Message From Management

RIGHT: Kunio Anzai

Chairman
LEFT:

Hideharu Uehara
President

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Mega-competition is knocking at the door of Japan’s energy

down ¥2.9 billion at ¥672.0 billion due to two main factors:

sector. And deregulation is unlocking it. This movement is being

reduction in gas rates based on the gas cost adjustment ratefurther accelerated by the worldwide information technology

system, and implementation of a downward rate revision inrevolution. Gas and electricity companies are entering eachDecember 1999. Consequently, consolidated net sales

other’s fields. Even companies from other industries are

declined 0.6% to ¥992.2 billion. Operating income alsoannouncing their arrival. We welcome this new era. Withdecreased, down 4.2% to ¥69.2 billion. An improvement“deregulation” and “change” comes “opportunity.” Bring it

in other income (expenses) and the effect of a reduction

on. We believe we have what it takes to seize the opportunities

in Japan’s statutory tax rate, however, led to growth ofand grow. That was our message last year—and it hasn’t

net income.

changed. If anything, we’re more convinced than ever that
we have what it takes to drive growth. In November 1999, wereleased a new medium-term management plan covering
fiscal 2000, the year ending March 31, 2001, through fiscal
2004. In this message, and throughout this report, we will
explain how we aim to accomplish our goals over the next five
years and beyond.

Deregulation
Major strides were made in energy sector deregulation infiscal 1999.
In the Japanese gas industry, revisions to the Gas Utility
Industry Law were enacted in November 1999. Those revisions
lowered the threshold at which regulations on gas supply areas
and rate-setting were removed for large-volume customers—

The Year in Review

from those consuming 2 million cubic meters or more per

Consolidated net income for fiscal 1999, the year ended

year to 1 million or more. In addition, the process for reduc-March 31, 2000, increased 50.3% year on year to ¥26.6

ing gas rates was simplified. Companies can now lower rates

billion. As a result, return on assets (ROA) improved from

simply by filing a report with the Ministry of International Trade

1.0% to 1.5%.

and Industry (MITI). Previously, it was necessary to navigate aGas sales volume in the Tokyo Gas Group increased 3.2%

complex system to obtain permission. Furthermore, we gained

from a year ago. Gas sales in monetary terms, however, weremore management independence. Gas companies are now

TOKYO GAS Annual Report 2000

free to use part of their profits from business activities tohands down in terms of its minimal environmental impact

strengthen their balance sheets and return profits to share-and energy efficiency.

holders, rather than solely for the reduction of gas rates as in2. A powerful and reliable network—connecting a broad baseof customers exceeding 8.7 million in total—with anthe past.
In the electricity industry, revisions to the Electricity Utility
Industry Law in March 2000 opened the door to liberalized
electricity sales to large-volume customers, defined as users
with a capacity of over 2,000 kW and using a 20 kV supply

enhanced supply capability ready to meet growing future
demand with minimum additional investment.
3. Strong marketing capabilities backed up by engineeringexpertise and price competitiveness.
4. The technological competency to meet market needs.

or more.
We view the advancing deregulation in both the gas

By leveraging these strengths to the maximum, we will

and electric utility industries positively. As mentioned in theexpand existing business domains and advance into new

opening of this letter, deregulation is creating new andones, including electricity retailing.

exciting business opportunities. Natural gas, which is environmentally friendly and for which there are stable supply
sources, is the cornerstone of our strategy to seize theseopportunities. By promoting its advantages, we will fortify
our position in the greater Tokyo market and transform Tokyo
Gas into a diversified energy services company. That means
we will supply heat and electricity, as well as gas. Gas-fired
cogeneration systems, which provide electricity and thermalenergy, will be a core driver of growth.

Medium-Term Management Plan Offers Blueprint for Success
The medium-term management plan we formulated in
November last year is grounded on these strengths. This plan
aims to maximize corporate value and thereby earn us highmarks from customers, shareholders and other stakeholders.
To this effect, we will increase free cash flows—net income
plus depreciation expenses less capital expenditures—andimprove asset efficiency.
Maximizing Free Cash Flows to Maximize Corporate Value

What Are Tokyo Gas’ Competitive Advantages?

We have set increasing free cash flows as a yardstick by which

We believe the following core strengths will give us a competi-

we will measure our success at creating corporate value. By

tive edge amid intensifying competition in the energy sector.

implementing measures to streamline management and1. Natural gas, our core product, beats other energy sourcesincrease gas sales volume by enhancing our competitiveness,Profitability and Financial Position Improvement Targets[Non-Consolidated]

March 31, 2000

March 31, 2005

Net sales¥869.9 billion

Total assets¥1,493.6 billion¥1,440 billion¥761.9 billion¥610 billion

Interest-bearing debt
Equity ratio

29.7%
March 31, 2000

Free cash flows
ROA¥26.0 billion¥1,020 billion (Average growth rate of 3.2%)

39.0%
5-Year Average(Year ending March 31, 2001 through year ending March 31, 2005)¥50 billion (5-year total: ¥250 billion)

1.5%

1.9%

Total asset turnover

0.60 times

0.65 times[Consolidated]

March 31, 2000

Net sales

Free cash flows
ROAConsolidated net income tonon-consolidated net income

March 31, 2005

¥992.2 billion¥1,170 billion (Average growth rate of 3.3%)

March 31, 2000

(Year ending March 31, 2001 through year ending March 31, 2005)¥42.0 billion¥61.5 billion (5-year total: ¥307.5 billion)

5-Year Average

1.5%

1.7%

1.19 times

1.13 times

Annual Report 2000 TOKYO GAS

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we aim to achieve non-consolidated free cash flows totaling¥215.3 billion in operating expenses recorded in fiscal 1999,¥250 billion, an average of ¥50 billion per year, over the 5-

reflecting our expectation that fixed expenses will increase

year period from fiscal 2000 through fiscal 2004. Free cash

in line with steady expansion of our customer base, we aim

flows in fiscal 1999, by comparison, were ¥26 billion.

to keep a lid on operating expenses by implementing

These free cash flows are to be earmarked for reducing
interest-bearing debt, returning value to shareholders either

Internal Financing of Capital Investment

by repurchasing and retiring treasury stock and/or increas-

Tokyo Gas is close to putting the finishing touches on several

ing dividends and investing in new businesses.

large-scale infrastructure projects. While using existing assets

Regarding interest-bearing debt, we increased debt overeffectively, we aim to keep future capital expenditures ona number of years to finance the construction of core facilities

production and supply facilities within the limits of free cash

to meet predicted expansion in demand. As of March 31,

flows in the 5-year period through fiscal 2004. This will be

2000, this debt stood at just over ¥760 billion, representing

achieved by reviewing construction methods and specifications

approximately 50% of total assets. Tapping the additional

as well as rationalizing purchasing to find ways to slash costs.

free cash flows we expect to generate, we plan to bringinterest-bearing debt down to ¥610 billion by the year ending
March 31, 2005.
Improving Asset Efficiency
A little under 10% of our total assets of roughly ¥1.5 trillion
as of March 31, 2000, will be accounted for by production
and supply facilities that are presently under construction
and will help us to meet higher demand in the future. When
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streamlining measures.

these facilities come on line and demand increases, we willstart recovering these investments. By working to improve
our top line and earnings at the same time as reducing total
assets and using existing assets more effectively, we intend
to raise ROA and total asset turnover. Specifically, our goal is
to raise ROA to an average of 1.9% from 1.5% in fiscal 1999

Introduction of a Strategic Management Structure
In July 1999, we reduced the number of divisions and departments by approximately 30%. At the same time, wecarried out reforms to put in place a strategic divisional systemcomprising six divisions aligned in terms of functions andmarkets. These changes are intended to drive administrative
efficiencies. They are also designed to strengthen our marketing capabilities and enhance customer services and safety.
Augmenting this new strategic framework is an innovative
business management system introduced in April 2000. The
new system, in a sense, entails each division and department
working like an independent company, and clearly spells outthe responsibilities of each section as well as the targets andresults that are expected of them.

over the 5-year period from fiscal 2000 through fiscal 2004;
total asset turnover will be raised from 0.60 times in fiscal

First of Two Rate Reductions Implemented

1999 to 0.65 times over the same period.

Tokyo Gas had announced plans to reduce rates by a total ofAchievement of these goals will call for greater

4-5% through two reductions. In December 1999, we carried

management efficiency to strengthen operations, and rate

through on that promise, reducing rates by an average ofreductions and organizational reforms to bolster our2%. The second rate reduction, planned for the current fiscal

competitiveness. Here’s what we intend to do in this regard.

year, will be in the order of 2-3%. The rate reductions are intended to make gas an even more attractive energy alternative.

Driving Efficiency
Personnel Reductions

Expanding Demand by Strengthening CompetitivenessWe plan to lower our head count at the parent company to

Based on these strategies to bolster our competitiveness, we10,000 people by the end of fiscal 2005. We will accomplish

plan to expand gas sales volume. The most promising area isthis personnel reduction through organizational reforms,

the gas market for electricity generation, including gas-fired

systematization, retooling of administrative processes andcogeneration, whose share in our gas sales volume is expected

fostering staff potential to reduce personnel. Putting limita-to increase from 15% at present to 27% by the year ending

tions on new recruitment is also part of our strategy.

in March 2005.

Controlling Operating Expenses

One major supply contract will contribute to theWe plan to hold operating expenses to the fiscal 1998 level

achievement of this target. Starting in fiscal 2001, we planof ¥224.2 billion for the next 3 years. While higher than theto supply upwards of 1.0 billion cubic meters of gas per year

TOKYO GAS Annual Report 2000

to The Tokyo Electric Power Company’s Shinagawa thermal

Leveraging our experience and successes in overseas

power station. That equates to about one-tenth of all theprojects, we intend to develop overseas operations. We cangas we supply.

point to our joint venture projects in Malaysia in particular toRecent trends are working in our favor. We are seeing ademonstrate our capabilities. These included the construction

shift from large-scale power generation to distributed power

and operation of a natural gas distribution system. This wasgeneration and on-site electricity generation. This promises

the first such overseas project undertaken by a Japanese en-

to lead to higher demand for gas from IPPs (independentergy utility company. Gas Malaysia Sdn. Bhd., the joint ven-power producers) and electricity supply in specific areas such

ture company, started paying dividends in 1999.

as redevelopment zones. Micro turbines will also likely spurgas demand. They have attracted attention in recent times
as a major step toward the introduction of cogeneration
systems for small-scale, private-sector users. This market has
been difficult for gas companies to penetrate until now
because of the lack of suitable products. Moreover, recognizing the importance of alliances in this changing businessenvironment, we are conducting feasibility studies with aview to entering the electricity retailing sector ourselves withNTT Facilities and Osaka Gas.

Focusing on Consolidated Management
Japanese companies were required to start reporting consolidated financial information starting in the fiscal year ended
March 31, 2000. Tokyo Gas, however, has been practicing
consolidated management for some time now. In 1993, forexample, we reorganized the Tokyo Gas group into 10 business fields, including energy sales, cryogenic energy use andchemicals businesses. One company was established in eachfield to take the leading role. Their goals were to drive management efficiencies within their fields and grow earnings.

Contributing to Local Communities

In fiscal 1999, we undertook a review of each of our busi-One of our greatest assets is our broad base of 8.7 million

nesses. At the same time, we formulated guidelines for whencustomers. To enlarge this base we are upgrading customer

to withdraw from unprofitable businesses and for when toservices and stressing maintenance and improvement of thereduce and consolidate group companies. We intend tostability of supply and safety. Furthermore, research andclearly delineate the strategic position of each group com-development is being emphasized to respond to diversepany to raise the value of the Tokyo Gas Group.

customer needs in an aging society which is being fundamentally altered by advances in IT. Information technology
is an important area of focus. We are planning to establish,
for example, two-way communication with customers via
the Internet. Tokyo Gas is also actively involved in environmental issues. Expanding the use of clean-burning natural
gas is one example. Moving forward, we intend to promote
the use of energy-efficient equipment and systems as well as
the reduction of industrial waste volumes and greater

In Conclusion
As deregulation takes hold, we are likely to see more andmore entrants into Japan’s gas and electricity businesses fromboth within Japan and overseas as well as from other industries. We are determined, however, to grow as a leading company in this climate of change. We are committed toexecuting the plan we have formulated to produce the results you expect of us, and to continue to be a major player
in the “natural gas era” of the twenty-first century.

recycling. By doing so, we will play our part in contributing
to the realization of a sustainable society.

July 2000

Stepping up Overseas Activities
Overseas activities are taking on greater importance for theTokyo Gas Group. Heretofore, our four representative offices

Kunio Anzai

overseas in New York, Paris, Kuala Lumpur and Beijing have

Chairmanbeen used mainly for gathering information and for
management and technological exchange with foreignenergy-related companies and institutions. While continuing

Hideharu Ueharathese activities, we also intend to use these offices as conduits

Presidentfor disseminating information to investors abroad.

Annual Report 2000 TOKYO GAS

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