CONSOLIDATED BALANCE SHEETSTokyo Gas Co., Ltd. and Consolidated Subsidiaries
Years ended March 31, 2004 and 2003
Thousands of
U.S. dollars (Note 1)

Millions of yen

ASSETS
Property, plant and equipment (Notes 3 and 6):
Production facilities
Distribution facilities
Service and maintenance facilities
Other
Construction in progress
Accumulated depreciation

Intangibles
Investments and other non-current assets:
Investments in unconsolidated subsidiaries and affiliated companies
Investment securities (Notes 4 and 6)
Long-term loans
Deferred tax assets (Note 9)
Other investments and non-current assets
Allowance for doubtful accounts

2004

2003

2004

688,339
1,952,210
194,047
591,542
75,4433,501,581(2,284,116)
1,217,465$ 6,734,997
19,042,069
1,717,684
5,771,221
363,170
33,629,141(22,587,360)
11,041,781

18,856

20,610177,890

29,71578,771
13,23051,252
47,131(1,659)218,440

20,271
51,274
10,23844,30749,592(2,244)
173,438

280,332
743,121
124,814483,507444,634(15,650)
2,060,758¥

713,9102,018,459
182,075
611,749
38,4963,564,689(2,394,260)
1,170,429¥

LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS’ EQUITY

2004

2003

2004

Long-term debt due after one year (Note 6)
Employees’ severance and retirement benefits (Note 8)
Allowance for repairs of gas holders
Deferred tax liability
Other non-current liabilities¥ 545,845
157,8083,445
2,396
24,853¥ 598,322
120,896
3,457
792
28,105$ 5,149,477
1,488,753
32,496
22,600234,465

30,029106,870

41,90091,079283,295
1,008,212

35,74736,90232,80844,958—42,456
329,770

37,67743,48635,05845,122
13
46,412
340,747

337,236
348,130
309,508
424,131—400,530
3,111,042

4,258

4,039

40,174

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

141,8442,065
429,653
17,003
4
590,569

1,338,155
19,485
4,320,038
336,365(2,144)
6,011,899(38,808)
598,453¥1,666,828(10,863)579,706¥1,676,064(366,113)
5,645,786$15,724,793

Current liabilities:
Bank loans (Note 6)Long-term debt due within one year (Note 6)
Notes and accounts payable:
Trade
Other
Income taxes payable (Note 9)
Accrued expenses
Deferred tax liability
Other current liabilities
Total current liabilities
Commitments and contingent liabilities (Note 13)
Minority interest

Current assets:
Cash and cash equivalents
Marketable securities (Note 4)
Notes and accounts receivables:
Trade
Allowance for doubtful accounts
Inventories (Note 5)
Deferred tax assets (Note 9)
Other current assets
Total current assets

See accompanying notes.

[ 37 ]TOKYO GAS ANNUAL REPORT 2004

43,961
1

52,1301

414,72412

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

132,235(1,448)21,125
11,481
49,027
264,551¥ 1,676,064

1,181,549(11,465)
215,345
109,319534,880
2,444,364$ 15,724,793

Thousands of
U.S. dollars (Note 1)

Millions of yen

Shareholders’ equity (Note 10):
Common stock:
Authorized: 6,500,000,000 shares
Issued: 2,810,171,295 shares in 2004
2,810,171,295 shares in 2003
Capital surplus
Retained earnings
Net unrealized holding gains on securities
Foreign currency translation adjustments
Treasury stock, at cost
109,025,944 shares in 2004
32,173,308 shares in 2003
Total shareholders’ equity

TOKYO GAS ANNUAL REPORT 2004

[ 38 ]

CONSOLIDATED STATEMENTS OF INCOMECONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITYTokyo Gas Co., Ltd. and Consolidated Subsidiaries
Years ended March 31, 2004 and 2003

Tokyo Gas Co., Ltd. and Consolidated Subsidiaries
Years ended March 31, 2004 and 2003
Thousands of
U.S. dollars (Note 1)

Millions of yen

Net sales (Note 11)
Costs and expenses (Note 11):
Cost of sales
Selling, general and administrative

2004

2003

2004

¥1,151,825¥1,127,634$10,866,270

578,530
421,008
999,538

571,930
432,410
1,004,340

5,457,830
3,971,770
9,429,600

152,287

123,294

1,436,670

Operating income (Note 11)
Other income (expenses):
Interest and dividend income
Interest expense
Adjustments of charges for construction of distribution facilities
Losses on unsecured notes redemption
Gains from sale of securities
Reversal of environmental conditioning costs
Losses on impairment of fixed assets(Note 11)
Gains resulting from changes to pension system
Write-off of unrecognized actuarial differences of pension plans
Foreign exchange gains (losses)
Equity in net income of an affiliated company
Other, net

1,399(14,823)(4,145)(6,575)589
1,650(3,322)
5,665(58,956)
(15)
236
(859)
(79,156)

Income before income taxes and minority interestin net income of consolidated subsidiaries
Income taxes (Note 9):
Current
Deferred
Minority interest in net income of consolidated subsidiaries
Net income

73,131[ 39 ]TOKYO GAS ANNUAL REPORT 2004

CapitalsurplusRetainedearnings¥141,843¥2,064¥387,315
59,201

Net unrealized
holding gains
on securities

Foreign currencytranslation
adjustments¥ 32,836¥ 115

Treasury
stock

¥

(95)

(15,833)(111)(10,768)(16,768)(95)
1¥141,844

1¥2,065¥429,653
44,787¥ 17,003¥

4¥(10,863)

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

Foreign currencytranslation
adjustments

Treasurystock

Thousands of U.S. dollars (Note 1)¥

44,266(16,367)
45,232(445)
44,7872004

See accompanying notes.

Balance at March 31, 2002
2,810,165
Net income
Net unrealized holding gains
on securities
Foreign currency translation
adjustments
Treasury stock
Cash dividends paid(¥6.00 per share)
Bonuses to directors
Shares issued upon conversionof convertible bonds
6
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

Commonstock

689,919

95,883¥

43,622(7,245)59,506(305)
59,201

Yen

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

13,194(139,839)(39,102)(62,024)
5,555
15,568(31,337)
53,443(556,189)
(140)
2,226
(8,106)(746,751)

1,089(17,472)(4,649)(6,328)
3,196
—
—
—
—
737
220
(4,204)(27,411)

Millions of yen
Number of sharesof common stock(Thousands)¥16.44
14.98
7.00

$

417,606(154,401)
426,714(4,195)422,519

U.S. dollars (Note 1)

2003¥21.18
19.11
6.00

2004

$0.16
0.14
0.07

Balance at March 31, 2003
Net income
Net unrealized holding gains
on securities
Foreign currency translation
adjustments
Treasury stock
Cash dividends paid($0.06 per share)
Bonuses to directors
Balance at March 31, 2004

Net unrealized
holding gains
on securities

Commonstock

CapitalsurplusRetainedearnings$1,338,155$19,485$4,053,326
422,519$160,401$

41$(102,480)

175,964(2,185)(8)$1,338,155$19,485(155,074)(725)$4,320,038(263,633)$336,365$(2,144)$(366,113)

See accompanying notes.

TOKYO GAS ANNUAL REPORT 2004

[ 40 ]

CONSOLIDATED STATEMENTS OF CASH FLOWSNOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Tokyo Gas Co., Ltd. and Consolidated Subsidiaries
Years ended March 31, 2004 and 2003

Tokyo Gas Co., Ltd. and Consolidated Subsidiaries
Years ended March 31, 2004 and 2003
Thousands of
U.S. dollars (Note 1)

Millions of yen

2004

Cash flows from operating activities:
Income before income taxes and minority interest in net incomeof consolidated subsidiaries
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 11)
Losses on impairment of fixed assets
Amortization of long-term prepayments
Loss on disposal of property, plant and equipment
Loss (gain) on sale of property, plant and equipment
Loss on reduction of acquisition costs of property,
plant and equipment for tax purposes
Gains from sale of securities
Loss on unsecured notes redemption
Increase (decrease) in employees’ severance and retirement benefits
Interest and dividend income
Interest expense
Changes in operating assets and liabilities:
Decrease (increase) in notes and accounts receivable
Decrease (increase) in inventories
Increase (decrease) in notes and accounts payable
Decrease in consumption taxes payable
Bonuses paid to directors
Other—net

2003

2004

¥ 73,131¥ 95,883

143,129
3,322
3,766
3,790
673

137,300
—
3,728
2,482
(5,380)1,350,270
31,33735,53335,759
6,345

1,608
(589)
6,575
36,912(1,399)14,823

4,416(3,196)
6,328(4,658)(1,089)17,472

15,169(5,555)62,024348,227(13,194)
139,839

5,157(1,701)274(1,552)(77)(10,045)277,797
1,381(15,053)(46,517)217,608(6,777)
7,634(1,785)(219)(95)
14,897
266,941
1,166(18,069)(36,505)
213,533

48,649(16,047)
2,585(14,638)(725)(94,768)
2,620,729
13,024(142,010)(438,837)
2,052,906

Cash flows from investing activities:
Purchases of investment securities
Proceeds from sales of securities
Purchases of property, plant and equipment
Purchases of intangible fixed assets
Long-term prepayments
Proceeds from sale of tangible and intangible fixed assets
Expenditure of long-term loans receivable
Other—net
Net cash used in investing activities(15,371)
7,683(101,012)(12,211)(2,103)
1,235(3,886)(373)(126,038)(7,297)
5,861(98,149)(9,015)(1,800)
6,888(4,256)(2,376)(110,144)(145,011)
72,483(952,941)(115,199)(19,840)
11,649(36,664)(3,519)(1,189,042)

Cash flows from financing activities:
Net repayments of short-term bank loans
Net repayments of commercial paper
Proceeds from long-term debt
Repayments of long-term debt
Cash dividends paid
Payments for acquiring treasury stock
Other—net
Net cash used in financing activities(11,871)—
87,790(131,042)(16,482)(28,038)(101)(99,744)(809)(12,000)
37,341(75,450)(16,831)(10,768)—(78,517)(111,988)—
828,207(1,236,244)(155,494)(264,508)(954)(940,981)

Effect of exchange rate changes on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year5
(8,169)52,130¥ 43,961(3)
24,86927,261¥ 52,13049(77,068)
491,792
414,724

Cash received for interest and dividends
Cash paid for interest
Cash paid for income taxes
Net cash provided by operating activities$$

689,919

1. Basis of presenting consolidated financial statements
Tokyo Gas Co., Ltd. (the “Company”) and its consolidated domestic subsidiaries maintain their accounts and records in accordance with the provisions set forth in the Japanese Securities and Exchange Law and its
related accounting regulations, and in conformity with accounting principles generally accepted in Japan, which are different in certain respects
as to application 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 suchfinancial statements.
The accompanying consolidated financial statements have been
restructured and translated into English (with some expanded descriptions and inclusion of consolidated statements of shareholders’ equity)from the consolidated financial statements of the Company prepared inaccordance with Japanese GAAP and filed with the appropriate Local
Finance Bureau of the Ministry of Finance as required by the Securities
and Exchange Law. Some supplementary information included in thestatutory Japanese-language consolidated financial statements, but notrequired for fair presentation, is not presented in the accompanying consolidated financial statements.
The translation of the Japanese yen amounts into U.S. dollars areincluded solely for the convenience of the reader outside Japan, using
the prevailing exchange rate at March 31, 2004, which was ¥106 to
US$1. The convenience translations should not be construed as representations that the Japanese yen amounts have been, could have been,or could in the future be, converted into U.S. dollars at this or any otherrate of exchange.

2. Significant accounting policies
Consolidation The consolidated financial statements include theaccounts of the Company and all of its significant subsidiaries. For theyears ended March 31, 2004 and 2003, 18 subsidiaries were consolidated.
All significant inter-company transactions and account balances are
eliminated in consolidation.

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 theypresent insignificant risk of change.

Equity method Significant investments in unconsolidated subsidiaries
and affiliates over which the Company has the ability to exercise significant influence with regard to operating and financial policies of theinvestees, are accounted for by the equity method. For the years ended
March 31, 2004 and 2003, one affiliated company was accounted for byequity method.

Securities The Company and its consolidated subsidiaries classify theirsecurities in one of the following three categories, in accordance with theJapanese Accounting Standard for Financial Instruments.
(a) Debt securities intended to be held to maturity (hereafter, “held-tomaturity debt securities”) are stated at amortized cost.
(b) Equity securities issued by unconsolidated subsidiaries and affiliatedcompanies which are not accounted for using the equity method arestated at moving-average cost.
(c) Available-for-sale securities, which are defined as securities otherthan held-to-maturity debt securities, equity securities issued byunconsolidated subsidiaries and affiliated companies, and securities
held for trading purposes, are stated at fair market value at the
year-end, if their fair market values are readily available. The difference between acquisition cost and book values on these securities
are reported, net of applicable income taxes, as a separate component of shareholders’ equity. Available-for-sale securities with noavailable fair market values are stated at moving-average cost.

Property, plant and equipment Property, plant and equipment is generally
stated at cost. Depreciation is determined mainly by the declining-balancemethod based on estimated useful life, except that buildings 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 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, theCompany adopted the standard and its implementation guidance commencing in the year ended March 31, 2004. As a result, income before
income taxes and minority interest in net income of consolidated subsidiaries decreased by ¥3,322 million (US$31,337 thousand).
The amounts of accumulated impairment losses are directly deductedfrom the acquisition costs of related fixed assets.
Software costs The Company and its consolidated subsidiaries include
software in intangible assets and depreciate it using the straight-line
method over the estimated useful life.

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, such securities arestated 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 interest rate swaps, foreign exchange forward contracts,
commodity swaps and weather derivatives only for the purpose of mitigating the risk of fluctuations in interest rates, foreign exchange rates,

See accompanying notes.

[ 41 ]TOKYO GAS ANNUAL REPORT 2004

TOKYO GAS ANNUAL REPORT 2004

[ 42 ]

market prices of raw materials and affects of changes in temperature. The
Company and its consolidated subsidiaries do not use derivative financial
instruments for speculative trading purposes. The derivative financial
instruments are executed with creditworthy financial institutions, and theCompany’s management believes there is little risk of default by counterparties. Derivatives are stated at fair market value at the year-end.

decreased by ¥52,640 thousand (US$496,603 thousand), compared withwhat would have been recorded under the previous plans and accounting method.

Inventories Inventories are stated at cost, cost being determined by themoving-average 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 to income in equal annual
amounts. The difference between the actual expenditure and theamount provided is charged to income in the year repairs are completed.

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

Accounting for certain lease transactions Finance leases which do nottransfer ownership to lessees are accounted for in the same 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, anunfunded lump-sum payment plan and a funded pension plan, underwhich employees’ severance and retirement benefits are based on thelevel 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 obligationand the fair value of the plan assets.
The estimated amount of all retirement benefits to be paid at the
future retirement date is assumed as generating equally to each service
year using the estimated number of total service years. Past service costs
are charged to income when incurred, and actuarial gains and losses arecharged to income in the fiscal year following the year when they arise.
With enactment of the Defined Benefit Corporate Pension Plan Law inJapan, the Company carried out a revision in its pension plans during theyear ended March 31, 2004, including a shift from the tax-qualified pension plan to the contract-type funded pension plan as well as introductionof a cash balance pension plan. As a result, the overall benefit ratio was
lowered and, therefore, ¥5,665 million (US$53,443 thousand) gain resulting from changes to pension system has been recorded as other income.
In addition, upon this plan revision, the Company 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 (US$556,189 thousand) 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 interest in net income of consolidated subsidiaries

Income taxes Income taxes comprise corporation tax, inhabitants’ taxes
and enterprise tax. The Company and its consolidated subsidiaries recognize tax effects of temporary differences between the financial statement basis and the tax basis of assets and liabilities.
Enterprise tax Enterprise tax normally constitutes income taxes.
However, in the case of companies engaged in gas businesses, enterprise
tax is levied, not on taxable income, but on net sales. In the accompanying consolidated statements of income, enterprise tax levied on net sales
is accounted for in “Selling, general and administrative” expenses in theamount of ¥11,145 million (US$105,139 thousand) and ¥10,633 million
for the years ended March 31, 2004 and 2003, respectively. Enterprisetaxes calculated based on taxable income of certain consolidated subsidiaries are included in income taxes.
Foreign currency translation Receivables and payables denominated inforeign currencies are translated into Japanese yen at the year-end rates.

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

4. Securities
Acquisition costs, book values and fair values of securities with available
fair market values at March 31, 2004 and 2003 were as follows:

2004

2003

2004

Acquisition cost

Book value

DifferenceBook value

¥34

¥35

Subtotal

Equity securities$330

Fair value

36

37

344

Difference

¥ 1

¥ 3

$ 14

Total

Thousands of
U.S. dollars

Millions of yen

2004$93,471$626,065

55

56

1

93,526626,121532,595

Bonds$532,594

Securities with book values not exceeding acquisition cost:

Securities with fair value exceeding book value:

2003

2004

Securities with fair value not exceeding book value:Book value

¥10

¥—

Fair value

10

—

91

Difference

¥—

¥—

$ 1

$92

5,803

5,497

(306)

$99,329$631,618$532,289

Available-for-sale securities sold amounted to ¥2,613 million(US$24,655 thousand) and ¥5,374 million for the years ended March 31,
2004 and 2003, respectively. Gains on available-for-sale securities amounted to ¥597 million (US$5,635 thousand) and ¥3,045 million and losses onavailable-for-sale securities amounted to ¥7 million (US$66 thousand) and¥50 million for the years ended March 31, 2004 and 2003, respectively.
Available-for-sale securities with no available fair values, which werestated at moving-average cost, amounted to ¥11,732 million (US$110,683
thousand) and ¥11,840 million at March 31, 2004 and 2003, respectively.

(b) Available-for-sale securities
Millions of yen
Acquisition cost

Book value

Difference

5. Inventories

Securities with book values exceeding acquisition cost:
Equity securities
Bonds
Subtotal¥ 9,908¥66,363¥56,455

6

6

—

9,914

66,36956,455

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

615

583

(32)

¥10,529¥66,952¥56,423

Inventories at March 31, 2004 and 2003 were as follows:
Millions of yen

For 2003

Acquisition cost

Book value

Thousands of
U.S. dollars

2004

2003

2004

Finished products¥ 1,949¥ 2,391$ 18,388

Raw materials

11,372

9,762

107,279

Supplies

8,177

7,745

77,141Work in process
Millions of yen

1,329

1,227

12,537¥22,827¥21,125$215,345

Difference

Securities with book values exceeding acquisition cost:
Equity securities
Bonds
Subtotal¥10,692¥37,910¥27,2185

6

1

10,69737,91627,219Securities with book values not exceeding acquisition cost:
Equity securities

TOKYO GAS ANNUAL REPORT 2004

Equity securities
Thousands of
U.S. dollars

Millions of yen

Total[ 43 ]

Thousands of U.S. dollars
For 2004

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

For 2004

Amounts per share of common stock Effective April 1, 2002, the Company
and its consolidated subsidiaries adopted the new accounting standard
for earnings per share (Accounting Standards Board Statement No. 2,“Accounting Standard for Earnings Per Share”) and related guidance(Financial Standards Implementation Guidance No. 4, “Implementation
Guidance for Accounting Standard for Earnings Per Share,” issued by
the Accounting Standards Board of Japan on September 25, 2002).
Basic net income per share is computed based on the net income
available for distribution to common shareholders and the weightedaverage number of common shares outstanding for the period. Diluted
net income per share reflects the potential dilution that could occur ifconvertible bonds were converted into common stocks.
Cash dividends per share have been presented on an accrual basis
and include dividends approved or to be approved after the balance
sheet dates, but applicable to the year then ended.

against the acquisition cost of the related asset. Such offsets recorded at
March 31, 2004 and 2003 were ¥238,670 million (US$2,251,885 thousand) and ¥236,141 million, respectively.

1,523

1,151

(372)

¥12,220¥39,067¥26,847

TOKYO GAS ANNUAL REPORT 2004

[ 44 ]

6. Bank loans and long-term debt

7. Derivative transactions

At March 31, 2004 and 2003, bank loans consisted of short-term notes,
bearing interest at average annual rates of 0.29% and 0.33%, respectively.
Long-term debt at March 31, 2004 and 2003 were as follows:

Contract amounts, market values and recognized gains on the interest
rate swap contracts, except those accounted for using hedge accounting,at March 31, 2004 and 2003 were as follows:
Thousands of
U.S. dollars

Millions of yen
2004

Domestic unsecured notes

Domestic unsecured convertible bonds

¥

2003

Millions of yen

2004

$

Contract
amounts——¥ 10,000

Due 2015 at a rate of 4.1%

13,80023,300130,188

Currency option contracts:

Due 2016 at a rate of 4.0%

27,70029,000261,321

Purchased cap optionDue 2018 at a rate of 2.625%

40,00040,000377,358

Due 2009 at a rate of 1.68%

30,00030,000283,020

Due 2009 at a rate of 1.73%

30,00030,000283,020

Due 2010 at a rate of 2.01%

20,00020,000188,679

Due 2011 at a rate of 1.39%

30,00030,000283,020

Currency option contracts:

Due 2012 at a rate of 1.35%

20,00020,000188,679

Purchased cap optionDue 2004 at a rate of 1.03%

3,000

3,000

28,302Due 2009 at a rate of 1.18%

4,000

4,000

37,736Due 2023 at a rate of 1.01%

20,000—188,679

Due 2013 at a rate of 1.41%

30,000—283,020

Due 2014 at a rate of 5.1%

1st issue due 2003 at a rate of 1.5%—

51,439—3rd issue due 2005 at a rate of 1.5%

82,877

82,877

781,858

5th issue due 2009 at a rate of 1.2%

49,96349,969471,349

6th issue due 2007 at a rate of 1.1%

49,96549,968471,368

18,333

18,333

172,956

DM bearer bonds due 2005 at a rate of 7.0%
Loans from banks, insurance companies and government agencies due
through 2028 at rates of 0.18% to 6.40%

Thousands of U.S. dollars

At March 31, 2004
Beyondone yearMarketvalue

At March 31, 2004
Recognized
gains (losses)

Contract
amounts

Beyondone yearMarketvalue

Recognized
gains (losses)

$—

$—

$—

$—

Currency option contracts:
¥—

¥—

¥—

Purchased cap option¥—

Millions of yen
At March 31, 2003
Contract
amounts

Beyondone yearMarketvalue

Recognized
gains (losses)¥3,000¥0¥0¥0

8. Employees’ severance and retirement benefits
Employees’ severance and retirement benefits included in the liability
section of the consolidated balance sheets as of March 31, 2004 and 2003
were as follows:
Thousands of
U.S. dollars

Millions of yen

Projected benefit obligation

2004

2003

2004

¥328,518¥ 331,622$ 3,099,225

1,148

178

10,830

Secured

9,074

6,373

85,600

Unrecognized prior service costs

Unsecured

174,003

191,142

1,641,538

Unrecognized actuarial differences(8,579)(64,194)(80,937)

652,715

689,401

6,157,689

Less fair value of pension assets(163,350)(146,710)(1,541,039)

106,870

91,0791,008,212

Prepaid pension costs$5,149,477

Employees’ severance and retirement benefits

Less—Amounts due within one year

¥545,845

The indentures covering the third, fifth and sixth domestic convertible
bonds provide, among other conditions, for (1) conversion into shares ofcommon stock at the conversion prices per share of ¥1,105.70 (US$10.43),¥339.00 (US$3.20) and ¥339.00 (US$3.20), respectively (subject to adjustment in certain circumstances), (2) conversion periods through March 30,
2005, March 30, 2009 and March 29, 2007, respectively, and (3) redemption at the option of the Company, commencing in April 1998 for the 3rd
issue, at prices ranging from 106% to 100% of the principal amount.
At March 31, 2004, investment securities and property, plant andequipment at book value amounting to ¥13,787 million (US$130,064
thousand) were pledged as collateral for secured loans and notes issuedby consolidated subsidiaries.
As is customary in Japan, a lending bank has the right to offset cash
deposited with it against any debt or obligation that becomes due and, inthe 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.

[ 45 ]TOKYO GAS ANNUAL REPORT 2004

¥598,322

Certain loan agreements provide, among other things, that, uponrequest, the Company and its consolidated subsidiaries submit to thelenders for approval of their proposed appropriation of retained earnings(including dividends) before such appropriation is submitted to theshareholders. Neither the Company nor any of its consolidated subsidiaries has ever received any such request.
The annual maturities of long-term debt at March 31, 2004 were as
follows:
Year ending March 31

Millions of yen

Thousands of
U.S. dollars

2005¥106,870$1,008,212

2006

46,723440,7822007

67,295634,857

2008

31,039292,820

2009

81,233766,348

2010 and thereafter

319,555

3,014,670¥652,715$6,157,689

71

—

674

¥157,808¥ 120,896$ 1,488,753

Included in the consolidated statements of income for the years ended
March 31, 2004 and 2003 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

2004

2003

2004

¥ 9,659¥10,132$ 91,121Interest cost on projected benefit obligation

8,182

9,093

77,190

Expected return on plan assets(3,057)(4,662)(28,836)

Amortization of prior service costs(3,761)(13)(35,484)

Amortization of actuarial differences

59,446

2,825

560,814

Other
Severance and retirement benefit expenses

101

—

953

¥70,570¥17,375$665,758

The discount rate and the rate of expected return on plan assets used by
the Company and its consolidated subsidiaries are approximately 2.3%
and 2.0%, respectively, at March 31, 2004, and approximately 2.5% and3.0%, respectively, at March 31, 2003.

TOKYO GAS ANNUAL REPORT 2004

[ 46 ]

9. Income taxes

11. Segment information
The Company’s and its consolidated subsidiaries’ primary business activities 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, iden-

The Company is subject to a number of taxes based on taxable income,which, in the aggregate, indicate a statutory rate in Japan of approximately 36.2% for the years ended March 31, 2004 and 2003.
The significant differences between the statutory tax rate and theeffective tax rate for financial statement purposes for the year ended
March 31, 2004 is as follows. The differences between the statutory tax
rate and the effective tax rate for financial statement purposes for theyear ended March 31, 2003 was not significant

Millions of yen

Tax credit for R&D expenses
Unrecognized net operating loss of consolidated subsidiary
Items for which tax planning strategies have notbeen determined

Gas sales

Gas appliance
sales

Relatedconstruction

Real estate
rental business

Other

Elimination or
corporate¥ 826,567¥132,254¥64,944¥ 14,151¥113,909

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

Consolidation

For 2004

2004

Statutory tax rate

tifiable assets, depreciation, losses on impairment of fixed assets andcapital expenditures by business segments for the years ended March 31,
2004 and 2003 was as follows:

Sales:

36.21%

Outside customers(1.43)

Inside group

1.04

Total

¥

—

¥1,151,825

0.93

Costs and expenses

Other—net

1.40

Operating income¥ 189,366

¥

7,904

¥ 4,456¥

7,883¥ 11,270¥ (68,592)¥ 152,287

Effective tax rate

38.15%

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

Depreciation

Effective for years commencing on April 1, 2004 or later, according to
the revised local tax law, income tax rates for enterprise taxes will be
reduced as a result of introducing assessment by estimation on the basisof the size of business. Due to the change of income tax rates, at March
31, 2003, certain consolidated subsidiaries changed the tax rates used

for calculation of deferred taxes assets and liabilities. The effect of thechange of effective tax rates was not significant.
Significant components of deferred tax assets and liabilities as ofMarch 31, 2004 and 2003 were as follows:

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¥ 789,688¥141,225¥67,045¥ 14,944¥114,732—¥1,127,634

For 2003

Sales:
Thousands of
U.S. dollars

Millions of yen

2004

2003

2004

Liabilities for retirement benefits¥52,847¥36,530$498,557

Other—net

33,731

34,376318,221Less valuation allowance(2,030)(595)(19,155)

Subtotal

84,54870,311

797,623

Net unrealized holding gains on securities

20,734

9,830

195,603

Reserve for tax purposes cost reduction of certain pipelines

1,462

1,883

13,793

Deferred tax assets:

Outside customers
Inside group
Total

¥

2,766

1,411

3,523

21,402

43,595(72,697)—

792,454

142,636

70,56836,346

158,327(72,697)

1,127,634

Costs and expenses

632,230

134,794

66,393Operating income¥ 160,224

¥

7,842

¥ 4,175¥

Identifiable assets

28,723

148,701

7,623¥(6,501)

1,004,340

9,626¥ (66,196)¥ 123,294¥1,067,439¥ 52,532¥23,058¥215,197¥185,981¥131,857¥1,676,064

Depreciation

111,343502

141

14,59012,216(1,492)

137,300

Capital expenditures

88,573

538

276

1,408

21,287(1,894)

110,188

Gas sales

Gas appliance
sales

Relatedconstruction

Real estate
rental business

Other

Elimination or
corporate

Consolidation$7,797,799$1,247,680$612,679$ 133,498$1,074,614$—$10,866,270

42,905

15,277

29,149200,877

549,537(837,745)—
10,866,270

Deferred tax liabilities:
Thousands of U.S. dollars

Other—net
Subtotal
Deferred tax assets—net

1,908

3,617

18,001

24,104

15,330227,397

For 2004¥60,444¥54,981$570,226

Sales:
Outside customers
Inside group7,840,704

1,262,957

641,828

334,375

1,624,151(837,745)

Costs and expenses

6,054,234

1,188,390

599,794

260,0111,517,826(190,655)

9,429,600

Operating income$1,786,470$

74,567$ 42,034$

74,364$ 106,325$ (647,090)$ 1,436,670

Identifiable assets$9,695,999$ 428,727$218,270$1,964,274$1,743,551$1,673,972$15,724,793

Depreciation

1,350,270

Total

10. Shareholders’ equity
At the current conversion prices, 369,744 thousand shares of common
stock were issuable at March 31, 2004 upon full conversion of the outstanding convertible bonds (see Note 6).
Under the Japanese Commercial Code, the excess of the total additional paid-in capital and legal reserve over 25% of common stock isavailable for dividends 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.

[ 47 ]TOKYO GAS ANNUAL REPORT 2004

The maximum amount that the Company can distribute as dividends
is calculated based on the unconsolidated financial statements of theCompany in accordance with the Japanese Commercial Code.
Effective April 1, 2002, the Company and its consolidated subsidiaries
adopted the new accounting standard for treasury stock and reversal ofstatutory reserves (Accounting Standards Board Statement No. 1,“Accounting Standard for Treasury Stock and Reduction of Statutory
Reserves,” issued by the Accounting Standards Board of Japan on
February 21, 2002). The effect on net income of adopting the new standard is not significant.

1,105,187

4,770

1,284

126,129

127,514(14,614)

Losses on impairment of fixed assets

15,582——

15,72233—

31,337

Capital expenditures

810,118

5,186

2,855

26,725

170,438(21,571)993,751

TOKYO GAS ANNUAL REPORT 2004

[ 48 ]

Costs and expenses under Elimination or corporate that cannot be allocated to business segments are related mainly to general administrative
expenses of the Company.
Assets under Elimination or corporate mainly comprise cash andcash equivalents, current and noncurrent securities and deferred tax

assets of the Company.
Geographic segment information is not shown due to the Company
having no overseas consolidated subsidiaries. Information for overseas
sales is not disclosed due to overseas sales being immaterial compared toconsolidated net sales.

12. Information for certain leases
Information as lessee
minimum lease payments at March 31, 2004 and 2003 were as follows:
Millions of yen

Accumulated
depreciation

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, 2004, the Company had several long-term purchase contracts for the supply of LNG. The purchase price determinable undersuch contracts is contingent upon fluctuations in the market price of
crude oil.

Net bookvalue

14. Subsequent events

For 2004

Thousands of
U.S. dollars

Production facilities$ 1,089

Distribution facilities

8,395

$

466

$

3,635

623
4,760

2004

2003

2004

¥ 958

¥ 972

$ 9,039

Service and maintenancefacilities

3,488

1,024

2,464

Other

34,36918,413

15,956$47,341$23,538$23,803

Future minimum lease payments inclusive of interest:
Current

¥ 840

¥ 808

$ 7,927

Noncurrent

1,683

1,685

15,878¥2,523¥2,493$23,805

The Company and its consolidated subsidiaries use certain production
facilities, distribution facilities, service and maintenance facilities andother assets under lease arrangements. Acquisition cost, accumulated
depreciation and net book value for property held under finance leases
which do not transfer ownership of the leased property to the lessee on
an “as if capitalized” basis for the years ended March 31, 2004 and 2003
were as follows:
Millions of yen
Acquisition
cost

Accumulated
depreciation

Net book
value

Information as lessor
Lease income for the years ended March 31, 2004 and 2003, and future
minimum lease payments to be received at March 31, 2004 and 2003
were as follows:
Millions of yen

Lease income¥ 115

Distribution facilities

890

Service and maintenancefacilities
Other

¥

49

¥

385

Thousands of
U.S. dollars

2004

2003

2004

¥ 4,473¥ 4,477$ 42,198$ 42,952(1) Acquisitions of treasury stock
On May 17, 2004, the Board of Directors approved the acquisition oftreasury stock based upon the approval of the general meeting ofshareholders.
Number of shares: Limited to 50,000,000 shares
Cost of shares acquisitions: Limited to ¥20,000 million (US$188,679
thousand)(2) Issuance of domestic unsecured notes
On May 27, 2004, the Company issued domestic unsecured notes
with conditions described below:(a) Amount issued: ¥20,000 million (US$188,679 thousand)Due: May 27, 2014
Coupon rate: 1.59%(b) Amount issued: ¥10,000 million (US$94,340 thousand)Due: May 27, 2024
Coupon rate: 2.29%(3) Appropriation of retained earnings
At the general meeting of shareholders held on June 29, 2004, theCompany’s shareholders approved (i) payment of year-end cash dividends of ¥4.0 (US$0.04) per share aggregating ¥10,805 million(US$101,930 thousand) to the shareholders of record as of March 31,
2004, and (ii) payment of bonuses to directors totaling ¥65 million(US$613 thousand).

Future minimum lease payments to be received:
Current¥ 4,553¥ 4,343

Noncurrent

12,98913,008

122,540¥17,542¥17,351$165,492

For 2004

Production facilities

66
505

Some of the consolidated subsidiaries lease other assets under direct
financing leases as lessors. Leased assets under direct financing leases
were as follows:

370

109

261

3,643

1,952

1,691

¥5,018¥2,495¥2,523¥¥¥

For 2003

Production facilities

The Company and its consolidated subsidiaries were contingently liable(1) for debt guarantees in the amount of ¥7,719 million (US$72,817
thousand) at March 31, 2004 for bank loans to affiliated companies,
other than consolidated subsidiaries (2) to banks in the amount of ¥401
million (US$3,782 thousand) at March 31, 2004 with respect to joint andseveral liabilities upon default of other debtors and (3) as guarantors fordomestic unsecured notes in the amount of ¥38,700 million (US$365,094

Thousands of U.S. dollars
Acquisition
cost

Lease payments in the years ended March 31, 2004 and 2003, and future

Lease payments

13. Commitments and contingent liabilities

Millions of yen
Acquisition
cost

Accumulated
depreciation

Net book
value¥25,214¥15,470¥9,744¥24,007¥16,359¥7,648For 2004

98

25

73

Distribution facilities

841

397

444

Service and maintenancefacilities

189

83

106

3,655

1,785

1,870

¥4,783¥2,290¥2,493

Other

Other assets
For 2003

Other assets

Thousands of U.S. dollars
Acquisition
cost

Accumulated
depreciation

Net book
value$237,867$145,944$91,923

For 2004

Other assets[ 49 ]TOKYO GAS ANNUAL REPORT 2004

TOKYO GAS ANNUAL REPORT 2004

[ 50 ]

INDEPENDENT AUDITORS’ REPORTTo 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, 2004 and 2003, and the related consolidated statements ofincome, shareholders’ equity and cash flows for the years then ended, expressed in Japanese yen. These
consolidated financial statements are the responsibility of the Company’s management. Our responsibility
is to independently express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in Japan. Thosestandards require that we plan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits provide a reasonablebasis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the consolidated financial position of TOKYO GAS CO., LTD. and subsidiaries as of March 31,
2004 and 2003, and the consolidated results of their operations and their cash flows for the years thenended, in conformity with accounting principles generally accepted in Japan.
Without qualifying our opinion, we draw attention to the change in accounting policy for actuarial differences of pension plans at TOKYO GAS CO., LTD. and the adoption of new accounting standards relating to impairment of fixed assets at TOKYO GAS CO., LTD. and subsidiaries, as described in Note 2, to theconsolidated financial statements. We also draw attention to Note 14 (1) and (2). Subsequent to March
31, 2004, TOKYO GAS CO., LTD. decided to acquire treasury stock and issue domestic unsecured notes.
The U.S. dollar amounts in the accompanying consolidated financial statements with respect to theyear ended March 31, 2004 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, 2004

[ 51 ]TOKYO GAS ANNUAL REPORT 2004