Casting Wide, Going DeepTokyo Gas Co., Ltd.
Annual Report 2006

Our Advantage
The Tokyo Gas Group aims to enhance its corporate value by focusing
on the development of a total energy business centering on natural gas.
This vision is the key to our future as a high-profitability, high-growthgroup capable of achieving sustainable success and progress.

Tokyo Gas will continue to provide advanced energy solutions, primarily through the
supply of natural gas to meet expanding demand.
As the most environmentally friendly, economical and convenient fossil fuel, natural gas has become a vital resource for modern society and lifestyles. Tokyo Gas has
made natural gas the core of its diversified energy-related business.
When Tokyo Gas was founded in 1885, Japan was just beginning to use gas on asignificant scale. Since then, Tokyo Gas has helped to build the Japanese city gas andnatural gas markets through its many pioneering achievements, including the introduction of natural gas as a resource for city gas in 1969. During its 120-year history,
it has accumulated sophisticated gas utilization technology and earned a solid reputation for reliability as a supplier of gas to a wide spectrum of residential, industrial
and commercial customers.
Today, Tokyo Gas serves over 9.8 million customers. With a brand image of“security, safety and reliability,” it has extended its business to include advancedenergy solutions and the provision of services that help to enhance the quality of life.
With an extensive network of gas pipelines and LNG receiving terminals, TokyoGas has steadily increased its advantage in the market. Its service area encompasses
the Kanto region, which is the heart of the Japanese economy and the region with thegreatest energy needs. Tokyo Gas is continually extending its pipeline network into
areas where energy demand is expanding. The total length of pipelines in the
network has reached 51,530 km.
Natural gas demand is expected to grow because of its excellent environmental
characteristics with the approach of the first Kyoto Protocol commitment period,
which starts in 2008. Tokyo Gas is working to establish and expand its presence
throughout the LNG value chain, participating in upstream projects and transportation as well as in import and supply operations in Japan. This strategy aims to ensure
the Tokyo Gas Group’s success in an energy sector that will become intenselycompetitive in the years ahead.

Contents

I.F.C. ■ Our Advantage
Share of Natural Gas in Primary Energy Supply in Japan and Worldwide

02 ■ Outline of New Medium-term Management Plan
04 ■ Financial Highlights
06 ■ Segment Information

Global Average

23.5%

08 ■ An Interview with the President
15 ■ Creation and Cultivation of New Natural Gas Markets

13.9%
Japan

Source: BP Statistical Review of World Energy, June 200616

For Residential Customers

18

For Industrial and Commercial Customers

20

Wide-area Development

22

Procurement of Gas Resources24

Technology Development

25 ■ Fulfilling our Commitment to Corporate Social Responsibility
Breakdown of GDP of Japan by Major Areas

Tokyo Area

Osaka Area
Nagoya Area

26

Corporate Governance26

Our Fundamental Concept of Corporate Governance

27

Management Structure

29

Board of Directors and Corporate Auditors

30

Internal Governance31

Disclosure Policy

15.9%

32

Group Management Structure

9.7%

33

38.6%

Source: Cabinet Office, Government of JapanThe Tokyo area includes Tokyo, plus Kanagawa, Saitama, Chiba, Ibaraki, Tochigi, Gunma, Yamanashi andNagano prefectures. The Osaka area includes Osaka, as well as Hyogo, Kyoto, Shiga, Nara and Wakayama
prefectures. The Nagoya area includes Aichi, Gifu and Mie prefectures.

Initiatives for Environmental Protection and Safety

35 ■ Financial Section
63 ■ Consolidated Subsidiaries and Equity-method Affiliates
64 ■ Investor Information

01

Outline of New Medium-term Management Plan

Tokyo Gas is establishing a broad-based profitable structure bycreating and cultivating new markets for natural gas.

Business Strategy Tokyo Gas is extending its strategic focus on the Kanto region,an area of continuous economic growth, to capture the huge potential demand forenvironmentally friendly and economical natural gas through expanding its service
area within a 200 km radius in the region. Another priority is to provide a one-stop
solution to the changing and increasingly diversified and sophisticated needs of ourcustomers. While procuring competitive feedstock and expanding our profit structure,
we will achieve this by establishing multi-energy supply systems that include both gas
and power, and by developing a diverse range of energy services based on the best mix
of appliances and systems.

Service Area Expansion

Marketing scheme covering 200 km radiusaround Tokyo in the Kanto region, and creationof wide-area infrastructure

Broad-based profit structure
built through the creation andcultivation of new markets
for natural gas

Current profit
structure

Greater Potential Value to Customers
Optimal one-stop multi-energy solutions including city gas,
electricity, LNG and LPG

02

The business environment in which Tokyo Gas operates has changed dramatically in the past decade. In addition
to the deregulation of the gas and power sector, shifts in demand patterns, and the emergence of increasingly
diversified and sophisticated customer needs, there has also been a rise in public expectations regarding corporate social responsibility. These changes have been reflected in our medium-term management plans. The plan
launched in 2000 focused on our evolution as a “new utility company,” while our goal under the plan that began
in 2003 was to develop Tokyo Gas as a corporate group on the energy frontier. We have extended the horizon for
our latest medium-term management plan, which was launched in April 2006. It will cover the period from fiscal
2006 to fiscal 2010 and reflects our vision for the Tokyo Gas Group in the second decade of this century. Over the
next five years we will focus our efforts on the “creation and cultivation of new markets for natural gas.”

Financial Strategy In our new medium-term management plan, financial
strategy is positioned alongside business strategy in terms of its importance togrowth. In the five years between fiscal 2006 and fiscal 2010, we aim to generate
operating cash flows* of ¥1,120 billion. We will work to optimize asset
efficiency, capital and shareholder allocations, while maintaining a balance with amore aggressive business strategy focusing on 2010 and beyond. Our goal is tomaximize shareholder value while achieving financial soundness and minimizing
capital costs.
*Operating cash flow = Net income + depreciation> Assuring Financial Soundness
D/E ratio of around

0.6> Focusing on Asset Efficiency

5.5%

ROA

Aim to have 0.6 D/E ratio toEnhance ROA and target a fiscal 2010

facilitate fundraising ability

ROA of 5.5%, while actively investingfor growth> Maximizing Shareholder Value■ Total dividend payout ratio

60%

Establish a total payout ratio
target of 60% (dividends +stock repurchases divided by current
net income)
Total payout ratio of year n = [(dividends fromunappropriated profit in year n) + (amount of treasury stocks
acquired in year n + 1)] / (consolidated net income in year n)■ Aim to achieve a continuous ROEof over

10%■ Implement TEP* of around50 billion by fiscal 2010¥

* TEP (Tokyo Gas Economic Profit)= net operating profit after tax prior to interest
payments – cost of capital (cost of interest-bearing debt
+ cost of shareholders’ equity)03

Financial Highlights

In fiscal 2005, winter temperatures hit record lows. This factor, combined with aggressive marketing of gas, helped to boost
gas sales volumes in all sectors. In value terms, net sales increased by 6.4% year on year to a new record of ¥1,266.5 billion. However, rising crude oil prices caused LNG prices to rise, and there was a sharp increase in gas resource costs. As aresult, operating income declined by 22.7% year on year to ¥112.3 billion, and net income by ¥21.9 billion to ¥62.1 billion.

Millions of yen
except per share amounts

For the Years ended March 31

Thousands of U.S. dollars except
per share amounts

2006

2005

2004

2006

1,266,502

1,190,783

1,151,825

10,824,801

Operating income

112,346

145,349

152,287

960,221

Net income

62,11584,04744,787

530,897

Net income

23.48

31,47

16.44

0.20

Net income (Diluted)

21.70

28.24

14.98

0.19

Shareholders’ equity

270.48244.73221.53

2.31

7.00

7.00

7.00

0.06

1,693,899

1,668,734

1,666,828

14,477,769

Long-term debt due after one year

496,740

547,139545,845

4,245,640

Total shareholders’ equity

728,232

648,766

598,453

6,224,204

Free cash flow

79,057116,789

84,241

675,698

Operating income to net sales

8.9%

12.2%

13.2%

8.9%

Net income to net sales

4.9%

7.1%

3.9%

4.9%

ROE

9.0%

13.5%

7.6%

9.0%

ROA

3.7%

5.0%

2.7%

3.7%

Equity Ratio

43.0%

38.9%

35.9%

43.0%

D/E ratio

0.77

0.96

1.14

0.77

Net sales

Amounts per share of common stock (Yen and U.S. dollars)

Cash dividends applicable to the year

At Year-end (March 31)

Total assets

Ratios

Notes: 1. U.S. dollar amounts have been translated from yen, for convenience only, at the rate of ¥117=U.S.$1, the Tokyo foreign exchange
market rate as of March 31, 2006.
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. ROE = net income/shareholders’ equity (average of positions at start and end of fiscal year)
4. ROA = net income/total assets (average of positions at start and end of fiscal year)
5. D/E ratio = interest-bearing debt (year-end) / shareholders’ equity (year-end)

04

Net Sales

Operating Income/Operating
Income to Net Sales (¥ billion/%)(¥ billion)

1,500

200

Net Income/Net Income to Net Sales (¥ billion/%)100

1,266.5
1,200

1,097.6

84.0

1,190.8
1,127.61,151.8

152.3
150

80

145.3

123.3
112.3

110.6

900

13.2

100

10.1

600

10.9

60

62.1

59.2
51.9
44.8

12.2
40

8.9

7.1
50
20

300

0

’02

’03

’04

’05

’06

0

’02

’03

’04

’05

0

’06

4.7

5.3

’02

’03

’04

EPS

ROE/ROAFree Cash Flow

(¥)

(%)

(¥ billion)

35

15

4.9

3.9

’05

116.8

120

13.5

31.47
28

100

12

92.2

88.2

84.2

79.1

80
21

23.48

10.4

9

9.3

21.18

9.0

18.47
14

’06

60

7.6

6

16.44

40

5.0
7

3

3.0
0

’02

’03

’04

’05

’06

2

’02

’03

’04

’05

’06

210

1.26
1.14
0.96

’02

’03

’04

’05

’06

(%)

’04

’05

’06

75

60

270.48200.75244.73221.53208.65

45

43.0

140

30

70

15

0

’03

Equity Ratio

0.77

0

’02

BPS

280

1.38

0

(¥)

350

1

20

ROE

2.7

ROA

0

D/E Ratio

3.7

3.5

’02

’03

’04

’05

’06

0

35.9
33.1 34.6

’02

’03

’04

38.9

’05

’06

All graph data for year ended March 31

05

Segment Information>

Gas Sales
Tokyo Gas produces city gas atthree terminals, using LNG as the

Share of Total Net Sales

Sales (¥billion)

Operating Income (¥billion)

65.6%
1,000

main resource, supplying it to over

200

910.3
831.1

9.8 million customers primarily in

189.4

182.7

160.0

’05

’06

834.7

800
150

the Kanto region through a
600

51,530-km pipeline network.

100

We have Japan’s largest gas

400

supply capability, and are proactively

50200extending pipelines to expand thecustomer base, focusing on thenorthern Kanto region, which offers
strong potential for demand growth.

’06

’04

87.6%
● In volume terms, gas sales increased by 7.1% year on year to 13,098 million m3.

was completed and began operation.

● Sales volumes exceeded the previous year’s levels in all sectors. There wereincreases of 6.9% in the residential sector and 6.3% in the industrial sector,
while sales to the commercial sector was 3.9% higher. Wholesaling to other gas
companies increased by 18.6%.

service area into areas where highdemand is expected, while maintaining a steady supply.
[Sales excluding intra-group transactions
constitute 98.7% of this segment’s sales.]● Despite the impact of rate revision implemented in January 2005, net sales
increased by 9.1% year on year to ¥910.3 billion. This reflects a rise in unit
prices made under the “gas rate adjustment system,” combined with the expansion of sales volumes.
● Operating income declined 12.4% to ¥160.0 billion owing to a sharp increase ingas resource costs resulting from rising crude oil prices.

Gas Appliance Sales
This segment is involved in the salesof gas appliances bought from

9.4%
2.5%

Sales (¥billion)
150

manufacturers, including gas

120

cooktops, water heaters and TES

90(Tokyo Gas Eco System), which use

60

hot water heated by gas to provide

30

space heating and other home com-0

forts, through about 320 outlets ofEnesta and Enefit, service networksof Tokyo Gas.
[Sales excluding intra-group transactions
constitute 98.1% of this segment’s sales.]Notes: 1) Segment sales include intra-group transactions.
2) All graph data for years ended March 31.

06

’05

In November 2005, the Tochigi Line
Tokyo Gas also plans to extend its

>

0

0

Share of Operating Income ’04

133.9

135.1 130.8

Operating Income (¥billion)
8

7.9
7.1

6

4.6
4

2

0

’04

’05

’06

’04

’05

’06

● Sales of high-value-added appliances remained strong. However, selling prices wereeroded by escalating competition and other factors, with the result that segment
sales decreased 3.2% to ¥130.8 billion.
● Investment in demand development to counter the “all-electric” promotion resulted
in a 34.5% decrease in operating income to ¥4.6 billion.

>

Related Construction
Tokyo Gas installs service pipes andgas cocks on the properties of new

4.3%
1.6%

customers, as well as adding gas

Sales (¥billion)
80

Operating Income (¥billion)
5

68.0

64.8

60

59.7

4.5

4

3.6
3.0

cocks and other equipment at

3
40

buildings of existing customer sites.

2
20[Sales excluding intra-group transactions
constitute 93.3% of this segment’s sales.]

1

0

0

’04

’05

’06

’04

’05

’06

● There were declines in the number of new installations and safety upgrades.
Segment sales fell by 7.8% year on year to ¥59.7 billion, and operating
income by 16.8% to ¥3.0 billion.

>

Real Estate Rental
A subsidiary, Tokyo Gas Urban
Development Co., Ltd., is primarily

2.5%
3.0%

Sales (¥billion)
40

35.4

responsible for activities in thisOperating Income (¥billion)
8

34.7

7.9

34.2

6.5

30

6

manages office buildings, including

20

4

the Shinjuku Park Tower.

102[Sales excluding intra-group transactions

0

5.5

segment. The company leases and

’04

’05

’06

0

’04

’05

’06

constitute 32.3% of this segment’s sales.]● Rent reductions caused segment sales to decline by 1.5% to ¥34.2 billion.
Operating expenses were higher, in part because of expenditure on building
renovation, with the result that operating income decreased by 16.1% to¥5.5 billion.

>

Other Businesses
Business activities in this segment
include district heating/cooling,

18.2%
5.3%

Sales (¥billion)300

15energy services, LPG sales, industrial
gas sales, credit leases, system

234.7
200

Operating Income (¥billion)
13.4

252.6
11.3

9.6

10

172.1

integration and general engineering.
100

5[Sales excluding intra-group transactions
constitute 68.4% of this segment’s sales.]
0

’04

’05

’06

0

’04

’05

’06

● There was healthy growth in the on-site energy service business. Other positive
factors included increased operation of LNG vessels managed by Tokyo LNG
Tanker Co., Ltd. Segment sales increased 7.6% to ¥252.6 billion.
● Operating income declined by 28.1% year on year to ¥9.6 billion. Reasons
included an increase in the initial depreciation costs associated with the onsite energy service business.

07

An Interview with the President

Having largely achieved the targets for our five-year plan (fiscal
2003–fiscal 2007) in the first three years, we have now
formulated a new medium-term management plan that allows
Tokyo Gas to maintain its impetus and capitalize on
business opportunities in a rapidly changing businessenvironment. Our aim is to pursue further growth by creating
and cultivating new markets for natural gas.
Mitsunori Torihara President

Q: Your appointment as President of Tokyo Gas coincided with the announcement of
a new medium-term management plan at the start of the current year, 2006. You
must be very determined to ensure that the plan's targets are achieved.
Torihara Competition is intensifying in the Japanese energy market. There is competition between
different forms of energy, and between different companies within energy segments. I am confident
that Tokyo Gas can continue to achieve growth and success in this business environment by further
enhancing its strengths, including its outstanding technological and solid marketing capabilities.
As President, I intend to heed the wishes of all stakeholders, including shareholders and investors.
My aim is to build a dynamic management approach based on trust. I am confident that we will beable to maximize our corporate value and enhance the attractiveness of the Tokyo Gas Group.
In April 2006, we took our first step on the path to this future by launching a new medium-term
management plan for the period from fiscal 2006 to fiscal 2010. As Executive Vice President, I was
deeply involved in the formulation of this plan, the content of which has been refined through repeated cycles of debate and discussion. My involvement in IR activities also dates from my time as
Executive Vice President. I have attended numerous meetings with institutional investors in Japanand overseas, and I have had many opportunities to hear the views of investors about our management policies. I believe that those views are properly reflected in our new medium-term management
plan. Our new plan is the product of long debate and thought. That process is now over, and the time
has come to turn the plan into action.
Tokyo Gas must never betray the expectations and trust of its shareholders and investors. My task
is to provide the leadership to ensure that the plan is implemented steadily.
This plan is an important step in our long-term strategy and I will use it to lead the Tokyo Gas
Group to sustainable growth in the second decade of the 21st century.

08

Q: The previous medium-term management plan ended in fiscal 2005. How would
you characterize that year?
Torihara We continued to make steady progress with policies contained in our “Frontier 2007”, theTokyo Gas Group’s medium-term management plan for the period from fiscal 2003 to fiscal 2007.
Fiscal 2005 was the third year of that plan, but our primary management targets were already withinreach, and we also needed to adapt to market changes and utilize the business opportunities. We
therefore decided to bring forward the transition to our newly formulated medium-term management
plan. Fiscal 2005 in effect became the final year of “Frontier 2007”. It was an extremely challenging
year, mainly because of continuing deterioration in the external environment.
Net income decreased by ¥21.9 billion from the previous year to ¥62.1 billion. The main factor
for this decline was a significant rise in the cost of gas resources compared with levels in fiscal 2004,
resulting from an upward trend in LNG prices in step with dramatic increases in crude oil prices.
However, we achieved significant successes in our sales operations. Growth in all sectors boosted
gas sales volumes by 7.1% year on year to 13.1 billion m3. This expansion was led by the growth of theindustrial and commercial cogeneration stock, which increased by 12% year on year to 1,340 MW.
Another impression from the previous year is that customers now have dramatically higher
expectations for natural gas as a fuel providing greater economic and environmental benefits thancrude oil, which has remained very expensive for the past year. We also made significant progresswith our preparations for this expansion of demand, including the announcement of new pipeline
expansion plans. One of these projects is the Chiba-Kashima Line, which is scheduled to start operation in fiscal 2010.

Q: Your previous five-year plan was scheduled to end in fiscal 2007 but was completed in just three years. Please tell us about your achievements under the plan.
Torihara Under the previous medium-term plan, we set quantitative targets for Tokyo Gas
Economic Profit, or TEP, which is our version of EVA®, and for ROA, free cash flows and interestbearing debt. Despite the serious erosion of profit levels by sharply higher gas resource costs led byappreciated crude oil costs, we had largely reached our final targets by fiscal 2005, the third year of
the plan. In fact, we exceeded our target for the reduction of interest-bearing debt, and our D/E ratioin fiscal 2005 was significantly improved at 0.77.
We also achieved our target of reducing fixed costs per m3 of gas sold by around 20%, throughcorporate restructuring measures designed to improve our cost structure.
“Frontier 2007” also stipulated the purposes for which free cash flows were to be allocated for use.

Statistics for the three-year period show that approximately 17% of free cash flows were used for dividends, approximately 20% for stock repurchases designed to prevent dilution resulting from CB conversions, approximately 13% for new investments to expand our business in energy-related areas, andapproximately 50% for the reduction of interest-bearing debt.
Compared to when we formulated the five-year plan, we allocated a smaller percentage to new business investment and larger percentages to shareholder returns in the form of dividends and stock
repurchases, and the reduction of interest-bearing debt. Reasons for these changes include the fact that
we were able to increase the dividend after it became apparent at the end of fiscal 2003 that free cash09flows would exceed the level targeted in the plan, and the fact that investment in the electric power business, which accounts for a relatively large share of our business expansion in energy-related areas, wasscheduled for the second half of the plan period. There has been no change in policy on the allocation offree cash flows.
The greatest achievement of “Frontier 2007” was therealization of our vision of Tokyo Gas as an energy frontier business group capable of generating added value not
only from natural gas, but also from other energy forms
and energy-related activities. I believe that we have built asolid foundation for our future growth. Of particular significance in the energy service business was our decision to
integrate the operations of ENERGY ADVANCE Co., Ltd., with those of Tokyo Gas Co., Ltd. By theend of fiscal 2005 we had signed 125 contracts for capacity amounting to 226 MW, which is thehighest performance in Japan.
In addition to this expansion of our energy-related business operations, we have also enhanced ourpresence throughout the natural gas value chain through our involvement in upstream projects, transportation and other areas. Tokyo Gas has made significant progress toward its next stage of development.

Q: What factors led to the formulation of the Tokyo Gas Group’s new medium-term
management plan, and what are the aims of the plan?
Torihara We have already made significant progress toward the realization of our vision for the
future of Tokyo Gas under “Frontier 2007.” However, the environment in which Tokyo Gas operates
has changed dramatically over the past few years.
Natural gas is seen increasingly as an environmentally friendly form of energy to combat global
warming, and the relative advantage of the price of natural gas have increased because of rising
crude oil prices. The geographical extent of energy market is expanding, and new areas of demand
are apparent. At the same time, deregulation has caused further intensification of competition
between energy forms and companies in the market for large-volume energy supplies. We also face
greater challenges in the market for regulated supplies for residential and commercial sectors. In
addition to the decreasing trend of gas sales of each household due to decline of the number of people
per household as well as more energy efficient appliances, aggressive all-electric promotion has intensified sharply.
Our medium-term management plan for the period from fiscal 2006 to fiscal 2010 is an action
plan designed to enhance our competitiveness by anticipating changes in our business environment sothat we can capitalize on business opportunities. The aim of the plan is to create and cultivate newmarkets for natural gas. We will go beyond “Frontier 2007” to create a broad-based profit structurein the energy sector.
I see this plan as an important step in a long-term strategy focusing on the future of the Tokyo Gas
Group in the second decade of the 21st century. We need to concentrate our management resources
and focus our efforts on aggressive investment. I am convinced that by achieving the goals of thisplan we can ensure a future of sustainable growth for the Tokyo Gas Group. To do this, we mustbuild up the abilities of the entire Tokyo Gas Group in a determined drive to strengthen our competitiveness at the organizational, marketing, technological and service levels.
10

Q: What are the key strategic points of your new medium-term management plan?
Torihara Our vision of the Tokyo Gas Group as the leading company in a total energy businessbeyond 2010 will require sustainable growth driven by solid competitiveness. To achieve this, we will
use the strength of our global LNG value chain, which encompasses all stages from upstream todownstream, to provide our customers with wide-ranging value and services. We also intend to
expand our services across an area within a 200 km radius around Tokyo in the Kanto region.
Specifically, we will work to meet the diverse needs of our customers through a multi-energy supply including city gas and electricity. We also aim to establish a one-stop energy service structure
capable of providing the optimal mix of appliances and systems. By further expanding and enhancing
our presence in the LNG value chain, we will transform the Tokyo Gas Group into a business structure with a broad earning base and the ability to translate a competitive advantage in the energy sector into profitability and high growth.
On the earning side, we estimate a 15.3% growth in total sales by fiscal 2010, as compared withfiscal 2005, and we also aim to achieve further cost savings. Our target is a 20% reduction in fixed
costs per m3 of gas sold by fiscal 2010, as compared with fiscal 2005*. We estimate that by achieving these goals we can lift our EPS to ¥38.2 by fiscal 2010, the final year of the current mediumterm management plan. Of course, there can be no final goal for cost reductions. We will strengthen
our corporate structure, build a more robust earning base and maximize our profits will continue
after 2010.
*Compared with projections of fiscal 2005 made in the medium-term management plan.

Q: What are your views on cash flow allocation strategy and financial strategy?
Torihara Financial strategy is as important to our future as business strategy. We will allocate cash
flows of ¥1,190 billion to the implementation of our business strategy, including total operating cash
flows of ¥1,120 billion over a five-year period, as well as ¥70 billion in other cash flows.
We will invest ¥860 billion in the whole of our core total energy business. Approximately 39% of
this amount will be allocated to demand development, including investment in pipelines to increase

Meeting Management Targets Ahead of Schedule

TEP

Operating Cash Flow

ROA

ROE

(¥billion)(¥billion)

(%)

(%)

1,120.0

1,200

60

51.0
1,000

50

37.8

995.0

5.5

6

4.8

5

12
10

3.7

800

4

600

3

6

20

400

2

4

10

200

1

2

0

0

0

40
30

22.9

FY ’05’06
Projection’10

FY ’03–’07 Total(Frontier 2007
Target)’06–’10Total

TEP (Tokyo Gas Economic Profit)
Operating cash flow = net income += net operating profit after tax prior to interest depreciation
payments – cost of capital

11.0

10.9

’06

’10

9.0

8

0

FY ’05’06’10

FY ’05

Projection

Projection

ROA = net income/total assets(average of positions at startand end of fiscal year)

ROE = net income/total shareholders’ equity (average of positions atstart and end of fiscal year)11the gas sales volumes and the expansion of electric power business and energy services business. We
will also invest in infrastructure development in readiness for future demand growth. Investment allocations will include 20% for infrastructure for pipelines and safety and approximately 17% for participation in upstream interests, LNG tanker construction and other priorities. We plan to allocate a
total of ¥270 billion to shareholder returns over the next five years in order to regulate the total payout ratio to our shareholders (dividends plus stock repurchases divided by current net income). The
reduction of interest-bearing debt was a key management issue under our previous medium-term management plan. As a result, our D/E ratio had reached 0.77 by the end of fiscal 2005. From a financial leverage perspective, I believe we have emerged from the rigorous reduction stage, and we areaiming for a reduction of ¥60 billion under the new medium-term management plan.
We have set four management targets: (1) ROA of 5.5% by 2010, (2) ROE of 10.9% by 2010,(3) Tokyo Gas Economic Profit (TEP, the Tokyo Gas version of EVA®) of ¥51 billion by 2010, and(4) total operating cash flows of ¥1,120 billion for the five-year period. During periods of active
investment, maintaining a good ROA is an indicator of our ability to raise assets efficiency throughinvestment while also placing appropriate weight on profitability. We aim to raise this indicator by
1.8 points from the fiscal 2005 result of 3.7%. Our ROE target represents an increase of 1.9 points
from the fiscal 2005 result of 9.0%. Our aim is to build an appropriate capital structure, despite theconversion of convertible bonds during the period covered by the plan. Our TEP target will require an
increase of ¥28.1 billion compared with the figure for fiscal 2005. Capital costs will remain a key
focus as we work to achieve this. To generate operating cash flows of ¥1,120 billion during the fiveyear period, we will work tirelessly to increase our income.
To enhance our financial soundness, we intend to maintain and improve our fund procurement
ability. At the same time, we will seek to reduce our D/E ratio to 0.51 by fiscal 2010. However, wehave already made considerable progress with the reduction of our interest-bearing debt, so I am prepared to be flexible with this numerical target.

Basic Policy on Cash Flow Allocation (5 years)

Operating Cash Flow ¥1,120 billion
Other Cash Flow

Operating Cash Flow ¥995 billion
Other Cash Flow

1,200
1,000
800

¥70 billion¥(122 billion)

Five-year total:¥1,190 billion
60
Five-year total:
270¥873 billion
100
860
181

600

592

Reduction of Interest-bearing Debt: ¥60 billion
Shareholder Benefits: ¥270 billion
Investment and Financing: ¥860 billion

Breakdown of Investment and Financing in
Total Energy Business

400

12%

200

17%

FY2003–FY2007*

Upstream/Overseas
Infrastructure

12%0FY2006–FY2010

20%
39%

Demand development
Business Facilities
OthersOperating Cash Flow=Net Income+Depreciation* “Frontier 2007” Target

12

Q: What are your thoughts on shareholder dividend allocations?
Torihara We intend to allocate a total of ¥270 billion to shareholder returns over the five years
covered by our current medium-term management plan. For the first time we have announced theconcept of a “total payout ratio” as an indicator of ourposition on profit distribution. Our target for this ratio,
which is calculated by dividing the sum of dividends andstock repurchases by net income*, is 60%. We aim tomeet shareholder expectations by raising both our profit level and per-share value. We have reached this position after talking to numerous shareholders andinvestors and considering how to meet their expectations as a company involved in a regulated utility business. I believe that, at present, this is the best
way to meet the expectations of all stakeholders, including our customers and shareholders.
Stock repurchases have traditionally been used as a way of counteracting the dilution effect that
occurs when convertible bonds are converted into shares. In the future, we intend to use thismethod primarily as a way of achieving a genuine improvement in corporate value, including theredemption of stock.
*Total payout ratio of year n = [(dividends from unappropriated profit in year n) + (amount of treasury stocks acquired in year n + 1)]/ (consolidated net income in year n)

Q: Tell us about your vision for Tokyo Gas in the approach to the second decade of
the 21st century?
Torihara As President of Tokyo Gas, my task is not only to implement our new medium-term management plan effectively and reliably, but also to maintain the status of Tokyo Gas as a company thatis trusted and preferred by shareholders and investors, as well as customers, society and communities.
My vision is based not just on short-term economic value, but on sustained long-term growth achieved
through the continuing enhancement of our brand value, which is built on our long-accumulated
expertise in security, safety and reliability. In addition to accelerated growth driven by the steady
implementation of the business and financial strategies that I have outlined, I believe our reliability
as a company is also extremely important to our future success.
I aspire to make Tokyo Gas corporate culture even more transparent and open. The changes madelast year to our officer remuneration systems were part of this process. Meetings of our Board of
Directors, which includes outside corporate directors, have become forums for lively debate. To
ensure prompt, appropriate management decision-making, we have established an investment assessment committee to screen each investment proposal thoroughly.

13Our new medium-term management plan includes strategies
designed to create a foundation forstrong growth performance in the
period to 2010 and beyond. We
began to put these strategies into
effect on April 1, 2006, and must
now maintain this momentum.
I intend to focus my greatest
efforts on the following areas: First,
we will target overall Group optimization. All of our business segments are linked to the LNG value chain, and I intend to ensure thatGroup optimization remains a continual focus in relation to the allocation of management resources,
including personnel and money, so that we can achieve our full potential as a company.
Second, the Tokyo Gas Group will restructure its marketing scheme by strengthening the local
roots. Our greatest asset is a customer base consisting of over 9.8 million customers. We aim to
improve our services and reliability by building an integrated operational structure encompassing thevarious tasks handled by Tokyo Gas itself, its local agents, such as Enesta and Enefit, and Group
companies involved in customer service and other areas.
Third, as President of Tokyo Gas, I am determined to ensure our success in this rapidly changing
environment by making sustained progress toward the creation of a broad-based profit structure forthe decade after 2010. We will also work to maximize our business opportunities by evolving from a
conventional gas business into a total energy company, and seek to create and cultivate new markets
for natural gas.
The path ahead will not be smooth. However, I am convinced that we can achieve sustainablegrowth by living up to the expectations and trust of all stakeholders. I approach my management rolewith a strong determination and commitment to the future success of Tokyo Gas.

Mitsunori Torihara, President

14

Deregulation has started to drive escalating competition across industry segments in themarket for industrial and commercial use. Tokyo Gas also faces increasing

Creation andCultivation of
New Natural Gas
Marketscompetition in the residential energy market. We see the advent of free competition as
an opportunity for the Tokyo Gas Group to evolve into a total energy company. We aim to
use the economic and environmental advantages of natural gas as the basis for the creation and cultivation of new markets. Our strategic assets include our strategic LNG
value chain, which covers all stages from resource development to supply and services,and our advanced technology and solutions.

15

For Residential
Customers

Expanding the One-stop Energy Service to
Residential Customers
Deep Cultivation of the Residential Market
By expanding the number of customers in the residential
sector, Tokyo Gas secures sales volume while also building
further demand by promoting its business. Over the past
few years, falling birthrates have resulted in a decline in
the average number of people per household. In addition,
more and more people are living in apartment-type housing with superior heat insulation and draught-proofing.
These structural factors all make it more difficult to avoid
a decline in the volume of gas sold per household.
Tokyo Gas is working to minimize the decline in gas
sales volumes in the residential sector by increasing the percentage of households installing strategic products, such as
floor-heating and mist saunas. We are also introducing andpromoting attractive charge options to stimulate increased
use of products already installed in customers’ houses, suchas TES floor-heating systems. We will try to increase thegas sales volume by capturing residential power demandthrough the promotion of home power generation.

Focusing on Strengthening
Marketing Abilities
Japan’s population began to shrink in 2006. A strong
marketing scheme is needed to attract more customers
and achieve sustainable growth in the residential sector.
Tokyo Gas already has important marketing capabilities,
and we intend to strengthen our systems still further.
We are strengthening our client marketing systems
and systems targeting local building firms to reach as
much of our target market as possible. We are also working to attract new customers by encouraging them to convert from other types of fuel, such as LPG. At the customer level, we plan to restructure and centralize appliance sales, maintenance services, safety services andother marketing and sales functions and develop regionally focused marketing approaches to provide a fine-tuned
response to lifestyle diversification and changing needs.
Through these strategies, we will improve our marketingcoverage and enhance our ability to meet market needs
by providing one-stop access to the products and services
sought by customers.
There is growing competition from companies
offering all-electric household systems. Tokyo Gas iscountering this competition with effective marketing ofWhat kind of system is TES?
TES (Tokyo Gas Eco System) is a single system that can supply hot water for all
household systems, including floor-heating, hot-water faucets, bathroom heater-dryers,
and mist saunas. These systems are economically designed to heat just the required
amount of water instantly. They are also extremely compact to save valuable space.
More than one million households already use TES and Tokyo Gas is focusing on
spreading TES in the residential sector.

16

a range of strategic products, including our “Pipitto
Konro” gas cooktops and our highly efficient water
heaters, the “Eco-JOES.” We aim to increase the useof gas appliances by promoting the comfort and theireconomic, environmental and energy advantages ofthe products.

Capturing Residential Electric Power Demandwith Upcoming “Power Generation in
the Home”
Tokyo Gas has introduced important new assets for its
efforts to expand demand and counter the trend toward
all-electric households: the LIFUEL fuel cell cogeneration system, and the ECOWILL gas engine cogeneration
system. We plan to advance marketing activities forthese systems under a project group setup.
We are currently marketing LIFUEL and ECOWILL
systems to customers in newly built detached houses.
Starting in fiscal 2007, we will expand the scope ofmarketing for ECOWILL systems to include existinghomes. Marketing of LIFUEL will begin in earnest in
the second half of fiscal 2008, following the introductionof a next-generation system with improved durability andeconomic performance. We plan to sell 43,000 LIFUEL
and ECOWILL systems by fiscal 2010.
We estimate that households with in-house power
generation systems, such as LIFUEL and ECOWILL
systems, will use an average of 1,200 m3 of gas per year.
This represents an increase of 300 to 400 m3 comparedwith existing systems. Because the number of householdswith these systems is still small, the impact on overallgas sales is marginal. However, we are very confident
that this factor will make a major contribution to growth
in residential sector gas sales volumes in the future.
Tokyo Gas has also commenced studies concerningenergy services for condominiums. We would provide
cost-effective energy solutions that would combine
energy-efficiency with enhanced comfort. The packages
would include TES and new products and services. There
would also be cogeneration facilities installed and owned
by Tokyo Gas, and we would supply residents withelectric power from these systems in conjunction withgrid-connected electric power systems.

TES

Water heaterAir
conditioning

Floor heating

Bathroomheating& drying

Bathroom heater dryer

Air conditioning

Mist sauna

Hot water bath

Hot water
Washing and drying

Lifestyle solutions

Strong marketing

Residential
cogeneration

TES

1

over

million households

17For Industrial andCommercial
Customers

Tokyo Gas is a Trusted Business Partner acrossthe Entire Energy Sector
An Advantage Based on SophisticatedEngineering Expertise and Solutions
To meet the changing and increasingly diverse needs ofindustrial and commercial customers, Tokyo Gas offers
long-accumulated engineering expertise including
combustion technology as well as the ability to provide
wide-ranging solutions and value backed by reliablesupport systems. Though many new entrants are
moving into the gas business, Tokyo Gas enjoys an
overwhelming competitive advantage. For theindustrial sector, Tokyo Gas is promoting its cogeneration systems based on advanced combustion technology
to attract customers to switch from other fuels to natural gas.
For the commercial sector, we introduced in 2005 a
segment-based marketing structure that supports
powerful marketing activities based on specialized knowledge. Despite escalating competition in the commercial
kitchen market, we have been able to expand our orders
over the past few years by accurately and effectively promoting our superior technology to customers.

Highly Competitive Multi-energy Supply
Using In-house Power Generation Capacity
Tokyo Gas offers one-stop, multi-energy solutions,
including city gas, heat, steam and electric power, tomeet the needs of its customers. In addition to cogeneration systems, which efficiently generate both heat andelectric power, Tokyo Gas is also able to provide gridconnected power from its own generation
systems as a back-up source of electric power. We havebuilt a power plant on previously unused land to create
our own generation capacity in anticipation of future

demand for electric power. The power plant is equippedwith advanced combined cycle technology to support
highly efficient, competitive power production. Tokyo
Gas Bay Power Co., Ltd. currently operates a 100 MW
power station at the Sodegaura Terminal. A 240 MW
facility operated by Tokyo Gas Yokosuka Power Co.,
Ltd. became operational in June 2006, to be followed byan 800 MW facility operated by Kawasaki Natural Gas
Power Generation. In 2008, there are also plans for a
1,200 MW facility to be operated by Ohgishima Power.
Environmental assessment work for this project iscurrently in progress. Tokyo Gas is now able to supply its
customers with one-stop access to a wide range of energy
requirements, including LNG and LPG.

Expansion of Energy Service with
Cogeneration Systems at the Core
As competition in the energy sector intensifies, Tokyo
Gas endeavors to fully develop its multi-energy supply
capabilities. Tokyo Gas has expanded its collaboration
with ENERGY ADVANCE Co., Ltd., a wholly owned
subsidiary, and is aggressively marketing its products
and services at the same time as it strives to develop thebest mix of energy and distribution systems. Moreover,by combining power supplied from its own substantial
generation capacity with on-site generation, Tokyo Gas
is able to make optimal proposals to various customer
needs in the areas of comfort, economic merit, energy
conservation and environmental performance.

Cogeneration Stock (MW)Growth of Cogeneration Stock

2,000

Cogeneration systems use city gas to produce heat and electric power simultaneously.
In addition to the economic benefits of reduced energy consumption, these systems
are also seen increasingly as having the potential to contribute to the reduction ofenvironmental problems. Tokyo Gas has achieved volume growth in gas sales bydemonstrating the benefits of these systems for customers in industrial and commercial sectors. Cogeneration technology is an important asset in our continuing efforts
to inform customers about the advantages of natural gas while helping them toachieve the best energy mixes that include in-house power generation.

1,500

1,000

500

0

Year ended March 31 ’97 ’98 ’99 ’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08 ’09 ’10 ’11
Industrial Use
Commercial Use

18

EstimatedLNG expertise

Multi-energy
supplyPower generation

Cogeneration Stock

1,850

MW
in FY 201019

Wide-area
Development

Expanding the Market for the Total Energy Business
Aggressive Pipeline Investment forDeveloping Demand

Enhancing the wide-area
infrastructure■ Chiba–Kashima Line (FY2010) ■ Central Line (FY2009)■ Gunma Line (FY2010)■ New-Negishi Line andYokohama Line Phase II■ Minami–Fuji Line (FY2006)

Energy demand is still growing in the Kanto region,
which accounts for around 40% of Japan’s GDP. Tokyo
Gas is responding to this demand through aggressive
investment in its pipeline network, on the basis of detailed
demand research and assessments of investment returns.
In November 2005, we completed the 69 km Tochigi
Line linking Sano and Utsunomiya across the northernpart of the Kanto region. Sales of natural gas to largevolume customers in this area have already commenced.
The new pipeline was constructed to meet the growing
needs of customers in the region’s expanding industrial
parks and strengthen supply. Our estimates indicate that
we will be able to tap potential new demand of around
400 million m3 annually. We have also decided to build a
new Chiba–Kashima Line to meet demand growth in the
Chiba and Ibaraki areas, where industrial demand has
been expanding. We will invest ¥26 billion in construction of approximately 73 km of pipeline. Completion is
expected in fiscal 2010.

(FY2013)■ Kisarazu Line (FY2008)

front-line solutions to meet the needs of our customers.
In 2007, the Japanese government will expand the scopeof energy sector deregulation. We are already preparing
for this change by actively building and strengthening therelationship of trust with customers with a total annual
demand below 500,000 m3.

Diversified Formats for Natural Gas Sales in
the Kanto Region within a 200 km Radiusaround Tokyo
When Tokyo Gas constructs a new pipeline, it uses theconcept of internal rate of return (IRR) as its standard
for determining the number of years required to achievea return on its investment. Only investments that satisfy
this criterion are implemented. However, customers
whose locations are remote from our pipelines may also
wish to use natural gas. In these cases, we transport gas
using trucks. This flexibility allows to meet the needs ofcustomers and access the huge potential demand thatstill remains untapped in the area within a 200 km
radius around Tokyo in the Kanto region.

Enhanced Environmental and Price
Advantages of Natural Gas
Natural gas is the most environmentally friendly productamong conventional fossil fuels. Large-volume customers
are starting to convert to natural gas for both economicand environmental reasons. Furthermore, the relativeadvantage in price has increased, due to sharp rises incrude oil prices in recent years. This has also started to
attract interest from customers who use other fuels,
resulting in increasing demand for the installation of city
gas facilities.
Tokyo Gas is responding to this trend by aggressively
marketing cogeneration systems, especially its mainstay
range of systems with medium- and large-capacity gas
engines. Our strategy in this area is to attract new customers by promoting our advanced energy conservationand combustion technologies, and our ability to develop

LNG’s Growing Price Advantage

Enhancing the base forstable supply

Loading an LNG tanker truck

All-Japan LNG/JCC Prices
U.S.$/bbl

U.S.$/MMBtu

LNG prices are determined primarily according to crude oil prices, such as theJapan Crude Cocktail (JCC) price or the Indonesian Crude Price (ICP). While persistently high crude oil prices have resulted in higher LNG prices, the percentage
increase has been small compared with the crude oil price increase. This is because
the pricing formula includes mechanisms designed to ease the effect of crude oil
price movements.

10

60

8

48

6

36

4

24

2

12

0

0

’02/2

’03/3

JCC
All-Japan LNG

20

’04/3

’05/3

’06/3

Tochigi

Gunma

4

NaganoIbaraki

Saitama3

Yamanashi

5

Tokyo

7
2

Kanagawa

6

Chiba

1

Shizuoka

Expanding Services within a

200

km Radiusaround Tokyo

Tokyo Gas Group’s Service Area
Service Areas of Wholesale Customers
Tokyo Gas’ High-Pressure
Transmission Pipelines
High-Pressure Transmission Pipelines of
Other Companies
Tokyo Gas’ Transmission Pipelines
Under Construction

縡 Scheduled to Operate in Dec. 2006

*Pipeline jointly owned with Shizuoka Gas
company and Teikoku Oil Co., Ltd.

縒 Scheduled to operate in Oct. 2008
縱 Scheduled to operate in Oct. 2009
縟 Scheduled to operate in Mar. 2010
縉 Scheduled to operate in Dec. 2010
縋 Scheduled to operate in Oct. 2013
縢 Scheduled to operate in Oct. 201321

Procurement of
Gas Resources

Gas Resource Procurement Strategy is Solidifying
our Business Structure
Focusing on Competitive LNG Procurement
Tokyo Gas currently imports LNG from ten projects insix countries. Unlike oil, which is found only in certain
parts of the world, natural gas is available globally. This
makes it possible to diversify the risk and ensure stableprocurement by trading with geographically diverse
producers in the Middle East, Southeast Asia, Australia,
Alaska and other locations with competitive contract
terms and conditions.
We are endeavoring to procure more competitive
LNG from diversified sources, such as greenfield projects including Darwin Project, which started delivery
in January 2006, and Sakhalin II Project, expected tolaunch between fiscal 2006 and fiscal 2010, as well as
Gorgon and Pluto Projects in Western Australia,scheduled to commence after 2010. We will fully exercise our bargaining power based on the prospect ofsteady demand growth and realize flexible and stable
LNG procurement. LNG prices are linked to crude oil
prices. However, the current price regime includes amechanism to alleviate the impact of fluctuating crude
oil prices. Tokyo Gas has taken additional steps to limit
dramatic price fluctuations, through adopting a pricing
formula that is less sensitive to oil price movements.

Reducing Transportation Costs by Using
Our Own Fleet
Regarding LNG transportation, Tokyo Gas currently
operates a fleet of four vessels, including ships dedicated for projects. We will increase the number of vessels to seven by fiscal 2010, and to nine thereafter.
Our goal is to reduce transportation costs by increasing the percentage of company-owned vessels byaround 50% by fiscal 2010.

Because it operates its own LNG vessels, Tokyo Gas
is not limited to transportation based on long-term
contracts. It will be able to reduce gas resource costs
and further improve its flexibility by taking advantage ofopportunities to procure LNG through short-term andspot transactions. Tokyo Gas also plans to diversify into
LNG trading and transportation services for third
parties, when it is appropriate in the context of LNG
market trends.

Measures for Aggressive Acquisition of
Upstream Interests
In 2003, Tokyo Gas and Tokyo Electric Power Co., Ltd.
jointly acquired a 10% interest in the Bayu-Undan
Project in Australia (1:2 basis). Furthermore, we are
currently involved in negotiations concerning participation in the Gorgon and Pluto Projects. In addition to
income opportunities, participation in upstream projects
allows natural hedging of price fluctuation risks.
Another advantage is relatively early access to upstream
information, which is essential to procurement activities.
There is also increased potential for business opportunities in such areas as trading.
By expanding its business activities along the entire
LNG chain, Tokyo Gas aims to establish a position foritself as a total energy company, to improve thecompetitiveness of its procurement activities, and tosecure new business opportunities.

Ex-Ship/FOB
Goods are traded under various terms and conditions. With the delivered ex-ship(DES) system, ownership and risk are transferred at the point of landing(LNG terminal). Under this method, the seller arranges and pays for freight andinsurance. With the free on board (FOB) system, ownership is transferred at the pointof loading (liquefaction terminal), the buyer arranges and pays for freight and insurance. There is also the cost, insurance and freight (CIF or C&F) system, whereby ownership and risk are transferred at the point of loading for a price that includes the costof insurance and freight, which are arranged by the seller. Tokyo Gas intends toexpand its use of FOB transactions with the aim of further reducing gas resource costsby minimizing freight costs.

22

Gas field

LNG liquefaction
terminal

Ocean transport

Gas pretreatment
facility

LNG receiving
terminal
Unloading

Pipeline(Ocean transport)

Liquefaction LNG
plant
tank

LNG Carrier(Discharge)

LNG tank(Load)
Ex-Ship Maritime transportation/Insurance grantSellerSellerOwnership/Risk bearing Seller
Maritime transportation/Insurance grant

Buyer

Ownership/Risk bearing

FOB

Buyer
Buyer

Competitive
procurement

After FY 2010, Tokyo Gas willreach a fleet size of

9

ships

Value-chain extension
23

Technology
Development

Technology Development to Enhance Competitiveness andContribute to Total Energy Businesses
Strategic and Platform Technology
Development
Tokyo Gas broadly divides its technology development
activities into strategic technology development andplatform technology development. Strategic technology
development focuses on areas that contribute to theevolution of a total energy business with natural gas as itscore area, while platform technology development has asits goal the creation of basic technologies that will help toimprove competitiveness while also ensuring social needs,
including safety, security and the environment.
Priorities for strategic technology development include
the development of highly efficient fuel cell systems,
including PEFC and SOFC systems, and cogeneration
systems based on high efficient gas engines as well as technology for biomass energy, which is renewable. This work
aims to contribute to the evolution of Tokyo Gas as a totalenergy company, one of the goals defined in our mediumterm management plan. We are also developing technology
for advanced microgrid “holonic energy systems,” whichhave the potential to contribute not only to energy conservation and the reduction of CO2 emissions, but also to theimprovement of supply stability. Demonstration testing will
start in the current fiscal year.
We are also developing new gas appliances andservices to meet potential social needs. For example,
we are continually improving the performance of gas
cooktops and other appliances and developing convenient energy-related services. Another important goalfor our technology development activities is the proposal and dissemination of ideas about new ways to use

Technology Development
Strategies

gas to enhance the quality of life while helping to protect the environment.
Platform technology development is targeted toward
the improvement of technology used in the construction,
maintenance and management of infrastructure, especially pipeline networks, as part of our continuing efforts
to ensure that natural gas can be supplied safely to ourcustomers while continuing to improve competitivenessthrough cost reductions. Through this work, we arehelping to improve platform technologies in areas offundamental importance to Tokyo Gas, especially gas
quality management and combustion engineering, andensure that they are passed on to future generations.

Technology Development system Linked with
Business Strategy
Under a new structure introduced in fiscal 2006, alltechnology development activities, from strategy formulation to project implementation, have been integrated
under the Technology Development Division. We also use
a “sponsorship” system, under which corporate
divisions and strategic business units commission andpay for R&D projects. This approach ensures close
collaboration and a strong linkage between technology
development and business strategy.
Despite a downward trend in R&D expenditure overthe past few years, there has been no reduction in R&D
activities. Instead, the effectiveness of R&D is beingenhanced by modifying approaches to technology
development and focusing resources on key areas.

Strategic Technology

Platform Technology
Business infrastructure
Holonic Energy System■ Expansion of microgrid■ Realization of Holonic Energy Society

Technology infrastructure

web For more information on our technology development activities, please see the Tokyo Gas website:24

http://www.tokyo-gas.co.jp/techno/index.html

The Tokyo Gas Group has an important social mission as a corporate group dedicatedto the vital task of supplying the energy needed for industrial activities as well as for

Fulfilling our
Commitment to
Corporate Social
Responsibility

day-to-day living. We must also remain acutely focused on the need to meet the
expectations of our shareholders and investors by continuing to achieve growth.
We are working actively to enhance the value of the Tokyo Gas Group for all
stakeholders, including customers, shareholders, investors and society, by fulfilling
CSR activities, including a strengthening of our corporate governance and promotionof compliance.

25

Corporate
Governance

Our Fundamental Concept of Corporate Governance
The Tokyo Gas Group aims to achieve ato shareholder interests, in keeping with ouring to the expectations of our customers,

continuous increase in corporate value androle as a joint stock company. This renewed

employees, business partners, communities andensure management soundness andawareness reflects increased inter-company

stakeholders, ultimately we also fulfill thetransparency. To this end, we are strengthening

competition following the deregulation of theneeds of our shareholders. Our corporate value

our corporate governance in accordance withenergy sector, as well as the globalization ofis the overall sum of the value that we provide

clear targets.

the capital market.

to all stakeholders.

Energy supply systems are vital to the

Our emphasis on shareholder interests is

For Tokyo Gas, the purpose of corporatesocial infrastructure. The profound awarenessnot incompatible with the continuing fulfill-governance is the continual refinement ofof our special role as a supplier of energy has

ment of our responsibilities as an utility com-

internal systems designed to maintain continu-

been reflected in a continuing commitment topany. In recent years, public interest in corpo-

al growth in corporate value by monitoring

the safe, reliable supply of city gas, and torate social responsibility has become so intense

corporate activities so that any issues can befairness in the provision of our services. We

that the economic and social values of a com-detected and remedied.

are keenly aware of the need to give priority

pany are now inextricably linked. By respond-

Initiatives for Strengthening Corporate GovernanceContinuous growth in corporate value

Progress toward Liberalization

Management
strategy

Organizational
Structure

Ensuring sound, transparent management

Announced in October 2002

Announced in January 2006

Medium-term management plan for
2000–2004: “New Utility Company”

Medium-term management plan for

Medium-term management plan for
2006–2010: “Creation and Cultivation of
New Natural Gas Markets”

Regional businessdivision system

2003–2007: “Frontier 2007”

June 1999-

April 2004-

Strategic business division system –• Strategic management structure capableof responding quickly to market trends

Strategic business unit system• Building of group management system• Maximization of group corporate value

July 1998Management
Structure

26

Announced in October 1999

Internal
Governance

Information
Disclosure

June 2002-

June 2005-

Reinforcement of Management Meeting
Management structure reform(abolition of Senior Management Committee • Reduction of regular number of directors
from 30 to 15
and Senior Management Liaison Committee)• Appointment of outside directors• Introduction of executive officer system• One-year term of office

Reform of officer remuneration system• Formulation and disclosure of basic policy• Abolition of retirement benefit system,and other measures

June 2002-

November 2002-

April 2004-

Reinforcement of internal audit
structure

Reinforcement of compliance system• Establishment of Management
Ethics Committee• Establishment of ComplianceDepartment

Reinforcement of risk
management system

June 1998-

July 1999-

June 2001-

April 2003-

April 2004-

July 2005-

Establishment ofspecialist IR
organization

Involvement of
top management in IR
activities

Start of overseas
IR activities• Earlier publicationof business results

Consolidated
accounting for allcompanies(All 51 companies in
consolidation)

Publication of
CSR Report• Introduction ofquarterly disclosureCorporate Governance Structure

Customers

Society

Shareholders/Investors

General Shareholders’ Meeting
ReportAppointment
Appointment

Inquiry

Advisory
Committee

Board of Directors
AnswerReportAudit

Collaboration

Financial
Audit

ReportPresident(Management Report Meeting)Management Ethics
Committee

PolicyReportMonitorInvestment Evaluation Committee(Company-wide Committee)

Promotion / Support

Internal Audit Dept.

Audit

Compliance Dept.

Independent Auditors

Board ofCorporate Auditors

ReportReportReportReportRisk Management
Promotion Selection
ReportSupportReportStrategic Business Units
Internal
Audit

Collaboration

Management Structure
Functions of the Executive
Officer Systembeen appointed as executive officers (as of July 1,

also began to appoint outside directors to2006). To ensure accountability for executive

enhance management transparency and

Growing awareness of the importance ofactions, all have been appointed for a term ofstrengthen our ability to supervise operations.

corporate governance has prompted many

one year. All officers at the executive officer

As of July 2006, the Board consists of 12

companies to modify their managementlevel and above, with the two corporate audi-

directors, including three outside directors.

systems. Since 2002, Tokyo Gas has

tors, gather to discuss important management

The presence of outside directors with special-

implemented a dynamic reform programissues at weekly management meetings. After

ized expertise and diverse backgrounds anddesigned to build an efficient and flexible

in-depth discussion, the President makes

ensures that there is always active debate atmanagement structure. In June 2002, we

immediate decisions. These meetings provide

board meetings.

became the first company in the city gas sec-

opportunities for exchanging views among divi-

tor to introduce an executive officer

sional chiefs, who have executive authority fortwo corporate auditors and three outside

system based on a clear division between

their respective operations. Because decisions

auditors. These five auditors conduct strin-

management and executive functions.

are made on the spot, these meetings tend to begent internal audits.

Responsibilities are also clearly defined, andlively and energetic.

by delegating substantial authority to theManagement actions are also checked by

Apart from the Chairman and Vice
Chairman, vice chairman and senior corporate

executive officers we have created a structure

Directors and Corporate Auditors

advisor, the other six directors appointed fromthat allows speedy executive action on

When Tokyo Gas adopted its executive officer

within Tokyo Gas are also involved in opera-

operational issues.

system, it also halved the number of directors

tions at the executive level. In addition to the

23 executive officers, including thefrom 30 to 15 to speed up decision-making. In

directors, board meetings are attended by the

President and division chief executives, haveaddition to curtailing the size of the Board, weinternal and outside auditors.

27

3. Share Purchasing Guidelines

lished an advisory committee to discuss mat-been considerable debate over the relative

All Directors, excluding outside directors, willters relating to the officer remuneration sys-

merits of the committee system and theacquire Tokyo Gas shares each month throughtem. In February 2005, this committee is

auditor system as suitable structures for

the Employee Shareholding Association. The

comprised of Outside Directors and Outside

reinforcing corporate governance. Tokyo Gas

amount purchased is determined according toCorporate Auditors, Chairman, Vice

currently operates as a company with

our newly introduced share purchasing guide-

Chairman and President to makes an impor-auditors, as we believe that this is the optimallines. The ownership of those shares will betant contribution to the soundness and trans-

method for attaining our corporate gover-retained during their terms of office.

parency of board activities.

Throughout the business world, there hasnance objectives, which are to ensure sound,transparent governance while achieving

Prior to imprementing the reform of theofficer remuneration scheme, we have estab-sustainable growth in corporate value. While
our auditors do not have voting rights, they
can speak freely and raise questions about
management decisions. They are able to view
our activities objectively and from a broader[The Basic Policy on the Remuneration for Directors]
1. The Role of the Officers and theRemuneration

4. Establishment of the Stock Purchase
Guideline

perspective, and their input helps to guide our

The expected role for the directors is to

The stock purchase guideline is set with thedecision-making in appropriate directions.

improve the corporate value both in a short

objectives of adopting a shareholder’s view-

We are also confident that the presence ofterm and in medium to long-term and thepoint into management as well as promoting

outside directors and auditors ensures man-remuneration system should serve effectively

endeavors to improve the shareholder value inagement transparency while allowing us toas incentive to achieve this goal.

long term.

make good decisions promptly.
2. The Scale of the Officers Remuneration

5. Ensuring the Objectivity and

The Remuneration System

The scale of the officers remuneration needs toTransparency

In 2005, Tokyo Gas restructured its officer

commensurate with the officers role, duty and

In order to ensure objectivity and transparency

remuneration system and published details of

performance.

of the remuneration for officers, the members

the new system with the aim of further enhancing management objectivity and transparency
as well as clarifying the management responsi-

of remuneration scheme advisory panel are
3. Introduction of a Performance-linked
Remuneration Scheme

bility toward business performance. The main

Performance-linked remuneration schemefeatures of the new system are as follows:

purpose to provide stronger incentive to carryelected from outside directors, outside auditors
and the company directors.

out the management strategy as well as having
1. Abolition of Retirement Benefits

clearer linkage between the term business

Retirement benefits for directors have been

results and remuneration.

abolished. Yearly retirement benefits have been
integrated into monthly payments to officers.
2. Introduction of a Performance-linked
Remuneration Scheme
Performance-linked remuneration scheme thatreflects the company-wide and divisional performance of the previous term, has been introduced for the monthly payment of Directors
who double as executive officers.

Compensation for Directors and Corporate Auditors (Fiscal 2005)
Millions of yen

Thousands of U.S. $Compensation for 12 directors (1 resigned during the term)

450

3,846

Retirement benefits for directors

81

692

Compensation for 6 corporate auditors (2 resigned during the term)

90

769

Retirement benefits for corporate auditors
Total

38

325

659

5,632

Compensation for independent public accountant (Fiscal 2005)
Millions of yen

Compensation for auditing services
Compensation for other services
Total*Basic Policies on Officer Remuneration

28

143

Thousands of U.S. $

1,222

6

51

149

1,273

Board of Directors and Corporate Auditors

ChairmanVice Chairman

President

Hideharu Uehara

Norio Ichino

Mitsunori Torihara

Executive Vice President

Executive Vice President

Executive Vice President

Senior Executive Officer

Senior Executive Officer

Shigero Kusano

Kouya Kobayashi

Tadaaki Maeda

Tsuyoshi Okamoto

Masaki Sugiyama

Senior Corporate Advisor

Outside Director

Outside Director

Outside Director

Kunio Anzai

Yuzaburo Mogi

Yuri Konno

Kazumoto Yamamoto

Chairman

Hideharu Uehara

Outside Director

Yuzaburo Mogi

(Chairman & CEO, Kikkoman Corporation)

Vice Chairman

Norio Ichino

Outside Director

Yuri Konno(President & CEO, Dial Service Co., Ltd.)

President

Mitsunori Torihara

Outside Director

Kazumoto Yamamoto (Advisor, Asahi Kasei Corporation)

Executive Vice President Kouya Kobayashi

AuditorHiroshi Hirai

Executive Vice President Tadaaki Maeda

AuditorTsunenori Tokumoto

Senior Executive Officer Tsuyoshi Okamoto

Outside Auditor

Masayoshi Hanabusa(Chairman, Board of Directors, Hitachi Capital Corporation)

Senior Executive Officer Masaki Sugiyama

Outside Auditor

Toshimitsu Shimizu(President, Yokohama Industrial Development Corporation)

Senior Corporate Advisor Kunio Anzai

Outside Auditor

Shoji Mori

(Vice Chairman, Institute for International Economic Studies)

Executive Vice President Shigero Kusano

29

Internal Governance
Establishing Risk Management
Systems

established an integrated group-level risk
management system. This system includes risk

mote compliance include the establishment ofUnder our internal governance system, man-

management regulations, and there are docu-

the Management Ethics Committee in 2002.

agement supervision is mainly the responsibili-mented rules concerning the principal man-

Chaired by the President, this committee to for-ty of the Board of Directors, while executive

agement risks that require management inter-mulate basic compliance policies and assess theofficers are responsible for operational

vention. A section for promoting risk manage-state of compliance with laws and regulations.

management, policy management and budget

ment has been established within the Audit

We have also established the Compliancemanagement. The performance of directors is

Department to coordinate risk management

Department, a specialized organization that

also audited by two internal and three outside

activities. In 2003, the section undertook

conducts a variety of activities, including theauditors. Additionally, we have created an

research targeting divisions and group compa-

development of compliance promotion systems

Internal Audit Department, which reports

nies. The aim of this work was to identify

and behavior standards, training and education,

directly to the President, to administer

shifts in the Group’s risk profile, and to moni-

the reduction of compliance risk, the provisioninternal audits based on the risk approach.

tor and assess steps taken to counteract riskof consultation, and the distribution of informa-factors. Principal management risks weretion within and beyond the Tokyo Gas Group.

four groups with responsibility for financial

reported to the Management Meeting and theCompliance committees have also been estab-

audits, operational audits, information system

Board of Directors. This list of significant

lished within individual business divisions andaudits and compliance audits. In 2002 therisks is updated each year on the basis of new

strategic units to create a mechanism that vol-number of staff was doubled from 18 to 36,

surveys conducted at regular intervals.

untarily and continuously promotes compliance

The Internal Audit Department consists ofand in 2006 the number was further increased

Organizational measures designed to pro-activities according to the basic policy.

to 40. Internal audits cover Tokyo Gas Co.,

Promoting ComplianceLtd. and all consolidated subsidiaries. Each

The value of our brand “security, safety andto execute effective self-purification as a com-business unit is objectively audited to ensure

reliability” which is essential to the competi-pany by discovering and solving problems at anthat it is operating appropriately, efficiently

tiveness of the Tokyo Gas Group, depends onearly stage through operating internal andand in accordance with business policies andbusiness activities continuing to comply withexternal counselling contracts appropriately. In

plans, and in compliance with laws and regu-

laws and regulations in accordance with social

addition, we conduct annual surveys on compli-

lations. Audit results are reported to the

ethics. That is why we are working toance awareness to reflect the results in the ini-

President, the Management Meeting and thestrengthen our compliance structure by “fos-tiatives of the following years. We also reduce

auditors, and also to the divisional chief exec-

tering compliance awareness,” “engaging

the risks steadily by implementing complianceutives responsible for business units, and to theboth policy in the whole Group and practice inaudits conducted by the ad-hoc organizationpresidents and auditors of group companies.

each work place” and “establishing a PDCA

under the Internal Audit Department andcycle for compliance.”

through its follow-up activities.

We are also developing a separate risk

In response to the compliance risks, we try

management system, and in fiscal 2003 we

Principal Management Risks
Disaster and accident risks

Accidents leading to the disruption of production and supply, natural disasters, disruptions to raw material procurement

Market risksMarket price fluctuations affecting real estate and financial assets, etc.,
weather fluctuations, etc.

Business strategy risks

Risks to existing businesses (increased competition, declines in existing
demand, changes to laws, regulations and systems), inappropriate action
on product recalls, ROI risks

Information risks

Information leaks, failures or malfunctions in backbone systems, loss of
telephone services to call centers

Social responsibility risks and other risk

Environmental risks, compliance risks, risks associated with corporate
responsibility and customer service*Please refer to P42–43.

30

Compliance Structure

Board of Directors
President

Corporate Auditors

ReportManagement Ethics Committee
Chairman: President
Members: Head of divisions/departments

ReportReportInternal Audit Dept.

Compliance Dept.
Instruction/report
Support/report

Each division/business unit

Compliance committees
Consultation/notification

Compliance audit(risk understanding)

Each department ofTokyo Gas

Subsidiaries & affiliates

Report/consultation

Report/consultation

Employees

Disclosure Policy
Together with the establishment of risk

The Tokyo Gas Group has long had a policy

One indicator of the importance that the

management systems and the improvement ofof setting short- and medium-term management

Tokyo Gas Group places on IR activities is thecompliance, information disclosure plays angoals and disclosing all specific management

active involvement of top management. Ouressential role in a company’s efforts to ensure

strategies and action plans used to achievesenior executives have attended IR meetings

management soundness and transparency andthose goals. We also actively publish informa-with investors and analysts in Japan since Julyto earn the support and trust of stakeholders,tion about our progress and achievements. The

1999, and overseas, since June 2001.

including shareholders and investors.

Tokyo Gas Group believes that disclosure

Currently, members of the top management

There is inevitably a gap between corporate

should not be a one-way process, and we active-

team conduct IR road shows in Japan andvalue viewed by a company’s management andly foster in-depth, two-way communication withoverseas twice each year. They also attend

the company’s evaluation by the market. This

shareholders and investors by holding briefings,

many meetings and make themselves available

gap has tended to widen in recent years because

seminars and other events.

for numerous individual interviews.

of the presence of a more diverse range ofWe have also developed and areinvestors, including foreign investors and indi-

continually improving our IR tools, which

vidual investors, in the Japanese stock market.

include annual reports, investor guides,

We believe that the purpose of IR activities is

IR websites and the Tokyo Gas newsletterto close this gap between the market value andto shareholders.

the real value of a company by actively disclosing information.

Shareholder/Investor Meetings in FY2005
Financial meetings and others
Small meetings: Individual investors(Visiting overseas investors)
Facility tours for investors (Individual)(Institutional)
Large meetings: Individual investors

6
275
(99)
3
3
3

31

Group Management Structure
The Tokyo Gas Group currently consists ofindustry. Management believes that to survive

from the formulation of business strategies toTokyo Gas Co., Ltd. and 54 subsidiaries and 1

and succeed in this harsh competitive environ-the allocation of management resources andaffiliated companies. Traditionally, the Tokyo

ment, Tokyo Gas needs to focus all of its Groupthe management of operations. The aim is to

Gas approach to group management allowed

resources on the same objective. In April 2004,

improve competitiveness by maximizing Group

individual Group companies to develop their

it introduced a new group structure known aspotential. To ensure speedy and flexible deci-business activities independently, and eachthe “strategic business unit” (SBU) system.

sion-making and management, wide-ranging

company was expected to be self-sufficient andUnder this system, Tokyo Gas divisions areauthority and responsibility have been delegat-

self-driven. However, with the deregulation ofwith Group companies as business units.

ed to the divisional chief executives who leadthe energy sector, Tokyo Gas now faces escalat-

Within each unit, Tokyo Gas and its Groupthe business units.

ing competition from within and outside of thecompanies work closely together in all stages

Group Management Structure

Top Management
Compliance Dept.
Internal Audit Dept.

Strategic Planning Div.

Corporate Service Div.

Corporate Communication Div.

Technology Development Div.
Information Technology Div.

Strategic Business Units

Energy Resources
Div.

Energy Production
Div.

Pipeline Network
Div.

Residential SalesDiv.

Energy Sales andService Div.

Regional
Development Div.

Executive Officers
President
Executive Vice
President

Mitsunori Torihara
Shigero Kusano

Norikazu Hoshino
Deputy Chief Executive, Corporate Service Div. General Manager, Purchasing Dept.

Kunihiro Mori

Chief Executive, Energy Sales and Service Div.; General Manager, Volume Sales Dept.

Assistant to Chief Executive, Corporate Communication Div.
Dispatched to the Japan Gas Association

Kouya Kobayashi

Yasuhiro Hiruma

Chief Executive, Energy Production Div.

Tadaaki Maeda
Chief Executive, Strategic Planning Div.

Masahiro Ishiguro
Chief Executive, Corporate Service Div.

Senior Executive Tsuyoshi Okamoto
Chief Executive, Corporate Communication Div.; Compliance Dept.; Internal Audit Dept.
Officers

Masaki Sugiyama
Chief Executive, Pipeline Network Div.; General Manager

Toshio Tezuka
Chief Executive, Regional Development Div.

Shigeru Muraki
Chief Executive, Technology Development Div.

Seiichi Nakanishi
Chief Executive, Residential Sales Div. President of Gastar Co., Ltd.

Tadashi Kaburagi
Chief Executive, Information Technology Div.

Toshiyuki Kanisawa
Chief Executive, Residential Sales Div.

Tsutomu Oya
Chief Executive, Energy Resources Div.

32

Executive
Officers

General Manager, Corporate Communications Dept., Corporate Communications Div.

Mikio Itazawa
General Manager, Pipeline Dept., Pipeline Network Div.

Michiaki Hirose
General Manager, Corporate Planning Dept., Strategic Planning Div.

Kazuo Yoshino
General Manager, Finance & Managerial Accounting Dept., Strategic Planning Div.

Hisao Watanabe
General Manager, Technology Planning Dept., Technology Development Div.

Akio Maekawa
Coordinator, Energy Sales and Service Div.

Manabu Fukumoto
General Manager, General Administration Dept., Corporate Communications Div.

Matsuhiko Hanba
General Manager, Personnel Dept., Corporate Service Div.

Initiatives
for Environmental
Protection and
SafetyContribution to the Environment
through Our Business Activities
All major companies now regard environmental

Comparison of Emission Levels (Coal=100)
SOx

CO2

NOx

Natural Gas

Natural Gas

Natural Gas

preservation as an essential aspect of their corporate social responsibility, and businesses inthe energy sector are seen as having a particularly important part to play. Tokyo Gas isdetermined to be a leader in environmental

0

Oil
70

100

Coal

Oil

Coal
20-40

70

60

100

Oil

Coal

80

100

Source: IEA Natural Gas Prospects (1986), Natural Gas Prospects and Policies (1991)

management and has based its efforts to over-is natural gas, which is the most environmentallyby natural gas, and natural gas vehicles. These

come environmental problems on four basic

friendly fossil fuel. When burned, natural gas

technologies are all helping to prevent global

policies. First, we will reduce the environmental

produces no sulfur oxides and just 20–60% of

warming and atmospheric pollution.

load resulting from our customers’ use of ener-

the amounts of nitrogen oxides and carbon diox-

Tokyo Gas has compiled its own environmen-gy. Second, we will reduce the total environ-

ide emitted by petroleum and coal. The supply oftal protection guidelines designed to ensure thatmental load resulting from our own businessnatural gas is the core activity of the Tokyo Gas

the advantages of its city gas business are applied

activities. Third, we will strengthen our envi-

Group, and we are extremely well positioned todirectly to environmental protection. These guide-ronmental partnerships with regional communi-

contribute to protection of the global environ-lines include a specific numerical target, whichties and the international community. Fourth,ment through our involvement in the develop-

call for a reduction in carbon dioxide emissions

we will promote research and development

ment and management of gas supply infrastruc-

resulting from gas use by Tokyo Gas customers

relating to environmental technologies.

ture, the development of new uses, such as gas

and by 8 million tons until fiscal 2010.

Tokyo Gas is involved primarily in the citycogeneration systems, gas floor heating systems,

gas business. The main gas resource for city gas

residential fuel cell cogeneration systems fueled

Global Warming Prevention Measures
1. In its city gas business, the Tokyo Gas Group aims
to reduce CO2 emissions from customers’ facilities
by 8 million tons by fiscal 2010, by promoting theuse of natural gas, and by improving the efficiency
of equipment and systems used with city gas.
2. The Tokyo Gas Group aims to reduce unit energy
consumption in its business operations by anaverage of at least 1% per year over the medium-term future.
3. From a global perspective, the Tokyo Gas Group willcontribute to the prevention of global warming byidentifying greenhouse gas reduction or absorption
projects in other countries, and by providing technical support for those projects.

Resource Recycling Promotion Guidelines

Green Purchasing Guidelines

1. Industrial waste field
There are major differences in the ways in which
industrial waste is produced in manufacturing plants(production sites) and through other activities, such as
construction. These categories will therefore have separate targets.
Tokyo Gas will achieve zero emission status at all
manufacturing plants by fiscal 2010.
Tokyo Gas will increase its recycling ratio for otherwaste, including construction waste, to at least 91%
by fiscal 2010.

1. The green purchasing ratio for items purchased fromelectronic catalogs will be increased to at least 70%
by fiscal 2010.
2. Tokyo Gas will encourage all group companies
included in the consolidated accounts to introduce
the electronic catalog purchasing system and implement green purchasing systems by 2010.
3. Tokyo Gas Group will promote green purchasing
within the Tokyo Gas Group in accordance with thegreen purchasing promotion guidelines.

2. Waste paper (paper recycling)
Tokyo Gas will increase the recycling ratio for waste
paper from its offices to at least 85% by fiscal 2010.
The amount of copier paper used will be reduced to5,000 sheets per person per year by fiscal 2010.
3. Excavation spoil
The amount of excavation spoil from road excavations
ordered by Tokyo Gas will be reduced to 15% by fiscal
2010, through volume reductions, reuse and recycling.

Results for Fiscal 2005 and Targets for Fiscal 2010
Result for FY2005

Resource circulation

Global warming

Reduction of CO2 emissions from customers’ facilities
Unit energy use in gas production facilities (Per unit of gas production)
Unit energy use in district cooling/heating systems (Per heat sales volume unit)
Unit energy use in Tokyo Gas business offices (Per city gas sales volume unit)
Industrial waste (manufacturing plants)
Recycling of industrial waste (except manufacturing plants)
Recycling of waste paper
Sheets of copy paper used per person per year
Excavation spoil ratio
Green procurement ratio

6.22 million tons*
4.5 % reduction*
0.7 % reduction
6.0 % reduction*
Zero emission status at 5 sites

93 %84.8 %
8,000
18 %
58 %

Target for FY2010

8 million tons
1 % reduction
1 % reduction
1 % reduction
Zero emission status at all sites

91 % or more
85 % or more
5,000
15 %
70 %

*Five-year average reduction

web Please see the CSR Report for further details http://www.tokyo-gas.co.jp/csr/

33

about environmentally friendly lifestyles andrate of approximately one per square kilometerenergy conservation through pamphlets andwhich can be defined as the world’s most highwebsites. Other activities designed to raise con-densely located pipeline safety system. This sys-

sumer awareness of the environment include

tem is designed to stop the supply of gas“Eco-cooking” courses and training programs

through the pipeline network and to shut down

for eco-cooking instructors. We are alsotransmission facilities and plants if a severe

expanding the scope of our environmental coop-earthquake occurs.

eration with government agencies, other comEco-cooking Instructor-training Seminar

Because city gas is part of the infrastructure

panies, NGOs and other related organizations.

needed to support daily life, the restoration of

As a leading company in the city gas indus-

supplies after earthquakes is as important as

try, Tokyo Gas is working through its research

accident-prevention and emergency responseand development activities to establish newmeasures. Tokyo Gas has implemented a fulltechnologies to expand the use of natural gas.

range of countermeasures at all three levels. In

Recent research projects have yielded numer-

addition to its emergency shutdown functions,ous important advances, including a residential

SUPREME is also designed to gather damage

fuel cell cogeneration system, and a high-effi-

data quickly, allowing us to build a detailed

ciency SOFC system.

picture of the situation within about 20 minutesof an incident. We have also developed a range

Residential Fuel Cell Cogeneration System LIFUEL

Safety and Disaster
Prevention Measuresof countermeasures, including a sophisticatedrestoration support system to ensure that gas

Energy is essential for the maintenance of eco-supplies are restored as quickly as possible

Building Environmental
Management Systems

nomic activity and living standards. As a suppli-

after an earthquake.

As part of its own environmental conservation

safety responsibilities and has worked through-efforts, Tokyo Gas obtained ISO 14001 certifi-

out its history to fulfill those responsibilities.

er of energy, Tokyo Gas is keenly aware of its

cation for all of its operations and sites in

Residential gas appliances are used by a

March 2005. This process has resulted in thewide range of customers. Tokyo Gas has devel-

establishment of corporate environmental man-oped enhanced safety features for these appli-

agement systems (EMS) that conform to theances, including systems to turn off the gas ifinternational standard for environmental man-the pilot light is extinguished, and temperatureagement systems. Starting in fiscal 2005,

sensors to prevent fires. One of the organiza-

Tokyo Gas is now helping its consolidated

tional units established by Tokyo Gas to ensure

Group companies to implement EMS andsafety is “Gas light 24,” which monitors gas

obtain ISO certification. We have also estab-

supply systems for leaks and other problems 24

lished the “Chairman’s Prize of thehours a day, 365 days a year. In addition, every

Environment,” which is awarded in recognition

gas appliance used by customers is checked forof forward-looking environmental protection

safety at least once every three years.

efforts. Through these initiatives, Tokyo Gas isJapan is an earthquake-prone country.

working to expand and enhance the efforts ofTokyo Gas has implemented multiple precau-

the “All Tokyo Gas” companies including non-tionary measures to maintain a high level ofconsolidated affiliate companies that cooperate

safety in the event of an earthquake. If majorin activities to prevent and overcome environ-seismic activity is detected, microchip-con-mental problems.

trolled gas meters in customers’ houses auto-

Tokyo Gas has also worked for many years

also installed the Super-dense Real-timeships through improved environmental commu-

Monitoring of Earthquakes (SUPREME) sys-

nication. We continue to distribute information

tem, containing seismic sensors placed at the34

Current

Center for Supply Control andDisaster Management

matically shut off the supply of gas. We haveto strengthen its environment-related partner-

web http://www.tokyo-gas.co.jp/csr/

Control Room

SUPREME Seismic Sensors

Financial Section

Contents

36 ■ Management’s Discussion and Analysis

42 ■ Principal Management Risks

44 ■ Frequently Asked Questions

46 ■ 11-year Summary

48 ■ Consolidated Balance Sheets

50 ■ Consolidated Statements of Income

51 ■ Consolidated Statements of Shareholders’ Equity

52 ■ Consolidated Statements of Cash Flows

53 ■ Notes to Consolidated Financial Statements

35

Management’s Discussion and Analysis

SUMMARY■ Consolidated gas sales volume steadily increased by 7.1% year on year, reflecting sales promotion efforts and low temperatures throughout the year.
■ Operating income decreased owing to the impact of higher gas resource costs caused by a steep rise in crude oil prices andthe gas rate reduction implemented in January 2005.
■ Every possible effort was made to minimize the impact of these external factors through cost reductions. However, net
income decreased by ¥21.9 billion year on year to ¥62.1 billion.

Sales Trends in the Core Gas BusinessFavorable Expansion of Gas Sales Volume in All Sectors■ Industrial Sector■ Residential Sector

As in the previous year, there was sustained growth in sales volumes.

Demand for hot water and heating increased due to the lower tempera-

Contributing factors included the start-up of facilities by new customers

ture over the course of the year (down 0.9Co on average) in addition tousing gas to generate power. There was also a steady increase of othersatisfactory increases in the number of customers. Overall sales volumeindustrial uses including cogeneration systems and boilers, which result-surged to 3,547 million m3, up 230 million m3, or 6.9%, year on year.

ed in a sales increase of 299 million m3, or 6.3%, year-on-year to

Of this volume, approximately 141 million m is attributable to the5,043 million m3. Gas sales for power generation accounted for approx-

effects of temperature and approximately 60 million m3 to growth inimately 73 million m3 of this increase, while other industrial uses con-the number of customers.

tributed approximately 197 million m3.

■ Commercial Sector, Other■ Wholesaling to Other Gas Companies

Increased demand for heating in the cold winter combined with theSales increased by 223 million m3, or 18.7%, year on year to 1,422

attraction of new customers countered the slowdown in growth ofmillion m3. Reasons for this growth include lower temperatures, which

demand for cooling that reflected the backlash against the hot summer

caused residential demand to expand in the service areas of other gasof the previous year. Gas sales in this sector increased 116 million m3 tocompanies, and the development of new demand among gas suppliers.

3

3,085 million m3, or 3.9%, year on year. Of this growth, 11 million m3
is attributable to temperature-related factors and 56 million m3 to the

There was volume growth in sales in all sectors. Total sales increased

increase in the number of customers.

by 868 million m3, or 7.1%, year on year to 13,098 million m3.

Gas sales volume by sector

Gas sales volume for power generation (Nonconsolidated)
3

3（Million m /45MJ）（Million m /45MJ）

15,0004,000

12,000

3,000

9,000
2,000
6,000
■ Wholesale■ Commercial sector, Other■ Industrial sector■ Residential sector

3,000

0
’02

’03

’04

’05

’06

1,000
■ Power generation only
■ Cogeneration (Industrial sector)■ Cogeneration (Commercial sector)

0
’02

’03

’04

’05

’06

Analysis of Income
Despite a Sales Increase, Operating Income
Declined on Rising Gas Resource Costs

increase operating efficiency and reduce costs to minimize the negative

Despite declining sales in some segments, including gas appliance sales,

prices and gas rate reductions implemented in January 2005, operating

related construction and real estate rental business, higher gas sales

income fell ¥33.0 billion, or 22.7%, year on year to ¥112.3 billion.

brought an increase in overall sales of ¥75.7 billion, or 6.4%, year on
year to a new record of ¥1,266.5 billion. Although efforts were made to36

impact of higher gas resource costs, pegged by sharply rising crude oil*All graph data for year ended March 31
Business results by segment (¥ million)

33.2% in line with the increased gas sales volume and due to the impactof a steep rise in crude oil prices. This pushed the operating expenses to

Sales
2006

2005

2004

¥750.3 billion, up by ¥98.3 billion or 15.1% on a year on year basis in

Gas Sales

910,321834,658

831,115

spite of our cost cutting efforts, through which we have reduced costs by

Gas Appliance Sales

130,826

135,109

133,873

approximately ¥10 billion in excess of its initial plans on a nonconsoli-

Related Construction

59,74764,79568,034

dated basis.

Real Estate Rental

34,187

34,70135,444Years ended March 31

Other BusinessAs a result, operating income decreased ¥22.7 billion or 12.4% to252,596234,721

172,160¥160.0 billion.

2006

2005

2004

160,020

182,685

189,366■ Gas Appliances Sales
Income Declined due to New Investments to Compete with the“All-electric” Promotion

Gas Appliance Sales

4,617

7,054

7,904

Despite solid sales of appliances, including TES-driven floor heaters,

Related Construction

2,976

3,575

4,456

bathroom heater-dryers with a mist sauna function and gas cooktops, unit

Real Estate Rental

5,459

6,503

7,883

prices dropped and sales rebates continued to rise in the face of fiercer

Other Business

9,647

13,415

11,270competition. Gas appliance sales decreased ¥4.3 billion, or 3.2%, year on

Operating income
Years ended March 31

Gas Sales

Note: Segment sales include intra-group transactions.

year to ¥130.8 billion, while operating expenses decreased ¥1.8 billion,
or 1.4%, year on year to ¥126.2 billion, and operating income decreased¥2.4 billion, or 34.5%, year on year to ¥4.6 billion.

■ Gas Sales
Higher Gas Resource Costs Bring Lower Income on Increased Sales

The segment’s total contribution to total sales declined from 10.4%
in the previous fiscal year to 9.4%.

Sales in this segment increased to ¥910.3 billion, up by ¥75.7 billion or
adjustment system. There was also a 7.1% increase in gas sales volume■ Related Construction
Drop in the Number of Installations Leads to Lower Sales and Income

in all sectors even though the revenue was lower due to the lower gas

There were declines in the number of new installations and safetyrate, of which average is 5.18% in the regulated rates, implemented in

upgrades, and segment sales fell ¥5.0 billion, or 7.8%, year on year, toJanuary 2005.

¥59.7 billion. Operating expenses decreased ¥4.4 billion, or 7.3%, to

9.1%, with contributions from the higher unit price under the gas rate

Nonconsolidated sales increased ¥71.3 billion, or 8.6%. Risingsales volume contributed ¥45.7 billion (of which ¥18.5 billion were
attributable to the impact of lower temperatures), and higher unit prices
had an adverse effect amounting to ¥25.6 billion, including ¥52.5 billion¥56.8 billion, and operating income decreased ¥0.6 billion, or 16.8%,
to ¥3.0 billion.
The segment’s contribution to total sales was lower at 4.3%, compared with 5.0% in the previous year.

due to price adjustments under the gas rate adjustment system, –¥21.9
and –¥5.0 billion due to other factors. The segment’s contribution to■ Real Estate Rental
Higher Building Repair Costs Lower Income

total sales increased from 63.9% to 65.6%.

Segment sales declined, in part because of rent reductions to reflect thebillion due to the impact of the rate reduction for regulated customers,

Regarding operating expenses, gas resource costs rose drastically bystate of the real estate market, falling ¥0.5 billion, or 1.5%, to ¥34.2
billion. Operating expenses increased ¥0.5 billion, or 1.9% due to anincrease in building repair costs, and operating income decreased ¥1.0
billion, or 16.1%, to ¥5.5 billion.

Rate Reduction

The segment’s contribution to total sales dropped from 2.7% to 2.5%.

In January 1, 2005, Tokyo Gas lowered its rates an average of 5.18%
from previous levels for small-volume customers. The impact of the rate
reduction on sales was a decrease of about ¥30.0 billion annually fromsales to regulated customers.
In April–December 2005, there was a year-on-year reduction inrevenue of approximately ¥21.9 billion.

■ Other Business
Energy Service Business Expanded
The sales of the other business segment increased by ¥17.9 billion, or
7.6%, year on year to ¥252.6 billion following various factors including

In February 2006, Tokyo Gas decided to change the ratio of LPG

the positive development of the on-site energy service business and theand LNG in city gas because of the rising price of LPG. This lowered theimproved operating rate for the LNG carriers managed by the Company.

calorific value from 46.04655 MJ/m3 to 45 MJ/m3. When calorific value
is taken into effect, the cost savings we were able to pass on to consumers
was 0.28% per equivalent calorific value after conversion. This action
had a minimal impact on operating results for the year under review.

Meanwhile, the operating expenses increased year on year by ¥21.6
billion, or 9.8%, affected by the factors including the increased initialdepreciation cost, usually associated with growth in on-site energy serv-

Tokyo Gas had two objectives in lowering gas rates: To return prof-

ice business, and the increase of lease expendables in the credit leasing

its earned through corporate efforts to customers and to increase com-business. This led operating income to decrease by ¥3.8 billion, or

petitiveness. Resources to allow gas rate reductions to a certain level

28.1% to ¥9.6 billion.

have been included in the medium-term management plan for
2006–2010 , and we plan to allocate these strategically.

As a result, this segment’s contribution to total sales increased from
18.0% in the previous year to 18.2%.

37

■ Other Revenues and Income / Net Income

current term net income and deducting the capital expenditures, as one

Other Revenues Improved although the Net Income
Decreased from the Previous Term.

of the key management indicators of “Frontier 2007”. However, in

Other income totaled ¥18.5 billion, a year-on-year increase of ¥0.6 bil-point, which initiates the transformation from the gas business into alion. No gain was recorded during the year under review from weather

total energy business, we have announced our decision to employ thederivatives of ¥2.7 billion, a major component of other income of the“operating cash flow”, which is calculated by adding depreciations toprevious year. However, gains of ¥2.4 billion on commodity derivatives,current net income, as the key management indicator and have alsoa ¥4.9 billion from the sale of securities, and a ¥2.2 billion from theannounced a resource allocation policy. (Refer to page 12)order to support the revised plan from the resource allocation stand-sales of fixed assets were recorded.
The other expenses totaled ¥30.0 billion, up by ¥0.1 billion from theprevious term. During this term, ¥5.7 billion payment incurred from

Free cash flow（¥ billion）

120

weather derivative transactions as the temperature stayed lower than
expected. On the one hand, interest payments and bond redemption losses fell by ¥2.1 billion and ¥2.9 billion respectively as a result of acceler-90

ated repayment of interest-bearing debts. During the previous term, ¥1.2
billion of the impairment loss on fixed assets and ¥3.5 billion of retire-

60

ment benefit premiums were recorded as once-only losses and were notincurred during this term. On the other hand, a ¥5.1 billion extraordinary loss was incurred in relation to the cancellation of information30

system development.
Other expenses, net amounted to –¥11.5 billion, a slight improve-

0’02

ment from –¥12.0 billion in the previous year. Net income declined¥21.9 billion, or 26.1%, to ¥62.1 billion due to worsening operating
income effects.

’03

’04

’05

’06

Free cash flow = net income + depreciation and amortization of long-term prepayments
Free cash flow = – capital expenditures
Capital expenditures = acquisition amount of property, plant and equipment+ acquisition amount of intangible assets+ expenses amount of long-term prepayment

Net income and net income per share（¥ billion）

（¥）

90

45

■ Fiscal 2006 Projection

Increased Sales and Income Projected for the YearEnding March 31, 2007
30

60

With regard to the core gas business in the year ending March 31, 2007,
the gas sales volume in the residential sector is expected to decline by
3.0% based on an assumption that the temperature, which was low in

30

15

fiscal 2005, will return to a normal level. We expect the gas sales volume in the industrial sector to grow by 2.3% by capturing new demand;

0

0
’02

’03

’04

’05

■ Net income● Net income per share’06

while that in the commercial/others sectors is expected to decline by
0.7% due to the diminishing temperature effect despite Tokyo Gas
efforts to develop new demand. Wholesale gas sales are projected toincrease by 6.2%, which reflects an increase in new demand acquired by
the gas companies and makes the total gas sales volume projection 79■ Free Cash Flowmillion m3 or 0.6% increase to 13.177 billion m3.

Capital Expenditure Increased for Total Energy
Business Expansion¥986.9 billion given the fact that, alongside the rising gas sales volume,

Free cash flow in this term decreased ¥37.7 billion or 32.3% to ¥79.1

the gas unit rate will rise due to a unit price adjustment made under thebillion in line with the fall in net income in the current term as well as agas rate adjustment system to reflect the increased gas resource cost of

rise in capital expenditures by Tokyo Gas and its consolidated sub-the second half of fiscal 2005.

sidiaries including Tokyo Gas Yokosuka Power Corporation and
ENERGY ADVANCE Co., Ltd.
In addition, capital expenditure increased ¥11.9 billion, or 11.1%,
year on year to ¥119.4 billion while depreciation decreased ¥3.9 billion,
or 2.8%, to ¥136.4 billion.

38

Gas sales are projected to increase ¥76.6 billion, or 8.4%, toAlthough gas appliances sales are expected to decline, sales of related construction and other businesses will expand, with the result thatgross sales on a consolidated basis are expected to increase ¥103.5 billion, or 8.2%, to ¥1,370 billion.
On the other hand, Tokyo Gas forecasts an operating income

Tokyo Gas is now implementing the new medium-term management

increase of ¥21.7 billion, or 19.3%, to ¥134 billion, and a net income

plan for the period from fiscal 2006 to fiscal 2010. Tokyo Gas had been

increase of ¥19.9 billion, or 32.0%, to ¥82 billion, on the back ofusing “free cash flow”, which is calculated by adding the depreciation to

reduced fixed costs driven by cost reductions as well as the decreased

*All graph data for year ended March 31

actuarial differentials on the retirement benefits even though gas
resource costs are anticipated to increase in the year ending March 31,
2007 in line with the rising oil prices.
Furthermore, the year ending March 31, 2007 is the first year forthe medium-term management plan for 2006–2010. In order to achieve
the targets set in the plan, we will take the following steps:◆ Establishment of marketing setups with deep local roots◆ Compete against a serious challenge from electricity in residential andcommercial sectors◆ Aggressive demand development by making the most of the relative economical advantages of LNG due to high rises in the price of crude oil◆ Further development of electricity business and energy services forone-stop services
We will focus on the above points and seek to implement them smoothly.

Tokyo Gas Original Indicator: TEP

TEP (EVA® Tokyo Gas Version)

With the aim of generating profits that exceed the cost of capital, Tokyo（¥ billion）

Gas formulated Tokyo Gas Economic Profit (TEP)*, as one of its key busi-

60

ness performance indicators. TEP is a Tokyo Gas-specific variation of
Economic Value Added (EVA®).
In fiscal 2005, NOPAT** decreased by ¥22.0 billion to ¥70.0 billion
owing to the impact of the implementation of the gas rate revision in January
2005, and a significant rise in gas resource costs caused by sharply rising

50
40
30

crude oil prices. On the other hand, the WACC remained at 3.7%, although
the cost of capital decreased by ¥0.1 billion to ¥47.0 billion, resulting in a20

year-on-year decrease in TEP of ¥22.1 billion to ¥22.9 billion.
Tokyo Gas considers TEP as a performance indicator for Group compa-

10nies and as a gauge for decisions on business restructuring and integration.
Tokyo Gas continues to position TEP as one of its key management indica-

0’05

tors in the new medium-term management plan and aims to generate ¥50 billion

’06

’11

Target in fiscal 2010of new medium-teammanagement planequivalent TEP in fiscal 2010, which is the final fiscal year specified in the plan.
** TEP: NOPAT – cost of capital** NOPAT: Net operating income after tax prior to interest payments

Cash Flows and Financial Position
Net Income Decreased Due to Rising Gas Resource
Costs Occurring in Step with Rising Crude Oil Prices■ Cash Flows from Operating Activities
Income before income taxes and minority interests in net income
decreased by ¥32.5 billion year on year due to a sharp increase in thecost of gas resource in connection with the steep rise in the price of
crude oil. Despite a reduction in employees’ retirement benefits reserve

Years ended March 31

2006

2005

2004

Net cash provided byoperating activities

181,529

215,038

217,608

Net cash used ininvesting activities(116,071)(107,376)(126,038)

Net cash used infinancing activities(83,041)(108,160)(99,744)

funds, there were increases in inventories and stocking liabilities.
Consequently, net cash provided by operating activities declined to

As a result of the above factors, cash and cash equivalents at the end of¥181.5 billion, down ¥33.5 billion year on year.

the term decreased to ¥45.6 billion, down ¥5.0 billion year on year.

■ Cash Flows from Investing Activities■ Interest Coverage Ratio

Turning to net cash used in investment activities, outflows mainly for the

The interest coverage ratio declined from the previous year, reflecting

acquisition of tangible fixed assets such as distribution facilities rose by

the year-on-year drop in operating income due to increasing gas resource¥16.9 billion, while outflows for intangible fixed assets dropped by ¥7.8

costs caused by sharply rising crude oil prices. The ratio decreased 0.82

billion. Consequently, net cash used in investing activities declined topoint thus became 10.33 times. Nonetheless, Tokyo Gas steadily–¥116.1 billion, down ¥8.7 billion year on year.

improved the soundness of its financial structure through the reductionof interest-bearing debt, thereby slashing interest expenses by■ Cash Flows from Financing Activities¥2.1 billion.

Net cash used in financing activities increased ¥25.1 billion to ¥83
billion year on year due to redemption of debentures decreasing by ¥80.4
billion and the procurement of funds by issuance of bonds decreasing by¥40.0 billion, while long-term debt repayment rose by ¥7.2 billion.

39

Interest coverage ratio

review increased ¥25.2 billion to ¥1,693.9 billion year on year. Tangible（Times）

fixed assets at the end of the year under review decreased by ¥19.2 bil-

18

lion to ¥1,140.3 billion, reflecting ongoing depreciation. Investments
and other non-current assets increased ¥28.2 billion to ¥227.9 billion
year on year due to an increase of ¥44.4 billion in investment securities,
12

reflecting a favorable rise in stock prices. Although cash and cash equivalents declined by ¥4.1 billion, inventories increased by ¥9.2 billion overthe level of the previous year and notes and accounts receivables rose by

6¥7.3 billion. As a result, current assets increased by ¥15.4 billion to
stand at ¥302.0 billion.
In the new medium-term management plan, the target for ROA is0

set at 5.5% in fiscal 2010. To achieve this target, Tokyo Gas takes a
’02

’03

’04

’05

’06

Interest coverage ratio=(operating income + interest and dividend income)/interest expense

rigorous look at efficiency while undertaking active investments aimed atlaying foundations for future profitability.
ROA = net income / total assets (average positions at start and end of fiscal year)■ Target for Reduction of Interest-bearing Debt Achieved
Ahead of Schedule■ ROE Target of 10.9%, Based on Optimal Capital Structure

One of the main management targets of “Frontier 2007”, our previous

ROE at the end of the year under review slipped by 4.5 points to 9.0%.

medium-term management plan, was to reduce interest-bearing debt, forThis decline was due to the decrease in net income caused by steep

which a reduction of ¥100 billion was planned over a five-year period. To

increases in the cost of gas resources. Shareholders’ equity increased byachieve this target, a total of ¥171.4 billion was invested over the three-¥25.0 billion, reflecting the net unrealized holding gain on securities asyear period from fiscal 2003 to fiscal 2005. This reduced interest-bear-well as an increase of ¥39.8 billion in retained earnings. In addition,

ing debt significantly, with the debt-equity ratio declining to 0.77 at thetreasury stock increased by ¥34.6 billion through switching convertible

end of fiscal 2005. The new medium-term management plan starting

bonds to stocks, and a decrease of ¥14.3 billion in treasury stock result-from fiscal 2006 takes the view that the soundness of our financial struc-ed from Tokyo Gas repurchase of stock worth ¥20.0 billion (48.7 mil-ture has already been improved substantially. Consequently, this item haslion stocks) in August 2005. As a result, shareholders’ equity increased

been removed from the list of main management targets, although efforts¥79.5 billion to ¥728.2 billion year on year.

continue to be made to procure low-interest funds to improve the soundness of our financial structure. Reductions of ¥60 billion in interest-

Aiming at an optimal capital structure, the new medium-term management plan targets an ROE of 10.9% in fiscal 2010.

bearing debt are planned over the five-year period of the plan.
ROA and ROE（% ）Interest-bearing debt and D/E ratio（¥ billion）

16（Times）

1,000

2.0
12

800

1.6

600

1.2

400

0.8

8
● ROA
● ROE

4
200

0.4

0

0
’02

’03

’04

’05

■ Interest-bearing debt
● D/E Ratio

’06

0
’02

’03

’04

’05

’06

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

Interest-bearing debt =long-term debt due after one year + long-term debt due within one year + bank loans
D/E ratio = interest-bearing debt / shareholders’ equity■ Targeting a Total Payout Ratio of 60% with Ongoing
Stock Repurchases

40■ ROA Target of 5.5%

The new medium-term management plan clearly sets the target for the

As a result of increases in the gas resource cost associated with the steep

proportion of profits returned to shareholders at 60% in keeping withrise in the price of crude oil, net income dropped by ¥21.9 billion year on

Tokyo Gas prioritization of returns to shareholders. Under this approach,year and return on assets (ROA) declined by 1.3 points to stand at 3.7%

the proportion is defined as the amount of dividend appropriated in FY n

for the year under review. Total assets at the end of the year underwithin the net income of FY n and the proportion of the net total of the*All graph data for year ended March 31

amount of stock repurchases to be carried out in n + 1 FY based on the net

Shareholders’ equity and equity ratio

income of FY n. Tokyo Gas aims to achieve 60% for the total payout ratio（¥ billion）

（% ）

800

60

while keeping in mind a balance between dividends and stock repurchases.
As for previous stock repurchases issues of convertible bonds set for
repayment in 2007 and 2009 (No. 5/No. 6 bonds: convertible price was

600

45

400

30

200

15

0

0

¥339) were carried out with the objective of preventing dilution due tothe conversion of bonds into stocks. Tokyo Gas intends to continue stock
repurchases in order to help improve shareholder value under the new
medium-term management plan even after having completed repurchasesto accommodate conversions.

’02

’03

’04

’05

’06

■ Shareholders’ equity● Equity ratio

Equity ratio=Shareholders’ equity (year-end)/total assets (year-end)

External Risks Affecting Business Activities■ Gas Rate Decline Risk

■ Gas Resource Fluctuation Risk

Progress in deregulation has caused competition to intensify among energy

City gas supplied by Tokyo Gas is produced mainly from imported LNG.

suppliers. There is a risk that the price of gas will need to be reduced to attract

Since contracts are denominated in U.S. dollars, earnings are at risk

and retain customers in the face of price reductions by the Tokyo Electricfrom fluctuations in the yen-dollar exchange rate. Also, the dollar-

Power Company (TEPCO), which is the greatest competitor of Tokyo Gas.

denominated LNG prices are linked to crude oil prices on a sliding scale,Tokyo Gas has reduced gas rates three times full rate reduction since
1999, by about 10% in total. TEPCO also reduced its electricity rates fourtimes, by about 21% in total, during the same period. Tokyo Gas will continue to implement strategic rate menu as necessary to prevail over competition.

which exposes the Company to risk from changes in the international
market price for crude oil.
The extent to which these fluctuations affect gas resource costs overin the year ended March 31, 2006 is as follows.
Approx. ¥3.0 billion for each ¥1 movement in the yen-dollar■ Temperature Fluctuation Risk

exchange rate

Temperatures affect the volume of city gas sales, which account for around
70% of consolidated sales and 90% of income. Gas is used mainly for

Approx. ¥4.2 billion for each $1 movement in the per-barrel priceof crude oilwater heating and space heating, especially in residential use. Mild winterFluctuations in the cost of gas resources are reflected in gas rates

weather can erode revenues and income by reducing the volume of gas sold.

after approximately six months under the “gas rate adjustment” system*.

The average temperatures in fiscal 2005 were 22.4ºC in the first half ofUnder this system, although earnings may be subject to temporary increas-

the year, 10.1ºC in the second half, and 16.2ºC over the whole year. Forecasts

es and decreases, crude oil prices and currency exchange rates have no sig-

for fiscal 2006 are based on an average of 16.9ºC over the whole year.

nificant impact on results over the medium- to long-term perspective.
In fiscal 2005, the crude oil price averaged $55.79 per barrel, andImpact of 1˚C temperature rise on gas sales volume
Rate of change

0.2%
-2.4%
-1.7%
-1.4%

Summer (June–September)
Winter (December–March)
Intervening months (April, May, October, November)
AnnualMonthly gas sales volumes for fiscal 2005 (Non-consolidated)
3（Million m /45MJ）

the average exchange rate was ¥113.32 to one dollar. Forecasts forfiscal 2006 are based on an average crude oil price of $62.5 per barrel
and an exchange rate of ¥120 to one dollar.
* Depending on the contract, changes may be reflected within a six-month time lag.
Adjustment has an upper limit (please refer to the accompanying Investors’ Guide 2006, P. 12).

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

1,500

term interest-bearing debt, which precludes risk of interest rate fluctua1,200

tion during the term of an obligation. However, there may be risk offluctuation when loans are refinanced.

900■ Stock Price Fluctuation Risk
600

Tokyo Gas primarily holds equities to maintain corporate relationships■ Wholesale■ Commercial sector■ Industrial sector■ Residential sector

300
0essential to the conduct of its business operations. Equity of publicly listed companies is subject to market risk. Tokyo Gas has established management policies and rules for handling of such equities.

’05.4 5 6 7 8 9 10 11 12 ’06.1 2 341

Principal Management Risks

In fiscal 2003, Tokyo Gas established an integrated risk management system and stipulated the principal forms of risk withwhich management should be involved. This makes it possible to systematically ascertain important risks and to disclose
appropriate information on the risks to stakeholders. The important risks are reconfirmed and revised each year in meetingsof management and the Board of Directors.
Details of the principal risks with which management should be involved are described below. Forward-looking statements contained herein are based on assessments of Tokyo Gas as of March 31, 2006.

1) Production and supply interruption risk5) Weather risk

Tokyo Gas business is founded on the production and supply ofAbnormal weather conditions, particularly summer heat waves

city gas, so a major gas leak or explosion attendant on theand warm winters, reduce gas sales volume in the residential sec-

production or supply of gas or a major gas leak or explosion at ator, where gas is mainly used to supply hot water and heating,customer site may result not only in direct damages, but also in

thereby affecting revenues.

tangible and intangible loss including the need to bear public
responsibility.

6) Risk faced by existing business

2) Natural disaster risk

A. Competitive risk
As industry deregulation progresses, competition with electric power

Tokyo Gas engages in facility-dependent businesses because city

companies and new firms entering the gas business is increasingly

gas production and supply facilities are the foundation of its busi-

fierce. Competition may have a greater impact on Tokyo Gas busi-

ness. Accordingly, earthquakes, typhoons or other major natural

ness performance. Specifically, demand might decrease or rates may

disasters may cause damage to plants and other production facili-

fall owing to marketing offensives by electric power companies toties or pipelines and other supply facilities and disrupt the supply

promote electrification, electric power rate reductions or competi-of city gas.

tion from new market entrants. Tokyo Gas is rolling out a strategic
rate menu while keeping a close watch on the competitive situation;3) Resource procurement supply interruption risk

reductions in rates have been implemented since 1999.
Amid ongoing market liberalization and intensified competition

Because Tokyo Gas relies on imports for the majority of its natu-

between energy sources, Tokyo Gas may lose a portion of existingral gas and other city gas resources, supplier country risk, acci-demand should competitors commence the supply of more competitive

dents at gas fields or LNG liquefaction plants, accidents to LNG

LNG in the Group’s existing markets, should LNG lose competitive-

vessels in transit or other situations preventing the smoothness compared to other forms of energy, or should it become unableprocurement of gas resources may disrupt the supply of

to purchase LNG at competitive prices due to problems concluding

natural gas.

contracts or renewing existing contracts.

4) Market risk

B. Demand risk
Changes in industry structure, economic recession, advancement ofTokyo Gas might incur losses in the event of changes in the mar-energy conservation activities or other factors may result in a partial

ket price of company-owned real estate, financial assets, pension

decrease in existing demand, particularly from large-volume

assets or other assets. Additionally, fluctuations in the price ofcustomers.

gas resources take about six months to show up in gas rates. Thisfactor may affect revenues by breaking up a fiscal year, which

C. Legal and regulatory risk

could cause over- or under-collection of gas rates.

Tokyo Gas manages its operations in compliance with the Gas Utility
Industry Law and other laws, regulations and institutions. Any revisions to these laws, regulations or institutions that prove detrimental
to the Tokyo Gas Group may affect business performance.

427) Inappropriate handling of recalls, etc.

11) Interruption of communication with call centers

Tokyo Gas may suffer tangible and intangible loss, including the need

Most communication with customers takes place via call centers.

to bear public responsibility, if it fails to make timely andInterruptions to telephone service to call centers would not only dis-

appropriate responses, such as recalls, to safety problems withrupt service to customers over wide areas, but may also incur serious

gas appliances.

tangible and intangible loss, including the need to bear public
responsibility.

8) ROI risk
12) Environmental and compliance risks
Tokyo Gas continues to make large investments in keeping with thegoal of “establishing a total energy business” as expressed in themedium-term management plan. Doing so involves investments
channeled into the electric power business, energy service business,and gas field and other development projects, the LNG transportation business and other new businesses, as well as large investments
into the foundations or to expand existing businesses such as widearea pipeline construction and IT. Such investments run the risk ofnot bringing in appropriate returns or not producing the expected

The need to comply with new environmental laws or additional obligations to improve the environment might increase costs. Also, any
violations of laws, rules and regulations or actions that contravene
corporate ethics may result not only in direct costs required to remedy the situation, but also in tangible and intangible loss including theneed to bear public responsibility.
13) Risks associated with corporate responsibility
and customer service

results due to changes in the economic situation.
Inadequate responses to customer needs or inappropriate customer9) Risk of information leaks

services may result in declining corporate competitiveness and intangible and intangible loss, including the need to bear public

Improper disclosure of customers’ personal information gathered andmanaged in the conduct of business as a public utility may result not
only in direct costs required to remedy the situation, but also in tangible and intangible loss, including the need to bear public responsibility
more serious than that required of other companies.

responsibility. Moreover, because Tokyo Gas regards the enhancement of customer satisfaction as an important means of fortifying
corporate competitiveness, and the importance of customer satisfaction is increasing, Tokyo Gas recognizes it as a business risk should
the Company be unable to increase customer satisfaction or fail tomeet the level of satisfaction required by customers.

10) Risk of failure or malfunctioning of backbone systems

The failure or malfunctioning of backbone computer systems connected with the manufacture and supply of gas or the calculation ofgas rates may result not only in a disruption in gas supply and delays
in customer service, but also in tangible and intangible loss including
the need to bear public responsibility.

43

Frequently Asked Questions

Q1 What are some of the characteristics of city gas business in Japan?
Japan’s mountainous terrain means there are few areas where thesuppliers, most of which are small or medium-sized firms.

population and industry are concentrated in such a way as to be

Approximately 90 percent of the city gas in Japan is sourced fromadvantageous to gas suppliers. For this reason, only about 5% ofnatural gas, almost all of which is imported in the form of LNG.

Japan’s land area currently has a ready supply of city gas.

Only a few companies import and regasify LNG to supply city gas.

Although about 210 city gas companies compete in this limit-

Unlike the United States and Europe, Japan does not have a

ed geographical area, three large companies Tokyo Gas, Osaka

nationwide pipeline network; each city gas company maintains a

Gas Co., Ltd., and Toho Gas Co., Ltd. account for about 80% of

network of pipelines in its service area through which it supplies

the total gas sales volume: In addition to city gas suppliers, there

and markets gas.

are about 1,700 specific-area gas suppliers and 26,000 LPG

Q2 Does Tokyo Gas plan to acquire neighboring gas companies?
Tokyo Gas currently wholesales gas to 21 city gas companies

to aggressively pursue hostile M&A. The Company did, howev-

around its service area. Wholesale volumes account for overer, acquire the gas operations from Konosu City, Saitama in

10% of total gas sales, and are expected to increase by an annu-

April 2002, and from Nagano Prefecture in April 2005 fol-

al average of 6.6% over the next five years. The wholesale sup-lowing the privatization. If any optimal M&A opportunity arises

ply business allows Tokyo Gas to raise income without

which appears likely to raise our corporate value and benefit ourincreasing assets, so its basic policy calls for an active develop-

customers, we would of course explore the possibility of acting

ment of this market. As hostile takeovers could have an adverse

on such an opportunity if that complies with the intentions of theeffect on the Company’s wholesale business, it has no intention

other party.

Q3 How does Tokyo Gas set its rates?
Service Agreement

In case where Tokyo Gas supplies gas

its gas production and supply facilities. These agreements havethrough the pipelines to meet general demand, the rate schedule

to be reported to the Minister and the selection of this option is“regulated” under the service agreement used to require an

up to the customer.

approval from the Minister of Economy, Trade and Industry.

Large-volume Supply Under the Gas Utility Industry Law, theUnder the amendments to the Gas Utility Industry Law in 1999,

conditions for gas rate setting and market entry for service

however, it became possible to change these rates simply by noti-

providers in the large-volume market are gradually deregulated.

fying the Minister, provided that these changes do not adversely

Effective from April 2004, customers who use 500,000 m3 oraffect any customers.

more will serve as large-volume customers.

Optional Agreement Tokyo Gas is permitted to offer rates and“Regulated” rates are calculated using a rate-base system.

service terms other than those outlined in the above service

A simplified version of this calculation is shown in the follow-

agreement. This enables the Company to make efficient use ofing equation:

Operating cost, etc.

• Cost of gas resources• Personnel expenses• Overheads• Depreciation• Non-operating expenses• Income taxes＋

Fair return

Calculated using the rate-basesystem, which involves multiplying fixed-asset investments,
etc. by the appropriate ratioof fair return−

Deductions, etc.

• Profit from gas appliancesales, etc.
• Profit from real estatebusiness, etc.

＝

Total fair cost

Represents an appropriate
profit added to an appropriate
cost under efficient management* Price fluctuations in the foreign exchange rates and/or crude oil prices are reflected in the meter rate gas unit price every three months in accordance with the gas resource cost adjustment
system. Consequently, the impact of such price fluctuations on revenue and expenditure is neutral in the medium or longer term.

44

Q4 What is the definition of the “energy service business”?
Energy service providers build facilities to provide one-stopsidiary, ENERGY ADVANCE Co., Ltd. The company operates

sources of energy services, such as cogeneration systems that pro-very efficiently by capitalizing on the LNG procurement systems

duce both electricity and heat. This type of service has major

and advanced engineering capabilities of the Tokyo Gas Group,

advantages for customers, including reduced energy costs and easemaking the most of the high added value that can be achievedof implementation, as there is no need for a large initial invest-

with cogeneration systems. It targets environmentally concerned

ment. There are also significant environmental benefits. Efficiency

customers, especially in the Kanto region, where demand is high.

improvements have turned the energy service business into a high-

By March 2006, it had signed a cumulative total of 125 con-

growth area characterized by rapidly improving profitability.

tracts for 226 MW, and it had received subsidies for 70 schemes

In 2002, Tokyo Gas moved to expand its involvement in the

totaling 173 MW.

energy service business by establishing a wholly owned sub-Q5 What kind of relationship does Tokyo Gas have with Tokyo Electric Power Company (TEPCO)?
Tokyo Gas and TEPCO have been purchasing more than 70% of

In contrast, Tokyo Gas and TEPCO compete fiercely at thetheir LNG requirements from our joint LNG projects, and are also

marketing level. TEPCO has entered the gas market and we aretaking part in other projects that entitle both companies tocompeting head to head especially in the commercial andupstream interests. Joint procurement increases the size of theindustrial sectors. Even in the residential sector, the competition

contracts, which enables us to achieve bargaining power.

between gas and electricity increased due to the marketing

Two of the three LNG terminals owned by Tokyo Gas,

offensive from the electric power companies who are promoting

Negishi and Sodegaura are operated jointly with TEPCO, which“all-electric” promotion. Tokyo Gas seeks to provide customers

enables us to mitigate the capex cost burden, reduce operatingwith optimal solutions that meet their true needs. To achievecosts, and achieve load leveling by leveraging the difference

this, we offer a total energy service instead of limiting ourselves

between the electricity and gas peak demand times, and lower

to being a single-energy provider offering only gas or electricity.

gas production costs.

Q6 How do you utilize your holdings of real estate?
The real estate business is regarded as a complement to the

our core business. Moreover, we employ approaches thatcore business of Tokyo Gas, the “total energy business.”emphasize on limiting the business risk, such as joint develop-

Accordingly, the fruits from the real estate business should be

ment with an external partner.

utilized to grow the core business. Large premises with asset

Our group has operations in many locations in the Tokyo

values expected to rise will be developed properly to maximize

Metropolitan Area, so operational efficiency and cost reductions

their potential with the aim of growing asset value whileare essential to enhance our competitiveness in the total energy

limiting the downside risks.

business. We use active management to increase the efficiency of

The funds needed for development are in principle sourced
from the land sale proceeds to insure that there is no impact on

the real estate business operation as well as to concentrate or
relocate existing operations to optimal locations.

45

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

2006

2005

2004

2003

1,266,502

1,190,783

1,151,825

1,127,634

Gas sales

910,321834,658

831,115

792,454

Gas appliance sales

130,826

135,109

133,873

142,636

Related construction

59,74764,79568,03470,568

Real estate rental

34,187

34,70135,44436,346

Other business

252,596234,721

172,160

158,327

Operating income

112,346

145,349

152,287

123,294

Net income

62,11584,04744,78759,201

Depreciation*

136,377

140,271

146,895

141,027

Capital expenditures**119,435

107,529

107,441

111,988

Free cash flow

79,057116,789

84,241

88,240Net income¥23.48¥31.47¥16.44¥21.18Net income (Diluted)

21.70

28.24

14.98

19.11

Shareholders’ equity

270.48244.73221.53208.65

7.00

7.00

7.00

6.00

1,693,899

1,668,734

1,666,828

1,676,064

Long-term debt due after one year

496,740

547,139545,845598,322

Total shareholders’ equity

728,232

648,766

598,453

579,706

Operating income to net sales

8.9%

12.2%

13.2%

10.9%

Net income to net sales

4.9%

7.1%

3.9%

5.3%

ROE

9.0%

13.5%

7.6%

10.4%

ROA

3.7%

5.0%

2.7%

3.5%

Equity ratio

43.0%

38.9%

35.9%

34.6%

For the years ended March 31
Net sales

Per share (yen)Cash dividends applicable for the year

At year-end (March 31)
Total assets

Ratios

Notes:

1. Segment sales include intra-group transactions.
2. Free cash flow = net income + depreciation* – capital expenditures***including amortization of long-term prepayments

46**purchases of tangible fixed assets + purchases of intangible fixed assets + long-term prepayments (accounting basis)

Millions of yen, except per share amounts

2002

2001

2000

1999

1998

1997

1996

1,097,589

1,086,771

992,255

997,767

1,009,155

988,077

958,662

750,439

740,731

672,069

674,997

686,649

663,066

633,253

149,203

146,517

127,916

133,925

127,880

135,057

136,344

71,33871,90868,651

68,81771,06074,76773,78437,55137,60137,841

37,61638,97840,91640,568156,011

159,578

158,819

155,045

154,602

144,032

143,931

110,608

103,659

69,23372,30376,48562,163

67,10951,912

27,595

26,69817,764

17,241

15,432

16,762

145,564

150,374

140,306

143,009———105,296111,397

124,975

151,126———

92,17866,57242,029

9,647

—

—

—

¥18.47

¥9.82

¥9.50

¥6.32

¥6.14

¥5.49

¥5.97

16.66

9.13

8.84

5.94

5.76

5.37

—

200.75

196.72172.33149.98148.67147.65147.23

6.00

6.00

5.00

5.00

5.00

5.00

5.00

1,702,713

1,797,669

1,805,086

1,707,446

1,720,684

1,772,132

1,657,176

680,887

708,329

843,634

820,753765,304

878,674

743,177

564,078

552,790484,239

421,442

417,755

414,906

413,725

10.1%

9.5%

7.0%

7.2%

7.6%

6.3%

7.0%

4.7%

2.5%

2.7%

1.8%

1.7%

1.6%

1.7%

9.3%

5.3%

5.9%

4.2%

4.1%

3.7%

4.1%

3.0%

1.5%

1.5%

1.0%

1.0%

0.9%

1.0%

33.1%

30.8%

26.8%

24.7%

24.3%

23.4%

25.0%

47

Consolidated Balance Sheets
Tokyo Gas Co., Ltd. and Consolidated Subsidiaries
March 31, 2006 and 2005

Thousands of
U.S. dollars (Note 1)

Millions of yen

ASSETS

Property, plant and equipment (Note 3):
Production facilities
Distribution facilities (Note 4)Service and maintenance facilities (Note 4)
Other facilities (Note 4)
Shutdown facilities
Construction in progress

2006
710,890
2,141,478
181,065
687,170
2,798
50,0683,773,469

Accumulated depreciation(2,633,167)
1,140,302

Intangibles:
Consolidation difference
Other intangibles

2,505
21,144
23,649Investments and other non-current assets:
Investment securities (Notes 4 and 5)
Long-term loans (Note 4)
Deferred tax assets (Note 10)
Other investments and non-current assets
Allowance for doubtful accounts

145,048
3,554
36,386
43,668(725)
227,931

Current assets:
Cash and cash equivalents
Marketable securities (Notes 4 and 5)
Notes and accounts receivables:
Trade
Other
Allowance for doubtful accounts
Inventories (Note 6)
Deferred tax assets (Note 10)
Other current assets
Total current assets

45,6342
147,060
13,457(848)
34,597
12,76549,350302,017
1,693,899

See accompanying notes.

48

2005

2006

714,527
2,069,325
182,103
673,327—
48,311
3,687,593(2,528,076)
1,159,517

6,075,982

2,903
19,87722,78018,303,227
1,547,565
5,873,249
23,912427,935
32,251,870(22,505,697)
9,746,173

21,408
180,722202,130

100,601
4,047
51,33045,503(1,711)
199,770

1,239,724

50,6658

390,030

139,723
11,701(963)
25,436
12,07548,022286,667
1,668,734

1,256,919

30,374
310,990373,235(6,195)
1,948,128

19

115,019(7,250)295,702109,105
421,794
2,581,338
14,477,769

Thousands of
U.S. dollars (Note 1)

Millions of yen

LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS’ EQUITY

2006

2005

2006

Long-term debt due after one year (Note 7)
Deferred tax liability (Note 10)
Employees’ severance and retirement benefits (Note 9)
Allowance for repairs of gas holders
Other non-current liabilities

496,740

4,245,640

26,425547,139
2,599
141,480
3,464
24,19645,501

51,843388,900

76,926

657,483

2,508,262

5,329
130,2223,229

45,547
1,113,010
27,599225,854

Current liabilities:
Long-term debt due within one year (Note 7)
Notes and accounts payable:
Trade
Other
Bank loans (Note 7)
Income taxes payable (Note 10)
Deferred tax liability (Note 10)
Other current liabilities
Total current liabilities

293,467

60,56429,06525,124
41,690167
84,006292,459

Minority interest

10,255

8,631

87,653

141,844

141,844
2,067
532,81031,501(311)
707,911

1,212,346

33,905
17,67033,528178
85,759289,786
151,029
286,564
1,521
732,979

Commitments and contingent liabilities (Note 14)
Shareholders’ equity (Note 11):
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

2,066
572,600
56,51052
773,072

Treasury stock, at cost
117,825,346 shares in 2006
159,437,083 shares in 2005
Total shareholders’ equity(44,840)
728,232
1,693,899(59,145)648,7661,668,734

17,654
4,894,013
482,995
444
6,607,452(383,248)
6,224,204
14,477,769

49

Consolidated Statements of Income
Tokyo Gas Co., Ltd. and Consolidated Subsidiaries
Years ended March 31, 2006 and 2005

Thousands of
U.S. dollars (Note 1)

Millions of yen

Net sales (Note 12)
Costs and expenses (Note 12):
Costs of sales
Selling, general and administrative expenses

2006

2005

2006

1,266,502

1,190,783

10,824,801

724,5036,192,336

1,154,156

624,722420,712
1,045,434

112,346

145,349

960,221

1,449

12,388(11,499)

1,086
653
2,741
472
5,262
(13,134)(4,043)(2,879)—(1,198)(3,487)
(52)
258
2,295
(12,026)

100,847

133,323

861,938

35,70445,074
3,534
84,715(668)
84,047305,161

429,653

Operating income (Note 12)
Other income (expenses):
Interest and dividend income
Gains from commodity derivatives
Gains (losses) from weather derivatives
Gains from sales of fixed assets
Gains from sales of investment securities (Note 5)
Interest expense
Adjustments of charges for construction of distribution facilities
Losses on unsecured bonds redemption
Losses on cancellation of system development
Losses on impairment of fixed assets (Note 12)
Special severance payment
Foreign exchange losses
Equity in net income of an affiliated company
Other, net

2,356(5,666)2,240
4,930(11,014)(3,017)—(5,128)
—
—
(552)
693
2,210

Income before income taxes and minority interestin net income of consolidated subsidiaries
Income taxes (Note 10):
Current
Deferred

2,498
38,202

Minority interest in net income of consolidated subsidiaries
Net income(530)
62,115Yen

See accompanying notes.

50

¥

23.48
21.70
7.00

9,864,580

20,133(48,429)
19,14342,134(94,138)(25,783)—(43,828)——(4,719)5,926
18,890(98,283)

21,348326,509(4,532)
530,897

U.S. dollars (Note 1)

2006

Amounts per share of common stock:
Net income
Diluted net income
Cash dividends applicable to the year

3,672,244

2005

¥

31.47
28.24
7.00

2006
$

0.20
0.19
0.06

Consolidated Statements of Shareholders’ Equity
Tokyo Gas Co., Ltd. and Consolidated Subsidiaries
Years ended March 31, 2006 and 2005

Millions of yen

Balance at March 31, 2004
Net income
Increase due to addition of
consolidated subsidiaries
Net unrealized holding gains
on securities
Foreign currency translation
adjustments
Treasury stock
Cash dividends paid(¥7.50 per share)
Bonuses paid to directors
Balance at March 31, 2005
Net income
Increase due to addition of
consolidated subsidiaries
Net unrealized holding gains
on securities
Foreign currency translation
adjustments
Treasury stock
Cash dividends paid(¥7.0 per share)
Bonuses paid to directors
Balance at March 31, 2006

Number of sharesof common stock Common(Thousands)
stock

CapitalsurplusRetainedearnings

2,810,171

2,065

457,924
84,047

141,844

Net unrealized Foreign currency
holding gains
translation
on securities
adjustments

35,655(227)

Treasurystock(38,808)

10,988(4,155)(84)
22,810,171

141,844

2,067(20,337)(20,084)(65)
532,810
62,11531,501(311)(59,145)5
25,009363

2,810,171

141,844(1)(3,768)2,066(18,496)(66)
572,600

14,30556,51052(44,840)

Thousands of U.S. dollars (Note 1)

Balance at March 31, 2005
Net income
Increase due to addition of
consolidated subsidiaries
Net unrealized holding gains
on securities
Foreign currency translation
adjustments
Treasury stock
Cash dividends paid($0.06 per share)
Bonuses paid to directors
Balance at March 31, 2006

Commonstock

CapitalsurplusRetainedearnings

1,212,346

17,666

4,553,932
530,897

Net unrealized Foreign currency
holding gains
translation
on securities
adjustments

269,239(2,659)Treasurystock(505,515)

39
213,756
3,103

1,212,346(12)(32,208)

17,654(158,087)(560)
4,894,013

122,267

482,995

444(383,248)

See accompanying notes.

51

Consolidated Statements of Cash Flows
Tokyo Gas Co., Ltd. and Consolidated Subsidiaries
Years ended March 31, 2006 and 2005

Thousands of
U.S. dollars (Note 1)

Millions of yen

Cash flows from operating activities:
Income before income taxes and minority interest in net incomeof consolidated subsidiaries
Adjustments to reconcile income before income taxes andminority interest in net income of consolidated subsidiaries
to net cash provided by operating activities:
Depreciation (Note 12)
Amortization of long-term prepayments
Losses on impairment of fixed assets (Note 12)
Losses on disposal of property, plant and equipment
Losses (gains) from sales of fixed assets
Gains from sales of securities
Losses on unsecured bonds redemption
Decrease in allowance for doubtful accounts
Decrease in employees’ severance and retirement benefits
Interest and dividend income
Interest expense
Changes in operating assets and liabilities:
Increase in major notes and accounts receivable
Increase in inventories
Increase in major notes and accounts payable
Decrease in consumption taxes payable
Decrease (increase) in other receivables
Bonuses paid to directors
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

2005

2006

100,847

133,323

861,938

132,300
4,077
—
3,251
(2,221)(4,930)—(1,101)(11,189)(1,449)11,014

136,421
3,851
1,198
3,388
125
(5,262)
2,879(1,293)(17,456)(1,086)13,134

1,130,771
34,844—27,789(18,981)(42,133)—(9,407)(95,635)(12,388)
94,138(7,102)(9,170)23,122(2,081)(1,552)(66)
4,518(2,232)
236,036
1,446(11,410)(44,543)
181,529(7,597)(778)
6,057(1,140)
1,353
(65)
—
3,533
270,585
1,057(13,003)(43,601)
215,038(60,699)(78,379)
197,622(17,784)(13,265)(560)
38,613(19,081)2,017,403
12,355(97,521)(380,706)
1,551,531

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
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 loans receivable
Proceeds from long-term loans
Other—net
Net cash used in investing activities(7,367)
6,466(7,564)5,220(110,993)(4,950)(2,503)
6,599(6,667)
9,123(14,119)
6,263(94,084)(12,787)(2,332)
4,029(62,968)
55,265(64,651)
44,615(948,660)(42,308)(21,393)
56,398678(1,573)
162(246)(116,071)—(1,610)4,428
380(107,376)

5,797(13,444)
1,387(2,102)(992,064)

Cash flows from financing activities:
Net decrease of short-term bank loans
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(8,685)
16,998(52,434)(18,591)(20,355)
26(83,041)(2,691)60,566(125,703)(20,144)(20,442)
254(108,160)(74,228)
145,278(448,156)(158,895)(173,975)
223(709,753)

4(17,579)
50,665(2)(500)
43,96138(150,248)
433,030

12,54845,634

7,204
50,665

107,248
390,030

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
Cash and cash equivalents at end of year
See accompanying notes.

52

2006

Notes to Consolidated Financial Statements
Tokyo Gas Co., Ltd. and Consolidated Subsidiaries
Years ended March 31, 2006 and 2005

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 incertain respects as to application and disclosure requirements ofInternational Financial Reporting Standards. The Company, as a regulated company, also follows the Gas Business Law related accounting
regulations for preparing such financial statements.
The accompanying consolidated financial statements have been
restructured and translated into English (with some expanded descriptions and the inclusion of consolidated statements of shareholders’ equity) from the consolidated financial statements of the Company preparedin accordance with Japanese GAAP and filed with the appropriate Local
Finance Bureau of the Ministry of Finance as required by the Securities
and Exchange Law. Some supplementary information included in thestatutory Japanese language consolidated financial statements, but notrequired for fair presentation, is not presented in the accompanying consolidated financial statements.
The translations of the Japanese yen amounts into U.S. dollars areincluded solely for the convenience of readers outside Japan, using the prevailing exchange rate at March 31, 2006, which was ¥117 to US $1. The
convenience translations should not be construed as representations that
the Japanese 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.

2. Significant accounting policies
Consolidation The consolidated financial statements include theaccounts of the Company and all of its significant subsidiaries. For theyears ended March 31, 2006 and 2005, 54 and 52 subsidiaries, respectively, were consolidated. All significant inter-company transactions andaccount balances are eliminated in consolidation.
In the elimination of investments in subsidiaries, the assets and liabilities of the subsidiaries, including the portion attributable to minority
shareholders, are recorded based on their fair value at the time theCompany acquired control of the respective subsidiary.
Consolidation differences are amortized on a straight-line basis over
10 years, except for minor amounts that are charged to income in the
period of acquisition.
For the year ended March 31, 2006, 3 subsidiaries were newly
included in the scope of consolidation due to those subsidiaries’
increased significance. On the other hand, the Company sold its investments in one subsidiary, which as a result was excluded from the scopeof consolidation.
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 theinvestees, are accounted for by the equity method. For the years ended
March 31, 2006 and 2005, one affiliated company was accounted for by
the equity method.
Property, plant and equipment Property, plant and equipment is generally stated at cost. Depreciation is determined mainly by the decliningbalance method based on estimated useful life, except that buildings(excluding building equipment) acquired after March 31, 1998 aredepreciated using the straight-line method.
Software costs The Company and its consolidated subsidiaries include
software in intangible assets and depreciate it using the straight-line
method over the estimated useful life.

Cash and cash equivalents Cash and cash equivalents include cash on
hand, readily-available deposits and short-term highly liquid investmentswith maturities not exceeding three months at the time of purchase,
which are readily convertible to known amounts of cash that they present
insignificant risk of change.
Securities The Company and its consolidated subsidiaries classify theirsecurities in one of the following three categories, in accordance with theJapanese Accounting Standard for Financial Instruments.
(a) Debt securities intended to be held to maturity (hereafter, “held-tomaturity debt securities”) are stated at amortized cost.
(b) Equity securities issued by unconsolidated subsidiaries and affiliatedcompanies that are not accounted for using the equity method arestated at moving-average cost.
(c) Available-for-sale securities, which are defined as securities otherthan held-to-maturity debt securities, equity securities issued byunconsolidated subsidiaries and affiliated companies, and securities
held for trading purposes, are stated at fair value at the year-end, if
their fair values are readily available. The difference between acquisition costs and book values of these securities are reported, net of
applicable income taxes, as a separate component of shareholders’equity. Available-for-sale securities with no available fair values arestated at moving-average cost.
If the fair value of held-to-maturity debt securities, equity securities
issued by unconsolidated subsidiaries and affiliated companies, andavailable-for-sale securities, declines significantly, and the decline is notconsidered recoverable, such securities are stated at fair value and thedifference between fair value and the carrying amount is recognized asloss in the period of the decline.
Derivative financial instruments The Company and its consolidated
subsidiaries use currency swap contracts, interest rate swaps, foreignexchange forward contracts, commodity swaps and weather derivatives
only for the purpose of mitigating the risk of fluctuations in foreignexchange rates, interest rates, market prices of raw materials and finished products and effects of changes in temperature.

53

The Company and its consolidated subsidiaries do not use derivative
financial instruments for speculative trading purposes. The derivative
financial instruments are executed with 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 procedureson risk control. Derivatives are stated at fair value at the year-end.
The Company and its consolidated subsidiaries use hedging accounting, provided that the conditions of the accounting were applicable to therules. Regarding forward exchange contracts and foreign currency swap
contracts fulfilled certain conditions, the hedged foreign currency receivable and payable 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 to be paid or received
under the interest rate swap contract is added to or deducted from theinterest on the liabilities for which the swap contract was executed.
Inventories Inventories are stated at cost, cost being determined by themoving-average method.
Allowance for doubtful accounts The Company and its consolidated
subsidiaries provide for doubtful accounts at an estimated amount ofprobable bad debts.
Employees’ severance and retirement benefits The Company and its
consolidated subsidiaries provide post-employment benefit plans, anunfunded lump-sum payment plan and a funded pension plan, underwhich employees’ severance and retirement benefits are based on thelevel of wages and salaries, length of service and certain other factors.
The Company and its consolidated subsidiaries determine benefit obligation and expenses for employees’ severance and retirement benefits
based on the amounts actuarially calculated using certain assumptions.
The liability for employees’ severance and retirement benefits is provided based on the estimated amounts of projected benefit obligation andthe 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 to income when incurred, and actuarial gains andlosses are charged to income mainly in the fiscal year following the year
when they arise.
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 expenditure and the amountprovided is charged to income in the year repairs are completed.

Accounting for certain lease transactions Finance leases which do
not transfer ownership to lessees are accounted for in the same manneras operating leases.
Income taxes Income taxes comprise corporation tax, inhabitants’taxes and enterprise tax (excluding enterprise taxes based on “amount ofadded value” and “amount of capital”). The Company and its consolidated subsidiaries recognize tax effects of temporary differences between
the financial 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 to reduce future income taxes.
Enterprise tax In the case of companies engaged in gas businesses,
enterprise tax which is levied, not on taxable income, but on net sales, isaccounted for in “Selling, general and administrative expenses”.
Enterprise tax based on “amount of added value” and “amount of capital” are also included in “Selling, general and administrative expenses”.
In the accompanying consolidated statements of income, enterprisetax, included in “Selling, general and administrative expenses” amounted to ¥12,626 million (US$107,917 thousand) and ¥11,607 million forthe years ended March 31, 2006 and 2005, respectively.
Foreign currency translation Receivables and payables denominatedin foreign currencies are translated into Japanese yen at the year-end
rates, and the resulting translation gains or losses are charged toincome currently.
Amounts per share of common stock Basic net income per share iscomputed based on the net income available for distribution to commonshareholders and the weighted-average number of common shares outstanding for the period. Diluted net income per share reflects the potential dilution that could occur if convertible bonds were converted into
common stocks.
At the current conversion prices, 240,724 thousand shares of common stock were issuable at March 31, 2006 upon full conversion of theoutstanding convertible bonds .
Cash dividends per share have been presented on an accrual basis
and include dividends approved or to be approved after the balance sheet
dates, but applicable to the year then ended.
Reclassifications Certain prior year amounts have been reclassified toconform to 2006 presentation. These changes had no impact on previously reported results of operations.

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 cost of the related asset. Such offsets recorded at March
31, 2006 and 2005 were ¥263,665 million (US$2,253,543 thousand) and ¥259,241 million, respectively.

54

4. Pledged assets
Pledged assets at March 31, 2006 and 2005 were as follows:
Millions of yen

Distribution facilities
Service andmaintenance facilities
Other facilities
Investment securities
Long-term loans
Marketable securities

2006
5,472
84
7,762
38
39
1
13,396

Liabilities secured by the above assets at March 31, 2006 and 2005
were as follows:

Thousands of
U.S. dollars

2005

5,658
141
10,80736
39—
16,681

2006
46,771Millions of yen

Long-term debt(including current portion)
Bank loans
Other current liabilities

716
66,343324
336

Thousands of
U.S. dollars

2006

2005

2006

4,941

5,299
—
60
5,359

42,231

30
60
5,031

256
515
43,002

9
114,499

5. Securities(b) Available-for-sale securities

Acquisition costs, book values and fair values of securities with available fairvalues at March 31, 2006 and 2005 were as follows:(a) Held-to-maturity debt securities

2006

2005

92

45
47
2

2005

Securities with fair value not exceeding book value:Book value
236—
Fair value
235—
Difference
(1)
—

2005

Securities with book values exceeding acquisition cost:
Equity securities
Book value
14,442
12,454
Fair value
104,118
62,578Difference
89,67650,124

2006

Millions of yen

2006

2006

Thousands of
U.S. dollars

Millions of yen

Securities with fair value exceeding book value:Book value
11
Fair value
11
Difference0Millions of yen

95

Thousands of
U.S. dollars

2006

123,439889,899
766,460

3
Millions of yen

Thousands of
U.S. dollars

2006

2005

Securities with book values not exceeding acquisition cost:
Equity securities
1,060
Book value
2,324
974
Fair value
2,126
(86)
Difference
(198)

2006
2,019
2,010
(9)

Thousands of
U.S. dollars

2006

9,058
8,327
(731)

Available for sale securities sold amounted to ¥5,194 million (US$44,395 thousand) and ¥6,040 million for the years ended March 31, 2006 and2005, respectively. Gains on available-for-sale securities amounted to ¥4,954 million (US$42,340 thousand) and ¥5,398 million and losses on available-for-sale securities amounted to ¥24 million (US$206 thousand) and ¥136 million for the years ended March 31, 2006 and 2005, respectively.
Available-for-sale securities with no available fair values, which were stated at moving-average cost, amounted to ¥12,062 million (US$103,095 thousand) and ¥12,008 million at March 31, 2006 and 2005, respectively. Investments in unconsolidated subsidiaries and affiliated companies amounted to¥27,639 million (US$236,234 thousand) and ¥23,832 million for the years ended March 31, 2006 and 2005, respectively.

6. Inventories
Inventories at March 31, 2006 and 2005 were as follows:
Thousands of
U.S. dollars

Millions of yen

2006

Finished products
Raw materials
Supplies
Work in process

3,670
22,1488,656
123
34,5972005

3,173
13,5708,604
89
25,4362006
31,366
189,301
73,982
1,053
295,70255

7. Bank loans and long-term debt
At March 31, 2006 and 2005, short-term bank loans, bearing interest at an average annual rate of 0.30% and 0.29%, respectively.
Long-term debt at March 31, 2006 and 2005 were as follows:
Thousands of
U.S. dollars

Millions of yen

Due in 2016 at a rate of 4.0%
Due in 2018 at a rate of 2.625%
Due in 2009 at a rate of 1.68%
Due in 2009 at a rate of 1.73%
Due in 2010 at a rate of 2.01%
Due in 2011 at a rate of 1.39%
Due in 2012 at a rate of 1.35%
Due in 2023 at a rate of 1.01%
Due in 2013 at a rate of 1.41%
Due in 2014 at a rate of 1.59%
Due in 2024 at a rate of 2.29%
Due in 2025 at a rate of 2.14%
Due in 2015 at a rate of 4.1%
Due in 2009 at a rate of 1.18%
Domestic unsecured convertible bonds
5th issue due in 2009 at a rate of 1.2%
6th issue due in 2007 at a rate of 1.1%
DM bearer bonds due 2005 at a rate of 7.0%
Loans from banks, insurance companies and government agencies due
through 2020 at rates of 0.31% to 5.60%:
SecuredUnsecured

2006

2005

2006

27,70027,70040,00030,00030,00020,00030,00020,00020,00030,00020,00010,00010,00013,8004,000
39,92949,956
18,333

236,752

Domestic unsecured bonds

40,00030,00030,00020,00030,00020,00020,00030,00020,00010,00010,00013,8004,000
39,70019,321—

4,941
172,779
542,241

Less—Amounts due within one year

45,501
496,740

The indentures covering fifth and sixth domestic convertible bonds
provide, among other conditions, for (1) conversion into shares ofcommon stock at the conversion prices per share of ¥339 (US$2.90)
and ¥339 (US$2.90), respectively (subject to adjustment in certain circumstances), (2) conversion periods through March 30, 2009 andMarch 29, 2007, respectively.
As is customary in Japan, a lending bank has the right to offset cash
deposited with it against any debt or obligation that becomes due and, in thecase of default or certain other specified events, against all debt payable tothe bank. To date no such offset request has been made to the Company andits consolidated subsidiaries.
Certain loan agreements provide, among other things, that, uponrequest, the Company and its consolidated subsidiaries submit to thelenders for approval of their proposed appropriation of retained earnings(including dividends) before such appropriation is submitted to theshareholders. Neither the Company nor any of its consolidated subsidiaries has ever received any such request.

56

5,299
179,965598,982
51,843547,139

341,880
256,410
256,410
170,940
256,410
170,940
170,940
256,410
170,940
85,47085,470117,949
34,188339,316
165,137—

42,232
1,476,746
4,634,540
388,900
4,245,640

The annual maturities of long-term debt at March 31, 2006 were as follows:Year ending March 31

Millions of yen

2007
2008
2009
2010
2011
2012 and thereafter

45,50140,848
71,11385,05642,882
256,841
542,241

Thousands of
U.S. dollars

388,900
349,125
607,807726,972
366,517
2,195,219
4,634,540

8. Derivative transactions
Contract amounts, fair values and recognized gains on the currency swap and commodity derivatives, except those accounted for using hedge accounting, and weather derivatives at March 31, 2006 and 2005 were as follows:
Millions of yen
At March 31, 2006
Contract amounts
Total

Commodity derivatives
Weather derivatives

Beyondone yearThousands of U.S. dollars
At March 31, 2006
Contract amounts

Fair value

Recognized
gains (losses)

700

—

483

483

8,000

1,400

—

—

—

—

—

483

Commodity derivatives
Weather derivatives

Beyondone year

Fair value

Recognized
gains (losses)

Currency swap contracts:
Receive Euro,
pay Japanese yen
105
Weather derivatives
5,625
—

—
—
—

32
—
—

32
—
32

Fair value

Recognized
gains (losses)

4,126

5,985

—

4,126

68,376

11,966

—

—

—

—

—

4,126

Fair value of currency swap and commodity derivatives contracts were
calculated based on the information presented by financial institution.
Contract amounts of the currency swap and commodity derivatives are
not indicative of the magnitude of market risk or credit risk concerningderivatives transactions.
Contract amounts of weather derivatives were stated at the maximum receivable amount under the contracts. Market value of weather
derivatives were not stated because the calculation of the fair value
was impossible.

Millions of yen
At March 31, 2005
Contract amounts
Total

Beyondone yearTotal

9. Employees’ severance and retirement benefits
Employees’ severance and retirement benefits included in the liability section of the consolidated balance sheets as ofMarch 31, 2006 and 2005 were as follows:
Thousands of
U.S. dollars

Millions of yen

Projected benefit obligation
Unrecognized prior service costs
Unrecognized actuarial differences
Less fair value of pension assets
Prepaid pension costs
Employees’ severance and retirement benefits

2006

2005

2006

348,820

345,3222,275(16,351)(190,056)
290
141,480

2,981,371

2,165
8,698
(229,601)
140
130,222

18,50774,338(1,962,403)
1,197
1,113,010

Severance and retirement benefit expenses for the years ended March 31, 2006 and 2005 were as follows:
Thousands of
U.S. dollars

Millions of yen

2006

Service costs - benefits earned during the year
Interest cost on projected benefit obligation
Expected return on plan assets
Amortization of prior service costs
Amortization of actuarial differences
Other
Severance and retirement benefit expenses

9,586
7,180
(3,808)(92)
10,5693,009
26,444

2005

2006

9,711
7,475
(3,402)
(155)
3,049
1,038
17,716

81,92861,369(32,544)(786)
90,33325,716226,016

The discount rate and the rate of expected return on plan assets used by the Company and its consolidated subsidiaries are primarily 2.0% and 2.0%, respectively, at March 31, 2006, and primarily 2.1% and 2.0%, respectively, at March 31, 2005.

57

10. Income taxes
The Company is subject to a number of taxes based on taxable income, which, in the aggregate, indicate a statutory rate in
the Company of approximately 36.2% for the years ended March 31, 2006 and 2005.
Reconciliation of the difference between the statutory tax rate and the effective tax rate for financial statement purposes for the years ended March 31, 2006 and 2005 are not presented as they are negligible.
Significant components of deferred tax assets and liabilities as of March 31, 2006 and 2005 were as follows:
Thousands of
U.S. dollars

Millions of yen

Deferred tax assets:
Liabilities for severance and retirement benefits
Other—net
Less valuation allowance
Subtotal
Deferred tax liabilities:
Net unrealized holding gains on securities
Reserve for depreciation of special gas pipeline construction
Other—net
Subtotal
Deferred tax assets - net

2006

2005

2006

47,082

49,04337,999(1,227)85,815

402,412

18,396
1,110
5,672
25,17860,637282,191

41,395(2,850)85,62733,016757
8,210
41,98343,644353,801(24,355)
731,858

6,469
70,171
358,831373,027

11. Shareholders’ equity
Under the Japanese Commercial Code of Japan (the “Code”), the entire
amount of the issue price of new shares is required to be designated ascommon stock, although a company may, designate an amount notexceeding one-half of the issue price of the new shares as additional
paid-in capital.
The Code provides that an amount equivalent to at least 10% of
cash dividends paid and other cash outlays shall be appropriated and set
aside as legal reserve until the total amount of additional paid-in capitaland legal earnings reserve equals 25% of common stock. As of March
31, 2006, the total amount of additional paid-in capital and legal earnings reserve has already exceeded 25% of common stock and, therefore,
no additional provision is required.
And under the Code, the excess of the total of additional paid-in
capital and legal earnings reserve over 25% of common stock is available for dividends by resolution of the general meeting of shareholders.
Additional paid-in capital is included in capital surplus and legal earn-ings reserve is included in retained earnings in the accompanying consolidated balance sheets.
The maximum amount that the Company can distribute as dividends
is calculated based on the unconsolidated financial statements of theCompany in accordance with the Code.
The Code provides that cash dividends are approved semiannually by
the resolution of the annual general shareholders’ meeting after the endof each fiscal year or by the resolution of the Board of Directors after
the end of each interim semi-annual period. Such dividends are payable
to shareholders of record at the end of each fiscal year or semi-annual
period. Appropriations are not accrued in the financial statements forthe period to which they relate, but are recorded in the subsequentaccounting period when the shareholders’ approval has been obtained.
Retained earnings at March 31, 2006 include amounts representing theyear-end cash dividends and bonuses to directors approved at the shareholders’ meeting held on June 29, 2006 as discussed in Note 15 (2).

12. Segment information
The Company’s and its consolidated subsidiaries’ primary businessactivities include (1) gas sales, (2) gas appliance sales, (3) related
construction, (4) real estate rental and (5) other business.
A summary of net sales, costs and expenses, operating income,58

identifiable assets, depreciation, losses on impairment of fixed assets andcapital expenditures by business segments for the years ended March 31,
2006 and 2005 was as follows:Millions of yen
Gas appliance
sales

Relatedconstruction

Real estate
rentalOtherbusiness

Elimination or
corporate

Consolidation

898,553

128,376

11,7682,450

55,772

11,055

3,975

23,132

172,746—

1,266,502

79,850(121,175)

910,321130,826

59,747-34,187

252,596(121,175)

1,266,502

750,301

126,209

160,020

4,617

56,771

28,728242,949(50,802)

1,154,156

2,976

5,459

9,647

(70,373)

1,013,054

112,346

43,075

19,719193,712228,086

196,253

1,693,899

100,788

485

184

11,34021,421(1,918)132,300

—

—

—

—

—

—

—

88,216

805

37

2,850

26,596(1,572)

116,932

Gas sales

Gas appliance
sales

Relatedconstruction

Real estate
rentalOtherbusiness

Elimination or
corporate

Consolidation

826,5838,075
834,658
651,973
182,685
1,006,673
107,082—
74,980132,374
2,735
135,109
128,055
7,054
42,681515—
534

60,831
3,964
64,79561,2203,575
21,426185—
297

14,004
20,697
34,701
28,1986,503
205,079
12,358—3,218

156,991
77,730234,721
221,306
13,415222,241
18,142
1,198
29,621—(113,201)(113,201)(45,318)(67,883)
170,634(1,861)—(3,453)

1,190,783
1,190,783
1,045,434
145,349
1,668,734
136,421
1,198
105,197

Gas sales

Gas appliance
sales

Relatedconstruction

Real estate
rentalOtherbusiness

Elimination or
corporate

Consolidation

7,679,942

1,097,234

476,680

94,487

1,476,458—

10,824,801

100,577

20,93633,977

197,713682,480(1,035,683)—

7,780,519

1,118,170

510,657

292,200

2,158,938(1,035,683)

10,824,801

6,412,825

1,078,708

485,224

245,540

2,076,484(434,201)9,864,580

1,367,694

39,46225,433

46,66082,454(601,482)

960,2218,658,578

368,164

168,537

1,655,660

1,949,452

1,677,378

14,477,769

861,440

4,148

1,575

96,919183,082(16,393)

1,130,771

—

—

—

—

—

—

—

753,984

6,878

314

24,360227,318(13,434)

999,420

Gas sales
For 2006

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

Millions of yen

For 2005

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

Thousands of U.S. dollars

For 2006

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

Costs and expenses under Elimination or corporate that cannot beallocated to business segments are related mainly to general and administrative expenses of the Company, and amounted to ¥71,570 million(US$611,706 thousand) and ¥66,945 million at March 31, 2006 and2005, respectively.
Assets under Elimination or corporate mainly comprise cash andcash equivalents, current and noncurrent securities and deferred tax

assets of the Company and its consolidated subsidiaries, and theyamounted to ¥239,031 million (US$2,043,000 thousand) and¥218,385 million at March 31, 2006 and 2005, respectively.
Geographic segment information is not shown due to the Company
having no overseas consolidated subsidiaries. Information for overseas
sales is not disclosed due to overseas sales being immaterial compared toconsolidated net sales.

5913. Information for certain leases
Finance leases

Information as lessor

Information as lessee
Lease payments in the years ended March 31, 2006 and 2005, andfuture lease payments inclusive of interest at March 31, 2006 and 2005
were as follows:

Lease income in the years ended March 31, 2006 and 2005, and futurelease payments to be received at March 31, 2006 and 2005 were as
follows:

Millions of yen

2006
Lease payments

569

Noncurrent

479
1,485
1,964

3,942

36,415

4,117
12,37916,496113,168

4,867

Future lease payments to be received:
Current

4,222

561
1,324
1,885

4,091

Noncurrent

13,241Millions of yen
Accumulated
depreciation

Other facilities

183

Other intangibles

4,125

2,053
109
2,162

3,994
3,994

2,109
2,109

For 2006

2006

4,221

613

17,46336,085
149,253

16,783

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 financeleases which do not transfer ownership of the leased property to thelessee on an “as if capitalized“ basis for the years ended March 31,
2006 and 2005 were as follows:

Acquisition cost

2005

4,261

Lease income

12,692Thousands of
U.S. dollars

2006

2006

2005

Future lease payments inclusive of interest:
Current

Millions of yen

Thousands of
U.S. dollars

Net book value

1,889

1,885
1,885

74
1,963

Acquisition cost, accumulated depreciation and net book value forproperty held under finance leases which do not transfer ownership ofthe leased property to the lessee for the years ended March 31, 2006
and 2005 were as follows:

Acquisition cost

Millions of yen
Accumulated
depreciation

Net book value

For 2006
Other facilities

23,218Other intangibles

2,147

7,390

25,365

15,828
1,333
17,161

23,98816,156

7,832

814
8,204

For 2005
Other facilities

For 2005
Other facilities

Thousands of U.S. dollars
Accumulated
Acquisition costdepreciation
Net book value

Thousands of U.S. dollars
Accumulated
Acquisition costdepreciation
Net book value

For 2006
Other facilities

198,443

Other intangibles

18,349For 2006

216,792

Other facilities

33,696

Other intangibles

1,564
35,26017,548933
18,481

135,280
11,395
146,675

63,163
6,954
70,117

16,148631
16,779Operating leases
Information as lessor
Future lease payments to be received at March 31, 2006 and 2005
were as follows:
Millions of yen

2006

2005

Thousands of
U.S. dollars

2006

Future lease payments:
Current

491

Noncurrent

792
1,283

60

544
1,049
1,593

4,194
6,768
10,962

14. Commitment and contingent liabilities
At March 31, 2006, the Company and its consolidated subsidiaries were
contingently liable for (1) debt guarantees in the amount of ¥11,517
million (US$98,438 thousand) for financial institution loans to companies, other than consolidated subsidiaries, (2) ¥121 million (US$1,037
thousand) with respect to joint and several liabilities upon default of theother debtors and (3) ¥38,700 million (US$330,769 thousand) as guarantors for domestic unsecured bonds issued by the Company, andassigned to certain banks under the debt assumption agreements made in
the years ended March 31, 2004, 2003 and 2002.
At March 31, 2006, the Company had several long-term purchase
contracts for the supply of LNG. The purchase price determinable undersuch contracts is contingent upon fluctuations in the market price of
crude oil.

15. Subsequent events(1) Acquisitions of treasury stock
The Directors’ meeting held on May 22, 2006, and the general meeting ofshareholders held on June 29, 2006 approved the acquisition of treasury
stock based upon the approval of the general meeting of shareholders.
Type of shares: Common stock
Number of shares: Limited to 56,000,000 shares
Cost of shares acquisitions: Limited to ¥35,000 million(US$299,145 thousand)
Period of acquisitions: Within one year after the general meeting ofshareholders held on June 29, 2006

(2) Appropriation of retained earnings
At the general meeting of shareholders held on June 29, 2006, theCompany’s shareholders approved (i) payment of year-end cash dividends of ¥3.5 (US$0.03) per share aggregating ¥9,423 million(US$80,540 thousand) to the shareholders of record as of March 31,
2006, and (ii) payment of bonuses to directors totaling ¥67 million(US$573 thousand).

61

Independent Auditors’ Report

To the Board of Directors of TOKYO GAS CO., LTD.
We have audited the accompanying consolidated balance sheets of TOKYO GAS Co., Ltd. (a Japanease corporation)and consolidated subsidiaries as of March 31, 2006 and 2005, and the related consolidated statements ofincome, shareholders' equity and cash flows for the years then ended, expressed in Japanese yen. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to independently express an opinion on these consolidated 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 reasonable basis 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, 2006 and 2005, and the consolidated results of their operations and their cash flows for the years thenended, in conformity with accounting principles generally accepted in Japan.
Without qualifying our opinion, we draw attention to the following.
As discussed in Note 15(1) to the consolidated financial statement, subsequent to March 31, 2006, TOKYO GASCo., Ltd. decided to acquire treasury stock.
The U.S. dollar amounts in the accompanying consolidated financial statements with respect to the year ended
March 31, 2006 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 theconsolidated financial statements.

Tokyo, Japan
June 29, 200662

Consolidated Subsidiaries and Equity-method Affiliates
As of March 31, 2006

Main Consolidated Subsidiaries
Company

Business

Capital(¥ million)

Equity owned
by Tokyo Gas(%)

FY2005 Net sales(¥ million)[% of outside sales]

Operatingincome(¥ million)

Tokyo Gas Urban Development Co., Ltd.

Real estate leasing, management andbrokerage

11,440100

31,946 [31.8]

4,610Tokyo Gas Toyosu Development Co., Ltd.

Real estate leasing and management

5,000

100

747 [32.4]

232

ENERGY ADVANCE Co., Ltd.

Energy service, district heating andcooling

3,000

100

33,341 [92.4]

3,171

Gastar Co., Ltd.

Production and sale of gas appliances

2,450

66.7

27,407 [41.9]

1,540

Tokyo LNG Tanker Co., Ltd.

LNG and LPG transportation and chartering of carriers

1,200

100

10,235 [22.5]

965

Toyoko Engineering Co., Ltd.

Gas facilities construction and gas
appliance sales

1,025

100

19,793 [43.2]

34

Tokyo Gas Energy Co., Ltd.

Sales of LPG

1,000

100

22,569 [81.9](298)

Tokyo Gas Chemicals Co., Ltd.

Sales of gas for industry and chemicals

1,000

100

15,639 [65.0]

688Park Tower Hotel Co., Ltd.

Hotel “Park Hyatt Tokyo” management

1,000

100

9,095 [99.7]

534

KANPAI Co., Ltd.

Gas facilities construction and gas
appliance sales

967

100

43,046 [35.9]

31

Chiba Gas Co., Ltd.

Supply of gas in Yachiyo City, Narita Cityand surrounding cities

480

100

12,489 [99.7]

917

TG Credit Services Co., Ltd.

Financing and leasing related to gas
equipment and construction

450

100

9,510 [55.6](359)

Tokyo Oxygen and Nitrogen Co., Ltd.

Production and sale of liquefied oxygenand nitrogen

400

54

2,109 [43.2]

182

TG Information Network Co., Ltd.

Information processing services, softwaredevelopment and sales of computerequipment

400

100

12,003 [25.1]

826

Tsukuba Gakuen Gas Co., Ltd.

Supply of gas in Tsukuba City

280

100

6,099 [97.8]

433

TG Enterprise Co., Ltd.

Group financial administration business

200

100

659 [32.3]

212

Tokyo Gas Engineering Co., Ltd.

Comprehensive engineering services witha particular focus on energy-related work

100

100

31,656 [70.0]

586Tokyo Gas Customer Service Co., Ltd.

Periodic safety checks, meter and billing
services

50

100

7,577

[1.4]

428

TG IT Service Co., Ltd.

Operation of Tokyo Gas systems andnetworks

50

100

8,956

[1.1]

190

KANPAI LIVING SERVICE Co., Ltd.

Sales, installation and repair of gas appliances, expansion and reconstruction work

50

100

6,264 [68.5]

92

GAS MALAYSIA SDN. BHD.

Supply of gas in Malaysia

RM42.8 million

20

—

—

Notes: 1. Gas Malaysia Sdn. Bhd. is an equity-method affiliate.
2. The scope of consolidation was expanded in April 2004 and now includes 54 companies at the end of March 2006.
3. 1RM nearly equals ¥31.24.

Other Subsidiaries
Miho Gas Co., Ltd., Shoei Gas Co., Ltd., Washimiya Gas Co., Ltd., Tochigi
Gas Co., Ltd., Toyoko Living Co., Ltd.,Tokyo Kiko Co., Ltd., Tokyo Gas Yokosuka Power Co., Ltd.,
Dining Art Systems Co., Ltd., Living Design Center Co., Ltd.,Tokyo Gas Bay Power Co., Ltd., TG Showa Co., Ltd.,
East Japan Housing Evaluation Center Co., Ltd.,Tokyo Carbonic Co., Ltd., Japan Super Freeze Co., Ltd.,TG Telemarketing Co., Ltd., Green Tech Tokyo Co., Ltd.,Tokyo Gas Auto Service Co., Ltd., Tokyo Gas Remodeling Co., Ltd.,Urban Communications, Inc., Tokyo Gas Techno-Service Co., Ltd.,Tokyo Gas Building Service Co., Ltd., Toeki Service Center Co., Ltd.,Showa Bussan Co., Ltd., Tosetz Co., Ltd.,
Kanpai Customer Service Co., Ltd., Toyoko Customer Service Co., Ltd.,Showa Unyu Co., Ltd., Tokyo Plant Service Co., Ltd.,Tokyo Rare Gases Co., Ltd., Tokyo Auto Gas Co., Ltd.,
Kanpai Tech Co., Ltd., Tachikawa Urban Center Co., Ltd.,Tokyo Gas LPG Terminal Co., Ltd., Nagano Toshi Gas Co., Ltd.

63

Investor Information
As of March 31, 2005

Securities Traded

Tokyo Gas Co., Ltd.
Head office
1-5-20 Kaigan, Minato-ku, Tokyo 105-8527, Japan
URL: http://www.tokyo-gas.co.jp

Common stock: Tokyo, Osaka and Nagoyastock exchanges (Trade code: 9531)

Independent Auditors

Agent to Manage Shareholders Registry

Overseas Offices
New York Office

The Chuo Mitsui Trust & Banking Co., Ltd. 3-33-1 Shiba, Minato-ku,
Tokyo 105-8574, JapanThe Chrysler Building, 405 Lexington Avenue, 33rd Floor
New York, NY 10174, U.S.A.
Tel: +1-646-865-0577 Fax: +1-646-865-0592

Number of Employees

Paris OfficePrincipal Shareholders

102, Avenue des Champs-Elysées, 75008 Paris, France
Tel: +33-1-45-62-00-59 Fax: +33-1-42-25-96-85

Asia Pacific Regional Office
Level 30, Menara Standard CharteredNo. 30 Jalan Sultan lsmail, 50250 Kuala Lumpur, Malaysia
Tel: +60-3-2144-2928 Fax: +60-3-2144-2930

Date of Establishment
Paid-in Capital

KPMG AZSA & Co.

October 1, 1885

¥141,844,398,888

Total number of shares issuable

6,500,000,000 shares

Issued Number of Shares

2,810,171,295 shares

Number of Shareholders

176,451

16,675 (Consolidated basis, excluding
part-time workers)

Number ofPercentage ofshares held
total shares(Thousands) outstanding(%)

Name

Nippon Life Insurance Company
The Dai-ichi Mutual Life
Insurance Company
Tokyo Gas Co., Ltd.
Japan Trustee Services Bank, Ltd.
(Trust Account)
The Master Trust Bank of Japan, Ltd.
(Trust Account)
State Street Bank and Trust Company
State Street Bank and Trust Company (505103)
Fukoku Mutual Life Insurance Company
Morgan Stanley and Co., Ltd.
The Chase Manhattan Bank N.A. London
Employees Shareholding Association

163,000

5.80

155,962
117,825

5.55
4.19

100,216

3.57

93,59576,19370,52567,504
46,46345,06939,338

3.33
2.71
2.51
2.40
1.65
1.60
1.40

Monthly Stock Price Range (Tokyo Stock Exchange)
(¥)
600

500

Stock Price

400(Thousands of shares)
300,000

300

Monthly Trading Volume

200

100

200,000

100,000

0

0
’01/
’02/
’03/
’04/
’05/
’06/
4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3

FURTHER INFORMATION

Forward-Looking Statements

Please direct comments regarding the content of this report orrequests for other publications to:Statements made in this annual report with respect to Tokyo Gas plans, strategies and beliefs, andother statements that are not expressions of fact are forward-looking statements about the future performance of the company. As such, they are based on management’s assumptions and opinions
stemming from currently available information, and therefore involve risks and uncertainties.
These risks and uncertainties include, without limitation, general economic conditions in Japan, theexchange rate between the yen and the U.S. dollar, and Tokyo Gas ability to continue to adapt to rapid
technological developments and deregulation.

Investor Relations Section, Corporate Planning Dept.
Tel: +81-3-5400-3888 Fax: +81-3-3437-2668
E-mail: tgir@tokyo-gas.co.jp

International Business Coordination Section,
Business Development Dept.
Tel: +81-3-5400-7561

64

Fax: +81-3-5472-5385

Financial Data and Graphs
For purposes of presentation in this annual report, all amounts less than one billion yen or one million
yen, and hundredths of a percentage point, have been rounded to the nearest whole number. In
addition, all graphs represent fiscal years ended March 31 of the respective years.

1-5-20 Kaigan, Minato-ku, Tokyo 105-8527, Japan
http://www.tokyo-gas.co.jp

This brochure is printed on the recycled paper from Tokyo Gas offices.
Printed in Japan