[

from]Strength toStrength
TOKYO GAS CO., LTD. ANNUAL REPORT 2004 For the year ended March 31, 2004[

Unrivaled
Advantages]

Natural gas is the most environment-friendly fossil fuel, which augurs well for continued demand growth;
it is also supported by government policy. Tokyo Gas has made this high-growth product the core of its
business activities. It has developed city gas production and supply infrastructure in the Kanto region,
Japan’s largest consumer of energy, and applies its technology and experience in the fields of gas utilization and engineering to achieve sustained expansion of its customer base.

Leading to Increasing Strength and Sustained GrowthWith the massive capital expenditure required to build up infrastructure behind it, Tokyo Gas is using
its substantial cash flow to strengthen the core gas business, including new approaches to win and retain
customers. Simultaneously, it is pursuing new areas of growth by leveraging opportunities emerging fromthe deregulation of the energy sector. Through this two-part approach, Tokyo Gas is determined to grow as
an “energy frontier” group offering diverse energy solutions.

 See overleaf for a discussion of strategies to strengthen offensive and defensive positions.

Our Strengths

Positive factors for growth Government policy driving growth in natural gas demand A trusted network with 9.4 million customers

 Potential for economic growth in the Kanto region

 State-of-the-art solutions for every energy need Natural gas demand expected to grow for environmental reasons Abundant cash flow for strategic business development

Share of Natural Gas in Primary Energy
Supply in Japan and Worldwide

Breakdown of GDP of Japan by Major Areas

Gas Sales Volume & Customer Growth(Nonconsolidated)
Million m3; 46.05 MJ/m3
15,000Cash Flow and Capital Expenditures(Nonconsolidated)Thousands
11,000¥ Billion200

5-year growth rate : 2.6%
10,50012,000Global Average

150

23.9%

Tokyo Area
38.4%

10,000

9,000

100

13.6%
Japan

Source: BP Statistical Review of World Energy 2004

Nagoya Area
9.6%
Osaka Area

6,000

9,500

16.0%

3,000

9,000

Source: Cabinet Office, Government of Japan (Year ended March 31, 2002)

Note: The Tokyo area includes Tokyo, plus the Kanagawa, Saitama, Chiba,
Ibaraki, Tochigi, Gunma, Yamanashi and Nagano prefectures. The
Osaka area includes Osaka, as well as the Hyogo, Kyoto, Shiga, Naraand Wakayama prefectures. The Nagoya area includes the Aichi, Gifu
and Mie prefectures.

[1]

TOKYO GAS ANNUAL REPORT 2004

Free cash flow

50

0

8,500

’04
Residential
Commercial

’05

’06

’07

Industrial
Wholesale

’08

’09

Number ofcustomers

0’91 ’92 ’93 ’94 ’95 ’96 ’97 ’98 ’99 ’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08
Net income
Depreciation
Capital expenditures
Free cash flow = net income + depreciation – capital expenditures

All graph data for years ended March 31

TOKYO GAS ANNUAL REPORT 2004

[4]

Utsunomiya

Gunma
Tochigi

Network Expansion and
New Energy Services are
Increasing Demand
To transform its business advantages into growth in
the core gas business, Tokyo Gas recognizes it is necessary to extend its pipeline network to expand its
supply services. With deregulation leading to escalating competition as more companies move into theenergy sector from other industries, the Company
believes that infrastructure development in regions of
expanding demand will create business opportunities.
Effective pipeline expansion, guided by careful monitoring of demand trends and profitability, is a criticalelement of business strategy.
Under this strategy, Tokyo Gas has extended its
pipeline network to the northern Kanto region,
which offers particularly strong potential for

Moka

HitachiTochigi Line (2006)
Sano
Kumagaya-Sano Line (2004)

IbarakiKumagayademand growth. The Kumagaya-Sano Line will becompleted in October 2004, and the Tochigi Line in
March 2006. To attract new users in areas aroundthese new pipelines, it is also actively marketingcogeneration systems, which are increasingly seen
as solutions to environmental and cost concerns.
There is growing interest in the concept of energy service providers. By establishing and retaining
ownership of the cogeneration systems and otherenergy facilities they employ, energy service
providers can give customers a one-stop solution totheir energy needs. Customers can easily adopt
these services because they are not required tomake large capital investments. Other customer

advantages include reduced energy costs andenvironmental friendliness. In 2002, Tokyo Gas
established a new subsidiary, ENERGY ADVANCE Co.,
Ltd. The engineering capabilities of the Tokyo Gas
Group and its ability to procure LNG reliably and economically allow the new company to maximize theadded-value potential of gas cogeneration. ENERGY ADVANCE is employing a highly efficient marketing strategy, targeting customers with substantial
heat needs and strong environmental awareness. Its
primary focus is the Kanto region, where there is alarge latent demand.

SaitamaTokyo

Central Trunk Line (2009)

Head
OfficeKanagawa

Chiba

Tokyo
Bay

Ohgishima
LNG Terminal

Sodegaura
LNG Terminal

Negishi LNG Terminal
Minamiashigara(

High-pressure transmission pipelines
High-pressure transmission pipelines(Under construction)
Medium-pressure transmission pipelines) Proposed year of completion
Tokyo Gas’ service area
Tokyo Gas’ direct and indirect wholesale area

Kanto Region

New Ways to Grow, Actively and Proactively
Configuration of Residential Fuel Cell
Cogeneration System

Strengthening Ties with
Customers through Product andService Innovation
Although anticipating strong competition from electric
power companies in the household market, Tokyo Gas isdetermined to attract new customers and maintain its
relationships with existing customers. A key strategic
asset in this market is the Tokyo Gas brand, which the
public associates with safety, reliability and trust. Tokyo
Gas is using this asset to its advantage against the competition by offering a wide range of products and

New Cooktop
Since its launch in 2001, sales havesteadily expanded. The number ofunits sold in fiscal 2003 reached44,500, a 64% year-on-year increase.

[2]

TOKYO GAS ANNUAL REPORT 2004

Utility gridElectricity

services that meet customer needs and provide
appealing lifestyle options.
In 2001, Tokyo Gas launched a new type of gas
cooktop. The ease of cleaning and attractive designof this appliance have made it a major success,and it is expected to account for over 40% of gas
cooktops sold by Tokyo Gas in 2004. The Company ismarketing the new cooktop on the basis of its excellent features to counter competition from induction
heating (IH) cooking appliances.
Another popular product of Tokyo Gas is high-efficiency water heaters. As a result of aggressive advertising campaigns, consumers have recognized the energy efficiency, environmental qualities and other appealing
features of this range of water heaters, and sales havefar exceeded initial projections. Since the second halfof the 1990s, the Company has also actively marketed
floor heating, establishing it as the de facto standard.
Today floor heating is installed as standard in about
80%* of new condominiums.
Many other products and services are helping toenhance the added value provided by Tokyo Gas from theperspective of consumers. Examples include a range ofbilling options for gas floor heating and a remote operation service for gas equipment to control bath or floor
heating from outside the home using mobile telephones
or computers. A home security service is provided incollaboration with Sohgo Security Services Co., Ltd., aleading security firm. Tokyo Gas also offers insurance
for household effects, which was jointly developed withSpace heating

City gas
Hot water

Sompo Japan Insurance Inc.
There is growing interest in residential fuel cells as
economical and environment-friendly energy systems. Tokyo Gas sees the emergence of this market as amajor business opportunity and has been developing
technology to improve durability and reduce costs with aview to a market launch in the fourth quarter of fiscal
2004. In April 2004, it established a project group within
its sales organization to specifically focus on these systems and develop a marketing structure.
* About 80% of all condominiums developed by the private sector in
the Tokyo Gas service area have floor-heating systems.

TOKYO GAS ANNUAL REPORT 2004

[3]

FINANCIAL HIGHLIGHTSS E G M E N T I N F O R M AT I O NTokyo Gas Co., Ltd. and Consolidated Subsidiaries

GAS SALES
Thousands of U.S. dollars except per shareamounts

Millions of yen
except per share amounts

For the Years ended March 31

2003

2002

2004

¥1,151,825
152,287
44,787
84,241¥1,127,634
123,294
59,201
88,240¥1,097,589
110,608
51,912
92,178$10,866,270
1,436,670
422,519794,726

16.44
14.98
221.53
7.00

21.18
19.11
208.65
6.00

18.47
16.66
200.75
6.00

0.16
0.14
2.09
0.07

2004

Net sales
Operating income
Net income
Free cash flow
Amounts per share of common stock (Yen and U.S. dollars):
Net income (Basic)
Net income (Diluted)
Shareholders’ equity
Cash dividends applicable to the year

Share of Total Net Sales

Sales (¥ Billion)

Operating Income (¥ Billion)

71.8%
750.4

789.7

189.4

826.6
160.2
149.2

[ Contents ]Share of Operating Income

’02

’03

’04

’02

’03

’04

85.7%
• Gas sales volume grew 7.1% to 11,218 million m3.
• Though residential demand declined, there was growth in sales to the commercial and industrial
sectors, as well as wholesaling to other gas companies.

At Year-end (March 31)¥1,666,828
545,844598,453

Total assets
Long-term debt due after one year
Total shareholders’ equity¥1,676,064
598,322579,706¥1,702,713
680,887
564,078$15,724,793
5,149,477
5,645,786[1]

NEW WAYS TO GROW,[2]• Sales to the industrial sector surged 15.7% year on year, reflecting a sharp increase in the use ofgas for power generation.

ACTIVELY AND PROACTIVELY• Demand expansion mainly for use in power generation boosted sales 4.7% to ¥826.6 billion.
Operating income was 18.2% higher at ¥189.4 billion.

FINANCIAL HIGHLIGHTS[5]

SEGMENT INFORMATION[6]TO OUR SHAREHOLDERS[7]

AN INTERVIEW WITH

[8]

GAS APPLIANCE SALES

Ratios
13.2%
3.9%
7.6%
2.7%
35.9%

Operating income to net sales
Net income to net sales
ROE
ROA
Equity ratio

10.9%
5.3%
10.4%
3.5%
34.6%

10.1%
4.7%
9.3%
3.0%
33.1%

11.5%
3.6%

• Sales of products developed to compete withelectrical appliances increased, but segment
sales declined 6.4% to ¥132.3 billion, due tooverall declines of sales volumes and lower
selling prices, brought by intense competition.
• Operating income rose 0.8% to ¥7.9 billion.

Sales (¥ Billion)
148.3

Notes: 1. U.S. dollar amounts have been translated from yen, for convenience only, at the rate of ¥106=U.S.$1, the approximate Tokyo foreign exchange market rate as ofMarch 31, 2004.
2. Free cash flow = net income + depreciation* – capital expenditures***including amortization of long-term prepayments**purchases of tangible fixed assets + purchases of intangible fixed assets + long-term prepayments (accounting basis)
3. ROE = net income/shareholders’ equity (average of positions at start and end of fiscal year)
4. ROA = net income/total assets (average of positions at start and end of fiscal year)

Net Sales (¥ Billion)

RELATED CONSTRUCTION
5.6%
2.0%

ROE/ROA (%)

Operating Income/Ratio to Net Sales

141.2

132.3

Operating Income (¥ Billion)
7.2

7.8

7.9

THE PRESIDENTACTIONS FOR
’02

’03

’04

Sales (¥ Billion)
67.6

67.0

’02

’03

’04

Operating Income (¥ Billion)

64.9

4.2

4.5

3.7

1,200

(¥ Billion)

(%)

200

15

• Sales were 3.1% lower at ¥64.9 billion. The
decline resulted mainly from a fall in the number of contracts.
• Operating income increased 6.7% to ¥4.5 billion.

1,000

REAL ESTATE RENTAL BUSINESS
1.2%
3.6%

10
150

ROE

800

8

100

600

12

400

6

OTHERS

4
ROA

Resources
’03

’04

’02

’03

’04

0

0

’01

’02

’03

’04

9

’01

’02

’03

’04

0

• Operating income was 17.1% higher at ¥11.3 billion.
’02

’03

’04
All graph data for years ended March 31

TOKYO GAS ANNUAL REPORT 2004

• Energy service business expanded steadily.

2’01

Sales (¥ Billion)
15.7

14.9

 Driving Future Growth through R&D

Operating Income (¥ Billion)
7.6

14.2

7.9

BUILT-IN SUSTAINABILITY[ 20 ]

 Commitment to Good Corporate

Citizenship Corporate Governance and Compliance
’02

’03

’04

’02

’03

’04

(District heating/cooling, energy service,general engineering, LPG sales, etc.)• Sales showed a 0.7% year-on-year decline to¥113.9 billion. Reasons included a fall in the number of large-scale general engineering orders andwithdrawal from the coke business.

50
200

9.9%
5.1%

by Deregulation
Customer Services

6.1• Sales were 5.3% lower at ¥14.1 billion becauseof downward pressure on rents due to conditions in the real estate market.
• Operating income reached ¥7.9 billion, an
increase of 3.4%.

 Overcoming Competition Triggered

 Enhancing Procurement of Gas’02

12[ 14 ]FURTHER GROWTH

 Entering Related Fields to Extend(¥ Billion/%)[5]

UNRIVALED ADVANTAGESSales (¥ Billion)

Operating Income (¥ Billion)

115.6

10.8

114.7

113.9

11.3

 Management Organization

FINANCIAL SECTION[ 26 ]CONSOLIDATED SUBSIDIARIES[ 52 ]AND EQUITY-METHOD AFFILIATE

9.6

INVESTOR INFORMATION
’02

’03

’04

’02

’03

[ 53 ]’04

Note: Segment sales are sales to outside customers, while operating income is the sum of sales to outside
customers and intra-group transactions minus the operating expenses of outside and inside transactions.
TOKYO GAS ANNUAL REPORT 2004

[6]

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 Drive
to Transform Ourselves
for Future Growth

clarifies future directions and strategies for the Tokyo Gas Group by thoroughly taking into
account 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 of

NORIO 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 under
our 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 the

A Throughout the past year, I was

impairment 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 that

Because 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 the

we 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. I

factors, 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 System

Strengthening
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

105

775
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 we

Q

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, we

products 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 in

expansion, 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 which

ence, 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 also

features, 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 ]

OVERCOMING COMPETITION TRIGGERED BY DEREGULATIONTokyo Gas is accurately identifying the risks and opportunities resulting from liberalizationand strengthening both its offensive and defensive positions.

Conventional Competition

Strategies• Gas rate strategies based on effective utilization of the ¥180 billion
allocated for rate reductions under Frontier 2007
• Development of energy service businesses based on environmental advantages of natural gas and energy efficiency andcost savings made possible by cogeneration• Expansion into electric power business with competitive electric power prices made possible by the strengths of the Tokyo
Gas Group

Utilizing a trusted network with more than 9.4 million customers

Gas VS. Electricity

Competition with otherenergy forms+

Tokyo Gas has always faced competition from other energy industries, including electricity. Competition in thearea of air conditioning and cogeneration systems for office buildings and other facilities has been particularly
intense since Tokyo Electric Power reduced its rates in 2002. Fierce competition is expected to continue, as Tokyo
Electric Power has already announced further cuts to take effect from October 2004. This competition has also
intensified in the residential market, with electric power companies promoting an all-electric lifestyle.
The strategy adopted by Tokyo Gas for this challenging environment is based on effective utilization of the¥180 million allocated under Frontier 2007 to offer attractive billing options that match the needs of customers.
The competitive advantage of Tokyo Gas is close ties with more than 9.4 million customers based on its brandreputation. Tokyo Gas is determined to protect and enhance this advantage by continuing to provide customers
with ideas for business efficiency and more comfortable lifestyles based on the use of natural gas with highadded-value products and services.

Offering energy solutions based on advanced technology

Gas VS. Gas

1 million m3 or more

500,000 m3 or more

100,000 m3 or more

Annual usage

Tokyo Gas

34%

Through 2003
Demand capacity

Electricity
Industry

30%

42%

2004

40%

50%

2005

2007

Study of full liberalization

New Competition Resulting from Liberalization

Liberalization Schedule

New market participants

Seizing business opportunities created by liberalization

63%

Electric power

50 kW or more

Electric power

VS.

Major users[ 15 ]

2,000 kW or more

500 kW or more

Large-scale factories andcommercial complexes

Medium-sized factories/hotels

TOKYO GAS ANNUAL REPORT 2004

Small-scale factories/hospitals

In April 2004, the scope of liberalization was expanded to include retail sales of gas to customers using 500,000
m3 or more annually. This means that approximately 40% of the total volume of gas sold is liberalized. Thus, competitors, including electric power companies and oil companies, are intensifying their gas marketing activities.
Tokyo Gas is responding to this gas-gas competition by refining and enhancing the unique strengths that will continue to make the Company attractive enough to be selected by customers.
The greatest strength of Tokyo Gas is its ability to apply advanced technology and engineering expertise to thedevelopment of solutions that precisely match customers’ needs. Tokyo Gas aims to maximize this advantage andremain attractive to customers through its energy services, which provide high added-value energy utilization
solutions through the use of natural gas cogeneration technology.
Tokyo Gas recognizes the risk of eroding sales as a result of competition and already reacted in Frontier 2007
by assuming that competition will reduce revenues by approximately ¥30 billion, or by a sales volume of 500 million m3, as of 2007.

Market participation
by Tokyo Gas

In April 2004, regulatory reform of the retail electricity market expanded the scope of liberalization to include customers with demand capacity of 500 kW, reaching about 40% of electricity sales in volume terms. Tokyo Gas isdetermined to exploit this opportunity to the full by becoming active in the electric power business. The most critical requirement for success in this market is the ability to supply electricity at highly competitive rates. Tokyo Gas
aims to expand its electric power business by forming alliances and using its competitive advantages. These
include the use of existing infrastructure and expertise of its own or partner companies, locating plants close to
demand areas, and utilizing the most advanced generation facilities to combine high efficiency and low cost.
A key challenge for newcomers is to find buyers for the electricity that they generate. However, Tokyo Gas isdeveloping a range of options, including sales to the power retailer Ennet, which was jointly established by Tokyo
Gas, the NTT Group and Osaka Gas, wholesaling to Tokyo Electric Power through an independent power producer(IPP), and direct sales to customers. It will also consider trading through the Japan Electric Power Exchange.

TOKYO GAS ANNUAL REPORT 2004

[ 16 ]

ENTERING RELATED FIELDS TO EXTEND CUSTOMER SERVICES

ENHANCING PROCUREMENT OF GAS RESOURCES

Deregulation has triggered the expansion of energy-related business opportunities. Tokyo

Tokyo Gas strives to improve its cost competitiveness through the establishment of a naturalGas is steadily creating new business in this environment.

gas supply chain linking upstream development to downstream markets.

Energy Services

Strategy■ Dynamically Expanding its Presence in the Growing Energy Service Market• Tokyo Gas is using bargaining power arising from prospects of further growth in gas sales volumes to negotiate morecompetitive contract terms regarding pricing and flexibility.
• The Company also aims to maximize the benefits of its LNG value chain by moving into upstream areas, such as gas
field development and transportation. Among its goals is a 5% or more reduction in gas resource costs per cubic meterfrom fiscal 2002 levels under Frontier 2007. (based on 2002 currency exchange rates and crude oil prices)

Customer site
Energy-using facilities

Operation management
Energy audit

Heat

Electric power

City gas Gas cogeneration facility,
installed and owned by

Energy service providers construct and retain ownership of the gas cogeneration systems and otherenergy facilities they employ on customer sites for the provision of one-stop energy solutions. Potential
customers are increasingly attracted to the benefits of energy services, which include energy cost savings, increased environmental responsibility and virtually no initial outlay. The profitability of this business is also improving, as the systems themselves are made more efficient—a trend that promises abright future for this emerging new business.
In 2002, Tokyo Gas established a new subsidiary, ENERGY ADVANCE Co., Ltd. This company is deploying a highly efficient marketing strategy by focusing on customers with substantial heating needs and astrong awareness of environmental issues. It is using the advanced engineering capabilities of the Tokyo
Gas Group and its ability to procure LNG reliably and economically to maximize the added-value potential ofgas cogeneration. Its main target market is the Kanto region, where there is significant untapped demand.
ENERGY ADVANCE is the leading company in the cogeneration field. By the end of fiscal 2003, thecompany had signed 35 contracts, totaling approximately 60 MW. It has also been selected for 18 subsidized schemes implemented by the New Energy and Industrial Technology Development Organization andother organizations. These schemes involve a total capacity of approximately 50 MW.

Electric Power Business■ Marking Full-scale Entry into Electric Power Generation

Tokyo Bay
Kawasaki Natural Gas
Power Generation
Ohgishima PowerTG
Yokosuka PowerTokyo Gas
Bay Power
Ohgishima
LNG Terminal Sodegaura LNG Terminal
NegishiLNG Terminal
Operating/
Under construction
PlannedThe Tokyo Gas Group’s full-scale involvement in the power business began in October 2003 with thecommencement of generation at a 100 MW plant operated by Tokyo Gas Bay Power Co., Ltd. In August
2003, Tokyo Gas acquired an IPP from Tomen Corporation and renamed it Tokyo Gas Yokosuka Power
Co., Ltd. This power plant will start operation from 2006 with a generation capacity of 240 MW. Tokyo
Gas is also exploring the establishment of an 800 MW plant in collaboration with Nippon Oil Corporation,
and a 1.2 GW plant in collaboration with the Shell Group. Eventually, Tokyo Gas plans to increase its total
generation capacity to 3 GW in line with the electric supply and demand and the evolution of deregulation in the electric power industry.

What’s New■ Adding Upstream Development Capability with Darwin LNG Project
Dili East Timor

Timor Sea

BAYU-UNDAN
FIELDGas Pipeline
DarwinAustralia

The Darwin LNG Project is in progress in the Joint Petroleum Development Area, shared by Australia andEast Timor. In June 2003, the two governments gave their approval for the project, in which Tokyo Gas
and Tokyo Electric Power Co. (TEPCO) have decided to participate. As a result of this approval,
Tokyo Gas is now involved in upstream development activities. In addition to their role in LNG
production through this project, Tokyo Gas and TEPCO will purchase a total production of 3 million tons of LNG annually over a 17-year period starting in 2006. This participation gives Tokyo
Gas entry to the entire LNG value chain, allowing it to reduce gas resource costs and ensuring
reliable procurement of gas resources.

■ Reducing Freight Costs through Use of Wholly Owned LNG Carrier Fleet
In September 2003, the Energy Frontier commenced operations as the Tokyo Gas Group’s first wholly
owned LNG carrier. During fiscal 2003, ten voyages were carried out to supply Tokyo Gas with LNG,
including spot trade, and to provide transportation for other parties. A second vessel is under construction
and due to be launched in March 2005. Tokyo Gas aims to reduce its freight costs by using its own vessels to expand its FOB transactions. The vessels will also be used for spot purchasing and the provision oftransportation services for other parties. In addition to reductions in gas resource procurement costs, theuse of company vessels will also allow Tokyo Gas to secure greater flexibility in contract terms.

Russia■ Securing Geographical Advantage with LNG Procurement from Sakhalin II
Home Security Business Launched
For decades Tokyo Gas has provided energy solutions to meet a wide range of energy needs. The resulting trust that has grown between Tokyo Gas and its customers is now the basis for the development andcommercial introduction of new services. One of these new products is a home-security service provided
in partnership with Sohgo Security Services Co., Ltd., combining Tokyo Gas safety technology with
Sohgo’s security technology. The service provides around-the-clock protection 365 days a year with features that include intruder detection, emergency notification, checking and remedial action when gas
taps are left on or doors left unlocked, and emergency action in response to fires and gas leaks. The newservice was introduced on a trial basis in April 2004 and will become fully available in autumn or later.

Nysh
DeKastri

PILTUN-ASTOKHSKOYE(Oil field with some associated gas)
LUNSKOYE

Nogliki(Natural gas field)

Sakhalin Island
Pipeline

In May 2003, Tokyo Gas reached basic agreement concerning the sales and purchase of up to
1.1 million tons of LNG annually from the Sakhalin II project over a 24-year period starting in
2007. In addition to benefits relating to pricing and contract-term flexibility, this project offers ageographical advantage, since the close proximity of Sakhalin to Japan will reduce transportation costs. In addition, Tokyo Gas reduces procurement risk by diversifying its gas resources.

Yuzhno-Sakhalinsk

PRIGORODNOYE(LNG/oil terminal)

Japan
Tokyo

[ 17 ]TOKYO GAS ANNUAL REPORT 2004

TOKYO GAS ANNUAL REPORT 2004

[ 18 ]

B U I LT- I N S U S TA I N A B I L I T Y

DRIVING FUTURE GROWTH THROUGH RESEARCH AND DEVELOPMENT
To help drive its growth, the Tokyo Gas Group is pursuing original research and development leading
to the creation of innovative products and services as well as to the maintenance and enhancement ofbasic technologies. These efforts will serve as building blocks for new business models.

[

What’s New■ Launch of Environment-friendly Residential Fuel Cells Planned for Fiscal 2004
Tokyo Gas is collaborating with system manufacturers on the development of a residential fuel cell cogeneration system. The introduction ofthis next-generation product is expected to lead directly to increased useof gas. The system that Tokyo Gas is developing is based on solid polymer electrolyte fuel cell (PEFC) technology and will be fueled by hydrogen extracted from city gas. It will have an output capacity of 1 kW. The
specifications were basically finalized in 2003 after trials in typicalhouseholds. The product is now in the final stages of development, andthe priorities are to improve durability and reduce costs ahead of thetarget launch date in the fourth quarter of fiscal 2004.

Pursuing
Our Responsibilities
to All Stakeholders]

 Commitment to Good Corporate Citizenship■ A New and More Efficient Method of Pipeline Maintenance
The period over which existing gas pipelines can be used safely has important implications
for capital investment planning and tariffs. Tokyo Gas has developed and started using“Double-lining Technology” that allows maintenance to be carried out without excavation.
Existing pipes are strengthened through the application of two resin coatings applied with aspray gun inserted into the pipes. There are major cost savings, since this method saves
time, compared with the conventional method.

Winch

Spray system

BranchOther pipe

 Corporate Governance and Compliance Management Organization

Spray gun

Gray cast iron pipe

■ “TES Remote PLUS”—Information Technology the Key to Enhanced Convenience and Safety
The new “TES Remote PLUS” service developed by Tokyo Gas allows customers to control their TES gas water heater/heating systems remotely using mobile telephony. The
new system, which has been available since April 2004 for newly built condominiums,
also supports remote operation of other residential equipment with home automation
capabilities, including door locks and electric air conditioners. TES system is becoming
increasingly popular, and TES floor heating is now installed many newly built condominiums in the Tokyo metropolitan area. Tokyo Gas developed the new service to provide
enhanced comfort, convenience, safety and peace of mind. The operation is also linked
to Tokyo Gas’ monitoring station, which can provide warnings or shut off the gas supply
remotely if necessary, such as when a customer leaves home and forgets to turn off a
gas appliance. The service also includes enhanced maintenance support by detecting
and reporting faults in appliances.

[ 19 ]TOKYO GAS ANNUAL REPORT 2004

TOKYO GAS ANNUAL REPORT 2004

[ 20 ]

COMMITMENT TO GOOD CORPORATE CITIZENSHIPThe Tokyo Gas Group is making an active contribution to more pleasant lifestyles and to the development ofenvironment-friendly urban communities. The Group aims to achieve continuing growth and success inpartnership with society, as a corporate group that earns and maintains the trust of all stakeholders
through all of its business activities.

Tokyo Gas and the Environment

0

Oil

Coal

70

100

NOx

Oil

Coal

20-40 70100

■ Issuing environmental reports■ Educational outreach centers

Natural Gas
Oil

Coal

80

100

Source: IEA Natural Gas Prospects (1986),

Tokyo Gas and Society

Gas is an essential commodity for day-to-day
living, and the most important responsibility forTokyo Gas as a supplier of that commodity is toensure reliability and safety. To fulfill that
responsibility, Tokyo Gas is constantly working
to secure reliable access to gas resources, andto maintain a full array of safety systems covering the process, delivery and use of naturalgas. In addition to these efforts to maintainuser confidence at all times, Tokyo Gas also
has active programs of social contribution thatbuild and maintain relationships of trust with
communities and customers.

Earthquake Precautions
Tokyo Gas has developed the world’s mostadvanced real-time disaster prevention
system. Known as SUPREME, the system
works in conjunction with automatic shutoff and remote shut-off systems to provide
24-hour security. This technology can significantly mitigate the risk of secondary
damage after earthquakes.

A neighborhood bus
Thirteen buses powered by natural
gas were introduced in Fuchu
City,Tokyo in fiscal 2003.

TOKYO GAS ANNUAL REPORT 2004

• Energy & Earth Emporium• Gas Science Center• Gas Museum■ Educational programs to raise awareness of the environment throughsessions and lectures■ Support for introduction of environmental management systems at
Group companies■ Green purchasing■ Human rights education programs■ Collaborating with local communities and organizations in
exhibitions and events■ Corporate compliance training programs■ Programs for supporting child rearing(Parental leave, flexible work shifts, etc.)■ Supporting education on energy and the environment■ Programs for supporting the care of dependents(Long-term leave, etc.)
School VisitsTokyo Gas presents educational programs about energy and the environment to elementary and junior highschools.
[About 90,000 students have attended as of March 2004.]©TOKYO GAS/U-COM■ Programs for supporting volunteer activities(holidays/leave for volunteer work, etc.)

Number of employees taking
parental leave(People)60

40“Gas Maru,” Tokyo Gas’ characterfor communication activities
200(FY) ’93 ’94 ’95 ’96 ’97 ’98 ’99 ’00 ’01 ’02 ’03

Social responsibility investment (SRI) is growing in importance. Under SRI,
investors and financial institutions make investment decisions based on not
only a company’s business results but also its social and environmental performance. Tokyo Gas is included in several SRI indexes/funds such as the Dow
Jones Sustainability Index.

[ 21 ]■ Pursuing initiatives aimed at acquiring ISO 14001 certification groupwideof March 2004]

CO2

60

■ Promoting an eco-lifestyle■ Promoting the use of natural gas vehicles (NGVs) as apractical means of helping to prevent air pollution.
[A total of 8,368 NGVs are in regular use in Tokyo Gas’ service area as

Natural Gas

Natural Gas Prospects and Policies (1991)

Maintaining Public Confidence
in the Tokyo Gas Group■ Encouraging wider use of natural gas cogeneration andresearch and development of highly efficient gas appliances to help prevent global warming

TOKYO GAS GROUP

Compared with other fossil fuels, natural gas isa very clean form of energy with a low environmental impact. As a corporate group that has
made this clean energy the core of its activities,
the Tokyo Gas Group is determined to be aleader in the field of environmental management and is strongly committed to environmental protection through various aspects of its
business. It is working to minimize environmental impact by using resources effectively
and efficiently, by strengthening its environmental partnership with local communities, andby developing and rolling out innovative technologies that contribute to achieving higher
standards of environmental protection.

SOx
Natural Gas

COMMUNITY

Clean Natural Gas as the Coreof its BusinessEco-cooking ®
The Eco-cooking program is designed to raise environmental
awareness by offering food ideas from the perspective of an
eco-lifestyle. The aim is to promote the concept of environment-friendly cooking process, including shopping and cleaning. The approach taken is to run Eco-cooking sessions, publish brochures and set up dedicated websites. Tokyo Gas
plans to expand these activities with the cooperation of government agencies, schools and others.
[About 40,000 participants have attended as of March 2004.]

SRI indexes that include Tokyo Gas• Dow Jones Sustainability Index (DJSI)• FTSE4Good• Ethibel Sustainability Index• MS-SRITOKYO GAS ANNUAL REPORT 2004

[ 22 ]

CORPORATE GOVERNANCE AND COMPLIANCE
The value of the Tokyo Gas brand is the result of decades of effort to build a reputation for reliability,
safety and trust. The Tokyo Gas Group is working to protect and enhance that reputation by reaching
higher and strengthening corporate governance and compliance.

Corporate governance has been enhanced through the introduction, in June 2002, of a new board

code of conduct will be promoted throughout the Group as partstructure. The number of directors was substantially reduced and the term of service shortened.

of efforts to raise awareness of compliance.

Outside directors were appointed to the board to provide closer supervision of management. Tokyo

Tokyo Gas is developing and introducing its own monitoring

Gas also became the first company in the Japanese gas industry to introduce a corporate executive

mechanisms to scrutinize the observance of compliance require-

officer system to speed up decision-making and improve operational efficiency.

ments on a continuing basis. Basic policies are to be determined

These structural changes will now form the basis for continuing efforts to revitalize the board ofTokyo Gas Group Compliance Management System

Top management
Management Ethics Committeeby the Management Ethics Committee, and their implementation

directors and ensure fair disclosure of information, while increasing management transparency.

Compliance Department

will be monitored by the Audit and Operational Enhancement

With regard to risk management, Tokyo Gas established a total management system for han-Department. Problems identified through this process will thendling risks and formulated basic guidelines for groupwide implementation.

Compliance committees
in each division

be addressed in forthcoming policies. Tokyo Gas has long enjoyed

In keeping with its important role in society as a public utility, the Tokyo Gas Group alreadythe confidence of customers and aims to maintain that reputation

makes all possible efforts to ensure compliance with legal and social requirements. Tokyo Gas

by applying this cyclical system throughout the Tokyo Gas Group.
Tokyo Gas Group employees

revised its code of conduct to ensure compliance at the individual employee level of the Group, by
utilizing the new compliance promotion system established in the previous fiscal year. The new
Audit

Board of Directors

YUKIO SATOYURI KONNOYUZABURO MOGIHIDEHARU UEHARAKUNIO ANZAINORIO ICHINO

MITSUNORI TORIHARASHIGERO KUSANO

KOUYA KOBAYASHITADAAKI MAEDA

TAKASHI KUNITOMITSUYOSHI OKAMOTO

Outside Director

Outside Director

Outside Director

Vice Chairman

ChairmanPresident

Executive Vice President

Executive Vice President

Executive Vice President

Senior Executive Officer

Senior Executive Officer

Senior Executive Officer

Chief Executive,Corporate
Communication Div.;
Compliance Dept.

Chief Executive, Energy
Sales and Service Div.;
General Manager, Volume
Sales Dept.

Chief Executive,
Energy Production Div.

Chief Executive, Energy
Resources Div.; Internal
Audit Dept.

Chief Executive,
Residential Sales Div.

Chief Executive,
Strategic Planning Div.

[ 23 ]TOKYO GAS ANNUAL REPORT 2004

TOKYO GAS ANNUAL REPORT 2004

[ 24 ]

MANAGEMENT STRUCTURE
Top Management

Strategic Business Units
Residential Sales Div.

Customer Relationship Dept.
Residential Sales Planning Dept.
Customer Service Management Dept.
● Area Development Dept.
● Residential Sales Promotion Dept.
● Residential Market Development Dept.
● Remodeling Sales Dept.
● Residential Facility Sales Dept.
● 36 group companies●●

Corporate●

Strategic Planning Div.

Corporate Planning Dept.
Finance & Managerial
Accounting Dept.
● Personnel Dept.
● Business Development Dept.
● Affiliated Companies Dept.
● 19 group companies●●

Corporate
Communications Div.

11 offices
Environmental Affairs Dept.
Corporate Communications Dept.
● General Administration Dept.
● Secretary Dept.
● 1 group company●

Energy Sales andService Div.

●

Wide Area Marketing Div.

●

Pipeline Network Div.

●●●

Shared Service / R&D
R&D Div.

R&D Planning Dept.
Research Dept.
● Technology Development Dept.
●●

Corporate Service Div.

Service Integration andPromotion Dept.
● Personnel Support Dept.
● Accounting Dept.
● Purchasing Dept.
● Information andCommunication Systems Dept.
● Real Estate Management Dept.
● 6 group companies●

Compliance Dept.

Energy Sales and Service Planning Dept.
Air-conditioning and Commercial Customer
Development and Service Dept.
● Industrial Gas Sales Dept.
● Energy Solution Business Dept.
● Natural Gas Vehicle Dept.
● Volume Sales Dept.
● 4 group companies[ Contents ]●Wide Area Development Planning Dept.
● Wholesale and Regional Service Dept.
● 7 service branches● 12 group companies
Strategy Planning Dept.
● Pipeline Dept.
● 3 pipeline regional offices● Emergency Management Dept.
● Supply Control andDisaster Management Dept.
● 2 group companies

Energy Production Div.

●

Energy Resources Div.

●

Energy Production Dept.
● 3 LNG terminals● 1 group company●

Gas Resources Dept.
3 group companies

Internal Audit Dept.

Management’s Discussion
and Analysis of Operation
and Financial Position[ 27 ]

Frequently Asked Questions[ 33 ]

11-year Summary[ 35 ]

Consolidated Balance Sheets[ 37 ]

Consolidated Statements ofIncome[ 39 ]

Consolidated Statements ofShareholders’ Equity[ 40 ]

Consolidated Statements ofCash Flows[ 41 ]

Notes to Consolidated
Financial Statements[ 42 ]FINANCIAL SECTION(As of April 1, 2004)

Auditors●

Corporate Auditors’ Office

Executive Officers and Corporate Auditors (As of June 29, 2004)
Executive Officers

Executive Officers
President
Executive Vice Presidents

Senior Executive Officers

Tokio Imazawa
Coordinator, Energy Sales and Service Div.

Norio Ichino

Seiichi Nakanishi

Mitsunori Torihara

General Manager, Residential Sales Promotion Dept.

Chief Executive, Corporate Communication Div.; Compliance Dept.

Taiichi Okuzawa

Shigero Kusano

General Manager, Kanagawa Branch

Chief Executive, Energy Sales and Service Div.; General Manager,
Volume Sales Dept.

Norikazu Hoshino

Kouya Kobayashi

Tadashi Kaburagi

Chief Executive, Energy Production Div.

General Manager, Industrial Gas Sales Dept.

Masahiro Ishiguro

Toshiyuki Kanisawa

Chief Executive, Corporate Service Div.

General Manager, Corporate Planning Dept.

General Manager, Customer Relationship Dept.

Kunihiro Mori

Tadaaki Maeda

General Manager, Energy Production Dept.

Chief Executive, Energy Resources Div.; Internal Audit Dept.

Yasuhiro Hiruma

Takashi Kunitomi

General Manager, Corporate Communications Dept.

Chief Executive, Residential Sales Div.

Tsutomu Oya

Tsuyoshi Okamoto

General Manager, Air-conditioning and Commercial Customer Development andService Dept.

Chief Executive, Strategic Planning Div.

Akira Habu

Mikio Itazawa

Managing Director, The Japan Gas Association

General Manager, Pipeline Dept.

Toshio Tezuka

Michiaki Hirose

Chief Executive, Wide Area Marketing Div.

General Manager, The Japan Gas Association

Masaki Sugiyama
Chief Executive, Pipeline Network Div.

Shigeru Muraki
Chief Executive, R&D Div.

Corporate Auditors
Standing Corporate Auditors Soichiro Akimoto

Hiroshi Hirai
Corporate Auditors[ 25 ]TOKYO GAS ANNUAL REPORT 2004

Kazuo Nemoto
Masayoshi Hanabusa
TOKYO GAS ANNUAL REPORT 2004

[ 26 ]

MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATION AND FINANCIAL POSITION

Analysis of Income

SUMMARY

Robust Growth in Gas Sales Reflected in
Sustained Expansion of Both Net Sales andOperating Income● Consolidated sales reached an all-time high, reflecting sustained growth in gas sales.
● This sales growth has been paralleled by a steady reduction in operating expenses, resulting in a 23.5% increase in operating income.
● Net income was lower because of decisions to take a lump-sum write-off of actuarial differences in retirement benefits, and to bring forward the application of impairment accounting to fixed assets. These measures will help to reduce the future cost burden.

The result was operating income of ¥189.4 billion representing an 18.2% year-on-year increase.

■ Gas Appliance Sales● Without these extraordinary items, free cash flow * would have been substantially above the initial target. For this reason, the annual dividend has been increased by one yen per share.

Despite reduced sales in some segments, such as gas appliance

Strong Sales of Products Designed to Compete with Electrical Appliances

sales and related construction, total sales rose ¥24.1 billion, orTokyo Gas recorded buoyant sales of products developed to* Tokyo Gas uses free cash flow as a key management indicator: Free cash flow = net income + depreciation* - capital expenditures**2.1%, to a new record of ¥1,151.8 billion. The rise was attributa-

compete with electrical appliances. However, sales of this seg-ble to healthy 4.9% growth in gas sales.

ment declined due to static total sales volumes and reduced sell-*including amortization of long-term prepayments**purchases of tangible fixed assets + purchases of intangible fixed assets + long-term prepayments (accounting basis)

Although feedstock costs increased in step with growth in theing prices, amid strong competition. Despite the resulting

volume of gas sales, operating expenses were minimized throughdecline in segment sales, lower procurement prices and success-further measures to improve operating efficiency. This wasful efforts to reduce fixed costs and other operating expenses■ Industrial Sector

reflected in operating income, which rose ¥29.0 billion, or 23.5%,

brought higher operating income.

In addition to an increase in demand for use in existing facilities,to ¥152.3 billion. Operating income increased in all segments.

Trends in Core Profit Source of Gas Sales Volume
Note: All graph data for year ended March 31

Steady Increase in the Volume of Sales,
Conspicuous Growth in Industrial Gas Sales

especially cogeneration systems, there was also a rise in demand

Segment sales fell 6.4%, or ¥9.0 billion, to ¥132.3 billion,
while operating expenses were reduced 6.5%, or ¥8.8 billion, toBusiness results by segment (¥ Million)■ Residential Sector

for gas used specifically for power generation. These factors

Temperatures at the start of the fiscal year and during thebrought substantial sales growth of 569 million m , or 15.7%,

Years ended March 31

2002

2003

2004

summer were lower than in the previous year. This was reflect-over the previous year’s level to 4,201 million m3. There was a

Gas Sales

750,439

789,688826,567

ed in increased demand for hot water in the first half of theparticularly steep increase in demand from electric power com-

Gas Appliance Sales

148,271

141,225

132,254

year. Temperatures in the winter were higher than in the year

panies and independent power producers (IPPs) for gas used

Related Construction

67,63367,04564,944■ Related Construction

before, with the result that demand for hot water and heating

solely for power generation. Sales in this area rose 35.3%, or 434

Real Estate Rental Business

15,685

14,944

14,151

Cost Savings Allow Income Growth Despite Slow Sales

remained static. Overall, sales declined 10 million m3, or 0.3%,

million m3. This growth resulted in part from increased utiliza-

Other115,561

114,732

113,909

There were declines in the number of new installations and safe-

at 3,292 million m . There was growth of 55 million m broughttion of natural gas in thermal generation facilities when nuclear

Operating income

on by an increase in the number of customers, and a decline of

power plant operations were suspended. For other uses in theYears ended March 31

2002

2003

2004

149,210160,224

189,366

Gas Appliance Sales

7,243

7,842

7,904

Related Construction

3,650

4,175

4,456

Real Estate Rental Business

6,091

7,623

7,883

Other

10,7999,626

11,2703

3

3

52 million m resulting from temperature-related factors.

industrial sector (mainly for cogeneration systems), there was a

Declines due to other factors, such as reduced sales per house-

133 million m3, or 5.6%, increase, amounting to 2,503 million m3.

3hold, amounted to 13 million m3.

■ Wholesaling to Other Gas Companies■ Commercial Sector

Sales expanded 9.1%, or 86 million m , to 1,030 million m with

Demand for air conditioning stagnated because of low summer

increases in the volume taken by the gas companies to which

temperatures and mild winter temperatures. However, total

gas is supplied.

3

million m . Contributing factors included steady flow of newly
commissioned facilities in new properties, including urban

Total sales amounted to 11,218 million m , an increase of 747
3

million m3, or 7.1%, over the previous year’s level.

redevelopment schemes.
Gas sales volume by sector

Gas Sales

Gas sales volume for power generation

er at ¥7.9 billion. This segment’s contribution to total sales
declined marginally from 12.5% to 11.5%.

ty upgrades. Despite the slowdown, operating income was higher

3

sales in this sector increased 4.0%, or 103 million m3, to 2,695
3¥126.0 billion. Operating income was ¥0.06 billion, or 0.8%, high-Sales to outside customers

Note: Segment sales are sales to outside customers, while operating income is thesum of sales to outside customers and intra-group transactions minus theoperating expenses of outside and inside transactions.

thanks to reductions in fixed costs and other expenses.
At ¥64.9 billion, sales were ¥2.1 billion, or 3.1%, lower thanin the previous year. Operating expenses were reduced 4.2%, or¥2.8 billion, to ¥63.6 billion, with the result that operating
income rose 6.7%, or ¥0.3 billion, to ¥4.5 billion. This segment’s
contribution to total sales was slightly lower at 5.6%, comparedwith 5.9% in the previous year.

■ Gas Sales■ Real Estate Rental Business

Higher Volumes Bring Sustained Growth in Both Sales and Income

Cost Cutting Offsets Reduced Rent Revenue

There was a 7.1% increase in gas sales volumes, led by strong

Segment sales declined, in part because of rent reductions todemand from power generation, in which unit prices are lower.

reflect the state of the real estate market, falling 5.3%, or ¥0.8

The unit price also rose under the “sliding rate” system, whichbillion, to ¥14.1 billion. Despite this, operating income improved

adjusts for fluctuations in gas resource costs. These factors helped

because of lower depreciation and the reduction of selling, gen-

Million m3

Million m3

12,0003,500

to boost sales in this segment by ¥36.9 billion, or 4.7%, to ¥826.6

eral and administrative expenses.

3,000

billion. Nonconsolidated sales increased 4.9%, or ¥38.4 billion.

Operating expenses were reduced 4.0%, or ¥0.2 billion, toRising sales volumes contributed ¥21.8 billion and price adjust-¥27.6 billion, and operating income rose 3.4%, or ¥0.3 billion, to

10,0002,500

ments under the “sliding rate” system added ¥18.0 billion, while¥7.9 billion. This segment’s contribution to total sales declined

2,000

other factors had an adverse effect amounting to ¥1.3 billion. This

from 1.3% in the previous year to 1.2%.

1,500

segment’s contribution to total sales rose from 70.0% to 71.8%.

8,000

6,000

Operating expenses were affected by a rise in gas resource

4,000
1,000

WholesaleIndustrial sector
Commercial sector
Residential sector

2,000

0

’00

[ 27 ]’01’02

TOKYO GAS ANNUAL REPORT 2004

’03

’04

Power generation only
Cogeneration (Industrial sector)
Cogeneration (Commercial sector)

500
0

’00

’01

’02

’03

’04

■ Othercosts in step with volume growth in gas sales. However, meas-

Steady Expansion of Energy Service Businessures to reduce selling, general and administrative expenses

Business areas in this segment include district heating and cool-allowed Tokyo Gas to hold its operating expenses to ¥641.7 bil-ing systems, energy services and LPG sales. Despite positive fac-

lion, an increase of just 1.5% over the previous year’s level.

tors, including sustained growth in energy service operations,TOKYO GAS ANNUAL REPORT 2004

[ 28 ]

Free cash flow

As a consequence, other expenses, net amounted to ¥79.2

segment sales declined 0.7%, or ¥0.8 billion, to ¥113.9 billion.
Reasons for the lower result include a drop in orders for large-

billion, compared with ¥27.4 billion in the previous year. Net

scale general engineering projects, and withdrawal from theincome declined ¥14.4 billion, or 24.3%, below the previous

coke business. This segment accounted for 9.9% of net sales,

year’s level to ¥44.8 billion.

down from 10.2% in the previous year.

Net income and net income per share

80

Increased Sales, Lower Operating Income,and Higher Net Income Projected for the
New Fiscal Year60

Gas sales volumes in the year ending March 31, 2005 are expect-¥ Billion100

ed to increase 2.6% to 11.5 billion m3. Sales to the residential sec-

Segment operating expenses were ¥12.2 billion, or 8.2%,
higher than in the previous year at ¥160.9 billion. Segment oper-¥ Billion

¥

60

30

40

50

25

20

40

20

tor are expected to increase 0.9%, from aggressive marketing offloor-heating systems and products developed to compete withating income increased 17.1%, or ¥1.6 billion, to ¥11.3 billion.

Temporary Decline in Net Income from
Lump-sum Write-off of Actuarial Differencesin Retirement Benefits

electrical appliances. Sales to the commercial sector are to grow
6.9%, driven by stepped-up demand for gas air conditioning.

0
30

15

20

10

10

5

’00

’01

’02

’03

’04

Sales to the industrial sector are estimated to decline 0.4% due tothe leveling of special demand for use in power generation, which

Decision to Increase Annual Dividend

increased dramatically in fiscal 2003. However, wholesale gas
sales are projected to rise 8.3%, reflecting an increase in the vol-Other income totaled ¥17.5 billion, a year-on-year increase of¥1.4 billion. This is mainly attributable to a ¥5.7 billion gain fromthe liquidation of excess allowances for retirement benefits

0

0

’00

’01

’02

’03

Net income
Net income per share’04

resulting from reform of the corporate pension plan, and thereceipt of ¥2.2 billion in proceeds from the sale of fixed assets.
Total other expenses increased ¥53.1 billion to ¥96.7 billion.
The increase is attributable to the write off in this fiscal year of
the entire amount of actuarial differences in retirement benefits,
totaling ¥59.0 billion, taken on the occasion of the reform of thecorporate pension plan. Another factor that increased expenses
was the decision to bring forward the application of impairment
accounting to fixed assets in order to strengthen the financial
structure. There were impairment losses of ¥3.3 billion on certain assets, including a once planned site for branch offices.
On the other hand, there were no environmental conditioning
costs, which were recorded as an extraordinary expenditure item

Although gas sales will increase in volume terms, unit pricesof about ¥480 billion generated over the five-year period from fiscal

are expected to fall under the “sliding rate” system, which
adjusts for fluctuations in gas resource costs. Tokyo Gas is there-

in free cash flow in this term, and if this factor is discounted, freefore projecting a decline of 0.6% in revenues from its gas sales

Following the enforcement of the Defined Benefit Corporate Pension Law, Tokyo
Gas undertook major reforms of its pension plan by switching from a tax-qualified
pension plan to a contract-type corporate pension plan and by introducing a cash
balance plan in fiscal 2003. This resulted in a reduction in the benefit rate, and¥5.7 billion in profit as a gain from reducing the retirement benefit reserve wasrecorded in the accounts as a result.
Further to the reform of the pension plan, the Company decided to change thenumber of years over which the unrecognized actuarial differences are written off
from ten years to one year. The full amount of unrecognized actuarial differencesfrom past years was recorded as a loss totaling ¥59.0 billion in this fiscal year. Thischange allows the status of the retirement benefit obligations to be reflected in the
Company’s financial statements in a timely manner. It also reduces the future burden and strengthens the Company’s financial structure.

cash flow would be substantially higher than the target. On thebusiness. An increase in the scope of consolidation from 18 com-completion of the first year of Frontier 2007, business projections

panies to about 50 in the new fiscal year is expected to lift total

now strongly indicate that the targets for the final year of the plan

net sales to ¥1,197 billion, a year-on-year increase of 3.9%.

will be exceeded. For this reason, it was decided to allocate part of

Expenses will also increase, however, and operating income isthe free cash flow in excess of the targets to dividends, in order toprojected to decline 4.8% to ¥145 billion. In the absence of thepass on the rewards to shareholders. The annual dividend per

extraordinary losses that affected earnings in fiscal 2003, net

share has been increased from ¥6 to ¥7 per share.

income is expected to rise 92.0% to ¥86 billion.

Cash Flows and Financial Position

Free Cash Flow of ¥84.2 Billion

Operating Cash Flows Increased, but Yearend Net Cash Declined because of Bond
Redemptions and the Acquisition ofTreasury Stock

Tokyo Gas has made free cash flow a key management indicator,■ Cash Flows from Operating Activities

which is calculated by adding depreciation* to net income and sub-Income before income taxes and minority interests declined

tracting capital expenditures**. One of the goals set down inbecause of the write-off of reserve obligations for retirement

Frontier 2007 is the achievement of free cash flow averaging ¥97

benefits and the early application of impairment accounting.

billion per annum and totaling ¥480 billion over a five-year period.

However, there was a large inflow of ¥143.1 billion for deprecia-

The result for this term fell short of this target at ¥84.2 billion, ation of fixed assets, including special depreciation of the newly

year-on-year decline of ¥4 billion, or 4.5%. Depreciation increased

completed LNG tank facilities at the Ohgishima LNG Terminal,

4.2% to ¥146.8 billion, while capital expenditures were reduced

as well as the aforementioned write-off of retirement benefit

4.1% to ¥107.4 billion. Though both of these factors had the effectreserve obligations. Subsequently, net cash provided by operat-of increasing free cash flow, net income declined 24.3% to ¥44.8

ing activities increased ¥4.1 billion year on year to ¥217.6 billion.

est-bearing debt.

12

to shareholders as dividends, nearly 17% of the total free cash flow
2003 to fiscal 2007. Transient factors caused a year-on-year decline

were reduced ¥2.6 billion through aggressive repayment of inter-Times

ume taken by gas companies to which gas was supplied.

REFORMS OF THE PENSION PLAN

amounting to ¥5.7 billion in the previous year. Interest expenses

Interest coverage ratio

Frontier 2007 established a basic policy of distributing ¥81 billion

year’s level of ¥110.1 billion. Capital expenditures, which are
the sum of acquisitions of tangible fixed assets and intangible
fixed assets, increased ¥6.0 billion to ¥113.2 billion. Major
investments included gas pipelines.
Capital expenditures and depreciation¥ Billion
200

10

8

6

4

2

0

’00

’01

’02

’03

’04

Interest coverage ratio = (operating income + interest and dividend income) /interest expense[ 29 ]TOKYO GAS ANNUAL REPORT 2004

billion because of measures to improve the Company’s financial

150

100

50

Capital expenditures
Depreciation

0

structure, as described above. The decline in free cash flow result-■ Cash Flows from Investing Activities

ed from this lower net income figure.

Net cash used in investing activities amounted to ¥126.0 bil-*including amortization of long-term prepayments**purchases of tangible fixed assets + purchases of intangible fixed assets + long-term prepayments (accounting basis)

lion, an outflow increase of ¥15.9 billion from the previous

’00

’01

’02

TOKYO GAS
’03
’04 ANNUAL REPORT 2004

[ 30 ]

Capital expenditures represent the amount of payments for fixed assets in the relevant fiscal year.

TOKYO GAS ANNUAL REPORT 2004

[ 30 ]Steady Reduction of Interest-bearing Debt

■ Cash Flows from Financing Activities
Net cash used in financing activities rose ¥21.2 billion, from ¥78.5

vent dilution caused by the conversion of convertible bonds

35.9%. However, the return on equity (ROE*) declined from

into shares, Frontier 2007 calls for the allocation of about 20%

10.4% to 7.6% because of the lower net income result. An

billion in the previous year to ¥99.7 billion. Though bond issues

Efforts to strengthen the Company’s financial structure broughtof free cash flow (¥100 billion) to the continuing repurchase of

improvement to 13.8% is predicted for fiscal 2004.

raised ¥50.0 billion, there was an overall reduction in cash and cash

a significant reduction in interest-bearing debt. The total at thestock. Tokyo Gas will continue to implement this policy.

equivalents because of outflows of ¥78.8 billion for bond redemp-

end of the year was ¥682.7 billion, a year-on-year decline of* ROE=Net income/shareholders’ equity (average of position at start and end of
fiscal year)

tions and ¥28.0 billion for the repurchase of common stock.

¥48.6 billion. This resulted mainly from the redemption of(¥ Million)

straight bonds through debt assumption contracts, retirement by

2002

2003

2004

purchase of straight bonds, and the redemption of convertible

Net cash provided byoperating activities

191,676

213,533

217,608

bonds. The ratio of interest-bearing debt to total assets

Net cash used ininvesting activities(111,821)(110,144)(126,038)

Years ended March

improved from 43.6% to 41.0%.
Interest-bearing debt and ratio of interest-bearing debt to total assets

Net cash used infinancing activities(117,176)(78,517)(99,744)

1,000

%
60

800

55

600

50

400

45

¥ Billion

The changes noted above had the effect of reducing cash andcash equivalents at the year-end by ¥8.2 billion to ¥44.0 billion.

The shareholders’ equity ratio improved from 34.6% toExternal Risks Affecting Business Activities■ Gas Rate Decline Risk

■ Gas Resource Cost Fluctuation Risk

Progress in deregulation has caused competition to intensify

City gas supplied by Tokyo Gas is produced mainly from import-

among energy suppliers. There is a risk that the price of gas will

ed LNG. Since contracts are denominated in U.S. dollars, earn-need to be reduced to attract and retain customers in the face ofings are at risk from fluctuations in the yen-dollar exchange rate.

price reductions by the Tokyo Electric Power Company, which is

Also, the dollar-denominated LNG prices are linked to crude oil

the greatest competitor of Tokyo Gas.

prices on a sliding scale, which exposes the Company to risk

Tokyo Gas recognizes this risk and has allocated capital

Despite Business Expansion, Fixed Assets to
be Reduced through Capital Expenditure
Focusing on Asset Efficiency
Total assets at the end of the year under review amounted to

The extent to which these fluctuations affect gas resource
costs over a year is as follows.

Frontier 2007 to cover price reductions.

■ Temperature Fluctuation Risk

40

200

35

0

’00

’01

’02

’03

Interest-bearing debt
Ratio of interest-bearing
debt to total assets’04

Interest-bearing debt = long-term debt due after one year + long-term debt due
within one year + bank loans

a year-end total of ¥1,170.4 billion through ongoing depreciation.
Investments and other non-current assets grew ¥45.0 billion to¥218.4 billion. This resulted from an increase in unrealized gains

from changes in the international market price for crude oil.

Approximately ¥2.1 billion for each ¥1 movement in the yen-dollar exchange rate

¥1,666.8 billion, a reduction of ¥9.2 billion from the previous year’slevel. Property, plant and equipment was reduced ¥47.0 billion toresources totaling ¥180.0 billion over the five-year period ofApproximately ¥4.3 billion for each $1 movement in the per-barrel price of crude oil

Temperatures affect the volume of city gas sales, which account

Fluctuations in the cost of gas resources are reflected in gas

for around 70% of consolidated sales and 80% of income. Gas is

rates after approximately six months under the “sliding rate”

used mainly for water heating and space heating especialy insystem*. Under this system, although earnings may be subject toresidential use. Mild winter weather can erode revenues andtemporary increases and decreases, crude oil prices and curren-

income by reducing the volume of gas sold.

cy exchange rates have no net effect on results over the medi-

The average temperatures in fiscal 2003 were 21.7ºC in the

Repurchase of Common Stockon investment securities because of rising share prices. Current

um- to long-term perspective.

first half of the year, 11.0ºC in the second half, and 16.3ºC overIn fiscal 2003, the crude oil price averaged $29.42 per barrel,

the whole year. Forecasts for fiscal 2004 are based on averages

and the average exchange rate was ¥113.19 to one dollar.

assets declined ¥5.4 billion to ¥259.1 billion, in part because of a

Shareholders’ equity at the year-end totaled ¥598.5 billion, anof 22.7ºC in the first half, 10.9ºC in the second half, and 16.8ºC

Forecasts for fiscal 2004 are based on an average crude oil pricereduction in cash and cash equivalents and receivables.

increase of ¥18.7 billion over the year. While there was aover the whole year.

of $30 per barrel and an exchange rate of ¥110 to one dollar.

Impact of 1˚C temperature rise on gas sales volume* Depending on the contract, changes may be reflected without a six-month time lag.
Adjustment has an upper limit (please refer to the accompanying Investors’ Guide
2004, P. 4).

One of the management policies defined in Frontier 2007 calls

decrease of ¥27.9 billion, due mainly to repurchase of our own

for an increase in return on assets (ROA*). This will be achieved

stock, retained earnings was ¥28.3 billion higher, and there wasthrough stringent screening of investment in tangible fixed assets.

a rise of ¥18.7 billion in net unrealized holding gains on securi-

In fiscal 2003, ROA declined from 3.5% in the previous year toties. The repurchase of 2.9 million shares of common stock for

2.7% due to a decrease in net income as a result of transient fac-

¥9.9 billion in the previous year was followed in fiscal 2003 bytors. However, an improvement to 5.1% is projected for fiscal 2004.

the acquisition of 76.6 million shares for ¥27.8 billion. To pre-*ROA = Net income/total assets (average of positions at start and end of fiscal year)

ROA and ROE

Rate of change

Summer (June–September)

0.2%

Winter (December–March)-2.4%

Intervening months (April, May, October, November)-1.9%

Annual-1.5%■ Interest Rate Fluctuation Risk
Tokyo Gas negotiates fixed interest rates for both short-term andlong-term interest-bearing debt, which precludes risk of interest

Monthly gas sales volumes for fiscal 2003 (nonconsolidated)

rate fluctuation during the term of an obligation. However, there

Shareholders’ equity and equity ratio

Million m3%¥ Billion

%

12

6,000

60

10

5,000

50

8

4,000

40

6

3,000

30

4

2,000

20

1,000

10

1,500

may be risk of fluctuation when loans are refinanced.

1,200■ Share Price Fluctuation Risk
Tokyo Gas primarily holds equities to maintain corporate rela-

900

tionships essential to the conduct of its business operations.
Equity of publicly listed companies is subject to market risk.

600

Tokyo Gas has established management policies and rules for

2

ROE
ROA

0

’00

[ 31 ]

’01

’02

’03

TOKYO GAS ANNUAL REPORT 2004

’04

0

0

’00

’01

’02

’03

300

handling of such equities.

0

Shareholders’ equity
Equity ratio

2003.4 5

6

7

Residential sector

8

9

10

11

Commercial sector

12 2004.1 2

3Industrial sector

Wholesale’04
TOKYO GAS ANNUAL REPORT 2004

[ 32 ]

FREQUENTLY ASKED QUESTIONS

Optional agreements

Q1

How does Tokyo Gas set its rates?

Tokyo Gas is permitted to offer rates

From a marketing perspective, the two companies are fierce-

dential sectors. We predict this competition will grow stronger inand service terms other than those outlined in the above service

ly competitive. We compete for gas sales, especially in the area

coming years. To prevail, we must offer customers optimal value.

agreement. This enables the Company to make efficient use ofof industrial supplies, following TEPCO’s recent entry into theTokyo Gas believes it is crucial to provide solutions, including

its gas production and supply facilities. These agreements havegas market. Meanwhile, the long-standing competition between

energy services, that truly meet the needs of users, not simply toto be reported to METI and the selection of this option is up togas and electric power is intensifying in the commercial and resi-

supply gas or power in isolation.

the customer.

Large-volume supply

Tokyo Gas’ rates are divided into the following three categories:

A March 1995 amendment to the Gas

Utility Industry Law deregulated tariffs and area of supply for

Service agreement

Tokyo Gas uses “regulated” rates

customers with contract volumes of two billion m 3 or more.

approved by the Minister of Economy, Trade and Industry

Rates and other supply terms can be determined by agreement(METI) to bill customers for gas supplied through pipelines tobetween gas suppliers and customers. Since April 2004, large-

meet general demand. Under a May 1999 amendment to Japan’s

volume customers have been defined as customers with yearly

Gas Utility Industry Law, it became possible to reduce thesecontract volumes of 500,000 m or more.

assets, so our basic policy calls for the active development of thismarket. There is also a possibility that hostile takeovers would

Q3

Does Tokyo Gas have an M&A strategy targeting

have an adverse effect on our wholesale business, so we have no

local gas companies?

plans for aggressive M&A.
We have made acquisitions in the past, however. We

3assumed operation of the municipal gas business of Konosu

rates simply by notifying METI, provided the change does notadversely affect any customers.

Operating cost, etc.

• Cost of gas resources• Personnel expenses• Overheads• Depreciation• Non-operating expenses• Income taxes＋

Fair return

Calculated using the rate-basesystem, which involves multiplying fixed-asset investments, etc.
by the appropriate ratio of fairreturn−“Regulated” rates are calculated using a rate-base system.

Tokyo Gas currently wholesales gas to 17 city gas companies

City in Saitama Prefecture, which was privatized in April 2002.

A simplified version of this calculation is shown in the follow-

surrounding its service area. These sales account for about 10%

If an optimal M&A opportunity with the potential to increase

ing equation:of total sales volumes, and we anticipate a high growth rate of

our corporate value and benefit our customers arises, we will

5.3% annually over the next five years. The wholesale supply

consider acting on the opportunity in line with the wishes ofbusiness allows Tokyo Gas to earn income without an increase in

the other party.

Deductions, etc.

＝

• Profit from gas appliance sales,etc.
• Profit from real estate business,
etc.

Total fair cost

Represents an appropriate profit
added to an appropriate cost
under efficient management

fairness of TPA charges and enhance the transparency of rev-

Q4

Have there been any important developments recently

enues and expenditures concerning the use of pipelines, generalin terms of deregulation? What is the status of thegas utilities and pipeline operators are required to disclose

third-party access scheme?

accounts based on accounting procedures introduced for TPA.
An April 2004 amendment to the Gas Utility Industry Law
broadened the scope of liberalization to include customers with

To promote fair competition in the gas market, all owners andannual contract volumes of 500,000m 3 or more, as well as

TEPCO both procure over 70% of their total LNG requirements

operators of gas supply pipelines are required to provide third-

expanding TPA arrangements as described above. Tokyo Gas

Although you regard Tokyo Electric Power as yourthrough joint projects. Because joint purchasing translates into

party access (TPA), and draw up and publish TPA agreements.

now has two types of TPA agreements: one for retailing to large-

biggest competitor, you purchase LNG jointly. Whatlarger contract volumes, our bargaining power with sellers is

This change allows access to pipelines owned by firms that werevolume customers and the other for wholesaling.

are the implications of this relationship?

strengthened, allowing us to purchase LNG at a lower cost.

not subject to regulation under the Gas Utility Industry Law,

The average unit price in TPA agreements for retailing is set

Tokyo Gas has three LNG terminals in Tokyo Bay. Of these,such as electric power companies and suppliers of natural gas

at ¥7.20/m3 (Tokyo area) and the average unit price for whole-

the Negishi LNG Terminal and Sodegaura LNG Terminal are

produced in Japan. Until recently, TPA was possible only for gas

sale customers is ¥6.60/ m3.

There are two facets to the relationship between Tokyo Gas andjointly operated with TEPCO. The benefits of joint operation

retailing. Now it is also available for wholesaling. To ensure theTokyo Electric Power Company (TEPCO): cooperation and com-

include reduced capital investment and operating costs.

petition. We cooperate on the procurement of LNG, and weMoreover, since the two companies have different peak demand

jointly operate LNG terminals.

seasons, we can level loads and improve capacity utilization,

Q2

As far as LNG procurement is concerned, Tokyo Gas and[ 33 ]TOKYO GAS ANNUAL REPORT 2004

leading to lower gas manufacturing costs.

TOKYO GAS ANNUAL REPORT 2004

[ 34 ]

11-YEAR SUMMARYTokyo Gas Co., Ltd. and Consolidated Subsidiaries
Million of yen, except per share amounts

For the years ended March 31

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

¥1,151,825¥1,127,634¥1,097,589¥1,086,771¥992,255¥997,767¥1,009,155¥988,077¥958,662¥915,862¥909,673

Gas sales

826,567

789,688

750,439

740,731

672,070

674,997

686,649

663,066

633,253

601,990622,632

Gas appliance sales

132,254

141,225

148,271

145,435

126,747

132,749

126,840

134,174

135,669

137,209

115,158

Related construction

64,94467,04567,63367,611

63,94963,63066,69569,966

68,82570,03473,158

Real estate rental business

14,151

14,944

15,685

15,602

14,95915,617

16,495

18,423

18,468

—

—

Other

113,909

114,732

115,561

117,392

114,530

110,774

112,476

102,448

102,447

106,629

98,725

Operating income

152,287

123,294

110,608

103,659

69,23372,30376,48562,163

67,10960,10559,263

Net income

44,78759,201

51,912

27,595

26,69817,764

17,241

15,432

16,762

11,072

16,173

Depreciation

143,129

137,300

141,646

146,420

136,214132,568

114,893

123,569

120,569——

Capital expenditures

105,388

110,188

104,291

109,899

121,806

142,030

159,433

162,282

180,080——

Free cash flow

84,241

88,24092,17866,57242,029

9,647

—

—

—

—

—

Net income (Basic)¥16.44¥21.18¥18.47

¥9.82

¥9.50

¥6.32

¥6.14

¥5.49

¥5.97

¥3.94

¥5.76

Net income (Diluted)

14.98

19.11

16.66

9.13

8.84

5.94

5.76

5.37

—

—

—

Shareholders’ equity

221.53208.65200.75

196.72172.33149.98148.67147.65147.23146.32145.81

7.00

6.00

6.00

6.00

5.00

5.00

5.00

5.00

5.00

5.00

5.00

¥1,666,828¥1,676,064¥1,702,713¥1,797,669¥1,805,086¥1,707,446¥1,720,684¥1,772,132¥1,657,176¥1,608,244¥1,513,038

Long-term debt due after one year

545,845598,322680,887

708,329

843,634

820,753765,304

878,674

743,177

724,523

721,980

Total shareholders’ equity

598,453

579,706

564,078

552,790484,239

421,442

417,755

414,906

413,725

411,164

409,713

Operating income to net sales

13.2%

10.9%

10.1%

9.5%

7.0%

7.2%

7.6%

6.3%

7.0%

6.6%

6.5%

Net income to net sales

3.9%

5.3%

4.7%

2.5%

2.7%

1.8%

1.7%

1.6%

1.7%

1.2%

1.8%

ROE

7.6%

10.4%

9.3%

5.3%

5.9%

4.2%

4.1%

3.7%

4.1%

2.7%

4.0%

ROA

2.7%

3.5%

3.0%

1.5%

1.5%

1.0%

1.0%

0.9%

1.0%

0.7%

1.1%

Equity ratio

35.9%

34.6%

33.1%

30.8%

26.8%

24.7%

24.3%

23.4%

25.0%

25.6%

27.1%

Net sales

Per share (yen)Cash dividends applicable for the year

At year-end (March 31)
Total assets

Ratios

Notes: 1. Capital expenditures represent the amount of payments for fixed assets in the relevant fiscal year.
2. Free cash flow = net income + depreciation* - capital expenditures***including amortization of long-term prepayments[ 35 ]TOKYO GAS ANNUAL REPORT 2004**purchases of tangible fixed assets + purchases of intangible fixed assets + long-term prepayments (accounting basis)

TOKYO GAS ANNUAL REPORT 2004

[ 36 ]

CONSOLIDATED BALANCE SHEETSTokyo Gas Co., Ltd. and Consolidated Subsidiaries
Years ended March 31, 2004 and 2003
Thousands of
U.S. dollars (Note 1)

Millions of yen

ASSETS
Property, plant and equipment (Notes 3 and 6):
Production facilities
Distribution facilities
Service and maintenance facilities
Other
Construction in progress
Accumulated depreciation

Intangibles
Investments and other non-current assets:
Investments in unconsolidated subsidiaries and affiliated companies
Investment securities (Notes 4 and 6)
Long-term loans
Deferred tax assets (Note 9)
Other investments and non-current assets
Allowance for doubtful accounts

2004

2003

2004

688,339
1,952,210
194,047
591,542
75,4433,501,581(2,284,116)
1,217,465$ 6,734,997
19,042,069
1,717,684
5,771,221
363,170
33,629,141(22,587,360)
11,041,781

18,856

20,610177,890

29,71578,771
13,23051,252
47,131(1,659)218,440

20,271
51,274
10,23844,30749,592(2,244)
173,438

280,332
743,121
124,814483,507444,634(15,650)
2,060,758¥

713,9102,018,459
182,075
611,749
38,4963,564,689(2,394,260)
1,170,429¥

LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS’ EQUITY

2004

2003

2004

Long-term debt due after one year (Note 6)
Employees’ severance and retirement benefits (Note 8)
Allowance for repairs of gas holders
Deferred tax liability
Other non-current liabilities¥ 545,845
157,8083,445
2,396
24,853¥ 598,322
120,896
3,457
792
28,105$ 5,149,477
1,488,753
32,496
22,600234,465

30,029106,870

41,90091,079283,295
1,008,212

35,74736,90232,80844,958—42,456
329,770

37,67743,48635,05845,122
13
46,412
340,747

337,236
348,130
309,508
424,131—400,530
3,111,042

4,258

4,039

40,174

141,8442,065
457,924
35,655(227)
637,261

141,8442,065
429,653
17,003
4
590,569

1,338,155
19,485
4,320,038
336,365(2,144)
6,011,899(38,808)
598,453¥1,666,828(10,863)579,706¥1,676,064(366,113)
5,645,786$15,724,793

Current liabilities:
Bank loans (Note 6)Long-term debt due within one year (Note 6)
Notes and accounts payable:
Trade
Other
Income taxes payable (Note 9)
Accrued expenses
Deferred tax liability
Other current liabilities
Total current liabilities
Commitments and contingent liabilities (Note 13)
Minority interest

Current assets:
Cash and cash equivalents
Marketable securities (Note 4)
Notes and accounts receivables:
Trade
Allowance for doubtful accounts
Inventories (Note 5)
Deferred tax assets (Note 9)
Other current assets
Total current assets

See accompanying notes.

[ 37 ]TOKYO GAS ANNUAL REPORT 2004

43,961
1

52,1301

414,72412

125,244(1,215)22,827
11,58856,697259,103¥ 1,666,828

132,235(1,448)21,125
11,481
49,027
264,551¥ 1,676,064

1,181,549(11,465)
215,345
109,319534,880
2,444,364$ 15,724,793

Thousands of
U.S. dollars (Note 1)

Millions of yen

Shareholders’ equity (Note 10):
Common stock:
Authorized: 6,500,000,000 shares
Issued: 2,810,171,295 shares in 2004
2,810,171,295 shares in 2003
Capital surplus
Retained earnings
Net unrealized holding gains on securities
Foreign currency translation adjustments
Treasury stock, at cost
109,025,944 shares in 2004
32,173,308 shares in 2003
Total shareholders’ equity

TOKYO GAS ANNUAL REPORT 2004

[ 38 ]

CONSOLIDATED STATEMENTS OF INCOMECONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITYTokyo Gas Co., Ltd. and Consolidated Subsidiaries
Years ended March 31, 2004 and 2003

Tokyo Gas Co., Ltd. and Consolidated Subsidiaries
Years ended March 31, 2004 and 2003
Thousands of
U.S. dollars (Note 1)

Millions of yen

Net sales (Note 11)
Costs and expenses (Note 11):
Cost of sales
Selling, general and administrative

2004

2003

2004

¥1,151,825¥1,127,634$10,866,270

578,530
421,008
999,538

571,930
432,410
1,004,340

5,457,830
3,971,770
9,429,600

152,287

123,294

1,436,670

Operating income (Note 11)
Other income (expenses):
Interest and dividend income
Interest expense
Adjustments of charges for construction of distribution facilities
Losses on unsecured notes redemption
Gains from sale of securities
Reversal of environmental conditioning costs
Losses on impairment of fixed assets(Note 11)
Gains resulting from changes to pension system
Write-off of unrecognized actuarial differences of pension plans
Foreign exchange gains (losses)
Equity in net income of an affiliated company
Other, net

1,399(14,823)(4,145)(6,575)589
1,650(3,322)
5,665(58,956)
(15)
236
(859)
(79,156)

Income before income taxes and minority interestin net income of consolidated subsidiaries
Income taxes (Note 9):
Current
Deferred
Minority interest in net income of consolidated subsidiaries
Net income

73,131[ 39 ]TOKYO GAS ANNUAL REPORT 2004

CapitalsurplusRetainedearnings¥141,843¥2,064¥387,315
59,201

Net unrealized
holding gains
on securities

Foreign currencytranslation
adjustments¥ 32,836¥ 115

Treasury
stock

¥

(95)

(15,833)(111)(10,768)(16,768)(95)
1¥141,844

1¥2,065¥429,653
44,787¥ 17,003¥

4¥(10,863)

18,652(231)(1)¥141,844¥2,065(16,438)(77)¥457,924(27,945)¥ 35,655¥(227)¥(38,808)

Foreign currencytranslation
adjustments

Treasurystock

Thousands of U.S. dollars (Note 1)¥

44,266(16,367)
45,232(445)
44,7872004

See accompanying notes.

Balance at March 31, 2002
2,810,165
Net income
Net unrealized holding gains
on securities
Foreign currency translation
adjustments
Treasury stock
Cash dividends paid(¥6.00 per share)
Bonuses to directors
Shares issued upon conversionof convertible bonds
6
Balance at March 31, 2003
2,810,171
Net income
Net unrealized holding gains
on securities
Foreign currency translation
adjustments
Treasury stock
Cash dividends paid(¥6.00 per share)
Bonuses to directors
Balance at March 31, 2004
2,810,171

Commonstock

689,919

95,883¥

43,622(7,245)59,506(305)
59,201

Yen

Amounts per share of common stock (Note 2):
Net income
Diluted net income
Cash dividends applicable to the year

13,194(139,839)(39,102)(62,024)
5,555
15,568(31,337)
53,443(556,189)
(140)
2,226
(8,106)(746,751)

1,089(17,472)(4,649)(6,328)
3,196
—
—
—
—
737
220
(4,204)(27,411)

Millions of yen
Number of sharesof common stock(Thousands)¥16.44
14.98
7.00

$

417,606(154,401)
426,714(4,195)422,519

U.S. dollars (Note 1)

2003¥21.18
19.11
6.00

2004

$0.16
0.14
0.07

Balance at March 31, 2003
Net income
Net unrealized holding gains
on securities
Foreign currency translation
adjustments
Treasury stock
Cash dividends paid($0.06 per share)
Bonuses to directors
Balance at March 31, 2004

Net unrealized
holding gains
on securities

Commonstock

CapitalsurplusRetainedearnings$1,338,155$19,485$4,053,326
422,519$160,401$

41$(102,480)

175,964(2,185)(8)$1,338,155$19,485(155,074)(725)$4,320,038(263,633)$336,365$(2,144)$(366,113)

See accompanying notes.

TOKYO GAS ANNUAL REPORT 2004

[ 40 ]

CONSOLIDATED STATEMENTS OF CASH FLOWSNOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Tokyo Gas Co., Ltd. and Consolidated Subsidiaries
Years ended March 31, 2004 and 2003

Tokyo Gas Co., Ltd. and Consolidated Subsidiaries
Years ended March 31, 2004 and 2003
Thousands of
U.S. dollars (Note 1)

Millions of yen

2004

Cash flows from operating activities:
Income before income taxes and minority interest in net incomeof consolidated subsidiaries
Adjustments to reconcile income before income taxes and minority
interest in net income of consolidated subsidiaries to net cash provided
by operating activities:
Depreciation (Note 11)
Losses on impairment of fixed assets
Amortization of long-term prepayments
Loss on disposal of property, plant and equipment
Loss (gain) on sale of property, plant and equipment
Loss on reduction of acquisition costs of property,
plant and equipment for tax purposes
Gains from sale of securities
Loss on unsecured notes redemption
Increase (decrease) in employees’ severance and retirement benefits
Interest and dividend income
Interest expense
Changes in operating assets and liabilities:
Decrease (increase) in notes and accounts receivable
Decrease (increase) in inventories
Increase (decrease) in notes and accounts payable
Decrease in consumption taxes payable
Bonuses paid to directors
Other—net

2003

2004

¥ 73,131¥ 95,883

143,129
3,322
3,766
3,790
673

137,300
—
3,728
2,482
(5,380)1,350,270
31,33735,53335,759
6,345

1,608
(589)
6,575
36,912(1,399)14,823

4,416(3,196)
6,328(4,658)(1,089)17,472

15,169(5,555)62,024348,227(13,194)
139,839

5,157(1,701)274(1,552)(77)(10,045)277,797
1,381(15,053)(46,517)217,608(6,777)
7,634(1,785)(219)(95)
14,897
266,941
1,166(18,069)(36,505)
213,533

48,649(16,047)
2,585(14,638)(725)(94,768)
2,620,729
13,024(142,010)(438,837)
2,052,906

Cash flows from investing activities:
Purchases of investment securities
Proceeds from sales of securities
Purchases of property, plant and equipment
Purchases of intangible fixed assets
Long-term prepayments
Proceeds from sale of tangible and intangible fixed assets
Expenditure of long-term loans receivable
Other—net
Net cash used in investing activities(15,371)
7,683(101,012)(12,211)(2,103)
1,235(3,886)(373)(126,038)(7,297)
5,861(98,149)(9,015)(1,800)
6,888(4,256)(2,376)(110,144)(145,011)
72,483(952,941)(115,199)(19,840)
11,649(36,664)(3,519)(1,189,042)

Cash flows from financing activities:
Net repayments of short-term bank loans
Net repayments of commercial paper
Proceeds from long-term debt
Repayments of long-term debt
Cash dividends paid
Payments for acquiring treasury stock
Other—net
Net cash used in financing activities(11,871)—
87,790(131,042)(16,482)(28,038)(101)(99,744)(809)(12,000)
37,341(75,450)(16,831)(10,768)—(78,517)(111,988)—
828,207(1,236,244)(155,494)(264,508)(954)(940,981)

Effect of exchange rate changes on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year5
(8,169)52,130¥ 43,961(3)
24,86927,261¥ 52,13049(77,068)
491,792
414,724

Cash received for interest and dividends
Cash paid for interest
Cash paid for income taxes
Net cash provided by operating activities$$

689,919

1. Basis of presenting consolidated financial statements
Tokyo Gas Co., Ltd. (the “Company”) and its consolidated domestic subsidiaries maintain their accounts and records in accordance with the provisions set forth in the Japanese Securities and Exchange Law and its
related accounting regulations, and in conformity with accounting principles generally accepted in Japan, which are different in certain respects
as to application and disclosure requirements of International Financial
reporting Standards. The Company, as a regulated company, also follows
the Gas Business Law related accounting regulations for preparing suchfinancial statements.
The accompanying consolidated financial statements have been
restructured and translated into English (with some expanded descriptions and inclusion of consolidated statements of shareholders’ equity)from the consolidated financial statements of the Company prepared inaccordance with Japanese GAAP and filed with the appropriate Local
Finance Bureau of the Ministry of Finance as required by the Securities
and Exchange Law. Some supplementary information included in thestatutory Japanese-language consolidated financial statements, but notrequired for fair presentation, is not presented in the accompanying consolidated financial statements.
The translation of the Japanese yen amounts into U.S. dollars areincluded solely for the convenience of the reader outside Japan, using
the prevailing exchange rate at March 31, 2004, which was ¥106 to
US$1. The convenience translations should not be construed as representations that the Japanese yen amounts have been, could have been,or could in the future be, converted into U.S. dollars at this or any otherrate of exchange.

2. Significant accounting policies
Consolidation The consolidated financial statements include theaccounts of the Company and all of its significant subsidiaries. For theyears ended March 31, 2004 and 2003, 18 subsidiaries were consolidated.
All significant inter-company transactions and account balances are
eliminated in consolidation.

Cash and cash equivalents Cash and cash equivalents include cash on
hand, readily-available deposits and short-term highly liquid investments with maturities not exceeding three months at the time of purchase, which are readily convertible to known amounts of cash that theypresent insignificant risk of change.

Equity method Significant investments in unconsolidated subsidiaries
and affiliates over which the Company has the ability to exercise significant influence with regard to operating and financial policies of theinvestees, are accounted for by the equity method. For the years ended
March 31, 2004 and 2003, one affiliated company was accounted for byequity method.

Securities The Company and its consolidated subsidiaries classify theirsecurities in one of the following three categories, in accordance with theJapanese Accounting Standard for Financial Instruments.
(a) Debt securities intended to be held to maturity (hereafter, “held-tomaturity debt securities”) are stated at amortized cost.
(b) Equity securities issued by unconsolidated subsidiaries and affiliatedcompanies which are not accounted for using the equity method arestated at moving-average cost.
(c) Available-for-sale securities, which are defined as securities otherthan held-to-maturity debt securities, equity securities issued byunconsolidated subsidiaries and affiliated companies, and securities
held for trading purposes, are stated at fair market value at the
year-end, if their fair market values are readily available. The difference between acquisition cost and book values on these securities
are reported, net of applicable income taxes, as a separate component of shareholders’ equity. Available-for-sale securities with noavailable fair market values are stated at moving-average cost.

Property, plant and equipment Property, plant and equipment is generally
stated at cost. Depreciation is determined mainly by the declining-balancemethod based on estimated useful life, except that buildings acquired after
March 31, 1998 are depreciated using the straight-line method.
As the accounting standard for impairment of fixed assets (“Opinion
on Setting Accounting Standard for Impairment of Fixed Assets,” issued
by the Business Accounting Council on August 9, 2002) and its implementation guidance (Financial Standards Implementation Guidance No.
6, “Implementation Guidance for Accounting Standard for Impairment of
Fixed Assets,” issued by the Accounting Standards Board of Japan on
October 31, 2003) can be adopted in the year ended March 31, 2004, theCompany adopted the standard and its implementation guidance commencing in the year ended March 31, 2004. As a result, income before
income taxes and minority interest in net income of consolidated subsidiaries decreased by ¥3,322 million (US$31,337 thousand).
The amounts of accumulated impairment losses are directly deductedfrom the acquisition costs of related fixed assets.
Software costs The Company and its consolidated subsidiaries include
software in intangible assets and depreciate it using the straight-line
method over the estimated useful life.

If the fair market value of held-to-maturity debt securities, equity
securities issued by unconsolidated subsidiaries and affiliated companies,
and available-for-sale securities, declines significantly, such securities arestated at fair market value and the difference between fair market value
and the carrying amount is recognized as loss in the period of the decline.
Derivative financial instruments The Company and its consolidated subsidiaries use interest rate swaps, foreign exchange forward contracts,
commodity swaps and weather derivatives only for the purpose of mitigating the risk of fluctuations in interest rates, foreign exchange rates,

See accompanying notes.

[ 41 ]TOKYO GAS ANNUAL REPORT 2004

TOKYO GAS ANNUAL REPORT 2004

[ 42 ]

market prices of raw materials and affects of changes in temperature. The
Company and its consolidated subsidiaries do not use derivative financial
instruments for speculative trading purposes. The derivative financial
instruments are executed with creditworthy financial institutions, and theCompany’s management believes there is little risk of default by counterparties. Derivatives are stated at fair market value at the year-end.

decreased by ¥52,640 thousand (US$496,603 thousand), compared withwhat would have been recorded under the previous plans and accounting method.

Inventories Inventories are stated at cost, cost being determined by themoving-average method.

Allowance for repairs of gas holders The Company and certain consolidated subsidiaries provide for periodic repairs of gas holders by estimating
future expenditures and charging them to income in equal annual
amounts. The difference between the actual expenditure and theamount provided is charged to income in the year repairs are completed.

Allowance for doubtful accounts The Company and its consolidated subsidiaries provide for doubtful accounts at an estimated amount of probable bad debts.

Accounting for certain lease transactions Finance leases which do nottransfer ownership to lessees are accounted for in the same manner as
operating leases under accounting principles generally accepted in Japan.

Employees’ severance and retirement benefits The Company and its consolidated subsidiaries provide post-employment benefit plans, anunfunded lump-sum payment plan and a funded pension plan, underwhich employees’ severance and retirement benefits are based on thelevel of wages and salaries at the time of retirement or termination,
length of service and certain other factors.
The Company and its consolidated subsidiaries determine benefit obligation and expenses for employees’ severance and retirement benefits
based on the amounts actuarially calculated using certain assumptions.
The liability for employees’ severance and retirement benefits is provided based on the estimated amounts of projected benefit obligationand the fair value of the plan assets.
The estimated amount of all retirement benefits to be paid at the
future retirement date is assumed as generating equally to each service
year using the estimated number of total service years. Past service costs
are charged to income when incurred, and actuarial gains and losses arecharged to income in the fiscal year following the year when they arise.
With enactment of the Defined Benefit Corporate Pension Plan Law inJapan, the Company carried out a revision in its pension plans during theyear ended March 31, 2004, including a shift from the tax-qualified pension plan to the contract-type funded pension plan as well as introductionof a cash balance pension plan. As a result, the overall benefit ratio was
lowered and, therefore, ¥5,665 million (US$53,443 thousand) gain resulting from changes to pension system has been recorded as other income.
In addition, upon this plan revision, the Company changed its accounting
for unrecognized actuarial differences from amortizing them over ten
years to writing them off in one year, resulting in write-off of ¥58,956 million (US$556,189 thousand) in actuarial differences incurred in previous
years. The purpose of this change is not only to timely reflect the funded
status of the benefit obligation in the consolidated financial statements,
but also to secure financial strength of the Company.
As a result of the changes described above, income before income
taxes and minority interest in net income of consolidated subsidiaries

Income taxes Income taxes comprise corporation tax, inhabitants’ taxes
and enterprise tax. The Company and its consolidated subsidiaries recognize tax effects of temporary differences between the financial statement basis and the tax basis of assets and liabilities.
Enterprise tax Enterprise tax normally constitutes income taxes.
However, in the case of companies engaged in gas businesses, enterprise
tax is levied, not on taxable income, but on net sales. In the accompanying consolidated statements of income, enterprise tax levied on net sales
is accounted for in “Selling, general and administrative” expenses in theamount of ¥11,145 million (US$105,139 thousand) and ¥10,633 million
for the years ended March 31, 2004 and 2003, respectively. Enterprisetaxes calculated based on taxable income of certain consolidated subsidiaries are included in income taxes.
Foreign currency translation Receivables and payables denominated inforeign currencies are translated into Japanese yen at the year-end rates.

3. Property, plant and equipment
Property, plant and equipment is generally recorded at cost. However, incases where the Company and its consolidated subsidiaries receive government grants toward the cost of construction, such amounts are offset

4. Securities
Acquisition costs, book values and fair values of securities with available
fair market values at March 31, 2004 and 2003 were as follows:

2004

2003

2004

Acquisition cost

Book value

DifferenceBook value

¥34

¥35

Subtotal

Equity securities$330

Fair value

36

37

344

Difference

¥ 1

¥ 3

$ 14

Total

Thousands of
U.S. dollars

Millions of yen

2004$93,471$626,065

55

56

1

93,526626,121532,595

Bonds$532,594

Securities with book values not exceeding acquisition cost:

Securities with fair value exceeding book value:

2003

2004

Securities with fair value not exceeding book value:Book value

¥10

¥—

Fair value

10

—

91

Difference

¥—

¥—

$ 1

$92

5,803

5,497

(306)

$99,329$631,618$532,289

Available-for-sale securities sold amounted to ¥2,613 million(US$24,655 thousand) and ¥5,374 million for the years ended March 31,
2004 and 2003, respectively. Gains on available-for-sale securities amounted to ¥597 million (US$5,635 thousand) and ¥3,045 million and losses onavailable-for-sale securities amounted to ¥7 million (US$66 thousand) and¥50 million for the years ended March 31, 2004 and 2003, respectively.
Available-for-sale securities with no available fair values, which werestated at moving-average cost, amounted to ¥11,732 million (US$110,683
thousand) and ¥11,840 million at March 31, 2004 and 2003, respectively.

(b) Available-for-sale securities
Millions of yen
Acquisition cost

Book value

Difference

5. Inventories

Securities with book values exceeding acquisition cost:
Equity securities
Bonds
Subtotal¥ 9,908¥66,363¥56,455

6

6

—

9,914

66,36956,455

Securities with book values not exceeding acquisition cost:
Equity securities
Total

615

583

(32)

¥10,529¥66,952¥56,423

Inventories at March 31, 2004 and 2003 were as follows:
Millions of yen

For 2003

Acquisition cost

Book value

Thousands of
U.S. dollars

2004

2003

2004

Finished products¥ 1,949¥ 2,391$ 18,388

Raw materials

11,372

9,762

107,279

Supplies

8,177

7,745

77,141Work in process
Millions of yen

1,329

1,227

12,537¥22,827¥21,125$215,345

Difference

Securities with book values exceeding acquisition cost:
Equity securities
Bonds
Subtotal¥10,692¥37,910¥27,2185

6

1

10,69737,91627,219Securities with book values not exceeding acquisition cost:
Equity securities

TOKYO GAS ANNUAL REPORT 2004

Equity securities
Thousands of
U.S. dollars

Millions of yen

Total[ 43 ]

Thousands of U.S. dollars
For 2004

Securities with book values exceeding acquisition cost:(a) Held-to-maturity debt securities

For 2004

Amounts per share of common stock Effective April 1, 2002, the Company
and its consolidated subsidiaries adopted the new accounting standard
for earnings per share (Accounting Standards Board Statement No. 2,“Accounting Standard for Earnings Per Share”) and related guidance(Financial Standards Implementation Guidance No. 4, “Implementation
Guidance for Accounting Standard for Earnings Per Share,” issued by
the Accounting Standards Board of Japan on September 25, 2002).
Basic net income per share is computed based on the net income
available for distribution to common shareholders and the weightedaverage number of common shares outstanding for the period. Diluted
net income per share reflects the potential dilution that could occur ifconvertible bonds were converted into common stocks.
Cash dividends per share have been presented on an accrual basis
and include dividends approved or to be approved after the balance
sheet dates, but applicable to the year then ended.

against the acquisition cost of the related asset. Such offsets recorded at
March 31, 2004 and 2003 were ¥238,670 million (US$2,251,885 thousand) and ¥236,141 million, respectively.

1,523

1,151

(372)

¥12,220¥39,067¥26,847

TOKYO GAS ANNUAL REPORT 2004

[ 44 ]

6. Bank loans and long-term debt

7. Derivative transactions

At March 31, 2004 and 2003, bank loans consisted of short-term notes,
bearing interest at average annual rates of 0.29% and 0.33%, respectively.
Long-term debt at March 31, 2004 and 2003 were as follows:

Contract amounts, market values and recognized gains on the interest
rate swap contracts, except those accounted for using hedge accounting,at March 31, 2004 and 2003 were as follows:
Thousands of
U.S. dollars

Millions of yen
2004

Domestic unsecured notes

Domestic unsecured convertible bonds

¥

2003

Millions of yen

2004

$

Contract
amounts——¥ 10,000

Due 2015 at a rate of 4.1%

13,80023,300130,188

Currency option contracts:

Due 2016 at a rate of 4.0%

27,70029,000261,321

Purchased cap optionDue 2018 at a rate of 2.625%

40,00040,000377,358

Due 2009 at a rate of 1.68%

30,00030,000283,020

Due 2009 at a rate of 1.73%

30,00030,000283,020

Due 2010 at a rate of 2.01%

20,00020,000188,679

Due 2011 at a rate of 1.39%

30,00030,000283,020

Currency option contracts:

Due 2012 at a rate of 1.35%

20,00020,000188,679

Purchased cap optionDue 2004 at a rate of 1.03%

3,000

3,000

28,302Due 2009 at a rate of 1.18%

4,000

4,000

37,736Due 2023 at a rate of 1.01%

20,000—188,679

Due 2013 at a rate of 1.41%

30,000—283,020

Due 2014 at a rate of 5.1%

1st issue due 2003 at a rate of 1.5%—

51,439—3rd issue due 2005 at a rate of 1.5%

82,877

82,877

781,858

5th issue due 2009 at a rate of 1.2%

49,96349,969471,349

6th issue due 2007 at a rate of 1.1%

49,96549,968471,368

18,333

18,333

172,956

DM bearer bonds due 2005 at a rate of 7.0%
Loans from banks, insurance companies and government agencies due
through 2028 at rates of 0.18% to 6.40%

Thousands of U.S. dollars

At March 31, 2004
Beyondone yearMarketvalue

At March 31, 2004
Recognized
gains (losses)

Contract
amounts

Beyondone yearMarketvalue

Recognized
gains (losses)

$—

$—

$—

$—

Currency option contracts:
¥—

¥—

¥—

Purchased cap option¥—

Millions of yen
At March 31, 2003
Contract
amounts

Beyondone yearMarketvalue

Recognized
gains (losses)¥3,000¥0¥0¥0

8. Employees’ severance and retirement benefits
Employees’ severance and retirement benefits included in the liability
section of the consolidated balance sheets as of March 31, 2004 and 2003
were as follows:
Thousands of
U.S. dollars

Millions of yen

Projected benefit obligation

2004

2003

2004

¥328,518¥ 331,622$ 3,099,225

1,148

178

10,830

Secured

9,074

6,373

85,600

Unrecognized prior service costs

Unsecured

174,003

191,142

1,641,538

Unrecognized actuarial differences(8,579)(64,194)(80,937)

652,715

689,401

6,157,689

Less fair value of pension assets(163,350)(146,710)(1,541,039)

106,870

91,0791,008,212

Prepaid pension costs$5,149,477

Employees’ severance and retirement benefits

Less—Amounts due within one year

¥545,845

The indentures covering the third, fifth and sixth domestic convertible
bonds provide, among other conditions, for (1) conversion into shares ofcommon stock at the conversion prices per share of ¥1,105.70 (US$10.43),¥339.00 (US$3.20) and ¥339.00 (US$3.20), respectively (subject to adjustment in certain circumstances), (2) conversion periods through March 30,
2005, March 30, 2009 and March 29, 2007, respectively, and (3) redemption at the option of the Company, commencing in April 1998 for the 3rd
issue, at prices ranging from 106% to 100% of the principal amount.
At March 31, 2004, investment securities and property, plant andequipment at book value amounting to ¥13,787 million (US$130,064
thousand) were pledged as collateral for secured loans and notes issuedby consolidated subsidiaries.
As is customary in Japan, a lending bank has the right to offset cash
deposited with it against any debt or obligation that becomes due and, inthe case of default or certain other specified events, against all debt
payable to the bank. To date no such offset request has been made to
the Company and its consolidated subsidiaries.

[ 45 ]TOKYO GAS ANNUAL REPORT 2004

¥598,322

Certain loan agreements provide, among other things, that, uponrequest, the Company and its consolidated subsidiaries submit to thelenders for approval of their proposed appropriation of retained earnings(including dividends) before such appropriation is submitted to theshareholders. Neither the Company nor any of its consolidated subsidiaries has ever received any such request.
The annual maturities of long-term debt at March 31, 2004 were as
follows:
Year ending March 31

Millions of yen

Thousands of
U.S. dollars

2005¥106,870$1,008,212

2006

46,723440,7822007

67,295634,857

2008

31,039292,820

2009

81,233766,348

2010 and thereafter

319,555

3,014,670¥652,715$6,157,689

71

—

674

¥157,808¥ 120,896$ 1,488,753

Included in the consolidated statements of income for the years ended
March 31, 2004 and 2003 were severance and retirement benefit expenses comprised of the following:Thousands of
U.S. dollars

Millions of yen

Service costs—benefits earned during the year

2004

2003

2004

¥ 9,659¥10,132$ 91,121Interest cost on projected benefit obligation

8,182

9,093

77,190

Expected return on plan assets(3,057)(4,662)(28,836)

Amortization of prior service costs(3,761)(13)(35,484)

Amortization of actuarial differences

59,446

2,825

560,814

Other
Severance and retirement benefit expenses

101

—

953

¥70,570¥17,375$665,758

The discount rate and the rate of expected return on plan assets used by
the Company and its consolidated subsidiaries are approximately 2.3%
and 2.0%, respectively, at March 31, 2004, and approximately 2.5% and3.0%, respectively, at March 31, 2003.

TOKYO GAS ANNUAL REPORT 2004

[ 46 ]

9. Income taxes

11. Segment information
The Company’s and its consolidated subsidiaries’ primary business activities include (1) gas sales, (2) gas appliance sales, (3) related construction, (4) real estate rental and (5) other business.
A summary of net sales, costs and expenses, operating income, iden-

The Company is subject to a number of taxes based on taxable income,which, in the aggregate, indicate a statutory rate in Japan of approximately 36.2% for the years ended March 31, 2004 and 2003.
The significant differences between the statutory tax rate and theeffective tax rate for financial statement purposes for the year ended
March 31, 2004 is as follows. The differences between the statutory tax
rate and the effective tax rate for financial statement purposes for theyear ended March 31, 2003 was not significant

Millions of yen

Tax credit for R&D expenses
Unrecognized net operating loss of consolidated subsidiary
Items for which tax planning strategies have notbeen determined

Gas sales

Gas appliance
sales

Relatedconstruction

Real estate
rental business

Other

Elimination or
corporate¥ 826,567¥132,254¥64,944¥ 14,151¥113,909

4,548

1,619

3,090

21,29358,251(88,801)—

831,115

133,873

68,03435,444

172,160(88,801)

1,151,825

641,749

125,969

63,57827,561

160,890(20,209)

999,538

Consolidation

For 2004

2004

Statutory tax rate

tifiable assets, depreciation, losses on impairment of fixed assets andcapital expenditures by business segments for the years ended March 31,
2004 and 2003 was as follows:

Sales:

36.21%

Outside customers(1.43)

Inside group

1.04

Total

¥

—

¥1,151,825

0.93

Costs and expenses

Other—net

1.40

Operating income¥ 189,366

¥

7,904

¥ 4,456¥

7,883¥ 11,270¥ (68,592)¥ 152,287

Effective tax rate

38.15%

Identifiable assets¥1,027,776¥ 45,445¥23,137¥208,213¥184,816¥177,441¥1,666,828

Depreciation

Effective for years commencing on April 1, 2004 or later, according to
the revised local tax law, income tax rates for enterprise taxes will be
reduced as a result of introducing assessment by estimation on the basisof the size of business. Due to the change of income tax rates, at March
31, 2003, certain consolidated subsidiaries changed the tax rates used

for calculation of deferred taxes assets and liabilities. The effect of thechange of effective tax rates was not significant.
Significant components of deferred tax assets and liabilities as ofMarch 31, 2004 and 2003 were as follows:

117,150506

136

13,37013,516(1,549)143,129

Losses on impairment of fixed assets

1,652

—

—

1,667

3

—

3,322

Capital expenditures

85,873

550

303

2,833

18,066(2,287)

105,338¥ 789,688¥141,225¥67,045¥ 14,944¥114,732—¥1,127,634

For 2003

Sales:
Thousands of
U.S. dollars

Millions of yen

2004

2003

2004

Liabilities for retirement benefits¥52,847¥36,530$498,557

Other—net

33,731

34,376318,221Less valuation allowance(2,030)(595)(19,155)

Subtotal

84,54870,311

797,623

Net unrealized holding gains on securities

20,734

9,830

195,603

Reserve for tax purposes cost reduction of certain pipelines

1,462

1,883

13,793

Deferred tax assets:

Outside customers
Inside group
Total

¥

2,766

1,411

3,523

21,402

43,595(72,697)—

792,454

142,636

70,56836,346

158,327(72,697)

1,127,634

Costs and expenses

632,230

134,794

66,393Operating income¥ 160,224

¥

7,842

¥ 4,175¥

Identifiable assets

28,723

148,701

7,623¥(6,501)

1,004,340

9,626¥ (66,196)¥ 123,294¥1,067,439¥ 52,532¥23,058¥215,197¥185,981¥131,857¥1,676,064

Depreciation

111,343502

141

14,59012,216(1,492)

137,300

Capital expenditures

88,573

538

276

1,408

21,287(1,894)

110,188

Gas sales

Gas appliance
sales

Relatedconstruction

Real estate
rental business

Other

Elimination or
corporate

Consolidation$7,797,799$1,247,680$612,679$ 133,498$1,074,614$—$10,866,270

42,905

15,277

29,149200,877

549,537(837,745)—
10,866,270

Deferred tax liabilities:
Thousands of U.S. dollars

Other—net
Subtotal
Deferred tax assets—net

1,908

3,617

18,001

24,104

15,330227,397

For 2004¥60,444¥54,981$570,226

Sales:
Outside customers
Inside group7,840,704

1,262,957

641,828

334,375

1,624,151(837,745)

Costs and expenses

6,054,234

1,188,390

599,794

260,0111,517,826(190,655)

9,429,600

Operating income$1,786,470$

74,567$ 42,034$

74,364$ 106,325$ (647,090)$ 1,436,670

Identifiable assets$9,695,999$ 428,727$218,270$1,964,274$1,743,551$1,673,972$15,724,793

Depreciation

1,350,270

Total

10. Shareholders’ equity
At the current conversion prices, 369,744 thousand shares of common
stock were issuable at March 31, 2004 upon full conversion of the outstanding convertible bonds (see Note 6).
Under the Japanese Commercial Code, the excess of the total additional paid-in capital and legal reserve over 25% of common stock isavailable for dividends by resolution of the general meeting of shareholders. Additional paid-in capital is included in capital surplus and legal
earnings reserve is included in retained earnings in the accompanying
consolidated balance sheets.

[ 47 ]TOKYO GAS ANNUAL REPORT 2004

The maximum amount that the Company can distribute as dividends
is calculated based on the unconsolidated financial statements of theCompany in accordance with the Japanese Commercial Code.
Effective April 1, 2002, the Company and its consolidated subsidiaries
adopted the new accounting standard for treasury stock and reversal ofstatutory reserves (Accounting Standards Board Statement No. 1,“Accounting Standard for Treasury Stock and Reduction of Statutory
Reserves,” issued by the Accounting Standards Board of Japan on
February 21, 2002). The effect on net income of adopting the new standard is not significant.

1,105,187

4,770

1,284

126,129

127,514(14,614)

Losses on impairment of fixed assets

15,582——

15,72233—

31,337

Capital expenditures

810,118

5,186

2,855

26,725

170,438(21,571)993,751

TOKYO GAS ANNUAL REPORT 2004

[ 48 ]

Costs and expenses under Elimination or corporate that cannot be allocated to business segments are related mainly to general administrative
expenses of the Company.
Assets under Elimination or corporate mainly comprise cash andcash equivalents, current and noncurrent securities and deferred tax

assets of the Company.
Geographic segment information is not shown due to the Company
having no overseas consolidated subsidiaries. Information for overseas
sales is not disclosed due to overseas sales being immaterial compared toconsolidated net sales.

12. Information for certain leases
Information as lessee
minimum lease payments at March 31, 2004 and 2003 were as follows:
Millions of yen

Accumulated
depreciation

thousand) issued by the Company, which were assigned to certain banks
under the debt assumption agreements made in the years ended March
31, 2004, 2003 and 2002.
At March 31, 2004, the Company had several long-term purchase contracts for the supply of LNG. The purchase price determinable undersuch contracts is contingent upon fluctuations in the market price of
crude oil.

Net bookvalue

14. Subsequent events

For 2004

Thousands of
U.S. dollars

Production facilities$ 1,089

Distribution facilities

8,395

$

466

$

3,635

623
4,760

2004

2003

2004

¥ 958

¥ 972

$ 9,039

Service and maintenancefacilities

3,488

1,024

2,464

Other

34,36918,413

15,956$47,341$23,538$23,803

Future minimum lease payments inclusive of interest:
Current

¥ 840

¥ 808

$ 7,927

Noncurrent

1,683

1,685

15,878¥2,523¥2,493$23,805

The Company and its consolidated subsidiaries use certain production
facilities, distribution facilities, service and maintenance facilities andother assets under lease arrangements. Acquisition cost, accumulated
depreciation and net book value for property held under finance leases
which do not transfer ownership of the leased property to the lessee on
an “as if capitalized” basis for the years ended March 31, 2004 and 2003
were as follows:
Millions of yen
Acquisition
cost

Accumulated
depreciation

Net book
value

Information as lessor
Lease income for the years ended March 31, 2004 and 2003, and future
minimum lease payments to be received at March 31, 2004 and 2003
were as follows:
Millions of yen

Lease income¥ 115

Distribution facilities

890

Service and maintenancefacilities
Other

¥

49

¥

385

Thousands of
U.S. dollars

2004

2003

2004

¥ 4,473¥ 4,477$ 42,198$ 42,952(1) Acquisitions of treasury stock
On May 17, 2004, the Board of Directors approved the acquisition oftreasury stock based upon the approval of the general meeting ofshareholders.
Number of shares: Limited to 50,000,000 shares
Cost of shares acquisitions: Limited to ¥20,000 million (US$188,679
thousand)(2) Issuance of domestic unsecured notes
On May 27, 2004, the Company issued domestic unsecured notes
with conditions described below:(a) Amount issued: ¥20,000 million (US$188,679 thousand)Due: May 27, 2014
Coupon rate: 1.59%(b) Amount issued: ¥10,000 million (US$94,340 thousand)Due: May 27, 2024
Coupon rate: 2.29%(3) Appropriation of retained earnings
At the general meeting of shareholders held on June 29, 2004, theCompany’s shareholders approved (i) payment of year-end cash dividends of ¥4.0 (US$0.04) per share aggregating ¥10,805 million(US$101,930 thousand) to the shareholders of record as of March 31,
2004, and (ii) payment of bonuses to directors totaling ¥65 million(US$613 thousand).

Future minimum lease payments to be received:
Current¥ 4,553¥ 4,343

Noncurrent

12,98913,008

122,540¥17,542¥17,351$165,492

For 2004

Production facilities

66
505

Some of the consolidated subsidiaries lease other assets under direct
financing leases as lessors. Leased assets under direct financing leases
were as follows:

370

109

261

3,643

1,952

1,691

¥5,018¥2,495¥2,523¥¥¥

For 2003

Production facilities

The Company and its consolidated subsidiaries were contingently liable(1) for debt guarantees in the amount of ¥7,719 million (US$72,817
thousand) at March 31, 2004 for bank loans to affiliated companies,
other than consolidated subsidiaries (2) to banks in the amount of ¥401
million (US$3,782 thousand) at March 31, 2004 with respect to joint andseveral liabilities upon default of other debtors and (3) as guarantors fordomestic unsecured notes in the amount of ¥38,700 million (US$365,094

Thousands of U.S. dollars
Acquisition
cost

Lease payments in the years ended March 31, 2004 and 2003, and future

Lease payments

13. Commitments and contingent liabilities

Millions of yen
Acquisition
cost

Accumulated
depreciation

Net book
value¥25,214¥15,470¥9,744¥24,007¥16,359¥7,648For 2004

98

25

73

Distribution facilities

841

397

444

Service and maintenancefacilities

189

83

106

3,655

1,785

1,870

¥4,783¥2,290¥2,493

Other

Other assets
For 2003

Other assets

Thousands of U.S. dollars
Acquisition
cost

Accumulated
depreciation

Net book
value$237,867$145,944$91,923

For 2004

Other assets[ 49 ]TOKYO GAS ANNUAL REPORT 2004

TOKYO GAS ANNUAL REPORT 2004

[ 50 ]

INDEPENDENT AUDITORS’ REPORTCONSOLIDATED SUBSIDIARIES AND EQUITY-METHOD AFFILIATE
As of March 31, 2004

To the Board of Directors of TOKYO GAS CO., LTD.
Company

Business

Capital(¥ million)

Equity owned
by Tokyo Gas(%)

FY2003 Net sale(¥ million)[% of outside sales]

Operatingincome(¥ million)

We have audited the accompanying consolidated balance sheets of TOKYO GAS CO., LTD. (a JapaneseTokyo Gas Energy Co., Ltd.

Sales of LPG

1,000

100

18,541 [92.2]

235

corporation) and subsidiaries as of March 31, 2004 and 2003, and the related consolidated statements ofTokyo Gas Chemicals Co., Ltd.

Sales of gas for industry and chemicals

1,000

100

19,352 [90.0]

581

Tokyo Oxygen and Nitrogen Co., Ltd.

Production and sale of liquefied oxygen andnitrogen400

54

2,210 [44.8]

165

Tokyo Gas Urban Development Co., Ltd.

Real estate leasing, management and brokerage

8,779

100

34,698 [38.2]

7,433Park Tower Hotel Co., Ltd.

Hotel “Park Hyatt Tokyo” management

1,000

100

8,529 [99.8]

245

KANPAI Co., Ltd.

Gas facilities construction

1,300

100

46,249 [52.4]

721

KANPAI LIVING SERVICE Co., Ltd.

Sales, installation and repair of gas appliances,
expansion and reconstruction work

50

100

4,648 [67.9]

25

Gastar Co., Ltd.

Production and sale of gas appliances

2,450

66.7

28,718 [55.7]

2,194

TG Credit Services Co., Ltd.

Financing and leasing related to gas equipment
and construction

450

100

10,423 [51.0]

690

Chiba Gas Co., Ltd.

Supply of gas in Yachiyo City, Narita City and surrounding cities

480

99.9

11,361 [99.2]

793

2004 and 2003, and the consolidated results of their operations and their cash flows for the years thenTsukuba Gakuen Gas Co., Ltd.

Supply of gas in Tsukuba City

280

100

5,640 [94.5]

462

ended, in conformity with accounting principles generally accepted in Japan.

Tokyo Gas Customer Service Co., Ltd.

Periodic safety checks, meter and billing services

50

100

13,819

[0.0]

1,643

Tokyo Gas Engineering Co., Ltd.

Comprehensive engineering services with a particular focus on energy-related work

100

100

29,491 [66.7]

656

TG Information Network Co., Ltd.

Information processing services, software development and sales of computer equipment

400

100

11,663 [28.9]

433

TG IT Service Co., Ltd.

Operation of Tokyo Gas systems and networks

50

100

10,211[0.1](4)Tokyo LNG Tanker Co., Ltd.

LNG and LPG transportation and chartering ofcarriers

1,200

100

3,830

[0.0]

399

ENERGY ADVANCE Co., Ltd.

Energy service, district heating and cooling

3,000

100

26,037 [93.5]

4,191

TG Enterprise Co., Ltd.

Group financial administration business

200

100

942 [63.4]

160

GAS MALAYSIA SDN. BHD.

Supply of gas in Malaysia

RM42.8 million

20

—

—

income, shareholders’ equity and cash flows for the years then ended, expressed in Japanese yen. These
consolidated financial statements are the responsibility of the Company’s management. Our responsibility
is to independently express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in Japan. Thosestandards require that we plan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits provide a reasonablebasis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the consolidated financial position of TOKYO GAS CO., LTD. and subsidiaries as of March 31,

Without qualifying our opinion, we draw attention to the change in accounting policy for actuarial differences of pension plans at TOKYO GAS CO., LTD. and the adoption of new accounting standards relating to impairment of fixed assets at TOKYO GAS CO., LTD. and subsidiaries, as described in Note 2, to theconsolidated financial statements. We also draw attention to Note 14 (1) and (2). Subsequent to March
31, 2004, TOKYO GAS CO., LTD. decided to acquire treasury stock and issue domestic unsecured notes.
The U.S. dollar amounts in the accompanying consolidated financial statements with respect to theyear ended March 31, 2004 are presented solely for convenience. Our audit also included the translation of
yen amounts into U.S. dollar amounts and, in our opinion, such translation has been made on the basis
described in Note 1 to the consolidated financial statements.

Notes: 1. Gas Malaysia Sdn. Bhd. is an equity-method affiliate.
2. The scope of consolidation was expanded to include about 50 companies in April 2004.
3. 1RM nearly equals ¥27.92.

Tokyo, Japan
June 29, 2004

[ 51 ]TOKYO GAS ANNUAL REPORT 2004

TOKYO GAS ANNUAL REPORT 2004

[ 52 ]

INVESTOR INFORMATIONAs of March 31, 2004

Securities Traded

Tokyo Gas Co., Ltd.
Head office
1-5-20 Kaigan, Minato-ku, Tokyo 105-8527, Japan
URL: http://www.tokyo-gas.co.jp

Independent Auditors
Transfer Agent

Overseas Offices
New York Office
The Chrysler Building, 405 Lexington Avenue, 33rd Floor
New York, NY 10174, U.S.A.
Tel: +1-646-865-0577 Fax: +1-646-865-0592
Paris Office
102, Avenue des Champs-Elysées, 75008 Paris, France
Tel: +33-1-45-62-00-59 Fax: +33-1-42-25-96-85
Asia Pasific Regional Office
Level 30, Menara Shahzan lnsas
No. 30 Jalan Sultan lsmail, 50250 Kuala Lumpur, Malaysia
Tel: +60-3-2144-2928 Fax: +60-3-2144-2930

Date of Establishment
Paid-in Capital

October 1, 1885

¥141,844,398,888

Authorized Number of Shares 6,500,000,000 shares
Issued Number of Shares

2,810,171,295 shares

Number of Shareholders

140,185

Common stock: Tokyo, Osaka and Nagoyastock exchanges (Trade code: 9531)
KPMG AZSA & Co.

The Chuo Mitsui Trust & Banking Co., Ltd.
2-8-4 Izumi, Suginami-ku, Tokyo 168-0068,
Japan

Number of Employees

8,753 (excluding part-time workers)

Principal Shareholders

Name

Number of Percentage ofshares held total shares(Thousands) outstanding

Nippon Life Insurance Company

160,123

5.70

The Dai-ichi Mutual Life Insurance Company

155,964

5.55

Japan Trustee Services Bank, Ltd. (Trust Account) 155,266

5.53

The Master Trust Bank of Japan, Ltd. (Trust Account)

151,530

5.39

Tokyo Gas Co., Ltd.

109,025

3.88

Fukoku Mutual Life Insurance Company

78,504

2.79

State Street Bank and Trust Company

57,811

2.06

The Chase Manhattan Bank, N.A. London

45,9181.63

Mizuho Corporate Bank, Ltd.

43,0001.53

Employees Shareholding Association

40,688

1.45

FURTHER INFORMATION
Please direct comments regarding the content of this report orrequests for other publications to:■ Investor Relations Section,
Corporate Planning Dept.
Tel: +81-3-5400-3888
Fax: +81-3-3437-2668
E-mail: tgir@tokyo-gas.co.jp

Monthly Share Price Range (Tokyo Stock Exchange)(¥)
500■ International Business Coordination Section,
Business Development Dept.
Tel: +81-3-5400-7561
Fax: +81-3-5472-5385

400(Thousands of shares)

Share Price300

300,000

Monthly Trading Volume200

200,000

100

100,000

0

0
’99/
’00/
’01/
’02/
’03/
’04/
4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3

Forward-Looking Statements

Unit conversion
bbl
cf
MJ
Btu

Barrel
Cubic footMegajoule
British thermal unit

LNG (liquefied natural gas)

1bbl=159 l
1cf=0.0283 m3
1MJ=10 6J=238.889 kcal
1Btu=1.054 kJ=0.252 kcal
MMBtu=1million Btu=1,054 MJ=252,000 kcal≈25 m3 of natural gas
Volume conversion
Calorie conversion

1 ton≈1,350 m3 of natural gas
1million≈1.35 billion m3 of natural gas
1 ton≈1.4k l of crude oil=8.8 bbl of crude oil

LNG tank with a capacity of 200,000 k l ≈92,000 tons of LNG≈124 million m3 of natural gas
LNG carrier with a capacity of 145,000 m3≈64,000 tons of LNG≈87 million m3 of natural gas[ 53 ]TOKYO GAS ANNUAL REPORT 2004

Statements made in this annual report with respect to Tokyo Gas’ plans,
strategies and beliefs, and other statements that are not expressions of fact
are forward-looking statements about the future performance of the company. As such, they are based on management’s assumptions and opinions
stemming from currently available information, and therefore involve risks anduncertainties. These risks and uncertainties include, without limitation, general economic conditions in Japan, the exchange rate between the yen and the
U.S. dollar, and Tokyo Gas’ ability to continue to adapt to rapid technologicaldevelopments and deregulation.

Financial Data and Graphs
For purposes of presentation in this annual report, all amounts less than one
billion yen or one million yen, and hundredths of a percentage point, havebeen rounded to the nearest whole number. In addition, all graphs represent
fiscal years ended March 31 of the respective years.

TOKYO GAS ANNUAL REPORT 2004

[ 54 ]