TO OUR SHAREHOLDERSHIDEHARU UEHARAKUNIO ANZAINORIO ICHINO

Vice Chairman

ChairmanPresident

AN INTERVIEW WITH THE PRESIDENT

Marking a Successful Start of “Frontier 2007” andon Track to Achieve Our Targets
Fiscal 2003, the year ended March 31, 2004, was the first year of Frontier 2007, the Tokyo
Gas Group’s medium-term management plan for the five-year period to fiscal 2007. The plan[]

Progress in Our Driveto Transform Ourselves
for Future Growthclarifies future directions and strategies for the Tokyo Gas Group by thoroughly taking intoaccount the maximum potential impact on our operations of progress in regulatory reformand expansion of the scope of liberalization. In this important initial year of the plan, weposted record consolidated net sales, with a 2.1% increase to ¥1.15 trillion, driven by strong

AN INTERVIEW WITH
THE PRESIDENTgas sales. Net income declined because of an extraordinary loss resulting from lump-sum
write off of the actuarial difference in retirement benefits. However, operating income was
23.5% higher at ¥152.3 billion. We believe that we have achieved a very successful launch ofNORIO ICHINO{ President }our medium-term plan.
If transient factors recorded as extraordinary losses were excluded, free cash flow
would be substantially above the initial target for the fiscal year, and our projections indicate that we are on track to exceed the targets set for the final year of Frontier 2007. In
recognition of this, we have increased the annual dividend per share from ¥6 to ¥7.
In fiscal 2004, we are determined to meet the expectations of all stakeholders, including
shareholders and investors, by achieving further enhancement in our corporate value underour new Group structure.

KUNIO ANZAIHIDEHARU UEHARANORIO ICHINO

ChairmanVice Chairman

President[7]

TOKYO GAS ANNUAL REPORT 2004

TOKYO GAS ANNUAL REPORT 2004[8]

Tokyo Gas is striving to consolidate its existing customer
base while aggressively taking up new challenges. By
strengthening this combination of defensive and growthoriented strategies, we aim to bring forward the achievement of the Frontier 2007 goals.

Q Fiscal 2003 was the firsttrial sectors. We also scored gains inaggressively promote female andyear of the Frontier 2007

our efforts to reduce costs, leading toyoung employees, and to maintainOur greatest strength is the trust-to enhance our offensive capability tomedium-term management

clear benefit to our operating income.

close relationships with customers. The

ed relationship with more than 9.4 mil-move into new markets, and ourplan and your first year as

Net income was lower, since we decid-reaction was very positive. With theselion customers built over a history

defensive ability to deepen the bonds

President. How would you

ed to write off actuarial differences forfavorable results, I believe that we havespanning 118 years, which enables ourwith our customers.

review the year from thisretirement benefit obligations, and to

made an excellent start overall.

front-line operations to work directly

perspective?

bring forward the application ofrefine and enhance those strengths.

with customers, offering suggestions

Q Tokyo Gas increased theA Throughout the past year, I wasimpairment accounting to fixed assets.

Q What are your priorities foron new ways to use energy and cus-annual dividend. Does thisconstantly aware of the importance ofWithout these transient factors, ourthe year ending March 2005

tomer-oriented services. Policies for-signal a policy change?

my mission to ensure a good start,

free cash flow would have been sub-in line with the Frontier

mulated by our strategic departments

A The policy set down in Frontierboth for Frontier 2007 and for my own

stantially above our initial target.

2007 targets?

are put into effect in the field. The

2007 calls for the payment of a divi-

NORIO ICHINO{ President }leadership. I am pleased to report thatBecause I saw the past year as a

A My aim for the coming year is toeffects of those policies are carefully

dend of ¥6 per share in each of the five

we set a new record for consolidated

time for the Tokyo Gas Group to build

use our achievements during the firstmonitored, and any errors or unsatis-

years covered by the plan. However,net sales, thanks to positive growth infoundations for new growth, I continu-

year of the plan to promote the earlyfactory results are reported back to thewe found at the end of the first year

sales of gas to commercial and indus-

ally emphasized how important it is toattainment of our targets under the plan.

strategic departments so that thethat, if we were to exclude transient

Competition has arrived in earnest

measures can be further refined. Ifactors, such as the lump-sum write-in the energy sector. For example, elec-

believe that this process is the key tooff of actuarial differences for retire-

tric power companies are not only

enhanced competitiveness for thement benefit obligations, our free cash

implementing marketing campaigns

Tokyo Gas Group.

flow would be substantially higher

Four Areas of Prime Focus in “Frontier 2007”
Business Model Innovation2007 targets by using these strengths

Business Expansion into
Energy-related Areas

Construction of the GroupManagement SystemStrengthening
the Corporate Structure

based on the concept of all-electricThat is why we need to put

than the target level. We therefore

lifestyles, but are also moving into theemployees with the ability to perceive

decided to pass on this gain to share-gas market itself. To combat competi-and understand customers’ needs into

holders by using the portion of freetion we must strengthen our business

front-line areas, such as sales, service

cash flow in excess of the planned

fundamentals through fine-tuned distri-and maintenance. We must build alevel to increase the dividend.

bution of management resources:

structure that allows these needs to be

The minimum requirement forinvesting actively in essential areas,incorporated into our strategies. If weour dividend policy is to maintain divi-

while streamlining as much as possible.

can do this, I am confident that we candend stability, and we will continue

We also need to foster a shared under-adapt successfully to any environmen-

our efforts to improve our earnings sostanding of the fortes of the Tokyo Gas

tal change. My mission is to bring for-that we may avoid ever having toGroup, and we must work together toward the achievement of the Frontier

reduce the dividend. We do not intend

Primary Management Targets
TEP

Free Cash Flow

ROA

Interest-bearing Debt(¥ Billion)(¥ Billion)(%)(¥ Billion)

10

3.9

105775
627

2.8
61
3

FY ’02’07

TEP (Tokyo Gas Economic Profit)= 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% (aftertax); Cost of equity: 6.5%

[9]TOKYO GAS ANNUAL REPORT 2004

FY ’02’07

Free cash flow = net income + depreciation– capital expenditures

FY ’02’07

FY ’02’07

ROA = Net income/total assets(average of positions at start andend of fiscal year)
Figures for fiscal 2002 are projections made when the medium-term
management plan was finalized in October 2002, not the actual results.

TOKYO GAS ANNUAL REPORT 2004

[ 10 ]

Frontier 2007 plans to apply ¥180 billion over the five-year
period of the plan for gas rate reductions. We will ensurethat these funds are used beneficially to develop an effective
rate strategy that expands demand and increases revenues.

at present to make major changes to

A The rate reduction is meant toTokyo Electric Power has announced

the free cash flow allocations stipulat-

improve our ability to succeed against

ed in Frontier 2007. However, if weQ

Natural gas faces increas-

We will continue to enhance our abili-that it will reduce its electricity rates

ing competition from elec-

ty to attract and keep customers byincreasingly fierce competition within October 2004. To enhance the com-tricity and other energy

offering superior products, and by

can generate free cash flow signifi-

other forms of energy or other gas

petitiveness of our gas pricing, weproducts in the householdproposing lifestyle ideas based on thecantly above the planned level, we will

suppliers. Another objective is to passannounced that we would cut ourmarket, as seen in market-

comfort and convenience of gas.
* About 80% of all condominiums newly developed by
the private sector in the Tokyo Gas service area havefloor-heating systems.

review the options to raise the divi-on the benefits of our corporate efforts

rates in the year ending March 2005.

ing campaigns for an all-dend or buy back our stock. Theseto our customers.

We are determined to implement aelectric lifestyle. How will
you respond?

options must be considered in line

In Frontier 2007, we earmarked

rate strategy that will drive demandwith other priorities, such as new

funds totaling ¥180 billion for use inexpansion, which will generate cash

A All-electric homes still make up

Q In April 2004, Tokyo Gas

business investment and the reduction

rate reductions over the five-year peri-

for future strategic developments.

only a small percentage of newly built

introduced the strategicof interest-bearing debt.

od. Having completed the first year ofhomes in our service area. However,business unit system. How

the plan, we expect that we will be

Q The scope of liberalization

the electric power companies havedoes it differ from the old

Q Tokyo Gas has announced aable to achieve all of the goals in thehas expanded following reg-

set a clear target, and we expect theGroup strategy?

gas rate reduction during

plan within the allotted time. Thisulatory reforms in April 2004.

also believe that considerable engi-

competition to intensify. We are

A In the past, our Group strategy

fiscal 2004. What are themeans we are free to spend the entire

Has the competitive environ-neering expertise is required to supply

preparing for this by strengthening

was based on a policy of independ-

reasons, and what will be¥180 billion effectively as planned—

ment changed, as a result?

and sell gas, especially to industrial

our product appeal in areas in whichence, which meant that individual

the effect?

and the only questions now are timing

A The scope of liberalization now

users. Moreover, long-standing rela-competition is intense. Of particularGroup companies pursued their own

and the way the funds are to be used.

includes retail sales of gas to cus-tionships of trust with our customers

importance are the products that webusiness approaches. However, given

tomers consuming 500,000 m or morecannot be broken easily. Of course, weare developing to compete with elec-

the intensifying competition in our vari-annually. In practical terms, however,cannot afford to be complacent, and wetrical appliances. These include a newous fields of business, we need to bring

there are not many companies withare building a strong defensive position

type of gas cooktop that is extremely

together the strengths of the entire

sufficient capacity to sell large volumes

by further improving our technology

easy to use and has enhanced designGroup by integrating the resources ofof natural gas. Although the latest

and marketing capabilities. We are alsofeatures, and highly efficient water

the parent company and Group mem-round of liberalization is unlikely tostrengthening our aggressive market-

heaters. Sales of these products werebers, including the utilization of knowl-cause dramatic changes in the short-ing position by using the introduction

significantly higher than our initialedge and commodities, and the formu-

term future, the level of competitionof the strategic business unit system totargets in fiscal 2003. Another initiative

lation and implementation of businesswill inevitably escalate. While we areoffer total energy services, including

is active marketing of floor-heating

strategies. To achieve this, we haveaware that our competitors are target-gas, electric power and heat, in collab-systems to establish a de facto stan-used our existing strategic division

ing large-volume customers withoration with Energy Advance and otherdard. Now, they are installed instructure as the framework for a moreaggressive marketing activities, weGroup companies.

around 80%* of new condominiums.

evolved organizational structure in

3

Deployment of Free Cash Flow
Electric power business 35%

Others¥79 billion

Upstream development and16%

New investments/ LNG transportation 43%
financing¥120 billion

25%
Overseas 17%

Reduction ofinterest-bearing debt
¥100 billion

21%

5-yeartotal:¥480 billion

New residential services 2%
Others 3%

17%
21%

Share repurchase¥100 billion

Dividends¥81 billion

Figures based on 2002 projections[ 11 ]TOKYO GAS ANNUAL REPORT 2004

TOKYO GAS ANNUAL REPORT 2004

[ 12 ]ACTIONS FOR FURTHER GROWTH

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

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

friendly natural gas. In this sense, we

strategic business units.

are extremely fortunate, because we

We believe that this unified

can contribute to society by working

approach will allow Tokyo Gas and its

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

kets. We also aim for agile manage-

we work to enhance our profitability

ment with quicker decision-making

and achieve growth by investingby devolving authority and accounta-

aggressively in areas with the potential

bility to the leaders of each strategic

for expansion.

[]

Moving Forward
toward Achievement ofFrontier 2007

business unit.

 Overcoming Competition Triggered by Deregulation

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

 Enhancing Procurement of Gas Resources
Top Management

 Driving Future Growth through R&D

Compliance Dept.
Internal Audit Dept.

Corporate

Shared Services / R&D

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

Strategic Business Units

Energy Resources Div.

Energy Production Div.

Pipeline Network Div.

Residential Sales Div.

Energy Sales andService Div.

Wide Area
Marketing Div.

( 3)

( 1)

( 2)

(36)

( 4)

(12 )

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

[ 13 ]TOKYO GAS ANNUAL REPORT 2004

TOKYO GAS ANNUAL REPORT 2004

[ 14 ]