An Interview with the President

Q: You launched a new medium-term management plan in fiscal 2006.
How would you assess initial progress under the plan?
Torihara: Fiscal 2006 was the first year of our medium-term management plan covering theperiod from fiscal 2006 to fiscal 2010. Various aspects of the business environment changed
more than we anticipated when we first announced the plan in January 2006.
First of all, the price trend of crude oil remains in the high range. Though natural gas is
becoming more price-competitive relative to other fuels, this factor eroded the ability of gas
cogeneration systems to compete with grid-connected electric power systems on price.
Another change was an extreme acceleration of the trend toward the use of electricity
instead of gas. Rising consumer awareness of the all-electric concept was reflected inincreased competition from electricity. There were also some unfortunate situations, includ-

Our Vision

ing cases of carbon monoxide poisoning caused by water heaters. These had the effect ofgoing the distance withtotal energy solutions

2006. While making additional investment to reinforce our strategies to counter competition

eroding public confidence in the safety of gas.
We responded to these changes by totally reviewing our policies in the summer offrom electricity and achieve strengthened safety measures, we endeavored to reduce costs
and continued to respond flexibly to changing conditions.
As a result, I believe that we generally made a good start in terms of our management
performance. We set new records for net sales, operating income and net income. The
increase in sales resulted mainly from volume growth driven by marketing efforts, combined with higher unit prices under the gas rate adjustment system, which adjusts gas rates
according to gas resource costs. Despite dramatically higher gas resource costs andincreased expenditure on safety, we were able to keep operating expenses under control
through savings in other areas, including reductions in labor costs resulting from further
work force downsizing and an actuarial differential on retirement benefits*. Operating
income increased by 44.5% to ¥162.3 billion over the previous year.
There was continuing growth in gas sales volumes, especially for industrial use. This
reflects the important environmental advantages of natural gas, as well as its price advantage
relative to crude oil. Sales to residential and commercial customers stagnated due to mild
winter temperatures, but overall there was a 1.7% year-on-year increase to 13.3 billion m3.
We also achieved encouraging sales of strategic products that we see as important to ourefforts to counter competition from companies offering all-electric systems. These include
our “Pipitto Konro” gas cooktops, our highly efficient “Eco-JOES” water heaters, and mistsaunas. Sales units of these items were substantially higher than the previous year’s results.
In the industrial segment, we have started to make steady progress toward our establishment into an integrated energy company, as envisioned in our medium-term management plan. In June 2006, Tokyo Gas Yokosuka Power Co., Ltd. started operation as our second power plant, with power generation capacity of 240 MW, and in April 2008, an 800-MW
facility operated by Kawasaki Natural Gas Power Generation will come on line.
* Tokyo Gas calculates its retirement benefit liabilities using actuarial computations based on specific assumptions.
Actuarial differentials are all shown as cost items in the accounts for the following year.

Q: Your forecasts for fiscal 2007, the fiscal year ending March 31,2008, appear pessimistic. What are the reasons for this?
Torihara: While we expect net sales for fiscal 2007 to exceed the excellent result for fiscal
2006, we are predicting a sharp decline in income. The three main factors for this forecast
are a heavier cost burden resulting from sharply higher gas resource costs, higher personnel

Mitsunori Torihara
6President

7expenses resulting from an actuarial differential on retirement benefits, and aggressive
investment in demand development to counter competition from all-electric systems.

Q: How will changes in the business environment affect the current
medium-term plan?

One reason for the rise in gas resource costs is higher LNG prices. This reflects risingworld demand for LNG, as well as the instability of crude oil prices, which have started tomove higher again after a period of relative calm.

Torihara: In fiscal 2006, many aspects of the business environment changed conspicuously compared with the assumptions on which the medium-term plan was based.
However, we took a positive, forward-looking stance in response to these changes and

The actuarial differential on retirement benefits has occurred despite cost savings resulting
from decreasing our employee numbers and is attributable to external factors. These include a
relatively lower yield on pension assets in fiscal 2006, compared with the excellent results
achieved in fiscal 2005, and another factor was the effect of a three-yearly actuarial review. In
addition, the discount rate has fallen from 2.0% to 1.8%.

quickly convened internal discussions. Our entire organization is now working to makethe necessary adjustments.
One of the issues that has affected us is public concern over carbon monoxide poisoning. We have responded by implementing special inspections of gas appliances. In fiscal
2007 we will deploy an additional 100 service staff and fulfill the scope of our safety inspec-

Investment in demand development is essential to counter the effects of competition
from all-electric systems. We will focus in particular on the expansion of sales of in-house
power generation systems, which combine our ECOWILL and LIFUEL systems. We regard
these as strategic products. Our target for fiscal 2007 is to install 3,950 units, which is overthree times higher than the fiscal 2006 result of 1,304 units sold. In addition to our investment in home power generation products, we are also steadily implementing initiatives
that are expected to yield sales growth in the future. These include increased efforts toovercome recent consumer concerns about using gas and appeal the safety and comfort
features of gas.

tions. We have also allocated a budget of ¥10 billion for measures to encourage consumers
to replace their appliances with safer models. In addition, customer contacts in the course of our business
operations provide opportunities to remind customers
about the importance of appliance safety. Through theinitiatives mentioned here and elsewhere, we doeverything possible to restore public confidence in gas
as quickly as possible.
LNG prices have climbed in step with rising crude

In fiscal 2007, we are also structuring a regionally focused marketing approach as statedin our medium-term management plan for fiscal 2006 to fiscal 2010. Specifically, we plan toestablish new regional energy companies to integrate the functions of safety inspections,meter reading and the collection of gas charges, as well as sales and maintenance of gas
appliances, that was formerly undertaken by Enesta. These services will be fine-tuned toreflect the diverse lifestyles of our customers. Trial operation of the new scheme has
already started in some regions. We are confident that this shift from a function-based marketing structure to a regionally based one will yield sustained benefits through the clear
grasping of customer needs while regularly carrying out day-to-day gas-related operations.

oil prices and are now above the level that we projected
when formulating the plan. Our forecast of lower
income in fiscal 2007 reflects sharply higher gas resource costs resulting from tight LNG
supply and demand balance in the global market, and the high level of crude oil prices.
However, we believe that this situation will improve as LNG is delivered from new projects,
including SakhalinⅡ in 2008, and Gorgon and Pluto after 2010. In future, we will continually
modify our LNG procurements according to prevailing conditions, including the use of flexible
contract terms.
Under our medium-term group management plan for fiscal 2006–2010, we aim toincrease our presence in the LNG value chain while building Tokyo Gas into an integrated
energy company. Though income in fiscal 2007 will be substantially below the fiscal 2006

Major Management Targets

level, if we exclude external factors, such as the actuarial differential on retirement benefits
TEP

Operating Cash Flow

ROAROE(¥ billion)(¥ billion)

(%)

(%)

53.8

1,120.0

51.0

5.9

5.5

and an increase in depreciation due to tax revision, our estimates for fiscal 2007 would be inline with the initial forecasts in our medium-term management plan. Our goals remain

13.2
10.9

4.3
9.1

energy supplier, by maintaining the reliability of our supply services, competitive pricing, andstrong commitment to continual improvement in safety and service quality.

22.0
233.8
FY ’06’07’10

OutlookTargetTEP (Tokyo Gas Economic Profit)= net operating profit after tax prior tointerest payments – cost of capital
WACC

unchanged. We will work even harder to maintain our reputation as a trusted and preferred

FY06 Results: 3.8%
FY07 Outlook: 3.8%
FY10 Target: 3.8%

FY ’06217.9’07’06–’10

Outlook

Total

Operating cash flow
= net income + depreciation

FY ’06’07’10

OutlookTarget

ROA = net income/total
assets (average of positions at start and end offiscal year)

FY ’06’07’10

OutlookTargetROE = net income/total
shareholders’ equity (averageof positions at start and endof fiscal year)

Q: There has been widespread public interest in M&A activities andother events affecting the energy sector in Europe and North
America. Do you foresee similar development in Japan? What are yourviews on M&A?
Torihara: We are closely monitoring energy sector developments in Europe and NorthAmerica. Of particular interest is a flurry of M&A activity in the European electric powerindustry, which appears to have resulted from total deregulation of the industry. Moreover,the energy situation in the EU is such that they have developed electric power and gas distribution infrastructure across the region. Investors ask me if a similar situation is likely todevelop in Japan. While we cannot rule this out entirely, conditions here are different, andwe need to consider the situation calmly.

89While the scope of deregulation is expanding in Japan, nationwide electric power andgas distribution has yet to develop sufficiently. The debate over full deregulation, including

Basic Policy on Cash Flow Allocation (5 years)

the residential sector, is only just beginning. Unlike the telecommunications and aviationindustries, there are no restrictions on share ownership by foreigners in electric power andgas. However, if a foreign corporation wishes to acquire 10% or more of the shares in aOperating Cash Flow
Other Cash Flow¥995 billion¥(122 billion)

power or gas company in Japan, it is required under the Foreign Exchange and Foreign

Five-year total:¥1,190 billion

Trade Law to notify the Ministry of Economy, Trade and Industry to obtain permission.
There are other restrictions under the Gas Utility Industry Law and the Antimonopoly Law.

Five-year total:¥873 billion

For such reasons, it seems unlikely that our industry will undergo rapid restructuring as a100
181

result of M&A and similar activities.

60860592

FY2003–2007

Reduction of Interest-bearing Debt: ¥60 billion
Shareholder Benefits: ¥270 billion
Investment and Financing: ¥860 billion

Breakdown of Investment andFinancing in Total Energy Businessate valuation. For this reason, we have not established specific defensive measures against¥1,120 billion¥70 billion

270I firmly believe that the priorities for Tokyo Gas are to achieve continual improvement inour corporate value, and to maintain dialogue with the markets as the basis for an appropri-

Operating Cash Flow
Other Cash Flow

12% 17%
12%
20%
39%

FY2006–2010

Upstream/Overseas
Infrastructure
Demand development
Business Facilities
Otherstakeover bids. However, we are prepared to takeappropriate decisions if there is a risk that largescale buying of our shares will jeopardize our ability
to implement our management philosophy or damage our corporate value. In such an event, we will
evaluate the TOB proposal with outside experts, aswell as holding a dialogue with the investors. If weconclude that the activity would have a negative
effect on our corporate value or the common interests of our shareholders, we will disclose details of the situation to our shareholders and make prompt decisions about theneed for specific countermeasures and the content of such measures, so as to be ready tointroduce and implement them.
Another question that I am asked is whether Tokyo Gas plans to merge with or absorb
other city gas companies. Tokyo Gas is currently a wholesale supplier to 24 city gas companies in its service area. In volume terms, sales to these companies account for over
10% of our total sales, and we anticipate a high growth rate averaging 4.4% over the next
five years. We are aggressively developing our wholesale supply business, which allows
us to earn income without increasing our assets. We have no plan to engage in hostile
M&A activities that might have a negative impact on the business. However, we havetaken over the business operations of a government-owned gas business when it was privatized. If there were an optimal M&A deal that would enhance our corporate value andimprove customer convenience, we would positively consider it while taking the wishes ofthe other party into account.

Q: What are your views on shareholder benefits and financial strategies?
Torihara: In our medium-term management plan, we have set targets for operating cash
flows and defined our allocation policy. Specifically, we aim to generate operating cash
flows of ¥1,120 billion and other cash flows of ¥70 billion, making a total of ¥1,190 billion.
Of this, we intend to invest ¥860 billion in the development of our integrated energy busi-

I see our business strategy and financial strategy as two halves of a whole. Together
with our integrated energy business, which constitutes the foundation stone of our business strategy, our financial strategy and shareholder benefits are the most important
issues for management.
In our medium-term management plan, we have set a 60% target for the total payout
ratio*. We have also declared our intention to distribute income to shareholders through dividends and stock repurchases. Based on this total payout ratio concept, we have increased
the dividend for fiscal 2006 and beyond by ¥1.0 to ¥8.0 per share, and we have allocatedfunds to repurchase stocks worth ¥39 billion (60 million shares). As a result of these measures, the total payout ratio for fiscal 2006 is expected to be 60.1%. While maintaining dividend stability, we aim to raise the dividend gradually. We have almost completed our stock
repurchases for fiscal 2006, which we implemented to prevent dilution caused by the conversion of convertible bonds. Our priority from now on will be to enhance shareholder value
by repurchasing stock primarily with a view to cancellation.
Another management priority is to maintain an appropriate capital structure and capitalcosts. Our main indicators in this area are ROE and Tokyo Gas Economic Profit (TEP), whichis the Tokyo Gas version of Economic Value Added (EVA®). We aim to achieve sustained
improvement in all of these indicators.
As president, I am determined to steadily implement the medium-term management
plan while also ensuring that Tokyo Gas remains a trusted name and a company of choice
for shareholders, investors, customers and the public. This unswerving commitment willcontinue to guide our activities in a changing business environment as we work to createand develop new markets for natural gas and build a broad-based profit structure for 2010and beyond. We will go the distance.
*Total payout ratio of year n =[(dividends from unappropriated profit in year n) +(amount of treasury stocks acquired in year n + 1)] /(consolidated net income in year n)

ness. This medium-term management plan is seen as an important step toward the realization of our long-term strategy for the period beyond 2010, and, consequently, we intend toconcentrate our management resources and invest aggressively in our core business.

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Mitsunori Torihara, President

11