Our new medium-term management plan includes strategies
Deregulation has started to drive escalating competition across industry segments in thedesigned to create a foundation forstrong growth performance in the
period to 2010 and beyond. We
began to put these strategies into
effect on April 1, 2006, and must
now maintain this momentum.
I intend to focus my greatest
efforts on the following areas: First,

market for industrial and commercial use. Tokyo Gas also faces increasing

Creation andCultivation of
New Natural Gas
Marketscompetition in the residential energy market. We see the advent of free competition as
an opportunity for the Tokyo Gas Group to evolve into a total energy company. We aim to
use the economic and environmental advantages of natural gas as the basis for the creation and cultivation of new markets. Our strategic assets include our strategic LNG
value chain, which covers all stages from resource development to supply and services,and our advanced technology and solutions.

we will target overall Group optimization. All of our business segments are linked to the LNG value chain, and I intend to ensure thatGroup optimization remains a continual focus in relation to the allocation of management resources,
including personnel and money, so that we can achieve our full potential as a company.
Second, the Tokyo Gas Group will restructure its marketing scheme by strengthening the local
roots. Our greatest asset is a customer base consisting of over 9.8 million customers. We aim to
improve our services and reliability by building an integrated operational structure encompassing thevarious tasks handled by Tokyo Gas itself, its local agents, such as Enesta and Enefit, and Group
companies involved in customer service and other areas.
Third, as President of Tokyo Gas, I am determined to ensure our success in this rapidly changing
environment by making sustained progress toward the creation of a broad-based profit structure forthe decade after 2010. We will also work to maximize our business opportunities by evolving from a
conventional gas business into a total energy company, and seek to create and cultivate new markets
for natural gas.
The path ahead will not be smooth. However, I am convinced that we can achieve sustainablegrowth by living up to the expectations and trust of all stakeholders. I approach my management rolewith a strong determination and commitment to the future success of Tokyo Gas.

Mitsunori Torihara, President

14

15

For Residential
Customers

Expanding the One-stop Energy Service to
Residential Customers
Deep Cultivation of the Residential Market
By expanding the number of customers in the residential
sector, Tokyo Gas secures sales volume while also building
further demand by promoting its business. Over the past
few years, falling birthrates have resulted in a decline in
the average number of people per household. In addition,
more and more people are living in apartment-type housing with superior heat insulation and draught-proofing.
These structural factors all make it more difficult to avoid
a decline in the volume of gas sold per household.
Tokyo Gas is working to minimize the decline in gas
sales volumes in the residential sector by increasing the percentage of households installing strategic products, such as
floor-heating and mist saunas. We are also introducing andpromoting attractive charge options to stimulate increased
use of products already installed in customers’ houses, suchas TES floor-heating systems. We will try to increase thegas sales volume by capturing residential power demandthrough the promotion of home power generation.

Focusing on Strengthening
Marketing Abilities
Japan’s population began to shrink in 2006. A strong
marketing scheme is needed to attract more customers
and achieve sustainable growth in the residential sector.
Tokyo Gas already has important marketing capabilities,
and we intend to strengthen our systems still further.
We are strengthening our client marketing systems
and systems targeting local building firms to reach as
much of our target market as possible. We are also working to attract new customers by encouraging them to convert from other types of fuel, such as LPG. At the customer level, we plan to restructure and centralize appliance sales, maintenance services, safety services andother marketing and sales functions and develop regionally focused marketing approaches to provide a fine-tuned
response to lifestyle diversification and changing needs.
Through these strategies, we will improve our marketingcoverage and enhance our ability to meet market needs
by providing one-stop access to the products and services
sought by customers.
There is growing competition from companies
offering all-electric household systems. Tokyo Gas iscountering this competition with effective marketing ofWhat kind of system is TES?
TES (Tokyo Gas Eco System) is a single system that can supply hot water for all
household systems, including floor-heating, hot-water faucets, bathroom heater-dryers,
and mist saunas. These systems are economically designed to heat just the required
amount of water instantly. They are also extremely compact to save valuable space.
More than one million households already use TES and Tokyo Gas is focusing on
spreading TES in the residential sector.

16

a range of strategic products, including our “Pipitto
Konro” gas cooktops and our highly efficient water
heaters, the “Eco-JOES.” We aim to increase the useof gas appliances by promoting the comfort and theireconomic, environmental and energy advantages ofthe products.

Lifestyle solutions

Capturing Residential Electric Power Demandwith Upcoming “Power Generation in
the Home”
Tokyo Gas has introduced important new assets for its
efforts to expand demand and counter the trend toward
all-electric households: the LIFUEL fuel cell cogeneration system, and the ECOWILL gas engine cogeneration
system. We plan to advance marketing activities forthese systems under a project group setup.
We are currently marketing LIFUEL and ECOWILL
systems to customers in newly built detached houses.
Starting in fiscal 2007, we will expand the scope ofmarketing for ECOWILL systems to include existinghomes. Marketing of LIFUEL will begin in earnest in
the second half of fiscal 2008, following the introductionof a next-generation system with improved durability andeconomic performance. We plan to sell 43,000 LIFUEL
and ECOWILL systems by fiscal 2010.
We estimate that households with in-house power
generation systems, such as LIFUEL and ECOWILL
systems, will use an average of 1,200 m3 of gas per year.
This represents an increase of 300 to 400 m3 comparedwith existing systems. Because the number of householdswith these systems is still small, the impact on overallgas sales is marginal. However, we are very confident
that this factor will make a major contribution to growth
in residential sector gas sales volumes in the future.
Tokyo Gas has also commenced studies concerningenergy services for condominiums. We would provide
cost-effective energy solutions that would combine
energy-efficiency with enhanced comfort. The packages
would include TES and new products and services. There
would also be cogeneration facilities installed and owned
by Tokyo Gas, and we would supply residents withelectric power from these systems in conjunction withgrid-connected electric power systems.

Strong marketing

Residential
cogeneration

TES

1

over
TES

Water heaterAir
conditioning

Floor heating

Bathroomheating& drying

Bathroom heater dryer

million households

Air conditioning

Mist sauna

Hot water bath

Hot water
Washing and drying

17

For Industrial andCommercial
Customers

LNG expertiseTokyo Gas is a Trusted Business Partner acrossthe Entire Energy Sector
An Advantage Based on SophisticatedEngineering Expertise and Solutions
To meet the changing and increasingly diverse needs ofindustrial and commercial customers, Tokyo Gas offers
long-accumulated engineering expertise including
combustion technology as well as the ability to provide
wide-ranging solutions and value backed by reliablesupport systems. Though many new entrants are
moving into the gas business, Tokyo Gas enjoys an
overwhelming competitive advantage. For theindustrial sector, Tokyo Gas is promoting its cogeneration systems based on advanced combustion technology
to attract customers to switch from other fuels to natural gas.
For the commercial sector, we introduced in 2005 a
segment-based marketing structure that supports
powerful marketing activities based on specialized knowledge. Despite escalating competition in the commercial
kitchen market, we have been able to expand our orders
over the past few years by accurately and effectively promoting our superior technology to customers.

Highly Competitive Multi-energy Supply
Using In-house Power Generation Capacity
Tokyo Gas offers one-stop, multi-energy solutions,
including city gas, heat, steam and electric power, tomeet the needs of its customers. In addition to cogeneration systems, which efficiently generate both heat andelectric power, Tokyo Gas is also able to provide gridconnected power from its own generation
systems as a back-up source of electric power. We havebuilt a power plant on previously unused land to create
our own generation capacity in anticipation of future

demand for electric power. The power plant is equippedwith advanced combined cycle technology to support
highly efficient, competitive power production. Tokyo
Gas Bay Power Co., Ltd. currently operates a 100 MW
power station at the Sodegaura Terminal. A 240 MW
facility operated by Tokyo Gas Yokosuka Power Co.,
Ltd. became operational in June 2006, to be followed byan 800 MW facility operated by Kawasaki Natural Gas
Power Generation. In 2008, there are also plans for a
1,200 MW facility to be operated by Ohgishima Power.
Environmental assessment work for this project iscurrently in progress. Tokyo Gas is now able to supply its
customers with one-stop access to a wide range of energy
requirements, including LNG and LPG.

Expansion of Energy Service with
Cogeneration Systems at the Core
As competition in the energy sector intensifies, Tokyo
Gas endeavors to fully develop its multi-energy supply
capabilities. Tokyo Gas has expanded its collaboration
with ENERGY ADVANCE Co., Ltd., a wholly owned
subsidiary, and is aggressively marketing its products
and services at the same time as it strives to develop thebest mix of energy and distribution systems. Moreover,by combining power supplied from its own substantial
generation capacity with on-site generation, Tokyo Gas
is able to make optimal proposals to various customer
needs in the areas of comfort, economic merit, energy
conservation and environmental performance.

Multi-energy
supplyPower generation

Cogeneration Stock

1,850

Cogeneration Stock (MW)Growth of Cogeneration Stock

MW

2,000

Cogeneration systems use city gas to produce heat and electric power simultaneously.
In addition to the economic benefits of reduced energy consumption, these systems
are also seen increasingly as having the potential to contribute to the reduction ofenvironmental problems. Tokyo Gas has achieved volume growth in gas sales bydemonstrating the benefits of these systems for customers in industrial and commercial sectors. Cogeneration technology is an important asset in our continuing efforts
to inform customers about the advantages of natural gas while helping them toachieve the best energy mixes that include in-house power generation.

1,500

in FY 2010

1,000

500

0

Year ended March 31 ’97 ’98 ’99 ’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08 ’09 ’10 ’11
Industrial Use
Commercial Use

18

Estimated19

Tochigi

Gunma

Wide-area
Development

4

NaganoExpanding the Market for the Total Energy Business
IbarakiAggressive Pipeline Investment forDeveloping Demand

Enhancing the wide-area
infrastructure■ Chiba–Kashima Line (FY2010) ■ Central Line (FY2009)■ Gunma Line (FY2010)■ New-Negishi Line andYokohama Line Phase II■ Minami–Fuji Line (FY2006)

Energy demand is still growing in the Kanto region,
which accounts for around 40% of Japan’s GDP. Tokyo
Gas is responding to this demand through aggressive
investment in its pipeline network, on the basis of detailed
demand research and assessments of investment returns.
In November 2005, we completed the 69 km Tochigi
Line linking Sano and Utsunomiya across the northernpart of the Kanto region. Sales of natural gas to largevolume customers in this area have already commenced.
The new pipeline was constructed to meet the growing
needs of customers in the region’s expanding industrial
parks and strengthen supply. Our estimates indicate that
we will be able to tap potential new demand of around
400 million m3 annually. We have also decided to build a
new Chiba–Kashima Line to meet demand growth in the
Chiba and Ibaraki areas, where industrial demand has
been expanding. We will invest ¥26 billion in construction of approximately 73 km of pipeline. Completion is
expected in fiscal 2010.

(FY2013)front-line solutions to meet the needs of our customers.
In 2007, the Japanese government will expand the scopeof energy sector deregulation. We are already preparing
for this change by actively building and strengthening therelationship of trust with customers with a total annual
demand below 500,000 m3.

When Tokyo Gas constructs a new pipeline, it uses theconcept of internal rate of return (IRR) as its standard
for determining the number of years required to achievea return on its investment. Only investments that satisfy
this criterion are implemented. However, customers
whose locations are remote from our pipelines may also
wish to use natural gas. In these cases, we transport gas
using trucks. This flexibility allows to meet the needs ofcustomers and access the huge potential demand thatstill remains untapped in the area within a 200 km
radius around Tokyo in the Kanto region.

Loading an LNG tanker truck

3

Yamanashi

7

U.S.$/bbl

U.S.$/MMBtu
10

60

8

48

6

36

4

24

2

12

0

2

Kanagawa

6

Chiba

1

Shizuoka

Expanding Services within a

All-Japan LNG/JCC Prices

5

Tokyo

Diversified Formats for Natural Gas Sales in
the Kanto Region within a 200 km Radiusaround Tokyo

Natural gas is the most environmentally friendly productamong conventional fossil fuels. Large-volume customers
are starting to convert to natural gas for both economicand environmental reasons. Furthermore, the relativeadvantage in price has increased, due to sharp rises incrude oil prices in recent years. This has also started to
attract interest from customers who use other fuels,
resulting in increasing demand for the installation of city
gas facilities.
Tokyo Gas is responding to this trend by aggressively
marketing cogeneration systems, especially its mainstay
range of systems with medium- and large-capacity gas
engines. Our strategy in this area is to attract new customers by promoting our advanced energy conservationand combustion technologies, and our ability to develop

LNG prices are determined primarily according to crude oil prices, such as theJapan Crude Cocktail (JCC) price or the Indonesian Crude Price (ICP). While persistently high crude oil prices have resulted in higher LNG prices, the percentage
increase has been small compared with the crude oil price increase. This is because
the pricing formula includes mechanisms designed to ease the effect of crude oil
price movements.

Saitama■ Kisarazu Line (FY2008)

Enhanced Environmental and Price
Advantages of Natural Gas

LNG’s Growing Price Advantage

Enhancing the base forstable supply

200

km Radiusaround Tokyo

Tokyo Gas Group’s Service Area
Service Areas of Wholesale Customers
Tokyo Gas’ High-Pressure
Transmission Pipelines
High-Pressure Transmission Pipelines of
Other Companies
Tokyo Gas’ Transmission Pipelines
Under Construction

縡 Scheduled to Operate in Dec. 2006

*Pipeline jointly owned with Shizuoka Gas
company and Teikoku Oil Co., Ltd.

縒 Scheduled to operate in Oct. 2008
縱 Scheduled to operate in Oct. 2009
縟 Scheduled to operate in Mar. 2010
縉 Scheduled to operate in Dec. 2010
縋 Scheduled to operate in Oct. 2013
縢 Scheduled to operate in Oct. 2013

0

’02/2

’03/3

’04/3

’05/3

’06/3

JCC
All-Japan LNG

20

21

Procurement of
Gas Resources

Gas Resource Procurement Strategy is Solidifying
our Business Structure
Focusing on Competitive LNG Procurement
Tokyo Gas currently imports LNG from ten projects insix countries. Unlike oil, which is found only in certain
parts of the world, natural gas is available globally. This
makes it possible to diversify the risk and ensure stableprocurement by trading with geographically diverse
producers in the Middle East, Southeast Asia, Australia,
Alaska and other locations with competitive contract
terms and conditions.
We are endeavoring to procure more competitive
LNG from diversified sources, such as greenfield projects including Darwin Project, which started delivery
in January 2006, and Sakhalin II Project, expected tolaunch between fiscal 2006 and fiscal 2010, as well as
Gorgon and Pluto Projects in Western Australia,scheduled to commence after 2010. We will fully exercise our bargaining power based on the prospect ofsteady demand growth and realize flexible and stable
LNG procurement. LNG prices are linked to crude oil
prices. However, the current price regime includes amechanism to alleviate the impact of fluctuating crude
oil prices. Tokyo Gas has taken additional steps to limit
dramatic price fluctuations, through adopting a pricing
formula that is less sensitive to oil price movements.

Reducing Transportation Costs by Using
Our Own Fleet
Regarding LNG transportation, Tokyo Gas currently
operates a fleet of four vessels, including ships dedicated for projects. We will increase the number of vessels to seven by fiscal 2010, and to nine thereafter.
Our goal is to reduce transportation costs by increasing the percentage of company-owned vessels byaround 50% by fiscal 2010.

Because it operates its own LNG vessels, Tokyo Gas
is not limited to transportation based on long-term
contracts. It will be able to reduce gas resource costs
and further improve its flexibility by taking advantage ofopportunities to procure LNG through short-term andspot transactions. Tokyo Gas also plans to diversify into
LNG trading and transportation services for third
parties, when it is appropriate in the context of LNG
market trends.

Competitive
procurement

Measures for Aggressive Acquisition of
Upstream Interests
In 2003, Tokyo Gas and Tokyo Electric Power Co., Ltd.
jointly acquired a 10% interest in the Bayu-Undan
Project in Australia (1:2 basis). Furthermore, we are
currently involved in negotiations concerning participation in the Gorgon and Pluto Projects. In addition to
income opportunities, participation in upstream projects
allows natural hedging of price fluctuation risks.
Another advantage is relatively early access to upstream
information, which is essential to procurement activities.
There is also increased potential for business opportunities in such areas as trading.
By expanding its business activities along the entire
LNG chain, Tokyo Gas aims to establish a position foritself as a total energy company, to improve thecompetitiveness of its procurement activities, and tosecure new business opportunities.

After FY 2010, Tokyo Gas willreach a fleet size of
Ex-Ship/FOB
Goods are traded under various terms and conditions. With the delivered ex-ship(DES) system, ownership and risk are transferred at the point of landing(LNG terminal). Under this method, the seller arranges and pays for freight andinsurance. With the free on board (FOB) system, ownership is transferred at the pointof loading (liquefaction terminal), the buyer arranges and pays for freight and insurance. There is also the cost, insurance and freight (CIF or C&F) system, whereby ownership and risk are transferred at the point of loading for a price that includes the costof insurance and freight, which are arranged by the seller. Tokyo Gas intends toexpand its use of FOB transactions with the aim of further reducing gas resource costsby minimizing freight costs.

22

Gas field

LNG liquefaction
terminal

Ocean transport

Gas pretreatment
facility

LNG receiving
terminal

9

ships

Unloading

Pipeline(Ocean transport)

Liquefaction LNG
plant
tank

LNG Carrier(Discharge)

LNG tank(Load)
Ex-Ship Maritime transportation/Insurance grantSellerSellerOwnership/Risk bearing Seller
Maritime transportation/Insurance grant

Buyer

Ownership/Risk bearing

FOB

Buyer
Buyer

Value-chain extension
23

Technology
Development

Technology Development to Enhance Competitiveness andContribute to Total Energy Businesses
Strategic and Platform Technology
Development
Tokyo Gas broadly divides its technology development
activities into strategic technology development andplatform technology development. Strategic technology
development focuses on areas that contribute to theevolution of a total energy business with natural gas as itscore area, while platform technology development has asits goal the creation of basic technologies that will help toimprove competitiveness while also ensuring social needs,
including safety, security and the environment.
Priorities for strategic technology development include
the development of highly efficient fuel cell systems,
including PEFC and SOFC systems, and cogeneration
systems based on high efficient gas engines as well as technology for biomass energy, which is renewable. This work
aims to contribute to the evolution of Tokyo Gas as a totalenergy company, one of the goals defined in our mediumterm management plan. We are also developing technology
for advanced microgrid “holonic energy systems,” whichhave the potential to contribute not only to energy conservation and the reduction of CO2 emissions, but also to theimprovement of supply stability. Demonstration testing will
start in the current fiscal year.
We are also developing new gas appliances andservices to meet potential social needs. For example,
we are continually improving the performance of gas
cooktops and other appliances and developing convenient energy-related services. Another important goalfor our technology development activities is the proposal and dissemination of ideas about new ways to use

Technology Development
Strategies

gas to enhance the quality of life while helping to protect the environment.
Platform technology development is targeted toward
the improvement of technology used in the construction,
maintenance and management of infrastructure, especially pipeline networks, as part of our continuing efforts
to ensure that natural gas can be supplied safely to ourcustomers while continuing to improve competitivenessthrough cost reductions. Through this work, we arehelping to improve platform technologies in areas offundamental importance to Tokyo Gas, especially gas
quality management and combustion engineering, andensure that they are passed on to future generations.

The Tokyo Gas Group has an important social mission as a corporate group dedicatedto the vital task of supplying the energy needed for industrial activities as well as for

Fulfilling our
Commitment to
Corporate Social
Responsibility

day-to-day living. We must also remain acutely focused on the need to meet the
expectations of our shareholders and investors by continuing to achieve growth.
We are working actively to enhance the value of the Tokyo Gas Group for all
stakeholders, including customers, shareholders, investors and society, by fulfilling
CSR activities, including a strengthening of our corporate governance and promotionof compliance.

Technology Development system Linked with
Business Strategy
Under a new structure introduced in fiscal 2006, alltechnology development activities, from strategy formulation to project implementation, have been integrated
under the Technology Development Division. We also use
a “sponsorship” system, under which corporate
divisions and strategic business units commission andpay for R&D projects. This approach ensures close
collaboration and a strong linkage between technology
development and business strategy.
Despite a downward trend in R&D expenditure overthe past few years, there has been no reduction in R&D
activities. Instead, the effectiveness of R&D is beingenhanced by modifying approaches to technology
development and focusing resources on key areas.

Strategic Technology

Platform Technology
Business infrastructure
Holonic Energy System■ Expansion of microgrid■ Realization of Holonic Energy Society

Technology infrastructure

web For more information on our technology development activities, please see the Tokyo Gas website:24

http://www.tokyo-gas.co.jp/techno/index.html

25