Message From Management

LEFT:Kunio Anzai
Chairman

RIGHT: Hideharu Uehara

President

4

Deregulation. Change. Restructuring. Competition. We seewith the startup of the Ohgishima LNG Terminal. However,in these words a positive connotation for business opportu-

we achieved a net income increase due to the improve-nities. They mean you must do things differently, stretch

ment of non-operating profit.

yourself, improve—tough tasks. But we are up to the challenge. We see opportunities in change. In this message, andDeregulation—What it Means for Tokyo Gas

throughout this report, we will demonstrate what underlies

In 1994, the Japanese Gas Utility Industry Law was

our confidence and how we will create growth as a gas

amended, abolishing regulations governing the areas

company in a deregulatory climate. But first let’s take awhere companies can supply gas and rates for large-

look back at the past fiscal year.

volume customers using 2 million cubic meters or moreof gas per year. The deregulation trend was accelerated

The Year in Review

by the startup of a third-party access system in 1996

Consolidated net income for fiscal 1998, the year ended

and other law amendments that take effect in this au-March 31, 1999, was ¥17.8 billion, 3.0% up from a year

tumn to lower the threshold for large-volume customers

earlier. We delivered a return on equity of 4.2% comparedto 1 million cubic meters per year. The pricing systemwith 4.1% one year earlier. Cash dividends per share werewill also be revised to give more freedom to us in setting¥5.00, the same as in the previous fiscal year.

pricing strategies.

Net sales fell 1.1% overall to ¥997.8 billion, despite aThe electric utility industry is also undergoing

2.0% increase in gas sales volume, due to the lowering ofchange. Amendments to the Electricity Utility Industry

gas rates in accordance with the gas cost adjustment rate

Law in April 1995 ushered in a new system that includes

system. Operating income decreased 5.5% to ¥72.3

independent power producers (IPPs) and power distri-billion, mainly due to increased depreciation costs incurredbution in specific areas. In the fall of this year, retail sales

TOKYO GAS Annual Report 1999

to customers with a capacity of over 2,000 kW and using

for more demand. Through our efforts, we will imple-a 20 kV supply will be liberalized.

ment a rate reduction in fiscal 1999 and 2000 while pre-Combined with deregulation and restructuring inserving our profit margins.

Japan’s petroleum industry, competition in Japan’s energy
sector is increasing as gas, electric, and oil companies see

More Efficiency

barriers that have divided their markets torn down.

In order to further strengthen the price competitiveness

The flip side of the coin is that deregulation is spawn-of our products and services, we have set the following

ing new opportunities—opportunities for expanding

goals to become more cost competitive.

market share. We will continue to devote ourselves toPersonnel reductions—By fiscal 2005, we plan to trim ourremaining the first choice for customers. Firstly, we in-workforce to 10,000 people, from roughly 12,000 as oftend to secure more large-volume customers both inside

the end of March 1999. This is in addition to the 1,000

and outside our service area with the lowering of usage

reduction achieved in the last 4 years.

thresholds and the lifting of restrictions on the supply

Organizational reform—We have streamlined our organiza-service areas. Secondly, we will make every effort to maketion. We combined our 33 divisions and departments into

our transmission service to third parties a profitable busi-

24 divisions and departments in June 1999. As for theness. Thirdly, deregulation in the electricity industry will

marketing and customer service organization, we replaced

allow us to supply gas to IPPs—and even become one

the existing 5 business district divisions with a new struc-ourselves—as well as to enter the power distribution field

ture made up of 4 strategic divisions in accordance within specific areas.

functions and markets. The new divisions are Customer
Service, Pipeline and Safety Management, Residential Sales

Environmentally Friendly Natural Gas—Another Driverand Service, and Energy Sales and Service. The aim: pro-of Growthviding a better response to our markets and customers

Another factor besides deregulation is working to ourwith enhanced safety and stability of supply.

advantage—big things are expected of environmentallyReduce capital expenditures—We have reviewed our capi-

friendly natural gas, our main raw material. COP3, thetal expenditures and will reduce our investment in plant

Third Conference of the Parties to the United Nationsand equipment to within the limits of our cash flows by

Framework Convention on Climate Change, was held in

fiscal 2000. Selection of investment projects with stricter

Kyoto in December 1997 to set reduction targets for glo-standards, more efficient designs, improved procurement

bal warming gas emissions. To achieve Japan’s targets,management and promotion of technical development

laws to conserve energy and respond to global warming

will aid these efforts. We will reduce non-consolidated

have already taken effect in Japan. We see this as an

capital expenditures from ¥132 billion in fiscal 1999 toopportunity to promote natural gas through our R&D¥110 billion in fiscal 2001.

efforts and other activities.

Paring operating expenses—We intend to hold operating
expenses at current levels while increasing sales volumes.

How Are We Responding?

This will require more efficient deployment of resources.

Deregulation and new government policies don’t only

However, we will continue to invest in strategically impor-cause change—they also create opportunities. By capi-tant areas including marketing and safety management.

talizing on these opportunities, we aim to capture agreater market share in the Japanese energy sector

More Capacity

through restructuring programs and focusing on three

Our powerful supply infrastructure will also play an im-core themes: more efficiency, more capacity, and R&D

portant role in strengthening our cost competitivenessAnnual Report 1999 TOKYO GAS

5

and meeting increased demand. Two immense projects

an active role in overseas energy projects while maintain-will result in greater supply capacity. In October 1998,

ing the proper balance between profitability and risk.

the new, state-of-the-art Ohgishima LNG Terminal started
operation. Additionally, in 1999 the Keihin Transmission

The Road Ahead

Pipeline and Yokohama Transmission Pipeline will com-

We must not overlook another area for bolstering ourplete and enhance a supply loop that encompasses thecompetitiveness—building a stronger balance sheet. Wegreater Tokyo area. We will thus be able to deliver more

will achieve this by using free cash flows from our valuegas, more reliably and more efficiently to customers overcreation activities to reduce interest-bearing debt. This

the greater Tokyo area. We will be able to meet the grow-debt increased in line with the capital expenditures neededing demand in the next few decades with minimum

to put in place our production and supply system to meet

additional investment.

higher gas demand in the 21st century. With much of thiswork having already been completed—capital expendi-

6

R&D for New Demandtures have passed their peak—we intend to fund future

Demand for gas is expected to increase. But we feel wecapital expenditures from cash flows from operations.

must take the initiative to work even harder at promoting

As deregulation permeates the energy industry, the com-the benefits of gas to create new demand. We must show

panies able to meet the demands of the new era will be-

customers how gas can work for them. Technological inno-come increasingly apparent. Tokyo Gas aims to be one ofvation is underpinning these efforts. Development of gasthem. We are creating more demand for gas by leveraging

cooling systems with higher efficiency and compactness,core competencies and enhancing efficiency and capacity,

gas cogeneration systems and floor heating are some ofwhich will translate into more value for our shareholders.

the fruits of R&D that are contributing to sales. We are also

As a public utility company based in the Tokyo metro-developing new technologies in such areas as polymer elec-

politan area, we have been given the significant responsi-

trolyte fuel cells and micro gas turbines, as well as making

bility of contributing to the stable supply and use ofimprovements to enhance the stability of supply, raise safety

environmentally friendly natural gas while maintaining a highlevels and reduce costs. In this drive, we budgeted aboutlevel of safety. Thus, our management mission is to make¥14.0 billion for R&D for the current fiscal year.

contributions to customers and communities as well as tomaximize shareholders’ value. In all our efforts, we remain

An Active Presence Overseas

steadfast in our commitment to being an active company

Overseas activities are taking on greater significance atin a new era of competition in Japan’s energy industry.

Tokyo Gas. Mainly through our four overseas representative offices, we have been working to collect information

August 1999

and to share management and technology information
with overseas energy-related organizations, as well as topromote investor-relation activities.
In Malaysia, we were the first Japanese energy-related
utility company to participate in an overseas project. TheKunio Anzai
Chairmanproject, aimed at building a natural gas distribution system, is being successfully carried out by our joint venture,
Gas Malaysia Sdn. Bhd. Gas Malaysia started to pay dividends in 1999. Leveraging these successes as well as ourHideharu Uehara

expertise in gas-related operations, we intend to assume

President

TOKYO GAS Annual Report 1999