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*All graph data for year ended March 31

SUMMARY

Business results by segment (¥ million)■ Consolidated gas sales volume steadily increased by 7.1% year on year, reflecting sales promotion efforts and low temperatures throughout the year.

Sales■ 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.

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

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

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

Gas Sales

160,020

182,685

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

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

Gas Appliance Sales

4,617

7,054

7,904

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

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

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

Related Construction

2,976

3,575

4,456

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

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 other

Real Estate Rental

5,459

6,503

7,883

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

satisfactory increases in the number of customers. Overall sales volumeindustrial uses including cogeneration systems and boilers, which result-

9,647

13,415

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

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

Other Business

surged to 3,547 million m3, up 230 million m3, or 6.9%, year on year.
Of this volume, approximately 141 million m3 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

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

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

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

demand for cooling that reflected the backlash against the hot summer

caused residential demand to expand in the service areas of other gas

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

There were declines in the number of new installations and safetyof the previous year. Gas sales in this sector increased 116 million m3 tocompanies, and the development of new demand among gas suppliers.

rate, 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%, toOperating income
Years ended March 31

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

increase in the number of customers.

Note: Segment sales include intra-group transactions.

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

Gas sales volume for power generation (Nonconsolidated)
3

3（Million m /45MJ）（Million m /45MJ）

15,0004,000

Nonconsolidated sales increased ¥71.3 billion, or 8.6%. Risingsales volume contributed ¥45.7 billion (of which ¥18.5 billion were
had an adverse effect amounting to ¥25.6 billion, including ¥52.5 billion

in the previous fiscal year to 9.4%.

¥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,
12,000The segment’s total contribution to total sales declined from 10.4%

Sales in this segment increased to ¥910.3 billion, up by ¥75.7 billion or

attributable to the impact of lower temperatures), and higher unit prices
Gas sales volume by sector

year to ¥130.8 billion, while operating expenses decreased ¥1.8 billion,

3,000

Regarding operating expenses, gas resource costs rose drastically by

9,000

state 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 an

2,000

increase in building repair costs, and operating income decreased ¥1.0

6,000

billion, or 16.1%, to ¥5.5 billion.
■ 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

Rate Reduction
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.

Analysis of Income

related construction and real estate rental business, higher gas sales

improved operating rate for the LNG carriers managed by the Company.

was 0.28% per equivalent calorific value after conversion. This action

impact of higher gas resource costs, pegged by sharply rising crude oil

had a minimal impact on operating results for the year under review.

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

7.6%, year on year to ¥252.6 billion following various factors including
the positive development of the on-site energy service business and theincrease operating efficiency and reduce costs to minimize the negative
prices and gas rate reductions implemented in January 2005, operating

The sales of the other business segment increased by ¥17.9 billion, orand LNG in city gas because of the rising price of LPG. This lowered theis taken into effect, the cost savings we were able to pass on to consumers

Despite declining sales in some segments, including gas appliance sales,■ Other Business
Energy Service Business Expanded

In February 2006, Tokyo Gas decided to change the ratio of LPG
calorific value from 46.04655 MJ/m3 to 45 MJ/m3. When calorific value

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

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%

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.

brought an increase in overall sales of ¥75.7 billion, or 6.4%, year on

have been included in the medium-term management plan foryear to a new record of ¥1,266.5 billion. Although efforts were made to2006–2010 , 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%.

3637

*All graph data for year ended March 31■ Other Revenues and Income / Net Income

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

actuarial differentials on the retirement benefits even though gas

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

of the key management indicators of “Frontier 2007”. However, inresource costs are anticipated to increase in the year ending March 31,

order to support the revised plan from the resource allocation stand-2007 in line with the rising oil prices.

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 a

Furthermore, the year ending March 31, 2007 is the first year forlion. No gain was recorded during the year under review from weather

total energy business, we have announced our decision to employ thethe medium-term management plan for 2006–2010. In order to achieve

derivatives of ¥2.7 billion, a major component of other income of the“operating cash flow”, which is calculated by adding depreciations to

the targets set in the plan, we will take the following steps:

previous year. However, gains of ¥2.4 billion on commodity derivatives,current net income, as the key management indicator and have also

◆ Establishment of marketing setups with deep local rootsa ¥4.9 billion from the sale of securities, and a ¥2.2 billion from theannounced a resource allocation policy. (Refer to page 12)◆ 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.

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（¥ billion）

Economic Value Added (EVA®).

ated repayment of interest-bearing debts. During the previous term, ¥1.2

In fiscal 2005, NOPAT** decreased by ¥22.0 billion to ¥70.0 billion

billion of the impairment loss on fixed assets and ¥3.5 billion of retire-owing to the impact of the implementation of the gas rate revision in January

60

2005, and a significant rise in gas resource costs caused by sharply rising
the cost of capital decreased by ¥0.1 billion to ¥47.0 billion, resulting in a

30

Tokyo Gas considers TEP as a performance indicator for Group compa0¥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）

30
20
10

nies and as a gauge for decisions on business restructuring and integration.
’02

ment from –¥12.0 billion in the previous year. Net income declined

40

year-on-year decrease in TEP of ¥22.1 billion to ¥22.9 billion.

system development.
Other expenses, net amounted to –¥11.5 billion, a slight improve-50

crude oil prices. On the other hand, the WACC remained at 3.7%, although

incurred during this term. On the other hand, a ¥5.1 billion extraordinary loss was incurred in relation to the cancellation of information

60

ness performance indicators. TEP is a Tokyo Gas-specific variation of90

ment benefit premiums were recorded as once-only losses and were notTokyo 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

（¥）

90

45

■ Fiscal 2006 Projection

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

60

30

15

3.0% based on an assumption that the temperature, which was low in

Net Income Decreased Due to Rising Gas Resource
Costs Occurring in Step with Rising Crude Oil Prices

fiscal 2005, will return to a normal level. We expect the gas sales vol-■ Cash Flows from Operating Activities

ume in the industrial sector to grow by 2.3% by capturing new demand;
0

0
’02

’03

’04

’05

Cash Flows and Financial Position

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■ 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

TEP (EVA® Tokyo Gas Version)

With the aim of generating profits that exceed the cost of capital, Tokyo
Gas formulated Tokyo Gas Economic Profit (TEP)*, as one of its key busi-

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-

Tokyo Gas Original Indicator: TEP

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 reduction

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 decreasedof 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

*All graph data for year ended March 31
Interest coverage ratio（Times）

18

12

6

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

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

Shareholders’ equity and equity ratio

fixed assets at the end of the year under review decreased by ¥19.2 bil-income of FY n. Tokyo Gas aims to achieve 60% for the total payout ratio（¥ billion）

lion to ¥1,140.3 billion, reflecting ongoing depreciation. Investments

while keeping in mind a balance between dividends and stock repurchases.

and other non-current assets increased ¥28.2 billion to ¥227.9 billion

As for previous stock repurchases issues of convertible bonds set foryear on year due to an increase of ¥44.4 billion in investment securities,

repayment in 2007 and 2009 (No. 5/No. 6 bonds: convertible price wasreflecting a favorable rise in stock prices. Although cash and cash equiv-¥339) were carried out with the objective of preventing dilution due toalents declined by ¥4.1 billion, inventories increased by ¥9.2 billion overthe conversion of bonds into stocks. Tokyo Gas intends to continue stock

the level of the previous year and notes and accounts receivables rose by

repurchases in order to help improve shareholder value under the new¥7.3 billion. As a result, current assets increased by ¥15.4 billion to

medium-term management plan even after having completed repurchases

stand at ¥302.0 billion.

to accommodate conversions.

（% ）

800

60

600

45

400

30

200

15

0

0

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’02

rigorous look at efficiency while undertaking active investments aimed at

’03

’04

’05

’06

■ Shareholders’ equity● Equity ratio

Equity ratio=Shareholders’ equity (year-end)/total assets (year-end)laying foundations for future profitability.
ROA = net income / total assets (average positions at start and end of fiscal year)

External Risks Affecting Business Activities■ 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%.

■ Gas Rate Decline Risk

■ Gas Resource Fluctuation Risk

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

Progress in deregulation has caused competition to intensify among energy

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

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

increases in the cost of gas resources. Shareholders’ equity increased bysuppliers. 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

achieve this target, a total of ¥171.4 billion was invested over the three-¥25.0 billion, reflecting the net unrealized holding gain on securities as

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

year period from fiscal 2003 to fiscal 2005. This reduced interest-bear-well as an increase of ¥39.8 billion in retained earnings. In addition,

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

denominated LNG prices are linked to crude oil prices on a sliding scale,ing debt significantly, with the debt-equity ratio declining to 0.77 at thetreasury stock increased by ¥34.6 billion through switching convertible

Tokyo Gas has reduced gas rates three times full rate reduction since

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-

1999, by about 10% in total. TEPCO also reduced its electricity rates four

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-times, by about 21% in total, during the same period. Tokyo Gas will contin-

ture has already been improved substantially. Consequently, this item haslion stocks) in August 2005. As a result, shareholders’ equity increased

ue to implement strategic rate menu as necessary to prevail over competition.

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-

agement plan targets an ROE of 10.9% in fiscal 2010.

（% ）

16
（Times）

1,000

2.0
12
1.6

800

■ Temperature Fluctuation Risk

Fluctuations in the cost of gas resources are reflected in gas rates
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, and400

Rate of change

● ROA
● ROE

0.8
4

200

0.4

0

0
’02

’03

’04

’05

■ Interest-bearing debt
● D/E Ratio’06of crude oilweather can erode revenues and income by reducing the volume of gas sold.

8

1.2

Approx. ¥4.2 billion for each $1 movement in the per-barrel pricewater heating and space heating, especially in residential use. Mild winterImpact of 1˚C temperature rise on gas sales volume
600

The extent to which these fluctuations affect gas resource costs overin the year ended March 31, 2006 is as follows.
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

ROA and ROE（¥ billion）

market price for crude oil.

Approx. ¥3.0 billion for each ¥1 movement in the yen-dollar

Aiming at an optimal capital structure, the new medium-term man-bearing debt are planned over the five-year period of the plan.
Interest-bearing debt and D/E ratio

which exposes the Company to risk from changes in the international

0.2%
-2.4%
-1.7%
-1.4%

Summer (June–September)
Winter (December–March)
Intervening months (April, May, October, November)
Annualthe 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).

0
’02

’03

’04

’05

’06

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

Monthly gas sales volumes for fiscal 2005 (Non-consolidated)
3（Million m /45MJ）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■ 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■ Targeting a Total Payout Ratio of 60% with Ongoing
Stock Repurchases■ 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 thetion 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 2 340

41

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

7) Inappropriate handling of recalls, etc.

11) Interruption of communication with call centers

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

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

Most communication with customers takes place via call centers.

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

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

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

customer site may result not only in direct damages, but also in

thereby affecting revenues.

gas appliances.

tangible and intangible loss, including the need to bear public

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

responsibility.
6) Risk faced by existing business

8) ROI risk
12) Environmental and compliance risks

2) Natural disaster risk

A. Competitive risk

Tokyo Gas continues to make large investments in keeping with the

As industry deregulation progresses, competition with electric power

goal of “establishing a total energy business” as expressed in theTokyo Gas engages in facility-dependent businesses because city

companies and new firms entering the gas business is increasingly

medium-term management plan. Doing so involves investments

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

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

channeled into the electric power business, energy service business,

ness. Accordingly, earthquakes, typhoons or other major natural

ness performance. Specifically, demand might decrease or rates may

and gas field and other development projects, the LNG transporta-disasters may cause damage to plants and other production facili-

fall owing to marketing offensives by electric power companies totion business and other new businesses, as well as large investments

ties or pipelines and other supply facilities and disrupt the supply

promote electrification, electric power rate reductions or competi-

into the foundations or to expand existing businesses such as wide-of city gas.

tion from new market entrants. Tokyo Gas is rolling out a strategicarea pipeline construction and IT. Such investments run the risk ofrate menu while keeping a close watch on the competitive situation;

not bringing in appropriate returns or not producing the expected

reductions in rates have been implemented since 1999.

results due to changes in the economic situation.

3) Resource procurement supply interruption risk

9) Risk of information leaks

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-

Improper disclosure of customers’ personal information gathered andvessels in transit or other situations preventing the smoothness compared to other forms of energy, or should it become unable

managed in the conduct of business as a public utility may result notprocurement of gas resources may disrupt the supply of

to purchase LNG at competitive prices due to problems concluding

only in direct costs required to remedy the situation, but also in tangi-

natural gas.

contracts or renewing existing contracts.

ble and intangible loss, including the need to bear public responsibility

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

services may result in declining corporate competitiveness and in

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.

B. Demand risk
10) Risk of failure or malfunctioning of backbone systems

Tokyo 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

The failure or malfunctioning of backbone computer systems con-assets or other assets. Additionally, fluctuations in the price ofcustomers.

nected with the manufacture and supply of gas or the calculation ofgas resources take about six months to show up in gas rates. Thisviolations of laws, rules and regulations or actions that contravene

tangible and intangible loss, including the need to bear publicmore serious than that required of other companies.

Changes in industry structure, economic recession, advancement ofgations to improve the environment might increase costs. Also, any

Inadequate responses to customer needs or inappropriate customer

Amid ongoing market liberalization and intensified competition

4) Market risk

The need to comply with new environmental laws or additional obli-

gas rates may result not only in a disruption in gas supply and delays

factor may affect revenues by breaking up a fiscal year, which

C. Legal and regulatory risk

in customer service, but also in tangible and intangible loss including

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

Tokyo Gas manages its operations in compliance with the Gas Utility

the need to bear public responsibility.

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

43

Frequently Asked Questions

Q1 What are some of the characteristics of city gas business in Japan?

Q4 What is the definition of the “energy service business”?

Japan’s mountainous terrain means there are few areas where thesuppliers, most of which are small or medium-sized firms.

Energy service providers build facilities to provide one-stopsidiary, ENERGY ADVANCE Co., Ltd. The company operates

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

Approximately 90 percent of the city gas in Japan is sourced fromsources of energy services, such as cogeneration systems that pro-very efficiently by capitalizing on the LNG procurement systems

advantageous to gas suppliers. For this reason, only about 5% ofnatural gas, almost all of which is imported in the form of LNG.

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

and advanced engineering capabilities of the Tokyo Gas Group,Japan’s land area currently has a ready supply of city gas.

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

advantages for customers, including reduced energy costs and easemaking the most of the high added value that can be achieved

Although about 210 city gas companies compete in this limit-

Unlike the United States and Europe, Japan does not have aof implementation, as there is no need for a large initial invest-

with cogeneration systems. It targets environmentally concerned

ed geographical area, three large companies Tokyo Gas, Osaka

nationwide pipeline network; each city gas company maintains ament. There are also significant environmental benefits. Efficiency

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

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

network of pipelines in its service area through which it supplies

improvements have turned the energy service business into a high-

By March 2006, it had signed a cumulative total of 125 con-the total gas sales volume: In addition to city gas suppliers, there

and markets gas.

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

totaling 173 MW.

energy service business by establishing a wholly owned sub-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?

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.
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.

The real estate business is regarded as a complement to the

our core business. Moreover, we employ approaches thatfying the Minister, provided that these changes do not adversely

Effective from April 2004, customers who use 500,000 m3 orcore business of Tokyo Gas, the “total energy business.”emphasize on limiting the business risk, such as joint develop-

affect any customers.

more will serve as large-volume customers.

Accordingly, the fruits from the real estate business should be

ment with an external partner.

Q6 How do you utilize your holdings of real estate?

“Regulated” rates are calculated using a rate-base system.

utilized to grow the core business. Large premises with asset

Our group has operations in many locations in the Tokyo

service terms other than those outlined in the above service

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

values expected to rise will be developed properly to maximize

Metropolitan Area, so operational efficiency and cost reductions

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

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

Optional Agreement Tokyo Gas is permitted to offer rates andOperating cost, etc.

＋

Fair return−

Deductions, etc.

＝

Total fair cost

The funds needed for development are in principle sourced
from the land sale proceeds to insure that there is no impact on• Cost of gas resources• Personnel expenses• Overheads• Depreciation• Non-operating expenses• Income taxes

Calculated using the rate-basesystem, which involves multiplying fixed-asset investments,
etc. by the appropriate ratioof fair return• Profit from gas appliancesales, etc.
• Profit from real estatebusiness, etc.

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

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

45

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

Millions of yen, except per share amounts

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1,266,502

1,190,783

1,151,825

1,127,634

1,097,589

1,086,771

992,255

997,767

1,009,155

988,077

958,662

Gas sales

910,321834,658

831,115

792,454

750,439

740,731

672,069

674,997

686,649

663,066

633,253

Gas appliance sales

130,826

135,109

133,873

142,636

149,203

146,517

127,916

133,925

127,880

135,057

136,344

Related construction

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

68,81771,06074,76773,784

Real estate rental

34,187

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

37,61638,97840,91640,568Other business

252,596234,721

172,160

158,327

156,011

159,578

158,819

155,045

154,602

144,032

143,931

Operating income

112,346

145,349

152,287

123,294

110,608

103,659

69,23372,30376,48562,163

67,109Net income

62,11584,04744,78759,201

51,912

27,595

26,69817,764

17,241

15,432

16,762

Depreciation*

136,377

140,271

146,895

141,027

145,564

150,374

140,306

143,009———

Capital expenditures**119,435

107,529

107,441

111,988

105,296111,397

124,975

151,126———

Free cash flow

79,057116,789

84,241

88,24092,17866,57242,029

9,647

—

—

—

Net income¥23.48¥31.47¥16.44¥21.18¥18.47

¥9.82

¥9.50

¥6.32

¥6.14

¥5.49

¥5.97

Net income (Diluted)

21.70

28.24

14.98

19.11

16.66

9.13

8.84

5.94

5.76

5.37

—

Shareholders’ equity

270.48244.73221.53208.65200.75

196.72172.33149.98148.67147.65147.23

7.00

7.00

7.00

6.00

6.00

6.00

5.00

5.00

5.00

5.00

5.00

1,693,899

1,668,734

1,666,828

1,676,064

1,702,713

1,797,669

1,805,086

1,707,446

1,720,684

1,772,132

1,657,176

Long-term debt due after one year

496,740

547,139545,845598,322680,887

708,329

843,634

820,753765,304

878,674

743,177

Total shareholders’ equity

728,232

648,766

598,453

579,706

564,078

552,790484,239

421,442

417,755

414,906

413,725

Operating income to net sales

8.9%

12.2%

13.2%

10.9%

10.1%

9.5%

7.0%

7.2%

7.6%

6.3%

7.0%

Net income to net sales

4.9%

7.1%

3.9%

5.3%

4.7%

2.5%

2.7%

1.8%

1.7%

1.6%

1.7%

ROE

9.0%

13.5%

7.6%

10.4%

9.3%

5.3%

5.9%

4.2%

4.1%

3.7%

4.1%

ROA

3.7%

5.0%

2.7%

3.5%

3.0%

1.5%

1.5%

1.0%

1.0%

0.9%

1.0%

Equity ratio

43.0%

38.9%

35.9%

34.6%

33.1%

30.8%

26.8%

24.7%

24.3%

23.4%

25.0%

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)

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

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

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

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

Thousands of
U.S. dollars (Note 1)

Millions of yen

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

30,374
310,990

Commitments and contingent liabilities (Note 14)373,235(6,195)
1,948,128

19
1,256,919

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

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

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

14,477,769

See accompanying notes.

48

49

Consolidated Statements of Income

Consolidated Statements of Shareholders’ Equity

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

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

960,221429,653

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
(11,499)

12,38820,133(48,429)
19,14342,134(94,138)(25,783)—(43,828)——(4,719)5,926
18,890(98,283)

100,847

133,323

861,938

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

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

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)

2,498
38,202

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

Yen

¥

23.48
21.70
7.00

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

9,864,580

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

1,449

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

3,672,244

Millions of yen
Number of sharesof common stock Common(Thousands)
stock

2005

¥

31.47
28.24
7.00

2006
$

0.20
0.19
0.06

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.
See accompanying notes.

50

51

Consolidated Statements of Cash Flows

Notes to Consolidated Financial Statements

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

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

2006

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

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.

See accompanying notes.

52

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.

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

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.

2005

2006

4,941

5,299
—
60
5,359

42,231

30
60

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:2006

Finished products
Raw materials
Supplies
Work in process

3,670
22,1488,656
123
34,597

54

2006

5,031

Thousands of
U.S. dollars

Millions of yen

3. Property, plant and equipment

Thousands of
U.S. dollars

2005

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

8. Derivative transactions

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:

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:
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

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

42,232

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.

341,880
256,410
256,410
170,940
256,410

Millions of yen

2007
2008
2009
2010
2011
2012 and thereafter

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

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

170,940
256,410

Commodity derivatives
Weather derivatives

85,470Total

Beyondone year

Fair value

Recognized
gains (losses)

85,470Currency swap contracts:
Receive Euro,
pay Japanese yen
105
Weather derivatives
5,625
—

—
—
—

32
—
—

32
—
32

117,949
34,188339,316
165,137

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

170,940

Beyondone year

Total

170,940—

1,476,746
4,634,540

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:

388,900

Thousands of
U.S. dollars

388,900
349,125
607,807

Thousands of
U.S. dollars

Millions of yen

4,245,640

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

Millions of yen
At March 31, 2006
Contract amounts

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

726,972
366,517

Severance and retirement benefit expenses for the years ended March 31, 2006 and 2005 were as follows:

2,195,219

Thousands of
U.S. dollars

Millions of yen

4,634,540

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.

56

57

Millions of yen

10. Income taxes

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

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

2006

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

2005

47,082
41,395(2,850)85,62749,04337,999(1,227)85,815

2006
402,412353,801(24,355)

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

731,858
Millions of yen

33,016757
8,210
41,98343,644

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

For 2006

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:

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

14. Commitment and contingent liabilities

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

17,463

Net book value

1,889

1,885
1,885

74
1,963

Acquisition cost

Net book value

For 2006
Other facilities

23,218Other intangibles

2,147

15. Subsequent events

149,253

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:
Millions of yen
Accumulated
depreciation

assigned 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.

36,085

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

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, and

7,390

25,365

15,828
1,333
17,161

23,98816,156

7,832(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).

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
10,96261

Independent Auditors’ Report

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

and consolidated subsidiaries as of March 31, 2006 and 2005, and the related consolidated statements of

Gastar Co., Ltd.

Production and sale of gas appliances

2,450

66.7

27,407 [41.9]

1,540income, shareholders' equity and cash flows for the years then ended, expressed in Japanese yen. These consol-

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

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)idated 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. Those

Tokyo Gas Energy Co., Ltd.

Sales of LPG

1,000

100

22,569 [81.9](298)

standards require that we plan and perform the audit to obtain reasonable assurance about whether the

Tokyo Gas Chemicals Co., Ltd.

Sales of gas for industry and chemicals

1,000

100

15,639 [65.0]

688

financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence sup-Park Tower Hotel Co., Ltd.

Hotel “Park Hyatt Tokyo” management

1,000

100

9,095 [99.7]

534

porting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting

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

As discussed in Note 15(1) to the consolidated financial statement, subsequent to March 31, 2006, TOKYO GASTsukuba Gakuen Gas Co., Ltd.

Supply of gas in Tsukuba City

280

100

6,099 [97.8]

433

Co., Ltd. decided to acquire treasury stock.

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

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.

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——

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.

June 29, 2006
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.,

62

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