The 8 Keys to Growth
In June 2002, Tokyo Gas established 3 new divisions at the Head Office—Strategic Planning, Corporate Communications and Corporate Service—bringing the total number of business divisions to 11. This move makes possible more
flexible and swifter policy-making, decision-making and business execution.
The Strategic Planning Division will formulate strategies to maximize Tokyo Gas’ corporate value. The Corporate
Communications Division is charged with creating plans to enhance the value of Tokyo Gas’ brand through improved
communications with the public. The Corporate Service Division’s mission is to coordinate the provision of sharedservices to members of the Tokyo Gas Group.
The other eight business divisions, effectively virtual companies, are growth drivers. Each is responsible for creating its own demand to spur growth by carving out markets in new businesses. They will target not only the gas business, but also electricity, heat supply and other fields where group resources can be effectively used.
These eight keys to growth will maintain and strengthen the Tokyo Gas Group’s ability to compete against otherenergy suppliers in an era of heightened competition in two mains ways—by cutting costs and offering improved services.
Capturing demand will also be important.

Production DivisionThis strategic business division is responsible for the production of gas at terminals that receive
LNG from overseas suppliers. Lowering the cost of producing gas is critical to competing
against other energy suppliers as deregulation unfolds in Japan. Another goal is to maintain astable, safe supply of gas at our present, world-class levels.
Essentially, the raison d’etre of the division is to “outperform the competition.” Embracing market-based principles, the Production Division is lowering the cost of operating LNG
receiving terminals with the aim of producing gas at a cost the competition can’t match. Specific actions include extending the life of LNG facilities, paring operating expenses, and improving
the efficiency of business processes and human resource allocation.
Tokyo Gas’ LNG receiving terminals are a prize asset. We believe they also hold the potential to generate new sources of earnings. The Production Division is exploring ways to tap into
this potential. There are many opportunities. LNG cryogenic energy technologies, electricity
generation, soil purification business, technology consulting in new business domains, and selling our expertise in sophisticated technologies outside the company are examples.
The free cash flows that we generate from cutting costs and new earnings streams will be
used to lower gas rates and return profits to shareholders.

The Tokyo Gas Production and Supply Framework
Tokyo Gas has three LNG terminals: the Negishi Terminal, which
received Japan’s first shipment of LNG; the Sodegaura Terminal, the world’s largest LNG receiving terminal (pictured right);
and the new, state-of-the-art Ohgishima Terminal. The threeterminals are linked by a loop pipeline system, creating a powerful mutual backup structure. This gives us a highly efficient production and distribution system to provide customers with areliable supply of gas.

8 TOKYO GAS Annual Report 2002

Tokyo Gas’ Capital Expenditures and Depreciation (billion ¥)Creating DemandTokyo Gas’ eight “virtual company” divisions are at the forefront of
our efforts to create new demand and business opportunities.

200

150

100

SUPREME
50

0Mar. 31 95

96

97

98

99

00

01

02

03

04

05

06

07

Capital Expenditures■ Production Facilities■ Supply Facilities■ Business Facilities■ Associated Business Facilities
Depreciation

In July 2001, Tokyo Gas brought the world’s most advanced
real-time disaster prevention system online. Known as
SUPREME, the system uses approximately 3,700 of thehighest-performing seismic sensors positioned throughout Tokyo
Gas’ service area to gather data on intensity, soil liquefaction
and other parameters during anearthquake. The system is linked
to automatic shut off and remotecontrol systems enabling supply tobe quickly suspended in areas
where there are leaks. This dramatically mitigates the risk of
secondary damage.

*The above graph represents non-consolidated data.
*2003~2007 are projected figures.

Pipeline and Safety Management DivisionThis division is responsible for the construction, operation and safety of the company’s pipeline
network, and plays a vital role in Tokyo Gas’ operations. In the supply of gas to customers, apipeline network that ensures stable supply and a comprehensive approach to maintaining
safety standards is crucial. The Pipeline and Safety Management Division is carrying out thesekey missions, while restructuring itself into a pipeline business company that will ensure thatTokyo Gas remains the customers’ chosen gas supplier as deregulation unfolds in Japan. Twopoints are key to this:1) Continuing to make sound investments to create an optimal pipeline network and develop
new demand, thereby lifting earnings through sales growth (volumes of gas sold), while
maintaining safety and a stable supply—the sources of Tokyo Gas’ competitiveness.
2) Conducting gas construction-related work economically, quickly and effectively, and, morethan ever, putting the customer first.
Furthermore, with deregulation creating a business opportunity due to increasing demand
for the third-party contract transportation of gas, Tokyo Gas sees its pipeline network as
having a prominent role to play in meeting this demand. The gas transportation business harbors considerable potential for generating new cash flows.

Pipelines
Tokyo Gas has built a natural gas transportation
pipeline configured in a loop encircling the greater
Tokyo area that enables the constant and stable supply of gas to our customers. After its completion
last year, the Saihoku Line was opened to respondto rising demand in the greater Tokyo area. Tokyo
Gas will continue to expand its pipeline network tocater to a more expansive supply area.

Strengthening Competitiveness to Capture Demand
To create a resilient company that can prevail against competition,
the eight divisions are reassessing all business processes and pushingahead with cost-cutting initiatives.
Annual Report 2002 TOKYO GAS 9The 8 Keys to Growth

Energy Sales and Service DivisionThis division has an extremely wide scope of operations—with natural gas as the common
denominator. Activities include capturing large-volume industrial and commercial gas customers, developing district heating and cooling projects, as well as promoting natural gas
vehicles and the use of natural gas for power generation. To cater to wide-ranging energy
needs, the Energy Sales and Service Division is attempting to expand business operations
further by proposing total energy solutions. More than just pricing based, these solutions accurately address customer needs by drawing on Tokyo Gas’ sophisticated know-how, cutting-edge
technologies and in-depth experience.
With no signs of an end to Japan’s economic downturn apparent, many Japanese companies
are desperately searching for ways to cut their energy costs. Up till now, we have offered corporate customers cogeneration as a solution. Economical and environmentally sound, cogeneration
systems use gas to generate electricity and at the same time recover thermal emissions for otherapplications. This results in an energy efficiency of around 80%. Progress has been made inrecent years in making these systems smaller. We are presently testing micro turbine cogeneration
systems, since demand for small on-site power generation systems is expected to grow in the future.
Creating new business models is another goal of the Energy Sales and Service Division.
One example is to provide comprehensive services including the design, construction, technicalsupport, operation and management and maintenance of heating and electricity facilities. Other
examples include services that yield cost and energy savings, and proposals that use financial
techniques to mitigate the risk of price fluctuations.
We manage the financial position of the division by keeping a close watch on all theiroperations, from marketing and equipment sales to maintenance, thus reducing costs. This
allows us to offer competitive rates that help to keep our existing customers and win new ones.
The Energy Sales and Service Division is thus working to capture new sources of demand
while retaining existing customers. We are doing this by generating detailed, individualized
responses to customer needs, using not only our pricing advantage but sales and technologicalcapabilities as well.
Energy Advance Co., Ltd.—Energy Service Business
In July 2002, we established Energy Advance as a one-stop source of energy services
that responds to various customer needs. In addition to electricity and heat supply
services through cogeneration systems, Energy Advance will offer services extending
from consulting on energy conservation to design, construction, operation and management, maintenance and finance. The market for these services is broad, frombuildings and plants to entire districts.

Electricity Business
Wholly owned subsidiary Tokyo Gas Bay Power Co., Ltd. is constructing a 100MWclass power plant at our Sodegaura LNG Terminal. The plant is slated to comeonline in the autumn of 2003. Meanwhile, we are using alliances to aggressively
advance our electricity business. Tokyo City Power Co., Ltd., established with theTokyo Bureau of Waterworks and Shell Gas & Power Japan Ltd., and Kawasaki
Natural Gas Generation Co., Ltd., established with Nippon Oil Corporation, plan toconstruct 150MW-class and 400MW-class power plants, respectively.

10 TOKYO GAS Annual Report 2002

Nijio Co., Ltd.—Natural Gas SalesIn May 2002, we teamed up with Shell Gas B.V. to establish
Nijio Co., Ltd. to sell natural gas to power generation companies under long-term agreements. The joint venture will leverage both companies’ considerable experience inthe energy field to provide
a stable supply of natural
gas to Japan’s growing
non-utility power generation industry.

Tokyo Gas President Hideharu Uehara (left)
and Shell International Gas Limited CEO Linda
Cook (right) at the signing ceremony of theagreement to establish Nijio.

Creating DemandInter-Regional Sales and Service Division
In the past, gas suppliers have had a monopoly on supplying gas within their respective service
areas. Deregulation has changed the landscape of the industry somewhat, in that gas companies are now allowed to supply large-volume customers outside of their service areas. This shift
in industry dynamics prompted us to form the Inter-Regional Sales and Service Division in
July 2001. This division will promote the development of demand to expand Tokyo Gas’ business to a wider-ranging supply area. This business division has already achieved success inrespect of its three missions: expanding wholesale activities, establishing the necessary pipeline network and growing demand, over a wider area.
As with Tokyo Gas’ service area, the prefectures on the periphery of the Tokyo metropolitan area boast many large-volume users. We are laying new pipelines to these areas to capture
demand. The new Tochigi Line is an example of a pipeline currently under construction. We
have also completed surveys of future demand and other factors in several other areas.
Tokyo Gas supplies gas on a wholesale basis to 16 gas companies in areas surrounding its
own service area. These sales account for around 10% of Tokyo Gas’ gas sales volume. We
expect high average annual growth of 8.2% through the fiscal year ending March 31, 2007 by
expanding sales to existing wholesale customers and finding new ones. Efforts to expand demand
include assisting these gas companies with activities to sell cogeneration systems.
Another theme for the Inter-Regional Sales and Service Division is promoting the conversion to city gas to customers in areas within Tokyo Gas’ service area who are using LPG. In
areas where conversion is problematic, our subsidiary Tokyo Gas Energy Co., Ltd. supplies
LPG. Looking ahead, we will continue in this way to meet all demand. And we will work inconcert with the Pipeline and Safety Management and other divisions to efficiently build pipeline infrastructures based on an accurate understanding of area needs.

The Transfer of Konosu City’s Gas Business to Tokyo Gas
April 1, 2002, saw the transfer of Konosu City’s gas business to Tokyo
Gas under a privatization program implemented by the municipal government. Under the terms of the agreement, Tokyo Gas paid
¥1,260 million for the business. Tokyo Gas expects to recoup
Kaminoits investment as well as expenses for replacing pipes andupgrading other facilities, over the next several years.
Outline of the Konosu City Gas BusinessNo. of customers: 10,954 (As of March 31, 2001)
Gas sales volume: 5,928,000 m3 per year
(Fiscal year ended March 31, 2001; anequivalent of 46.05MJ/m3)

Ibaraki
Konosu Area

Saitama
Saihoku Line

DaimonAngyo
Tokyo Gas' Pipelines

Tokyo

Head Office
Tokyo
Bay

Chiba

Kanagawa

Strengthening Competitiveness to Capture Demand
Annual Report 2002 TOKYO GAS 11

The 8 Keys to Growth

Residential Sales and Service Division
Residential users account for around 90% of Tokyo Gas’ roughly 9 million customers, making
them the bedrock of earnings from gas sales.
In the home heating field, where competition with other forms of energy is particularly
intense, our strategy has been to develop demand by expanding sales of high-comfort gas floor
heating. Competition in recent years hasn’t been restricted to heating. Electricity companies
have been actively encouraging customers to switch to electricity by developing products suchas induction heating (IH) cooking appliances and heat pump water heaters using CO2 as arefrigerant. The Residential Sales and Service Division has countered these moves with higher
profile advertising and PR to make customers more aware of the latest gas appliances, as wellas with product development and sales activities for cooking and water heating equipment.
A central theme is making gas floor heating the de facto standard for new residentialbuildings. We are promoting the virtues of this heating system among builders of large privateand public-sector housing projects, major homebuilders, local construction companies andother residential construction firms. As a result of these efforts, gas floor heating was installed
in a third of the new houses and multi-unit buildings built in the year ended March 31, 2002.
Around 70% of new condominiums had this heating system installed during the same period.
Ensuring that customers understand such matters as how to use and maintain this heating
system will be a focus of our after-sales service.
Owners of existing homes are becoming increasingly aware of the advantages of gas
floor heating as this system is installed in a greater number of residences. Seizing on theopportunities this presents, Tokyo Gas is promoting gas floor heating systems that can beeasily installed when houses are renovated. Moreover, capturing heating demand in areas of
the house other than the living room, such as the bathroom, is another area being investigated. We are also expanding our sales efforts for the latest gas cooking appliances to stave
off competition from electrical kitchen appliance manufacturers.
Markets where earnings are growing, such as equipment sales and new business ventures,are focal points, too. With the profitability of the former having risen, boosted by more efficient
distribution methods, we are eager to expand sales revenue. To lift earnings even higher, weare selling kitchen systems and other complete systems for the house, in addition to individual
gas appliances. What’s more, we are considering entering new businesses that capitalize on ourclose contact with customers, such as nursing care services for the elderly and security services.

Gas Floor Heating
Advanced Kitchen Appliances
To counter the threat posed by IH cooking
equipment, we are making customers fully
aware of the inherent advantages of gas.
This is being achieved through advertisingand events that raise the profile of gas, andby promoting the latest gas appliances with
automatic temperature adjustment functions and other new features.

12 TOKYO GAS Annual Report 2002

With demand for gas floor heating
increasing year by year, Tokyo Gas ismaking proposals for more comfortable living to customers of both newand existing houses.

Creating Demand

Customer Service Division
The mission of this division is to provide high-quality services at a lower cost. As competitionin the energy sector heats up, it is imperative that we retain customers by offering services thatare less expensive and deliver maximum satisfaction. The Service Planning Dept., Service
Promotion Dept. and 11 service branches are tackling this difficult challenge, and are aiming
to deliver the highest level of customer satisfaction in Japan.
We are confident that our services are already top class, but the Customer Service Division
intends to raise the bar even higher. To this end, the division has introduced the JQA (JapaneseQuality Award) quality assurance program. Work processes, service details, and quality arebeing reviewed from the customer’s standpoint. With this new perspective, Tokyo Gas will
make numerous changes in our operation.
Tokyo Gas established Tokyo Gas Customer Service Co., Ltd., starting to outsource periodic safety checks, and some meter reading and gas bill collection operations in some parts ofTokyo Gas’ service area in July 2002. Tokyo Gas Customer Service will become fully operational by July 2003, and will be instrumental in delivering high-quality customer services at alower cost. Tokyo Gas will continue to assume responsibility for safety, determining gas rates
and bill collection, as well as maintaining service quality. Together, Tokyo Gas and Tokyo Gas
Customer Service will work to enhance customer satisfaction.
In another move to enhance the quality of our services, in July of last year, we combined 12
contact center locations into two and upgraded their functions. This will better enable us torespond promptly and accurately to customer requests. We will analyze feedback from customers
and effectively relay this feedback throughout the organization to improve service quality andcustomer satisfaction—and ultimately win new customers.
In this way, the Customer Service Division will garner satisfaction through its own services
and make customer satisfaction the cornerstone of our company. Achieving a higher level ofsatisfaction across the whole Tokyo Gas Group will bolster our competitiveness and lead tomore business opportunities.

Contact Centers
These centers are at the forefront of customer relations in a number of ways. They are an importantbase for gathering information from and conveying
information to our customers. This is made possible by a proprietary system wedding the Internet,
phones and computers to ensure a speedy response.

Strengthening Competitiveness to Capture Demand
Annual Report 2002 TOKYO GAS 13

The 8 Keys to Growth
Polymer Electrode Fuel Cells (PEFC)
On-site, residential-use cogeneration systems using PEFCs are energy
efficient, economically sound and environmentally friendly, and they
increase the demand for gas. Using proprietary technology, Tokyo
Gas is pushing ahead with the development of advanced fuel reformers for these systems, and conducting field tests in actual homes.

Methane Hydrate
The seabeds around Japan are estimated to hold reserves of methane hydrate—methane and water frozen into a sherbet-like form
under high pressure—equivalent to Japan’s natural gas consumption for about 100 years. For a country like Japan that is almost
totally reliant on imports of energy, this substance is seen as anextremely exciting potential source of energy. Tokyo Gas is continuing basic research into options for using methane hydrate as a
future source of natural gas.

R&D DivisionThis division, which is the nucleus of Tokyo Gas’ R&D activities, conducts wide-ranging researchand development into technologies related to the production, supply and use of gas, as well as
research aimed at expanding Tokyo Gas’ operations into other business fields. As deregulation leads to greater competition, these activities will be vital for developing technologies thatwin customers in the company’s gas and also non-gas businesses, and that raise our corporate
value. Indeed, the R&D Division supports the efforts of other strategic business divisions bycreating products and technologies that differentiate us from rivals and that facilitate further
cost reductions.
This section showcases just a handful of the solutions that will maintain and increase ourcompetitiveness. Others not detailed here include on-site power generation facilities that use
Solid Oxide Fuel Cells (SOFCs), ultra-efficient gas-fired air conditioning technologies,
increasingly sophisticated safety functions using intelligent gas meters and enhanced value
with a more varied rate structure, higher pressure gas pipes that improve facility capabilities,
and new safety technologies. The division’s activities extend to the development of technologies for the creation of new businesses, such as household refurbishment, home services,
facility monitoring and maintenance, and the manufacturing of isotope-related products. Technology for protecting the environment is another key R&D theme.

Techniques for Restoring Pipes
Highly Efficient Condensing Boilers
Tokyo Gas’ condensing boilers, which capture latent thermal emissions,boast a high thermal efficiency of 93%, reduced
CO2 emissions and low running costs, thus adding to the competitiveness of the company’s gas
boilers. Work continues at Tokyo Gas to further
improve the ease of installation and to reducerunning costs with a view to promoting their widespread use in businesses and homes.

14 TOKYO GAS Annual Report 2002

The length of time that existing gas distribution pipes can be usedeffectively has a huge bearing on Tokyo Gas’ capital expenditure plans
and thus achieving competitive gas rates. Tokyo Gas is therefore
developing techniques for maintaining pipelines without excavation.
One example is lining the inside of existing pipes with a protective
epoxy resin coating. This technique is far more cost effective thanprevailing techniques that involve excavation, thereby helping to makeTokyo Gas more competitive.

Creating DemandComprehensive Engineering Services in the Energy Sector
Tokyo Gas Engineering Co., Ltd. is the lynchpin of Tokyo Gas Group’s
engineering business. It provides technical and consulting services covering all aspects of the production, supply and use of gas. The company’s
expertise extends from LNG receiving terminals to cogeneration and DHC
systems. In Japan and overseas, it has chalked up many successes, earninga solid reputation for its comprehensive engineering excellence.

Affiliated Companies Division
Seeing the advance of deregulation as a business opportunity, the Tokyo Gas Group is aiming
to grow steadily as a total energy services provider with natural gas as its core business. This
includes entering new business domains such as electricity generation and retailing, and LNG
transportation using our own LNG carriers. Furthermore, we are developing energy-related
businesses that draw on the strengths of our gas business—including our people, assets andtechnology—and “lifestyle” businesses that respond to the IT revolution and Japan’s “graying” society, as well as those that contribute to environmental protection.
The 54 Tokyo Gas Group member companies are implementing structural reforms designed
to raise the value of the Group. They are being guided by their respective missions and by thepolicy that earnings are the fundamental priority for all affiliated companies. Quick decisions
are needed. We won’t hesitate to channel resources to businesses with high potential. Equally,
we are just as determined to withdraw from unprofitable businesses where we have no expectations for a turnaround. We will use return on capital as our principal yardstick for determining whether a business is worthwhile or not, and if not, reconstituting the group’s management to optimally reallocate resources. For this we have established a project team topromote reforms aimed at raising Group profitability.

LNG Transportation Business

Key Ingredient for Breakthrough Diagnostic Method—13C

Tokyo Gas established Tokyo LNG Tanker Co.,
Ltd. to lower the cost of importing LNG, andto secure a stable supply of this vital energy
source. This subsidiary is presently building two
LNG carriers that will help reduce LNG importcosts by allowing Tokyo Gas to take advantage of short-term contracts and spot trading.
It is also exploring the possibility of supplying
LNG to third parties.

Tokyo Gas achieved a world first by
developing technology to separate 13CMethane from LNG. The 13C-Methane
is being processed and sold by Group
member Tokyo Gas Chemicals Co., Ltd.
as a key ingredient for a diagnostic
reagent to test for the existence ofHelicobacter pylori, a common causeof gastritis and gastric ulcers. Researchis being carried out on 13C-Methane to find uses in other drugs such as
for the diagnosis of pancreatic disease.

Strengthening Competitiveness to Capture Demand
Annual Report 2002 TOKYO GAS 15