A Multifaceted Energy Growth Strategy — Facet 1

The Saitama New City Center district heating and cooling system covers an area of 27.3 hectares that is home to 10 government departments and 17 government
offices. The system supplies heat in an energy-efficient and environmentally friendly manner using gas-fired cogeneration.
8Toward an Increasingly
Diversified Energy Services Company
Japan’s energy sector stands on the threshold of an era of mega-competition. Regulations are being torn down, gas andelectric utilities are entering one another’s fields and major overseas energy companies have signaled their intention toenter the electricity industry in Japan. Tokyo Gas regards this industry realignment as an opportunity to expand its sphereof business. And natural gas will be the core energy source propelling our growth. Tokyo Gas has set its sights on growing
into a diversified energy services company, supplying heat and electricity as well as gas.

The Superiority of Cogeneration
Society is demanding energy that is both environmentally friendly and for which there is a stable supply. Natural gas meets thesedemands. As such, its importance to society is increasing. Furthermore, in recent times, small and medium users, as well as largevolume customers, have grown more conscious of reducing energy costs. Gas cogeneration systems that supply both electricity
and thermal energy are coming into their own both as an answer to environmental issues and to raise energy efficiency. Tokyo Gas
plans to leverage its competitive edge in gas cogeneration systems to aggressively develop these operations and capitalize on an
expected increase in demand for natural gas for power generation and cogeneration in the greater Tokyo/Kanto Plain area.

Expanding Existing Businesses
As a result of revisions to the Japanese Gas Utility Industry Law in 1999, Tokyo Gas can now supply customers outside its service area
who consume 1 million or more cubic meters of gas per year. Previously, the threshold was twice that. This legislative change isTOKYO GAS Annual Report 2000

Configuration of Residential Fuel Cell Cogeneration System

This energy-efficient household cogeneration system generates electricity through fuel cells, which
use hydrogen produced by innovative fuel processing equipment. The thermal energy emitted
when electricity is generated is captured bya recuperator and used for water
heating and floor heating.

Utility grid

PEFC stack
InverterElectricity
Air supplying
systemElectricity
Recuperator

AirHot water
City gas

Fuel processing
systemFloor heating

City gas

Hot water

Tokyo Gas intends to couple its proprietary recuperator technology with micro turbines developed by Capstone Turbine Corporation to offer
cogeneration solutions.

expected to spark fierce competition. Heretofore, Tokyo Gas has devoted itself to introducing and popularizing gas cogeneration
systems, mainly to large-volume users. In April 2000, the Saitama New City Center district heating and cooling system started
operations in Saitama Prefecture, as Tokyo Gas’ 15th district heating and cooling operation. We intend to take full advantage of theexpertise, technological capabilities and engineering skills we have acquired from such operations to power growth in gas demand.

Entering New Businesses
In March 2000, revisions were enacted to the Electricity Utility Industry Law, opening the door to unrestricted electricity sales to largevolume customers. The enactment of these revisions is expected to have a profound effect on the energy sector and spark further
deregulation of the generation and sale of electricity. In response, Tokyo Gas is considering entering the electricity retailing field withNTT Facilities and Osaka Gas. Furthermore, with demand expected to increase for natural gas as a fuel for electricity generation,Tokyo Gas sees a new business opportunity to transport gas to power producers, leveraging its gas pipeline network.

Small Distributed Power Generators—A Technology for the Future
Amid the accelerating shift from large-scale power generation to small distributed power generators, the spotlight is falling on
small-scale, on-site electricity generation. Micro turbines, in particular, are stealing the limelight. Leading the market at present
are two U.S.-based manufacturers of micro turbines. Tokyo Gas is looking to package their leading-edge technology with its
energy-efficient cogeneration systems for commercialization in Japan. We are targeting commercial demand such as small andmedium-size hospitals, hotels, shops and other establishments, as well as small and medium-size industrial demand, where thediffusion rate of gas cogeneration systems is relatively low. In April 2000, Tokyo Gas formed the Micro Cogeneration Section
to formulate a strategy and carry out feasibility studies.
A fuel cell cogeneration system for residential use is another in which we project success. This system generates electricity
as well as hot water through Polymer Electrolyte Fuel Cells (PEFC), using hydrogen reformed from gas.
PEFCs are attracting attention for their potential contribution to environmental preservation and energy conservation.
Compactness and simplicity of operation are among their outstanding features. Tokyo Gas estimates that the introduction ofthese cells will lead to the consumption of about 50% more gas for home electricity and hot water than a typical household
currently requires for hot water alone. That spells growth for Tokyo Gas. To tap this potential, we are working toward commercializing these systems.
In the year ending March 31, 2001, a large-scale national project for the development of these fuel cells will be initiated.
Manufacturers and gas suppliers are expected to team up to develop this technology. Joining this project as a member of theJapan Gas Association, Tokyo Gas will work to bring PEFCs to market as soon as possible.
Annual Report 2000 TOKYO GAS

9A Multifaceted Energy Growth Strategy — Facet 2

The residential sector accounts for over 90% of Tokyo Gas’ gas customers. As such, this sector will be an important source of stable demand in the future.

10Spurring Residential Gas DemandIn terms of absolute numbers, residential customers account for over 90% of Tokyo Gas’ customers. This makes the residential market an important pillar of the company’s business. To expand demand here, Tokyo Gas has adopted a twopronged strategy. One strategy focuses on marketing activities, in particular the expansion of heating demand. The otheraims to raise customer satisfaction.

Marketing Initiatives to Spur Residential Gas Consumption
Already, we are the preferred energy supplier for water heating and cooking in our service area with market shares of 96% and76%, respectively. We aim to maintain this preferred status by developing highly efficient, high-quality products. In the extremely competitive heating sector, where gas heating accounts for only 30% of the market, we are aiming to spur demand bypopularizing gas floor heating and gas fan heaters. Floor heating has many strong selling points. For one, it is ideally suited tothe Japanese custom of sitting on the floor at home. Floor heating is also a clean and comfortable heating alternative and helps
control house dust and mold that can cause allergies. These advantages suggest that floor heating could become establishedas the de facto standard for heating in Japanese homes. Newly constructed houses are an obvious target, but we are also
marketing products for existing homes. To cater to customers with homes where floor heating is not an option, we arepromoting the virtues of fan heaters, which are highly efficient, environmentally friendly and inexpensive.

TOKYO GAS Annual Report 2000

Demand for gas floor heating is expanding. Not only isfloor heating clean and comfortable, but it boasts
superior energy efficiency and cost advantages.

Through 370 Enesta and Enefit service outlets nationwide, Tokyo
Gas is providing a broad range of services to make gas evenmore user friendly.

A Customer-Based Approach
Customer satisfaction is an important key to becoming the preferred energy supplier. That’s why we are stepping up ourefforts to offer better services from various angles. Improved safety, more attractive rates, low-maintenance appliances andlifestyle ideas are just some of the ways we are working to spur residential gas consumption—and build stronger bonds oftrust with our customers.
Playing a significant role here is our customer service network. Our 18 branches offer total consulting solutions, including
inspections of appliances in homes once every 3 years and meter reading. To further deepen relationships with residentialcustomers, we have established 12 call centers to handle inquiries from customers.
Augmenting our customer service network are roughly 370 Tokyo Gas franchise-based service outlets. Operating under
the names Enesta and Enefit, these outlets provide a broad range of services ranging from gas pipeline works to installation andrepair of gas appliances and household renovations.

Percentage of New Housing
With Gas Floor Heating
Systems in the Tokyo Gas
Service Area

2520(%)
15105
Tokyo Gas visits customers’ homes
0Mar. 31

once every three years to carry out
96 97 98 99 00

inspections of gas appliances.

Annual Report 2000 TOKYO GAS

11

A Multifaceted Energy Growth Strategy — Facet 3

A 1,000 kW class steam-injected gas turbine with a variable heat-to-power
ratio for cogeneration systems: Tokyo Gas is first in the world to develop
and commercialize a turbine in this class for cogeneration systems.
Methane hydrate combustion: Tokyo Gas is pushing ahead with research into technologies for using methane hydrate, which is expected
to become a major source of energy in the 21st century.
12A Focus on Technological Innovation
Research and development is positioned as a major corporate theme at Tokyo Gas as a means of driving growth in existing
businesses and creating business opportunities. Our main goal is to make gas the preferred form of energy by ensuring astable supply of low-cost, safe natural gas. To this effect, we are emphasizing speed and profitability and allocating resources selectively. Three areas have been singled out for research and development in line with this policy.

Appliances and Pipeline R&D Department

The Tokyo Gas R&D Organization

Residential Appliances andInstallation R&D Center
Top Management

Technology Policy Committee

System Control and Meter
Technology R&D Center
Commercial Appliances R&D Center

Corporate R&D Dept.
Fuel Cell Development Center
Fundamental Technology
Laboratory
Energy and Environmental
Technology Laboratory
Frontier Technology Laboratory

Pipeline Engineering andDevelopment Center
Infill Development Sect.
Production Division
Production Engineering Dept.
Production Engineering
Development Sect.

R&D Divisions
OthersTOKYO GAS Annual Report 2000

R&D Targets and Themes

PromoteAdvanced Gas
Utilization

Residential-use fuel cell systems
Technologies for micro gas turbines
High-performance, gas-fired air conditioning
Highly efficient cogeneration systems
Low-cost, space-saving gas appliances
Technologies with low environmental impact

Increase Customer
Satisfaction andCreate Profitable
Businesses
Enhance theSupply andOperation
Infrastructure

Enhance customer services by taking advantage of IT, including
the Internet.
Development of high-added-value technologies such as 13CMethane and technologies that lead to the creation of newbusinesses such as hydrogen generators.
Research into pioneering technologies that will drive expansion
within the Tokyo Gas Group, including new materials,electronic devices and biotechnology.

Technologies to build more efficient production, storage,transmission and supply systems.
Technologies to increase the safety of existing production andsupply infrastructures and lower the cost of maintenance.
Technologies such as cutting-edge information technology (IT)that contribute to higher operational efficiency.
Technologies to open the way to the use of other energy
feedstocks in the future such as those related to methane hydrate.

Promote Advanced Gas Utilization

13

We are developing products that enable customers to use environmentally friendly gas more efficiently, cheaply and easily.
These products include residential gas appliances, commercial kitchen equipment, gas-fired air conditioners, cogeneration
systems and equipment for industrial use.

Enhance the Supply and Operation Infrastructure
We are conducting research to supply gas to even more customers at attractive rates and with long-term reliability. This willallow us to meet society’s demand for the increased use of natural gas, an environmentally benign fuel, as a primary source ofenergy. At the same time, this research will drive growth in our customer base.

Increase Customer Satisfaction and Create Profitable Businesses
To meet our customers’ diverse needs, Tokyo Gas is carrying out R&D that will broaden customer services by using the latest
information and communications technologies, including the Internet. Furthermore, we are working on research that will leadto new businesses rooted in unique Tokyo Gas technical expertise.

Tokyo Gas Makes Breakthrough With Diamond Ultraviolet Light-Emitting Device
Tokyo Gas has developed the world’s first diamond ultraviolet light-emitting device capable of operating atroom temperature. The device uses a high-quality semiconductor diamond made from carbon powder.
Significantly, the carbon powder is extracted from LNG. This technology has the potential to increase therecording density and capacity of optical disks. What’s more, it doesn’t use harmful substances like mercury
making it an environmentally friendly lighting alternative.

Annual Report 2000 TOKYO GASA Multifaceted Energy Growth Strategy — Facet 4December 1999 saw the completion of the Keihin and Yokohama transmission pipelines. Tokyo Gas now boasts a 300km-long supply loop encircling the greater Tokyoarea. Pictured is the Tsurumi River Bridge, which was built for the Keihin Transmission Pipeline.
14

Powerful Supply Infrastructure—
the Foundation of Our Competitiveness
Demand for natural gas has risen as alternative energy sources other than petroleum are sought and the government looks
for solutions to environmental problems. Tokyo Gas was quick to recognize this trend. We reacted by constructing theOhgishima LNG Terminal, the Keihin Transmission Pipeline and other facilities to bolster our supply capacity. With thesemajor projects having largely been completed by the end of March 2000, we will start recovering our investment in theyear ending March 2001. Leveraging this powerful supply infrastructure, Tokyo Gas hopes to expand demand and increase
profits. We also expect to generate higher free cash flows.

Unrivaled Natural Gas Supply Capacity
Just how powerful is Tokyo Gas’ supply infrastructure? Tokyo Gas has Japan’s largest natural gas supply capability and isprogressively increasing capacity. Three LNG terminals—each of which plays a prominent role in Japan’s gas industry—are atthe heart of this strength. Our Negishi LNG Terminal received Japan’s first shipment of LNG in 1969. Our Sodegaura facility isthe world’s largest LNG receiving terminal. And then there is the new Ohgishima LNG Terminal, the first phase of which cameon stream in October 1998. Boasting the most sophisticated technologies, Ohgishima is of particular strategic importance. Theterminal’s location in the high-demand Keihin district near Yokohama means lower costs because a new long-distance pipeline
was not required. Ohgishima will eventually have a production capacity of approximately 4 billion m3 per annum to respondto increasing demand.

TOKYO GAS Annual Report 2000

Capital Expenditures and Depreciation inRelation to Gas Sales Volume(1993~2005)(Left scale: billion ¥)(Right scale: million m3, 46.047 MJ/m3)

KANTO PLAIN

TOKYO

200

20,000150

15,000100

10,00050

5,000

Head OfficeTOKYO BAY

00Mar. 31 93

Ohgishima
LNG Terminal
YOKOHAMASodegaura
LNG Terminal

NegishiLNG Terminal

94 95 96 97 98 99 00 01 02 03 04 05

Capital expenditures
Gas sales volume

Depreciation

Note: 2001~2005 are projected figures. The abovegraph represents non-consolidated data.

Length of pipeline: 46,285 km(As of March 31, 2000)

05101520（km）

High-pressure transmission pipelines
Planned or under construction
Medium-pressure transmission pipelines
Tokyo Gas service area

The Negishi, Sodegaura and Ohgishima LNG terminals are now connected by a loop of highpressure pipes following the December 1999 completion of the Keihin and Yokohama transmission
pipelines. This means Tokyo Gas can start responding to rising industrial demand in the Keihin

15

district near Yokohama, provide a more reliable supply of gas in the greater Tokyo area andmeet rising demand in the future.

The Sodegaura LNG Terminal is the world’slargest LNG receiving terminal.

Extensive Transmission and Distribution NetworkInvestments to bolster our transmission capacity are allowing us to take maximum advantage of our competitive edge inproduction. With the completion of the Keihin Transmission Pipeline and the Yokohama Transmission Pipeline in December
1999, Tokyo Gas now has in place a 300km-long supply loop encircling the greater Tokyo area that is connected by highpressure pipes to the Negishi, Sodegaura and Ohgishima LNG terminals. Why is this significant? Because it means we can now
cater to rising industrial demand in the Keihin district near Yokohama where industrial demand is expected to increase markedly.
It also means we have built a mutual backup system for our three LNG receiving terminals. In short, we have bolstered ourability to provide customers with a reliable supply of gas. And we will continue to extend our pipeline network to meetpotential demand outside of our existing service area.

With these enhanced infrastructures we will be able to meet growing demand during the next few decades with minimum
additional investment.

Annual Report 2000 TOKYO GAS