Management’s Discussion and Analysis of Operations
Tokyo Gas Co., Ltd. and its 18 consolidated
subsidiaries operate in five segments: gas sales,
gas appliance sales, related construction, realestate rental, and other.

including an increase in supply contract volume. As a result, total
gas sales volume for the fiscal year increased 13.5% year-on-year to
10,471 million m3.

Net Sales

Gas Sales Volume

Consolidated net sales increased 2.7% year-on-year to ¥1,127.6
billion. Gas sales increased 5.6% year-on-year, supported by theincrease in gas sales volume and other factors including gas rateadjustments based on the “sliding rate system.” Sales of gas
appliances and sales from related construction, however, decreased
from the previous fiscal year.

For the year ended March 31, 2003, gas sales volume in theresidential sector increased 5.9% year-on-year to 3,302 million m3.
Factors in the increase included a lower average temperature thanin the previous fiscal year, which increased demand for hot waterand heating. An increase in the number of both gas customers andgas appliances in use also supported the gain. Gas sales volume inthe commercial and other business user sector, which consists ofcommercial, public and medical customers, increased 9.7% to 2,592
million m3. Factors supporting the increase included additional
consumption from new customers and the favorable effect of thelower average temperature on demand for hot water and heating.
Gas sales volume in the industrial sector increased 23.4% to 3,632
million m3. Factors in the increase included higher demand in thepower generation market and additional consumption from newcustomers. Gas sales volume in wholesale supply to other gas
companies increased 17.6% to 944 million m3 due to factors

1,100
1,000900(Years ended March 31)

6,000

Rate of Change

Summer (June – September)

0.1%

Winter (December – March)-2.7%

Intervening months(April, May, October, November)-1.9%

Annual

-1.6%

2000

2001

2002

2003

Costs and expenses, the sum of cost of sales and selling,
general and administrative (SG&A) expenses, increased 1.8% yearon-year to ¥1,004.3 billion. While raw material expenses rose intandem with the increase in sales volume, costs and expenses
increased at a rate below that of net sales due to efforts to further
raise efficiency and control overhead, personnel and other expenses.
Cost of sales increased 1.8% to ¥571.9 billion, while SG&A
expenses increased 1.7% to ¥432.4 billion. Consequently, operating
income increased 11.5% year-on-year to ¥123.3 billion.

8,000

Effect of 1ºC Temperature Increase on
Gas Sales Volume

1999

Operating Expenses and Operating Income

10,000200002001

2002

2003

Monthly Gas Sales Volume by Sector for Fiscal 2002 (Non-consolidated)(Million m3, 46.05MJ/m3)
1,200
1,000
800
600
400
Residential
Commercial/Other
Industrial
Wholesale20004/02567891011121/032325
Annual Report 2003

(Million m3, 46.05MJ/m3)
12,0004,000
Residential
Commercial/Other
2,000
Industrial
Wholesale0(Years ended March 31)
1999(¥ Billion)
1,200Tokyo Gas Co., Ltd.

Gas Sales Volumeby Sector

Net Sales

Operating Income

income increased 14.0% year-on-year to ¥59.2 billion. The ratio ofnet income to net sales was 5.3%, a year-on-year improvement of60 basis points from 4.7% for the previous fiscal year. Net incomeper share increased to ¥21.18 from ¥18.47 for the previous fiscalyear. Fully diluted net income per share increased to ¥19.11 from
¥16.66 for the previous fiscal year.

(¥ Billion)
150
120
90
60

Net Income andNet Income per Share30(Years ended March 31)

0

1999

2000

2001

2002

2003

Other Income (Expenses)

Tokyo Gas Co., Ltd.

26
Annual Report 2003

Other expenses, net totaled ¥27.4 billion, compared to ¥27.7
billion for the previous fiscal year. Other income totaled ¥5.2 billion,
compared to ¥4.9 billion for the previous fiscal year, primarily
because Tokyo Gas recorded an exchange gain, as opposed to theexchange loss of the previous fiscal year. Other expenses totaled¥32.7 billion, compared to ¥32.6 billion for the previous fiscal year.
Interest expense decreased 9.4% to ¥17.5 billion, reflecting
progress in reducing interest-bearing debt. The interest coverage
ratio, which is the sum of operating income and interest anddividend income divided by interest expense, was 7.1 times,
compared to 5.8 times for the previous fiscal year. The decrease ininterest expense, however, was offset by factors including a yearon-year increase of ¥1.7 billion in loss on unsecured noteredemption to ¥6.3 billion, and environmental conditioning costs of¥5.7 billion, which is included in other, net.
Interest Coverage Ratio(¥)
30

5025402030

15201010Net income
Net income per share01999(Years ended March 31)

52000

2001

2002

2003

0Dividends
Tokyo Gas’s basic policy is to distribute to shareholders
approximately 20% of free cash flow generated under Frontier 2007
from fiscal 2003 to fiscal 2007. In addition, Tokyo Gas plans togenerate another 20% from free cash flow for the repurchase of its
common shares outstanding to counter the dilutive effect of theconversion of convertible bonds into shares. Based on these
considerations, the Company declared cash dividends for the fiscal
year totaling ¥6.00 per share, the same as in the previous fiscal year.

Segment Information(Times)
8In this section, segment sales refers to sales to outside
customers, excluding inside Group sales. Operating expenses aretotal expenses associated with sales to outside customers and insideGroup sales. Operating income is calculated as the total of sales tooutside customers and inside Group sales less operating expenses.

642
Interest coverage ratio =(Operating income + Interest anddividend income)/ Interest expense0(March 31)
1999(¥ Billion)
60

Gas
2000

2001

2002

2003

Income before Income Taxes, Income Taxes
and Net Income
Improved operating profitability supported a year-on-yearincrease of 15.7% in income before income taxes and minority
interest in net income of consolidated subsidiaries to ¥95.9 billion.
Income taxes increased 18.2% to ¥36.4 billion. As a result, net

Gas sales volume increased 13.5% year-on-year. Segment sales
increased 5.2% year-on-year, or ¥39.2 billion, to ¥789.7 billion, andaccounted for 70.0% of total net sales, compared to 68.4% in theprevious fiscal year. Higher gas sales volume and gas rateadjustments based on the “sliding rate system” were primaryfactors in the increase. Segment operating expenses increased 5.2%
to ¥632.2 billion as higher sales volume resulted in higher raw
material costs. Segment operating income therefore increased 7.4%,
or ¥11.0 billion, to ¥160.2 billion.

Gas Appliances

Financial Strategy

Segment sales decreased 4.8% year-on-year, or ¥7.0 billion, to¥141.2 billion, and accounted for 12.5% of total net sales,
compared to 13.5% in the previous fiscal year. Segment operating
expenses decreased 5.0%, or ¥7.2 billion, to ¥134.8 billion.
Segment operating income therefore increased 8.3%, or ¥0.6 billion,to ¥7.8 billion.

Tokyo Gas is emphasizing reducing interest-bearing debt andraising asset efficiency. The Company is working to increase overall
return on assets (ROA) by rigorously evaluating new capital
investments on the basis of projected profitability, while
restructuring its existing portfolio of assets and investments forgreater profitability.

Related Construction
Segment sales decreased 0.9% year-on-year, or ¥0.6 billion, to¥67.0 billion, and accounted for 5.9% of total net sales, compared
to 6.2% in the previous fiscal year. Segment operating expenses
decreased 1.9%, or ¥1.3 billion, to ¥66.4 billion. Segment operating
income therefore increased 14.4%, or ¥0.5 billion, to ¥4.2 billion.

Real Estate Rental

This segment consists of businesses including district heating
and cooling systems, sales of liquefied petroleum gas (LPG),
industrial gases, system engineering and comprehensiveengineering. Segment sales increased 0.7% year-on-year, or ¥0.8billion, to ¥114.7 billion, and accounted for 10.2% of total net sales,
compared to 10.5% in the previous fiscal year. The gain in segment
sales was supported by factors such as higher sales of LPG. Segment
operating expenses increased 2.4%, or ¥3.5 billion, to ¥148.7billion. Segment operating income therefore decreased 10.9%, or¥1.2 billion, to ¥9.6 billion.
Net Sales by Segment(¥ Billion)

Year ended March 31
Net cash provided byoperating activities
Net cash used ininvesting activities
Net cash used infinancing activities

2003

2002

2001

213.5

191.7

187.5

(110.1)(111.8)(115.8)(78.5)(117.2)(104.4)

Cash Flows from Operating Activities
Net cash provided by operating activities increased ¥21.9 billion
from the previous fiscal year to ¥213.5 billion. The increase inincome before income taxes and minority interest was a primaryfactor in the improvement in net cash provided by operations.
Changes in operating assets and liabilities, including a reduction ofinventory totaling ¥7.6 billion, used a net ¥1.1 billion of net cash
provided by operations, compared to net ¥2.5 billion used in theprevious fiscal year. These factors offset a decrease in depreciation
to ¥137.3 billion resulting from selection and concentration indeploying capital.
Net Cash Provided byOperating Activities(¥ Billion)
250200(¥ Billion)
1,200

150
1,000
100

800

50600
Gas sales400
Gas appliance sales
Related construction
200
Real estate rental business
Other0(Years ended March 31)(Years ended March 31)

1999

2000

2001

2002

2003

01999

200020012002

2003

Cash Flows from Investing Activities
Net cash used in investing activities totaled ¥110.1 billion,
compared to ¥111.8 billion in the previous fiscal year. Capitalexpenditures, the sum of purchases of property, plant and equipment
and purchases of intangible fixed assets, decreased 4.9%, or ¥5.5

27
Annual Report 2003

Other

Cash FlowsTokyo Gas Co., Ltd.

Segment sales decreased 4.7%, or ¥0.7 billion, to ¥14.9 billion,
and accounted for 1.3% of total net sales, compared to 1.4% in theprevious fiscal year. Segment operating expenses decreased 8.7%,or ¥2.7 billion, to ¥28.7 billion. Segment operating income therefore
increased 25.2%, or ¥1.5 billion, to ¥7.6 billion.

Liquidity and Capital Resourcesbillion, to ¥107.2 billion. Principal capital expenditures included
underground liquefied natural gas (LNG) tanks at the Ogishima
Terminal and gas pipelines. Proceeds from sale of tangible andintangible fixed assets more than doubled to ¥6.9 billion.
Free cash flow, calculated by subtracting net cash used ininvesting activities from net cash provided by operating activities,increased 29.5%, or ¥23.5 billion, to ¥103.4 billion.
Capital Expenditures
and Depreciation(¥ Billion)
150

As of March 31, 2003, current liabilities totaled ¥340.7 billion,
an increase of 14.4% from a year earlier, or ¥42.9 billion. The
increase was primarily the result of the shift of ¥50.8 billion fromlong-term debt to long-term debt due within one year. Income taxes
payable increased ¥7.1 billion from a year earlier, while othercurrent liabilities decreased ¥16.9 billion. Working capital deficit
totaled ¥76.2 billion, compared to ¥46.0 billion a year earlier. The
current ratio was .78 to 1, compared to .85 to 1 a year earlier.

9060Tokyo Gas Co., Ltd.

28

Current assets increased 5.0% from a year earlier, or ¥12.7
billion, to ¥264.6 billion. Cash and cash equivalents increased ¥24.9
billion from a year earlier, and trade receivables increased ¥3.7
billion from a year earlier. Tokyo Gas reduced inventories by 26.5%
from a year earlier, or ¥7.6 billion, to ¥21.1 billion. Other current
assets also decreased ¥9.2 billion from a year earlier to ¥49.0 billion.

Current Liabilities

12030
Capital expenditures(payment basis)
Depreciation
0(Years ended March 31)
1999

Current Assets

2000

2001

2002

2003

Current Ratio

Cash Flows from Financing Activities

Annual Report 2003

Net cash used in financing activities totaled ¥78.5 billion,
compared to ¥117.2 billion for the previous fiscal year. Repaymentsof long-term debt totaled ¥75.5 billion, compared to ¥159.1 billion
for the previous fiscal year, and Tokyo Gas redeemed commercial
paper totaling ¥12.0 billion. At the same time, proceeds from longterm debt decreased ¥8.1 billion to ¥37.3 billion, which included anissue of unsecured notes due 2012 totaling ¥20.0 billion.
Consequently, cash and cash equivalents at the end of the year
nearly doubled year-on-year to ¥52.1 billion.

(Times)
1.0
0.8
0.6
0.4
0.2

(March 31)

01999

2000

2001

2002

2003

Assets, Liabilities and Stockholders’ Equity

Interest-Bearing Debt

As of March 31, 2003, total assets amounted to ¥1,676.1billion, a decrease of 1.6%, or ¥26.6 billion, from a year earlier.
Return on average total assets increased to 3.5% from 3.0% for theprevious fiscal year.

One of the basic policies of the Company’s medium-term
management plan is continuous improvement to strengthen theCompany’s financial structure. As of March 2003, interest-bearing
debt decreased 5.7% from a year earlier, or ¥44.6 billion, to ¥731.3

Property, Plant and Equipment

Interest-Bearing Debt (¥ Billion)

Property, plant and equipment decreased 2.6% from a year
earlier, or ¥32.5 billion, to ¥1,217.5 billion as a result ofdepreciation. Prior to adjustment for depreciation, production
facilities increased 0.2% from a year earlier, or ¥1.3 billion, to¥688.3 billion. Distribution facilities increased 3.3% from a year
earlier, or ¥63.1 billion, to ¥1,952.2 billion, reflecting the Company’spipeline expansion and maintenance program. Construction inprogress increased 27.4% from a year earlier, or ¥16.2 billion, to¥75.4 billion as a result of projects including LNG carrierconstruction.

1,000(%)
100

800

80

600

60

Interest-bearing debt
400
Ratio of interest-bearing
debt to total assets
Interest-bearing debt =200Long-term debt due after oneyear + Long-term debt due within
one year + Bank loans0(March 31)
1999

40
202000

2001

2002

2003

0billion. The figure for the previous fiscal year includes ¥12.0 billion
in commercial paper accounted for in other liabilities. The rate ofdependence on interest-bearing debt, which is defined as interestbearing debt as a percentage of total assets, improved to 43.6%
from 45.6% a year earlier.

Stockholders’ Equity(¥ Billion)
Total Capital andRatio of Stockholders’ 1,500
Equity to Total Capital

(%)
100

1,200

80

Long-term debt due afterone yearBank loans
600
Long-term debt due within
one year300
Stockholders’ equity
Ratio of stockholders’ equity
to total capital0(March 31)
1999

ROE and ROA

60
40

Progress in deregulation will cause competition to intensify
among energy suppliers. Tokyo Gas is subject to gas rate decreaserisk that may result in order to acquire and retain customers if theCompany’s primary competitor, Tokyo Electric Power Co., Inc.,
reduces its rates.
Tokyo Gas has taken rate decrease risk into account in thecurrent medium-term plan in planning a resource reduction fromrate decreases totaling ¥180.0 billion.

Foreign Exchange Risk
The primary raw material for the city gas that Tokyo Gas
supplies is LNG from overseas. LNG purchase contracts aredenominated in U.S. dollars, which exposes the Company to foreign
currency exchange rate risk. In addition, dollar-denominated LNG
prices are linked to crude oil prices using a sliding scale, which
exposes the Company to risk from changes in the market price ofraw materials. The effect of such changes on annual raw material
costs are as follows:• Approximately ¥2.0 billion for every ¥1 movement in the yendollar exchange rate
• Approximately ¥4.3 billion for every US$1 movement in the perbarrel price of crude oil

202000

2001

2002

2003

(%)
120

Due to the application of the “sliding rate system,” any change
in the cost of raw materials is reflected in gas rates after
approximately six months. While earnings may be subject totemporary increases or decreases, crude oil prices and exchange
rates have no net effect on results over the long term.

Interest Rate Risk
9Tokyo Gas has both long-term and short-term fixed-rateinterest-bearing debt, which precludes interest rate risk during theterm of an obligation. However, Tokyo Gas may be subject tointerest rate risk when refinancing and in other instances.

63

Stock Price Risk

ROEROA(March 31)

0

1999

2000

2001

2002

2003

Tokyo Gas primarily holds equities to maintain corporate
relationships needed to conduct business operations. Equities ofpublicly listed companies are subject to market risk. Tokyo Gas has
formulated a management policy and rules for the handling of such
equities.

29
Annual Report 2003

900

Gas Rate Decrease Risk

Tokyo Gas Co., Ltd.

Stockholders’ equity increased 2.8% from a year earlier, or¥15.6 billion, to ¥579.7 billion. Retained earnings increased ¥42.3
billion, which was offset by a decrease of ¥15.8 billion in net
unrealized holding gains on securities. Total capital, defined as thesum of bank loans, long-term debt due within one year, long-term
debt due after one year, and stockholders’ equity, totaled ¥1,311.0billion, of which stockholders’ equity accounted for 44.2%. The ratioof stockholders’ equity to total assets was 34.6%, compared to33.1% a year earlier. Return on average total stockholders’ equity
improved to 10.4%, compared to 9.3% for the previous fiscal year.

Market Risk Exposure