Message From Management

RIGHT: Kunio Anzai

Chairman
LEFT:

Hideharu Uehara
President

4

Full-fledged competition in Japan’s energy sector is upon us.

higher gas sales volume and increased gas rates based on

Gas and electricity retailing to large-volume customers has been

the “gas cost adjustment rate (sliding rate)” system. Accord-liberalized, and electricity and gas companies are crossing into

ingly, consolidated net sales climbed 9.5% to ¥1,086.7 bil-each other’s fields. In this era of full-scale competition, Tokyolion and operating income surged 49.7% to ¥103.6 billion.

Gas has adopted a new corporate slogan called Energy Fron-

Net income was held to a slight rise of 3.4%, to ¥27.5 bil-tier. This slogan embodies our drive to grow as a diversified

lion, principally by the recording of a one-off charge of ¥21.9

energy services company, delivering heat, electricity and gas,billion for the shortfall in Tokyo Gas’ corporate pension fundswith natural gas as our core energy source. Four key strengths

following the adoption of new accounting standards. Returnunderpin our drive: positioning the outwardly expanding greateron assets (ROA) was 1.5%. We also generated free cash flows

Tokyo/Kanto plain area as our central sales base; an extensiveof ¥66.5 billion, up ¥24.5 billion year on year.

natural gas infrastructure linking LNG receiving terminals andReturning value to shareholders is a central element ofcustomers; cutting-edge engineering capabilities; and strong,

our medium-term management plan. As such, we are pleased

trusting relationships with our customers. As the 21st century

to announce that cash dividends applicable to the year weredawns, we are determined to continue to play a leading role at¥6.00 per share, a ¥1.00 increase over previous years.

the forefront of Japan’s energy sector.

Progress of Deregulation

The Year in Review

Japan’s gas industry underwent partial deregulation in

In February 2001, we reduced our gas rates by an average ofNovember 1999, with the lowering of the threshold at which

3.02%, bolstering price competitiveness and responding toregulations on gas supply areas and rate-setting restrictions

the needs of our customers. Having also reduced rates infor large-volume customers are set, from those consuming 2December 1999, our rates have fallen by a total of 5.02% inmillion m3 or more per year to 1 million m3 or more. March

the last 2 years.

2000 saw the liberalization of electricity sales to large-volume

Gas sales volume in the Tokyo Gas Group increased 5.4%
3customers, with revisions to the Electricity Utility Industry

to 8,879 million m . Gas sales in monetary terms also

Law. The new regulations apply to users with a capacity ofincreased, up ¥68.6 billion to ¥740.7 billion, reflecting theover 2,000 kW and using a supply of 20 kV or above. TheTOKYO GAS Annual Report 2001

scope of deregulation in both industries is expected to widen.
In the gas industry, at the end of January 2001, theAgency of Natural Resources and Energy formed a privategroup for the study of basic issues regarding the conditionof the gas market, including LPG, over the next decade. The
council will report on its finding later this year.

The actions outlined below will be instrumental to achieving our revised targets.
Stepping Up the Efficiency DrivePersonnel Reductions
We had planned to reduce the parent company head countto 10,000 by the end of March 2006. We now aim to achieve

Tokyo Gas welcomes deregulation. We view it as an excellent opportunity to increase corporate value. Deregulation willallow us to advance into the electricity market. It will also enable
us to capture demand beyond our service area. We also want
to seize upon other business opportunities, including the natural gas transportation business using our powerful pipelines.

this goal by March 2004, 2 years ahead of schedule, byundertaking a rigorous review of work processes across alloperations. We have decided to transfer 1,500 contract
employees connected with meter reading, bill collection andother customer-service duties to a new outsourcing company
at the end of March 2004. These actions are expected toTokyo Gas’ Medium-Term Plan

yield labor cost savings of ¥37.0 billion from the year ending

Our basic strategy is to increase free cash flows and ROA. InMarch 2002 through the year ending March 2005.

the year ended March 2001, the first year of our 5-year

Controlling Operating Expenses

medium-term plan, we achieved encouraging results. BasedWe have revised our initial goal of holding operating expenses

on this progress, we announced new projections in May

to the level in the year ended March 1999 of ¥224.2 billion,

2001. By stepping up our drive to raise efficiency, we aim tofrom the year ended March 2001 to the year ending Marchachieve our goals a year ahead of our initial plan.

2003, through cost cutting and operational reforms. We have

1. Increase Free Cash Flows

lowered our target to an average of under ¥221.0 billion

Our plan initially called for free cash flows totaling ¥250.0

over the 5 years of the plan. This includes the increase inbillion over 5 years. We have revised our target upward to

fixed expenses in line with expansion of our customer base,¥287.9 billion. In the year ended March 2001, we gener-

but excludes an increase in outsourcing costs of ¥27.0 bil-ated free cash flows of ¥53.9 billion, far above our initial

lion from the year ending March 2002 to the year ending

target of ¥32.0 billion.

March 2005.
Internal Financing of Capital Expenditures

2. Raise ROAHere, we were originally forecasting to raise ROA to an

We will continue to invest aggressively in new pipelines toaverage of 1.9% over the term of the plan. Now we areboost gas demand and meet rising gas demand in the future.

aiming for an average of 2.6% per year, with ROA of 3.8%

However, we intend to hold capital expenditures to aroundin the year ending March 2005, the plan’s final year. The¥100 billion, within the limits of internal financing, throughresult in the year ended March 2001 of 1.8%, on a non-cost-cutting measures.

consolidated basis, again exceeded our initial goal of 1.1%.
Medium-Term Management Plan Progress Report and Outlook (As of May 2001)<Non-consolidated>
Mar. 31
Net sales
Free cash flows
Total assets
Interest-bearing debt
ROA
Total asset turnover
Equity ratio¥ billion¥ billion¥ billion¥ billion%
times%

00
869.9
26.0
1,493.6
761.9
1.5
0.60
29.7

01
965.6
53.9
1,490.1
685.5
1.8
0.65
34.1

02
976
51
1,450
635
2.1
0.66
35.9

03
1,005
49
1,465
627
2.4
0.69
36.7

04
1,036621,462
610
2.8
0.71
38.3

05
1,065
72
1,460
570
3.8
0.73
40.900
992.2
42.0
1.501
1,086.7
66.5
1.502
1,100672.003
1,136512.304
1,16765
2.605
1,19675
3.5

1.19

1.01

1.13

1.14

1.12

1.09

<Consolidated>
Mar. 31
Net sales¥ billion
Free cash flows¥ billion
ROA%
Consolidated net income tonon-consolidated net income
times

Note: Figures for the years ended March 31, 2000 and 2001 represent actual figures. Other figures are estimates.

Annual Report 2001 TOKYO GAS

5Structural Reforms (Organizational and System)

March 31, 2005. Of this cash, roughly 20% is earmarked forIn January 2001, we established the Energy Solution Busi-

new business investments, approximately 20% will beness Department within the Energy Sales and Service Divi-

returned to shareholders, and about 60% will be used tosion, to advance into the electricity business. In July 2001,strengthen our balance sheet.

the Inter-Regional Sales and Service Division was launched toRegarding new business investments, when we formu-augment our sales strategy outside the Tokyo metropolitan

lated our plan, we focused on building LNG carriers with aarea and to develop effective sales activities. In another move,view to entering the LNG transportation business. This area

we merged two functions—experimental research andof business has the potential to generate handsome profits.

development of product technologies—into the newly

Thereafter, we established a specialist section, responsible

formed R&D Division. This division strives to apply in-housefor planning and launching new businesses, to oversee thedeveloped technologies both in and outside the company.

launch of businesses outside the gas field, as well as to forge

With these actions, we have increased the number of strate-business alliances. These efforts led us to establish new

gic business divisions from 6 to 8. This new framework also

companies and to take equity stakes in others (See FAQ on

heralds the start of a virtual in-house company system,

page 33). Moreover, in June 2001 we established Tokyo Gas

whereby each division has been assigned free cash flow andBay Power to sell electricity generated from a 100,000kW

ROA targets. Each division is striving to maximize profits.

power station to be constructed within the grounds of theWe have also carried out reviews of the remuneration system

Sodegaura LNG Terminal. Operations are slated to start into provide added incentive to employees to improve their

the year ending March 2004.

performance. Senior managers and above are subject to an

Our investment in new businesses does not mean that weannual salary system and regular employees are increasingly

are sacrificing our core gas business. We are aggressively

compensated by a results-based pay system.

investing in new pipelines to capture new demand in the future.

Strategy to Expand Sales VolumesGas sales volumes drive sales and earnings. Our medium-term
6plan calls for an average annual increase in volumes of about
6.4%. To this end, we are executing a detailed strategy toexpand sales in each user customer category. Our overwhelming market shares of 95% and 80% in the residential market
for water heating and cooking, respectively, underpin ourefforts there. Building on this base, we are popularizing gas
floor heating for the home, and in the commercial sector,
gas-fired air conditioning for office buildings. Furthermore,this year we launched sales of micro turbines for cogeneration for small-scale commercial use. Another focus is development of small-scale fuel cell systems for residential use. OurFor shareholders, we plan to sustain the dividend in theyear ended March 31, 2001 of ¥6.00 per share in the year
ending March 31, 2002 and thereafter. We expect there to
be a dilutive effect on shares due to the conversion of convertible bonds into shares in line with the strong recovery in
our stock price. As such, we are considering share buybacks
to create shareholder value.
We hope to quickly strengthen our balance sheet by stepping up the repayment of interest-bearing debt. We aim toachieve our target of bringing interest-bearing debt downto ¥610.0 billion by the end of March 2005, a year ahead ofschedule in March 2004. Our new target is to reduce interestbearing debt to ¥570.0 billion as of March 31, 2005.

plan is to begin sales of these systems in 2004 and to makeResponding to Risk

them commonplace by about 2010. Moreover, while expand-Our medium-term plan factors in business risk accompany-ing demand primarily for cogeneration, a strategic product,ing deregulation. This mainly constitutes the risk of compe-

we will aggressively enter new fields. Target areas are electric-tition, which can be broken down into two categories. One

ity retailing, electricity and heat supply to specific areas suchis the risk of losing customers to new players. The other is

as redevelopment zones, and power generation businesses.

the risk that sales might fall as a result of having to reduce

Expanding and Allocating Free Cash FlowsAs highlighted above, we expect to generate free cash flowsof ¥287.9 billion during our medium-term plan, ¥38.1 billion above the initial target. Combined with cash on hand,
we expect to have total cash of ¥343.8 billion to invest fromthe year ended March 31, 2001 through the year ending

TOKYO GAS Annual Report 2001

rates to remain competitive.
With regard to the former, we see our main rivals aselectric utility companies. Like gas companies, they have theinfrastructure in place, in the form of LNG receiving terminals, and have positioned entry into gas operations as animportant strategy. Competition is expected to heat up

quickly as electric utility companies attempt to drive

manufacturing plant sites and to take whatever actions wereexpansion in demand by using the pipelines of other com-appropriate. We will report on all our environmental actions,panies in addition to their own pipelines. To counter this risk

believing that full disclosure is the hallmark of a responsibleof lost business, we will offer increased value to new andcorporate citizen.

existing customers. For new customers, we will leverage oursophisticated engineering capabilities to cement a strongmarket position. For existing customers, we will compete on
the basis of our price. Price competitiveness is underpinnedby cost-reduction efforts. Therefore, we will accelerate costcontainment efforts to achieve cost reductions above thoseof electric utility companies. To hedge this risk, we aim tounlock new demand by enlarging our service area, taking
maximum advantage of our pipeline infrastructure.
Regarding the second risk category, in December 1999
and February 2001 we lowered ordinary gas rates for residential and other customers. As a result, our gas rates are
now among the lowest in Japan, and we feel confident that
we can hold our own against other forms of energy. As such,
we do not plan further rate reductions in this mid-term plan
period. However, price competition with new entrants in thelarge-volume user domain, as well as cogeneration and air
conditioning demand, may force us to reduce rates, thereby

Promoting Activities Overseas
At the threshold of an era of full-scale competition in theenergy sector, overseas activities are taking on greater
importance for the Tokyo Gas Group. Heretofore, our fourrepresentative offices overseas have focused mainly on gathering information and on management and technologicalexchanges with foreign energy-related companies and institutions. While continuing these activities, we also intend touse these offices as conduits for disseminating information
to investors abroad.
Leveraging our experience and successes in overseas
projects, we intend to develop overseas operations. In particular, we can point to our joint venture projects in Malaysia
to demonstrate our capabilities. These included the construction and operation of a natural gas distribution system. Thiswas the first such overseas project undertaken by a Japaneseenergy utility company. Gas Malaysia Sdn. Bhd., the joint
venture company, started paying dividends in 1999.

impacting sales. Reducing costs is the key to remaining pricecompetitive and maintaining and expanding earnings.

In Conclusion

7

Deregulation heralds the arrival not just of competition, but
Contributing to Local Communities
One of our greatest assets is our broad base of about 8.9
million customers. To enlarge this base we are upgrading
customer services and maintaining and enhancing the safetyand stability of supply. Furthermore, R&D is being emphasized to respond to diverse customer needs in an aging society which is being fundamentally altered by advances in
information technology. IT is an important area of focus.

of business opportunities. It promises to spur growth innatural gas businesses in Japan. With a core business model
focused primarily on natural gas, we are well positioned tobenefit. Taking on the challenges of deregulation, we aim to
expand sales and to maximize earnings through top-line
growth, structural reforms and cost cutting.
As always, your support will serve as inspiration andencouragement for our actions.

A Leader in Environmental Management
The 21st century is being hailed as the century of the envi-July 2001

ronment. In the new era, corporations’ actions to addressenvironmental issues will fall increasingly under the spotlight.
In 2000, Tokyo Gas revised its comprehensive environmental strategy for the first time in eight years. With this review,

Chairmanaddressing environmental issues is one of the most important items on our management agenda. Our aim is to be aleader in environmental management. In addition to expanding the use of clean-burning natural gas—a long-standing
focus—we are actively promoting environmental protection

President

initiatives across the Tokyo Gas Group. For example, weannounced our intention in January 2001 to determine theextent of possible soil contamination at several former gas

Annual Report 2001 TOKYO GAS