ACTIONS FOR FURTHER GROWTH

We are leveraging the strategic business unit system tomaximize Group earnings, as well as to implement agile
management with quick decision-making.

which Group companies with potentialof its customers with environment-synergic benefits are integrated into

friendly natural gas. In this sense, we

strategic business units.

are extremely fortunate, because we

We believe that this unified

can contribute to society by working

approach will allow Tokyo Gas and its

hard at our business activities. This isGroup companies to maximize Groupthe starting point for our activities, andearnings in free and competitive mar-we will continue to focus on this role as

kets. We also aim for agile manage-

we work to enhance our profitability

ment with quicker decision-making

and achieve growth by investingby devolving authority and accounta-

aggressively in areas with the potential

bility to the leaders of each strategic

for expansion.

[]

Moving Forward
toward Achievement ofFrontier 2007

business unit.

 Overcoming Competition Triggered by Deregulation

The Tokyo Gas Group provides
convenience and comfort to the lifestyle Entering Related Fields to Extend Customer Services
Tokyo Gas Group Management Structure (As of April 1, 2004)

 Enhancing Procurement of Gas Resources
Top Management

 Driving Future Growth through R&D

Compliance Dept.
Internal Audit Dept.

Corporate

Shared Services / R&D

Strategic Planning Div. (19 )Corporate Service Div. ( 6 )Corporate Communications Div. (1 )R&D Div.

Strategic Business Units

Energy Resources Div.

Energy Production Div.

Pipeline Network Div.

Residential Sales Div.

Energy Sales andService Div.

Wide Area
Marketing Div.

( 3)

( 1)

( 2)

(36)

( 4)

(12 )

Figures in parentheses are numbers of Group companies in each business unit.

[ 13 ]TOKYO GAS ANNUAL REPORT 2004

TOKYO GAS ANNUAL REPORT 2004

[ 14 ]

OVERCOMING COMPETITION TRIGGERED BY DEREGULATIONTokyo Gas is accurately identifying the risks and opportunities resulting from liberalizationand strengthening both its offensive and defensive positions.

Conventional CompetitionStrategies• Gas rate strategies based on effective utilization of the ¥180 billion
allocated for rate reductions under Frontier 2007
• Development of energy service businesses based on environmental advantages of natural gas and energy efficiency andcost savings made possible by cogeneration• Expansion into electric power business with competitive electric power prices made possible by the strengths of the Tokyo
Gas Group

Utilizing a trusted network with more than 9.4 million customers

Gas VS. Electricity

Competition with otherenergy forms+Tokyo Gas has always faced competition from other energy industries, including electricity. Competition in thearea of air conditioning and cogeneration systems for office buildings and other facilities has been particularly
intense since Tokyo Electric Power reduced its rates in 2002. Fierce competition is expected to continue, as Tokyo
Electric Power has already announced further cuts to take effect from October 2004. This competition has also
intensified in the residential market, with electric power companies promoting an all-electric lifestyle.
The strategy adopted by Tokyo Gas for this challenging environment is based on effective utilization of the¥180 million allocated under Frontier 2007 to offer attractive billing options that match the needs of customers.
The competitive advantage of Tokyo Gas is close ties with more than 9.4 million customers based on its brandreputation. Tokyo Gas is determined to protect and enhance this advantage by continuing to provide customers
with ideas for business efficiency and more comfortable lifestyles based on the use of natural gas with highadded-value products and services.

Offering energy solutions based on advanced technology

Gas VS. Gas

1 million m3 or more

500,000 m3 or more

100,000 m3 or more

Annual usage

Tokyo Gas

34%

Through 2003
Demand capacity

Electricity
Industry

30%

42%

2004

40%

50%

2005

2007

Study of full liberalization

New Competition Resulting from Liberalization

Liberalization Schedule

New market participants

Seizing business opportunities created by liberalization

63%

Electric power

50 kW or more

Electric powerVS.

Major users[ 15 ]

2,000 kW or more

500 kW or more

Large-scale factories andcommercial complexes

Medium-sized factories/hotels

TOKYO GAS ANNUAL REPORT 2004

Small-scale factories/hospitals

In April 2004, the scope of liberalization was expanded to include retail sales of gas to customers using 500,000
m3 or more annually. This means that approximately 40% of the total volume of gas sold is liberalized. Thus, competitors, including electric power companies and oil companies, are intensifying their gas marketing activities.
Tokyo Gas is responding to this gas-gas competition by refining and enhancing the unique strengths that will continue to make the Company attractive enough to be selected by customers.
The greatest strength of Tokyo Gas is its ability to apply advanced technology and engineering expertise to thedevelopment of solutions that precisely match customers’ needs. Tokyo Gas aims to maximize this advantage andremain attractive to customers through its energy services, which provide high added-value energy utilization
solutions through the use of natural gas cogeneration technology.
Tokyo Gas recognizes the risk of eroding sales as a result of competition and already reacted in Frontier 2007
by assuming that competition will reduce revenues by approximately ¥30 billion, or by a sales volume of 500 million m3, as of 2007.

Market participation
by Tokyo Gas

In April 2004, regulatory reform of the retail electricity market expanded the scope of liberalization to include customers with demand capacity of 500 kW, reaching about 40% of electricity sales in volume terms. Tokyo Gas isdetermined to exploit this opportunity to the full by becoming active in the electric power business. The most critical requirement for success in this market is the ability to supply electricity at highly competitive rates. Tokyo Gas
aims to expand its electric power business by forming alliances and using its competitive advantages. These
include the use of existing infrastructure and expertise of its own or partner companies, locating plants close to
demand areas, and utilizing the most advanced generation facilities to combine high efficiency and low cost.
A key challenge for newcomers is to find buyers for the electricity that they generate. However, Tokyo Gas isdeveloping a range of options, including sales to the power retailer Ennet, which was jointly established by TokyoGas, the NTT Group and Osaka Gas, wholesaling to Tokyo Electric Power through an independent power producer(IPP), and direct sales to customers. It will also consider trading through the Japan Electric Power Exchange.

TOKYO GAS ANNUAL REPORT 2004

[ 16 ]

ENTERING RELATED FIELDS TO EXTEND CUSTOMER SERVICES

ENHANCING PROCUREMENT OF GAS RESOURCES

Deregulation has triggered the expansion of energy-related business opportunities. Tokyo

Tokyo Gas strives to improve its cost competitiveness through the establishment of a naturalGas is steadily creating new business in this environment.

gas supply chain linking upstream development to downstream markets.

Energy ServicesStrategy■ Dynamically Expanding its Presence in the Growing Energy Service Market• Tokyo Gas is using bargaining power arising from prospects of further growth in gas sales volumes to negotiate morecompetitive contract terms regarding pricing and flexibility.
• The Company also aims to maximize the benefits of its LNG value chain by moving into upstream areas, such as gas
field development and transportation. Among its goals is a 5% or more reduction in gas resource costs per cubic meterfrom fiscal 2002 levels under Frontier 2007. (based on 2002 currency exchange rates and crude oil prices)

Customer site
Energy-using facilities

Operation management
Energy audit

Heat

Electric power

City gas Gas cogeneration facility,installed and owned by

Energy service providers construct and retain ownership of the gas cogeneration systems and otherenergy facilities they employ on customer sites for the provision of one-stop energy solutions. Potential
customers are increasingly attracted to the benefits of energy services, which include energy cost savings, increased environmental responsibility and virtually no initial outlay. The profitability of this business is also improving, as the systems themselves are made more efficient—a trend that promises abright future for this emerging new business.
In 2002, Tokyo Gas established a new subsidiary, ENERGY ADVANCE Co., Ltd. This company is deploying a highly efficient marketing strategy by focusing on customers with substantial heating needs and astrong awareness of environmental issues. It is using the advanced engineering capabilities of the TokyoGas Group and its ability to procure LNG reliably and economically to maximize the added-value potential ofgas cogeneration. Its main target market is the Kanto region, where there is significant untapped demand.
ENERGY ADVANCE is the leading company in the cogeneration field. By the end of fiscal 2003, thecompany had signed 35 contracts, totaling approximately 60 MW. It has also been selected for 18 subsidized schemes implemented by the New Energy and Industrial Technology Development Organization andother organizations. These schemes involve a total capacity of approximately 50 MW.

Electric Power Business■ Marking Full-scale Entry into Electric Power Generation

Tokyo Bay
Kawasaki Natural Gas
Power Generation
Ohgishima PowerTGYokosuka PowerTokyo Gas
Bay PowerOhgishima
LNG Terminal Sodegaura LNG Terminal
NegishiLNG Terminal
Operating/
Under construction
PlannedThe Tokyo Gas Group’s full-scale involvement in the power business began in October 2003 with thecommencement of generation at a 100 MW plant operated by Tokyo Gas Bay Power Co., Ltd. In August
2003, Tokyo Gas acquired an IPP from Tomen Corporation and renamed it Tokyo Gas Yokosuka PowerCo., Ltd. This power plant will start operation from 2006 with a generation capacity of 240 MW. Tokyo
Gas is also exploring the establishment of an 800 MW plant in collaboration with Nippon Oil Corporation,and a 1.2 GW plant in collaboration with the Shell Group. Eventually, Tokyo Gas plans to increase its total
generation capacity to 3 GW in line with the electric supply and demand and the evolution of deregulation in the electric power industry.

What’s New■ Adding Upstream Development Capability with Darwin LNG Project
Dili East Timor

Timor Sea

BAYU-UNDAN
FIELDGas Pipeline
DarwinAustralia

The Darwin LNG Project is in progress in the Joint Petroleum Development Area, shared by Australia andEast Timor. In June 2003, the two governments gave their approval for the project, in which Tokyo Gasand Tokyo Electric Power Co. (TEPCO) have decided to participate. As a result of this approval,
Tokyo Gas is now involved in upstream development activities. In addition to their role in LNG
production through this project, Tokyo Gas and TEPCO will purchase a total production of 3 million tons of LNG annually over a 17-year period starting in 2006. This participation gives Tokyo
Gas entry to the entire LNG value chain, allowing it to reduce gas resource costs and ensuring
reliable procurement of gas resources.

■ Reducing Freight Costs through Use of Wholly Owned LNG Carrier Fleet
In September 2003, the Energy Frontier commenced operations as the Tokyo Gas Group’s first wholly
owned LNG carrier. During fiscal 2003, ten voyages were carried out to supply Tokyo Gas with LNG,
including spot trade, and to provide transportation for other parties. A second vessel is under construction
and due to be launched in March 2005. Tokyo Gas aims to reduce its freight costs by using its own vessels to expand its FOB transactions. The vessels will also be used for spot purchasing and the provision oftransportation services for other parties. In addition to reductions in gas resource procurement costs, theuse of company vessels will also allow Tokyo Gas to secure greater flexibility in contract terms.

Russia■ Securing Geographical Advantage with LNG Procurement from Sakhalin II
Home Security Business Launched
For decades Tokyo Gas has provided energy solutions to meet a wide range of energy needs. The resulting trust that has grown between Tokyo Gas and its customers is now the basis for the development andcommercial introduction of new services. One of these new products is a home-security service provided
in partnership with Sohgo Security Services Co., Ltd., combining Tokyo Gas safety technology withSohgo’s security technology. The service provides around-the-clock protection 365 days a year with features that include intruder detection, emergency notification, checking and remedial action when gastaps are left on or doors left unlocked, and emergency action in response to fires and gas leaks. The newservice was introduced on a trial basis in April 2004 and will become fully available in autumn or later.

NyshDeKastri

PILTUN-ASTOKHSKOYE(Oil field with some associated gas)
LUNSKOYE

Nogliki(Natural gas field)

Sakhalin IslandPipeline

In May 2003, Tokyo Gas reached basic agreement concerning the sales and purchase of up to1.1 million tons of LNG annually from the Sakhalin II project over a 24-year period starting in2007. In addition to benefits relating to pricing and contract-term flexibility, this project offers ageographical advantage, since the close proximity of Sakhalin to Japan will reduce transportation costs. In addition, Tokyo Gas reduces procurement risk by diversifying its gas resources.

Yuzhno-Sakhalinsk

PRIGORODNOYE(LNG/oil terminal)

JapanTokyo[ 17 ]TOKYO GAS ANNUAL REPORT 2004

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B U I LT- I N S U S TA I N A B I L I T Y

DRIVING FUTURE GROWTH THROUGH RESEARCH AND DEVELOPMENTTo help drive its growth, the Tokyo Gas Group is pursuing original research and development leading
to the creation of innovative products and services as well as to the maintenance and enhancement ofbasic technologies. These efforts will serve as building blocks for new business models.

[What’s New■ Launch of Environment-friendly Residential Fuel Cells Planned for Fiscal 2004
Tokyo Gas is collaborating with system manufacturers on the development of a residential fuel cell cogeneration system. The introduction ofthis next-generation product is expected to lead directly to increased useof gas. The system that Tokyo Gas is developing is based on solid polymer electrolyte fuel cell (PEFC) technology and will be fueled by hydrogen extracted from city gas. It will have an output capacity of 1 kW. The
specifications were basically finalized in 2003 after trials in typicalhouseholds. The product is now in the final stages of development, andthe priorities are to improve durability and reduce costs ahead of thetarget launch date in the fourth quarter of fiscal 2004.

Pursuing
Our Responsibilities
to All Stakeholders] Commitment to Good Corporate Citizenship■ A New and More Efficient Method of Pipeline Maintenance
The period over which existing gas pipelines can be used safely has important implications
for capital investment planning and tariffs. Tokyo Gas has developed and started using“Double-lining Technology” that allows maintenance to be carried out without excavation.
Existing pipes are strengthened through the application of two resin coatings applied with aspray gun inserted into the pipes. There are major cost savings, since this method saves
time, compared with the conventional method.

Winch

Spray system

BranchOther pipe

 Corporate Governance and Compliance Management Organization

Spray gun

Gray cast iron pipe

■ “TES Remote PLUS”—Information Technology the Key to Enhanced Convenience and Safety
The new “TES Remote PLUS” service developed by Tokyo Gas allows customers to control their TES gas water heater/heating systems remotely using mobile telephony. The
new system, which has been available since April 2004 for newly built condominiums,
also supports remote operation of other residential equipment with home automation
capabilities, including door locks and electric air conditioners. TES system is becoming
increasingly popular, and TES floor heating is now installed many newly built condominiums in the Tokyo metropolitan area. Tokyo Gas developed the new service to provide
enhanced comfort, convenience, safety and peace of mind. The operation is also linked
to Tokyo Gas’ monitoring station, which can provide warnings or shut off the gas supply
remotely if necessary, such as when a customer leaves home and forgets to turn off agas appliance. The service also includes enhanced maintenance support by detecting
and reporting faults in appliances.

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