Management’s Discussion and Analysis of Operations
The business activities of Tokyo Gas Co., Ltd. and its 14 consolidated subsidiaries are broken down into
5 categories: gas sales, gas appliance sales, related construction, real estate rental business, and other.

Gas Sales Volume by Sector(Million m3, 46.05 MJ/m3)

10,000Please refer to Notes 1 and 2 of the Notes to Consolidated Financial Statements for an explanation ofthe main accounting policies.

8,000

6,000

OVERVIEW OF CONSOLIDATED BUSINESS RESULTS
4,000

Gas Sales Volume
The volume of gas sold by Tokyo Gas in fiscal 2001, the year ended March 31, 2002, increased 3.9% to2,0009,227 million m3. Growth was attributable mainly to higher demand in the industrial-use sector, wherevolume climbed 14.5% due to higher capacity utilization rates of existing customers and efforts to0secure new customers. Residential gas volume decreased 1.5% year on year as a record-setting warm

Mar. 31 98

winter negated efforts to win new customers and to popularize gas appliances. Tokyo Gas also worked toResidential
Commercial
Industrial
WholesaleNote: Non-consolidated

win new customers in the commercial and other business user sectors.

Net Sales

99000102

Consolidated net sales edged up 1.0% over the previous year to ¥1,097.5 billion, reflecting the highergas sales volume and adjustments to gas rates based on the “sliding rate” system, as well as increased
sales of gas appliances. Growth was limited by the effect of gas rate reductions.

Operating Expenses and Operating Income
The cost of raw materials rose in fiscal 2001 as raw material usage rose in line with the increase in gas
sales volumes. The yen weakened approximately ¥14.5 against the U.S. dollar compared with the previous fiscal year, outweighing a drop of roughly US$4.5 per barrel in the price of crude oil. Costs andexpenses, the sum of cost of sales and selling, general and administrative expenses, increased by only
0.4% to ¥986.9 billion thanks to efforts to pare operating, personnel and other expenses through greater
efficiency. Operating income rose 6.7% to ¥110.6 billion.

Other Income (Expenses)
Other expenses were ¥27.7 billion, an improvement of ¥30.8 billion on the previous fiscal year. ThisNet Income(Billion ¥)60

reflected the absence of a charge for unfunded obligations arising from an amendment of accounting
standards for retirement benefits recorded in fiscal 2000 and lower interest expenses resulting fromprogress made in repaying interest-bearing debt.
40

Income Before Income Taxes, Income Taxes and Net Income
Income before income taxes and minority interest in net income of consolidated subsidiaries climbed
83.8% to ¥82.8 billion on account of the higher operating income and the significantly lower other20expenses. Income taxes were ¥31.5 billion. Net income, after taking into account tax adjustments due totax-effect accounting, rose 88.1% to ¥51.9 billion. Basic net income per share was ¥18.47 and diluted
net income per share was ¥16.66. ROE for fiscal 2001 was 9.3%.
0Mar. 31 98

99000102

Annual Report 2002 TOKYO GAS 21

SEGMENT INFORMATION (Sales to Outside Customers)

Net Sales by Segment(Billion ¥)1,200Gas Sales
Gas sales increased 1.3%, or ¥9.7 billion, to ¥750.4 billion, despite the effects of downward rate revi-1,000sions. The increase was attributable to efforts to expand gas sales volumes and upward adjustments togas rates based on the “sliding rate” system. Gas sales accounted for 68.4% of total net sales. Costs andexpenses increased 1.8%, or ¥10.4 billion, due to higher raw materials costs and other factors. Segment

800
600

operating income was about the same as last year at ¥149.2 billion.
400

Gas Appliance Sales
Segment sales rose 2.0%, or ¥2.8 billion, to ¥148.2 billion due to strong demand for TES (Thin &Economical System) air-conditioning systems, gas floor heating, GHPs (gas engine-driven heat pumps)
and other gas appliances. The segment accounted for 13.5% of total net sales. Costs and expenses

2000Mar. 31 98

increased 1.5%, or ¥2.0 billion, in line with the increase in the number of units sold. But operating

9900

0102

Gas Sales
Gas Appliance Sales
Related Construction
Real Estate Rental Business
Other

income climbed 9.3%, or ¥0.6 billion, to ¥7.2 billion.

Related Construction
Sales were largely the same as in the previous year at ¥67.6 billion, representing 6.2% of total net sales.
Costs and expenses were reduced by 0.4%, or ¥0.2 billion, year on year. A decline in intersegment sales,
however, led to a 7.7%, or ¥0.3 billion, decrease in operating income to ¥3.6 billion.

Real Estate Rental Business
Sales were largely the same as in the previous year at ¥15.6 billion, representing 1.4% of total net sales.
Costs and expenses rose 6.6%, or ¥1.9 billion, as the depreciation method for the Shinjuku Park Tower
was changed from straight line to declining balance to make it consistent with other company-owned

Total Assets and Equity Ratio(Billion ¥)(%)

2,000401,500

301,00020500

10buildings. Operating income dropped 24.7%, or ¥1.9 billion, to ¥6.0 billion as a result.

OtherSegment sales edged down 1.6%, or ¥1.8 billion, to ¥115.5 billion due mainly to lower demand for
district heating and cooling (DHC) systems. Other sales accounted for 10.5% of total net sales. Costsand expenses decreased 2.8%, or ¥4.2 billion, due to factors such as lower depreciation expenses on
DHC facilities. Consequently, operating income increased 6.6%, or ¥0.6 billion, to ¥10.7 billion.

FINANCIAL POSITION
Total assets as of March 31, 2002, stood at ¥1,702.7 billion, down 5.3%, or ¥94.9 billion.

Fixed Assets
Fixed assets decreased 4.4% to ¥1,450.8 billion. Plant, property and equipment declined 3.3% to¥1,249.9 billion due to depreciation. Investment securities decreased ¥36.8 billion as the stock market
dipped, resulting in an 11.8% decline in investments and other non-current assets to ¥181.6 billion.

Current Assets
Current assets stood at ¥251.8 billion, a decrease of 10.1%, as of March 31, 2002. This primarilyreflected a decline in short-term advances to group members in other current assets.

22 TOKYO GAS Annual Report 2002

00Mar. 31 98

9900

Fixed assets
Current assets
Equity ratio (%)

0102

Long-Term Liabilities
Long-term liabilities decreased 4.3% to ¥836.9 billion. This mainly reflected the repurchase andInterest-bearing Debt
(Billion ¥)(%)

1,000

100

800

80600

60

400

40200

20

retirement of convertible bonds, as well as the transfer to current liabilities of long-term debt due
within one year.

Current Liabilities
Current liabilities totaled ¥297.8 billion, down 18.8% from a year ago. The decrease reflected progressin repaying debt and redemption of convertible bonds as the company took steps to reduce interestbearing debt.

Interest-Bearing Debt
As of March 31, 2002, interest-bearing debt was ¥775.8 billion, a decline of 10.9% from a year ago as
the company continued efforts from last year to strengthen its balance sheet. The rate of dependence on

00Mar. 31 98

interest-bearing debt, which is defined as interest-bearing debt as a percentage of total assets, improved

9900

0102

Interest-bearing debt
Dependency on interest-bearing
debt (%)

from 48.4% to 45.6%.

Stockholders’ Equity

Capital Expenditures andDepreciation

Total stockholders’ equity increased 2.0% to ¥564.0 billion, mainly because retained earnings rose(Billion ¥)200¥33.5 billion thanks to the company’s strong operating results. Net unrealized holding gains on securities, however, decreased ¥22.3 billion, reflecting the application of accounting standards for financial
instruments, which have been applied since fiscal 2000. Efforts to strengthen the balance sheet contrib-150

uted to a higher equity ratio of 33.1%, up from 30.8% in the previous year.

Capital Expenditures

100Tokyo Gas is making investments to expand facilities to put in place a more stable supply system for gas.
With respect to production facilities, Tokyo Gas has expanded LNG-related facilities, such as by con-50

structing various facilities at the Ohgishima LNG Terminal, which started operations in October 1998.
In regard to supply facilities, Tokyo Gas has made investments in pipelines to develop new sources ofdemand, to create a trunk network and to replace existing pipelines and take other measures to make the0Mar. 31

supply system better able to withstand earthquakes. Capital expenditures in fiscal 2001 decreased 5.1%

Net cash provided by operating activities rose ¥4.1 billion to ¥191.6 billion, principally reflecting the sharp
increase in income before income taxes and minority interest in net income of consolidated subsidiaries.

9900

0102

Capital expenditures
Depreciation

to ¥104.2 billion.

Cash Flows

98Net Cash Provided byOperating Activities(Billion ¥)200

Investing activities used net cash of ¥111.8 billion, ¥4.0 billion less than in the previous fiscal year.
This represented mainly a ¥1.2 billion increase to ¥104.8 billion in purchases of property, plant and150

equipment, which as it did last year, accounted for the lion’s share of cash used by investing activities.
Financing activities used net cash of ¥117.1 billion, ¥12.7 billion more than in the previous fiscalyear. Cash was used to repay long-term debt of ¥39.0 billion and redeem ¥120.0 billion in bonds as100

Tokyo Gas pushed ahead with efforts to reduce interest-bearing debt.
As a result of the foregoing items, cash and cash equivalents at the end of the year were ¥27.250billion, ¥37.3 billion lower than a year ago.
0Mar. 31 98

9900

0102

Annual Report 2002 TOKYO GAS 23

FINANCIAL POLICYInterest Coverage Ratio

Tokyo Gas has made capital expenditures in excess of the total of net income and depreciation over thepast 10 years to build a comprehensive production and supply infrastructure to respond to an escalation(times)6in demand for gas. As a result, interest-bearing debt increased. However, Tokyo Gas has now entered aperiod in which past investments are generating returns. Consequently, Tokyo Gas is now able to conduct
capital expenditures within the bounds of depreciation. The free cash flows that the company generates

4

will be used to pay dividends and for investments in new businesses, as well as for the repayment ofinterest-bearing debt. In this way, Tokyo Gas will streamline and strengthen its balance sheet and parefinancial expenses.

2Tokyo Gas is thus placing emphasis on reducing interest-bearing debt and raising asset efficiency.
This will include thoroughly examining the projected returns of new capital expenditures as well as
reviewing the profitability of existing facilities and investments to raise ROA.
0Mar. 31 98

9900

01

02

Medium-Term Plan Projections (Announced in May 2001)
Free cash flows

Average of ¥64.9 billion a year for 5 years

ROA

2.4% (5-year average)

Interest-bearing debt (Non-consolidated)¥570.0 billion as of March 31, 2005

Note: Interest coverage ratio=(net income+income
taxes+interest expense)/
interest expense

MARKET RISK EXPOSURE
Stock Price Risk

ROE and ROAEquities held by Tokyo Gas are for the most part held to maintain corporate relationships needed to(%)
10conduct business operations. Stock price risk relates to stock of listed companies. Tokyo Gas has formulated a management policy and rules for the handling of such stock.

Foreign Exchange Risk

86LNG, the main raw material used by Tokyo Gas for the supply of gas, is purchased based on U.S. dollardenominated agreements. As such, these agreements are subject to fluctuations in the yen-dollar ex-4change rate. Furthermore, because the U.S. dollar-denominated LNG price is determined with referenceto crude oil prices, fluctuations in the market price of crude oil are another risk factor. The hypothetical

2effect of these fluctuations on annual raw materials costs is as follows:0

Fluctuation of ¥1 to U.S.$1Approx. ¥1.5 billion

Fluctuation of U.S.$1 per barrel in crude oil priceApprox. ¥4.7 billion (Fiscal year ended March 2002)

However, the above fluctuations are automatically passed on to customers in regulated user categories under the “sliding rate” system. First-half crude oil prices are reflected in gas rates in the second
half of each fiscal year, while second-half crude oil prices are reflected in gas rates in the first half of thefollowing year. Consequently, changes in crude oil prices have no effect on Tokyo Gas’ business over themedium to long term.

Interest Rate Risk
Tokyo Gas only has fixed-rate short- and long-term debt. Therefore, there is no risk from fluctuations ininterest rates during the borrowing term. However, Tokyo Gas does become subject to interest rate risk
when refinancing.
24 TOKYO GAS Annual Report 2002

Mar. 31 98

ROEROA

9900

0102