Financial Section

Contents

32

Management’s Discussion
and Analysis of Operations
and Financial Position38

Principal Management Risks

40

Frequently Asked Questions

42

11-year Summary

44

Consolidated Balance Sheets46

Consolidated Statements ofIncome47

Consolidated Statements ofShareholders’ Equity

48

Consolidated Statements ofCash Flows49

Notes to Consolidated
Financial Statements

Tokyo Gas Annual Report 2005

31

Management’s Discussion and Analysis of Operations and Financial Position

ANALYSIS OF INCOME

Summary■ Consolidated sales increased steadily, reflecting stepped-up sales efforts and the expanded scope of consolidation.
■ Operating income decreased owing to the impact of higher gas resource costs caused by a steep rise in crude oil prices
and the gas rate reduction implemented in January 2005.
■ Net income increased sharply in the absence of the one-time loss booked the previous period to alleviate the future costburden from retirement benefit obligations.

SALES TRENDS IN THE CORE GAS BUSINESSSales Volume Increased Steadily Except in the
Residential Sector■ Residential Sector
Although the number of customers increased steadily, gassales volume per household decreased. Overall sales volume
declined 50 million m3, or 1.5%, to 3,242 million m3 year on
year. Although low temperatures brought higher demand for
hot water and heating in winter, this was not sufficient tooffset a decrease in demand for hot water during a summerof record-breaking heat. The net decline in temperaturerelated demand was 84 million m3. A positive factor in residential sales was a year-on-year rise in demand of 51 million
m3 due to growth of the customer base.
■ Commercial Sector
Demand for air conditioning increased due to high summer
temperatures, and low winter temperatures brought
increased demand for heating. Sales also rose due tocustomer-base expansion and increased operation atcustomers’ existing facilities. In all, gas sales in this sectorrose 207 million m3, or 7.7%, to 2,902 million m3 year on year.
Temperature-related factors accounted for 100 million m3 ofthis increase, and growth in the number of customers
accounted for 56 million m3.

■ Industrial Sector
In fiscal 2004, demand for gas used specifically for power
generation continued to surge. Non-generation use atexisting facilities also grew, as did demand due to customer
acquisitions. As a result, gas sales in this sector increased
favorably by 436 million m3, or 10.4%, over the previous
year’s level to 4,637 million m3. Sales of gas to electric powercompanies and independent power producers (IPPs)
accounted for 206 million m3 of the increase.
■ Wholesaling to Other Gas Companies
Sales expanded 141 million m3, or 13.8%, to 1,171 million
m3 with increases both in the volume taken by the gas
companies to which gas is supplied as well as the numberof gas companies.
Total sales amounted to 11,952 million m3, an increase of 734
million m3, or 6.5%, over the previous year’s level.

Despite a Sales Increase, Operating Income
Declined on Rising Gas Resource Costs andCustomer Rate Reductions■ Gas Sales

Although sales in some segments, including related construction and real estate rental business, decreased, higher gas
sales and expansion of the scope of consolidation brought anincrease in overall sales of ¥38.9 billion, or 3.4%, to a newrecord of ¥1,190.7 billion. The impact of the change in thescope of consolidation was ¥43.1 billion.
Operating income fell ¥6.9 billion, or 4.6%, to ¥145.3
billion, affected by significant negative factors, including
higher gas resource costs, pegged to the sharp rise in crude
oil prices, and rate reductions implemented in January
2005. The Company succeeded in offsetting much of thedecline through efforts to increase operating efficiency andreduce costs.

There was a 6.5% increase in gas sales volume, led by strong
demand from commercial and industrial customers. The
higher volume compensated for lower unit prices due tofactors such as the rate reduction. As a result, sales in thissegment increased ¥3.5 billion, or 0.4%, to ¥834.6 billion.
Nonconsolidated sales increased ¥1.8 billion, or 0.2%. Risingsales volume contributed ¥20.4 billion, and lower unit prices
had an adverse effect amounting to ¥18.6 billion, including¥3.5 billion due to price adjustments under the “sliding rate”
system, ¥8.2 billion due to the impact of the rate revision,and ¥6.9 billion due to other factors. The segment’s contribution to total sales decreased from 66.9% to 63.9%.
Operating expenses rose slightly by 1.6%, to ¥651.9
billion as cost reduction efforts and lower depreciation
partially offset an increase in gas resource costs tied to a
sharp rise in crude oil prices. Operating income fell ¥6.7
billion, or 3.5%, to ¥182.6 billion.

Business results by segment (¥ million)

Sales

Higher Gas Resource Costs and Rate Reductions
Bring Lower Income on Higher Sales

2003

2004

2005

Gas Sales

792,454

831,115834,658

Gas Appliance Sales

142,636

133,873

135,108

Rate Revision

Related Construction

70,56868,03464,795In January 2005 the Company implemented a reduction in gas rates

Real Estate Rental

36,34635,44434,701Other Business

158,327

172,160

234,721

2003

2004

2005

to promote the use of gas. The Company also reviewed its third-

160,224

189,366

182,685

party access agreements, reducing charges for third-party use for

Gas Appliance Sales

7,842

7,904

7,054

the purpose of direct sales by 6.04% and charges for third-party sale

Related Construction

4,175

4,456

3,575

to other gas suppliers by 6.01%. The impact of the rate reduction on

Real Estate Rental

7,623

7,883

6,503

sales will be a decrease of about ¥30.0 billion annually from sales to

Other Business

9,626

11,27013,415regulated customers.

Years ended March 31

Operating income

and expanded its rate options. Specifically, in Tokyo and neighboringareas, the Company lowered its rates an average of 5.18% fromprevious levels for customers under regulated tariffs (using less than
500,000 m3 annually), while at the same time expanding rate options

Years ended March 31

Gas Sales

Tokyo Gas had two objectives in lowering gas rates: to return toNote: Segment sales include intra-group transactions.

Gas sales volume by sector

Gas sales volume for power generation

customers profits earned through corporate efforts and to increase

12,000 (Million m3)

3,500 (Million m3)

competitiveness. In Frontier 2007, the Company allocated ¥180

10,0003,000

billion in capital resources over a five-year period for rate reductions
and, as implementation of the plan was progressing well, had alreadyExpansion of the Scope of Consolidation

2,500
8,000

announced that it would implement a rate revision during fiscal 2004.

The construction of the group management system is one of the
2,000

prime areas of focus set forth in Frontier 2007, the current medium-

6,000

term management plan. On April 1, 2004 Tokyo Gas introduced the

1,500

strategic business unit system as a foundation to integrate the4,000■ Wholesale■ Industrial sector

2,000■ Commercial sector■ Residential sector

0
’01

’02

’03

’04

’05

1,000

business operations of the Company and its affiliates. On this■ Power generation only500

■ Cogeneration (Industrial sector)■ Cogeneration (Commercial sector)

0

occasion, the Company also expanded its scope of consolidation forfiscal 2004, increasing the number of consolidated subsidiaries from18 in the previous period to 52. The impact of the expansion of the

’01

’02

’03

’04

’05

scope of consolidation is as follows.

All graph data for years ended March 31

Impact (¥ billion)

32 Tokyo Gas Annual Report 2005

Net Sales

Operating Income

Net Income

43.1

2.5

(0.4)

■ Gas Appliance Sales

Sales Up Due to New High-performance Products
and Investment in Demand Development, but
Income Down
Tokyo Gas increased unit sales value by introducing highvalue-added appliances, including built-in home gas
cooktops with greatly enhanced features and bathroom
heater-dryers with a mist sauna function. This and the contribution from newly consolidated companies helped com-

Tokyo Gas Annual Report 200533

pensate for a decrease in sales volumes. These developments brought a slight year-on-year increase in segment
sales. However, an increase in selling expenses to counterthe “all electric” promotion of electric power companies led
to lower operating income.
Segment sales increased ¥1.2 billion, or 0.9%, to ¥135.1
billion, while operating expenses also increased ¥2.1 billion,
or 1.7%, to ¥128.0 billion. Operating income decreased ¥0.9
billion, or 10.8%, to ¥7.0 billion. The segment’s contribution
to total sales declined marginally from 10.8% to 10.4%.

■ Related Construction

Drop in the Number of Installations Leads to Lower
Sales and Income
There were declines in the number of new installations andsafety upgrades, and segment sales fell ¥3.3 billion, or 4.8%,
year on year, to ¥64.7 billion. Operating expenses decreased¥2.3 billion, or 3.7%, to ¥61.2 billion, and operating income
decreased ¥0.9 billion, or 19.8%, to ¥3.5 billion. The
segment’s contribution to total sales was lower at 5.0%,
compared with 5.5% in the previous year.

■ Real Estate Rental

Lower Rents Bring Lower Sales and Income
Segment sales declined, in part because of rent reductions toreflect the state of the real estate market, falling ¥0.7 billion,
or 2.1%, to ¥34.7 billion. Operating expenses increased ¥0.6
billion, or 2.3%, and operating income decreased ¥1.3 billion,
or 17.5%, to ¥6.5 billion. The segment’s contribution to total
sales dropped from 2.9% to 2.7%.

from 13.9% in the previous year.
Operating expenses increased ¥60.5 billion, or 37.6%, to¥221.3 billion, and operating income increased ¥2.2 billion, or
19.0%, to ¥13.4 billion.

Net Income Increases Sharply in the Absenceof Extraordinary Losses Recorded in thePrevious Year
Other income totaled ¥17.8 billion, a year-on-year increase of¥0.3 billion. No gain was recorded during the year underreview from the liquidation of excess allowances for retirement benefits resulting from reform of the pension plan, amajor component of other income the previous year.
However, a ¥2.7 billion gain on weather derivatives and a ¥5.2
billion gain from the sale of securities were recorded.
Total other expenses decreased ¥66.8 billion to ¥29.8
billion. The principal reason for this was the absence of
extraordinary factors including a ¥58.9 billion lump-sum
write-off of actuarial differences in retirement benefits takenin the previous year in connection with the reform of thecorporate pension plan. Interest expenses were reduced ¥1.6
billion through aggressive repayment of interest-bearing
debt, and losses on the redemption of convertible bonds
decreased ¥3.6 billion. On the other hand, premiums onretirement benefits of ¥3.4 billion were booked at consolidated subsidiaries.
As a consequence, other expenses, net amounted to ¥12.0
billion, compared with ¥79.1 billion in the previous year. Net
income surged ¥39.3 billion, or 87.7%, to ¥84.0 billion.

Expanding the Scope of Consolidation Raises Sales
and Income
Nearly 80% of the impact from expansion of the scope of
consolidation, which boosted total sales, occurred in thissegment. Segment sales increased ¥62.6 billion, or 36.3%, to¥234.7 billion. The breakdown of sales by category was ¥32.8
billion from district heating and cooling systems, ¥31.8 billion
from the industrial gas business, and ¥18.3 billion from LPG
sales. The segment’s contribution to total sales rose to 18.0%

Net income and net income per share
45 (¥)

90 (¥ billion)

60

30

30

15
■ Net income● Net income per share

Interest coverage ratio00

12 (Times)

’01

’02

’03

’04

’05

Free Cash Flow of ¥116.7 Billion Greatly Exceeds
the Average Annual Target

84Interest coverage ratio=(operating income +interest and dividend income)/
interest expense

0
’02

’03

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

Free cash flow
120 (¥ billion)

90

60

30

0
’01

’02

’03

’04

’05

Increased Sales and Decreased Profits Projected
for Fiscal 2005
Gas sales volume in the year ending March 31, 2006 is
expected to increase 1.0% to 12.0 billion m3. Sales to the resi-

dential sector and commercial sector are expected toincrease 2.4% and 1.7% respectively, a projection based on
the assumptions of the leveling of temperatures and theacquisition of new demand. Sales to the industrial sector are
estimated to decrease 0.7% owing to projected leveling of
demand for use in electric power generation, which has
grown dramatically for two consecutive years. However,wholesale gas sales are projected to rise 2.6%, reflecting an
increase in the volume taken by gas companies to which gas
was supplied.
In addition to an increase in gas sales volume, anotherpositive factor is the anticipated improvement in revenue due
to a unit price adjustment under the “sliding rate” system.
However, lower unit prices are anticipated due to the rate
reductions. Accordingly, the Company forecasts a slightincrease in sales from the core gas business. Although management projects slightly lower sales from the gas appliance,
related construction, and real estate rental businesses, it
expects continued strong expansion from the other businesssegment, which showed dramatic growth during fiscal 2004.
In line with these projections, the Company forecasts a 1.1%
increase in total sales to ¥1,204.0 billion. Operating income is
projected to fall 21.6% to ¥114.0 billion, due to factors
including the impact of the rate reduction and an increase indepreciation on acquired facilities due to an increase inorders for energy services (other businesses segment), andnet income is expected to decrease 19.1% to ¥68.0 billion.

CASH FLOWS AND FINANCIAL POSITION■ Other Business’01

free cash flow increased ¥32.5 billion, or 38.6%, from theprevious year to ¥116.7 billion, greatly exceeding the annual
target. Depreciation decreased 4.5% to ¥140.2 billion, while
capital expenditures increased 0.1% to ¥107.5 billion.

’04

34 Tokyo Gas Annual Report 2005

’05

Tokyo Gas has made free cash flow a key management
indicator, which is calculated by adding depreciation* to net
income and subtracting capital expenditures**. One of thegoals set down in Frontier 2007 is the achievement of free
cash flow averaging ¥96 billion per annum and totaling ¥480
billion over a five-year period. During the year under review,

Expansion of the Scope of Consolidation
Increases Net Cash
■ Cash Flows from Operating Activities
Income before income taxes and minority interests in net
income increased dramatically due to the absence of onetime losses recorded in the previous period, and there was an
inflow of ¥136.4 billion from the ongoing depreciation ofproperty, plant, and equipment. On the other hand, areduction in employees’ severance and retirement benefits
and an increase in notes and accounts receivable resulted in
cash outflows. Subsequently, net cash provided by operating
activities decreased ¥2.6 billion year on year to ¥215.0 billion.
■ Cash Flows from Investing Activities
Net cash used in investing activities decreased ¥18.7 billion
to ¥107.3 billion from the previous year’s level of ¥126.0
billion. The principal investment item was ¥94.0 billion for
acquisitions of gas supply facilities and other property, plant,
and equipment.

■ Cash Flows from Financing Activities
Net cash used in financing activities increased ¥8.4 billion,
from ¥99.7 billion in the previous year to ¥108.1 billion.
Though bond issues raised ¥40.0 billion, there was an overall
reduction in cash and cash equivalents because of outflows of¥98.7 billion for bond redemptions, ¥20.4 billion for the
repurchase of common stock and ¥20.1 billion in cash
dividend payments.
(¥ million)
Years ended March 31

Net cash provided byoperating activities
Net cash used ininvesting activities
Net cash used infinancing activities

2003

2004

2005

213,533

217,608

215,038(110,144)(126,038)(107,376)(78,517)(99,744)(108,160)

The year-end balance of cash and cash equivalents
increased ¥6.7 billion from the previous year to ¥50.6
billion, in part due to a ¥7.2 billion increase attributable toexpansion of the scope of consolidation.

Tokyo Gas Annual Report 200535

prevent dilution caused by the conversion of convertible
bonds into shares. During fiscal 2003, the first year of theplan, 76.6 million shares were repurchased for ¥27.8 billion.
During the year under review the Company repurchased 49.6
million shares during August and September of 2004 for ¥20.0
billion. Accordingly, a total of 126.2 million shares wererepurchased at a cost of ¥47.8 billion during the two-year
period.
The shareholders’ equity ratio improved from 35.9% to38.9%, and return on equity (ROE*) increased from 7.6% in
the previous year to 13.5%.

Tokyo Gas’ Original Indicator: TEP
With the aim of generating profits that exceed the cost ofcapital, Tokyo Gas formulated Tokyo Gas Economic Profit(TEP)*, a key business performance indicator. TEP is a Tokyo
Gas-specific variation of Economic Value Added (EVA).
In fiscal 2004, NOPAT** increased by ¥37.4 billion to ¥92.6
billion owing to the absence of factors that suppressed earnings
the previous period, including an extraordinary loss (¥58.9
billion) from a lump-sum write-off of pension liabilities and an
extraordinary gain (¥5.7 billion) attendant on the switch to acash balance pension plan. Furthermore, the cost of capitaldecreased by ¥2.2 billion to ¥46.1 billion due to a lower
weighted average cost of capital, resulting in a year-on-yearincrease in TEP of ¥39.6 billion to ¥46.5 billion.
Tokyo Gas uses TEP as a performance indicator for Group
companies and as a gauge for decisions on business restructuring and integration.

TEP
50 (¥ billion)

40

30

20

10

■ Target of Frontier 2007

Total assets at the end of the year under review amounted to¥1,668.7 billion, an increase of ¥1.9 billion from the previous
year’s level. Property, plant and equipment decreased ¥10.9
billion year on year to ¥1,159.5 billion through ongoing
depreciation. Investments and other non-current assets
decreased ¥18.7 billion to ¥199.7 billion. There was a
reduction in investment securities and long-term loans
resulting from internal eliminations due to expansion of thescope of consolidation. Increases in cash and cash equivalents and receivables raised current assets by ¥27.6 billion to¥286.6 billion.
Return on assets (ROA*), one of the management policies
defined in Frontier 2007, was 5.0% for the year under review.
This marked a substantial improvement from 2.7% in theprevious year, when net income was low due to transient
factors.

’04

’05

’06

Target for Reduction of Interest-bearing Debt
Achieved Ahead of Schedule
A reduction in interest-bearing debt to ¥627.0 billion by theend of fiscal 2007 is one target of Frontier 2007. This target
was achieved ahead of schedule, and the balance of interestbearing debt at the end of the year under review was ¥624.1
billion, a reduction of ¥58.6 billion from the previous year. A
major factor in this success was the redemption andretirement of convertible bonds. The year-end ratio ofinterest-bearing debt to total assets improved from 41.0% to37.4%. The debt to equity ratio fell below 1.0, improving from
1.14 to 0.96.

Interest-bearing debt and ratio to total assets
1,000 (¥ billion)

60 (%)

800

55

600

50

400

45

ROA and ROE

200

40

0

35

12

’01

’02

’03

’04

’05

40

375

30

250

20

125

10

■ Shareholders’ equity● Equity ratio

0
’01

’02

’03

’04

’05

’02

’03

’04

■ Temperature Fluctuation Risk
Temperatures affect the volume of city gas sales, which
account for around 70% of consolidated sales and 80% ofincome. Gas is used mainly for water heating and spaceheating, especially in residential use. Mild winter weather
can erode revenues and income by reducing the volume ofgas sold.
The average temperatures in fiscal 2004 were 23.4ºC in
the first half of the year, 10.7ºC in the second half, and 17.1ºC
over the whole year. Forecasts for fiscal 2005 are based on anaverage of 17.0ºC over the whole year.

Approx. ¥4.0 billion for each $1 movement in the per-barrel price of crude oil

Impact of 1˚C temperature rise on gas sales volume

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

Summer (June–September)
Winter (December–March)
Intervening months (April, May, October, November)
AnnualRate of change

0.2%
-2.3%
-1.8%
-1.4%

’05

Continued Repurchases of Common Stock

’01

500

■ Gas Resource Cost Fluctuation Risk
City gas supplied by Tokyo Gas is produced mainly fromimported LNG. Since contracts are denominated in U.S.
dollars, earnings are at risk from fluctuations in the yendollar exchange rate. Also, the dollar-denominated LNG
prices are linked to crude oil prices on a sliding scale, which
exposes the Company to risk from changes in the international market price for crude oil.
The extent to which these fluctuations affect gas
resource costs over a year is as follows.

1,500 (Million m3)

050■ Gas Rate Decline Risk
Progress in deregulation has caused competition to intensify
among energy suppliers. There is a risk that the price of gas
will need to be reduced to attract and retain customers in theface of price reductions by the Tokyo Electric Power Company(TEPCO), which is the greatest competitor of Tokyo Gas.
Tokyo Gas has reduced gas rates three times since 1999,
by about 10% in total. TEPCO also reduced its electricity
rates three times, by about 17% in total, during the same
period. Tokyo Gas will continue to implement strategic rate
reduction as necessary to prevail over competition.

Monthly gas sales volumes for fiscal 2004 (nonconsolidated)

■ ROA
■ ROE

625

0
*ROE=net income/shareholders’ equity (average of positions at start and end of fiscal year)■ Interest-bearing debt
● Ratio of interest-bearing■ debt to total assets8

460 (%)

EXTERNAL RISKS AFFECTING BUSINESS ACTIVITIES’08

Projection asof April 28, 2005

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

16 (%)

750 (¥ billion)

0* TEP: NOPAT - cost of capital** NOPAT: Net operating profit after tax prior to interest payments

Substantial Improvement in ROA

Shareholders’ equity and equity ratio

Shareholders’ equity at the year-end totaled ¥648.7 billion, an
increase of ¥50.3 billion over the previous year. Whileretained earnings increased ¥74.9 billion as a result of the
sharp increase in net income, stock repurchases amounted to¥20.3 billion. Frontier 2007 calls for the allocation of ¥100.0
billion, about 20% of free cash flow generated during the fiveyear period of the plan, for the repurchase of stock to

Approx. ¥2.5 billion for each ¥1 movement in the yen-dollar exchange rate

Fluctuations in the cost of gas resources are reflected ingas rates after approximately six months under the “slidingrate” system*. Under this system, although earnings may besubject to temporary increases and decreases, crude oil
prices and currency exchange rates have no net effect on
results over the medium- to long-term perspective.
In fiscal 2004, the crude oil price averaged $38.82 perbarrel, and the average exchange rate was ¥107.55 to one
dollar. Forecasts for fiscal 2005 are based on an average
crude oil price of $38 per barrel and an exchange rate of¥105 to one dollar.
* Depending on the contract, changes may be reflected without a six-month time lag.
Adjustment has an upper limit (please refer to the accompanying Investors’ Guide
2005, P. 4).

■ Interest Rate Fluctuation Risk
Tokyo Gas negotiates fixed interest rates for both shortterm and long-term interest-bearing debt, which precludes
risk of interest rate fluctuation during the term of an obligation. However, there may be risk of fluctuation whenloans are refinanced.

1,200

900

600
■ Wholesale■ Commercial sector■ Industrial sector■ Residential sector

300■ Share Price Fluctuation Risk
Tokyo Gas primarily holds equities to maintain corporate
relationships essential to the conduct of its business operations. Equity of publicly listed companies is subject to market
risk. Tokyo Gas has established management policies andrules for handling of such equities.

036 Tokyo Gas Annual Report 2005

’04/4 5 6 7 8 9 10 11 12 ’05/1 2 3Tokyo Gas Annual Report 2005

37

Principal Management Risks

The level of business risk facing Tokyo Gas is expected to3) Resource procurement supply interruption riskincrease due to growing competition under industry deregulation and the Company’s entry into new business fields.
For this reason, in fiscal 2003 Tokyo Gas established an
integrated risk management system and stipulated theprincipal forms of risk with which 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 recon-

more competitive LNG than the Tokyo Gas Group in theGroup’s existing markets, or should LNG lose competitive-

Because Tokyo Gas relies on imports for the majority of its

ness compared to other forms of energy.

natural gas and other city gas resources, supplier country
risk, accidents at gas fields or LNG liquefaction plants,
accidents to LNG vessels in transit or other situations preventing the smooth procurement of gas resources might
disrupt the supply of natural gas.
4) Market risk

Details of the principal risks with which management
should be involved are described below. Forward-looking

Economic recession, changes in industry structure,
progress with energy conservation activities or otherfactors might result in a partial decrease in existing

1) Production and supply interruption risksuch as the need to bear public responsibility.
2) Natural disaster risk

market price of company-owned real estate, financial

Tokyo Gas manages its operations in compliance with the

The need to comply with new environmental laws or addi-

assets, pension assets or other assets.

Gas Utility Industry Law and other laws, regulations andtional obligations to improve the environment might

institutions. As deregulation progresses, any revisions toincrease costs. Also, any violations of laws, rules and regu-

these laws, regulations or institutions that prove

lations or actions that contravene corporate ethics might

detrimental to the Tokyo Gas Group might affectresult not only in direct costs required to remedy thebusiness performance.

situation, but also in tangible and intangible damages such5) Weather risk
Abnormal weather conditions, particularly summer heat
dential sector and affect revenues.
6) Risk faced by existing businessas the need to bear public responsibility.
7) New-market risk

A. Competitive risk
As industry deregulation progresses, competition withelectric power companies and new firms entering the gas

Tokyo Gas engages in facility-dependent businesses

increased impact on Tokyo Gas’ business performance.

because city gas production and supply facilities are theSpecifically, demand might decrease or rates might fall

foundation of its business. Accordingly, earthquakes,

owing to marketing offensives by electric power companies

typhoons or other major natural disasters might cause

to promote electrification, electric power rate reductions or

damage to plants and other production facilities orcompetition from new market entrants.

of city gas.

Industry deregulation entails increases in business opportu-

11) Risks associated with corporate responsibility andcustomer service

nities such as the emergence of new markets in the futurebusiness is becoming fierce. Competition might have an

pipelines and other supply facilities and disrupt the supply

bear public responsibility.
10) Environmental and compliance risks

leak or explosion at a customer site might result not only indirect damages, but also in tangible and intangible damages

also in tangible and intangible damages such as the need todemand.

Tokyo Gas’ business, so a major gas leak or explosion
attendant on the production or supply of gas or a major gas

ruption in gas supply and delays in customer service, but

C. Regulatory risk

waves and warm winters, reduce gas sales volume in the resiThe production and supply of city gas are the foundation ofor the calculation of gas rates might result not only in a dis-Tokyo Gas might incur losses in the event of changes in thestatements contained herein are based on assessments ofTokyo Gas as of March 31, 2004.

The failure or malfunctioning of backbone computer
systems connected with the manufacture and supply of gas

B. Demand risk

firmed and revised each year in meetings of management
and the Board of Directors.

9) Risk of failure or malfunctioning of
backbone systems

Amid ongoing market liberalization and intensified com-brought about by the fusion of energy-related markets. The

Inadequate responses to customer needs or inappropriateTokyo Gas Group sees this situation as a growing opportu-

customer services might result in lowering corporatenity to enter into new businesses and is working to expand

competitiveness and in tangible and intangible damages

its business in energy-related fields, including gas-fieldsuch as the need to bear public responsibility. Moreover,development and other upstream development, LNG

because Tokyo Gas regards the enhancement of customertransport, city gas-related businesses overseas and newsatisfaction as an important means of fortifying corporate

services for residential customers. Entry into these newcompetitiveness, and the importance of customer satisfac-

businesses might involve new risks different from thosetion is increasing, Tokyo Gas recognizes it as a business risk

Tokyo Gas has faced in the established gas business.

should the Company be unable to increase customer
satisfaction or fail to meet the level of satisfaction required8) Risk of information leaks

by customers.

petition between energy sources, Tokyo Gas might lose aportion of existing demand should it become unable to

Improper disclosure of customers’ personal information

purchase LNG at competitive prices due to problems con-gathered and managed in the conduct of business as acluding new resource procurement contracts or revisingpublic utility might result not only in direct costs required

existing contracts or maintaining alliances for resource

to remedy the situation, but also in tangible and intangible

procurement, should competitors commence the supply ofdamages, such as the need to bear public responsibility
more serious than that required of other companies.

38 Tokyo Gas Annual Report 2005

Tokyo Gas Annual Report 2005

39

Frequently Asked Questions

Q1 What are some of the characteristics of city gas business in Japan?
Japan’s mountainous terrain means there are few areas

suppliers and 30,000 liquefied petroleum gas (LPG)

where the population and industry are concentrated insuppliers, most of which are small or medium-sized firms.

such a way as to be advantageous to gas suppliers. For thisThe resource for approximately 90 percent of the city gas

reason, only about 5% of Japan’s land area currently has ain Japan is natural gas, almost all of which is imported inready supply of city gas.

the form of liquefied natural gas (LNG). Only a few

Although about 220 city gas companies compete in thiscompanies import and regasify LNG to supply city gas.

limited geographical area, three large companies accountUnlike the United States and Europe, Japan does not havefor about 80% of the total gas sales volume: Tokyo Gas,a nationwide pipeline network; each city gas company

Osaka Gas Co., Ltd., and Toho Gas Co., Ltd. In addition tomaintains a network of pipelines in its service area throughcity gas suppliers, there are about 1,700 specific-area gas

which it supplies and markets gas.

Since April 2004, large-volume customers have been

“Regulated” rates are calculated using a rate-basedefined as customers with yearly contract volumes ofsystem. A simplified version of this calculation is shown

500,000 m3 or more.

in the following equation:

Operating cost, etc.

41• CostTokyo
Gas resources
Annual Report 2005of gas• Personnel expenses• Overheads• Depreciation• Non-operating expenses• Income taxes+

Fair return—

Deductions, etc.

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

Total fair cost

Represents an appropriate profit
added to an appropriate cost
under efficient management

Q2 Does Tokyo Gas plan to acquire neighboring gas companies?

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

Tokyo Gas currently wholesales gas to 19 city gas

On the other hand, Tokyo Gas purchased the municipal

It is a business in which energy service providers offer one-takes advantage of the Tokyo Gas Group’s LNG procure-companies around its service area. Wholesale volumes

gas operation of Konosu City in Saitama Prefecture, when it

stop energy solutions that include the provision of electrici-

ment capabilities and advanced engineering to maximize

currently account for approximately 10% of total gas sales,

was privatized in April 2002. It was also selected by Nagano

ty and heat through gas cogeneration systems and otherthe added-value potential of gas cogeneration. It uses a

and are expected to increase by an annual average of 3.2%

Prefecture to be the new owner of the gas operation previ-energy facilities they build, own and operate on customer

highly effective marketing strategy, which targets environ-over the next five years. The wholesale supply businessously owned by the prefectural government, following thesites. The system offers benefits that are attracting an

mentally conscious customers primarily in the Kanto

allows Tokyo Gas to earn income without increasing assets,

privatization in September 2004. Should there arise anincreasing number of potential customers, benefits that

region, where there is significant untapped demand.

so its basic policy calls for an active development of thisoptimal M&A opportunity with the potential to increase our

include virtually no initial investment (allowing swift instal-market. As hostile takeovers could have an adverse effectcorporate value and benefit our customers, Tokyo Gas will

lation), environmental friendliness and energy cost savings.

tion field. By March 31, 2005 the company had signed 67

on the Company’s wholesale business, it has no intention toconsider acting on the opportunity in accordance with theThis is a business that offers tremendous growth potential

contracts for systems that have a total capacity of approxi-

wishes of the other party.

because increases in system efficiency have dramaticallymately 140 MW. It has been selected for 32 projects subsi-

improved profitability.

dized by the New Energy and Industrial Technology

aggressively pursue M&A.

In 2002, Tokyo Gas established a wholly owned sub-Q3 How does Tokyo Gas set its rates?

sidiary called ENERGY ADVANCE Co., Ltd. with the aim ofTokyo Gas’ rates are divided into the following three

Optional agreements

categories:

rates and service terms other than those outlined in theTokyo Gas is permitted to offer

above service agreement. This enables the Company toService agreement

Tokyo Gas uses “regulated” rates

ENERGY ADVANCE is now the leader in the cogenera-

Development Organization (NEDO), with a total capacity of
approximately 120 MW.

expanding the energy services business. This company

Q5 What advantages does Tokyo Gas have in the electric power generation business?

make efficient use of its gas production and supply facili-

approved by the Minister of Economy, Trade and Industry

ties. These agreements have to be reported to METI andTokyo Gas has several strengths in the electric power gen-petitive fuel procurement, resulting from the Company’s(METI) to bill customers for gas supplied through pipelines

the selection of this option is up to the customer.

eration business.

involvement in the electric power business, which raises

Japan’s Gas Utility Industry Law, it became possible toLarge-volume supply

1) Competitive fuel procurement that takes advantage ofreduce these rates simply by notifying METI, provided theGas Utility Industry Law deregulated tariffs and area ofchange does not adversely affect any customers.

supply for customers with contract volumes of two billion

LNG transaction volumes.

to meet general demand. Under a May 1999 amendment to
A March 1995 amendment to them or more. Rates and other supply terms can be deter3

mined by agreement between gas suppliers and customers.

40

Tokyo Gas Annual Report 2005

strong bargaining power.
2) Power plant sites adjacent to demand areas that leverage
existing infrastructure such as LNG terminals.
3) Potentially lower fixed costs per m3 and even more com-

At the business decision stage, Tokyo Gas will use aflexible approach, based on careful consideration of market
trends, to determine project scales and approaches tomarketing.

Tokyo Gas Annual Report 200541

11-year SummaryTokyo Gas Co., Ltd. and Consolidated Subsidiaries
Millions of yen, except per share amounts

For the years ended March 31

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

¥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¥915,862

Gas sales

834,658

831,115

792,454

750,439

740,731

672,069

674,997

686,649

663,066

633,253

601,989

Gas appliance sales

135,109

133,873

142,636

149,203

146,517

127,916

133,925

127,880

135,057

136,344

138,557

Related construction

64,79568,03470,56871,33871,90868,651

68,81771,06074,76773,78475,121

Real estate rental

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

37,61638,97840,91640,568—Other business

234,721

172,160

158,327

156,011

159,578

158,819

155,045

154,602

144,032

143,931

167,206

Operating income

145,349

152,287

123,294

110,608

103,659

69,23372,30376,48562,163

67,10960,105

Net income

84,04744,78759,201

51,912

27,595

26,69817,764

17,241

15,432

16,762

11,072

Depreciation*

140,271

146,895

141,027

145,564

150,374

140,306

143,009

—

—

—

—

Capital expenditures**107,529

107,441

111,988

105,296111,397

124,975

151,126

—

—

—

—

Free cash flow

116,789

84,241

88,24092,17866,57242,029

9,647

—

—

—

—

Net income (Basic)¥31.47¥16.44¥21.18¥18.47

¥9.82

¥9.50

¥6.32

¥6.14

¥5.49

¥5.97

¥3.94

Net income (Diluted)

28.24

14.98

19.11

16.66

9.13

8.84

5.94

5.76

5.37

—

—

Shareholders’ equity

244.73221.53208.65200.75

196.72172.33149.98148.67147.65147.23146.32

7.00

7.00

6.00

6.00

6.00

5.00

5.00

5.00

5.00

5.00

5.00

¥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¥1,608,244

Long-term debt due after one year

547,139545,845598,322680,887

708,329

843,634

820,753765,304

878,674

743,177

724,523

Total shareholders’ equity

648,766

598,453

579,706

564,078

552,790484,239

421,442

417,755

414,906

413,725

411,164

Operating income to net sales

12.2%

13.2%

10.9%

10.1%

9.5%

7.0%

7.2%

7.6%

6.3%

7.0%

6.6%

Net income to net sales

7.1%

3.9%

5.3%

4.7%

2.5%

2.7%

1.8%

1.7%

1.6%

1.7%

1.2%

ROE

13.5%

7.6%

10.4%

9.3%

5.3%

5.9%

4.2%

4.1%

3.7%

4.1%

2.7%

ROA

5.0%

2.7%

3.5%

3.0%

1.5%

1.5%

1.0%

1.0%

0.9%

1.0%

0.7%

Equity ratio

38.9%

35.9%

34.6%

33.1%

30.8%

26.8%

24.7%

24.3%

23.4%

25.0%

25.6%

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

42 Tokyo Gas Annual Report 2005**purchases of tangible fixed assets + purchases of intangible fixed assets + long-term prepayments (accounting basis)

Tokyo Gas Annual Report 200543

Consolidated Balance Sheets
Tokyo Gas Co., Ltd. and Consolidated Subsidiaries
Years ended March 31, 2005 and 2004
Thousands of
U.S. dollars (Note 1)

Millions of yen

ASSETS
Property, plant and equipment (Notes 3 and 4):
Production facilities
Distribution facilities
Service and maintenance facilities
Other
Construction in progress
Accumulated depreciation

Intangibles:
Consolidation difference
Other intangibles

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

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

See accompanying notes.

44 Tokyo Gas Annual Report 2005

2005

¥

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

¥

2004

2005

713,9102,018,459
182,075
611,749
38,4963,564,689(2,394,260)
1,170,429$ 6,677,822
19,339,487
1,701,894
6,292,774
451,505
34,463,482(23,626,874)
10,836,608

2,903
19,87722,780—18,856
18,85627,127
185,769
212,896

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

108,486
13,23051,252
47,131(1,659)218,440

940,196
37,826
479,715425,263(15,993)
1,867,007

50,665
8

43,961
1

473,501
77

139,723(963)
25,436
12,07559,723
286,667¥ 1,668,734

125,244(1,215)22,827
11,58856,697259,103¥ 1,666,828

1,305,822(8,996)
237,721112,851
558,159
2,679,135$ 15,595,646

Thousands of
U.S. dollars (Note 1)

Millions of yen

LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS’ EQUITY

2005

2004

2005

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¥ 547,139
2,599
141,480
3,464
24,196¥ 545,845
2,396
157,808
3,445
24,853$ 5,113,446
24,294
1,322,243
32,372
226,135

51,843

106,870

484,516

60,56429,06525,124
41,69032,616167
51,390292,459

35,74736,90230,02932,80844,958—42,456
329,770

566,015
271,631234,800
389,630
304,8251,563
480,280
2,733,260

8,631

4,258

80,660141,844
2,067
532,81031,501(311)
707,911

141,8442,065
457,924
35,655(227)
637,261

1,325,649
19,3204,979,533
294,401(2,908)6,615,995(59,145)648,766¥1,668,734(38,808)
598,453¥1,666,828(552,759)
6,063,236$15,595,646

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)
Accrued expenses
Deferred tax liability (Note 10)
Other current liabilities
Total current liabilities
Commitments and contingent liabilities (Note 14)
Minority interest
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
Treasury stock, at cost
159,437,083 shares in 2005
109,205,944 shares in 2004
Total shareholders’ equity

Tokyo Gas Annual Report 200545

Consolidated Statements of Income

Consolidated Statements of Shareholders’ Equity

Tokyo Gas Co., Ltd. and Consolidated Subsidiaries
Years ended March 31, 2005 and 2004

Tokyo Gas Co., Ltd. and Consolidated Subsidiaries
Years ended March 31, 2005 and 2004
Thousands of
U.S. dollars (Note 1)

Millions of yen

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

2005

2004

2005

¥1,190,783¥1,151,825$11,128,814

Operating income (Note 12)
Other income (expenses):
Interest and dividend income
Gains from settlement of weather derivatives
Exclusive facilities income
Reversal of environmental conditioning costs
Gains from sale of securities (Note 5)
Interest expense
Adjustments of charges for construction of distribution facilities
Losses on unsecured notes redemption
Gains resulting from changes to pension system (Note 2)
Losses on impairment of fixed assets (Note 12)
Write-off of unrecognized actuarial differences of pension plans (Note 2)
Special severance payment
Foreign exchange losses
Equity in net income of an affiliated company
Other, net

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

624,722420,712
1,045,434

578,530
421,008
999,538

5,838,525
3,931,884
9,770,409

145,349

152,287

1,358,405

1,086
2,741
1,507
—
5,262
(13,134)(4,043)(2,879)—(1,198)—(3,487)
(52)
258
1,913
(12,026)

1,399
—
374
1,650
589
(14,823)(4,145)(6,575)
5,665(3,322)(58,956)—(15)
236(1,233)(79,156)

10,146
25,617
14,087—49,182(122,748)(37,783)(26,907)—(11,200)—(32,587)
(490)
2,412
17,874(112,397)

133,323

73,13145,074
3,534
84,715(668)¥ 84,047¥

44,266(16,367)
45,232(445)
44,787

Yen

Amounts per share of common stock (Note 2):
Net income
Diluted net income
Cash dividends applicable to the year2004

¥31.4728.24
7.00¥16.44
14.98
7.00

Balance at March 31, 2003
2,810,171
Net income
Net unrealized holding gains
on securities
Foreign currency translation
adjustments
Treasury stock
Cash dividends paid(¥6.00 per share)
Bonuses to directors
Balance at March 31, 2004
2,810,171
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 to directors
Balance at March 31, 2005
2,810,171

Commonstock

CapitalsurplusRetainedearnings¥141,844¥2,065¥429,653
44,787Net unrealized Foreign currency
holding gains
translation
on securities
adjustments¥ 17,003¥

4

Treasurystock¥(10,863)

18,652(231)(1)¥141,844¥2,065(16,438)(77)¥457,924
84,047(27,945)¥ 35,655¥(227)¥(38,808)

10,988(4,154)(84)
2¥141,844¥2,067(20,337)(20,084)(65)¥532,810¥ 31,501¥(311)¥(59,145)

Thousands of U.S. dollars (Note 1)
Commonstock

CapitalsurplusRetainedearnings

1,325,649$19,303$4,279,664
785,489

Net unrealized Foreign currency
holding gains
translation
on securities
adjustments

Treasurystock

1,246,008
421,248
33,030791,730(6,241)$ 785,489

U.S. dollars (Note 1)

2005

Millions of yen
Number of sharesof common stock(Thousands)

2005

$0.29
0.26
0.07

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($0.07 per share)
Bonuses to directors
Balance at March 31, 2005

$333,222$(2,125)$(362,691)

102,692(38,821)(783)
171,325,649$19,320(190,068)(187,702)(610)$4,979,533$294,401$(2,908)$(552,759)

See accompanying notes.

See accompanying notes.

46 Tokyo Gas Annual Report 2005

Tokyo Gas Annual Report 200547

Consolidated Statements of Cash Flows

Notes to Consolidated Financial Statements

Tokyo Gas Co., Ltd. and Consolidated Subsidiaries
Years ended March 31, 2005 and 2004

Tokyo Gas Co., Ltd. and Consolidated Subsidiaries
Years ended March 31, 2005 and 2004
Thousands of
U.S. dollars (Note 1)

Millions of yen

2005

Cash flows from operating activities:
Income before income taxes and minority interest in net incomeof consolidated subsidiaries¥ 133,323
Adjustments to reconcile income before income taxes and minority
interest in net income of consolidated subsidiaries to net cash provided
by operating activities:
Depreciation (Note 12)136,421
Amortization of long-term prepayments
3,851
Losses on impairment of fixed assets (Note 12)
1,198
Loss on disposal of property, plant and equipment
3,388
Gains from sale of securities(5,262)
Loss on unsecured notes redemption
2,879
Increase (decrease) in allowance for doubtful accounts(1,293)
Increase (decrease) in employees’ severance and retirement benefits (17,456)
Interest and dividend income(1,086)
Interest expense
13,134
Changes in operating assets and liabilities:
Decrease (increase) in notes and accounts receivable(7,597)
Decrease (increase) in inventories(778)
Increase (decrease) in notes and accounts payable
6,057
Increase (decrease) in consumption taxes payable(1,140)Bonuses paid to directors(65)
Other—net
5,011
270,585
Cash received for interest and dividends
1,057
Cash paid for interest(13,003)
Cash paid for income taxes(43,601)
Net cash provided by operating activities
215,038
Cash flows from investing activities:
Purchase of time deposits(6,667)
Proceeds from redemption of time deposits
9,123
Purchases of investment securities(14,119)
Proceeds from sales of securities
6,263
Purchases of property, plant and equipment(94,084)
Purchases of intangible fixed assets(12,787)
Long-term prepayments(2,332)
Proceeds from sale of tangible and intangible fixed assets
4,029
Expenditure of long-term loans receivable(1,610)
Proceeds from long-term loans
4,428
Other—net
380
Net cash used in investing activities(107,376)
Cash flows from financing activities:
Net increase (decrease) repayments of short-term bank loans(2,691)
Proceeds from long-term debt
60,566
Repayments of long-term debt
(125,703)
Cash dividends paid
(20,144)
Payments for acquiring treasury stock(20,442)
Other—net
254
Net cash used in financing activities(108,160)
Effect of exchange rate changes on cash and cash equivalents(2)
Net increase (decrease) in cash and cash equivalents(500)
Cash and cash equivalents at beginning of year
43,961
Increase in cash and cash equivalents due to addition of
consolidated subsidiaries
7,204
Cash and cash equivalents at end of year
¥ 50,665

2004

2005

¥ 73,131$ 1,246,008

143,129
3,766
3,322
3,790
(589)
6,575
(193)
36,912(1,399)14,823

1,274,959
35,989
11,20031,667(49,182)
26,907(12,083)(163,139)(10,145)
122,748

5,157(1,701)274(1,552)(77)(7,571)
277,797
1,381(15,053)(46,517)217,608(70,999)(7,273)56,610(10,653)(610)
46,8302,528,834
9,879(121,528)(407,478)
2,009,698(12,581)
11,629(15,371)
7,683(101,012)(12,211)(2,103)
1,235(3,886)894(315)(126,038)(62,309)85,262(131,950)
58,535(879,288)(119,503)(21,797)
37,650(15,048)
41,381
3,556(1,003,511)(11,871)
87,790(131,042)(16,482)(28,038)(101)(99,744)5(8,169)52,130(25,145)566,033(1,174,790)(188,263)(191,050)
2,370(1,010,845)(19)(4,677)
410,848—¥ 43,961$

67,330473,501

1. Basis of presenting consolidated financial statements
Tokyo Gas Co., Ltd. (the “Company”) and its consolidated
domestic subsidiaries maintain their accounts and records inaccordance with the provisions set forth in the Japanese Securities
and Exchange Law and its related accounting regulations, and in
conformity with accounting principles generally accepted in Japan(“Japanese GAAP”), which are different in certain respects as toapplication and disclosure requirements of International 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 havebeen restructured and translated into English (with some
expanded descriptions and inclusion of consolidated statements ofshareholders’ equity) from the consolidated financial statements of

the Company prepared in 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 the statutory Japaneselanguage consolidated financial statements, but not required forfair presentation, is not presented in the accompanying
consolidated financial statements.
The translation of the Japanese yen amounts into U.S. dollars
are included solely for the convenience of readers outside Japan,
using the prevailing exchange rate at March 31, 2005, which was¥107 to US$1. The convenience translations should not be
construed as representations that the Japanese yen amounts havebeen, 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
the years ended March 31, 2005 and 2004, 52 subsidiaries and 18
subsidiaries, respectively, were consolidated. All significant intercompany transactions and account balances are eliminated inconsolidation.
In the elimination of investments in subsidiaries, the assets andliabilities of the subsidiaries, including the portion attributable tominority shareholders, are recorded based on their fair value at thetime the Company 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 toincome in the period of acquisition.
The Company implemented the strategic business unit system
on April 1, 2004, based on its medium-term management plan
“Frontier 2007,” developed in October 2002, where the Company
has set the establishment of a group management system as one ofits major goals. Upon implementation of the new system, theCompany has expanded its scope of consolidation, resulting in an
increase in the number of consolidated subsidiaries from 18
companies in the year ended March 31, 2004, to 52 companies inthe year ended March 31, 2005. As a result, the result figures forthe year ended March 31, 2005 have been calculated based on the
new scope of consolidation. The effects of expansion of the scopeof consolidation are summarized as follows.
Increase (Decrease)

Sales
Operating income
Net income

Millions of yen

Thousands of
U.S. dollars¥43,157
2,567
(457)

$403,336
23,991(4,271)Equity method Significant investments in unconsolidated subsidiaries and affiliates over which the Company has the ability to
exercise significant influence with regard to operating and financial
policies of the investees, are accounted for by the equity method.
For the years ended March 31, 2005 and 2004, one affiliatedcompany 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 declining-balance method based on estimated useful life,
except that buildings (excluding building equipment) acquired
after March 31, 1998 are depreciated using the straight-line
method.
As the accounting standard for impairment of fixed assets(“Opinion on Setting Accounting Standard for Impairment of Fixed
Assets,” issued by the Business Accounting Deliberation Council
on August 9, 2002), and its implementation guidance (Financial
Standards Implementation Guidance No. 6, “Implementation
Guidance for Accounting Standard for Impairment of Fixed
Assets,” issued by the Accounting Standards Board of Japan on
October 31, 2003) can be adopted in the year ended March 31,
2004, the Company adopted the standard and its implementation
guidance commencing in the year ended March 31, 2004. As aresult, income before income taxes and minority interest in net
income of consolidated subsidiaries decreased by ¥3,322 million.
The amounts of accumulated impairment losses are directlydeducted from the acquisition costs of related fixed assets.
Software costs The Company and its consolidated subsidiaries
include software in intangible assets and depreciate it using thestraight-line method over the estimated useful life.

See accompanying notes.

48 Tokyo Gas Annual Report 2005

Tokyo Gas Annual Report 200549

Cash and cash equivalents Cash and cash equivalents include
cash on hand, readily-available deposits and short-term highly
liquid investments with 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
their securities in one of the following three categories, in accordance with the Japanese Accounting Standard for Financial
Instruments.
(a) Debt securities intended to be held to maturity (hereafter,“held-to-maturity debt securities”) are stated at amortized cost.
(b) Equity securities issued by unconsolidated subsidiaries andaffiliated companies that are not accounted for using the equity
method are stated at moving-average cost.
(c) Available-for-sale securities, which are defined as securities
other than held-to-maturity debt securities, equity securities
issued by unconsolidated subsidiaries and affiliated companies,
and securities held for trading purposes, are stated at fairmarket value at the year-end, if their fair market values arereadily available. The difference between acquisition costs andbook 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 market values
are stated at moving-average cost.
If the fair market value of held-to-maturity debt securities,
equity securities issued by unconsolidated subsidiaries and affiliated companies, and available-for-sale securities, declines
significantly, unless the decline is considered recoverable, suchsecurities are stated at fair market value and the difference
between fair market value and the carrying amount is recognized
as loss in the period of the decline.
Derivative financial instruments The Company and its consolidated subsidiaries use currency swap contracts, interest rate
swaps, foreign exchange forward contracts, commodity swaps andweather derivatives only for the purpose of mitigating the risk offluctuations in foreign exchange rates, interest rates, market pricesof raw materials and finished products and affects of changes intemperature. The Company and its consolidated subsidiaries do
not use derivative financial instruments for speculative trading
purposes. The derivative financial instruments are executed withcreditworthy financial institutions, and the Company’s and its
consolidated subsidiaries’ management believes there is little riskof default by counterparties. The derivative financial instruments
are used based on internal policies and procedures on risk control.
Derivatives are stated at fair market value at the year-end. The
Company and its consolidated subsidiaries use hedging accounting,provided that the conditions of the accounting were applicable to
the rules.

50 Tokyo Gas Annual Report 2005

Inventories Inventories are stated at cost, cost being determinedby the moving-average method.

actual expenditure and the amount provided is charged to incomein the year repairs are completed.

Allowance for doubtful accounts The Company and its consolidated subsidiaries provide for doubtful accounts at an estimatedamount of probable bad debts.

Accounting for certain lease transactions Finance leases
which do not transfer ownership to lessees are accounted for in thesame manner as operating leases under accounting principles
generally accepted in Japan.

Employees’ severance and retirement benefits The Company
and its consolidated subsidiaries provide post-employment benefit
plans, an unfunded lump-sum payment plan and a funded pension
plan, under which employees’ severance and retirement benefits
are based on the level of wages and salaries at the time of retirement or termination, 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 and the fair value of the plan assets.
The estimated amount of all retirement benefits to be paid at
the future retirement date is assumed as generating equally toeach service year using the estimated number of total service
years. Past service costs are charged to income when incurred, andactuarial gains and losses are charged to income in the fiscal year
following the year when they arise.
With enactment of the Defined Benefit Corporate Pension Plan
Law in Japan, the Company carried out a revision in its pension
plans during the year ended March 31, 2004, including a shift fromthe tax-qualified pension plan to the contract-type funded pension
plan as well as introduction of a cash balance pension plan. As aresult, the overall benefit ratio was lowered and, therefore, ¥5,665
million gain resulting from changes to pension system has beenrecorded as other income. In addition, upon this plan revision, theCompany changed its accounting for unrecognized actuarial differences from amortizing them over ten years to writing them off in
one year, resulting in write-off of ¥58,956 million in actuarial
differences incurred in previous years. The purpose of this change
is not only to timely reflect the funded status of the benefit obligation in the consolidated financial statements, but also to secure
financial strength of the Company. As a result of the changes
described above, income before income taxes and minority interestin net income of consolidated subsidiaries decreased by ¥52,640
thousand, compared with what would have been recorded under
the previous plans and accounting method.
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 toincome in equal annual amounts. The difference between the

Income taxes Income taxes comprise corporation tax, inhabitants’ taxes and enterprise tax (excluding enterprise taxes based
on “amount of added value” and “amount of capital”). The
Company and its consolidated subsidiaries recognize tax effects of
temporary differences between the financial statement basis andthe tax basis of assets and liabilities.
Enterprise tax In the case of companies engaged in gas business,enterprise tax which is levied, not on taxable income, but on net
sales, is accounted for in “Selling, general and administrative”
expenses. With the promulgation of the “Revision of the Local Tax
Law” (Legislation No. 9, 2003) on March 31, 2003, the tax bases forassessing enterprise taxes comprise “amount of income,” “amountof added value” and “amount of capital” commencing April 1, 2004.
Enterprise taxes based on “amount of added value” and “amount of
capital” are included in “Selling, general and administrative
expenses” commencing this fiscal year pursuant to “Practical
Solutions on Presentation for Size-Based Components of Corporate
Enterprise Tax on the Income Statement” (Accounting Standards

Board, Practical Solution Report No. 12 issued on February 13,2004). The effect of the change was not significant.
In the accompanying consolidated statements of income,enterprise tax is accounted for in “Selling, general and administrative” expenses in the amount of ¥11,607 million (US$108,474
thousand) and ¥11,145 million for the years ended March 31, 2005
and 2004, respectively.
Foreign currency translation Receivables and payables denominated in foreign currencies are translated into Japanese yen at the
year-end rates, and the resulting translation gains or losses arecharged to income currently.
Amounts per share of common stock Basic net income pershare is computed based on the net income available for distribution to common shareholders and the weighted-average number ofcommon shares outstanding for the period. Diluted net income pershare reflects the potential dilution that could occur if convertible
bonds were converted into common stocks.
Cash dividends per share have been presented on an accrualbasis and include dividends approved or to be approved after thebalance sheet dates, but applicable to the year then ended.
Reclassifications Certain prior year amounts have been reclassified to conform to 2005 presentation. These changes had no
impact on previously reported results of operations.

3. Property, plant and equipment
Property, plant and equipment is generally recorded at cost.
However, in cases where the Company and its consolidated subsidiaries receive government grants toward the cost of acquisition,such amounts are offset against the acquisition cost of the related

asset. Such offsets recorded at March 31, 2005 and 2004 were¥259,241 million (US$2,422,814 thousand) and ¥238,700 million,
respectively.

4. Pledged assets
Pledged assets at March 31, 2005 and 2004 were as follows:
Thousands of
U.S. dollars

Millions of yen

Distribution facilities
Service andmaintenance facilities
Other
Investment securities

2005

2004

2005

¥ 5,658¥ 5,742$ 52,876

Pledged as collateral for long-term debt and other liabilities at
March 31, 2005 and 2004 were as follows:

2005

2004

2005

¥5,299¥9,073$49,519—

6—

Bank loans

—

300

—

Other current liabilities

60

53

561

¥5,359¥9,432$50,080

Long-term debt
141

142

1,322

10,807

7,865

100,996

75

37

700

¥16,681¥13,786$155,894

Thousands of
U.S. dollars

Millions of yen

Accounts payable

Tokyo Gas Annual Report 2005

51

5. Securities

7. Bank loans and long-term debt
Millions of yen

Acquisition costs, book values and fair values of securities withavailable fair market values at March 31, 2005 and 2004 were as
follows:

For 2004

Acquisition cost(a) Held-to-maturity debt securities

Bonds
SubtotalThousands of
U.S. dollars

Millions of yen
2004

¥45

$416

Fair value

47

36

435

Difference

¥ 2

¥ 1

$ 19

¥66,363¥56,455

6

6

—

9,914

66,36956,455

615

583

(32)

Total

¥10,529¥66,952¥56,423

For 2005

Acquisition cost

Equity securities¥35¥ 9,908

At March 31, 2005 and 2004, bank loans consisted of short-term
notes, bearing interest at an average annual rate of 0.29%.
Long-term debt at March 31, 2005 and 2004 was as follows:

Domestic unsecured notes

Thousands of U.S. dollars
Book value

Difference

Securities with book values exceeding acquisition cost:Thousands of
U.S. dollars

Millions of yen

2005

2004

Equity securities

¥—

Total

Fair value

—

10

—

Difference

¥—

¥—

$—

Millions of yen
Acquisition cost

Book value

Difference

Securities with book values exceeding acquisition cost:
Equity securities¥12,454¥62,578¥50,124

Securities with book values not exceeding acquisition cost:
Equity securities
Total

2,324

2,126

(198)

¥14,778¥64,704¥49,926

21,715

19,865(1,850)$138,108$604,709$466,601

Available for sale securities sold amounted to ¥6,040 million(US$56,447 thousand) and ¥2,613 million for the years ended March
31, 2005 and 2004, respectively. Gains on available-for-sale securities
amounted to ¥5,398 million (US$50,449 thousand) and ¥597 million
and losses on available-for-sale securities amounted to ¥136 million(US$1,267 thousand) and ¥7 million for the years ended March 31,
2005 and 2004, respectively.
Available-for-sale securities with no available fair values, whichwere stated at moving-average cost, amounted to ¥12,008 million(US$112,223 thousand) and ¥11,732 million at March 31, 2005 and2004, respectively. Investments in unconsolidated subsidiaries andaffiliated companies amounted to ¥23,832 million (US$222,726 thousand) and ¥29,715 million for the years ended March 31, 2005 and2004, respectively.

(b) Available-for-sale securities
For 2005

6. Inventories
Inventories at March 31, 2005 and 2004 were as follows:
Thousands of
U.S. dollars

Millions of yen

Finished products
Raw materials
Supplies
Work in process

52

Tokyo Gas Annual Report 2005

$468,451$—

Equity securities¥10$584,844

Securities with book values not exceeding acquisition cost:

Securities with fair value not exceeding book value:Book value$116,393

2005

2005

2004

2005

¥ 3,173
13,5708,604
89¥25,436¥ 1,949
11,372
8,177
1,329¥22,827$ 29,658
126,823
80,409831$237,721

Thousands of
U.S. dollars

Millions of yen

Securities with book values not exceeding acquisition cost:

2005

Securities with fair value exceeding book value:Book value

Difference

Securities with book values exceeding acquisition cost:
Equity securities

2005

Book value

Domestic unsecured convertible bonds

Due 2016 at a rate of 4.0%
Due 2018 at a rate of 2.625%
Due 2009 at a rate of 1.68%
Due 2009 at a rate of 1.73%
Due 2010 at a rate of 2.01%
Due 2011 at a rate of 1.39%
Due 2012 at a rate of 1.35%
Due 2023 at a rate of 1.01%
Due 2013 at a rate of 1.41%
Due 2014 at a rate of 1.59%
Due 2024 at a rate of 2.29%
Due 2025 at a rate of 2.14%
Due 2015 at a rate of 4.1%
Due 2004 at a rate of 1.03%
Due 2009 at a rate of 1.18%
3rd issue due 2005 at a rate of 1.5%
5th issue due 2009 at a rate of 1.2%
6th issue due 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 2019 at rates of 0.174% to 6.40%
SecuredUnsecured
Less—Amounts due within one year

The indentures covering the fifth and sixth domestic convertible
bonds provide, among other conditions, for (1) conversion intoshares of common stock at the conversion prices per share of¥339.00 (US$3.17) and ¥339.00 (US$3.17), respectively (subject toadjustment in certain circumstances), (2) conversion periods
through March 30, 2009 and March 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 becomesdue and, in the case of default or certain other specified events,
against all debt payable to the bank. To date no such offset request
has been made to the Company and its 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 the shareholders. Neither the Company nor any of its
consolidated subsidiaries has ever received any such request.

2005

2004

2005

¥ 27,700
40,00030,00030,00020,00030,00020,00020,00030,00020,00010,00010,00013,800—4,000—
39,92949,956
18,333¥ 27,700
40,00030,00030,00020,00030,00020,00020,00030,000———13,8003,000
4,000
82,87749,96349,965
18,333$ 258,879
373,832
280,374
280,374
186,916
280,374
186,916
186,916
280,374
186,916
93,45893,458
128,972—
37,383—373,168
466,879
171,340

5,299
179,965598,982
51,843¥547,139

9,074
174,003652,715
106,870¥545,845

49,5191,681,914
5,597,962
484,516$5,113,446

The annual maturities of long-term debt at March 31, 2005 were as
follows:
Year ending March 31

Millions of yen

Thousands of
U.S. dollars

2006¥ 51,843$484,516

2007

75,987710,162

2008

40,613

379,557

2009

71,756670,618

2010

81,807

764,552

2011 and thereafter

276,976

2,588,557¥598,982$5,597,962

Tokyo Gas Annual Report 2005

53

8. Derivative transactions

10. Income taxes

Contract amounts, market values and recognized gains on the currency swap contracts, except those accounted for using hedge
accounting, and weather derivatives at March 31, 2005 and 2004
were as follows:

Thousands of U.S. dollars
At March 31, 2005
Contract
amounts

Receive Euro, pay
Japanese yen

At March 31, 2005
Beyondone yearMarketvalue

Recognized
gains (losses)

Weather derivatives:

Currency swap contracts:
¥ 105

¥—

¥32

¥32

Weather derivatives:

5,625

—

—

—

¥—

¥—

¥ 32

¥

$

—

Millions of yen
Beyondone yearMarketvalue

Recognized
gains (losses)

$ —

—

$302

$302

—

—

—

$ —

$ —

$302

Market value of currency swap contracts were calculated based on
the information presented by financial institution. 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.

At March 31, 2004
Contract
amounts

983

52,570$Receive Euro, pay
Japanese yen

Marketvalue

Currency swap contracts:

Millions of yen
Contract
amounts

Beyondone year

The Company is subject to a number of taxes based on taxable
income, which, in the aggregate, indicate a statutory rate in Japan ofapproximately 36.2% for the years ended March 31, 2005 and 2004.
It is not shown due to the difference between the statutory tax
rate and the effective tax rate for financial statement purposes forthe year ended March 31, 2005 being not significant. The significant differences between the statutory tax rate and the effective
tax rate for financial statement purposes for the year ended March
31, 2004 was as follows.

2004

36.21%

Statutory tax rate
Tax credit for R&D expenses(1.43)

Unrecognized net operating loss of
consolidated subsidiary

1.04

Items for which tax planning strategies have notbeen determined (for impairment of fixed assets)

0.93

Other—net

1.40

Effective tax rate

38.15%

Significant components of deferred tax assets and liabilities as ofMarch 31, 2005 and 2004 were as follows:
Thousands of
U.S. dollars

Millions of yen

Recognized
gains (losses)

2005

2004

2005

Liabilities for retirement benefits¥49,043¥52,847$458,347

Other—net

37,99933,731

355,128

Less valuation allowance(1,227)(2,030)(11,465)

Subtotal

85,81584,548802,010

Net unrealized holding gains on securities

18,396

20,734

171,925

Reserve for tax purposes cost reduction of certain pipelines

1,110

1,462

10,370

Deferred tax assets:

Currency swap contracts:
Receive Euro, pay
Japanese yen

¥—

¥—

¥—

¥—

Weather derivatives:

—

—

—

—

¥—

¥—

¥—

¥—

Deferred tax liabilities:

9.Employees’ severance and retirement benefits
Employees’ severance and retirement benefits included in the liability section of the consolidated balance sheets
as of March 31, 2005 and 2004 were as follows:
Thousands of
U.S. dollars

Millions of yen

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

2005

2004

2005

¥345,322
2,275(16,351)(190,056)
290¥141,480¥ 328,518
1,148(8,579)(163,350)71¥ 157,808$ 3,227,308
21,258(152,812)(1,776,224)
2,713$ 1,322,243

Included in the consolidated statements of income for the years ended March 31, 2005 and 2004 were severance
and retirement benefit expenses comprised of the following:Thousands of
U.S. dollars

Millions of yen

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

2005

2004

2005

¥ 9,7117,475(3,402)
(155)
3,049
1,038
¥17,716¥ 9,659
8,182(3,057)(3,761)59,446
101¥70,570$ 90,759
69,861(31,797)(1,446)28,495
9,697$165,569

The discount rate and the rate of expected return on plan assets used by the Company and its consolidated subsidiaries are approximately 2.1% and 2.0%, respectively, at March 31, 2005, and approximately 2.3% and 2.0%,
respectively, at March 31, 2004.

54 Tokyo Gas Annual Report 2005

Other—net

5,672

1,908

53,010Subtotal

25,178

24,104

235,305¥60,637¥60,444$566,705

Deferred tax assets—net

11. Shareholders’ equity
At the current conversion prices, 365,512 thousand shares ofcommon stock were issuable at March 31, 2005 upon fullconversion of the outstanding convertible bonds (see Note 7).
Under the Commercial Code of Japan (the “Code”), the entire
amount of the issue price of new shares is required to be designated as common stock, although a company may, by a resolution ofits Board of Directors, designate an amount not exceeding one-halfof 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 appropriatedand set aside as legal reserve until the total amount of legal reserve
and additional paid-in capital equals 25% of the stated capital. Asof March 31, 2005, the total amount of legal reserve and additional
paid-in capital has already exceeded 25% of the stated capital and,
therefore, no additional provision is required.
And under the Code, the excess of the total additional paid-in
capital and legal reserve over 25% of common stock is available fordividends by resolution of the general meeting of shareholders.
Additional paid-in capital is included in capital surplus and legal

earnings 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 the Company in accordance with the JapaneseCommercial Code.
The Code provides that cash dividends may be approve semiannually by the resolution of the annual general shareholders’ meeting
after the end of each fiscal year or by the declaration of the Boardof Directors after the end of each interim semi-annual period. Such
dividends are payable to shareholders of record at the end of eachfiscal year or semi-annual period. Appropriations are not accrued in
the financial statements for the period to which they relate, but arerecorded in the subsequent accounting period when the shareholders’ approval has been obtained. Retained earnings at March 31,
2005 include amounts representing the year-end cash dividends
and bonuses to directors and approved at the shareholders’ meeting
held on June 29, 2005 as discussed in Note 15 (2).

Tokyo Gas Annual Report 2005

55

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,identifiable assets, depreciation, losses on impairment of fixed
assets and capital expenditures by business segments for the years
ended March 31, 2005 and 2004 was as follows:

Costs and expenses under Elimination or corporate that cannot
be allocated to business segments are related mainly to generaladministrative expenses of the Company, amounted to ¥66,945
million (US$625,651 thousand) and ¥69,466 million at March 31,
2005 and 2004, respectively.
Assets under Elimination or corporate mainly comprise cash
and cash equivalents, current and noncurrent securities anddeferred tax assets of the Company, amounted to ¥218,385 million(US$2,040,985 thousand) and ¥225,856 million at March 31, 2005
and 2004, respectively.
Geographic segment information is not shown due to theCompany having no overseas consolidated subsidiaries.
Information for overseas sales is not disclosed due to overseas
sales being immaterial compared to consolidated net sales.

Millions of yen
Gas sales

Gas appliance
sales

Relatedconstruction

Real estate
rentalOtherbusiness

Elimination or
corporate

Consolidation

13. Information for certain leases

For 2005

Sales:
Outside customers
Intra groupTotal¥ 826,583¥132,374¥60,831¥ 14,004¥1,190,783

Finance leases
Information as lessee

2,735

3,964

20,697

77,730(113,201)—

135,109

64,79534,701

234,721(113,201)

1,190,783

Lease payments in the years ended March 31, 2005 and 2004, and651,973

128,055

61,220¥ 182,685

¥

7,054

¥ 3,575¥

Identifiable assets¥1,006,673¥ 42,681

107,082515—
74,980Capital expenditures

—

8,075

Operating income

Losses on impairment of fixed assets¥

834,658

Costs and expenses

Depreciation¥156,991

28,198221,306(45,318)

1,045,434

future minimum lease payments at March 31, 2005 and 2004 were

6,503

¥ 13,415¥ (67,883)¥ 145,349

as follows:¥21,426¥205,079¥222,241¥ 170,634¥1,668,734

185

12,35818,142(1,861)

136,421

—

—

—

1,198

—

1,198

534

297

3,218

29,621(3,453)

105,197

Thousands of
U.S. dollars

2005

2004

2005

¥ 958

¥ 613

$ 5,728

Future minimum lease payments to be received:
Millions of yen
Gas sales

Gas appliance
sales

Relatedconstruction

Real estate
rentalOtherbusiness

Elimination or
corporate

Consolidation¥132,254¥64,944¥ 14,151¥113,909¥¥1,151,825

Current

¥ 561

¥ 840

$ 5,243

Noncurrent

1,324

1,683

12,374¥1,885¥2,523$17,617

For 2004

Sales:
Outside customers
Intra group
Total
Costs and expenses¥ 826,567

—

4,548

1,619

3,090

21,29358,251(88,801)—

831,115

133,873

68,03435,444

172,160(88,801)

1,151,825

641,749

125,969

63,57827,561

160,890(20,209)

999,538

Operating income¥ 189,366

¥

7,904

¥ 4,456¥

7,883¥ 11,270¥ (68,592)¥ 152,287

Identifiable assets¥1,027,776¥ 45,445¥23,137¥208,213¥184,816¥177,441¥1,666,828

117,150506

136

13,37013,516(1,549)143,129

Losses on impairment of fixed assets

1,652

—

—

1,667

3

—

3,322

Capital expenditures

85,873

550

303

2,833

18,066(2,287)

105,338

Depreciation

The Company and its consolidated subsidiaries use certain production facilities, distribution facilities, service and maintenancefacilities and other assets under lease arrangements. Acquisition
cost, accumulated depreciation and net book value for property
held under finance leases which do not transfer ownership of theleased property to the lessee on an “as if capitalized” basis for theyears ended March 31, 2005 and 2004 were as follows:

Relatedconstruction

Real estate
rentalOtherbusiness

Elimination or
corporate

Acquisition
cost

Accumulated
depreciation

Net book
value¥3,994¥2,109¥1,885¥3,994¥2,109¥1,885

Sales:

Production facilities¥ 115

Distribution facilities

890

385

505

370

109

261

3,643

1,952

1,691

¥5,018¥2,495¥2,523$$7,725,079$1,237,138$568,511$ 130,881$1,467,205—$11,128,814

75,46625,55937,049193,429

726,446(1,057,949)—

7,800,545

1,262,697

605,560

324,310

2,193,651(1,057,949)

11,128,814

Service and maintenancefacilities

Costs and expenses

6,093,207

1,196,775

572,152

263,532

2,068,276(423,533)

9,770,409

Other

Operating income$1,707,338$

65,922$ 33,408$

60,778$ 125,375$ (634,416)$ 1,358,405

Identifiable assets$9,408,159$ 398,889$200,240$1,916,626$2,077,018$ 1,594,714$15,595,646

Depreciation

1,000,766

4,811

1,726

115,498

169,552(17,394)

1,274,959

—

—

—

—

11,200—

11,200700,747

4,991

2,778

30,072276,833(32,267)

983,154

Total

Losses on impairment of fixed assets
Capital expenditures¥ 4,221¥ 4,473$ 39,450

Current¥ 4,117¥ 4,553$ 38,478

Noncurrent

12,37912,989115,692¥16,496¥17,542$154,170

Acquisition cost, accumulated depreciation and net book value
for property held under finance leases which do not transfer ownership of the leased property to the lessee on an “as if capitalized”
basis for the years ended March 31, 2005 and 2004 were as follows:
Millions of yen
Acquisition
cost

Accumulated
depreciation

Net book
value¥23,988¥16,156¥7,832¥25,214¥15,470¥9,744

For 2005

Other
For 2004

Other

Thousands of U.S. dollars
Acquisition
cost

Accumulated
depreciation

Net bookvalue$224,183$150,991$73,192

For 2005
For 2004

Intra group

2005

Future minimum lease payments to be received:

Consolidation

For 2005

Outside customers

2004

For 2005

Thousands of U.S. dollars
Gas appliancesales

Lease income

2005

Millions of yen

Other
Gas sales

Thousands of
U.S. dollars

Millions of yen
Millions of yen

Lease payments

Information as lessor
Lease income in the years ended March 31, 2005 and 2004, andfuture minimum lease payments to be received at March 31, 2005
and 2004 were as follows:

Other
¥

49

¥

66

Operating leases
Information as lessor
Future minimum lease payments to be received at March 31, 2005
and 2004 were as follows:
Thousands of
U.S. dollars

Millions of yen
Thousands of U.S. dollars
Acquisition
cost

Accumulated
depreciation2005
Net book
value

2004

2005

Future minimum lease payments inclusive of interest:
Current¥ 544¥—

Noncurrent

1,049

—

9,806

¥1,593¥—$14,888$ 5,082

For 2005

Other$37,323$37,32356 Tokyo Gas Annual Report 2005

$19,706$19,706$17,617$17,617

Tokyo Gas Annual Report 200557

Independent Auditors’ Report
14. Commitment and contingent liabilities
The Company and its consolidated subsidiaries were contingently
liable (1) for debt guarantees in the amount of ¥10,751 million(US$100,481 thousand) at March 31, 2005 for financial institutionloans to affiliated companies, other than consolidated subsidiaries(2) in the amount of ¥242 million (US$2,261 thousand) at March
31, 2005 with respect to joint and several liabilities upon default ofother debtors and (3) as guarantors for domestic unsecured notesin the amount of ¥38,700 million (US$361,682 thousand) issued by

the Company, which were assigned to certain banks under the debt
assumption agreements made in the years ended March 31, 2004,
2003 and 2002.
At March 31, 2005, the Company had several long-term
purchase contracts for the supply of LNG. The purchase pricedeterminable under such contracts is contingent upon fluctuationsin the market price of crude oil.

To the Board of Directors of TOKYO GAS CO., LTD.
We have audited the accompanying consolidated balance sheets of TOKYO GAS CO., LTD. (a Japanese corporation) and subsidiaries as of March 31, 2005 and 2004, and the related consolidated statements ofincome, stockholders’ equity and cash flows for the years then ended, expressed in Japanese yen. These
consolidated financial statements are the responsibility of the Company’s management. Our responsibility is
to independently express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in Japan. Those

15. Subsequent events(1) Acquisitions of treasury stock
The Board of Directors held on May 23, 2005, and the general
meeting of shareholders held on June 29, 2005 approved theacquisition of treasury stock based upon the approval of thegeneral meeting of shareholders.
Kind of shares: Common stock
Number of shares: Limited to 50,000,000 shares
Cost of shares acquisitions: Limited to ¥20,000 million($186,916 thousand)standards require that we plan and perform the audit to obtain reasonable assurance about whether the(2) Appropriation of retained earnings
At the general meeting of shareholders held on June 29, 2005,
the Company’s shareholders approved (i) payment of year-end
cash dividends of ¥3.5 (US$0.03) per share aggregating ¥9,278
million (US$86,706 thousand) to the shareholders of record asof March 31, 2005, and (ii) payment of bonuses to directors
totaling ¥65 million (US$607 thousand).

financial statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis forour 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 subsidiaries as of March 31, 2005 and 2004,
and the consolidated results of their operations and their cash flows for the years then ended, in conformity
with accounting principles generally accepted in Japan.
Without qualifying our opinion, we draw attention to the following.
(1) As discussed in Note 2 to the consolidated financial statements, effective for the year ended March 31, 2004,
TOKYO GAS CO., LTD. changed the method of accounting for actuarial differences of pension plans and,TOKYO GAS CO., LTD. and consolidated subsidiaries prospectively adopted new accounting standards for
impairment of fixed assets.
(2) As discussed in Note 15 (1) to the consolidated financial statements, subsequent to March 31, 2005, TOKYOGAS CO., LTD. decided to acquire treasury stock.
The U.S. dollar amounts in the accompanying consolidated financial statements with respect to theyear ended March 31, 2005 are presented solely for convenience. Our audit also included the translation of yen
amounts into U.S. dollar amounts and, in our opinion, such translation has been made on the basis
described in Note 1 to the consolidated financial statements.

Tokyo, Japan
June 29, 2005

58 Tokyo Gas Annual Report 2005

Tokyo Gas Annual Report 2005

59