To ensure optimal business activities through close collaboration among Groupcompanies, in fiscal 2004 Tokyo Gas introduced the strategic business unit
system, dividing operations into functional categories such as gas resource
procurement, gas production, transmission, residential sales and industrial andcommercial sales. In the current era of full-scale competition in energy, eachbusiness unit takes advantage of the power of the Group and their own independent maneuverability to create value that exceeds customer expectations.

Enhancing Value Every Day

Tokyo Gas Annual Report 200515

For Residential CustomersOffering Comfortable, Satisfying
Lifestyles Made Possible by Gas
Tokyo Gas enhances many aspects of people’s lives. We work to promote theuse of gas in the home by offering the kinds of comfortable, satisfying lifestyles
only gas can provide.

Countering the “All Electric” Offensive
As typified by electric power company sales campaigns extolling “all-electric homes,” competition between companies in the energy industry has increased in the past few years,
even in the residential sector. To cope with the changing business environment, we havereinforced our sales activities to target both end-users and companies such as housingdevelopers. We have also stepped up the development of appealing products and worked
to renew people’s appreciation of the convenience and comfort that can only be achieved
with gas. As a result of these efforts, we have managed to minimize the impact of the “allelectric” campaign in our service area.

Attractiveofferings

Introducing New Rate Menu while Promoting Gas Appliance Development
and Advertising
There is no question, however, that the residential energy market is becoming more andmore competitive. Therefore, the Residential Sales Division has actively implemented
measures that include new rate menu, developing attractive products and holding events
to improve market communication.
With regard to rates, in January 2005 Tokyo Gas put into effect an average rate reduction of 5.18% for customers under regulated tariffs to promote the use of gas. From May

Total number of TES systems sold(Unit = 10 thousand)2005, we also simplified the pricing of the Danran plan, which applies to customers with106
100floor heating systems, installed as standard equipment in many condominiums. This change

89

aims to attract customers with discounts that increase with the amount of gas used.
In the area of product development, Tokyo Gas has enhanced the performance of the79
68

highly energy-efficient latent-heat recovery water heaters and its renowned gas cooktops,
which are popular for their design, safety and ease of use. We have introduced one
innovative product after another, including an innovative mist sauna, which has proved
highly popular among women, and the remote operation service for gas appliances. InFebruary 2005, Tokyo Gas released LIFUEL, the world’s first commercialized residen-(FY) ’00

’01

’02

’03

’04

tial fuel cell cogeneration system.
To link the new rate menu and strengthened appliance development capabilities to thepromotion of gas usage, we will actively hold joint events with housing manufacturers and“Tokyo Gas is enhancing

engage in advertising and publicity activities on television and in other media.

rate menu and the range ofits gas appliances in orderto remain a company people choose for their homeenergy needs.”

Further Strengthening the Bond of Trust with Customers
In 2006, the population of Japan will begin to decrease. To maintain its position of strength
in the residential sector, we must make certain to understand and meet customers’ needs
and propose ideas for fulfilling lifestyles. Building on the solid business base constructed
over the years, we will engage in close communication with customers to learn what they
truly desire and create added value to deliver it. Tokyo Gas will further solidify the bond oftrust it enjoys with customers by developing highly efficient, environmentally friendly gas
appliances and providing new creative services, such as home security monitoring and fire
insurance for household effects, in order to become appreciated as an all-around advisor on

Takashi Kunitomi (center)
Chief Executive, Residential Sales Div.

16 Tokyo Gas Annual Report 2005

residential matters. On the basis of these initiatives, Tokyo Gas will strive to continue to be
a company people choose for their home energy needs.

New services

Tokyo Gas Annual Report 200517

For Industrial and Commercial Customers

Pursuing Customer Benefits ThroughHigh Value-added Services
Relying on the most environmentally friendly fossil fuel, natural gas, as the main gas source,
our energy services provide customers with a one-stop source of essential energy by fully
exercising advanced technology and the ability to offer integrated solutions. Tokyo Gas supports its customers’ energy requirements with these high value-added services.

Advanced Technological Capabilities Unrivaled in the Industrial Sector
In 2004, the scope of liberalization of the gas business was expanded to include retail sales
to customers that consume 500,000 m3 or more per year. The effect on the energy industry has been all-out competition pitting gas companies against one another as well as
against oil companies and electric power companies. In another development, the Kyoto
Protocol went into effect in February 2005, resulting in greatly heightened environmental
awareness among the public.
In this business environment, Tokyo Gas has taken full advantage of the high energy
efficiency and environmental benefits of natural gas cogeneration systems and steadily
promoted conversion from oil to gas. Our sophisticated gas utilization technologies, per-Competitivetechnology

fected through long years of experience, have demonstrated competitiveness against newentrants into the gas business. In the coming years we aim to expand our trade area anddevelop demand within a 200 km-wide area centered on Tokyo. One way will be to capitalize on our unshakeable strengths in cogeneration and combustion technologies for heating
furnaces, drying furnaces and other applications to build relationships of trust with customers and expand sales.
Strengthening Sales Capability to Commercial and Public Facilities
Although commercial power rates were long considered to be high in comparison with gas

Cogeneration equipment capacity(thousands of kW)
859
760

rates, the gap has decreased owing to rate reductions by electric power companies. For
this reason, for sales activities directed at commercial and public facilities it has become

652571605

increasingly important to strengthen the ability to offer integrated solutions.
In response to this development, in April 2005 the Energy Sales and Service Division
implemented a major reorganization. Abandoning a geographical based organization, it
adopted a new structure organized by major customer categories: for instance, hotels,hospitals, schools and restaurants. This structure enables the sales force to develop andrefine industry specializations, strengthen relationships with customers and propose high-285
194(FY) ’00

312

337

’03

’04

208’01
Commercial use’02

Industrial use

er-level solutions.
In addition, office-building renovation is a field in which demand is expected to grow.
To capture demand for air conditioning in this market, we will approach sales through“Tokyo Gas is upgrading
its technological andsolution proposals based on accurate assessment of customer needs.
Energy Services—A Business in the Spotlightsolutions capabilities toCollaboration with ENERGY ADVANCE Co., Ltd., a Group company that provides ener-

meet the varied energy

gy services, is an important element of sales activities in the industrial, commercial andneeds of customers.”

public sectors.
In the Group’s energy services business scheme, ENERGY ADVANCE constructs andretains ownership of gas cogeneration systems and other energy facilities as company
assets and provides with a one-stop source of air conditioning, electricity, hot watersupply, lighting and other energy customers require. The offer of this “asset-free” and“personnel-free” energy supply is drawing increased attention from customers, andShigero Kusano (far right)

through March 31, 2005, ENERGY ADVANCE had signed 67 contracts for cogeneration

Chief Executive, Energy Sales andService Div.

systems delivering a total of 140 MW. The company is utilizing the rock-solid engineering
capabilities of the Tokyo Gas Group to expand its energy services beyond cogeneration
systems into gas-absorption air-conditioning systems, gas boilers and other facilities.

Flexible
response

In the coming years, we aim to further leverage this type of flexible response tocustomer needs for increased gas sales.

18 Tokyo Gas Annual Report 2005

Tokyo Gas Annual Report 200519Gas Resource Procurement

Constructing a Value Chain to Lower
LNG Procurement Costs
Tokyo Gas participates in gas field development projects and engages in the transportbusiness using company-owned LNG carriers. By participating in upstream operations
and constructing a natural-gas value chain, we seek to ensure competitive advantage ingas resource procurement.

Tireless Efforts to Ensure Competitive Gas Resources Procurement
Because Tokyo Gas relies on imports for nearly all the natural gas source used for its core gas
operations, stable, low-cost resource procurement is extremely important to our business.
For this reason, Tokyo Gas has continuously worked to ensure stability and low cost in gasresource procurement since becoming the first company in Japan to import LNG in 1969.
Tokyo Gas currently imports LNG from nine projects in six countries. Unlike oil, which
is found in only certain parts of the world, natural gas is produced widely in the world. Thismakes it possible to spread the risk and ensure stable procurement by trading with geographically diverse producers in the Middle East, Southeast Asia, Australia, Alaska andother locations with competitive contract terms and conditions.
Yet another factor that promotes stable procurement is that long-term sales contracts arecommonplace owing to the fact that the natural gas business requires enormous investment

Cost
advantagein launching a greenfield project. While the contracts are based on a long-term commitment,
we have built into them flexible adjustment of offtake volume to cope with demand fluctuation. On the other hand, on the occasion of signing a new long-term contract or renewing an
existing long-term contract, there are opportunities to negotiate price reductions. Tokyo Gastakes advantage of these opportunities to reduce procurement costs.
Although LNG market prices are linked to oil prices, the price formula produces

LNG imports by country in FY 2004
Indonesia 8.7%

smaller fluctuations, and we hold down prices by negotiating contracts that allow control

Qatar 4.7%
Alaska 3.4%of the oil price increase curve.
Tokyo Gas Acquires Its Second LNG Vessel
In recent years, Tokyo Gas has actively participated in transportation, upstream
resource development and liquefaction business with the aim of further reducing
resource procurement costs. In March 2005, Tokyo Gas put into service the Energy“Tokyo Gas is pursuing greater

Advance, its second company-owned LNG carrier. The operation of a second vessel
taking advantage of FOB contracts. The industry trend is toward more flexible LNG con-resource procurement andtracts, including looser destination clauses. This trend creates opportunities that we willtransport operations in orderpursue to maximize the benefits of vessel ownership through expanding transportation

to provide customers with abusiness by providing transportation and charter service for the other buyers.

competitive prices.”

TotalMalaysia

tonsAustralia
24.5%

marked progress in the establishment of a structure to reduce ocean freight charges,

sophistication in its gas

stable supply of city gas at

Brunei

14.4% 8.9 million 44.6%

A third vessel will be chartered from December 2006, and a fourth one will enter
service in March 2008.
Constructing a Natural Gas Value Chain by Participating in
Upstream Development

Tadaaki Maeda (right)
Chief Executive, Energy Resources Div.

In 2003, Tokyo Gas formally decided to participate in the Bayu-Undan gas field development project (off Australia and East Timor), in which Tokyo Electric Power Co. andTokyo Gas jointly own a 10% interest (in a ratio of two to one). Tokyo Gas has decided topurchase one million tons of LNG per year over a 17-year period beginning in 2006 fromthis source, for the purpose of stabilizing gas resource procurement and reducing costs.
In the Sakhalin II Project, Tokyo Gas has entered into an agreement to purchase up to
1.1 million tons of LNG per year over a 24-year period beginning in 2007. In addition toobtaining terms that make us more competitive from the standpoint of price and flexibility, we expect substantial transport cost reductions owing to the geographical proximity ofthe field to Japan and the use of company-owned carriers.

20 Tokyo Gas Annual Report 2005

Enhancedsecurity

Research and Development

Pursuing Advances in Gas-Related
Technologies to Become More Competitive
Japan is the world’s most advanced country in the use of natural gas. As the leader
in Japan’s gas industry, Tokyo Gas continues to develop new technologies that open
the way to the future of natural gas.

Besting Competitors with Our R&D Edge
As the Tokyo Gas Group seeks to develop and grow a comprehensive energy business withnatural gas at its core, it is critical to provide timely and sophisticated technology as anadvantage over competitors. The R&D Division engages in research and development witha sense of great urgency.
Specifically, we focus on “strategic technology,” which aims at increasing our competitive edge through total energy services, and on “platform technology,” which addresses
the risks associated with gas supply, such as accidents and disruptions, with the goal ofreducing costs.
In the area of strategic technology, cogeneration technologies involving gas engines
and fuel cells are a key priority and, thanks to our R&D, we now market fuel cell cogeneration systems. Today, it is important to propose both systems as well as appliances tailored

Technology
innovation

to customer requirements for industrial and commercial use, which the R&D Division
promotes and researches in the area of systems development. The division maintains a
special focus on “holonic energy systems” and has begun a demonstration test program,
while also promoting research by sponsoring a course at the University of Tokyo. Holonicenergy systems involve the balanced deployment and supply of energy from distributed
power, such as cogeneration, solar-power and wind-power generation systems in a givenarea. The national government has indicated interest in the holonic energy concept as ameans of saving energy and reducing CO2 emissions.

Distribution of R&D expenses(Total: ¥8,335 million)
Utilization of intellectual
property rights/others 10%
Hydrogen business 2%

Revitalizing R&D through the Sponsor System and Reform of theCompensation System

Platform
technology
40%

Concentrating its 350 researchers in the R&D Division rather than attaching them tooperating divisions enables Tokyo Gas to flexibly shift personnel to projects as needed. Since
1997 we have applied the Sponsor System, by which the R&D Division undertakes researchand development on the basis of commissions from corporate divisions and strategic business

Onsite power
generation
business
31%
Countermeasures for “all-electric”
campaign 17%

units. Because R&D costs are borne by the commissioning party, solid results are required
and a sense of urgency is maintained that leads to actual accomplishments.
In 2004, Tokyo Gas reformed the compensation system applied to research and devel-“Tokyo Gas is further refining

opment, effectively abolishing the upper limit on compensation. By adopting a rationalits world-class gas infra-

procedure for evaluating annual income generated by the discoveries and inventions, andstructure technologies andpaying out about 5% as compensation with the intention to revitalize the research anddeveloping gas utilization

development activities.

technologies centered oncogeneration.”

Active Acquisition and Utilization of Patents and Trademark Registrations
In addition to concrete research and development activities, the R&D Division isfocusing on the management and utilization of intellectual property rights. Tokyo Gasowns about 1,700 patents, not all of which have been fully utilized. We are currently
reviewing our intellectual property, and the Intellectual Property Office will take thelead in systematically acquiring and strategically utilizing rights, while minimizing theShigeru Muraki (far right)
Chief Executive, R&D Div.

risk of rights infringement.
Tokyo Gas has nearly 900 trademark registrations, which it regards as both a source ofroyalty revenues and a precious asset for increasing the value of the Tokyo Gas brand.
Trademark registrations are another resource we plan to take full advantage of.
For further information, please visit the website at http://www.tokyo-gas.co.jp/techno/index_e.html

22 Tokyo Gas Annual Report 2005

Robustinfrastructure