Rising Demand for Natural Gas in JapanTokyo Gas Co., Ltd.

*Cogeneration: An ecologically and economically sound form of
distributed generation in which electricity is generated while the waste
heat generated in the process is recovered and used as energy, instead ofbeing wasted (as is the usual case in thermal power plants).

Tokyo Gas: Industry Leader

6
Annual Report 2003

Tokyo Gas is Japan’s largest city gas company, with aservice area of 3,155 km2, covering the Tokyo
metropolitan area and the Kanto region. The Kanto region
is Japan’s most densely populated area, with more thanforty million residents. Tokyo is the center of the Japanese
economy, and the location of many companies’
headquarters. In addition, the Kanto region contains
Japan’s largest industrial area, which produces 40 percentof the country’s gross domestic product (GDP). Tokyo Gas,
which is based in this area, expects growth to result not
only from rising gas demand, but also from the expansionof its energy-related businesses.
■ Gas Sales Volume in Japan andTokyo Gas by Sector(Year ended March 31, 2003)

high-growth business that will play an even greater rolein Japan’s energy market of the future.

■ Share of Natural Gas in Primary Energy Supply
in Japan and Overseas

26.2%

24.3%

23.6%

Japan
13.7%

Source: BP Statistical Review of World Energy 2003

■ Growth in Tokyo Gas Sales Volume by Sector(Million m3, 46.05MJ/m3)

14,00012,00010,000
8,000
6,000
4,000
2,000

0
(3/31) 98 99 00 01 02 03 04 05 06 07 08
Residential
WholesaleCommercial

Industrial

Note: 2004 to 2008 are projected figures.

■ Number of Gas Customers in Japan and Tokyo
Gas Customers(Million m3, 46.05MJ/m3)(As of March 31, 2003)(Customers)

Residential
3,254

Residential
8,637,347

Commercial
2,504

Commercial
582,084

Industrial
3,599

Industrial
24,945Wholesale
1,107
Japan
Tokyo Gas

U.S.A.

WorldEU

24,937
10,464* The above three graphs represent non-consolidated data.

Wholesale
17
Japan
Tokyo Gas

26,737,527
9,244,393

RIGHT

Natural gas is the most environmentally sound of thefossil fuels. While roughly 60 percent of the world’s oil
reserves are concentrated in the Middle East, natural gas
reserves are scattered throughout the world. Natural gas
reserves are also expected to last longer than oil, making
it the energy source for the future. In addition, demand
for natural gas is increasing not only for its existing
applications as an energy source for city gas supply andlarge-scale power plants, but also as a result of the rapid
spread of cogeneration* systems over the past decade.
Demand is also expected to rise further as we enter theage of distributed energy, such as the use of compact
residential fuel cells to enable small-scale cogeneration.
The share of natural gas in Japan’s primary energy supply
is relatively low — about half that of Europe and theUnited States. However, in its report on Japan’s long-term
energy demand outlook, the Japanese government has
identified natural gas as the only fossil fuel for which
demand is expected to grow. As such, natural gas is a

An Expanding Supply Area and Pipeline Network

Utsunomiya

Gunma

Tochigi

Moka

HitachiTochigi Line (2006)
Sano
Kumagaya-Sano Line (2004)

Kumagaya

IbarakiTokyo Gas Co., Ltd.

SaitamaTokyo
Head Office

Kanagawa

Central TrunkLine (2009)

High-pressure transmission pipelines
High-pressure transmission pipelines (under construction)
Medium-pressure pipelines

Sodegaura
LNG Terminal

NegishiLNG Terminal( ) Proposed year of completion
Tokyo Gas’s service area
Tokyo Gas’s direct and indirect wholesale area

Total Pipeline Length: 49,431km(As of March 31, 2003)■ Breakdown of GDP of Japanby Major Areas■ Percentage of Tokyo, Osaka and Nagoya
Areas in Total Population of Japan(Year ended March 31, 2000)(As of October 2002)

Japan

7

Tokyo Bay

Ohgishima
LNG Terminal

Minamiashigara

Chiba¥509.7 trillionJapan

127,435 thousand

Tokyo Area
39.9%

Tokyo Area
34.5%

Osaka Area
16.9%

Osaka Area
16.4%

Nagoya Area
8.0%

Nagoya Area
8.7%

Source: Cabinet Office, Government of Japan

Source: Bureau of Statistics, Ministry of Public Management,
Source: Home Affairs, Posts and Telecommunications

Notes: 1. The Tokyo area includes Tokyo, plus Kanagawa, Saitama, Chiba, Ibaraki, Tochigi, Gunma, Yamanashi and Nagano prefectures.
The Osaka area includes Osaka, as well as Hyogo, Kyoto, Shiga, Nara and Wakayama prefectures.
The Nagoya area includes Aichi, Gifu and Mie prefectures.
2. GDP of each area is the total of GDPs for the area’s major city and its surrounding prefectures, listed above.

Yokohama-Shonan Line andSecond Joso Trunk Line Completed
In May 2002, Tokyo Gas completed the
Yokohama-Shonan line, which was constructedto accommodate rising demand in the Seisho
district of Kanagawa Prefecture, as well aslarge-scale demand from gas utilities such as
Odawara Gas and those in the MinamiAshigara district. In addition, the Second Joso
Trunk Line, which extends through northern
Chiba Prefecture and southern Ibaraki
Prefecture, was completed in October. The
purpose of the Second Joso Trunk Line is toensure a stable supply by strengthening thetransmission of city gas. Actively responding toincreases in gas demand, Tokyo Gas iscontinuing to expand its supply infrastructurewith projects such as the Tochigi Trunk Line,scheduled for completion in 2006.

Annual Report 2003

PLACE

Tokyo Gas, which supplies city gas to 9.2 million customers in the Tokyo metropolitan area and the Kanto region,
where demand in Japan is the greatest, has pipeline extending a total of 49,431 km. In order to ensure the long-term,
stable supply of natural gas and to accommodate this demand, Tokyo Gas has built a 300-km natural gas supply loop
encircling the Tokyo metropolitan area, incorporating three LNG receiving terminals (one of which, the Sodegaura LNG
Terminal, is the world’s largest).
In addition, Tokyo Gas is moving aggressively into locations where demand for city gas is expected to grow, working
to build and expand supply infrastructure based on an assessment of return on investment. Furthermore, the Company isactively cultivating demand in response to the liberalization of supply areas for large-volume customers following the
deregulation of the gas industry.

As of April 2003, Japan had approximately 230 city gas companies. While this number may seem large, three major
companies account for approximately 80 percent of total gas sales volume. In addition to these city gas companies,
there are about 1,800 specific area gas suppliers and roughly 30,000 liquefied petroleum gas (LPG) companies, most ofwhich are small or medium-sized firms. The industry is thus clearly divided into two well-defined segments — the threelarge participants and many small and medium-sized firms.
The raw material for approximately 90 percent of city gas used in Japan is natural gas, almost all of which isimported in the form of liquefied natural gas (LNG). Only a limited number of companies take delivery of LNG imports aswell as produce and supply city gas. Unlike the United States and Europe, Japan does not have a nationwide pipeline
network. Each gas company owns pipelines and supplies and markets gas within its own respective service area.

Continuing Progress in Deregulation

Tokyo Gas Co., Ltd.

8

In Japan’s energy markets, retail sales of gas to large-scale customers was liberalized in 1995, along with thegeneration component of the electric power business. Factors such as the partial liberalization of the retail electricity
market starting in March 2000 and the shift to the reporting system for rate reductions have increased management
autonomy in both industries.
In February 2003, the schedule for regulatory reform through 2007 was determined. In 2007, customers using
100,000 m3 or more annually will be able to freely select their gas supplier. In the electric power business, the scope ofliberalization will expand in 2005 to include customers with a demand capacity of 50 kW or more, and a study of full
liberalization, including residential electric power, is slated to begin in 2007.
■ Deregulation Schedule

Annual Report 2003

Gas:
• Annual usage ≥ 1,000,000 m3 • Annual usage thresholddecreases to ≥500,000 m3• Liberalization of approximately
30% of total sales volume• Liberalization of approximately
40% of total sales volume

30%• Annual usage thresholddecreases to ≥100,000 m3• Liberalization of approximately
50% of total sales volume

40%

50%

Projected

2003

2004

Projected

2005

2007

Projected
Projected

Study of full liberalization
60%
30%

40%

Electricity:• Demand capacity threshold• Demand capacity threshold• Demand capacity ≥ 2 MW
decreases to ≥ 50 kW
decreases to ≥ 500 kW• Liberalization of approximately• Liberalization of approximately • Liberalization of approximately
30% of total sales volume
60% of total sales volume
40% of total sales volume

RIGHT

Overview of the City Gas Business in Japan

Major New Business Opportunities

Tokyo Gas Co., Ltd.

9

Ample Free Cash Flow Supports Growth
While emphasizing revenue growth, Tokyo Gas exceeded internal capital resources in investing to construct thecomprehensive production and supply infrastructure needed to respond to deregulation and meet expanding demand forenergy, particularly natural gas, in the Kanto region. As a result, interest-bearing debt on the balance sheets increased.
However, this period of massive capital expenditures has given way to a period of return on investment, and Tokyo Gas
is now able to restrain capital expenditures within the scope of depreciation. In addition, under the management plan
covering the five years from fiscal 2000 to fiscal 2004, Tokyo Gas reduced total assets, raised asset efficiency and madeparticular efforts to reduce its large volume of interest-bearing debt. In fact, the Company achieved its target for fiscal
2004 of reducing interest-bearing debt to ¥786.0 billion two years ahead of schedule. Tokyo Gas is therefore able tocapitalize effectively on the opportunities for growth presented by deregulation, and has the ample cash flow required toaggressively invest in new areas.
■ Cash Flow and Capital Expenditures (Non-consolidated)(¥ Billion)

200
160
120
80
40
0
(3/31)

70

72

74

Depreciation

76

78

Net income

80

82

84

86

Capital expenditures

Cash flow = Net income + depreciation

88

90

92

94

96

98

00

02

04

06
Planned08

Annual Report 2003

TIME

Progress in deregulation is bringing about an era of “mega-competition.” On one hand, competition among gas
companies will intensify. On the other, heightened competition in the commercial and residential markets resulting fromlower electric power rates will add to the intensity of competition between gas and electric power companies. However,while overall energy demand in Japan is not projected to grow strongly, the share of environmentally friendly natural gas
is projected to expand.
As the largest city gas company in Japan, Tokyo Gas is implementing a number of initiatives to benefit from theopportunities presented by deregulation. In the gas business, Tokyo Gas has concentrated on expanding its supply
network to capture new demand outside of its previous supply area. We have begun marketing natural gas to newentrants in the electric power business, and have initiated a pipeline business for third parties. Moving away from the
supply of gas alone, Tokyo Gas is building its energy services business, which entails high value-added energy use
proposals. In aggressively entering the electric power business, Tokyo Gas will implement initiatives that include
working alone and in alliances to develop its businesses in power generation and electricity retailing, as well as on-site
electricity and heat generation in specified areas. Tokyo Gas is also vigorously reducing costs in areas such as procuring
LNG, a field in which the Company has a strong competitive advantage.
Tokyo Gas has many strengths. Amid increasing emphasis on environmental protection, its business centers on
environmentally friendly natural gas. Leading-edge technologies for using natural gas with optimum efficiency haveadded to our superiority in this area, and Tokyo Gas has an established foundation of sales branches and natural gas
infrastructure in the Tokyo metropolitan area and the Kanto region, where demand for energy continues to expand.
Moreover, Tokyo Gas’s marketing capabilities are based on customer trust acquired over many years, and this will be asignificant advantage in making comprehensive energy proposals to industrial and commercial customers. Armed withthese strengths, Tokyo Gas is raising its management efficiency, countering the potential risks of reduced demand andlower revenues due to liberalization, and aggressively expanding the businesses of supplying electricity, heat andservices with an emphasis on its core city gas business. Tokyo Gas aims to transform itself into an Energy Frontier
Corporate Group with natural gas as its core energy source.

In November 1999, Tokyo Gas formulated a five-year medium-term management plan to respond to changes in
its operating environment, including the advent of greater competition due to deregulation and the globalization of
the economy. This plan covered the five years beginning with fiscal 2000, and the entire Tokyo Gas Group
implemented it in concert. As a result, Tokyo Gas achieved the objectives of the plan by the end of fiscal 2002, twoyears ahead of schedule.
While Tokyo Gas was implementing the recently concluded management plan, further deregulation of Japan’s
energy markets resulted in increased competition. Although the operating environment has become more challenging,it also presents significant opportunities for growth for companies able to respond appropriately. In the midst of awhirlwind of change, the Tokyo Gas Group created a new Group management plan, Frontier 2007, in response to thechanging operating environment with the aim of generating continued growth and development in energy-relatedareas, the Group’s core business domain. Announced in October 2002, Frontier 2007 covers the period from fiscal 2003
to fiscal 2007, and the Group began implementing it in April 2003. Frontier 2007 revolves around the concepts oftransformation and innovation. Its aim is to lead the Tokyo Gas Group to the next stage in its development.

Frontier 2007
Group Medium-Term Management Plan
for Fiscal 2003 to Fiscal 2007
Tokyo Gas Co., Ltd.

Deregulation as a Business Opportunity

10
Annual Report 2003

Business Model
Innovation
Construction of the GroupManagement System

Strengthening
the Corporate Structure

Business Expansion into
Energy-Related Areas

Growth and Development as an Energy Frontier Corporate Group
that Continues to Earn the Trust of Customers, Shareholders and Society
Under Frontier 2007, Tokyo Gas will expand its participation throughout the natural gas value chain, adding
upstream gas field development and LNG transportation to its existing business of gas distribution. We will also
expand into new energy-related businesses, including the electric power business, energy services, and new residential
services. Our objective is to continue to grow and develop with the trust of customers, shareholders and society bytransforming ourselves into an Energy Frontier Corporate Group that supplies energy and value-added energy-related
products and services.
Frontier 2007 has four pillars. Two are business model innovation and business expansion into energy-related areas.
The other two, construction of the Group management system and strengthening the corporate structure, support thefirst two. These specific measures are the key to the sweeping transformation of the Group’s business domains andstructure necessary to achieve the broader objectives of Frontier 2007.

RIGHT

Frontier 2007: The Medium-Term Management Planfor the Tokyo Gas GroupPrimary Management Objectives (Consolidated)

Net sales (¥ billion)

TEP

Free Cash Flow(¥ Billion)(¥ Billion)

6.0

97.0
61.0

3.0
FY2002Average for
FY2003 – FY2007

FY2002Average for
FY2003 – FY2007(FY2007: ¥10.0 billion)

ROA(FY2007: ¥105.0 billion)

Interest-Bearing Debt(¥ Billion)

3.4%

775.0

Average for
FY2003 – FY2007

FY20022.8%
FY2002627.0
End of FY2007(FY2007: 3.9%)

FY2002

FY2007

Average for
FY2002 – FY2007
1,156.0

1,121.0

1,165.0

ROE (%)

8.5

9.2

9.1

Stockholders’ equity/Total assets (%)

34.2

42.4

38.4

Capital expenditures (¥ billion)

128.0

92.0

102.0

Total assets (year-end, ¥ billion)

1,739.0

1,707.0—

TEP: Tokyo Gas Economic Profit
TEP = Net operating profit after tax prior to interest
payments - Cost of capital
Cost of capital = Cost of debt + Cost of equity
Assumptions: Average cost of debt: 2.23% (after tax);
Cost of equity: 6.5%
Free cash flow = Net income + Depreciation - Capital
expenditures
Figures for fiscal 2002 are projections made when themedium-term management plan was finalized in October
2002, not the actual results.

Generating Free Cash Flow and Using It Effectively■ Deployment of Free Cash Flow (¥ Billion)
2%
3%

Frontier 2007
Five-Year Total: ¥480 billion

Others

17%

43%

35%

New residential services
Overseas
Upstream development and
LNG transportation
Electric power business16%
Others21%

Reduction ofinterest-bearing debt

12%

52%

21%
Acquisition oftreasury shares

26%

17%
Dividends

10%

25%
New financing investments

FY2000 – FY2004 Medium-Term
Management Plan
Five-Year Total: ¥307.5 billion

11
Annual Report 2003

Under Frontier 2007, Tokyo Gas has set a target for free cash flow of ¥480 billion, approximately 1.5 times theamount generated under the previous management plan. We intend to use this free cash flow effectively to maximize
the value of the Tokyo Gas Group in ways such as investing in new business areas, as well as reducing liabilities andcapital employed. The chart below details specific plans for deploying free cash flow. Primary uses of free cash flow willbe ¥120 billion for business expansion investments in new energy-related areas, ¥100 billion for share buybacks and¥100 billion for reducing interest-bearing debt.

Tokyo Gas Co., Ltd.

PLANTokyo Gas will work to broaden its earnings base,aggressively develop demand, and expand into energyrelated businesses through steady progress in
implementing the four pillars of Frontier 2007.
Moreover, the Company intends to achieve positive
Tokyo Gas Economic Profit (TEP) by fiscal 2005 forGroup companies by implementing structural reform of
the business of affiliates. We also intend to reduce fixed
costs (per cubic meter of sales volume) by 24 percent
from their fiscal 2002 level by reducing the number of
employees and controlling overhead expenses. Other
points of emphasis include reducing total assets, raisingasset efficiency and strengthening the Group’s financial
structure. These initiatives are geared to achieving themanagement objectives in the table below.

Tokyo Gas Co., Ltd.

12
Annual Report 2003

INNOVATE

Business Model Innovation
Business model innovation is central among the four pillars of Frontier 2007. Until now, Tokyo
Gas used a business model that entailed the supply of gas alone, which involved the
production of city gas from LNG, its supply and marketing. Under Frontier 2007, Tokyo Gas will
expand participation throughout the natural gas value chain in upstream development and
LNG transportation, in addition to its existing downstream gas business. We will also expand
into new areas such as electricity, energy-related services and new residential services. Thus,
Tokyo Gas will transform its business model into one in which we supply energy and valueadded energy-related services throughout the entire value chain of the Tokyo Gas Group.

Natural Gas Procurement
Innovating toward a business model that advances into upstream development and LNG
transportation to maximize the benefits of participation throughout the LNG value chain
By expanding its participation in the LNG value chain, Tokyo Gas is advancing into upstream development and LNG
transportation to build synergies with raw material procurement. Tokyo Gas is participating in the Darwin LNG Project,
and the construction of two Tokyo Gas-owned LNG carriers is under way. These initiatives will raise the Company’scompetitiveness and flexibility.

■ Business Flow and Business Model Innovation
Natural Gas Field

LNG Liquefaction Plant

LNG Carrier

LNG Receiving Terminal

LNG Receiving Terminals
Innovating cost centers into a terminal infrastructure business
Until now, Tokyo Gas viewed LNG terminals as cost centers that focused on producing
gas and ensuring safety. Looking forward, Tokyo Gas’s objective is to convert its LNG
terminals into profit centers. We aim to achieve this objective by increasing revenue fromallowing third parties to use our terminals, and to raise terminal efficiency by increasing
capacity utilization rates, lengthening the service life of LNG facilities through preventive
maintenance, and reducing production costs.

The Right Plan
Commercial and Industrial Sales
Innovating our business model to encompass one-stop supply of optimal energy solutions by fully
utilizing our network of customers and companies
Tokyo Gas is moving from its previous business model of supplying gas alone to a comprehensive business model of supplying
energy-related services that encompass electric power and heat in addition to gas, as well as maintenance and engineering. Tokyo
Gas’s aim is to transform itself into a one-stop supplier of optimal energy solutions for its customers.

Inter-Regional Sales
Innovating to expand business areas based on the best mix of diverse commercial resources
and new management techniques, with a focus on direct supply, wholesaling, energy
services, LPG and LNG sales, and alliances with other companies
Key Issues• Aggressively acquire additional customers on the peripheryof pipelines scheduled for construction.
• Strengthen gas wholesale marketing capabilities through steps
including strategic rates, stronger sales and technical support,
and the provision of energy services in addition to gas.
• Aggressively expand the liquefied petroleum gas (LPG)
business as a Group, and cooperate and form alliances withLPG enterprises in response to deregulation.

• Expand into the energy services business.
• Expand LNG sales deliveries with LNG tank lorries and vessels.
• Develop efficient infrastructure through methods such asalliances with other companies.

Expand energy services.
Prepare an integrated electric power sales organization.

Pipeline Network

Primary Business Areas

Expand one-stop energy service capabilities.

City Gas Business

Inter-Regional Sales

13

Residential Sales
家庭用エネルギー

Annual Report 2003

Electricity Business

Energy-Related Business

Develop residential services including remodeling, insurance, and home security.

Pipelines

Counter the shift from gas to electrical appliances.
Commercialize and widely distribute compact fuel cells for residential use.

Innovating our pipeline business from a costcenter into a profit center
Until now, Tokyo Gas viewed pipelines the same way itviewed LNG receiving terminals: as cost centers that focus on
stable gas supply and safety assurance. We have adopted
more rigorous return on investment criteria, however, and areworking to reduce the cost of necessary investments andstrengthen their security level. The development of thewheeling business is an effort to raise capacity utilization rates
and distribute costs over the added wheeling capacity, thereby
lowering the effective cost of gas sold to our customers.

Residential Sales
Innovating our business model to provide customers withcomprehensive value encompassing energy, products and services
Tokyo Gas has built a strong relationship of trust over the years with the 8.6 million
households it serves. This will serve as the base for developing a residential services
business. In addition to remodeling, insurance, home security and other services, we willcommercialize and promote the spread of compact fuel cells for residential use, as well
as home appliances that use gas instead of electricity, a product area where the pace ofgrowth has been accelerating in recent years.

Technology Development
Innovating technology development into a tool for business model innovation and creation,with an emphasis on fuel cell development
Key Issues• Popularize residential fuel cells and expand sales channels
through continuous technological development. Tokyo Gas isfield testing residential fuel cell production prototypes it hasdeveloped and expects to commercialize them in fiscal 2004.
• Develop technologies that contribute to the creation of new
businesses such as the supply of hydrogen.

Tokyo Gas Co., Ltd.

Commercial and Industrial Sales• Develop highly efficient cogeneration systems to increase
competitiveness.
• Develop and apply trenchless pipe repair methods toimprove customer service, mitigate environmental impact
and reduce costs.

Tokyo Gas Co., Ltd.

14
Annual Report 2003

EXPANDBusiness Expansion into Energy-Related Areas
Expanding our business into energy-related areas will be a major part of business model
innovation. Tokyo Gas plans to take full advantage of the business opportunity represented
by the growth in energy-related markets as a result of deregulation, and will expand into
new value-added energy business fields in natural gas and related businesses. As a result, weare targeting net sales from new business areas of ¥50 billion in fiscal 2007 and ¥150 billion
in fiscal 2010. We will further enhance our competitive edge through the construction of avalue chain extending from upstream to downstream areas, consisting of the upstream
development and LNG transportation business, the electric power business, energy services,
overseas business, and new residential services such as insurance and home security.
(¥ Billion)

150■ Targets for Expansion into Energy-Related Areas

Electric Power
Energy Services
Overseas
New Residential Services
Total

Net Sales (¥ Billion)
FY2007FY2010
11
75
10
30
11
15
18
30
50
150

30
120

15

90

30

60
30
0

18

75

11
10
11
FY2007FY2010(1) Electric PowerWe are building power plants fueled with our natural gas to provide the foundation for expansion into the electric
power business. In accordance with the progress of deregulation as well as power supply and demand trends, generating
capacity will be expanded in stages, with an estimated scale of 3,000 mW in the future.

Developing a Power Generation BusinessTokyo Gas has begun working to build its power generation business, a key elementof our plan to expand into energy-related areas. We have established subsidiary Tokyo
Gas Bay Power Co., Ltd., and built a 100 mW power plant at the Sodegaura Terminal,
where final testing is underway and full operations are scheduled to begin in October
2003. In addition to keeping installation costs and operating costs to a minimum bybuilding the plant on our own LNG terminal site, we will use the latest high-efficiency
combined-cycle generators to stay fully competitive.
We are also planning to construct a 900 mW power plant jointly with Nippon Oil
Corporation (scheduled to begin operations in 2008) and a 1,200 mW power plant with
the Shell Group (scheduled to begin operations in 2009).

Power plant of Tokyo Gas Bay Power Co., Ltd.

(2) Energy Services
Business development in this area will be led by ENERGY ADVANCE Co., Ltd., which will provide onsite one-stop
services covering everything from energy services, gas and electric power supply, and engineering to maintenance.
Establishment of ENERGY ADVANCE Co., Ltd.
In July 2002, Tokyo Gas established ENERGY ADVANCE Co., Ltd., with paid-in
capital of ¥3.0 billion, to function as a total energy service provider for thebuildings, factories and urban development projects of companies and local
governments. The company will concentrate its operations in three business areas:
on-site energy services, district energy services, and installation and maintenanceof cogeneration systems. It also aims to provide one-stop services that meet
diverse customer needs from consulting on energy-saving measures toconstruction, operation management, maintenance, and financing of projects.

On-site energy
servicebusiness

District energy
services

Installation andmaintenance ofcogeneration
systems

The Right Plan
(3) Upstream Development and LNG Transportation
Tokyo Gas is branching out into the areas of upper and midstream LNG businesses, including
overseas development of gas fields and liquefaction plants as well as LNG transportation.
By participation in the entire LNG value chain, we will gain synergy, ensure our competitiveness,and obtain better terms in feedstock procurement.

Dili
East Timor

Bayu-Undan Gas Field

Gas Pipeline

Investment in the Darwin LNG Project
In June 2003, Tokyo Gas officially agreed to participate in the Darwin LNG
Project, located in the Bayu-Undan Gas Field in the Joint Petroleum Development
Area (JPDA) shared by Australia and East Timor. Tokyo Gas and Tokyo ElectricPower Co., Inc. have signed a long-term contract for the purchase of the entire
yearly production of LNG (3 million tons) projected for the project. This has enabledTokyo Gas to participate in the entire LNG chain, from gas production andliquefaction to sales and transport using our own LNG carriers and marketing, thus
allowing the Company to maximize the total value of its natural gas business.

DarwinAustralia

The Bayu-Undan Gas Field
Location: The Joint Petroleum Development Area (JPDA) of
Australia and East Timor 250 kilometers off the south
coast of East Timor 500 kilometers offshore from
Darwin, Australia
Reserves: Approximately 3.4 trillion cubic feet of natural gas
Approximately 400 million barrels of condensate and LPG

Building Our Own Fleet of LNG Carriers(4) Overseas
Tokyo Gas is moving into gas distribution, power generation and other energy-related areas overseas, increasing earnings throughmanagement that leverages our technology and know-how.

The Tokyo Gas Group has had numerous successful overseas projects over its long history, including involvement in building and managing gas supply
infrastructures. The establishment of Malaysia’s first natural gas distribution business and gas-fired district cooling business was the first full-fledged
international project by a Japanese energy utility, and has been regarded as a model for other Asian countries.
Tokyo Gas will continue to identify and develop investment opportunities in overseas energy-related businesses such as gas supply and electric power,
while focusing closely on profitability.

(5) New Residential Services
In the residential segment, Tokyo Gas is developing businesses for electricity (residential fuel cells) and other utilities besides gas, aswell as providing home-related services including remodeling, installation and maintenance of facilities and equipment, insurance,
financing, and home security.
Establishment of Tokyo Gas Customer Service Co., Ltd.
Tokyo Gas established Tokyo Gas Customer Service Co., Ltd. in April 2002, and began outsourcing its
customer service operations – such as periodic safety checks, meter reading and bill collection – in parts of Tokyo
Gas’s service area in July 2002. Operations were transferred in all 67 sectors of our service area by July 2003 toprovide high-quality service at a lower cost. Support for this outsourcing will come from Enesta*, a group of
franchised, community-based outlets for gas-related operations. Enesta companies will acquire equity stakes in a
new company that will be established in April 2004, to which some outsourced services will be transferred.

Entering the Non-Life Insurance Business
Aiming to become a company that provides a variety of energy solutions, products and services used in daily life, Tokyo Gas entered the non-life
insurance business in January 2003. Tokyo Gas and Enesta became agents of Sompo Japan Insurance Inc. in order to sell a product that insures household
effects against fire, which was jointly developed with Sompo Japan. The first step toward business model innovation will be leveraging the power of ourbrand, which means reliability, safety and trust to our base of loyal customers.
* Enesta: A group of companies that are part of the Tokyo Gas service network, whose customer service outlets already handle home services such as the connection and disconnection of gas service, thesale, installation and repair of gas appliances, and the remodeling of surrounding areas where equipment is installed.

15
Annual Report 2003

Overseas Activities

Tokyo Gas Co., Ltd.

Tokyo Gas is currently building two LNG carriers, which it will own and operate. The first will be completed infall 2003 and the second in 2005. The Company will use its new carriers to expand free-on-board (FOB)
transactions in order to procure competitive LNG by reducing the freight costs. Furthermore, these two carriers
will be used not only for LNG transport under long-term contracts, but also in a new LNG procurement programthat includes short-term contracts and spot trading, which will result in further reduction of import prices andgreater flexibility in contract terms.

Construction of the Group Management System

Tokyo Gas Co., Ltd.

16
Annual Report 2003

CREATE

In order to move forward with business model innovation and expand our business into
energy-related markets, we must build a consolidated operating structure that integrates the
management of Tokyo Gas and its Group companies. These Group companies havepreviously operated independently, but must now work together to maximize the earningsof the Tokyo Gas Group.
Frontier 2007 is a plan for shifting from a business model that revolves exclusively around the supply of gas
to one that repositions the Company as a total provider of energy and value-added energy-related services.
This new model will improve the competitiveness of the entire Tokyo Gas Group and generate stronger
consolidated earnings.
To achieve this objective, we are building a consolidated management system that will centralize theformerly separate and independent business operations of Tokyo Gas and its Group companies. We aim todevelop a business strategy reflecting the goals of the entire Tokyo Gas Group, including our affiliates, andestablish an organizational structure and a management framework to support it. In centralizing business
management functions, it will be particularly important to invest management resources strategically and work
toward optimization of the Group as a whole. We will also work to enhance corporate functions to ensure thatstrategic business units (SBUs) have the freedom and flexibility to develop their operations. This will create astronger market orientation and deepen our relationship of trust with our base of more than 9.2 million
customers, our greatest asset.
Changes to the current management organization are in still in the planning stage, with the new structurescheduled to take effect in April 2004.
■ Organization of the Strategic Business Unit System●Present●April 2004
Strategic Business Unit

Strategic Planning
Division A

Division

Strategic Planning
Division B

Executive Officers

Affiliate A
Strategic Planning
Division Z

Company A
Company B

Affiliate B

Corporate Division

Affiliated Companies
Division
SeniorManagement

Company Z

Division

Affiliate Z

Executive Officers

Shared Services
and R&D Divisions

The Right Plan
Building a Group Management Structure
The core element of the Group management structure is the SBU. The existing divisions, currently organized in terms offunction and business area, will be restructured and consolidated into SBUs with a strong customer-centric focus. The businessareas of affiliates, which are closely related to Tokyo Gas’s operations, will be incorporated into various strategic business units,
thereby consolidating the management of the parent company and affiliates. This will encourage mutual cooperation among
members of the Tokyo Gas Group that will result in improved competitiveness against and differentiation from our competitors.
In addition, we will clarify functions and roles by dividing Group management into three areas: the corporate division; theSBUs; and divisions for shared services and R&D. Specifically, the corporate division, which is responsible for the managementof the entire Group, will define the framework for optimization of the Group as a whole and will formulate and execute Groupstrategy. Each SBU will work to develop the respective business it is associated with. The shared service divisions and the R&D
division will be in charge of providing services and technical support for the entire Group. By ensuring that these three areas
function smoothly together in an organic fashion, Tokyo Gas will maximize the power of the Group.

Strengthening the Group Management Structure(¥ Million)

Company

Business

Capital

FY2002 Net Sales(% of Outside Sales)

Operating
Income (Loss)

Tokyo Gas Urban Development Co., Ltd.

Real estate leasing, management, brokerage

8,779

35,539(39.6)

7,125

ENERGY ADVANCE Co., Ltd.

Energy service business

3,000

17,837(89.8)

3,708

Gaster Co., Ltd.

Gas appliances production and sales

2,450

29,032(55.0)

2,539

KANPAI Co., Ltd.

Design and construction of gas pipelines, waste water and air conditioning facilities

1,300

47,202(32.5)

1,077

Tokyo LNG Tanker Co., Ltd.

LNG and LPG chartering, transport of carriers

1,200

1,711

(0.1)

586

Tokyo Gas Energy Co., Ltd.

Sales of energy LPG and coke

1,000

20,731(91.7)

275

Tokyo Gas Chemicals Co., Ltd.

Sales of gas for industry and chemicals, R&D of LNG cooling applications

1,000

20,313(91.3)

641

Park Tower Hotel Co., Ltd.

Hotel (Park Hyatt Tokyo) management

1,000

8,988

(99.9)

764

Tokyo Oxygen and Nitrogen Co., Ltd.

Production and wholesale of liquefied oxygen and nitrogen

800

2,296

(44.9)

258

Chiba Gas Co., Ltd.

Gas business

480

11,174(99.6)

699

TG Credit Services Co., Ltd.

Financing and leasing related to gas equipment and construction

450

10,940(47.4)

263

TG Information Network Co., Ltd.

System integration business

400

14,706(24.8)(121)

Tsukuba Gakuen Gas Co., Ltd.

Gas business

280

5,025

(98.8)

375

TG Enterprise Co., Ltd.

Group financial administration business

200

817

(52.8)(27)

Tokyo Gas Engineering Co., Ltd.

Comprehensive engineering services centered on energy

100

31,068(70.8)

458

TG•IT Service Co., Ltd.

Tokyo Gas systems, network operations

50

8,394

(0.2)

282

Tokyo Gas Customer Service Co., Ltd.

Provision of periodic gas safety checks, meter reading and billing services

50

1,365

(0)

240

KANPAI LIVING SERVICE Co., Ltd.

Sales of gas appliances

50

3,584

(82.8)(120)
As of March 31, 2003

17
Annual Report 2003

Tokyo Gas Group Companies

Tokyo Gas Co., Ltd.

As changes in the business environment accelerate, the functions and framework associated with optimizing the Tokyo Gas
Group will become increasingly important. As a result, we are focusing on developing stronger business management capabilities.
The corporate division will clearly set forth the direction of the Group, with the responsibility and authority to makeadjustments as circumstances demand. SBUs will be given the freedom to carry out plans such as reorganizing or consolidating
businesses within units. In addition, we will consolidate all Group management functions under the Strategic Planning Division.
This move will replace the current parallel structure where the corporate division is overseen by the Strategic Planning Divisionand the Affiliated Companies Division is responsible for all Tokyo Gas affiliates. This reorganization will ensure the smoothplanning, implementation and management of the Group’s strategies.
Under this management structure, we will achieve a dynamic management that uses a process of selection andconcentration to focus management resources in highly profitable and competitive areas.

Strengthening the Corporate Structure
To succeed in this period of “mega-competition” in the energy industry, it is essential tocreate a stronger and more streamlined corporate organization. To this end, Frontier 2007
will focus on establishing corporate governance, strengthening our financial position,clarifying evaluation standards, and pursuing cost reductions across the board.

Tokyo Gas Co., Ltd.

18
Annual Report 2003

VITALIZE

Establishing Corporate Governance
The underlying foundation of our business activities is delivering value to our customers. All our activities focus
on our customers, as we strive to become a corporate group that is trusted by customers, shareholders, and society
as a whole. With this in mind, we are working to further improve compliance while promoting active disclosure of
information and stronger corporate governance.
In November 2002, Tokyo Gas established a Compliance Department and a supporting organization to bolster
the Company’s compliance promotion system. Under the basic guidelines formulated by the Management Ethics
Committee, which is chaired by the President, Compliance Committees established in each division are eachconducting their own ongoing compliance-related measures, while the Compliance Department is responsible forcompany-wide educational programs. Through these efforts, we are working to create a corporate culture thatencourages all executives and employees to emphasize compliance in their decisions and behavior, thereby
continually improving our brand value.
■ Compliance Organization
In March 2003, Tokyo Gas set up two Compliance Hot Lines to accept
Board of Directors
Auditors
employee questions. Employees are able to consult directly on compliancerelated issues through either an in-house or external hotline. This new
system enables employees to quickly resolve problems and has
President
strengthened the Company’s ability to carry out compliance automatically(Reports to)and independently.
The Audit and Operational Enhancement Department also performs
compliance
audits to ensure compliance with governmental regulations.
Management Ethics
Committee Secretariat
To strengthen corporate governance, Tokyo Gas reorganized its
governance system in June 2002. Changes included substantially reducing(Secretariat)
the number of directors, shortening their terms of service, and appointing
outside directors to the board. At the same time, Tokyo Gas was the first inCompliance Department
the industry to introduce a corporate executive officer system, which has
improved the management of day-to-day operations. In the future, we willcontinue working to revitalize the board of directors while increasing
Compliance Committees
in each division
management transparency.
■ Management Philosophy
As a total energy industry, the Tokyo Gas Group shall make an active contribution to pleasant living and thedevelopment of environmentally friendly cities, and also pursue ongoing advancement together with the rest ofsociety, as a corporate group that earns and maintains the trust of its customers, shareholders and communities
through its various activities.
1. Tokyo Gas shall strive to evolve into a new utility that simultaneously satisfies the goals of contribution to customers andcommunities as a public-minded enterprise and increases its corporate value as a joint-stock corporation.
2. Tokyo Gas shall observe the letter and spirit of laws and regulations, and work for socio-economic advancement throughbusiness activities that are both fair and transparent.
3. Tokyo Gas shall contribute to the alleviation of global environmental problems as a leading practitioner of environmental
management.
4. Tokyo Gas shall remain keenly aware of its obligations to be a good corporate citizen and assist the emergence of a more
fulfilling society through contributing to community activities.
5. Tokyo Gas shall pursue innovation on an ongoing basis to promote a cost effective business approach and a flexible but resilient
disposition.
6. Tokyo Gas shall aspire to build organizations that are brimming with vitality based on the full exercise of and respect for thetalents, desires, and creativity of each and every employee.

The Right Plan
■ Interest-Bearing Debt (Consolidated)

Strengthening Our Financial Position and Clarifying
Evaluation Standards(¥ Billion)

1,000Continued from our previous medium-term management plan, one of the goals ofFrontier 2007 is to improve asset efficiency by reducing fixed, financial and other assets.
We are aiming to lower the amount of interest-bearing debt by about ¥150 billion, on aconsolidated basis (approximately ¥100 billion compared with actual results for fiscal
2002), in order to improve our financial position by minimizing interest-rate risk. In
addition, we are establishing uniform standards for entering, maintaining, andwithdrawing from businesses, as well as for investment decision-making, in order todevelop more efficient and effective operations.
These evaluation standards are Tokyo Gas Economic Profit (TEP), Net Present Value(NPV) and Internal Rate of Return (IRR). TEP is Tokyo Gas’s version of Economic Value
Added (EVA®), allowing us to meet the expectations of shareholders while looking forways to generate added value, determining the future direction of our business andoptimizing the allocation of management resources.

800

775.0
627.0

600
400
200
0

FY2002

FY2007

Note: Figures for fiscal 2002 are projections made when themedium-term management plan was finalized in
October 2002, not the actual results.

12,000Tokyo Gas is reducing costs through measures such as making administrative divisions
more efficient, which enables increasing cash flow for investment in new businesses.
The introduction of shared services for the Group as a whole will improve theefficiency of administrative operations while reducing staffing requirements and costs at
the Tokyo Gas head office. In addition, any increase in fixed costs due to an increase in
new customers will be absorbed through our cost cutting efforts, and overhead in fiscal
2007 should be back to fiscal 2002 levels.
Because business model innovation will require improvement in the quality of humanresources and a more dynamic organization, we are focusing harder than ever on humanresources development and management. At the same time, through reorganization of all
businesses, Tokyo Gas will reduce personnel by about 1,700, or 16 percent, comparedwith the end of fiscal 2002, resulting in a total staff of no more than 8,800 by the end of
fiscal 2007. In addition, expanding the merit-based system of annually salary negotiations
for managers and other measures will bring compensation more closely in line withperformance.

10,00010,450
8,750

8,000
6,000
4,000
2,000
0

FY2002

FY2007

Note: Figures for fiscal 2002 are projections made when themedium-term management plan was finalized in
October 2002, not the actual results.

■ Fixed Expenses per m3 of Gas Sales(Non-consolidated)(2003 = 100)

100

100

80

76

60
40
20
0

FY2002

FY2007

Fixed expenses = Wages + Overhead + Depreciation andAmortization + Non-operating expenses

19
Annual Report 2003

Pursuing Cost Reductions

Tokyo Gas Co., Ltd.

■ Personnel (Non-consolidated)