppliers and taken every

off devices with new units that incorporate this importantpossible measure to minimize inconvenience to customers

safety feature. The campaign will continue for approximate-by ensuring restoration of services as quickly as possible.

ly three years from January 2007.
Starting in April 2007, we will progressively increase
our safety inspection work force by around 100 to support extensive inspection programs. We will also enhance
our communication activities in order to foster customer
confidence in the safety of gas by responding to safetyrelated questions and concerns.
Customer safety is the fundamental mission and themost important responsibility of a gas supplier. The entire

Current

Control RoomTokyo Gas organization has worked to fulfill its responsibility

Contents

under the leadership exercised by the top management. In

Management’s Discussion and Analysis

38

Consolidated Statements of Cash Flows53

Principal Management Risks

44

Notes to Consolidated Financial Statements

54

actively developing new technologies that will help to12-year Summary

46

Independent Auditors’ Report66

enhance safety.

Consolidated Balance Sheets48

Consolidated Statements of Income

50

Consolidated Subsidiaries andEquity-method Affiliates

67

Consolidated Statements ofShareholders’ Equity

Investor Information

68

51

Consolidated Statements of
Change in Net Asset52

addition to our efforts to expand safety inspections and promote the replacement of unsafe appliances, we are also

Center for Supply Control
and Disaster Management

SUPREME Seismic Sensors
Red points are sensor locations (Approximately 4,000)36

37

Management’s Discussion and Analysis

Summary■ Consolidated gas sales volume increased by 1.7% year-on-year. Residential and commercial sales were lower due
to temperature-related factors, but this was offset by higher industrial sales.
■ Net sales increased by 8.7% to ¥1,377.0 billion year-on-year, operating income by 44.5% to ¥162.3 billion and net
income by 62.1% to ¥100.7 billion. One reason for these large increases was a rise in crude oil prices in the second
half of fiscal 2005 and in the first half of fiscal 2006, which triggered increases in unit prices under the gas rateadjustment system according to gas resource costs. Other contributing factors included a reduction in personnel
costs resulting from an actuarial differential on retirement benefits.

Business results by segment (¥ million)■ Related Construction

Sales

Reduced Installation Numbers Reflected in Lower
Sales and Income

2007

2006

2005

Gas Sales

999,521910,321834,658

Gas Appliance Sales

135,407

130,826

135,109

Related Construction

59,23059,74764,795

Real Estate Rental

34,03534,187

34,701Other Business

285,407

252,596234,721

Years ended March 31

Sales decreased by ¥0.5 billion, or 0.9%, year-on-year to¥59.2 billion, reflecting a reduction in the number of new
installations. Operating expenses increased by ¥0.7 billion,
or 1.2%, to ¥57.5 billion, while operating income decreased¥1.2 billion, or 41.2%, to ¥1.8 billion. This segment’s contribution to total net sales declined from 4.3% to 3.9%.

Operating income
Years ended March 31

Gas Sales

2007

2006

2005

203,566

160,020

182,685

1,169

4,617

7,054

Gas Appliance Sales

Sales Trends in the Core Gas Business

Gas Sales Volume Growth Led
by Industrial Sector

Sales volume declined by 95 million m , or 2.7%, to 3,452
3Related Construction

1,751

2,976

3,575

Real Estate Rental

6,731

5,459

6,503

Other Business

13,848

9,647

13,415

Note: Segment sales include intra-group transactions.

■ Real Estate Rental

Reduced Depreciation Reflected in Higher Income
Despite Lower Revenues
Sales were similar to the previous year’s result at ¥34.0 billion. Operating income decreased by ¥1.4 billion, or 5.0%,
due to reduced depreciation and other factors, with theresult that operating income increased by ¥1.3 billion, or

million m .
3■ Residential Sector■ Gas Sales

23.3%, to ¥6.7 billion. This segment’s contribution to total
net sales was reduced from 2.5% to 2.2%.

In the first half of fiscal 2006, temperatures were 0.4ºC■ Commercial Sector, Public and Medical

lower on average than in the previous fiscal year, resulting

Temperatures were lower year-on-year in the first half andHigher Sales and Income Resulting from High Unit
Prices Under the Gas Rate Adjustment System

in increased demand for hot water. In the second half, how-higher in the second. Air conditioning demand declined,

Though there was a 1.7% volume increase in total gas sales,■ Other Business

ever, when gas demand is seasonally higher, the averagewith the result that gas sales were 113 million m3, or 3.7%,

residential and commercial sector sales were lower due toEnergy Service Business Expanding

temperature was 1.6ºC higher than in the previous year,

below the previous year's level at 2,972 million m3.

temperature-related factors. In value terms, however, gas

Sales of other business segments increased by ¥32.8 bil-sales increased by ¥89.2 billion, or 9.8%, to ¥999.5 billion, in

lion, or 13.0%, year-on-year to ¥285.4 billion. Reasons for■ Industrial Sector

part because of higher unit prices under the gas rate adjust-the higher result include the sustained expansion of the on-

Gas sales increased by 293 million m3, or 5.8%, to 5,336 mil-ment system. At the non-consolidated level, sales increased

site energy service business, and increased operations bylion m3. This growth reflects the start-up of new facilities byby ¥84.3 billion, or 9.4%. Sales volumes and temperature-

the Tokyo Gas LNG tanker fleet. Operating expenses rosecustomers using gas solely for power generation, and steadyrelated factors had negative impacts of ¥6.0 billion and ¥23.4

by ¥28.6 billion, or 11.8%. This reflects the increased initial

growth in the operations of new and existing customers.

billion respectively, while higher unit prices under the gas

depreciation burden associated with the on-site energy

rate adjustment system used to adjust for gas resource

service business. Operating income increased by ¥4.2 bil-

■ Wholesaling to Other Gas Companies

costs made a positive contribution of ¥93.5 billion. This waslion, or 43.5%, to ¥13.8 billion. This segment’s contribution

Sales increased by 132 million m , or 9.3%, year-on-year tooffset by a ¥3.2 billion negative impact from other factors,

to total net sales increased from 18.2% to 18.9%.

resulting in reduced demand for hot water and heating.

Gas sales volume by sector(Million m3/45MJ)
15,00012,0009,000

31,554 million m . This was mainly attributable to steadyleaving a total price-related contribution of ¥90.3 billion. The

growth in the operations of new and existing customers incontribution of gas sales to total sales increased from 65.6%■ Other Revenues and Income/Net Income

the service areas of the purchasing suppliers.

in the previous year to 66.1%.

Total other income increased by¥8.3 billion to ¥26.9 billion.

3

6,000

3,000

0

’03

’04

’05

’06

’07

■ Wholesale■ Commercial sector,
Public and Medical■ Industrial sector■ Residential sector

Total sales increased by 217 million m , or 1.7%, over the

Operating expenses were affected by a 14.4% increaseprevious year's level to 13,315 million m3, with the industrial

in gas resource costs resulting from higher gas sales vol-There were no gains on commodity derivatives, which con-sector contributing most of the growth. Sales exceeded theumes and rising crude oil prices. There was also additional

tributed ¥2.4 billion to the increase recorded in the previous

forecast for the current year by 137 million m3, or 1.0%.

expenditure on safety measures and demand development.

year. However, there was a ¥1.6 billion gain on weather

Despite efforts to minimize existing expenditure items, total

derivatives, reflecting higher-than-anticipated tempera-

operating expenses increased by ¥45.7 billion, or 6.1%.

tures. There were also extraordinary income, including ¥5.9

3

Operating income increased by ¥43.5 billion, or 27.2%,

Analysis of Income

Operating Income Substantially Higher Due toHigher Unit Prices Under the Gas Rate Adjustment
System and Lower Personnel Costs Resulting froman Actuarial Differential on Retirement Benefits

to ¥203.6 billion.
Operating income rose by ¥50.0 billion, or 44.5%, year-■ Gas Appliances Sales

on-year to ¥162.3 billion. This increase was achieved

Higher Sales, Higher Costs, Lower Income

despite a 14.4% rise in gas resource costs resulting from

Firm sales trends continued, especially for gas floor-heating

growth in gas sales, higher crude oil prices and other fac-systems using hot water supplied by the Tokyo Gas Eco

Net sales increased by 9.8% in the year ended March 31,

tors, and higher expenditure on safety measures andSystem (TES), bathroom heater-dryers with mist sauna func-

2007. Contributing factors included growth in gas sales, anddemand development. Reasons for the increase included

tions and built-in cooktops. Sales of gas appliances increased

higher unit prices under the gas rate adjustment system.

cost reductions achieved through ongoing efficiency

by ¥4.6 billion, or 3.5%, to ¥135.4 billion, while operating

Results from other segments included an increase in sales

efforts, and cost savings resulting from an actuarial differ-expenses were ¥8.0 billion, or 6.4%, higher at ¥134.2 billion.

from the energy services business. Total net sales increased

ential on retirement benefits.

As a result, operating income declined by ¥3.4 billion, orby ¥110.5 billion, or 8.7%, over the previous year’s figure toa new record of ¥1,377.0 billion.
38

74.7%, to ¥1.2 billion. The contribution made by gas appliance sales to total net sales declined from 9.4% to 8.9%.

Net income and net income per share(¥ billion)
100

(¥)
45

80
30
60

40
15
20

0

’03

’04

’05

’06

’07

0

■ Net income● Net income per share39

In volume terms, gas sales are expected to increase by

Fiscal 2007 will be an important year for our efforts to● We will strengthen our safety measures at all stages,

4.1% year-on-year. However, a time-lag in the gas ratebuild a foundation for sustainable growth in the 2010s. We

including production, transportation and consump-

Total other expenses amounted to ¥26.6 billion, a year-

adjustment system will delay the recovery of some gas

will focus on the following priorities.

tion. In particular, we will work to improve safety

on-year decline of ¥3.3 billion. There was no loss on weather

resource costs, leading to a ¥20.2 billion year-on-year● We will develop a regionally-focused marketing sys-derivatives, which amounted to ¥5.7 billion and ¥3.0 billion

reduction in the gross margin. Depreciation will increase intem, restructure our customer service organization,

These key policies will be targeted for prioritized

respectively in the previous year. The reduction of interest-

fiscal 2007 due to changes to tax revision. We also antici-

and implement the new regional energy company

investment, funded where possible through thebearing debt was reflected in a ¥0.6 billion reduction inpate substantial increases in fixed costs resulting fromconcept, with the aim of building closer customer

scrapping of existing expenditure items.

interest payments. In the previous year there was also a ¥5.1

external factors, such as the taxation system, trends in gov-

relationships and strengthening our ability to com-billion loss resulting from the abandon of system develop-

ernment bond interest rates and the capital market. These

ment. In the current year there was an extraordinary

include an increase in the actuarial differential on retire-● We will build a one-stop service capacity by develop-

expense of ¥7.2 billion relating to the advanced depreciation

ment benefits, resulting in part from differences in the dis-ing upstream, transportation, power and energy serv-

of fixed assets.

count rate and investment yield.

ice businesses to increase our presence in the LNG

billion from sales of investment securities, and ¥7.9 billion
from sales of fixed assets.

Other income, net improved by ¥0.2 billion form theAnother reason for our forecast of higher sales andprevious year’s result of other expenses, net amounting tolower income than fiscal 2007 is our plan for additional¥11.5 billion. Net income increased by ¥38.6 billion, or

expenditure on measures to counter competition from all-

62.1%, to ¥100.7 billion.

electric systems. The ¥20.2 billion negative impact of thepete with all-electric systems.

services for customers.

As far as cash flow utilization is concerned, weare investing steadily in areas that will generate
income streams in the future, as provided in our
medium-term management plan.

value chain.

Tokyo Gas Original Indicator : TEP

TEP (EVA® Tokyo Gas Version)

time lag in the gas rate adjustment system is the result of

Our goal is to generate profit in excess of capital costs. This is■ Operating Cash Flowcomposite factors, including a difference in the economic

reflected in our adoption of Tokyo Gas Economic Profit (TEP),(¥ billion)60

In the current fiscal year Tokyo Gas launched a new medium-

frame compared with the previous year.

term management plan covering the period to FY2010. One

The consolidated operating income forecast for fiscal

which is Tokyo Gas version of Economic Value Added (EVA®), as
our main management indicator. In fiscal 2006, Net Ordinaryof the target indicators used in the previous medium-term

2007 can be analyzed by comparing it with the plan for fis-plan, “Frontier 2007,” was free cash flow, which is calculated

cal 2007 in the medium-term management plan. We predictthe gas rate adjustment system, and an actuarial differential on

by adding depreciation to net income and subtracting capital

operating income of ¥113.0 billion. If we adjust this for tran-

retirement benefits. However, the Weighted Average Cost of

expenditures. Under the new plan, we have published asient factors, including the ¥13.0 billion negative impact ofCapital (WACC) rose from 3.7% to 3.8%, with the result that theresource allocation policy based on the use of our resources

the time lag in the gas rate adjustment system, the ¥9.7 bil-cost of capital increased by ¥2.6 billion to ¥49.6 billion.

to support our evolution from a gas business to an integrated

lion negative impact from the recalculation of pension

energy business. This is also reflected in the adoption ofassets, and a ¥4.7 billion decline resulting from a difference

operating cash flow, which is calculated by adding deprecia-

in the discount rate, together with ¥2.5 billion in surplus

to ¥103.4 billion, in part because of unit price increases under

On this basis, TEP increased by ¥30.9 billion over the previ-

40
30
20
10

ous year’s level to ¥53.8 billion. TEP is also being used as a management indicator for group companies, and as a benchmark for0business restructuring and integration. We will continue to use

income resulting from the expected return on pension

TEP as a key management indicator under the new medium-term

Operating cash flow for the fiscal year ended March 31,

assets, we are left with a figure of ¥137.9 billion, which ismanagement plan. Our aim is to generate TEP of ¥50.0 billion in2007 amounted to ¥233.8 billion, a year-on-year increase of¥300 million below the ¥138.2 billion figure projected forfiscal 2010, which is the final year of the plan.

¥35.4 billion, or 17.8%. The higher figure reflects an increase

the medium-term management plan.

tion to net income, as a key target indicator. (See Page 11.)50

Profit After Tax (NOPAT) increased by ¥33.4 billion year-on-year

’05

’06

’07

’11

Target in fiscal 2010of new medium-teammanagement plan

TEP: NOPAT – cost of capital
NOPAT: Net ordinary income after tax prior to interest paymentsof ¥38.6 billion, or 62.1%, in net income, and a reduction of

These forecasts include a negative impact of ¥13.1 bil-

¥3.2 billion, or 2.4%, in depreciation. Capital expenditurelion resulting from tax revision. Based on conditions in a

increased by ¥5.1 billion, or 4.3%, over the previous year’s

normal year, there would be a ¥12.8 billion net improvementlevel to ¥124.6 billion.

in income.

■ Fiscal 2007 Projection

ment plan will fall short of the target on an income basis, itwill almost match the target in terms of operating cash

Increased Net Income Reflected in Higher Cash
Flows from Operating Activities■ Cash Flows from Financing Activities

Higher Revenues and Lower Income Predicted for
Fiscal Year Ending March 31, 2008

flow. We believe that we are advancing at the required pace

■ Cash Flows from Operating Activities

decreased by ¥17.2 billion year-on-year to ¥65.8 billion. The

In fiscal 2007 (the year ending March 31, 2008), we expect

in terms of the generation and investment of cash flow.

Net cash and cash equivalents from operating activities

main sources of this increase were ¥6.0 billion from com-

net sales to increase by ¥42.0 billion, or 3.1%, to ¥1,419.0

increased by ¥9.1 billion to ¥190.6 billion over the previous

mercial paper and ¥14.9 billion from long-term loans.

billion. However, operating income is expected to decline

year. Despite a ¥37.3 billion reduction in retirement benefit

Outflows included expenditure of ¥34.7 billion on shareby ¥49.3 billion, or 30.4%, to ¥113.0 billion and net income

reserves and a ¥17.4 billion increase in notes and accounts

repurchasing and ¥26.8 billion on long-term debt repay-

Tax Revision in Fiscal 2007

receivable, income before income taxes and minority inter-

ment, and ¥18.9 billion for dividend payments.

The reasons for this forecast of a substantial decline inChanges to the taxation system in fiscal 2007 will have the

est in net income increased by ¥61.7 billion year-on-year toincome compared with the fiscal 2006 results are analyzed

effect of raising the depreciation limit from 95% to 100%. An¥162.5 billion. Depreciation of fixed assets declined by ¥3.3

Cash Flows and Financial Position

Although progress under the medium-term manage-by ¥27.7 billion, or 27.5%, to ¥73.0 billion.

below on the basis of non-consolidated operating income.
In fiscal 2006, non-consolidated operating income

amount equivalent to 5% of the residual book value of existing assets will be subject to straight line depreciation overNet cash and cash equivalents used in financing activities

As a result of the above factors, cash and cash equiva-

billion year-on-year to ¥129.0 billion.

lents at the end of the term amounted to ¥40.2 billion, afive years. When the effect on assets newly acquired in fiscal

amounted to ¥136.8 billion. The result for fiscal 2007 is2007 is included, the total impact at the consolidated level■ Cash Flows from Investing Activities

Years ended March 31(unit : million yen)

expected to be sharply lower, with a year-on-year decline ofwill be a ¥13.1 billion increase in depreciation.

Net cash and cash equivalents used in investment activities¥45.8 billion, or 33.5%, to ¥91.0 billion. A reduction in the
gross margin on gas accounts for ¥5.5 billion of this projected decline, and an increase in fixed costs and other factors for ¥40.3 billion.
40

The effects of this change will continue for the next five
years. However, we expect the long-term effect to be positive
because of the resulting increase in cash flow, as well as taxrelated advantages.

amounted to ¥130.9 billion, a increase of ¥14.9 billion compared with the previous year’s figure. This total consists
mainly of expenditure of ¥124.2 billion on the acquisition of
fixed assets, including gas distibution facilities.

2007

2006

2005

Net cash provided byoperating activities

190,597

181,529

215,038

Net cash used ininvesting activities(130,922)(116,071)(107,376)

Net cash used infinancing activities(65,844)(83,041)(108,160)

41

decline of ¥5.4 billion from the previous year’s year-end
total of ¥45.6 billion.

ROA and ROE(%)
16■ Interest-Bearing Debt Reduced — D/E Ratio at 0.66
Interest-bearing debt was reduced by ¥34.4 billion to ¥525.5

repurchase 60 million shares worth ¥39.0 billion yen in fis-tion caused by the conversion of convertible bonds. Thiscal 2007. This is expected to result in a total payout ratio ofprocess was largely completed in fiscal 2006, and future

60.1% in fiscal 2006.

repurchasing programs will be designed to enhance share-

We have previously repurchased shares to prevent dilu-

holder value primarily through the cancellation of shares.

12

billion, in part because of the maturation of the 6th issue of
convertible bonds in March 2007. This is reflected in a D/E
ratio of 0.66, which indicates that Tokyo Gas is maintaining

8

External Risks Affecting Business Activities

financial soundness. From the perspective of debt leverage,
we believe that we have passed the stage of aggressive

4■ Gas Rate Decline Risk

reduction of interest-bearing debt. However, we place con● ROA● ROE

siderable importance on a balanced approach that also takes
into account the need to maintain and improve our ability to
procure finance, and we see a D/E ratio of around 0.6 as areasonable target in this context.

0

’03

’04

’05

’06

’07

ROE = net income/shareholders’ equity(average of positions at start and end of fiscal year)

Progress in deregulation has caused competition to intensify
among energy suppliers. There is a risk that the price of gas
will need to be reduced to attract and retain customers in
the face of price reductions by the Tokyo Electric Power
Company (TEPCO), which is the greatest competitor of■ ROE at 13.2%

Interest-bearing debt and D/E ratio(¥ billion)
1,000(times)
2.0

800

1.6

1.2

600

400

0.8

200

0.4

0
’03

’04

’05

’06

’07

debt
● D/E Ratio(million m3/45MJ)
1,400
1,200
1,000

A year-on-year increase of ¥38.6 billion, or 62.1%, in net

Tokyo Gas has reduced gas rates three times full rate800

income lifted ROE by 4.2 points to 13.2%. Despite a reduc-reduction since 1999, by about 10% in total. TEPCO also

600

tion in retained earnings resulting from the dividend, net

reduced its electricity rates five times, by about 25% in total,

income of ¥100.7 billion helped to raise shareholders’ equi-during the same period. Tokyo Gas will continue to implementty by ¥66.9 billion year-on-year to ¥795.1 billion. One of thestrategic rate menu as necessary to prevail over competition.

goals of the medium-term management plan is to build an■ Interest-bearing
0

Tokyo Gas.

Monthly gas sales volumes for fiscal 2006
(Non-consolidated)■ Wholesale■ Commercial, Public

400

and Medical■ Industrial sector■ Residential sector

200
0’06.4 5 6 7 8 9 10 11 12 ’07.1 2 3

optimal capital structure. This is reflected in a ROE target of■ Temperature Fluctuation Risk

10.9% by fiscal 2010. While there may be fluctuation in indi-

Temperatures affect the volume of city gas sales, which

vidual years, we aim to maintain continuous improvement

account for around 70% of consolidated sales and 90% of

Fluctuations in the cost of gas resources are reflected inin this indicator.

income. Gas is used mainly for water heating and spacegas rates after approximately six months under the “gasheating, especially in residential use. Mild winter weather

rate adjustment” system*. Under this system, although

can erode revenues and income by reducing the volume ofearnings may be subject to temporary increases andgas sold.

decreases, crude oil prices and currency exchange rates■ Dividend Increases and Stock Repurchases —60% Target for Total Payout Ratio

Interest-bearing debt = long-term debt due after one year +long-term debt due within one year + bank loans

In its new medium-term management plan, Tokyo Gas has

The average temperatures in fiscal 2006 were 22.0ºC in

D/E ratio = interest-bearing debt / total shareholders’ equity(as of end of fiscal year)

introduced the concept of a 60% total payout ratio as an

the first half of the year, 11.7ºC in the second half, andindicator of its commitment to shareholder returns. We

16.8ºC over the whole year. Forecasts for fiscal 2007 are■ Increase in Net Income — ROA at 5.9%

define this new indicator as a portion of net income in FY n

based on an average of 16.8ºC over the whole year.

Net income rose by ¥38.6 billion, or 62.1%, over the previ-

equivalent to the sum of the income distributed as divi-

ous year’s level, in part because of higher unit prices under

dends in FY n and share repurchasing in FY n+1 funded by

the gas rate adjustment system according to gas resource

net income from FY n. We aim to maintain a total payout

costs. As a result, ROA improved by 2.2 points to 5.9% atratio of 60% while maintaining a balance between divi-

the end of the accounting period.

dends and stock repurchases.

Total assets declined by ¥1.3 billion year-on-year to

In line with this concept, we will raise the dividend for¥1,692.6 billion. As a result of ongoing depreciation, thefiscal 2006 by 1 yen to ¥8.0 per share. We also plan tolong-term perspective.
In fiscal 2007, the crude oil price averaged $63.45 perbarrel, and the average exchange rate was ¥116.97 to one
dollar. Forecasts for fiscal 2006 are based on an average

Impact of 1ºC temperature rise on gas sales volume
Rate of change

Summer (June – September)

0.3%

Winter (December – March)–3.7%

Intervening months (April, May, October, November)–3.1%

Annual–2.4%■ Gas Resource Fluctuation Risk

tangible fixed asset portion of this amounted to ¥1,130.5

have no significant impact on results over the medium- to

crude oil price of $55 per barrel and an exchange rate of¥120 to one dollar.
* Depending on the contract, changes may be reflected within a sixmonth time lag. Adjustment has an upper limit (please refer to page 5of the accompanying Investors’ Guide 2007).

■ Interest Rate Fluctuation Risk
Tokyo Gas negotiates fixed interest rates for both short-

City gas supplied by Tokyo Gas is produced mainly fromterm and long-term interest-bearing debt, which precludes

imported LNG. Since contracts are denominated in U.S.

risk of interest rate fluctuation during the term of an obliga-

dollars, earnings are at risk from fluctuations in the yen-dol-tion. However, there may be risk of fluctuation when loans

reduction in cash and bank deposits, current assets rose bylar exchange rate. Also, the dollar-denominated LNG prices

are refinanced.

¥19.0 billion to ¥321.1 billion. This reflects increases ofare linked to crude oil prices on a sliding scale, whichbillion. Investments and other assets declined by ¥10.9 bil-

Total Shareholders’ equity and equity ratio

lion to ¥217.0 billion, in part because of an ¥8.3 billion(¥ billion)800

reduction in deferred tax assets. Despite a ¥6.5 billion

(%)
60

600

45

¥19.3 billion in notes and accounts receivable and ¥5.5 bil-

exposes the Company to risk from changes in the interna-■ Stock Price Fluctuation Risk

lion in other current assets.

tional market price for crude oil.

Tokyo Gas primarily holds equities to maintain corporate

In the medium-term management plan the target for an

400

30

The extent to which these fluctuations affect gas resource

ROA is set at 5.5% in fiscal 2010. Though there may be rises
and falls in individual years, we aim to achieve continual

15

200

improvement by combining aggressive investment in the■ Total Shareholders’laying of foundations for future profitability with careful● Equity ratio

attention to efficiency.
42

equity

0

0
’03

’04

’05

’06

’07

relationships essential to the conduct of its business opera-

costs over in the year ended March 31, 2007 is as follows.

tions. Equity of publicly listed companies is subject to mar-Approx. ¥3.7 billion for each ¥1 movement in the yen-dollar

ket risk. Tokyo Gas has established management policies

exchange rate

and rules for handling of such equities.

Approx. ¥4.4 billion for each $1 movement in the per-barrel
price of crude oil
43Principal Management Risks

Described below are aspects of the information provided in the financial statements concerning thebusiness and financial situation that could have a significant influence on investor decisions.
Forward-looking statements are based on judgments as of the end of current consolidated accounting year (March 31, 2007).

1

Disruption of Production and Supply

The business operations of Tokyo Gas are based on the pro-accidents at gas fields or LNG liquefaction plants, accidents to

C. Demand risktion in gas supply and delays in customer service, but also

LNG vessels in transit or other situations preventing theChanges in industry structure, economic recession, advance-

in tangible and intangible loss including the need to bearsmooth procurement of gas resources may disrupt the supply

ment of energy conservation activities or other factors may

public responsibility.

of natural gas.

result in a partial decrease in existing demand, particularly

duction and supply of city gas. A major gas leak or explosion

from large-volume customers.

12

relating to the production or supply of gas could result not
only in direct damages, but also tangible and intangible loss-

6

Market risk

es, including a social liability.

2

Quality Problems Affecting
Gas Equipment

D. Legal and regulatory risk
Tokyo Gas manages its operations in compliance with theTokyo Gas might incur losses in the event of changes in the

Gas Utility Industry Law and other laws, regulations and insti-

Most communication with customers takes place via call cen-market price of company-owned real estate, financial assets,tutions. Any revisions to these laws, regulations or institu-

ters. Interruptions to telephone service to call centers would

pension assets or other assets. Additionally, fluctuations intions that prove detrimental to the Tokyo Gas Group may

not only disrupt service to customers over wide areas, but

the price of gas resources take about six months to show up

affect business performance.

may also incur serious tangible and intangible loss, including

in gas rates. This factor may affect revenues by breaking up a
Tokyo Gas sells gas appliances and other equipment under the

fiscal year, which could cause over- or under-collection of gas

Tokyo Gas brand through consolidated subsidiaries and allied

rates.

the need to bear public responsibility.

9

ROI risk
13

companies. Costs resulting from accidents caused by gas
appliances and other equipment could affect future earnings,
and there could also be other tangible and intangible losses.

3

Damage to Reputation Resulting
from Gas Accidents Causedby Other Companies

Weather risk

with the goal of “establishing a total energy business” as

The need to comply with new environmental laws or addi-

expressed in the medium-term management plan. Doing so

tional obligations to improve the environment might increase

Abnormal weather conditions, particularly summer heat

involves investments channeled into the electric power busi-

costs. Also, any violations of laws, rules and regulations or

waves and warm winters, reduce gas sales volume in the res-ness, energy service business, and gas field and other devel-

actions that contravene corporate ethics may result not only

idential sector, where gas is mainly used to supply hot water

opment projects, the LNG transportation business and otherin direct costs required to remedy the situation, but also inand heating, thereby affecting revenues.

new businesses, as well as large investments into the founda-tangible and intangible loss including the need to bear public

tions or to expand existing businesses such as wide-area

responsibility.

pipeline construction and IT. Such investments run the risk of

8

Risk faced by existing businessnot bringing in appropriate returns or not producing the
expected results due to changes in the economic situation.

reputation of the city gas industry as a whole. This could
result in tangible and intangible losses.

Environmental and compliance risks

Tokyo Gas continues to make large investments in keeping

7

Accidents involving gas appliances and other products supplied by other companies could have a serious effect on theInterruption of communication
with call centers

A. Competitive risk

14

Risks associated with corporate
responsibility and customer service

As industry deregulation progresses, competition with electric power companies and new firms entering the gas busi-

4

Natural disaster risk

10

Risk of information leaks

Inadequate responses to customer needs or inappropriate
customer services may result in declining corporate competi-

ness is increasingly fierce. Competition may have a greater
impact on Tokyo Gas business performance. Specifically,

Improper disclosure of customers’ personal information gath-tiveness and in tangible and intangible loss, including theTokyo Gas engages in facility-dependent businesses because

demand might decrease or rates may fall. Tokyo Gas may

ered and managed in the conduct of business as a public utili-need to bear public responsibility. Moreover, because Tokyo

city gas production and supply facilities are the foundation oflose a portion of existing demand should LNG lose competi-ty may result not only in direct costs required to remedy theGas regards the enhancement of customer satisfaction as an

its business. Accordingly, earthquakes, typhoons or othertiveness compared to other forms of energy, or should it

situation, but also in tangible and intangible loss, including

important means of fortifying corporate competitiveness, andmajor natural disasters may cause damage to plants andbecome unable to purchase LNG at competitive prices.

the need to bear public responsibility more serious than thatthe importance of customer satisfaction is increasing, Tokyorequired of other companies.

Gas recognizes it as a business risk should the Company beother production facilities or pipelines and other supply facilities and disrupt the supply of city gas.

unable to increase customer satisfaction or fail to meet theB. Changes to the Resource Procurement Environment

level of satisfaction required by customers.

Earnings could be affected if it becomes necessary to procure
LNG on the spot market, such as if the amount of gas avail-5

Resource procurement supply
interruption riskable from existing LNG projects is reduced due to demand

11

Risk of failure or malfunctioningof backbone systems

growth resulting from temperature fluctuations and other factors or the aforementioned disruptions to resource procure-

The failure or malfunctioning of backbone computer sys-

Because Tokyo Gas relies on imports for the majority of its

ment, or if there are major delays in the start of supply fromtems connected with the manufacture and supply of gas or

natural gas and other city gas resources, supplier country risk,

new LNG projects.

the calculation of gas rates may result not only in a disrup-

44

45

12-year SummaryTokyo Gas Co., Ltd. and Consolidated Subsidiaries

Millions of yen, except per share amounts

For the years ended March 31

2007

2006

2005

2004

2003

2002

2001

1999

1998

¥ 1,376,958¥ 1,266,502¥ 1,190,783¥ 1,151,825¥ 1,127,634¥ 1,097,589¥ 1,086,771

997,767¥ 1,009,155

Gas sales

999,521910,321834,658

831,115

792,454

750,439

740,731

672,069

674,997

686,649

663,066

633,253

Gas appliance sales

135,407

130,826

135,109

133,873

142,636

149,203

146,517

127,916

133,925

127,880

135,057

136,344

Related construction

59,23059,74764,79568,03470,56871,33871,90868,651

68,81771,06074,76773,784

Real estate rental

34,03534,187

34,70135,44436,34637,55137,60137,841

37,61638,97840,91640,568Other business

285,407

252,596234,721

172,160

158,327

156,011

159,578

158,819

155,045

154,602

144,032

143,931

Operating income

162,315

112,346

145,349

152,287

123,294

110,608

103,659

69,23372,30376,48562,163

67,109Net income

100,700

62,11584,04744,78759,201

51,912

27,595

26,69817,764

17,241

15,432

16,762

Depreciation*

133,142

136,377

140,271

146,895

141,027

145,564

150,374

140,306

143,009———

Capital expenditures**124,557

119,435

107,529

107,441

111,988

105,296111,397

124,975

151,126———

Free cash flow

109,285

79,057116,789

84,241

88,24092,17866,57242,029

9,647

—

—

—

Net sales

2000¥

992,255

¥

1997

¥

988,077

1996¥

958,662

Amounts per share ofcommon stock (yen)Net income

¥

37.50

¥

23.48

¥

31.47

¥

16.44

¥

21.18

¥

18.47

¥

9.82

¥

9.50

¥

6.32

¥

6.14

¥

5.49

¥

5.97

Diluted net income

35.69

21.70

28.24

14.98

19.11

16.66

9.13

8.84

5.94

5.76

5.37

—

Net assets

293.11

270.48244.73221.53208.65200.75

196.72172.33149.98148.67147.65147.23

8.00

7.00

7.00

7.00

6.00

6.00

6.00

5.00

5.00

5.00

5.00

5.00

¥ 1,692,635¥ 1,693,899¥ 1,668,734¥ 1,666,828¥ 1,676,064¥ 1,702,713¥ 1,797,669¥ 1,805,086¥ 1,707,446¥ 1,720,684¥ 1,772,132¥ 1,657,176

Long-term debt due after one year

465,896496,740

547,139545,845598,322680,887

708,329

843,634

820,753765,304

878,674

743,177

Total net assets

806,046

—

—

—

—

—

—

—

—

—

—

—

—

728,232

648,766

598,453

579,706

564,078

552,790484,239

421,442

417,755

414,906

413,725

Operating income to net sales

11.8%

8.9%

12.2%

13.2%

10.9%

10.1%

9.5%

7.0%

7.2%

7.6%

6.3%

7.0%

Net income to net sales

7.3%

4.9%

7.1%

3.9%

5.3%

4.7%

2.5%

2.7%

1.8%

1.7%

1.6%

1.7%

ROE

13.2%

9.0%

13.5%

7.6%

10.4%

9.3%

5.3%

5.9%

4.2%

4.1%

3.7%

4.1%

ROA

5.9%

3.7%

5.0%

2.7%

3.5%

3.0%

1.5%

1.5%

1.0%

1.0%

0.9%

1.0%

Equity ratio

47.0%

43.0%

38.9%

35.9%

34.6%

33.1%

30.8%

26.8%

24.7%

24.3%

23.4%

25.0%

Cash dividends applicable to the year

At year-end (March 31)
Total assets

Total shareholders’ equity

Ratios

Notes:

1. Segment sales include intra-group transactions.
2. Free cash flow = net income + depreciation* – capital expenditures***including amortization of long-term prepayments**purchases of tangible fixed assets + purchases of intangible fixed assets + long-term prepayments (accounting basis)

3. Effective from the year ending March 31, 2007, the Company and its consolidated subsidaries adopted the new accounting standard
for presentation of net assets (“Accounting Standard for Presentation of Net Assets in the Balance Sheet and its Implementation Guidance”
issued by the Business Accounting Deliberation Council on December 9, 2005.)

46

47

Consolidated Balance Sheets
Tokyo Gas Co., Ltd. and Consolidated Subsidiaries
March 31, 2007 and 2006

Thousands of
U.S. dollars (Note 1)

Millions of yen

Assets

2007

2006

2007

Property, plant and equipment (Note 3):
Production facilities¥

713,984¥

710,890$ 6,050,711

2,196,766

2,141,478

18,616,665

Service and maintenance facilities (Note 4)

170,539

181,065

1,445,243

Other facilities (Notes 4 and 15)

707,259

687,170

5,993,723

2,798

2,798

23,710Distribution facilities (Note 4)

Shutdown facilities
Construction in progress
Accumulated depreciation

52,79150,068447,380

3,844,137

3,773,469

32,577,432(2,713,656)(2,633,167)(22,997,088)

1,130,481

1,140,302

9,580,344

Intangibles:
Goodwill

1,396

2,505

11,832Other intangibles (Note 15)

22,672

21,144

192,135

24,06823,649203,967

Investment securities (Notes 4 and 5)

144,667

145,048

1,225,988

Long-term loan receivables (Note 4)

3,779

3,554

32,025

Deferred tax assets (Note 11)

28,04436,386237,658

Other investments and non-current assets

41,28943,668349,911

(752)

(725)

(6,364)217,027

227,931

1,839,218

40,232

45,634340,947

3

2

28

Trade (Note 6)

166,382

147,060

1,410,018

Other

13,81813,457

117,103

Current assets:
Cash and cash equivalents
Marketable securities (Notes 4 and 5)
Notes and accounts receivable

(930)

(848)

(7,880)Inventories (Note 7)

36,132

34,597306,204

Deferred tax assets (Note 11)11,98912,765

101,602

Other current assets

53,43349,350452,816

Allowance for doubtful accounts

Total current assets
Total assets
Accompanying notes are an integral part of these financial statements.

321,059

302,0172,720,838¥ 1,692,635¥ 1,693,899$ 14,344,367

2007

2006

$ 3,948,272
39,969787,692
29,13345,993
246,012
5,097,071

42,61745,501

361,159

59,72840,454
10,95543,854107
87,420285,135

76,92633,905
17,67033,528178
85,759293,467

506,173
342,832
92,837
371,647906
740,846
2,416,400—

10,255

—

—
—
—
—
—
—

141,8442,066
572,600
56,51052
773,072

—
—
—
—
—
—

—
—
—

(44,840)
728,232¥ 1,693,899———

141,8442,066
644,652———$ 1,202,071
17,5055,463,154

Treasury stock, at cost
97,537,522 shares in 2007

(44,565)—(377,669)

Net unrealized holding gains on securities
Deferred gains on hedge transactions
Foreign currency translation adjustments

49,707
1,095
302

—
—
—

421,242
9,282
2,560

Minority interest

10,945—92,751

806,046¥ 1,692,635——

6,830,896$ 14,344,367¥

Current liabilities:
Long-term debt (Notes 4 and 8)
Notes and accounts payable:
Trade (Note 6)
Other
Bank loan payable (Notes 4 and 8)
Income taxes payable
Deferred tax liabilities (Note 11)
Other current liabilities (Note 4)
Total current liabilities

465,896
4,716
92,9483,438
5,427
29,029601,454¥2007

496,740
5,329
130,2223,229—
26,425661,945

Commitments and contingent liabilities (Note 16)
Shareholders’ equity: (Note 12)
Common stock:
Authorized: 6,500,000,000 shares
Issued: 2,810,171,295 shares
Capital surplus
Retained earnings
Net unrealized holding gains on securities
Foreign currency translation adjustments
Treasury stock, at cost
117,825,346 shares in 2006
Total shareholders’ equity
Total liabilities and shareholders’ equity
Net assets: (Note 12)
Common stock:
Authorized: 6,500,000,000 shares
Issued: 2,810,171,295 shares
Capital surplus
Retained earnings

Total net assets
Total liabilities and net assets
48

Thousands of
U.S. dollars (Note 1)

Millions of yen

Minority interests

Investments and other non-current assets:

Allowance for doubtful accounts

Liabilities, Minority Interests andShareholders’ Equity / Net Assets
Long-term debt due after one year (Notes 4 and 8)
Deferred tax liabilities (Note 11)
Reserve for retirement benefits (Note 10)
Allowance for repairs of gas holders
Reserve for safety measures
Other non-current liabilities¥

49

Consolidated Statements of Income

Consolidated Statements of Shareholders’ Equity

Tokyo Gas Co., Ltd. and Consolidated Subsidiaries
Years ended March 31, 2007 and 2006

Tokyo Gas Co., Ltd. and Consolidated Subsidiaries
Year ended March 31, 2006

Net sales (Note 14)

Millions of yen

Thousands of
U.S. dollars (Note 1)

Millions of yen

2007

2006

2007

¥ 1,376,958¥ 1,266,502$ 11,669,137

Number of sharesof common stock(Thousands)

Balance at March 31, 2005 2,810,171

Costs and expenses (Note 14):
Costs of sales

799,468

724,5036,775,157

Net income

Selling, general and administrative expenses

415,175

429,653

3,518,429

1,214,643

1,154,156

10,293,586

Increase due to addition of
consolidated subsidiaries

162,315

112,346

1,375,551

Net unrealized holding
gains on securities

Operating income (Note 14)

Net unrealized Foreign currencytranslation
holding gains
adjustmentson securities

Commonstock

CapitalsurplusRetainedearnings¥ 141,844¥ 2,067¥ 532,810¥ 31,501¥ (311)

Interest and dividend income

2,051

1,449

17,378Treasury stock

Gains (losses) from weather derivatives

1,621(5,666)

13,734

Rental income

1,501

944

12,718Cash dividends paid(¥7.0 per share)

Exclusive facilities income

1,489

166

12,618Bonuses paid to directors

Gains from sales of fixed assets

7,870

2,240

66,696

Balance at March 31, 2006 2,810,171

Losses on compression of fixed assets(7,228)(298)(61,253)

Gains from sales of investment securities (Note 5)

5,851

4,930

49,588(10,370)(11,014)(87,878)—(5,128)—Foreign exchange losses

(188)

(552)

(1,594)Equity in net income of an affiliated company

1,347

693

11,416

Other, net(3,726)

737(31,572)

218(11,499)

1,851

162,533

100,847

1,377,402

Current

49,33535,704

418,097

Deferred

11,711

2,498

99,24961,04638,202

517,346

Interest expense
Losses on cancellation of system development

Income before income taxes and minority interestin net income of consolidated subsidiaries¥ (59,145)

62,115525,009Foreign currencytranslation adjustments

Other income (expenses):

Treasury
stock

363
(1)

(3,768)14,305(18,496)(66)¥ 141,844¥ 2,066¥ 572,600¥ 56,510¥52¥ (44,840)

Accompanying notes are an integral part of these financial statements.

Income taxes:

Net income

(530)

(787)

Minority interest¥¥

100,700

62,115yen(6,667)$853,389

U.S. dollars (Note 1)

2007

2006

2007

Amounts per share of common stock:
Net income

¥

37.50

¥

23.48

$

0.32

Diluted net income

35.69

21.70

0.30

Cash dividends applicable to the year

8.00

7.00

0.07

Accompanying notes are an integral part of these financial statements.

50

51

Consolidated Statements of Change in Net Asset

Consolidated Statements of Cash Flows

Tokyo Gas Co., Ltd. and Consolidated Subsidiaries
Year ended March 31, 2007

Tokyo Gas Co., Ltd. and Consolidated Subsidiaries
Years ended March 31, 2007 and 2006

Millions of yen

Shareholders’ equity at
March 31, 2006 aspreviously reported

Number of sharesof common stock(Thousands)

Commonstock

CapitalsurplusRetainedearnings

Treasurystock

2,810,171¥141,844¥2,066¥572,600¥(44,840)

Net unrealized Deferred gains Foreign currency
holding gains
on hedgetranslation
on securities
transactions
adjustments¥56,510—¥ 52

Reclassification due to adoption of new accounting standards forpresentation of net assets in the balance sheet at April 1, 2006

Balance at April 1, 2006

2,810,171¥141,844¥2,066¥572,600

Net income¥(44,840)¥56,510—¥ 52

Minority
interests—¥728,232

10,255

10,255¥10,255¥738,487
100,700

Increase due to additionof consolidated subsidiaries(1,404)(1,404)

Treasury stock(8,403)275(8,128)(6,803)

Deferred gains
on hedge transactions(6,803)
1,095

Foreign currency translation
adjustments

1,095
250

Minority interests

250
690

Cash dividends paid(¥7.0 per share)

Net changes
during the year690

(18,774)(18,774)

(67)

(67)

Bonuses paid to directors———

72,052275(6,803)

1,095

250

690

67,559Balance at March 31, 2007 2,810,171¥141,844¥2,066¥644,652¥(44,565)¥49,707¥1,095¥302¥10,945¥806,046

Minority
interests

total

Thousands of U.S. dollars (Note 1)
Number of sharesof common stock(Thousands)

Shareholders’ equity at
March 31, 2006 aspreviously reported

Commonstock

Capitalsurplus2,810,171 $1,202,071$17,505

Retainedearnings

Treasurystock

Net unrealized Deferred gains Foreign currency
holding gains (losses) on hedgetranslation
on securities
transactions
adjustments$4,852,539 $(380,001) $478,902

—

$ 440

Reclassification due to adoption of new accounting standards forpresentation of net assets in the balance sheet at April 1, 2006

Balance at April 1, 2006

2,810,171 $1,202,071$17,505$4,852,539 $(380,001) $478,902

Net income

853,389

Increase due to additionof consolidated subsidiaries(11,898)

Treasury stock(71,213)—$ 440$86,911 $6,258,367(11,898)
2,332(68,881)(57,660)

Deferred gains
on hedge transactions(57,660)
9,282

Foreign currency translation
adjustments

9,282
2,120

2,120
5,840

Minority interests
Cash dividends paid
(US$0.07 per share)———$17,505

5,840(159,093)(159,093)

(570)

(570)

Bonuses paid to directors

Balance at March 31, 2007 2,810,171 $1,202,071

86,911

853,389

Net unrealized holding
gains on securities

Net changes
during the year

— $6,171,456

86,911(57,660)

9,282

2,120

$5,463,154 $(377,669) $421,242

610,615$9,282$2,560Accompanying notes are an integral part of these financial statements.

2,332

5,840

2007

2006

2007

¥ 162,533¥ 100,847$ 1,377,402

128,998
4,144
3,157(7,904)132,300
4,077
3,251(2,221)

1,093,205
35,11926,752(66,979)

7,228(5,851)(37,274)
5,427(2,051)
10,3701,347

298(4,930)(11,189)—(1,449)11,014693

61,253(49,588)(315,885)
45,993(17,378)
87,878
11,416(17,369)(1,535)(14,076)
4,451—(3,438)238,157
2,011(10,244)(39,327)
190,597(7,102)(9,170)23,122(2,081)
4,518(5,942)
236,036
1,446(11,410)(44,543)
181,529(147,197)(13,009)(119,286)
37,719—(29,138)
2,018,277
17,038(86,810)(333,276)
1,615,229(5,517)
6,616(12,625)
9,912
595(124,174)(8,611)(2,472)
5,986(7,367)
6,466(7,564)5,220—(110,993)(4,950)(2,503)
6,599(46,756)
56,068(106,995)
84,0005,044(1,052,318)(72,978)(20,945)
50,729—(840)
208(130,922)

678(1,573)(84)(116,071)—(7,121)
1,763(1,109,509)(6,523)6,000
14,935(26,986)(18,874)(34,658)262(65,844)(8,685)—
16,998(52,434)(18,591)(20,355)
26(83,041)(55,276)
50,847
126,566(228,697)(159,944)(293,712)
2,218(557,998)

10(6,159)45,634

4(17,579)
50,66580(52,198)
386,725799

12,548

6,776

total

100,700

Net unrealized holding
gains on securities

Thousands of
U.S. dollars (Note 1)

Millions of yen

572,529$92,751 $6,830,896

Cash flows from operating activities:
Income before income taxes and minority interestin net income of consolidated subsidiaries
Adjustments to reconcile income before income
taxes and minority interest to net cash provided
by operating activities:
Depreciation (Note 14)
Amortization of long-term prepayments
Losses on disposal of property, plant and equipment
Gains from sales of fixed assets
Losses on reduction of acquisition costs of property,
plant and equipment for tax purposes
Gains from sales of securities
Decrease in employees’ severance and retirement benefits
Increase in reserve for safety measures
Interest and dividend income
Interest expense
Return on investment accounted by equity method
Changes in operating assets and liabilities:
Increase in major notes and accounts receivable
Increase in inventories
Increase (decrease) in major notes and accounts payable
Increase (decrease) in consumption taxes payable
Losses on cancellation of system development
Other – net
Cash received for interest and dividends
Cash paid for interest
Cash paid for income taxes
Net cash provided by operating activities
Cash flows from investing activities:
Purchase of time deposits
Proceeds from redemption of time deposits
Purchases of investment securities
Proceeds from sales of investment securities
Losses on revaluation of investment securities
Purchases of property, plant and equipment
Purchases of intangible fixed assets
Long-term prepayments
Proceeds from sales of tangible and intangible fixed assets
Proceeds from sales of investments in a consolidated
subsidiary accompanied by change in the scope of consolidation
Expenditure of long-term loan receivable
Other – net
Net cash used in investing activities
Cash flows from financing activities:
Net decrease of short-term bank loan payable
Proceeds from commercial paper
Proceeds from long-term debt
Repayments of long-term debt
Cash dividends paid
Payments for acquiring treasury stock
Other – net
Net cash used in financing activities
Effect of exchange rate changes on cash and cash equivalents
Net decrease in cash and cash equivalents
Cash and cash equivalents at beginning of year
Increase in cash and cash equivalents due to addition of
consolidated subsidiaries
Decrease in cash and cash equivalents due to exclusion ofsubsidiaries from scope of consolidation
Cash and cash equivalents at end of year¥(42)
40,232¥—
45,634$(356)
340,947

Accompanying notes are an integral part of these financial statements.

52

53

Notes to Consolidated Financial Statements
Tokyo Gas Co., Ltd. and Consolidated Subsidiaries
Years ended March 31, 2007 and 2006

1

Basis of presenting consolidated financial statements

Tokyo Gas Co., Ltd. (the “Company”) and its consolidated
subsidiaries maintain their accounts and records in accordance with the provisions set forth in the Japanese
Securities and Exchange Law and its related accounting
regulations, and in conformity with accounting principles
generally accepted in Japan (“Japanese GAAP”), which are
different in certain respects as to application and disclosure
requirements from International Financial ReportingStandards. The Company, as a regulated company, also follows the Gas Business Law related accounting regulations
for preparing such financial statements.
The accounts of the Company’s overseas subsidiaries
are based on their accounting records maintained in conformity with generally accepted accounting principles prevailing in the respective countries of domicile.
The accompanying consolidated financial statements
have been restructured and translated into English from theconsolidated financial statements of the Company preparedin accordance with Japanese GAAP and filed with theappropriate Local Finance Bureau of the Ministry of Financeas required by the Securities and Exchange Law. Some supplementary information included in the statutory Japanese
language consolidated financial statements, but notrequired for fair presentation, is not presented in the2

Significant accounting policies(1) Consolidation — The consolidated financial statements include the accounts of the Company and all of its
significant subsidiaries. For the years ended March 31, 2007
and 2006, 52 and 54 subsidiaries, respectively, were consolidated. All significant inter-company transactions andaccount balances are eliminated in consolidation.
In the elimination of investments in subsidiaries, theassets and liabilities of the subsidiaries, including the portion attributable to minority shareholders, are recorded
based on their fair value at the time the Company acquired
control of the respective subsidiary.
For the year ended March 31, 2007, three subsidiaries
were newly included in the scope of consolidation due tothose subsidiaries' increased significance. On the other hand,
one subsidiary was excluded from the scope of consolidation
as it was dissolved during the fiscal year. Besides, the number of consolidated subsidiaries decreased by four due tobusiness combinations among consolidated subsidiaries.
(2) Equity method — Significant investments in unconsolidated subsidiaries and affiliates over which the Company
has the ability to exercise significant influence with regard
to operating and financial policies of the investees, areaccounted for by the equity method. For the years ended
March 31, 2007 and 2006, one affiliated company was
accounted for by equity method.
(3) Accounting period of consolidated subsidiaries —Though the Company’s fiscal year ends on March 31, the54

accompanying consolidated financial statements.
The consolidated balance sheet as of March 31, 2007,
which has been prepared in accordance with the new
accounting standard as discussed in Note2(19) Significant
accounting policies, is presented with the consolidated balance sheet as of March 31, 2006 prepared in accordancewith the previous presentation rules.
Also, as discussed in Note2(20) Significant accounting
policies, the consolidated statement of changes in net
assets for the year ended March 31, 2007 has been prepared in accordance with the new accounting standard. The
accompanying consolidated statement of shareholders'equity for the year ended March 31, 2006 was voluntarily
prepared for the purpose of inclusion in the consolidated
financial statements although such statements were notrequired to be filed with the Local Finance Bureau.
The translation of the Japanese yen amounts into U.S.
dollars is included solely for the convenience of readers
outside Japan, using the prevailing exchange rate at March
31, 2007, which was ¥118 to US $1. The convenience translations should not be construed as representations that theJapanese yen amounts have been, could have been, or
could in the future be, converted into U.S. dollars at this or
any other rate of exchange.

following companies end their year on December 31:
TOKYO GAS AUSTRALIA LTD.
Tokyo Gas Darwin LNG Pty Ltd.
All significant adjustments considered necessary during
the period from December 31 to the consolidated fiscal
year end have been made on consolidation.
(4) Property, plant and equipment — Property, plantand equipment is generally stated at cost. Depreciation isdetermined mainly by the declining-balance method basedon estimated useful life, except that certain buildings are
depreciated using the straight-line method.
(5) Software costs — The Company and its consolidated
subsidiaries include software in intangible assets anddepreciate it using the straight-line method over the estimated useful life.
(6) Accounting for certain lease transactions —Finance leases which do not transfer ownership to lessees
are accounted for in the same manner as operating leases.
(7) Goodwill — Goodwill and negative goodwill are amortized on a straight-line basis within 20 years (mainly 10 years).
(8) Cash and cash equivalents — Cash and cash equivalents include cash on hand, readily-available deposits andshort-term highly liquid investments with maturities notexceeding three months at the time of purchase, which arereadily convertible to known amounts of cash that theypresent insignificant risk of change.

(9) Securities — The Company and its consolidated subsidiaries classify their securities in one of the following
three categories, in accordance with the Japanese
Accounting Standard for Financial Instruments.
(a) Debt securities intended to be held to maturity (hereafter, “held-to-maturity debt securities”) are stated
at amortized cost.
(b) Equity securities issued by unconsolidated subsidiaries and affiliated companies that are notaccounted for using the equity method are stated atmoving-average cost.
(c) Other securities with fair value, which are defined as
securities other than held-to-maturity debt securities,
equity securities issued by unconsolidated subsidiaries and affiliated companies, and securities
held for trading purposes, are stated at fair value atthe year-end, if their fair values are readily available.
The difference between acquisition costs and bookvalues of these securities are reported, net of applicable taxes, as a separate component of net assets.
Other securities with no fair value are stated at moving-average cost.
If the fair value of held-to-maturity debt securities, equity
securities issued by unconsolidated subsidiaries and affiliated companies, and other securities with fair value, declines
significantly, and the decline is not considered recoverable,
such securities are stated at fair value and the difference
between fair value and the carrying amount is recognized asloss in the period of the decline.
(10) Derivative financial instruments — The Company
and its consolidated subsidiaries use currency swap contracts, interest rate swap contracts, foreign exchange forward contracts, commodity swap contracts and weather
derivatives only for the purpose of mitigating the risk offluctuations in foreign exchange rates, interest rates, market prices of raw materials and finished products andaffects of changes in temperature.
The Company and its consolidated subsidiaries do notuse derivative financial instruments for speculative trading
purposes. The derivative financial instruments are executedwith creditworthy financial institutions, and the Company’s
and its consolidated subsidiaries’ management believes
there is little risk of default by counterparties. The derivative financial instruments are used based on internal policies and procedures on risk control. Derivatives are stated
at fair market value at the year-end.
The Company and its consolidated subsidiaries use hedging accounting, provided that the conditions of the accounting were applicable to the rules. Regarding forward exchange
contracts and foreign currency swap contracts fulfilled certain
conditions, the hedged foreign currency receivable andpayable are recorded using the Japanese yen amount of thecontracted forward rate or swap rate. Regarding interest rate
swap contracts fulfilled certain conditions, the net amount tobe paid or received under the interest rate swap contract is
added to or deducted from the interest on the liabilities forwhich the swap contract was executed.

(11) Inventories — Inventories are stated at cost, cost
being determined by the moving-average method.
(12) Allowance for doubtful accounts — For normal
receivables, an allowance for doubtful accounts is provided
using the historical experienced default ratio.
For specific receivables such as bankruptcy/rehabilitation claims, an allowance for doubtful accounts is provided
for the estimated amounts considered to be uncollectible
after reviewing individual collectability.
(13) Reserve for and retirement benefits —The Company and its consolidated subsidiaries provide postemployment benefit plans, an unfunded lump-sum payment
plan and a funded pension plan. The Company and certain
consolidated subsidiaries provide defined benefit plan anddefined contribution pension plan. Under which reserve forretirement benefits are based on the level of wages andsalaries, length of service and certain other factors.
The Company and its consolidated subsidiaries determine benefit obligation and expenses for reserve for retirement benefits based on the amounts actuarially calculatedusing certain assumptions.
The liability for reserve for retirement benefits is provided based on the estimated amounts of projected benefit
obligation and the fair value of the plan assets.
The estimated amount of all retirement benefits to be
paid at the future retirement date is assumed as generating
equally to each service year using the estimated number of
total service years. Past service costs are mainly charged toincome when incurred, and actuarial gains and losses arecharged to income mainly in the fiscal year following theyear when they arise.
(14) Allowance for repairs of gas holders —The Company and certain consolidated subsidiaries provide
for periodic repairs of gas holders by estimating future
expenditures and charging them to income in equal annual
amounts. The difference between the actual expenditureand the amount provided is charged to income in the year
repairs are completed.
(15) Reserve for safety measures — The Company provide for expenses necessary to secure safety of gas consumers by estimating total amount of such expenses which
are expected to incur after the year-end date.
(16) Translation of financial statements denominatedin foreign currency — Receivables and payables denominated in foreign currencies are translated into Japanese yenat the year-end rates, and the resulting translation gains orlosses are charged to income currently. Assets and liabilities of the foreign subsidiaries are translated into Japanese
yen at the exchange rates prevailing at the balance sheet
date. Profit and loss accounts for the year are translated
into Japanese yen at the exchange rates prevailing at thebalance sheet date as well. Differences in yen amounts arising from the use of different rates presented as “Foreign
currency translation adjustment” in net assets.
(17) Income taxes — Income taxes comprise corporation
tax, inhabitants’ taxes and enterprise tax (excluding enterprise taxes based on “amount of added value” and “amountof capital”). The Company and its consolidated subsidiaries

55

recognize tax effects of temporary differences between thefinancial statement basis and the tax basis of assets and liabilities. The Company and its consolidated subsidiaries do
not recognize deferred tax assets which are not expected toreduce future income taxes.
(18) Enterprise tax — In the case of companies engaged ingas businesses, enterprise tax which is levied, not on taxable
income, but on net sales, is accounted for in “Selling, generaland administrative expenses”. Enterprise taxes based on“amount of added value” and “amount of capital” are also
included in “Selling, general and administrative expenses”.
In the accompanying consolidated statements ofincome, enterprise tax, included in “Selling, general andadministrative expenses” amounted to ¥13,933 million(US$118,078 thousand) and $12,626 million for the years
ended March 31, 2007 and 2006, respectively.
(19) Presentation of net assets — From the fiscal year
ended March 31, 2007, “Accounting Standard for Presentationof Net Assets in the Balance Sheet” (Statement No.5 issued
by the Accounting Standards Board of Japan on December
9, 2005) and “Guidance on Accounting Standard for
Presentation of Net Assets in the Balance Sheet” (theFinancial Accounting Standard Implementation Guidance
No.8 issued by Accounting Standards Board of Japan on
December 9, 2005) are adopted. These new accounting standards require that the balance sheet be divided into sectionsof assets, liabilities and that net assets be divided into sections of shareholders’ equity, valuation and translation
adjustments, stock acquisition rights and minority interest.
Under the New Accounting Standards, the following items
are presented differently at March 31, 2007 compared toMarch 31, 2006. The net assets section includes unrealized
gains/losses on hedging derivatives, net of taxes. Under theprevious presentation rules, unrealized gains/losses on
hedging derivatives were included in the assets or liabilities
section without considering the related income tax effects.
Minority interests is included in the net assets section atMarch 31, 2007. Under the previous presentation rules, companies were required to present minority interests in the liabilities section and between the non-current liabilities andthe shareholders’ equity sections. There was no impact on
operating results as a result of this new adoption.
If the New Accounting Standards had not been adopted
at March 31, 2007, the shareholders’ equity amounting to¥794,006 million would have been presented.
(20) Accounting Standard for Statement of Changes
in Net Assets — Effective from the year ended March 31,
2007, the Company and its consolidated subsidiaries adopted the new accounting standard, “Accounting Standard forStatement of Changes in Net Assets” (Statement No.6
issued by the Accounting Standards Board of Japan on
December 27, 2005), and the implementation guidance forthe accounting standard for statement of changes in net
assets (the Financial Accounting Standard Implementation
Guidance No. 9 issued by the Accounting Standards Boardof Japan on December 27, 2005), (collectively, “theAdditional New Accounting Standards”).

56

The Company prepared the accompanying consolidated
statement of changes in net assets for the year ended
March 31, 2007 in accordance with the Additional New
Accounting Standards. The accompanying consolidated
statement of shareholders’ equity for the year ended March
31, 2006, which was voluntarily prepared for inclusion in
the consolidated financial statements, has not been adapted to the new presentation rules of 2007.
(21) Business combinations and business divestitures— From the fiscal year ended March 31, 2007, “Accounting forbusiness combinations” (Business Accounting Council on
October 31, 2003), “Accounting Standard for Business
Divestitures” (Statement No.7 issued by the AccountingStandards Board of Japan on December 27, 2005), and“Guidance on Accounting Standard for Business Combinations
and Accounting Standard for Business Divestitures” (theFinancial Accounting Standard Implementation Guidance No.
10 issued by the Accounting Standards Board of Japan on
December 27, 2005) are adopted.
(22) Bonuses to directors — From the fiscal year ended
March 31, 2007, “Accounting Standard for Directors' Bonus”(Statement No.4 issued by the Accounting Standards Boardof Japan on November 29, 2005) is adopted. This new
accounting standard requires companies to charge bonuses
to directors to income on an accrual basis, while suchbonuses were previously accounted for as appropriation ofretained earnings in the fiscal year of shareholders' resolution. As a result of this new adoption, operating income andincome before income taxes and minority interest in net
income of consolidated subsidiaries decreased by ¥67 million (US$568 thousand), respectively, compared with what
would have been under the previous accounting method.
“Bonuses paid to directors” shown in the accompanying
consolidated statements of changes in net assets as a reduction item of retained earnings in the fiscal year ended March
31, 2007 is appropriation of retained earnings resolved at
the general shareholders’ meeting held in June, 2006.
(23) Amounts per share of common stock — Basic net
income per share is computed based on the net income
available for distribution to common shareholders and theweighted-average number of common shares outstanding
for the period. Diluted net income per share reflects thepotential dilution that could occur if convertible bonds wereconverted into common stocks.
At the current conversion prices, 2,830,171 thousand
shares of common stock were issuable at March 31, 2007
upon full conversion of the outstanding convertible bonds.
Cash dividends per share have been presented on an
accrual basis and include dividends approved or to beapproved after the balance sheet dates, but applicable tothe year then ended.
(24) Reclassifications — Certain prior year amounts havebeen reclassified to conform to 2007 presentation. Thesechanges had no impact on previously reported results ofoperations.

3

Property, plant and equipment

Property, plant and equipment is generally recorded at cost. However, in cases where the Company and its consolidated
subsidiaries receive government grants toward the cost of acquisition, such amounts are offset against the acquisition costof the related asset (“reduction entry accounting”). Such offsets recorded at March 31, 2007 and 2006 were ¥262,818 million(US$2,227,273 thousand) and ¥263,665 million, respectively.

4

Pledged assets

Pledged assets at March 31, 2007 and 2006 were as follows:
Thousands of
U.S. dollars

Millions of Yen

Distribution facilities

2007

2006

2007

¥ 6,493¥ 5,472$ 55,022

Service andmaintenance facilities
Other facilities

83

84

705

7,762

152,833

36

Long-termloan receivable

39

Marketable securities

5

38

305

39

2007

2006

2007

Long-term debt(including current
portion)¥13,537¥4,941$114,721

Bank loan payable

584

30

4,949

Other current liabilities

61

60

521

¥14,182¥5,031$120,191

330

2

1

17

¥24,687¥13,396$209,212

Securities

Acquisition costs, book values and fair values of securities
with available fair values at March 31, 2007 and 2006 wereas follows:(b) Other securities with fair value

Thousands of
U.S. dollars

Millions of Yen
2006

2007

Securities with fair value
exceeding book value:Book value

¥27

¥11

27

11

232

¥ 0

¥ 0

$

¥19,196¥ 14,442

Fair value

98,132

104,118

831,633¥78,936¥ 89,676$668,952

$228

2006

2006

2007

$19,696

Securities with fair values
not exceeding acquisition cost:
Equity securities

2007

Securities with fair value
not exceeding book value:Book value

¥220

¥236

$1,868Fair value

220

235

1,865

¥

¥ (1)

$

Thousands of
U.S. dollars

Millions of Yen

4

Thousands of
U.S. dollars

Millions of Yen

0$162,681

acquisition cost

2007

2007

2007

Equity securities

Difference

Fair value
Difference

2006

Securities with fair values
exceeding acquisition cost:(a) Held-to-maturity debt securities

2007

Thousands of
U.S. dollars

Millions of Yen
2007

Difference

Thousands of
U.S. dollars

Millions of Yen

18,034

Investment securities

Liabilities secured by the above assets at March 31, 2007
and 2006 were as follows:

acquisition cost

¥2,324¥1,060Fair value

2,230

974

Difference

¥

(94)

¥

(86)

18,897
$

(799)

(3)

Other securities sold amounted to ¥9,449 million (US$80,078
thousand) and ¥5,194 million for the years ended March 31,
2007 and 2006, respectively. Gains on sale of other securities amounted to ¥5,851 million (US$49,588 thousand) and¥4,954 million and losses on sale of other securities amounted ¥24 million for the years ended March 31, 2006.
Other securities with no fair value, which were stated atmoving-average cost, amounted to ¥16,964 million(US$143,766 thousand) and ¥12,062 million at March 31,
2007 and 2006, respectively. Investments in unconsolidated
subsidiaries and affiliated companies amounted to ¥27,089
million (US$229,567 thousand) and ¥27,639 million for theyears ended March 31, 2007 and 2006, respectively.

57

6

Effect of the Bank Holiday

As financial institutions in Japan were closed on March 31, 2007, ¥700 million (US$5,932 thousand) of trade notes receivableand ¥1,049 million (US$8,890 thousand) of trade notes payable maturing on March 31, 2007 were settled on the following
business day and accounted for accordingly.

7

Inventories

Inventories at March 31, 2007 and 2006 were as follows:
Thousands of
U.S. dollars

Millions of Yen
2007

2006

2007

Finished products¥ 4,341¥ 3,670$ 36,783

Raw materials

22,357

22,148

189,469

Supplies

9,227

8,656

78,195

207

123

1,757

¥36,132¥34,597$306,204Work in process

The indentures covering fifth domestic convertible bonds
provide, among other conditions, for (1) conversion intoshares of common stock at the conversion prices per shareof ¥339.00 (US$2.87) (subject to adjustment in certain circumstances), (2) conversion periods through March 30, 2009.
As is customary in Japan, a lending bank has the rightto offset cash deposited with it against any debt or obligation that becomes due and, in the case of default or certain
other specified events, against all debt payable to the bank.
To date no such offset request has been made to theCompany and its consolidated subsidiaries.

The annual maturities of long-term debt at March 31, 2007
were as follows:Year ending March 31

Millions of Yen

Thousands of
U.S. dollars

2008
2009
2010
2011
2012
2013 and thereafter¥ 42,617
67,56887,95744,93847,565
217,868¥508,513$ 361,159
572,607745,395
380,827
403,096
1,846,348$4,309,432

Note: The Company has the specific commitment line contract with the maincorrespondent financial institution, at 30 billion yen in total.

9

Derivative transactions

Contract amounts, fair values and recognized gains on the commodity derivatives except those accounted for using hedge
accounting and weather derivatives at March 31, 2007 and 2006 were as follows:
Millions of Yen

Thousands of U.S. dollars

At March 31, 2007

8

Bank loan payables and long-term debt

At March 31, 2007

Contract amounts

The average annual interest rates of short-term bank loan payables at March 31, 2007 and 2006 were 0.7% and 0.3%, respectively.
Long-term debt at March 31, 2007 and 2006 were as follows:

Total

RecognizedBeyondone year Fair value gains(losses)

Commodity derivatives¥1,538

¥

—

¥(61)

¥(61)

Weather derivatives

3,600

1,000

—

—

—

—

—

¥(61)

Thousands of
U.S. dollars

Millions of Yen
2007

2006

Contract amounts
Total

RecognizedBeyondone year Fair value gains(losses)

Commodity derivatives$13,032$—$(516)

Weather derivatives

30,5088,475—$(516)————$(516)

2007

Domestic unsecured bonds

Millions of Yen

Due in 2016 at a rate of 4.0%

¥ 27,700¥ 27,700$ 234,746

Due in 2018 at a rate of 2.625%

40,00040,000338,983

Due in 2009 at a rate of 1.68%

30,00030,000254,237

Due in 2009 at a rate of 1.73%

30,00030,000254,237

Due in 2010 at a rate of 2.01%

20,00020,000169,492

Due in 2011 at a rate of 1.39%

30,00030,000254,237

Due in 2012 at a rate of 1.35%

20,00020,000169,492

Due in 2023 at a rate of 1.01%

20,00020,000169,492

Due in 2013 at a rate of 1.41%

30,00030,000254,237

Due in 2014 at a rate of 1.59%

20,00020,000169,492

Due in 2024 at a rate of 2.29%

10,00010,00084,746Due in 2025 at a rate of 2.14%

10,00010,00084,746Due in 2015 at a rate of 4.1%

13,80013,800116,949

Due in 2009 at a rate of 1.18%

4,000

4,000

33,898

5th issue due in 2009 at a rate of 1.2%

32,61839,700276,424

6th issue due in 2007 at a rate of 1.1%—

19,321—At March 31, 2006
Contract amounts
Total

RecognizedBeyondone year Fair value gains(losses)

Commodity derivatives

¥ 700

¥

—

¥483

Weather derivatives

8,000

1,400

—

—

—

—

—

¥483

¥483

Fair value of commodity derivatives contracts was calculated based on the information presented by financial institution. Contract amounts of the commodity derivatives is notindicative of the magnitude of market risk or credit risk concerning derivatives transactions.
Contract amounts of weather derivatives were stated at
the maximum receivable or payable amount under the contracts. Fair value of weather derivatives were not statedbecause the calculation of the fair value was impossible.

Domestic unsecured convertible bonds

Loans from banks, insurance companies andgovernment agencies due through 2020 at rates of 0.31% to 5.60%:
Secured13,537

4,941

114,720

Unsecured

156,858

172,779

1,329,303

508,513542,241

4,309,431

42,61745,501

361,159¥465,896¥496,740$3,948,272

Less-Amounts due within one year

58

59

10

Reserve for retirement benefits

12

Reserve for retirement benefits included in the liability section of the consolidated balance sheets as ofMarch 31, 2007 and 2006 were as follows:
Thousands of
U.S. dollars

Millions of Yen
2007

2006

2007

¥ 364,288¥ 348,820$ 3,087,187

Unrecognized prior service costs

1,778

2,165

15,064

Unrecognized actuarial differences(16,791)

8,698(142,295)

Less fair value of pension assets(256,339)(229,601)(2,172,363)

12

140

¥ 92,948¥ 130,222

Projected benefit obligation

Prepaid pension costs
Employees’ severance and retirement benefits

99$

787,692

Reserve for retirement benefit expenses for the years ended March 31, 2007 and 2006 were as follows:
Thousands of
U.S. dollars

Millions of Yen

Service costs – benefits earned during the year

2007

2006

2007

¥ 9,657¥ 9,586$ 81,842

Interest cost on projected benefit obligation

6,876

7,180

58,273

Expected return on plan assets(4,623)(3,808)(39,176)

Amortization of actuarial differences(13,095)

10,569(110,972)

Amortization of prior service costs

(332)

(92)

(2,815)

Other

6,669

3,009

56,520¥ 5,152¥26,444$ 43,672

Severance and retirement benefit expenses

The discount rate and the rate of expected return on plan assets used by the Company and its consolidated subsidiaries are approximately 1.8% and 2.0%, respectively, at March 31, 2007, and approximately
2.0% and 2.0%, respectively, at March 31, 2006.

11

Income taxes

The Company is subject to multiple taxes based on taxable income, which, in the aggregate, indicate astatutory rate in the Company of approximately 36.2% for the years ended March 31, 2007 and 2006.
Reconciliation of the difference between the statutory tax rate and the effective tax rate for financial
statement purposes for the years ended March 31, 2007 and 2006 are not presented as they are negligible.
Significant components of deferred tax assets and liabilities as of March 31, 2007 and 2006 wereas follows:
Thousands of
U.S. dollars

Millions of Yen
2007

2006

2007

Liabilities for severance and retirement benefits¥33,954¥47,082$287,748

Other – net

39,752

41,395

336,875

Less valuation allowance(5,228)(2,850)(44,301)

Subtotal

68,47885,627580,322

Net unrealized holding gains on securities

29,09333,016

246,547

Other – net

4,175

8,967

35,390Subtotal

33,26841,983281,937¥35,210¥43,644$298,385

Deferred tax assets:

Net assets

The Japanese Corporate Law (“the Law”) became effective
on May 1, 2006, replacing the Japanese Commercial Code(“the Code”). The Law is generally applicable to events andtransactions occurring after April 30, 2006 and for fiscal
years ending after that date.
(a) Distribution to the shareholders
Under the Corporate Law, dividends can be paid at any time
during the fiscal year in addition to the year-end dividend
upon resolution at the shareholders’ meeting. Semiannualinterim dividends may also be paid once a year upon resolution by the Directors’ meeting if the articles of incorporation of
the company so stipulate, if companies meet certain criteria.
The Corporate Law provides certain limitations on theamounts available for dividends and/or the purchase oftreasury stock. The limitation is defined as the amountavailable for distribution to the shareholders, and it is calculated mainly based on capital surplus other than other capital surplus, other retained earnings and treasury stock, but
the amount of net assets after dividends must be maintained at no less than ¥3 million.
The maximum amount that the Company can distributeas dividends is calculated based on the non-consolidated
financial statements of the Company in accordance withJapanese laws and regulations.
At the general meeting of shareholders held on June
28, 2007, the Company’s shareholders approved paymentof year-end cash dividends of ¥4.5 (US$0.04) per share
aggregating ¥12,207 million (US$103,448 thousand) to theshareholders of record as of March 31, 2007.
Such appropriations have not been accrued in the consolidated financial statements as of March 31, 2007. Suchappropriations are recognized in the period in which they
are approved by the shareholders.
(b) Increase/decrease and transfer of common stock, reserveand surplus
Under Japanese laws and regulations, the entire amount
paid for new shares is required to be designated as common stock.
However, a company may, by a resolution of the Board

13

of Directors, designate an amount not exceeding one-halfof the price of the new shares as additional paid-in capital,
which is included in capital surplus.
Under the Law, in cases where a dividend distributionof surplus is made, the smaller of an amount equal to 10%of the dividend or the excess, if any, of 25% of common
stock over the total of additional paid-in-capital and legal
earnings reserve must be set aside as additional paid-incapital or legal earnings reserve. Legal earnings reserve is
included in retained earnings in the accompanying consolidated balance sheets.
Under the Code, companies were required to set aside
an amount equal to at least 10% of the aggregate amount ofcash dividends and other cash appropriations as legal earnings reserve until the total of legal earnings reserve andadditional paid-in capital equaled 25% of common stock.
Under the Code, legal earnings reserve and additional
paid-in capital could be used to eliminate or reduce a deficit
by a resolution of the shareholders’ meeting or could becapitalized by a resolution of the Board of Directors. Under
the Law, both of these appropriations generally require aresolution of the shareholders' meeting.
Additional paid-in capital and legal earnings reserve
may not be distributed as dividends. Under the Code, however, on condition that the total amount of legal earnings
reserve and additional paid in capital remained equal to or
exceeded 25% of common stock, they were available for
distribution by resolution of the shareholders’ meeting.
Under the Law, all additional paid-in-capital and all legal
earnings reserve may be transferred to other capital surplus
and retained earnings, respectively, which are potentiallyavailable for dividends.
(c) Treasury stock
The Corporate Law provides for companies to purchasetreasury stock and dispose of such treasury stock by resolution of the Directors’ meetings. The amount of treasury
stock purchased cannot exceed the amount available for
distribution to the shareholders which is determined by
specific formula.

Additional Information for Cash Flows

Deferred tax liabilities:

Deferred tax assets – net

60

Significant non-cash transactions at March 31, 2007 and 2006 were as follows:

Decrease in treasury stock due to the conversion of convertible bonds
Loss on disposal of treasury stock due to the conversion of convertible bonds
Decrease in convertible bonds

Millions of Yen

Thousands of
U.S. dollars¥34,697(8,490)¥26,207$294,040(71,947)$222,093

61

14

Segment information

15

The Company’s and its consolidated subsidiaries’ primarybusiness activities include (1) gas sales, (2) gas appliancesales, (3) related construction, (4) real estate rental and (5)other business.

A summary of net sales, costs and expenses, operating
income, identifiable assets, depreciation, losses on impairment of fixed assets and capital expenditures by businesssegments for the years ended March 31, 2007 and 2006 was
as follows:

Information for certain leases

Finance leases
Information as lessee
Lease payments in the years ended March 31, 2007 and 2006,
and future minimum lease payments inclusive of interest at
March 31, 2007 and 2006 were as follows:

Information as lessor
Lease income in the years ended March 31, 2007 and 2006,
and future lease payments to be received at March 31, 2007
and 2006 were as follows:

Millions of yen
Gas sales

For 2007Sales:
Outside customers
Intra group
Total
Costs and expenses
Operating income
Identifiable assets
Depreciation
Losses on impairmentof fixed assets
Capital expenditures

Gas appliance
sales

Relatedconstruction

Real estate
rentalOther businessElimination or
corporate

Lease payments¥ 976,358
23,163
999,521795,955¥ 203,566¥1,009,880
97,969¥132,742
2,665
135,407134,238¥ 1,169¥ 46,187
544¥55,527
3,703
59,23057,479¥ 1,751¥20,619165¥ 11,933
22,102
34,03527,304¥ 6,731¥185,909
10,400¥200,398
85,009285,407271,559¥ 13,848¥248,139
21,951—
83,449

—
576

—
64

—
3,332

Gas appliance
sales

Relatedconstruction¥—(136,642)(136,642)(71,892)¥ (64,750)¥ 181,901(2,031)¥1,376,958—
1,376,958
1,214,643¥ 162,315¥1,692,635
128,998—
37,496—(2,832)—122,085

Other businessElimination or
corporate

Consolidation

Millions of yen
Gas sales

For 2006
Sales:
Outside customers
Intra group
Total
Costs and expenses
Operating income
Identifiable assets
Depreciation
Losses on impairmentof fixed assets
Capital expenditures

Real estate
rentalThousands of
U.S. dollars

Millions of Yen

Consolidation

2007

2006

2007

¥ 552

¥ 569

$ 4,679

Future lease payments
inclusive of interest:¥128,376
2,450
130,826
126,209¥ 4,617¥ 43,075
485¥55,772
3,975
59,74756,771¥ 2,976¥19,719184¥ 11,055
23,132
34,18728,728¥ 5,459¥193,712
11,340¥172,746
79,850252,596
242,949¥ 9,647¥228,086
21,421¥—(121,175)(121,175)(50,802)¥ (70,373)¥ 196,253(1,918)¥1,266,502—
1,266,502
1,154,156¥ 112,346¥1,693,899
132,300—
88,216

—
805

—
37

—
2,850

—
6,596

—
(1,572)—
116,932

For 2007Sales:
Outside customers
Intra group
Total
Costs and expenses
Operating income
Identifiable assets
Depreciation
Losses on impairmentof fixed assets
Capital expenditures$8,274,225
196,292
8,470,517
6,745,380$1,725,137$8,558,307
830,249—
707,197

Gas appliancesales$1,124,930
22,589
1,147,519
1,137,610$
9,909$ 391,412
4,610

Relatedconstruction$470,568
31,378501,946
487,107$ 14,839$174,736
1,397

—
4,880

—
544

Real estate
rental$ 101,128
187,304
288,432
231,387$ 57,045$1,575,505
88,134—28,235

Other business$1,698,286
720,418
2,418,704
2,301,352$ 117,352$2,102,873
186,027—
317,759

Elimination or
corporate$—(1,157,981)(1,157,981)(609,250)$ (548,731)$ 1,541,534(17,212)—(23,998)62

dated subsidiaries, and they amounted to ¥223,419 million(US$1,893,380 thousand) and ¥239,031 million at March 31,
2007 and 2006, respectively.
Geographic segment information is not shown due to theCompany having no overseas consolidated subsidiaries.
Information for overseas sales is not disclosed due to overseas
sales being immaterial compared to consolidated net sales.

$ 43,510¥ 479$ 4,248

Current¥ 5,134¥ 4,222

2,130

1,485

18,048Non-current

15,502

13,241

131,371¥2,631¥1,964$22,296¥20,636¥17,463$174,881

The Company and its consolidated subsidiaries use certain
other facilities and other intangibles under lease arrangements. Acquisition cost, accumulated depreciation and net
book value for property held under finance leases which do
not transfer ownership of the leased property to the lessee
on an “as if capitalized” basis for the years ended March
31, 2007 and 2006 were as follows:

Acquisition
cost

Accumulated
depreciation

Net

Other facilities¥4,174¥1,688¥2,486

Other intangibles

314

169

145

¥4,488¥1,857¥2,631For 2007

Acquisition cost, accumulated depreciation and net bookvalue for property held under finance leases which do nottransfer ownership of the leased property to the lessee forthe years ended March 31, 2007 and 2006 were as follows:
Millions of Yen
For 2007

Acquisition
cost

Accumulated
depreciation

Net

Other facilities¥24,029¥14,709¥9,320

Other intangibles

1,030

674

356

¥25,059¥15,383¥9,676

Other facilities¥23,218¥15,828¥7,390

Other intangibles

2,147

1,333

814

¥25,365¥17,161¥8,204

For 2006

For 2006

Other facilities¥3,942¥2,053

Other intangibles

183

109

¥1,88974¥4,125¥2,162¥1,963

For 2007

Acquisition
cost

Accumulated
depreciation

Net

Other facilities$35,375$14,310$21,065

Other intangibles

2,660

1,429

1,231

$38,035$15,739$22,296

Thousands of U.S. dollars
For 2007

Acquisition
cost

Accumulated
depreciation

Net

Other facilities$203,636$124,653$78,983

8,725

5,713

3,012

$212,361$130,366$81,995

Other intangibles

Operating leases
Information as lessor
Future lease payments to be received at March 31, 2007 and2006 were as follows:
Thousands of
U.S. dollars

Millions of Yen
2007

2006

2007

¥ 444

¥ 491

$3,762

632

792

5,353

¥1,076¥1,283$9,115

Future lease payments:
Current
Non-current

Costs and expenses under Elimination or corporate that cannot be allocated to business segments are related mainly togeneral administrative expenses of the Company, amounted
to ¥65,392 million (US$554,170 thousand) and ¥71,570 million at March 31, 2007 and 2006, respectively.
Assets under Elimination or corporate mainly comprise
cash and cash equivalents, current and non-current securities and deferred tax assets of the Company and its consoli-2007$ 39,056¥ 501

Thousands of U.S. dollars—
1,034,617

2006¥ 4,261

Non-current

Consolidation$11,669,137—
11,669,137
10,293,586$ 1,375,551$14,344,367
1,093,205

2007¥ 4,609

Current

Thousands of U.S. dollars
Gas sales

Lease income
Future lease payments
to be received:

Millions of Yen¥ 898,553
11,768910,321750,301¥ 160,020¥1,013,054
100,788

Thousands of
U.S. dollars

Millions of Yen

63Independent Auditors’ Report

16

Commitment and contingent liabilities

At March 31, 2007, the Company and its consolidated subsidiaries were contingently liable for (1) debt guarantees in
the amount of ¥6,858 million (US$58,116 thousand) for financial institution loans to companies other than consolidated
subsidiaries, (2) ¥41 million (US$348 thousand) with respect
to joint and several liabilities upon default of the otherdebtors and (3) ¥38,700 million (US$327,966 thousand) as
guarantors for domestic unsecured bonds issued by theCompany, and assigned to certain banks under the debt
assumption agreements made in the years ended March 31,
2004, 2003 and 2002.
At March 31, 2007, the Company had several long-term
purchase contracts for the supply of LNG. The purchaseprice determinable under such contracts is contingent upon
fluctuations in the market price of crude oil.

To the Board of Directors of Tokyo Gas Co., Ltd.
We have audited the accompanying consolidated balance sheets of Tokyo Gas Co., Ltd. (a Japanese corporation) and consolidated subsidiaries as of March 31, 2007 and 2006, the related consolidated statements of income for the years then ended, the consolidated statement of changes in net assets for theyear ended March 31, 2007, the consolidated statement of shareholders’ equity for the year ended March
31, 2006, and the consolidated statements of cash flows for the years ended March 31, 2007 and 2006,
expressed in Japanese yen. These consolidated financial statements are the responsibility of the17

Subsequent events(1) Resolution of acquisitions of treasury stock
The Directors’ meeting held on April 26, 2007 approved theacquisition of treasury stock based upon the approval of thegeneral meeting of shareholders (on June 29, 2006).
Number of shares: Limited to 60,000,000 shares
Cost of shares acquisitions:
Limited to ¥39,000 million (US$330,508 thousand)
Period of acquisitions:
From April 27, 2007 to March 31, 2008
(2) Implementation of acquisitions of treasury stock
The Directors’ meeting held on April 26, 2007 approved theacquisition of treasury stock based upon the approval of thegeneral meeting of shareholders.
Number of shares purchased : 31,000,000 shares
Cost of shares acquisitions : ¥18,688 million (US$158,364
thousand)
Period of acquisition : April 27 to May 23, 2007 (commitment basis)

Company’s management. Our responsibility is to independently express an opinion on these consolidated(3) Issue of bond
The company published the 28th unsecured bond based on
the resolution of board of directors held on March 27, 2007
as follows.
Total amount of issue : ¥20,000 million
Interest rate : 2.29% per annum
Amount-paid frame : ¥99.98 per face value of ¥100
Term : 20 years
Maturity date : June 15 , 2027 (Bullet maturity)
Interest payment day : June 15 and December 15 (Every year)
Subscriber’s yield : 2.291%
Offering period : June 1, 2007
Payment date : June 15, 2007

financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in Japan. Thosestandards require that we plan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits provide a reasonablebasis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Tokyo Gas Co., Ltd. and consolidated subsidiaries as ofMarch 31, 2007 and 2006, and the consolidated results of their operations and their cash flows for theyears then ended, in conformity with accounting principles generally accepted in Japan.
Without qualifying our opinion, we draw attention to the following:(1) As discussed in Note 2(19) to the consolidated financial statements, effective April 1, 2006, Tokyo
Gas Co., Ltd. and consolidated domestic subsidiaries adopted new accounting standards for thepresentation of net assets in the balance sheet.
(2) As discussed in Note 17(1) to the consolidated financial statements, subsequent to March 31,
2007, Tokyo Gas Co., Ltd. decided to acquire treasury stock.
(3) As discussed in Note 17(2) to the consolidated financial statements, subsequent to March 31,
2007, Tokyo Gas Co., Ltd. effectuated acquisition of treasury stock.
(4) As discussed in Note 17(3) to the consolidated financial statements, subsequent to March 31,
2007, Tokyo Gas Co., Ltd. published the 28th unsecured bond.

The U.S. dollar amounts in the accompanying consolidated financial statements with respect to the year
ended March 31, 2007 are presented solely for convenience. Our audit also included the translation of yen
amounts into U.S. dollar amounts and, in our opinion, such translation has been made on the basis
described in Note 1 to the consolidated financial statements.

Tokyo, Japan
June 28, 2007

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