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Enhancing the value of your company

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Enhancing the value of your company Powered By Docstoc
					Enhancing the value of
your company....

         ....with a successful first step toward
         the attainment of our goals and
         the achievement of even greater success.




                            Osaka Gas Co., Ltd.
                            Annual Report 2001
                            For the year ended March 31, 2001
                                                                                                                                     Consolidated Financial Highlights
                                                                                                                                     Years ended March 31




The Osaka Gas
 The Osaka Gas Group is a diversified group of enterprises. In the core of the Group is                                                                                                                                        1998
                                                                                                                                                                                                                                                           Millions of Yen
                                                                                                                                                                                                                                                        1999                 2000                   2001
                                                                                                                                                                                                                                                                                                              Thousands of
                                                                                                                                                                                                                                                                                                               U.S. dollars
                                                                                                                                                                                                                                                                                                                 2001

                                                                                                                                      FINANCIAL DATA
 the distribution business of natural gas obtained from liquefied natural gas (LNG).                                                        Operating revenues                                                           ¥ 853,597              ¥ 831,366              ¥ 849,225             ¥ 951,927       $ 7,683,027
                                                                                                                                            Operating income                                                                 63,095                 66,376                62,724                74,055           597,700
 Osaka Gas serves its customers in the Kansai region, which is Japan’s second largest                                                       Net income                                                                       21,775                 21,614                27,345                36,097           291,340
                                                                                                                                            Capital expenditures                                                            107,016                 94,932                93,952                91,233           736,343
 economic area. Osaka Gas sells in excess of 7.4 billion cubic meters of gas to 6.4 mil-                                                    Depreciation and amortization                                                    79,793                 80,106                80,842                92,461           746,255
                                                                                                                                            Total assets                                                                  1,181,380              1,178,352             1,219,515             1,310,976        10,580,920
 lion customers. Under its Vision 2010, the entire Osaka Gas Group is working to maxi-                                                      Total shareholders’ equity                                                      381,954                380,846               428,523               475,020         3,833,898
                                                                                                                                            Number of shares, issued and outstanding (Thousands of shares)                2,528,163              2,500,463             2,477,761             2,429,564
 mize its value for shareholders, customers and society through its “value-creation
                                                                                                                                      PER SHARE DATA (Yen and U. S. dollars)
 management.” The Group is seizing opportunities amid the deregulation of energy and                                                        Net income                                                                       ¥   8.61               ¥     8.56           ¥ 10.94               ¥ 14.72            $0.119
                                                                                                                                            Shareholders’ equity                                                               151.08                   152.31            172.95                195.52             1.647
 other sectors. It is moving toward a new growth phase through the development of a

 dual business structure consisting of a “one-stop” energy business, including the sup-                                                                                                                                              1998                 1999                  2000                  2001

                                                                                                                                      KEY RATIOS
 ply of natural gas, heat, electric power and LPG, to meet the needs of its customers,                                                      Equity ratio (%)                                                                         32.3                 32.3                  35.1                  36.2
                                                                                                                                            Debt ratio (%)                                                                           39.9                 40.5                  40.3                  38.2
 and the non-energy businesses, covering areas essential to modern comfortable living                                                       Interest coverage ratio (Times)                                                           5.3                  6.8                   7.6                   9.8
                                                                                                                                            Return on average total assets (%)                                                        1.8                  1.8                   2.3                   2.9
 and lifestyles in the region.                                                                                                              Return on average shareholders’ equity (%)                                                5.8                  5.7                   6.8                   8.0

                                                                                                                                      OPERATING DATA
                                                                                                                                            Gas sales by volume (Million m )      3
                                                                                                                                                                                                                                 6,606                   6,603                7,160                  7,407
                                                                                                                                            Customers (Thousands)                                                                6,083                   6,210                6,305                  6,401
                                                                                                                                            Number of employees (Non-consolidated)                                               9,994                   9,816                9,569                  9,264

                                                                                                                                      Notes: 1. Yen amounts have been translated, for convenience only, at ¥123.90 = US$1, the approximate exchange rate on the Tokyo Foreign Exchange
                                                                                                                                                Market on March 31, 2001. Billion is used in the American sense of one thousand million.
                                                                                                                                             2. Number of consolidated companies is twenty in 1998 and 1999, twenty-five in 2000 and thirty-five in 2001.
                                                                                                                                             3. Number of employees is including part-time workers, and excluding employees on transfer.


                                                                                                                                                               Gas Sales by Volume                              Operating Revenues                                       Net Income
 Forward-Looking Statements                                                                                                                                   (Millions of m3; 1m3 = 46.04655 MJ)                (Billions of Yen)                                       (Billions of Yen)
 Statements contained in this report with respect to the Osaka Gas Group’s plans, strategies and beliefs that are not historical
                                                                                                                                                                                          7,407                                             951.9                                                    36.0
 facts are forward-looking statements about the future performance of the Osaka Gas Group which are based on management’s                                                         7,160
 assumptions and beliefs in light of the information currently available to it. These forward-looking statements involve known and                            6,370 6,606 6,603                                 837.9 853.5 831.3 849.2
 unknown risks, uncertainties and other factors that may cause the Osaka Gas Group’s actual results, performance or achieve-
                                                                                                                                                                                                                                                                                             27.3
 ments to differ materially from the expectations expressed herein.
                                                                                                                                                                                                                                                                                 21.7 21.6

 CONTENTS                                                                                                                                                                                                                                                                16.9
 Consolidated Financial Highlights           1         Adapting to Deregulation                      12
 Our Business Territory—The Kansai Region    2         Expanding Demand for Natural Gas              14
 To Our Shareholders                         4         Natural Gas Value Chain                       16
 An interview with the President             6         Research and Development                      17
                                                       Contributing to the Environment and Society   20
                                                       The Osaka Gas Group in 2001 and Future        21
                                                                                                                                                            FY 1997 1998 1999 2000 2001                     FY 1997 1998 1999 2000 2001                              FY 1997 1998 1999 2000 2001
                                                       Financial Section                             32
                                                                                                                                                                                                                                                                                                                              1
            Our Business Territory—The Kansai Region


            The Kansai region, the main business territory of the Osaka Gas Group, is located near the geo-
            graphical center of Japan. It consists of six prefectures: Osaka, Kyoto, Hyogo, Shiga, Nara and
            Wakayama. These prefectures have a combined population of 20.8 million (October 1999), of
            which 8.8 million live in Osaka. This is equivalent to 16.4% of Japan’s total population. There are
            approximately 7.9 million households in the Kansai region (end of March 2000), which represents
            16.6% of the national total.
                       Economic statistics for fiscal 1997 showed that the six prefectures of the Kansai region had a
            gross economic output of ¥84.3 trillion, a figure similar to the GNP of Canada. The region is
            Japan’s second biggest economic zone after the Tokyo Metropolitan Area.
                       Natural gas is supplied to 82.1% of households in the six prefectures of the Kansai region.
            This saturation rate is higher than the national average of 53.7%.
                       A key focus for international interaction in the region is Kansai International Airport, which
            was opened in 1994. With links to 30 overseas countries and regions, the airport processes over
            10 million passengers and about 800,000 tons of international cargo annually and is a hub for
            expanding flows of passengers and goods. The completion of a second runway in 2007 is expect-
            ed to bring a further surge of international exchange in the region.
                       The Kansai region has numerous traditional, cultural and historical attractions, and four
            locations in the region, including those in the ancient cities of Kyoto and Nara, have been given
            UNESCO World Heritage status. As one of Japan’s most important tourist destinations, Kansai
                                                                                                                                                                                                                                                                                                                                                        RUSSIA
            attracts over 100 million visitors annually. The region’s leisure and tourism industries are expect-                                                                                                                                                                                                                CHINA

            ed to receive a major boost from the opening of a major new theme park, Universal Studios
            Japan, in April 2001. In addition to its role as a tourist and leisure destination, the new facility is
            also expected to become a center for the development of the motion picture and video business.                                                                                                 Osaka Gas Service Area                                                                                               NORTH KOREA



                       The Kansai region can look forward to further exciting growth and development in the 21st
                                                                                                                                                                                                                                                                                                                                 SOUTH KOREA
                                                                                                                                                                                                                                                                                                                                                                 JAPAN
            century. As a member of the regional community, Osaka Gas will continue to contribute to region-
            al prosperity through its activities as an integrated provider of energy services.




     Total Primary Energy Supply                 Use of Gas by Sector in Japan        Import of LNG in Japan             Population of the Kansai Region   GDP of the Kansai Region           Share of Gas Sales Volume                         Comparison of the GDP of the                  Number of Customers                          Twenty-three-year Compound
     in Japan (Fiscal year 2000)                 (Calender year 1999)                  (10 thousand tons)                as a Portion in Japan             as a Portion in Japan              in Japan (Fiscal year 2000)                       Kansai Region with the GDP                    (Meters Installed)                           Annual Growth Rate
                                                                                                                         (Calender year 1999)              (Fiscal year 1998)                                                                   of Major Countries                             (Thousands of unit)
                                                                                                                 5,211                                                                                                                          (Billions of U.S. dollars)                                        6,305 6,401                                        Osaka Gas Sales by
                                                                                                                                                                                                                                                                                                      6,083 6,210
                                                                                                                                                                                                                                                                                              5,916                                                                  Volume 5.5%
    Geothermal 0.2%
                             New Energies 1.1%                                                           4,645                  Japan 126.7 million           Japan ¥50,509.8 billion           Japan 983,575 million MJ
Hydroelectric 3.6%
                                                                                                 3,998
                                                              Others
                                                                                                                                                                                                                                    Germany                                           2,133
                                                                                         3,608                                                                                                                                                                                                                                                                           Electric Power
                                                              8.0%                                                                                                                                                                                                                                                                                                       Consumption 3.4%
             Nuclear                                                                                                             Kansai Region 16.4%             Kansai Region 16.6%                                                  France                                  1,451                                                       FY 1976=100
             13.0%                                                                                                                                                                                Osaka Gas
                                                                                                                                                                                              315,912 million MJ                                                                                                                                                         Real Economic
                                                                        Residential                                                                                                                                                     Italy                         1,171
                                                     Industrial         39.0%                                                                                                                       32.1%                                                                                                                                                                Growth 3.0%
         Coal 17.4%        Petroleum 52.0%
                                                     36.7%                                                                                                                                                                                                                                                                                                               Final Energy
                                                                                                                                                                                                                              United Kingdom                                 1,387
                                                                                                                                                                                                                                                                                                                                                                         Consumption 1.6%
             Natural Gas                                          Commercial                                                                                                                                                  Kansai Region                 630
                                                                                                                                                                                                                                                                                                                                                                         Petroleum
             12.7%                                                  16.2%                                                                                                                                                                                                                                                                                                Consumption 1.2%
                                                                                                                                                                                                                                     Canada                603


                                                                                      FY 1991 1994 1997 2000                                                                                                                                                                             FY 1997 1998 1999 2000 2001                    FY 1976 1981 1986 1991 2001
    Source: Integrated Energy Statistics          Source: Japan Gas Association       Source: Japan Gas Association            Source: Statistics Bureau   Source: Economic Planning Agency   Source: Japan Gas Association             Calender year 1998, except Kansai Region                                                           Source: Agency of Natural Resource and Energy
2                                                                                                                                                                                                                                       in Fiscal year 1998.                                                                                                                                3
    To Our Shareholders                                                                                                                                  A Successful First Step on our Path to 2010




                                                                                                                                                                Osaka Gas
                                                                                                                                                                            In October 1999 Osaka Gas adopted the Vision 2010, and in February 2000, it formulated


                                                                                                                                                                            the GATE Plan, a medium-term business plan covering the period to fiscal year 2003. It is

                                                                                                Shin-ichiro Ryoki, Chairman (left)
                                                                                                Akio Nomura, President (right)                                              now working toward the achievement of the goals identified in these plans.

       We should like to begin this report by thanking our shareholders         reforms, the aim of which is to improve efficiency by promoting com-
                                                                                                                                                                               The year ended March 2001 was the first year of the plans. The combined efforts of
       most sincerely for their continued support of our business activities.   petition and creating an open market environment with transparent
            Since its start of operations in 1905, Osaka Gas has fulfilled      information. These changes are starting to drive a variety of phenom-
       an important public mission as the company responsible for sup-          ena, including an influx of new companies into the energy sector, and                       the entire group, including both management and employees, were reflected in the fol-
       plying gas to the Kansai region. Today, with the highest priority        the diversification of existing energy suppliers into other energy
       placed on superior services, we provide our 6.4 million customers        industries. Traditionally the energy sector was divided into separate
                                                                                                                                                                            lowing major achievements.
       with the safe and reliable distribution of natural gas, the most envi-   industries, such as electric power, gas and heat. Today those indus-
       ronment-friendly fossil fuel.                                            tries are merging to form a single energy market.
            Our aim is to maximize our corporate value through a wide-               Players in this new energy market can no longer limit them-
       ranging involvement at both the upstream and downstream levels of        selves to the supply of one form of energy. Instead they need to offer
       the energy sector. This involvement includes investment in natural       efficient integrated energy systems based on optimized energy com-
                                                                                                                                                                            ■ Consolidated net sales increased by 12.1% to ¥951.9 billion.




                                                                                                                                                         2010
       gas production projects, ownership of an LNG carrier fleet, diversifi-   binations, and to build integrated energy supply systems that con-
       cation into heat and power supply businesses, and gas equipment          tribute to environmental protection, the improvement of urban func-
       sales. We are also using our management resources to build busi-         tions, and the creation of amenable living spaces.
       ness activities in a wide range of fields, including housing, informa-        Our aim is to enhance our management flexibility so that we can
                                                                                                                                                                            ■ Consolidated net income increased by 32.0% to ¥36.0 billion.
       tion and engineering. For example, the cryogenic energy of LNG           adapt to changes in our business environment. We are determined to
       obtained in the process of regasification is used in frozen food manu-   build a business structure that will attract customers and give us a
       facturing and the production of industrial gases through air separa-     competitive advantage in terms of energy costs, efficiency and con-
       tion. Through these activities the Osaka Gas Group is helping to build   sideration for the environment.
                                                                                                                                                                            ■ Consolidated ROE improved by 1.2 points to 8.0%.
       an enhanced living environment and prosperous regional communi-               We look forward to your continuing support.
       ties. There are now over 100 group companies, and consolidated
       sales are in excess of ¥900 billion.
            A major challenge for the energy sector today is the balancing of
                                                                                                                                                                            ■ Consolidated ROA improved by 0.6 points to 2.9%.
       sustainable economic growth with environmental protection and
                                                                                                                   Shin-ichiro Ryoki, Chairman
       energy security. We call this the “3E” challenge. The electric power
       and gas industries are also adapting to deregulation and regulatory

                                                                                                                   Akio Nomura, President


4                                                                                                                                                                                                                                                                       5
    An Interview with the President


    Osaka Gas adopted the Vision 2010 in October 1999. In February 2000 it introduced the GATE Plan, a medium-term business                                                                                                                                                                                    rior technology and proposal-marketing capabilities of Osaka
    plan covering the period from fiscal year 2001 to fiscal year 2003. The aim of these plans is to maximize corporate value by                                                                                                                                                                               Gas. In fiscal year 2001, cumulative installed capacity exceed-
    adopting the concept of “value-creation management” as the basic management philosophy of the Osaka Gas Group.                                                                                                                                                                                             ed 1 GW. Rising concern about environmental problems has
                                                                                                                                                                                                                                                                                                               been paralleled by increasing recognition of the efficiency of
        Under the medium-term GATE Plan, Osaka Gas will work to realize the aims of value-creation management. It has set
                                                                                                                                                                                                                                                                                                               cogeneration technology and its contribution to the reduction
    and published goals for the enhancement of the Group’s value for customers, shareholders and society. Customer value
                                                                                                                                                                                                                                                                                                               of energy consumption. This is reflected in a global increase
    goals relate to rate levels, the diversification of rate options, and standards of service and safety. Shareholder value                                                                                                                                                                                   in the use of cogeneration systems in recent years. We are
    goals are based on performance indicators, including income before income taxes, net income, ROE, ROA and free cash                                                                                                                                                                                        determined to take full advantage of this trend to promote fur-

    flows. Social value goals focus on environmental behavior, social contribution, information disclosure and compliance.                                                                                                                                                                                     ther growth in the use of cogeneration technology.
                                                                                                                                                                                                                                                                                                                       We are also working to develop residential cogeneration
                                                                                                                                                                                                                                                                                                               systems, which we see as the key to a dramatic improvement
                                                                                                                                                                                                                                                                                                               in gas sales. Osaka Gas plans to launch a micro-gas engine

                Shareholder Value Enhancement Targets under the Medium-Term Plan                                                                                             Results for Fiscal Year 2001 and Target for Fiscal Year 2002
                                                                                                                                                                                                                                                                                                               in fiscal year 2003 and a residential fuel cell system in fiscal
                                                                                                         Osaka Gas Group. In fiscal year 2001, which was the first year of   (Billions of Yen)                 Target for fiscal year 2001     Result for fiscal year 2001     Target for fiscal year 2002     2006. The fuel cell system will revolutionize the supply of
                   1. Income before income taxes                                                         that plan, our primary objective was to achieve steady improve-                                                                                                                                       energy. We are fully committed to the development of the fuel
                                                                                                                                                                                                              Consolidated Non-consolidated   Consolidated Non-consolidated    Consolidated Non-consolidated
                      Non-consolidated: at least ¥65 billion in fiscal year 2003
                      Consolidated (25-company basis): at least ¥75 billion in fiscal year 2003          ment in our performance toward the realization of our goals.         Income before income taxes         57.0            47.0             63.8          53.9              72.0             61.0        cell system under an alliance with fuel cell manufacturers. Our
                   2. Net income                                                                              Our target for consolidated net sales in fiscal year 2001       Net income                         30.0            26.0             36.0          32.9              43.0             38.5        assets include advanced catalyst technology, which is crucial
                      Non-consolidated: at least ¥35 billion in fiscal year 2003
                      Consolidated: at least ¥40 billion in fiscal year 2003                             was ¥915.0 billion. In fact we exceeded that target with a           ROE                                 7.7%            6.7%             8.0%          8.2%              8.7%             9.0%       to the reforming of natural gas for use in fuel cell systems.
                   3. ROE
                                                                                                         result of ¥951.9 billion. This was attributable not only to vol-     ROA                                 2.4%            2.4%             2.9%          3.2%              3.2%             3.5%
                      At least 9.0% at both the consolidated and non-consolidated levels in
                                                                                                                                                                                                                                                                                                                       How are you working to improve man-
                                                                                                                                                                                                                                                                                                               Q
                      fiscal year 2003                                                                   ume growth in gas sales, but also to the sales contribution          Free cash flows                      4.1             3.1            40.5          37.2              45.0             33.5
                   4. ROA
                      At least 3.5% at both the consolidated and non-consolidated levels in              from 10 new consolidated companies that were added to the           1. Free cash flows: Operating income after tax + depreciation (including incidentals) and other internal reserves –                       agement efficiency?
                                                                                                                                                                                capital investment (cash basis)
                      fiscal year 2003                                                                   Group following our acquisition of Nissho Iwai Petroleum Gas        2. The target for the number of consolidated subsidiaries in fiscal year 2001 was 32, and the actual number was 35.               We are determined to strengthen our business foundation
                   5. Free cash flows                                                                                                                                           The target for fiscal year 2002 is 42.
                      Positive at both the consolidated and non-consolidated levels in fiscal            Corporation in September 2000.                                                                                                                                                                        and improve our competitiveness. To achieve these goals,
                      year 2001, and increasing thereafter                                                    The non-consolidated net sales of Osaka Gas Co., Ltd.                                                                                                                                            we need to enhance both the efficiency and speed of man-
                                                                                                                                                                                                                            gies by reforming our personnel systems and making opti-
                                                                                                         amounted to ¥754.1 billion, which is above the original target                                                     mal use of IT. In addition, we will strengthen our risk man-                       agement. Our efforts to improve efficiency are focusing pri-
                                           First, could you comment about manage-
                                       Q   ment planning in general, starting with
                                       progress under the management plan.
                                                                                                         of ¥731.0 billion.
                                                                                                              As stated in the attached chart, we achieved all of our
                                                                                                                                                                                                                            agement systems as part of our efforts to ensure the sound
                                                                                                                                                                                                                            development of the Osaka Gas Group.
                                                                                                                                                                                                                                                                                                               Employee Numbers
                                                                                                                                                                                                                                                                                                               (Including Employees on Transfer, Excluding Part-Time Workers)
                                                                                                                                                                                                                                                                                                                                98          99         00          01          02           03        98➝03
                                                                                                         numerical goals for the improvement of shareholder value.
                                       Our medium-term management plan will give concrete form to                                                                                                                                                                                                               Target                    9,850      9,660       9,410       9,180        8,990 –1,004
                                                                                                         These results represent an important first step toward the                                                              What initiatives have you introduced to
                                       our shareholder-focused management stance. We regard the
                                       three-year period covered by the plan as a crucial first step
                                                                                                         realization of the goals set down in our medium-term
                                                                                                         management plan.
                                                                                                                                                                                                                           Q     achieve the targets set down in the
                                                                                                                                                                                                                            medium-term plan? First of all, what is your
                                                                                                                                                                                                                                                                                                                Actual        9,994       9,816      9,569       9,241       8,965(planned) —

                                                                                                                                                                                                                                                                                                               Note: The scale of operations has increased over the years due to growth in customer num-
                                                                                                                                                                                                                                                                                                                     bers and gas sales volumes. However, it is planned to reduce the number of employees
                                       toward the realization of our Vision 2010 for the future of the                                                                                                                                                                                                               at the end of fiscal year 2003 by approximately 1,000 compared with the level at the end
                                                                                                                                                                                                                            strategy for the natural gas business?                                                   of fiscal year 1998, through operational and organizational changes, and through the
                                                                                                               What are the key aspects of the manage-
                                                                                                         Q
                                                                                                                                                                                                                                                                                                                     use of information technology. The work force was down to 9,241 by the end of fiscal
                                                                                                                                                                                                                            In the residential sector we will develop increased demand for                           year 2001, indicating that the reduction process is ahead of schedule. Efforts to improve
                Osaka Gas Vision 2010                                                                          ment plan for fiscal year 2002?                                                                              gas and enhance our ability to compete with electric power by                            work force efficiency will continue after the completion of the present plan. The target is
                Value Creation on Three Levels                                                                                                                                                                                                                                                                       to reduce the total work force to 8,000 by the end of fiscal year 2007.
                                                                                                         Our business environment is changing. In our management                                                            establishing de facto standards for central heating systems,
                                                                                                         plan for fiscal year 2002, we have brought forward the dead-                                                       including floor heaters and bathroom heater-dryers, and by                         Gas Sales Volume per Employee
                                                                                                         line for the achievement of the medium numerical targets for                                                       promoting the use of gas-powered home air conditioners. We
                                                 Corporate Value                                         fiscal year 2003 by almost one year.                                                                               will also strengthen our marketing capabilities by forming                                                                                850
                                                                                                                                                                                                                                                                                                                                                          833
                                                                                                              The priorities identified in our management policy for                                                        alliances with leading manufacturers, by developing new dis-                                                     802
                                                                                                         the current fiscal year are the expansion of our energy-busi-                                                      tribution channels, and by reforming our distribution and                                           748
                                                                                                         ness areas and the reinforcement of group management, so                                                           maintenance organizations.
                            Customer                Shareholder                Social Value              that we can achieve a significant improvement in competi-                                                                 In the commercial and industrial areas, we will step up                          673
                             Value                     Value
                                                                                                         tiveness through the application of our total group                                                                our efforts to promote cogeneration systems. Since 1982
                      Rate levels               Income before income taxes   Environmental behavior
                      Diversification of rate   Net income                   Social contribution         resources and capabilities in an increasingly competitive                                                          numerous customers have benefited from the efficiency and
                      options                   ROE                          Information disclosure
                      Service standards         ROA                          Compliance                  energy sector. We will also work to maximize group syner-                                                          energy-saving potential of these systems, and from the supe-
                      Safety standards          Free cash flows
                                                                                                                                                                                                                                                                                                                FY 1999         2000         2001        2002 (Target) 2003(Target)

6                                                                                                                                                                                                                                                                                                                                                                                                             7
An Interview with the President




                                  marily on continuing cost reductions, and on the use of IT to                                                                                                                     How does Osaka Gas manage its cash                                                         our gas operations. We see investment in upstream areas of
                                  rationalize our operations.
                                        One aspect of our cost reduction strategy is the mini-
                                                                                                                                                                                                                Q   flows to increase corporate value and
                                                                                                                                                                                                                market value. How does its approach differ
                                                                                                                                                                                                                                                                                                               the natural gas business as an effective way to secure reli-
                                                                                                                                                                                                                                                                                                               able access to low-cost supplies. In fiscal year 2001 we
                                  mization of personnel costs through reduction of our work                                                                                                                     from that of other companies?                                                                  invested ¥9.6 billion in the acquisition of interests in off-
                                  force. We are also working to reduce capital investment                                                                                                                       As is apparent from our consolidated shareholders’ equity ratio                                shore gas fields in northern Australia. We also plan to invest
                                  costs by improving our purchasing methods, by introduc-                                                                                                                       of 36.2%, and our debt equity ratio of 1.07, Osaka Gas has the                                 actively in the electric power and LPG areas. Our aim is to
                                  ing new technologies, and by reviewing replacement cycles                                                                                                                     strongest financial structure in the Japanese electric power and                               provide customers with one-stop services to meet all of their
                                  for major facilities.                                                                                                                                                         gas sectors. The advantage that we gain from this financial                                    energy needs. In fiscal year 2000 we acquired the Nissho
                                        We are also targeting the improvement of asset efficien-                                                                                                                strength is our ability to invest actively in new projects and retire                          Iwai Petroleum Gas Group for ¥7.5 billion. We also invested
                                  cy. Measures in this area include the sale or disposal of idle       provide to its shareholders. The most important area of con-                                             our shares, using not only cash flows but also debt leverage.                                  ¥1.9 billion in the establishment of a power retailing sub-
                                  real estate and low-return assets.                                   cern for us is the corporate market value. To enhance share-                                                                                                                                            sidiary, Ennet Corporation.
                                        We are actively using information technology to                holder value, we believe that we need to improve efficiency and                                                What is your thinking on the use of                                                            Investment decisions are based on stringent prior
                                  improve the efficiency of our billing operations. We are
                                  also employing information technology to improve the effi-
                                                                                                       strengthen our ability to succeed in a competitive environment.
                                                                                                       We are also determined to achieve profit and cash flow levels
                                                                                                                                                                                                                Q     cash flows?
                                                                                                                                                                                                                Our approach is to choose and implement the use that is
                                                                                                                                                                                                                                                                                                               assessments. The criteria applied include reliable partners,
                                                                                                                                                                                                                                                                                                               and investment risks and returns. In the past decisions were
                                  ciency of our Customer Service Center, which handles 2.2             that make Osaka Gas an attractive investment for shareholders.                                           most effective at the time from the viewpoint of enhancing                                     made according to judgment criteria that were specific to each
                                  million inquiries a year.                                                  We also plan to introduce SVA (shareholders’ value                                                 shareholder value. We give first priority to investment in                                     project. Since fiscal year 2001, however, we have adopted a
                                                                                                       added) as one of the performance indicators for our internal                                             new activities with the potential to produce high rates of                                     uniform approach based on net present value (NPV), which is
                                      You have targeted the maximization of
                                  Q
                                                                                                       organizations and all group companies. We will use the SVA                                               return. We next consider the improvement of our financial                                      calculated using hurdle rates adjusted for specific project
                                      shareholder value, customer value and                            indicator to ensure that our management plans and perform-                                               structure or returns to shareholders.                                                          risks. We believe that this approach will help us to invest effi-
                                  social value. What is your thinking on share-                        ance assessments reflect the expectations of shareholders                                                      When investing in new activities, we focus mainly on                                     ciently and effectively and in a variety of business fields.
                                  holder value?                                                        with regard to earnings.                                                                                 energy-related businesses, such as natural gas, electric                                             As far as the reinforcement of our financial structure
                                  Deregulation and the introduction of competition have                                                                                                                         power and LPG areas that offer significant synergies with                                      and the return of profits to shareholders are concerned, we
                                  advanced to the stage where electricity and gas utilities are        Consolidated Return on Equity (%)                                                                                                                                                                       will continue to consider the share buy backs, dividend
                                  now able to move into each other’s markets. In this environ-                                                                                                                  Consolidated Free Cash Flow (Billions of Yen)                                                  increases and other measures, taking into account our
                                                                                                                                   36.2      36.6
                                  ment, customers are becoming more selective about suppliers,                        35.1                                                                                                                                                                                     income and expenditure position, trends in our investment
                                                                                                                                                                                                                                                                       45.0
                                  and capital markets are becoming increasingly stringent in                                                                                                                                                                                                                   activities, share price movements, interest rates and other
                                                                                                            32.3                                                                                                                                     40.5
                                  their selection of companies for investment. Investors want to                                                                                                                                                                                                               factors. The share buy backs benefit shareholders in various
                                  know how much value a corporate group has provided and will                                                                                                                                                                                                                  ways, including higher profit and ROE per share. Over the
                                                                                                                                                                                                                    28.2                                                                                       past three years we have bought and retired 99 million
                                  SVA
                                                                                                                                                                                                                                                                                                               shares for a total of ¥30 billion.
                                     This indicator was introduced on a trial basis in fiscal year                                                                                                                                                                                                                   Our basic dividend policy is to maintain stable divi-
                                     2002. Performance evaluations for organizations and Groups
                                                                                                                                                                                                                                                                                                               dends, but decisions will be based on a comprehensive view
                                     of Osaka Gas were stated using SVA instead of operating                                                                                                                                       18.9
                                                                                                         FY 1999      2000        2001       2002 (Target)                                                                                                                                                     that also reflects business performance, future business
                                     income. SVA is calculated by subtracting creditors’ and
                                     shareholders’ anticipated returns on capital invested from
                                                                                                                                                                                                                 FY 1999           2000              2001              2002 (Target)
                                                                                                                                                                                                                                                                                                               plans, and other profit sharing measures. In fiscal year 2002
                                     after-tax operating income. It therefore represents the value     Consolidated Debt/Equity Ratio (Times)
                                     added for shareholders. SVA is calculated using the weighted                                                                                                                                                                                                              we aim to increase the annual dividend per share by ¥1 to ¥6.
                                     average cost of capital (WACC), which reflects the risk-                                                                            Free Cash Flow Utilization (¥billions)
                                     adjusted anticipated rate of return. This means that the share-
                                                                                                                                                                                                 Dividends        Share buy back       New investments                    New investment
                                     holder value added for each activity can be monitored more                                                                          Fiscal year 2001       ¥12.2 billion      ¥14.6 billion        ¥13.7 billion  ¥9.5 billion       through debt leverage                Share Buy Back
                                     accurately, providing information that can be used to support                                                                        (actual)
                                     a strategy of business selection and concentration.                                                                                                                                                                                 New investment                             Period    Number of shares retired Value of retired shares    Purchase price
                                                                                                          1.25                                                                                    Dividends           New investments / Share buy back
                                                                                                                                                                         Fiscal year 2002                                                                             through debt leverage
                                     SVA = NOPAT– (interest-bearing liabilities +                                    1.15
                                                                                                                                                                                                 ¥14.7 billion                  ¥30.3 billion
                                                                                                                                                                                                                                                                          ¥24.3 billion                            2–3/99     27.7 million shares           ¥10.0 billion        ¥361 per share
                                                                                                                                                                          (planned)
                                           shareholders’ equity) ✕ WACC                                                           1.07      1.09                                                                                                                                                                   2–4/00     38.6 million shares           ¥ 9.6 billion        ¥248 per share
                                                                                                                                                                                            0            100           200             300          400          500             600          700    800
                                     NOPAT = Before-tax net income before deduction                                                                                                                                                                                                                 ¥billion      11–12/00    32.3 million shares           ¥10.0 billion        ¥310 per share

                                             of interest paid ✕ (1-effective tax rate) –                                                                                                                             Free cash flows
                                                                                                                                                                                                                      ¥45.0 billion                                                                            Note: Over the past two years, Osaka Gas has implemented three share
                                             (entertainment expenses – dividends
                                                                                                                                                                                            Note: Free cash flows = Operating income after tax + depreciation (including incidentals) and                            buy back schemes. Further 151 million shares remain in the quota
                                             received) ✕ effective tax rate                                                                                                                                         other internal reserves – capital investment (cash basis)                                        established by the Board of Directors.

                                                                                                        FY 1999      2000         2001      2002 (Target)




8                                                                                                                                                                                                                                                                                                                                                                                                  9
An Interview with the President




                                                     The reduction of rates appears to have                          What is your basic policy in relation to                        buy and sell surplus power through a network of existing
                                               Q     become an important priority, not only in
                                                terms of returning profits to consumers, but
                                                                                                                  Q  recent trends in deregulation and the
                                                                                                                  competition in the energy market?
                                                                                                                                                                                     Osaka Gas customers with cogeneration facilities. The Osaka
                                                                                                                                                                                     Gas Group is also involved in on-site generation through a
                                                also as a way of countering escalating com-                       The amendment of the Gas Utility Industry Law and the              combination of contract private generation and ESCO opera-
                                                petition in the energy sector. What is your                       Electricity Utility Industry Business Law in 1999 and 2000         tions. A scheme was launched in January 2001 at a large
                                                thinking on this issue?                                           have increased the scope of liberalization in gas and electrici-   shopping center in Ibaraki City, Osaka Prefecture.
                                                We led the industry by cutting our rates by 3.61% in February     ty retailing. In the gas sector the threshold for large-volume
                                                                                                                                                                                          Compared with other utilities in Japan,
                                                1999. We decided to initiate studies about the next round of
                                                changes when we are firmly on track to achieve the goals set
                                                                                                                  gas supply was lowered from 2 million cubic meters per year
                                                                                                                  to one million cubic meters. Other changes include the estab-      Q    Osaka Gas has a large group of business-
                                                                                                                                                                                     es in an extremely wide range of fields. What                        business restructuring measures, which may include withdraw-
                                                down in our present medium-term plan. Our plans for fiscal        lishment of gas transportation services. Changes in the elec-
                                                year 2002 call for the achievement of the targets set down for    tricity business include not only the establishment of IPPs,       is the current state of group management, and                        al or sale. This approach reflects our “selection and concentra-
                                                fiscal year 2003 almost a year ahead of schedule, so we           but also the liberalization of retailing to special high-voltage   what is your future policy in this area?                             tion” strategy, the aim of which is to concentrate resources into
                                                expect to review our rates in the first half of 2002.             users. The Study Group on Gas Market Reform of the Ministry        The earnings of group companies that are still at the develop-       activities that offer higher returns. As part of the selection and
                                                      In the gas business, there has always been competition      of Economy, Trade and Industry is currently studying further       ment stage are small compared with those of Osaka Gas. We            concentration process, we decided in fiscal year 2001 to
                                                from other forms of energy, such as oil and electricity, espe-    reforms for the gas business, including a grand design for the     will need to enhance the overall corporate value of the Group        restructure the Harman Group, which produces and sells gas
                                                cially in the commercial and industrial markets. In the future,   next decade. Osaka Gas is helping to create optimized sys-         by pursuing a strategy of selection and concentration, and by        appliances and equipment, in partnership with Noritz Corp.
                                                however, more new companies are expected to move into the         tems that match the realities of the Japanese energy situation     building sound, strong business structures.                                Another goal is the reinforcement of group management
                                                gas supply market using our transportation services. We plan      by participating in the design of those systems.                        In fiscal year 2001, we made the transition from “G9” to        infrastructure. Measures in this area include the enhancement
                                                to adapt to this new environment by reducing our rates in              Osaka Gas has not attempted to maintain the regulatory        “G10” with the addition of the Nissho Iwai Petroleum Gas             of group financial and cash management systems, the provi-
                                                areas affected by escalating price competition, and by offering   framework of the past. Instead we are responding positively to     Group to our Group. We now have 10 core companies,                   sion of incentive schemes, such as internal entrepreneurship
                                                an enhanced range of rate options. The process started last       deregulation, which we see as an opportunity to expand             including Osaka Gas Co., Ltd., each of which will function as        systems based on employee share ownership, and perform-
                                                year with the introduction of rates based on total energy sys-    demand for natural gas and move into the electricity business.     a growth engine. Our aim is to build a federal management            ance evaluation systems for directors of group companies.
                                                tem contracts for cogeneration customers and the floor heat-      We are determined to build an integrated energy business           structure under which we can increase the overall value of the       We will also target the improvement of group management,
                                                ing rate for residential customers, and a review of residential   capable of competing with newcomers in the gas sector and          Group by enhancing both the scale and depth of our activities.       and the development of a group accounting data system to
                                                air conditioning rates. We will continue to enhance our com-      expanding successfully into the electricity business.                   We will ensure the financial health of all our core com-        support the early implementation of consolidated accounting,
                                                petitiveness by developing and introducing strategic rate                                                                            panies so that their shares can be listed in the future. This will   in order to provide enhanced segment data.
                                                                                                                        What specific plans do you have for the                      require the achievement of profit levels that match sharehold-
                                                structures that help to boost demand while providing
                                                increased benefits to customers.                                  Q     electricity business?
                                                                                                                  We plan to build and own our generation facilities so that we
                                                                                                                                                                                     er expectations, and the proper disclosure of financial data.
                                                                                                                                                                                     We are working to make all of our core companies independ-           Q     Finally, what message would you like to
                                                                                                                                                                                                                                                                send to investors?
                                                                                                                  can enter the market as a power generator. We also intend to       ent and self-sufficient. This approach is exemplified by Kinrei      Competition in the energy sector will intensify as a result of
                          Current Directions in Deregulation
                                                                                                                  move into the electricity retailing business by acquiring sur-     Co., Ltd., our core company in the area of foodstuffs and            deregulation. The gas business has a history of competition
                             The Study Group on Gas Market Reform                                                 plus power from major power users and other sources for sale       restaurant operations, which in fiscal 2001 Kinrei achieved          with other forms of energy, but in the future there will be also
                             • This is a non-statutory study group for the Directors-General of the               to our commercial and industrial customers. We believe that        the listing of its shares for public trading.                        competition among gas suppliers. Our survival in this fiercely
                               Natural Resources and Fuel Department and Electricity and Gas
                               Industry Department of the Ministry of Economy, Trade and Industry.                there are ample opportunities to use our customer networks              In fiscal 2001 we established uniform investment criteria       competitive environment will depend on our ability to adapt
                             • Established in January 2001, it will carry out studies for one year. The           and proposal marketing capabilities in this field.                 for the Group. These standards provide a framework for               our management systems flexibly in response to change in
                               results of this work will be handed over to a statutory policy council,                                                                               appropriate investment decision-making in a wide range of            our business environment. It will also be necessary to speed
                                                                                                                       A specific example of our involvement in the electricity
                               which will make plans for a third round of deregulation in 2003.
                             • The main focus of research will be a grand design for market regula-               business is an IPP venture, which will start to wholesale elec-    business areas, and for the realistic evaluation of M&A deals        up our decision-making processes. We will continue to adapt
                               tion over the medium- to long-term future (about 10 years).                        tricity to Kansai Electric Power in April 2002. A 150Mw facili-    and overseas investments, which are on a trend of increase.          vigorously while responding positively to deregulation and
                                  •   Approaches to the specific business activities that make up the gas         ty is currently under construction at Torishima in Osaka City.          From fiscal year 2003 onwards, we will base the perform-        competition. Our aim is to ensure that the investors will con-
                                      chain, including importation, storage, pipeline transportation, wholesal-
                                      ing and retailing                                                           We have also moved into the electricity retailing business         ance indicators for the internal organizations of Osaka Gas and      tinue to place a high value on the Osaka Gas Group. We look
                                  •   Reconciling supply safety and consumer protection with the develop-         with the establishment of Ennet Corporation in April 2001.         its group companies on shareholders’ value added (SVA)               forward to your continued support in the future.
                                      ment of a competitive environment                                                                                                              instead of income before income taxes. When preparing our
                                                                                                                  Ennet is a joint venture with NTT Facilities Co., Ltd. and
                                  •   Approaches to safety, regulation, etc.
                                                                                                                  Tokyo Gas Co., Ltd. The new company has made a pleasing            business plan for fiscal year 2002, we directed all group com-
                                                                                                                  start, including the placement of a successful tender to supply    panies to work toward a positive SVA position by fiscal 2003. If
                                                                                                                  power to the Osaka Prefecture Government. In the future it will    any company is unable to attain this target, we will implement                                                   Akio Nomura, President

10                                                                                                                                                                                                                                                                                                                             11
        The Focus of Our Operations — Osaka Gas in 2001

                                                                 Adapting to Deregulation

                                                                 The Ongoing Deregulation Process                           among companies in the energy sector. Yet                                                                         ➂ Group Companies in Growth Phase                             The LPG chain expertise developed by the
                                                                 Japan has been working in earnest to open up its           there are also increased opportunities to move                                                                    Companies in the Osaka Gas Group have                  Nissho Iwai Petroleum Gas Group has been
                                                                 markets and introduce competition into the public          into other energy markets.                                                                                        achieved net sales of ¥380 billion and income          added to the marketing and gas facility expertise
                                                                 utility industries since the 1980s. These efforts                                                                                                                            before income tax of ¥13 billion, and they are         of the Osaka Gas Group in its gas operations.
                                                                 have brought dramatic changes in the business              The Strengths of the Osaka Gas                                                                                    still achieving sustained growth. Initially the        The Nissho Iwai Petroleum Gas Group will
                                                                 environment for the energy sector as well.                 Group                                                                                                             Group expanded into areas that offered signifi-        develop the LPG business on a national scale in
                                                                        Changes affecting the gas industry include          The Osaka Gas Group has a number of strengths                                                                     cant synergies with the gas business. Today,           cooperation with the Liquid Gas Group’s existing
                                                                 the March 1995 amendments to the Gas Utility               that will help it to adapt successfully to these                                                                  more and more group companies are demon-               LPG retailing business in the Kansai region.
                                                                 Industry Law, which eased restrictions on rates            changes in the business environment. These                                                                        strating their core competencies in a variety of              The Osaka Gas Group has moved into the
                                                                 and market entry in the area of gas supplies to            strengths can be broadly categorized into the fol-                                                                industrial sectors. Osaka Gas has achieved             electric power business as an operator of its own
                Japan’s Energy Demand by Type                    large users (over 2,000,000 m3 annually).                  lowing three areas.                                      Press meeting announcing the establishment of a new
                                                                                                                                                                                                                                              greater diversification than any other utility         generation facilities. It also aggregates surplus
                (Millions of Kiloliters)                                                                                                                                             subsidiary, Ennet Corporation.                           company in Japan. During its 20-year history of        power from in-house generation facilities
                                                                 Changes to pricing systems include yardstick               ➀ Excellent Financial Structure and
                                                                 system and the fuel-cost adjustment system,                    Ample Cash Flows                                                                                              diversification, it has also accumulated               belonging to major power users. One of the
                                           622
                              593
                                           4.9%    Others        which were fully implemented in January 1996.              Compared with other companies in the Japanese                                                                     immense resources of knowledge and expertise.          Group’s strengths in this field is its proposal
                              4.9%         15.0
                  526         13.0                 Nuclear       The Gas Utility Industry Law was again                     energy sector, Osaka Gas combines low reliance                                                                    Another important strength is the Group’s              marketing expertise, which will be used to dis-
                  5.6%
                   9.4        12.7         13.2                  amended in November 1999.                                  on interest-bearing debt with a high sharehold-                                                                   human resources. Group members, especially             cover demand and build a presence in the elec-
                                                   Natural gas
                  10.1                                                  The new amendments to the Law further               ers’ equity ratio. In addition, the cash flows are                                                                the core companies, will continue to raise their       tricity retailing business.
                              17.4         21.9
                  16.6                             Coal-fired    eased restrictions, and the market subject to lib-         expected to remain ample in the medium-term                                                                       profiles in their respective areas. At the same               Osaka Gas is currently building a 150MW
                  58.3        52.0                               eralization was expanded to include customers              future, allowing the Company to undertake for-                                                                    time, the Group will follow a strategy of selec-       generator at Torishima in Osaka City. The plant
                                           45.0
                                                   Oil           using in excess of 1,000,000 m3 of gas annually.           ward investment in such areas as the electric                                                                     tion and concentration.                                will supply electric power to Kansai Electric
                                                                 Also, to facilitate the supply of gas to large users       power business and overseas energy projects.                                                                             Osaka Gas aims to use these strengths to        Power Co., Inc. as an independent power pro-
                                                                 by suppliers without their own pipelines, the four         ➁ Strong Customer Confidence, Ability                                                                             attract both customers and investors in the increas-   ducer (IPP). The plant is scheduled to come on
                                                                 major gas utilities (Tokyo Gas, Osaka Gas, Toho                to Respond Precisely to Customer                                                                              ingly competitive energy sector of the future.         line in April 2002. In April 2001, Ennet
              FY 1991        2000          2011 (Projected)      Gas, Saibu Gas) became subject to reporting and                Needs through Proposal Marketing                     LPG terminated facilities in Yokkaichi                                                                          Corporation, a power retailing company estab-
                                                                                                                                                                                     (Nissho Iwai Petroleum Gas Group)
     Source: The Advisory Committee for Resources and Energy     publishing requirements concerning their trans-            Osaka Gas is able to respond to customer needs                                                                    Energy Business Activities                             lished jointly by Osaka Gas, NTT Facilities Co.,
                                                                 portation services.                                        precisely, thanks to its advanced proposal, engi-                                                                 The Osaka Gas Group sees this new era of               Ltd. and Tokyo Gas Co., Ltd., began to supply
                                                                        The electric power, petroleum and LPG               neering and maintenance capabilities. In addi-                                                                    deregulation as a time of business opportunities.      power to the Osaka Prefectural Government and
                                                                 industries are making similar moves toward                 tion, a tradition of reliability has enabled the                                                                  It is aggressively expanding into the LPG and          nine office buildings. Ennet aims to secure
                                                                 deregulation and liberalization. These changes             Osaka Gas Group to build a strong foundation of                                                                   electric power businesses under a strategy             resources of around 500MW within three years.
                                                                 are reflected in accelerating competition                  customer confidence.                                                                                              designed to turn the Group into a “one-stop”           In addition to the special high-voltage market,
                                                                                                                                                                                                                                              energy supply service capable of meeting all of        which has already been liberalized, the Osaka
                                                                 Deregulation in the Electricity and Gas Industries
                                                                                                                                                                                                                                              its customers’ energy needs.                           Gas Group is awaiting the liberalization of high-
                                                                                                                                                                                                                                                     In the area of LPG, Osaka Gas acquired          voltage supplies. It aims to attract demand
                                                                                                       Phase 1                          Phase 2                      Phase 3                                                                  70% of the shares of Nissho Iwai Petroleum Gas         equivalent to 3.5 GW, or 10% of all commercial
                                                                                                       (1995–)                          (2000–)                      (2003–)
                                                                                                                                                                                                                                              Corporation in September 2000, making it a part        contracts in the Kanto and Kansai regions. Plans
                                                                                             Liberalization for customers Expansion of liberalization to        Further expan-       The Torishima Energy Center, an IPP under construction
                                                                                   Gas       using over 2 million m3 per include customers using over 1         sion of scope of     in Osaka.
                                                                                                                                                                                                                                              of the Osaka Gas Group. The Nissho Iwai                for the electric power business also call for the
                                                                     Entry
                                                                                             annum                        million m3 per annum                  liberalization                                                                Petroleum Gas Group handles 540,000 tons of            networking of existing Osaka Gas customers so
                                                                  restrictions               Introduction of IPPs and                                           Equal footing for                                                             LPG annually. It imports LPG as a wholesaler           that surplus power can be sourced from their
                                                                                                                           Liberalization of special high-volt- third party access
                                                                                 Electricity restricted power supply                                                                                                                          and sells it to LPG dealers throughout Japan. Its      cogeneration facilities for sale.
                                                                                                                           age (over 2,000kW and 20,000V)
                                                                                             business
                                                                                                                                                                Separate
                                                                                                                                                                accounting for
                                                                                                                                                                                                                                              group consists of 16 companies, including LPG                 In addition, the Osaka Gas Group is devel-
                                                                                    Gas/     Allowing third party access
                                                                  Transmission
                                                                                 Electricity to transmission lines
                                                                                                                           Establishing connecting rules        network opera-                                                                retailers, throughout Japan. Group annual sales        oping its energy service company (ESCO) busi-
                                                                                                                                                                tions (pipelines)
                                                                                                                                                                                                                                              amount to ¥65 billion.                                 ness in conjunction with on-site generation. In
                                                                                          Introduction of yardstick    From approval to notification       Facilitation of
                                                                     Rate        Gas/                                                                                                                                                                                                                January 2001 it began to provide services to a
                                                                                          system and fuel-cost adjust- (price reductions), diversification third-party use of
                                                                  regulations Electricity
                                                                                          ment system                  of billing options                  LNG terminals                                                                                                                             major shopping center in Ibaraki City, Osaka.


12                                                                                                                                                                                                                                                                                                                                                       13
        The Focus of Our Operations — Osaka Gas in 2001



                                                                Expanding Demand for Natural Gas
                                                                Natural Gas Demand Forecast                                               can be expected to play an increasingly significant                                                                         Development of Residential Fuel Cells                                   will be used to extract hydrogen from natural
                                                                Natural gas is seen as a principal energy source                          role in meeting Japan’s energy needs.                                                                                       Continuing                                                              gas. In addition to its compact design, the fuel
                                                                having potential for greatest growth in Japan’s                                  The gas sales of Osaka Gas have increased                                                                            Polymer electrolyte fuel cells (PEFCs) have                             reformer also features a unique structure that
                                                                energy mix in the future. The three basic require-                        by an average of 4.3% annually in volume terms                                                                              been described as a revolution in energy tech-                          provides dramatic improvements in thermal
                                                                ments for an energy supply system are the ability                         over the past decade and expected to increase by                                                                            nology. Osaka Gas aims to have PEFCs for                                efficiency. Because the device is easy to pro-
                                                                to cope with economic growth, consideration for                           an average of 3.4% per annum until 2010.                                                                                    use as residential cogeneration systems on                              duce, it will be possible to reduce costs sub-
                                                                the environmental protection and energy security.                                                                                                                                                     the market by 2005. The target of the commer-                           stantially through mass-production. The tech-
                                                                In particular, global warming is now recognized                           Developing New Uses                                                                                                         cial development program is to produce 500W                             nology embodied in this fuel reformer is at the
                                                                as a major issue throughout the entire world, and                         Residential Cogeneration System to                                                                                          and 1kW PEFC cogeneration systems. These                                leading edge of international developments in
     The Bontang LNG Base in East Kalimantan, Indonesia         there is growing demand for clean energy.                                 Debut in 2002                                                                                                               next-generation cogeneration systems will                               this field and is being supplied to manufactur-
                                                                      Natural gas is an abundant resource, with                           The cumulative capacity of gas cogeneration                                                                                 have an extremely high generation efficiency                            ers in Japan and overseas.
                                                                reserves estimated to be sufficient for 63 years. It                      systems supplied by Osaka Gas, primarily for                                                                                rating of 35% (LHV). Since waste heat will                                     A prototype 500W PEFC cogeneration
                                                                is also environment-friendly, since it contains no                        commercial and industrial uses, is now in                                                                                   also be utilized, total energy efficiency will                          system developed by Osaka Gas underwent
            Future Natural Gas Demand in Japan                  SOx and emits far smaller amounts of CO2, NOx                             excess of 1GW. These systems form a highly                                                                                  reach 65~70% (LHV). This new technology                                 field tests under actual living conditions
            (Millions of Metric Tons)
                                                                and other substances than coal or oil. The envi-                          efficient distributed energy network with an out-                                                                           will allow residential energy consumption to                            between January and April 2000 in Next21,
                                              58
                                                                ronmental impacts imposed by natural gas is the                           put equivalent to that of a major power station.                                                                            be reduced by about 10%, and CO2 emissions                              an experimental multi-family housing unit
                                        48                      smallest of any fossil fuel.                                                     Osaka Gas aims to introduce cogeneration                                                                             by 20%. These systems are extremely envi-                               occupied by Osaka Gas employees and their
                                                                      In July 2001, the Advisory Committee for                            systems into the residential sector. In the fall of                                                                         ronment-friendly. Emissions of nitrous oxides                           families. This trial, the first in the world, yielded
                          38
                                                                Resources and Energy, which advises the                                   2002, it plans to market a cogeneration system                                                                              (NOx) will be almost zero, and there will be                            useful information about crucial technical
                                                                Minister of Economy, Trade and Industry, formu-                           with a compact 1kW gas engine. Based on field                                                                               negligible vibration or noise.                                          issues. Osaka Gas plans to resolve these
                                                                                                                                                                                                Fuel reformer for PEFCs
                                                                lated a new long-term energy supply and demand                            tests, the new system can be expected to reduce                                                                                  The keys to the development of the new                             issues in the first half of fiscal year 2002 and
               17
                                                                outlook calling for the increased contribution of                         residential energy consumption by 10% and                                                                                   systems are catalyst technology developed over                          to resume trials in an actual household envi-
                                                                LNG to Japan’s energy mix from 12.7% in fiscal                            CO2 emissions by 15%.                                                                                                       many years, and a compact fuel reformer that                            ronment, using modified equipment.
                                                                year 2000 to 14.0% by fiscal 2011. Natural gas
          CY 1980       1990       1996      2010 (Projected)                                                                                                                                          Projected Gas Sales Growth by Sector
                                                                                                                                                                                                                       3
                                                                                                                                                                                                       (Millions of m )
          Source: Ministry of Economy, Trade and Industry
                                                                                                                                                                                                                                                                      PEFC Cogeneration System for Residential Application
                                                                                                                                                                                                                                   7,407   7,472
                                                                                                                                                                                                                           7,160           133     Wholesale
                                                                                                                                                                                                                                   124
                                                                                                                                                                                                                           109             470
                                                                                                                                                                                                        6,605   6,603              470             Public & Medical
                                                                                                                                                                                                                           429             927
                                                                                                                                                                                                          97     101               913
                                                                                                                                                                                                         347     385       883                     Commercial
                                                                                                                                                                                                         834     869
                                                                                                                                                                                                                                   3,656   3,696
                                                                Environmental Advantages of Natural Gas                                                                                                                    3,526
                                                                                                                                                                                                        3,162   3,134                              Industrial
                                                                                                                                                                                                                                                                             Commercial
                                                                                                                                                                                                                                                                             Power Line                    Electric
                                                                                                Coal                                                                                   100                                                                                                                 Power
                                                                             SOX                Petroleum                                                                 70                                                                                                               PEFC                             Bath          Air                Light
                                                                                                Natural Gas           0                                                                                                                                                                   System                                       Conditioner

                                                                                                Coal                                                                                                                                                                           Battery       Inverter
                                                                                                                                                                                       100
                                                                                                                                                                                                                                           2,246




                                                                                                                                                                                                                                                                                                            Storage tank
                                                                                                                                                                                                                                   2,244
                                                                             NOX                Petroleum                                                                 70                            2,165   2,114      2,213
                                                                                                                                                                                                                                                   Residential                              Cell Stack
                                                                                                                                                                                                                                                                                                                                        TV
                                                                                                Natural Gas                                           40                                                                                                                    Natural Gas
                                                                                                                                                                                                                                                                                           Fuel Reformer
                                                                                                Coal                                                                                   100                                                                                                  Back-up Burner
                                                                             CO2                Petroleum                                                                      80                                                                                                                                          Hot Water    Floor Heating
                                                                                                Natural Gas                                                          60                              FY 1998    1999       2000    2001    2002 (Projected)


                                                                Note: All values are in relation to coal emissions, which are set at 100 for comparative purposes.
                                                                Source: “IEA Natural Gas Prospects to 2010,” 1986



14                                                                                                                                                                                                                                                                                                                                                                                                    15
        The Focus of Our Operations — Osaka Gas in 2001



                                                                 Natural Gas Value Chain                                                                                                                                                     Research and Development
                                                                 Natural Gas Value Chain                              2000, Osaka Gas signed a contract under which                                                                          Perspectives on Technology                                                                                               Activities in Fiscal 2001
                                                                                                                                                                                      R&D Expenditures
                                                                 The Osaka Gas Group has a number of                  it owns a 10% share of the offshore gas of                      (Billions of Yen)                                      Development                                                                                                               In fiscal year 2001, consolidated expenditure on
                                                                 strengths in the natural gas business, including     Northern Australian Gas Venture (NAGV).                                                    184                         Competition is intensifying in the energy sector.                                                                        research and development, including labor
                                                                                                                                                                                                178
                                                                                                                                                                                       172                172
                                                                 its infrastructure and expertise, and its powerful        Following the ownership of two LNG                                                              165
                                                                                                                                                                                                                                             The Osaka Gas Group uses a strategy of “selec-                                                                           costs, expenses and depreciation, amounted to
                                                                 market development capabilities. One of its          tankers, LNG Flora and LNG Vesta, the third                                                                            tion and concentration” to maximize the cost                                                                             ¥16.5 billion. Some of the important achieve-
                                                                 management strategies is to seek business            vessel of Osaka Gas, LNG Jamal, went into                                                                              effectiveness of its R&D activities. Management                                                                          ments during the year are outlined below.
                                                                 opportunities at all levels from upstream to         service in October 2000. Recently surplus
                                                                                                                                                                                                                                             also recognizes the need to accelerate develop-
                                                                 downstream, and to link all of its business oper-    capacity on these vessels has been used to
                                                                                                                                                                                                                                             ment so that new advances can be brought to the                                                                          Cogeneration Technology
                                                                 ations to form a value chain. Areas of business      deliver LNG to other countries.
                                                                                                                                                                                                                                             market as quickly as possible. Osaka Gas has                                                                             There is growing interest in cogeneration sys-
                                                                 in which the Group is already involved range                                                                                                                                created a highly efficient R&D structure that takes                                                                      tems as distributed energy systems that impose
          LNG Purchase by Volume
          (10 thousand Metric Tons)                              from upstream activities, such as gas field          Domestic Gas Transportation
                                              584                                                                                                                                                                                            full advantage of the Company’s own core areas                                                                           a reduced load on the environment. There is
                                      553      12    Oman        development and LNG transportation, to diverse       and Supply
                     530      517      36      30    Qatar                                                                                                                         FY 1997     1998       1999   2000      2001
                                                                                                                                                                                                                                             of expertise while building alliances with outside                                                                       enormous potential for the increased use of this
            496      48       30       64
                                               75
                                                     Malaysia    gas transportation and supply.                       Osaka Gas has put considerable effort into the
            41                53
                                                                                                                                                                                                                                             companies and institutions. This approach is                                                                             technology in the future. Osaka Gas has sold
            78
                     73
                                       80
                                               86                                                                     development of the supply network to other gas
                              76                     Australia                                                                                                                                                                               helping to enhance the competitiveness of the                                                                            more cogeneration capacity than any other gas
                     337
                                               301
                                                                 Upstream Natural Gas Activities                      companies in Japan. Its efficient supply system
            310
                              288
                                       300                                                                                                                                                                                                   Osaka Gas Group.                                                                                                         companies in Japan. In addition to its efforts to
                                                                 The Osaka Gas Group sees an involvement in the       which originates from Himeji Terminal and
                                                     Indonesia   upstream end of the value chain as a way of          Senboku Terminal is based on the combination
                                                                 ensuring stable supply of low-cost gas. At the       of pipeline network, coastal tankers (planned)
                                                                 same time, the upstream undertaking is expected      and an overland lorry fleet. These various meth-
            69       71       71       74      80
                                                     Brunei      to contribute to earnings as an independent          ods are used for wholesaling of natural gas to 11

        FY 1997     1998     1999     2000    2001               business within the Group.                           other gas companies (as of March 2001). A total                                                                         New Technologies to Meet Demand for Gas Cogeneration
                                                                      Osaka Gas first became involved in over-        of 124 million cubic meters of gas is supplied by
                                                                                                                                                                             Osaka Gas achieved advanced R&D results in the area of PEFCs.
                                                                                                                                                                                                                                                                                                      Fuel cells, micro-gas engines        Micro-gas turbines         High-efficiency gas engines, turbines
                                                                 seas gas field development in 1990, when it          pipeline to four companies, while the LNG




                                                                                                                                                                                                                                                                                                                                                                                                                              Areas where increased use
                                                                 acquired a shareholding in Universal Gas and         equivalent of 170,000 tons is delivered to seven
                                                                                                                                                                                                                                                                                                                      Small commercial facilities   Large commercial facilities            Industrial




                                                                                                                                                                                                                                                                                                                                                                                                                                     is expected
                                                                                                                                                                                                                                                                                                100
                                                                 Oil (UGO). UGO explores and produces natural         companies by lorries.
                                                                                                                                                                                                                                                                                                 90
                                                                 gas and other resources in Indonesia. In July                                                                                                                                                                                                                                                                         Industrial plants
                                                                                                                                                                                                                                                                                                 80                                                                                   (metals, machinery)
                                                                                                                                                                                                                                                                                                                        Convenience stores                 Offices, shops




                                                                                                                                                                                                                                               Electricity as percentage of energy demand (%)
                                                                                                                                                                                                                                                                                                 70
                                                                                                                                                                                                                                                                                                                                                                                       Industrial plants
                                                                 The Northern Australian Gas Venture (NAGV).                                                                                                                                                                                     60                                                                                   (paper, foodstuffs)




                                                                                                                                                                                                                                                                                                                                                                                                                              Areas where cogeneration
                                                                                                                                                                                                                                                                                                                                                          Hospitals, hotels




                                                                                                                                                                                                                                                                                                                                                                                                                                  is already in use
                                                                                                                                                                                                                                                                                                 50
                                                                            Greater Sunrise               Evans-Shoal Gas Field                                                                                                                                                                                              Fast food,
                                                                                                                                                                                                                                                                                                 40                          restaurants
                                                                            Gas Field
                                                                                                                                                                                                                                                                                                 30    Residential                                                             District heating/
                                                                                                                                                                             Valuation test of PEFC for residential use.                                                                                                                                                       air conditioning
     LNG Jamal transports LNG to Osaka Gas.                                                                  Darwin                                                                                                                                                                                                       Public baths
                                                                                                                                                                                                                                                                                                 20

                                                                                                                                                                                                                                                                                                 10

                                                                                                                                                                                                                                                                                                  1
                                                                                                                                                                                                                                                                                                                           10                       100                       1,000                      10,000
                                                                                                                                                                                                                                                                                                                                                                                                   Generation capacity (kw)
                                                                                                          Australia




                                                                                                                                                                          Advanced micro-gas turbine.


16                                                                                                                                                                                                                                                                                                                                                                                                                                                        17
        The Focus of Our Operations — Osaka Gas in 2001




                                                                    improve generating efficiency through the refine-   Residential Appliances                                                                                       Information Technology, Materials                         into natural gas reformers for fuel cells, natural
                                                                    ment of combustion methods and cycles, it also      The aim of development activities in this area is                    1nm (10 m)
                                                                                                                                                                                                     –9
                                                                                                                                                                                                                                     Technology                                                gas adsorption materials, lithium secondary
                                                                    aims to expand the market for new systems by        to enhance and expand the existing range of gas                                                              Osaka Gas has responded to the rapid spread of            power cells and other energy storage materials,
                                                                    developing compact cogeneration systems,            home appliances while developing new products                                                                the Internet by establishing electronic commerce          as well as environmental purification catalysts
                                                                    including micro-gas turbines, polymer electrolyte   with improved levels of energy performance,                                                                  systems. It is also developing technology for             to remove toxic substances from exhaust gases
                                                                    fuel cells (PEFCs) and micro-gas engines.           safety and comfort. Kitchen appliances developed                                                             remote meter reading systems based on wireless            and waste water. The development of the mass-
                                                                         Osaka Gas plans to commercialize a resi-       by Osaka Gas include a popular built-in cooker,                                                              communications jointly with other utilities.              production method for high-grade carbon nan-
                Number of Patent Applications
                                                                    dential cogeneration system with a 1kW gas          which features a heat-resistant ceramic glass top,                                                                 In the past Osaka Gas manufactured gas              otubes is another product of our accumulated
                                        995
                                                                    engine on the market in 2002, followed in 2005      which combines an attractive design with ease of                                                             from coal and oil. It has maintained and                  technologies and applications for this nanotech-
                                892             904
                                                                    by 1kW and 0.5kW PEFC systems. Fuel reform-         cleaning. The range also includes central heating    High-grade carbon nanotube used for nanotechnology      expanded expertise accumulated during that                nology-based product is now under develop-
                                                                                                                                                                             applications.
                                                                    ers developed by Osaka Gas incorporate the          terminal devices, such as floor heaters, bathroom                                                            period, which has formed the basis of new tech-           ment as a hydrogen storage material and elec-
                       638
                                                                    most advanced catalyst technology in the world.     heater-driers and dishwashers. In addition, Osaka                                                            nologies in carbon materials and catalysts. This          tron discharge material.

                545
                                                                    It has supplied this technology to a number of      Gas has developed the PRIOR ECO, a water                                                                     knowledge and expertise has further developed
                                                                    fuel cell manufacturers, including H Power          heater that uses condensing technology to recov-
                                                                    Corporation of the United States.                   er latent heat from steam exhaust gases. The                      R&D Achievements

                                                                                                                        most efficient system of its type in Japan, it won
                                                                                                                                                                                               Field                              Achievement
                                                                    Gas Air Conditioning Technology                     an energy conservation award from the Minister
             FY 1997    1998 1999 2000 2001
                                                                    There are two gas air conditioning technologies:    of Economy, Trade and Industry.                                                                           • Development of cogeneration system based on 290kW micro-gas turbine
                                                                                                                                                                                               Cogeneration                       • Development of lean-burn mirror cycle gas engine
                                                                    absorption chiller/heater and gas engine heat                                                                                                                 • Transfer of high-performance fuel reformer technology for polymer electrolyte fuel cell (PEFC) to H Power
                                                                    pump. Because of its excellent energy efficiency,   LNG Transportation and Distribution
                                                                    gas accounts for a substantial share in the air-    Technology                                                                                                • Reduction of NOx emissions from GHP
                                                                                                                                                                                               Air conditioning
                                                                                                                                                                                                                                  • Development of gas air conditioner with new refrigerant
                                                                    conditioning market for large buildings. Osaka      Another focus of technology development is the
                                                                    Gas aims to make gas air conditioning more          maintenance of safety in LNG operations. Osaka                                                            • Development of “PRIOR ECO” condensing hot water and heating system
                                                                                                                                                                                                                                  • Development of table-top dish washer-drier
                                                                    competitive against electrical systems by devel-    Gas has been involved in the development of                                                               • Development of wall-mounted, gas-fired bathroom heater-drier
                                                                                                                                                                                               Residential
                                                                    oping technology to further improve system effi-    pre-stressed concrete (PC) LNG tanks for many                                                             • Development of high-power cooker with multiple internal burners for Chinese cooking
                                                                                                                                                                                                                                  • Development of “Glass-Top Built-in Cooker” with heat-resistant ceramic glass top
     Built-in cooker with a heat-resistant ceramic glass surface.   ciency and reduce prices.                           years. The latest technology resulted in con-                                                             • Development of bath with pulse detector
                                                                         Osaka Gas has developed a super-efficient      struction of an 180,000kl LNG tank at the
                                                                                                                                                                                                                                  • 18th LNG tank at Senboku Terminal
                                                                    gas heat pump which has achieved the industry’s     Semboku Terminal, with substantial savings in                          LNG                                • Development of simultaneous two-way transmission system for moving pictures via PHS)
                                                                    highest coefficient of performance (COP) of 1.3.    cost and construction time.                                                                               • Development of methane hydrate exploration and production technology

                                                                    It plans to launch the new system in fiscal year         Technologies to enhance the durability,
                                                                                                                                                                                                                                  • Trenchless pipe replacement method
                                                                    2002 for use in stand-alone air conditioning sys-   earthquake resistance and safety of transporta-                        Gas transmission and               • Development of in-pipe camera system with water extraction functions
                                                                                                                                                                                               distribution                       • Development of “G-Setter” governor pressure adjustment system for gas regulator
                                                                    tems in commercial buildings.                       tion and distribution systems are also among the                                                          • Development of software for 3-D gas visualization system
                                                                                                                        agenda of R&D. Trenchless pipe replacement
                                                                                                                                                                                                                                  • Field testing of shared remote metering system for electricity and gas
                                                                                                                        systems which can reduce installation costs                            Information technology
                                                                                                                                                                                                                                  • Development of rice cooker controlled via Internet
                                                                                                                        have also been introduced.
                                                                                                                                                                                                                                  • Development of carbon nanotubes
     The No. 18 LNG tank at the Senboku Terminal.                                                                                                                                                                                 • Development of LNG polymer materials
                                                                                                                                                                                                                                  • Development of mass-production technology for high-grade polysilane
                                                                                                                                                                                               Materials, etc.
                                                                                                                                                                                                                                  • Development of new low-NOx combustion system based on fluid elements
                                                                                                                                                                                                                                  • Development of new “Aqua Loop System” wet-catalyst oxidation process
                                                                                                                                                                                                                                  • Development of world’s smallest dioxin recovery filter (capable of high-speed extraction)


18                                                                                                                                                                                                                                                                                                                                                  19
        The Focus of Our Operations — Osaka Gas in 2001                                                                                                                                The Osaka Gas Group in 2001 and Future




         Number of Natural Gas Vehicles
                                                                              Contributing to the Environment and Society
         (Units)




                                                                                                                                                                                             Osaka Gas
                                            7,811
                                                                              The Environment                                       Contributing to Society
                                                                              Osaka Gas is working to enhance its value to the      All corporate activities of the Osaka Gas Group
                                   5,252                                      shareholders, customers and society. In its           are linked to local communities. The companies
                                                    NGVs in
                                                    the rest of Japan
                                                                              efforts to enhance its social value, the Company      and employees who make up the Group, are                             The Osaka Gas Group is committed to a federal management approach. Under this sys-
                           3,640
                                                                              has focused in particular on environmental pro-       involved in a wide range of community activities
                                                                                                                                                                                                         tem, each group business is basically expected to operate independently and self-suffi-
                   2,093                                                      tection. In June 2000 it adopted Long-term            through the Osaka Gas Small Light Campaign,
                                                                                                                                                                                                         ciently. This federal system was initially based on a structure of nine core companies (the
         1,211                              2,716                             Environmental Targets for the period to fiscal        which has now been running for 20 years.
                           1,405
                                   1,835            NGVs in
                                                                              year 2011. It is working to reduce CO2 emis-          Activities range from charity concerts to fund-                      G9 structure). Following the acquisition of a shareholding in the Nissho Iwai Petroleum
                                                    Osaka Gas’ service area
          397      760

      FY 1997      1998    1999    2000     2001
                                                                              sions resulting from its business activities, and     raising for disaster relief, sign language and                       Gas Group in October 2000, the Group shifted to a federal management system based on
                                                                              to reduce and recycle wastes. Other efforts to        braille courses and local clean-up projects.                         the G10 structure. The goal now is to achieve further growth in the overall performance
                                                                              reduce the environmental load include the                  The Osaka Gas Group Welfare Foundation
                                                                                                                                                                                                         of the Group under this new structure.
                                                                              reduction of the volume of soil requiring final       provides grants for welfare activities, and for
                                                                                                                                                                                                            At the end of fiscal year 2001, there were 119 companies in the Osaka Gas Group, of
                                                                              disposal during gas pipeline construction work,       research and surveys relating to the welfare of
                                                                              the promotion of “Green Procurement,” the             the elderly. It also supports health improvement
                                                                                                                                                                                                         which 35 are included in the consolidated accounts. The number of consolidated compa-
                                                                              development of highly efficient products, and         activities for the aged. The Osaka Gas                               nies will increase to 42 in the fiscal year 2002.
                                                                              recycling of used appliances. In addition, the        Foundation of International Cultural Exchange
                                                                              Osaka Gas Group has established a corporate           provides assistance for classroom materials for                        Energy Businesses
                                                                              environmental behavior promotion system. It has       use in elementary schools and junior and sen-                          G1: Osaka Gas
                                                                              also included environmental items in its internal     ior high schools in natural gas-producing                                    Procurement of gas resources, production, supply and sales of natural gas, pipe installation,
     Osaka Gas encourages the use of natural-gas-powered buses.                                                                                                                                                  and gas appliances sales
                                                                              performance assessment systems and achieved           countries, including Indonesia and Malaysia. It
                                                                                                                                                                                                           G2: Liquid Gas Group
                                                                              ISO14001 accreditation at all corporate facilities.   also provides research grants and scholarships                               Supply and sales of fuel gas, production and sales of industrial gases
                                                                              Through these and other activities, Osaka Gas is      to universities.
                                                                                                                                                                                                           G3: Nissho Iwai Petroleum Gas Group
                                                                              helping to conserve energy and resources and               As part of its public relations activities                              Wholesaling and retailing of LPG
                                                                              reduce the burden on the environment.                 for enhancing community understanding                                  G4: Gas and Power Investment Group
                                                                                   Since 2000 Osaka Gas has calculated and          about natural gas, Osaka Gas established                                     Domestic and overseas energy-related activities, including IPP and ESCO operation, electricity
                                                                                                                                                                                                                 retailing and heat supply
                                                                              disclosed its environment costs based on uni-         facilities at its Senboku and Himeji LNG
                                                                                                                                                                                                           G5: Harman Group
                                                                              form environmental accounting standards adopt-        Terminals. The Gas Science Museum at
                                                                                                                                                                                                                 Production and sales of gas appliances and related equipment
                                                                              ed by the entire gas industry. Details of the         Senboku and the Gas Energy Hall in Himeji
                                                                              Company’s environmental behavior can be found         receive around 94,000 visitors per year, most                          Non-Energy Businesses
     The Gas Science Museum at Senboku Terminal attracts
     many visitors.
                                                                              in its Environmental Action Report.                   of whom are elementary school children.                                G6: Urbanex Group
                                                                                                                                                                                                                 Real estate development, management and leasing
                                                                                                                                                                                                           G7: Kinrei Group
                                                                                                                                                                                                                 Production and sales of frozen foods, restaurant chain operation
                                                                                                                                                                                                           G8: OGIS Research Institute Group
                                                                                                                                                                                                                 Information processing services, sales of computer equipment and software
                                                                                                                                                                                                           G9: Osaka Gas Chemicals Group
                                                                                                                                                                                                                 Sales of coke and chemicals, production and sales of carbon fiber and related products
                                                                                                                                                                                                           G10: OG Capital Group
                                                                                                                                                                                                                 Engineering, contract research, sales of home equipment, security services, sports businesses,
     Osaka Gas achieved ISO 14001 accreditation at all                                                                                                                                                           operation of home-improvement stores, information services, etc.
     corporate facilities.


20                                                                                                                                                                                                                                                                                                                21
        The Osaka Gas Group in 2001 and Future

             Number of Companies
             in Energy Business
                                                                       Energy Business
             (As of March 31, 2001)



                         G5:17                                         The Energy Business sector of the Osaka Gas Group consists of Osaka Gas, the gas distribution com-                                                                                   Improving Customer Services
                 G4:3                    G1:32
                                                                       pany and its affiliates in the Gas Business Group, the Liquid Gas Group, the Nissho Iwai Petroleum                                                                                   Each year Osaka Gas receives 2.2 million telephone inquiries from customers. Previously these calls
                        G3:17                                          Gas Group, the Gas and Power Investment Group, and the Harman Group. The Gas Business Group is                                                                                       were handled at six separate centers, but in fiscal 2001 services were centralized at two regional
                                 G2:11
                                                                       made up of companies that are closely involved in the gas business. The Liquid Gas Group manufac-                                                                                    Customer Centers located in Osaka and Kyoto. The Centers feature call reception systems based on the

                      Total: 80 Companies                              tures and sells industrial and fuel gases. The Nissho Iwai Petroleum Gas Group became part of the                                                                                    latest technology, and they are staffed by employees with expert knowledge covering all aspects of
                                                                       Osaka Gas Group in September 2000. The Gas and Power Investment Group will develop a wide-rang-                                                                                      operations. These systems are designed to facilitate a prompt and satisfactory response to customer
                                                                       ing involvement in areas that include the electric power business and overseas business activities. The                                                                              requests. In addition, customer comments and requests gathered at the two Customer Centers are used
             Residential Gas Sales by Volune
                           3
             (Million of m )                                           Harman Group manufactures and sells gas appliances and equipment.                                                                                                                    to improve products and services for higher customer satisfaction.
              2,207                           2,213    2,244
                        2,165    2,114
                                                                       ■ G1: The Gas Business Group                                                                                                                                                         Industrial Gas Sales
                                                                       Overview of Gas-Related Activities                                                                          Customer Centers respond quickly to diverse customer                     Natural gas has become an important energy resource in a variety of industries, including metals,
                                                                                                                                                                                   needs and requests
                                                                       Gas sales in fiscal year 2001 amounted to 7,407 million m , an increase of 3.5% over the previous
                                                                                                                                  3
                                                                                                                                                                                                                                                            chemicals, machinery, foodstuffs and textiles. It is cleaner than other forms of energy and has many
                                                                       year’s result. This growth reflects sustained efforts to develop demand. The number of customers                                                                                     other advantages, including reduced energy consumption and space requirements, and ease of control.
                                                                       increased by 96 thousand or 1.5%, to 6,401 thousand.                                                                 Industrial Gas Sales by Volume                                  In addition, Osaka Gas uses its technical expertise to develop detailed proposals in response to cus-
                                                                                                                                                                                            (Millions of m3)
                                                                                                                                                                                                                                                            tomer requirements. Demand for natural gas is expanding rapidly.
                                                                                                                                                                                                                               3,656
                                                                       Residential Gas Sales                                                                                                                           3,526                                     In addition to the demand for thermal energy for industrial furnaces and boilers, there has also
                                                                                                                                                                                                     3,162     3,134
                                                                       The number of residential customers increased by 91 thousand, or 1.5%, to 6,092 thousand. Sales                       2,929
                                                                                                                                                                                                                                                            been a sustained increase in the use of cogeneration systems, which produce both heat and electric

           FY 1997      1998     1999         2000     2001
                                                                       increased by 1.4% to 2,244 million m , thanks to the growth of the customer base and marketing efforts.
                                                                                                               3
                                                                                                                                                                                                                                                            power. These systems allow major energy savings in factories. Their growing popularity reflects the
                                                                                                                                                                                                                                                            priority that society places on energy conservation.
              Sales of Gas Floor Heaters                               Diversified Proposals for Gas Utilization                                                                                                                                                 Sales of natural gas for industries increased by 3.7% to 3,656 million m3. This growth reflects
              (Thousands of units)
                                                      83               The Osaka Gas Group is actively involved in the development and marketing of safe, convenient gas                                                                                    the development of new demand, especially among users of cogeneration systems. It also results
                                                           New
                                                           dwellings   appliances and systems to promote the use of natural gas as a clean, efficient household energy                                                                                      from the creation of new markets and applications, such as cooling systems for production processes,
                                                                       resource. In addition to traditional items, such as cooking equipment and water heaters, there has been                                                                              and industrial waste disposal systems. Sales were helped by steady trends in the business opera-

                                         57                            a rapid increase in recent years in the use of central heating equipment, such as hot water floor heating                                                                            tions of existing customers.
                                                                       and bathroom heater-driers.                                                                                        FY 1997    1998      1999    2000    2001
                                                                                                                                                                                                                                                            Industrial Gas Sales
                                                                            The Osaka Gas Group is also working to boost summer gas demand by promoting the use of
                                 31                                                                                                                                                                                                                         Fiscal Year                                     1997         1998        1999        2000            2001
                                                                       home-use gas air conditioners. The product range includes the Eco-Life Multi air conditioner, which
                         22                                                                                                                                                                                                                                 Gas sales (millions of m )
                                                                                                                                                                                                                                                                                    3
                                                                                                                                                                                                                                                                                                            2,929       3,162        3,134       3,526       3,656
                                                                       uses a totally CFC-free absorption cycle system, and the Housing Multi, which is a gas heat pump sys-               Cogeneration Capacity
                13                                                                                                                                                                                                                                          Number of customers (1,000s)                       21           21          21          21             21
                                                      8
                                              5
                                                           Existing
                                                                       tem. Customers who use these products enjoy reduced running costs under a special rate introduced                                                                                    Average monthly consumption (m /month)
                                                                                                                                                                                                                                                                                                 3
                                                                                                                                                                                                                                                                                                          14,624       15,811      15,834       18,268      19,106
                 2        2       2                                                                                                                                                                                            771
                                                           dwellings
                                                                       by Osaka Gas. Gas is supplied under special contracts for customers with home floor heating and                                                 678
                                                                                                                                                                                                                                       Number of
                                                                                                                                                                                                                                       cogeneration units
            FY 1997 1998 1999 2000 2001
                                                                       home air conditioning systems.                                                                                                          562             1,041
                                                                                                                                                                                                     490               967
                                                                                                                                                                                             433               871                     Capacity             Sales of Gas to the Commercial, Public and Medical Sectors
                                                                       Residential Gas Sales                                                                                                                                           (Megawatts)
                                                                                                                                                                                                     834
                                                                                                                                                                                                                                                            Gas sales to the commercial, government and medical sectors are driven primarily by gas air-con-
                                                                       Fiscal Year                                     1997           1998      1999        2000        2001                 751
                                                                                                                                                                                                                                                            ditioning systems and cogeneration systems. Gas absorption air conditioning has become the
                                                                       Gas sales (millions of m )
                                                                                               3
                                                                                                                       2,207          2,165    2,114        2,213       2,244
                                                                                                                                                                                                                                                            dominant technology for major buildings. Gas heat pump systems are becoming increasingly pop-
                                                                       Number of customers (1,000s)                    5,622          5,786    5,909        6,001       6,092
                                                                       Average monthly consumption (m /month)
                                                                                                           3
                                                                                                                        36.2           34.8      33.4        34.5         34.5                                                                              ular in small and medium-sized buildings because of their convenience and suitability for stand-
                                                                       Average annual temperature in Osaka (°C)         16.5           17.0      17.7        17.1         17.3                                                                              alone installations. Changes to Japanese law in fiscal 2001 resulted in the establishment of numer-
                                                                                                                                                                                         FY 1997     1998      1999    2000    2001
                                                                                                                                                                                                                                                            ous new large retail outlets. This was reflected in increased sales of gas heat pump systems, which
                                                                                                                                                                                                                                                            are ideal for this type of demand.
     Residential gas floor heater provides great comfort.


22                                                                                                                                                                                                                                                                                                                                                                      23
        The Osaka Gas Group in 2001 and Future




                                                                           Cogeneration systems are used by customers with business operations ranging in size from large                                                            ing to reduce LNG transportation costs and diversify sources. It is also expanding into upstream areas,
                                                                      commercial facilities to small retail outlets. The e-Combi, a compact 9.8kW cogeneration system for                                                            including the acquisition of concession rights.
                                                                      smaller and medium-sized office buildings and shops, has been very popular since its launch in fiscal                                                                In fiscal year 2001 Osaka Gas purchased 5.84 million tons of LNG. In addition to its traditional
                                                                      year 1999. To date it has been installed by 175 customers.                                                                                                     sources, which are Indonesia, Australia, Brunei, Malaysia and Qatar, it also began to import gas from
                                                                           Osaka Gas is also involved in urban environmental projects. Its Super Waste-to-Energy Generator                                                           Oman under its strategy of diversification of sources. To minimize costs and ensure reliable transporta-
                                                                      is a highly efficient power generation system, which makes an important contribution to energy conser-                                                         tion, a group company, Osaka Gas International Transport Inc., maintains a fleet of three LNG carriers.
                                                                      vation by using waste heat from garbage incinerators in waste disposal plants. In fiscal year 2001 the
                                                                      first cogeneration system designed to use its waste heat for water purification processes was commis-                                                          Ensuring Safety and Efficiency in Production and Supply Systems
     A water-treatment plant using waste heat from                    sioned at a major water treatment plant. Sales of commercial gas in fiscal year 2000 amounted to 913                                                           Osaka Gas has systematically expanded its basic production and transportation infrastructure to keep
     cogeneration systems.
                                                                      million m , an increase of 3.4% compared with the previous year’s result. The increase reflects strong
                                                                                3
                                                                                                                                                                                                                                     pace with continuing growth in the demand for natural gas. The 180,000 KL No. 18 LNG Tank at the
                                                                      demand for air conditioning due to relatively high summer temperatures. Another factor was the acquisi-                                                        Senboku Terminal was completed in November 2000. A new 750mm high-pressure pipeline linking
                                                                      tion of new demand, especially in relation to cogeneration systems and heat pumps. Sales to the gov-              Share of Gas Feedstock
                                                                                                                                                                                                                                     Senboku Terminal II with the Hokko Plant was finished in December 2000. The Wangan Line covers a
             Commercial and Other Gas Sales
             by Volume                                                ernment sector and the medical sector showed a yearly increase of 9.8% to 470 million m , thanks in
                                                                                                                                                                  3                     (%)                                          distance of 22km. Cost reduction is an important priority for basic infrastructure construction projects.
             (Millions of m3)
                                        1,312
                                                1,383                 part to the start-up of the aforementioned water treatment plant.                                                     Coal gas   10
                                                                                                                                                                                                                   1
                                                                                                                                                                                                                    5          4     The No. 18 LNG Tank is a large-capacity facility built using new technology and construction methods.
                                                                                                                                                                                                                               96
                                1,254            470                                                                                                                                   Petroleum gas               94
                                                                                                                                                                                                         4
                      1,181              429            Public and
                                                        Medical-use                                                                                                                                     78
                                                                                                                                                                                                                                     The Wangan Line is a large-diameter high-pressure pipeline. Construction costs were minimized
             1,148              385                                   Sales of Gas for Commercial, Public and Medical Use                                                                Natural gas

               343
                       347                                                                                                                                                                                                           through the use of high-speed automatic welding and a low-cost shield tunneling method.
                                                                      Fiscal Year                                          1997      1998          1999    2000        2001
                                                                                                                                                                                                                                           The expansion of basic infrastructure continues. Current projects include the No. 8 LNG Tank at
                                869      883
                                                913                   Gas sales (millions of m )
                                                                                              3
                                                                                                                           1,148    1,181          1,254   1,312       1,383
              805
                       834
                                                        Commercial                                                                                                                                                                   the Himeji Terminal and Keiji Line, both of which are scheduled for completion in 2003. The Keiji
                                                                      Number of customers (1,000s)                          273        276          280      284         288
                                                                      Average monthly consumption (m /month)
                                                                                                           3
                                                                                                                            410        419          444      463         488                                                         Line project will result in the construction of a 750mm pipeline covering the 39km between
                                                                                                                                                                                                                                     Kumiyama in Kyoto and Kusatsu City in Shiga Prefecture. Cost reduction strategies will also be
                                                                                                                                                                                                                                     applied to these projects.
                                                                      Reliable Access to Natural Gas                                                                                           Other    8

                                                                                                                                                                                                   FY 1986       1991        2001
          FY 1997     1998      1999    2000    2001                  Natural gas reserves rival oil reserves in scale. Confirmed reserves amount to 149 trillion m3. Supplies                                                       Maintaining and Improving Safety
                                                                                                                                                                                        Note: LNG conversion was completed in 1990
                                                                      are very reliable because of the wide distribution of production areas. Osaka Gas is working to secure                                                         Safety is the greatest priority for the Osaka Gas Group and a prerequisite for the Group’s survival. A
                                                                      stable access to natural gas by signing long-term contracts with producers. At the same time it is striv-                                                      variety of safety measures are implemented. For example, pipes and other supply facilities are regularly
             Total Air-Conditioning Capacity                          Import Routes
                                                                                                                                                                                                                                     inspected for leaks, and older pipes are systematically upgraded to polyethylene pipes, which are better
             (Megawatts)
                                                                                                                                                                                                                                     able to resist earthquakes.
                                                2,494
                                        2,359
                                                                                                                                                                                                                                           Osaka Gas has implemented a variety of measures to guard against the effects of earthquakes.
                                2,175                                                                                                                                                                                                These include microprocessor-equipped meters, which automatically shut off the supply of gas if an
                      2,029
              1,911



                                                                                Qatar
                                                                                         Oman


                                                                                                                                          Brunei
                                                                                                                                                                                  Gas pipeline bridge across the Kizu River.
                                                                                                       Malaysia
                                                                                                               Indonesia

                                                                                                                                   Australia
           FY 1997    1998      1999    2000    2001




                                                                                                                                                                                                                                     The Central Control Room monitors the safety of supply systems.


24                                                                                                                                                                                                                                                                                                                                               25
        The Osaka Gas Group in 2001 and the Future




                                                        earthquake is detected, and the establishment of supply shut-off blocks. Much was learned from the                                                                                              Gasnet Co., Ltd.. The combined sales of these five companies amounted to ¥19,379 million. In fiscal
                                                        experience of the Great Hanshin Earthquake of 1995. Osaka Gas doubled the number of shut-off blocks                                                                                             year 2001 there was a steady growth in shipments of industrial gases to semiconductor manufacturers.
                                                        in its gas supply network and installed remote-controlled shut-off mechanisms for all middle-pressure                                                                                           The overall result was an improvement in both revenues and income before income taxes.
                                                        A governors, at approximately 300 locations. Shut-off devices with seismic sensors were installed in
                                                        the approximately 3,000 middle pressure B governors. This work was completed in fiscal year 2001.                                                                                               ■ G3: Nissho Iwai Petroleum Gas Group
             Total Pipeline Length                            The seismic sensors are especially important, since they will prevent secondary disasters by                                                                                              In September 2000, Osaka Gas acquired 70% of the shares of Nissho Iwai Petroleum Gas Corporation,
             (Kilometers)
                                                        allowing the supply of gas to be shut off immediately if damage is anticipated due to a major earth-                                                                                            an LPG wholesaler in the Nissho Iwai Group. This brought a 17-company group led by Nissho Iwai
                                         53,546
                           52,157 52,771
             50,992 51,559
                                                        quake. In the event that the central control room in the Company’s headquarters is affected by a                                       The Torishima Energy Center will be completed in early
                                                                                                                                                                                                                                                        Petroleum Gas into the Osaka Gas Group. The activities of the Nissho Iwai Petroleum Gas Group range
                                                                                                                                                                                               2002 and operated by Gas and Power Investments.
                                                        disaster, monitoring and control functions can be immediately switched to the newly completed                                                                                                   from the importation of LPG to wholesaling and retailing through a nationwide sales network. In fiscal
                                                        back-up control center in Kyoto. Measures such as these are helping to toughen the gas supply                                                                                                   2001 the Group recorded the total sales of ¥64,698 million. A total of four companies, including
                                                        network against earthquakes.                                                                                                                                                                    Nissho Iwai Petroleum Gas and Nissho Propane Sekiyu are included in consolidation.


                                                        G1 Group Companies                                                                                                                                                                              ■ G4: Gas and Power Investment Group
                                                        There are 32 associated companies involved in both upstream and downstream activities that are closely                                                                                          The Gas and Power Investment Group consists of three companies, including the core company, Gas
                                                        related to the gas business of Osaka Gas. Some of these businesses complement various aspects of the                                                                                            and Power Investment. Established in June 2000, Gas and Power Investment, is extensively involved in
                                                        gas business, while others are based on spin-off activities. In fiscal year 2001 the total sales of group                                                                                       the energy business in Japan and overseas. It is currently building the Torishima Energy Center, the
           FY 1997    1998     1999    2000     2001
                                                        companies in gas-related areas (excluding Osaka Gas) increased by 9.7% to ¥49,285 million.                                                                                                      IPP generation facility, which will start to supply electricity to Kansai Electric Power in April 2002.
                                                              The three consolidated subsidiaries in this category are Osaka Gas International Transport Inc.,                                                                                          G&M Energy Services has been providing electric power and heat processing services to commercial
                                                                                                                                                                                               Gas turbine installed at the Torishima Energy Center.
                                                        OG Road Co., Ltd. and Kinki Piping Co., Ltd. Osaka Gas International Transport owns LNG carriers. Its                                                                                           facilities in Ibaraki City, Osaka since January 2001. These group companies were established only
                                                        third vessel, the LNG Jamal, entered service in November 2000. OG Road helps to protect the global                                                                                              recently and are still in the process of starting up full-scale business operations. For this reason, they
                                                        environment by manufacturing road materials using reprocessed excavated soil from pipeline con-                                                                                                 are not subject to consolidation in fiscal year 2001. Gas and Power Investment and Gas and Power will
                                                        struction works and other projects. Kinki Piping is the core of the contracting group that handles the                                                                                          be included in the consolidation for fiscal year 2002.
                                                        installation house pipes and pipelines for Osaka Gas.
                                                                                                                                                                                                                                                        ■ G5: Harman Group
                                                        ■ G2: Liquid Gas Group                                                                                                                                                                          The Harman Group consists of 17 companies, including Harman Co., Ltd. itself. The Group’s principal
                                                        The Liquid Gas Group consists of 11 companies, with Liquid Gas Co., Ltd. as its core. The main activi-                                                                                          activities are the production and sales of gas appliances and equipment. Group sales in fiscal year
     An air-separation plant of the Liquid Gas Group.   ties of the Group are the manufacture and sale of industrial gases and fuel gases. In fiscal year 2001,                                                                                         2001 amounted to ¥49,337 million, which is equivalent to 12.8% of the sales of all associated compa-
                                                        the Group recorded total sales of ¥21,115 million, an increase of 6.4% over the previous year. This is                                                                                          nies. There are three consolidated companies: Harman Co., Ltd., Harman Engineering Co., Ltd. and
                                                        equivalent to 5.5% of the sales of all affiliated companies. The consolidated companies in fiscal year                                    Harman manufactures and sells a wide range of gas     Harman Seiki Co., Ltd.
                                                                                                                                                                                                  appliances, such as this built-in cooker.
                                                        2001 were Liquid Gas, Cold Air Products Co., Ltd., Cryo-Air Co., Ltd., Liquid Gas Kyoto Co., Ltd. and                                                                                                Harman manufactures and sells a wide range of gas appliances, including water heaters, kitchen
                                                                                                                                                                                                                                                        equipment and space heaters. A prolonged slump in consumer spending and fierce price competition
                                                        Revenue of Core Companies in the Energy Business Field (¥millions)                                                                                                                              has created a tough business environment. In January 2001 Harman decided to form a business part-
                                                        Fiscal Year                                             1997             1998             1999             2000               2001                                                              nership with another gas appliance manufacturer, Noritz. By the end of 2001 Harman aims to complete
                                                        Liquid Gas                                             10,052           10,243             9,584            9,720             10,184                                                            a restructuring plan that will split its group operations into three companies. One will be responsible
                                                        Nissho-Iwai Petroleum Gas                              47,939           45,011           39,383           41,112              37,485
                                                                                                                                                                                                                                                        for development and manufacturing, one for sales, and the third for administration. The business part-
                                                        Gas & Power Investment                                       —                —                —                —               530
                                                                                                                                                                                                                                                        nership with Noritz is expected to yield significant synergy benefits through the combination of
     An LPG replenishing facility of the Nissho Iwai    Harman                                                 41,216           37,461           35,712           34,163              34,412
     Petroleum Gas Group.                                                                                                                                                                                                                               Harman’s expertise in the area of kitchen equipment, including built-in cookers, with Noritz’s leader-
                                                        Notes:• Nissho-Iwai Petroleum Gas has been included in the consolidated accounts since the second half of fiscal year 2001.
                                                              • Gas & Power Investment was established in fiscal year 2001.                                                                                                                             ship in the area of water-heating equipment.



26                                                                                                                                                                                                                                                                                                                                                                   27
        The Osaka Gas Group in 2001 and Future

                                                   Non-Energy Business

                                                   This business group consists of the Urbanex Group of urban development businesses, the Kinrei                                                                    ■ G7: Kinrei Group
                                                   Group of food and restaurant businesses, the OGIS Research Institute Group of information-related                                                                The Kinrei Group consists of the core company, Kinrei Co., Ltd., together with OG Royal Co., Ltd.
                                                   businesses, the Osaka Gas Chemicals Group of companies involved in the areas of coke, chemicals                                                                  Group sales in fiscal year 2001 amounted to ¥34,447 million, or 8.9% of total sales of the affiliated
                                                   and materials. In addition to companies involved in these diverse areas of activity, the Non-Energy                                                              companies. Kinrei and OG Royal are both covered by consolidation. In September 2000, Kinrei became
                                                   Business Group also includes the OG Capital Group, which acts as a financial company for the Osaka                                                               the first Osaka Gas subsidiary whose stocks are listed on the stock exchange. The public float of
                                                   Gas Group and helps to incubate new businesses.                                                                                                                  Kinrei’s shares symbolizes the evolution of group companies into self-reliant business entities.
                Number of Companies                     Over two decades have passed since Osaka Gas established a specialist organization, the New                                                                      This business group is involved in food-related activities. Kinrei uses refrigeration know-how
                in Non-Energy Business             Business Development Office, to drive its business diversification. Today the Osaka Gas Group’s
                (As of March 31, 2001)                                                                                                                                                                              derived from the cryogenic technology employed with LNG. It manufactures and sells a variety of
                                                   non-energy business encompasses a wide range of industries and customers and various aspects                                                                     frozen foods, including frozen noodles. It also operates Japanese restaurants, especially the
                                                   of day-to-day life.                                                                                                                                              “Kagono-ya” chain of Japanese restaurants.
                                                        The Osaka Gas Group continues to foster new businesses and expand the scope of its activities. It                                                                OG Royal is developing the “Royal Host” family restaurant chain in the Kansai region.
                                         G6 12
                      G10 17
                                                   is also working to improve efficiency, maximize earnings and enhance the overall corporate value of                                                              Sophisticated kitchen systems have enabled the restaurants to gain an excellent reputation for good
                                            G7 2
                                                   the Group through a strategy of selection and concentration.                                                                                                     food, and earnings are increasing steadily. As of March 2001, Kinrei Group companies were running a
                                         G8 3
                               G9 5                                                                                                                                                                                 total of 120 restaurants, including 30 Kagono-ya outlets, 72 Royal Host, and other restaurant formats.
                                                   ■ G6: Urbanex Group                                                                                      Kinrei’s production line for frozen noodles.
                       Total: 39 Companies
                                                   The Urbanex Group consists of 12 companies, including its core company, Urbanex Co., Ltd. Its main                                                               ■ G8: OGIS Research Institute Group
                                                   activities are real estate development, management and leasing. Group sales in fiscal year 2001                                                                  The OGIS Research Institute Group consists of three companies, of which Osaka Gas Information
                                                   amounted to ¥31,769 million, or 8.2% of total sales by associated companies. The Group includes                                                                  System Research Institute Co., Ltd. is the core company. These companies are involved primarily in
                                                   three consolidated subsidiaries: Urbanex Co., Ltd., Kyoto Research Park and Serendi Co., Ltd.                                                                    information-related activities. Group sales in fiscal year 2001 totaled ¥31,489 million, or 8.2% of total
                                                        The Urbanex Group plans and operates major commercial facilities and large-scale research and                                                               sales of associated companies. OGIS Research Institute is the only consolidated company in this busi-
                                                   information complexes, including Kyoto Research Park. Other activities include the operation and man-                                                            ness group. It originated as the Systems Development Department of Osaka Gas. Today it provides a
                                                   agement of condominiums, commercial buildings, office buildings and other types of real estate, the                                                              wide spectrum of information-related services, including software development and sales, sales of sys-
                                                   planning and operation of event spaces, and advertising.                                                                                                         tems equipment, and help-desk services to support customers’ business activities.
                                                                                                                                                                                                                         In the area of object-oriented technology, which is essential to the efficient development of
                                                   Revenue of Core Companies in the Non-Energy Business Field (¥millions)                                   A Japanese-style restaurant, “Kagono-ya,” is operated
     The Kyoto Research Park constantly improves                                                                                                                                                                    advanced systems, it is among the most advanced companies in Japan and is able to respond to a
                                                                                                                                                            by the Kinrei Group.
     its state-of-the-art R&D activities.          Fiscal Year                                1997        1998          1999         2000        2001
                                                                                                                                                                                                                    variety of customer requirements. The emergence of the advanced information society is reflected in a
                                                   Urbanex                                  12,598       12,272       13,600       13,847       13,611
                                                                                                                                                                                                                    growing need for information technology. In fiscal year 2000, this business group and Mitsubishi
                                                   Kinrei                                   13,186       14,202       15,567       16,408       17,412
                                                                                                                                                                                                                    Corp. jointly established EcubeNet.com to provide services relating to EC and EDI. The business group
                                                   OGIS Research Institute                  33,009       34,311       32,214       32,387       31,224
                                                   Osaka Gas Chemicals                      15,208       14,196       12,490       12,647       14,286                                                              continues to build and enhance its next-generation information service capabilities. For example, at the
                                                   OG Capital                                    —            —             —           95         3,894                                                            end of fiscal year 2001 the business group became a shareholder in Ube Information Systems, which
                                                                                                                                                                                                                    has advanced expertise in the field of computer-aided engineering.




                                                                                                                                                            The Iwasaki Computer Center is the key facility
                                                                                                                                                            of the OGIS Research Institute.




28                                                                                                                                                                                                                                                                                                                              29
        The Osaka Gas Group in 2001 and Future                                                                                                                              Consolidated Companies in Fiscal 2001

                                                                                                                                                                                                                                                      Operating
                                                                                                                                                                                                                               Capital    Revenues                                                                                          Osaka
                                                                                                                                                                                                                                                       income                                                                                                  Financial
                                                                                                                                                                                                  Company                     (Millions   (Millions                                          Business Lines                                  Gas’
                                                                                                                                                                                                                                                      (Millions                                                                                                Segment
                                                                                                                                                                                                                               of Yen)     of Yen)                                                                                         Ownership
                                                                                                                                                                                                                                                       of Yen)

                                                                                                                                                                            G1: GAS BUSINESS GROUP
                                                                                                                                                                            Osaka Gas International Transport Inc.               3,190       2,042       586 Leasing of LNG tankers                                                          100.0        Other Business
                                                                 ■ G9: Osaka Gas Chemicals Group                                                                            OG Road Co., Ltd.                                       50       1,403        43 Manufacture and sale of road materials                                       100.0 (100.0)   Other Business
                                                                                                                                                                            Kinki Piping Co., Ltd.                                 112      16,977       130 Installation of gas pipes, civil engineering and road pavement work          100.0 (100.0)   Pipeline Installation
                                                                 The Osaka Gas Chemicals Group consists of five companies, including the core company, Osaka Gas
                                                                                                                                                                            Enetech Kyoto Co., Ltd                                  30       4,408       138 Design, installation and sales of systems and facilities,                    100.0 (100.0)   Other Business
                                                                 Chemicals Co., Ltd. Group companies manufacture and sell carbon materials, coke, chemicals and                                                                                              including air conditioning, water supply and drainage and hot water

                                                                 other products. Group sales in fiscal year 2001 amounted to ¥17,407 million, or 4.5% of total sales of     Enetech Minami-Osaka Co., Ltd.                          20       2,099        85 Design, installation and sales of systems and facilities,                    100.0 (100.0)   Other Business
                                                                                                                                                                                                                                                             including air conditioning, water supply and drainage and hot water
                                                                 associated companies. Only Osaka Gas Chemicals is included in consolidation.                               G2: LIQUID GAS GROUP
                                                                      This business group uses the accumulated carbon technology of the Osaka Gas Group as the              Liquid Gas Co., Ltd.                                 1,030      10,184       699 Sales of LNG, LPG, liquified oxygen, nitrogen and argon                         100.0        Other Business
                                                                                                                                                                            Liquid Gas Kyoto Co., Ltd                               40       1,842        54 Sales of LPG, equipment, kerosene and charcoal, and installation of pipes    100.0 (100.0)   Other Business
                                                                 basis for its sales of essential industrial products, including coke and chemicals. It also manufactures
                                                                                                                                                                            Cold Air Products Co., Ltd.                            480       2,032       221 Production and sales of liquid nitrogen, oxygen and argon                      55.0 (55.0)   Other Business
                                                                 and sells advanced carbon materials, such as carbon fiber, activated carbon fiber and spherical carbon     CRYO-AIR Co., Ltd.                                     480       2,949       260 Production and sales of liquid nitrogen, oxygen and argon                      55.0 (55.0)   Other Business
                                                                 materials. The Group’s performance has shown steady growth, thanks to strong sales of meso-carbon          Gasnet Co., Ltd.                                        46       2,372        98 Production and sales of high-pressure gases (oxygen, nitrogen, etc.) and       55.0 (55.0)   Other Business
                                                                                                                                                                                                                                                             sales of high-pressure gas equipment and facilities, etc.
                                                                 microbeads (MCMB). Demand for this carbon material, which is used in lithium ion battery cells, has
                                                                                                                                                                            G3: NISSHO IWAI PETROLEUM GAS GROUP
                                                                 rocketed with the boom in mobile telephones and PCs.                                                       Nissho Iwai Petroleum Gas Co., Ltd.                  1,726      37,485       223 Importation and sales of LPG                                                     70.0        Other Business
                                                                                                                                                                            Nissho Propane Sekiyu Co., Ltd.                         60      14,137       116 Sales of LPG, gas equipment and oil                                          100.0 (100.0)   Other Business

                                                                 ■ G10: OG Capital Group                                                                                    Nissho Iwai Gas Co., Ltd.                               80       3,718      –130 Sales of LPG, gas equipment and oil                                          100.0 (100.0)   Other Business
                                                                                                                                                                            Nissho Iwai Gas Energy Co., Ltd.                       170       2,993        96 Sales of LPG, gas equipment and oil                                          100.0 (100.0)   Other Business
     Heat-resistant materials using carbon fibers manufactured   The OG Capital Group was established as holding company for a group of associated companies
     by Osaka Gas Chemicals.                                                                                                                                                G5: HARMAN GROUP
                                                                 involved in activities relating to services, engineering, R&D, marketing, housing, services for the        Harman Co., Ltd.                                     1,483      34,412       276 Production and sales of gas appliances and equipment                          100.0 (34.7)   Gas Appliance

                                                                 aged, and information. OG Capital helps to improve the efficiency of the Group’s internal finances         Harman Engineering Co., Ltd.                            50         743       –41 Exterior wall cleaning, pipe refurbishment, maintenance and management       100.0 (100.0)   Other Business
                                                                                                                                                                                                                                                             of air conditioning and water supply/drainage systems for district heating
                                                                 through its cash management system (CMS). It also acts as a business incubator for new companies                                                                                            systems
                                                                                                                                                                            Harman Seiki Co., Ltd.                                  50       1,084       –15 Production of dies, assembly and processing of small-lot products,           100.0 (100.0)   Other Business
                                                                 in such fields as mobile telephony, Internet contents and home portals. The OG Capital Group con-                                                                                           preparation of prototypes
                                                                 sists of 17 companies, including the core company, OG Capital Co., Ltd. These companies are                G6: URBANEX GROUP

                                                                 engaged in wide array of activities.                                                                       Urbanex Co., Ltd.                                      983      13,611     2,622 Real estate development, business support services                             100.0 (3.4)   Rental Real Estate
                                                                                                                                                                            Kyoto Research Park Co., Ltd.                          100       4,755       278 Research park operation, industry-academia exchange projects,                100.0 (100.0)   Rental Real Estate
                                                                      In fiscal year 2001 group sales amounted to ¥86,006 million, or 22.3% of total sales of associat-                                                                                      real estate management, operation and leasing
                                                                 ed companies. The 11 companies covered by consolidation in fiscal year 2001 included OG Capital            Serendi Co., Ltd.                                      100       8,591       232 Restaurant operation, office and travel services                             100.0 (100.0)   Other Business
                                                                                                                                                                            G7: KINREI GROUP
                                                                 Co., Ltd., Osaka Gas Engineering Co., Ltd., which provides engineering services, Osaka Gas Housing
                                                                                                                                                                            Kinrei Co., Ltd.                                       966      17,412     1,513 Manufacture and sales of frozen foodstuffs, restaurant operation               74.6 (30.2)   Foods and Restaurant
                                                                 Equipment Co., Ltd., which provides services relating to housing equipment, the security company           OG Royal Co., Ltd.                                     100      17,036       494 Restaurant operation                                                           50.0 (50.0)   Foods and Restaurant
     The communications magazine, “Pado,”
     is published by L-Net.                                      Osaka Gas Security Service Co., Ltd., OG Sports Co., Ltd., which operates sports facilities, and L-Net     G8: OGIS GROUP

                                                                 Co., Ltd., a publisher of community information magazines.                                                 Osaka Gas Information System Research                  400      31,224     2,116 Information processing, sales of computer hardware and software,                100.0        Other Business
                                                                                                                                                                            Institute Co., Ltd.                                                              computer software development
                                                                      The OG Capital Group is working to strengthen the management resource allocation functions            G9: OSAKA GAS CHEMICALS GROUP
                                                                 of its core company, to foster new businesses, and to expand the Group’s areas of involvement. It is       Osaka Gas Chemicals Co., Ltd.                          480      14,286       290 Sales of coke, coal tar, crude benzene, petroleum and chemical products        100.0 (5.3)   Other Business
                                                                                                                                                                            G10: OG CAPITAL GROUP
                                                                 also striving to improve efficiency and enhance its earning power through a strategy of selection
                                                                                                                                                                            OG Capital Co., Ltd.                                 3,000       3,894     1,457 Management of OG Capital Group companies (Holding company)                      100.0        Rental Real Estate
                                                                 and concentration.                                                                                         Osaka Gas Engineering Co., Ltd.                        100      17,546       174 Planning, design, consultation and technical consultation on                 100.0 (100.0)   Other Business
                                                                                                                                                                                                                                                             industrial equipment and facilities
                                                                                                                                                                            Kansai Research Institute, Inc.                        300       4,461       267 Research and development of leading-edge technologies                        100.0 (100.0)   Other Business
                                                                                                                                                                                                                                                             consulting and exchange of information on technical research and
                                                                                                                                                                                                                                                             development
                                                                                                                                                                            Osaka Gas Housing Equipment Co., Ltd.                  450      10,224       147 Sales of kitchen units, kitchen utensils and other equipment for the home    100.0 (100.0)   Other Business
                                                                                                                                                                            Kiccory Co., Ltd.                                      300      11,406        58 Sales of DIY materials                                                       100.0 (100.0)   Other Business
                                                                                                                                                                            Osaka Gas Security Service Co., Ltd.                   100       8,555       262 Security services, sales of home security services                           100.0 (100.0)   Other Business
     “Pado Town Search” is an                                                                                                                                               OG Sports Co., Ltd.                                    100       5,641       461 Management of sports facilities, sales of sporting goods                     100.0 (100.0)   Other Business
     information site for cellular                                                                                                                                          OG Auto Service Co., Ltd.                              100       3,360       195 Leasing of vehicles, maintenance of vehicles                                 100.0 (100.0)   Other Business
     phone use.
                                                                                                                                                                            OGIC Co., Ltd.                                         600       8,193       204 Leasing of gas appliances, office machinery and other equipment              100.0 (100.0)   Other Business
                                                                                                                                                                            L-Net Co., Ltd.                                         40       3,299        73 Research on gas and gas appliances, publication of community papers          100.0 (100.0)   Other Business
                                                                                                                                                                            Active Life Inc.                                       900       2,034       –29 Retirement housing and health care                                             76.7 (76.7)   Other Business
                                                                                                                                                                            G4: Gas and Power Investment Group has no consolidated companies in Fiscal 2001.
30                                                                                                                                                                                                                                                                                                                                                                                31
 Financial Section                                                                                                                                                                   Overview of Operations
 Osaka Gas Co., Ltd.
                                                                                                                                                                                     Group Companies                                                                                                                Products and Cryo Air. Cold Air Products and Cryo Air use these
                                                                                                                                                                                     The Osaka Gas Group consists of 35 consolidated subsidiaries. Areas of                                                         resources to produce and sell industrial gases.
                                                                                                                                                                                     activity include gas and gas by-products, pipeline installation, gas                                                                       Nissho Iwai Petroleum Gas, an Osaka Gas subsidiary, is involved in
 Seven-year Summary
                                                                                                                                                                                     appliances, real estate leasing, foodstuffs and restaurant operation.                                                          the wholesaling and retailing of LPG. Because Osaka Gas acquired
                                                                                                                 Millions of Yen
                                                                                                                                                                                     Segments                                                                                                                       shares in Nissho Iwai Petroleum Gas in September 2000, it is only
 FINANCIAL DATA                                                      1995            1996            1997                 1998            1999            2000             2001
                                                                                                                                                                                     1. Gas and By-Products                                                                                                         included in the consolidation for the balance sheet and the income
 For the Year:                                                                                                                                                                       Osaka Gas manufactures, supplies and sells gas. Heating and cooling                                                            statements for the second half of the fiscal year. OGIS Research Institute,
     Operating revenues . . . . . . . . . . . . . . . . . . ¥ 711,560            ¥ 770,756       ¥ 837,869            ¥ 853,598       ¥ 831,367       ¥ 849,225       ¥ 951,927      resources produced as by-products of the gas production process are                                                            also an Osaka Gas subsidiary, provides computer-based information
     Costs and expenses . . . . . . . . . . . . . . . . . .          664,648         719,951         782,753              790,503         764,991         786,501         877,872    sold to a subsidiary, Liquid Gas.                                                                                              processing services to Osaka Gas.

     Operating income . . . . . . . . . . . . . . . . . . . .         46,912          50,805          55,116               63,095          66,376          62,724          74,055    2. Pipeline Installation                                                                                                                   Another subsidiary, Osaka Gas Chemical, manufactures and sells
                                                                                                                                                                                     Osaka Gas undertakes house gas piping work at customers’ expense. A                                                            carbon and related products. It also sells coke and chemicals.
     Other income (expenses) . . . . . . . . . . . . . .             (57,078)        (16,832)        (15,402)             (17,424)        (13,538)        (16,781)        (14,210)
                                                                                                                                                                                     subsidiary, Kinki Piping, carries out house piping work orders for                                                                         Financial services for the Group are provided by OG Finance, also
     Income (loss) before income taxes . . . . . . .                 (10,166)         33,973          39,714               45,671          52,838          45,943          59,845
                                                                                                                                                                                     Osaka Gas.                                                                                                                     an Osaka Gas subsidiary.
     Income taxes . . . . . . . . . . . . . . . . . . . . . . .       (1,059)         19,314          22,664               23,656          31,097          24,069          28,090
                                                                                                                                                                                     3. Gas Appliance                                                                                                                           There are also subsidiaries involved in engineering, contract
     Net income . . . . . . . . . . . . . . . . . . . . . . . . .     (9,124)         14,603          16,893               21,775          21,614          27,345          36,097    A subsidiary, Harman, manufactures gas appliances, which are sold                                                              research, housing equipment sales, security and fire prevention services,
                                                                                                                                                                                     wholesale to Osaka Gas. Osaka Gas sells gas appliances directly. It also                                                       sports businesses, silver businesses, home center operation, information
 At Year-End:                                                                                                                                                                        sells appliances wholesale through its service chain.                                                                          services and various other areas.
     Total current assets . . . . . . . . . . . . . . . . . .        237,373         296,867         285,599              237,635         224,445         195,047         222,613    4. Rental Real Estate

     Investments and other assets . . . . . . . . . . .              110,445         113,114         106,982              121,983         123,658         171,540         223,335    Subsidiaries, including Urbanex, lease real estate to Osaka Gas and other
                                                                                                                                                                                                                                                                                                                            Gas Sales by Volume                                       Consolidated Operating Revenues
                                                                                                                                                                                     companies. They also provide management services.                                                                                      (Millions m3: m3= 46.0655MJ)                              (Billions of Yen)
     Property, plant and equipment, at cost . . . .                  789,463         791,813         804,388              818,840         826,918         842,770         850,091
                                                                                                                                                                                     5. Foods and Restaurants                                                                                                                                                     7,407                                               951.9
                                                                                                                                                                                                                                                                                                                                                        7,160
     Intangibles . . . . . . . . . . . . . . . . . . . . . . . . .     3,762           2,501           2,759                2,923           3,331          10,158          14,932                                                                                                                                                                                                               853.5
                                                                                                                                                                                     Subsidiaries, including Kinrei (OTC Code 2661) and OG Royal,                                                                                      6,606 6,603                                     837.9            831.3 849.2
                                                                                                                                                                                                                                                                                                                               6,370
     Total assets . . . . . . . . . . . . . . . . . . . . . . . . 1,141,043      1,204,295       1,199,728            1,181,381       1,178,352       1,219,515       1,310,976
                                                                                                                                                                                     manufacture and sell frozen foods and operate restaurant chains and
     Total current liabilities . . . . . . . . . . . . . . . .       292,765         360,347         339,625              336,137         300,917         287,099         263,502    other food service businesses.
     Total non-current liabilities . . . . . . . . . . . .           487,864         481,501         487,210              461,816         495,012         499,953         565,771    6. Other Business
     Total shareholders’ equity . . . . . . . . . . . . .            360,414         362,447         372,893              381,954         380,847         428,523         475,020    Osaka Gas and other group companies are involved in the supply of heat.
     Total interest-bearing debt . . . . . . . . . . . . .           493,904         503,409         486,704              471,742         476,923         491,012         510,179    A subsidiary, Liquid Gas, wholesales and retails LNG and also operates a

     Number of consolidated companies . . . . . .                           15              15              20                   20              20              25           35     cryogenic pulverizing business using LNG cold purchased from Osaka
                                                                                                                                                                                     Gas. LNG cold is also sold to other subsidiaries, including Cold Air
                                                                                                                                                                                                                                                                                                                        FY 1997 1998 1999 2000 2001                                FY 1997 1998 1999 2000 2001
 Per Share Data (Yen):                                                                                                                                                               Business Outline of Osaka Gas Group
     Net income (loss) . . . . . . . . . . . . . . . . . . . . ¥      (3.61)     ¥      5.78     ¥      6.68          ¥      8.61     ¥      8.56     ¥     10.94     ¥     14.72           Osaka Gas Engineering Co., Ltd.          Planning and design of gas production
                                                                                                                                                                                                                                     and supplying facilities
                                                                                                                                                                                                                                                                                                                                                                       Urbanex Co., Ltd.
                                                                                                                                                                                                                                                                                                             Rental real estate
                                                                                                                                                                                                Kinki Piping Co., Ltd.                                                                                                                                               OG Capital Co., Ltd.
     Shareholders’ equity . . . . . . . . . . . . . . . . .           142.56          143.36          147.50               151.08          152.31          172.95          195.52        Osaka Gas International Transport Inc.
                                                                                                                                                                                                                                     LNG transportation                                                                                                          Kyoto Research Park Co., Ltd.
                                                                                                                                                                                                                                                                                                             Information processing services
                                                                                                                                                                                                                                                                                                                                                                        OGIS-RI Co., Ltd.
                                                                                                                                                                                                  Liquid Gas Co., Ltd.
                                                                                                                                                                                                                                                                                                             Securities services
                                                                                                                                                                                                  CRYO-AIR Co., Ltd.                                                                                                                                          Osaka Gas Security Service Co., Ltd.
                                                                                                                                                                                                                                     Sale of cold air
 KEY RATIOS                                                                                                                                                                                    Cold Air Products Co., Ltd.                                                                                   Office services
                                                                                                                                                                                                                                                                                                                                                                         Serendi Co., Ltd.




                                                                                                                                                                                                                                                                                       Osaka Gas Co., Ltd.
                                                                                                                                                                                                    Gasnet Co., Ltd.
     Equity ratio (%) . . . . . . . . . . . . . . . . . . . . .                                                                                                                                                                                                                                                                                                     OG Auto Service Co., Ltd.
                                                                       31.59           30.10           31.08                32.33           32.32           35.14           36.23              Liquid Gas Kyoto Co., Ltd.                                                                                    Leasing services
                                                                                                                                                                                                                                                                                                                                                                        OGIC Co., Ltd.

     Debt ratio (%) . . . . . . . . . . . . . . . . . . . . . .                                                                                                                           Nissho Iwai Petroleum Gas Co., Ltd.
                                                                       43.29           38.28           40.57                39.93           40.47           40.27           38.15                                                    Wholesale of gas appliances                                             R&D, information services
                                                                                                                                                                                                                                                                                                                                                                 Kansai Research Institute, Inc.
                                                                                                                                                                                                    Harman Co., Ltd.                                                                                                                                                    L-Net Co., Ltd.
     Interest coverage ratio (Times) . . . . . . . . . .                2.41            3.11            3.73                 5.35            6.76            7.61           9.82              Harman Engineering Co., Ltd.                                                                                                                                             OG Sports Co., Ltd.
                                                                                                                                                                                                                                                                                                             Management of sports
                                                                                                                                                                                                 Harman Seiki Co., Ltd.                                                                                      and walefare facilities
     Return on average total assets (%) . . . . . . .                 (0.80)            1.25            1.41                 1.83            1.83            2.28            2.85                                                                                                                                                                                       Kinrei Co., Ltd.
                                                                                                                                                                                                 Enetec Kyoto Co., Ltd                                                                                                                                                OG Royal Co., Ltd.
                                                                                                                                                                                                                                     Sale of gas appliances
     Return of average shareholders’ equity (%) . . .                 (2.53)            4.00            4.59                 5.77            5.67            6.76            7.99            Enetec Minami-Osaka Co., Ltd.                                                                                                                                       Osaka Gas Chemicals Co., Ltd.
                                                                                                                                                                                                                                                                                                                                                                     OG Capital Co., Ltd.
                                                                                                                                                                                                                                                          Sale of home-use equipment
                                                                                                                                                                                                                                                                                                                                                                        Active Life Inc.
                                                                                                                                                                                                                                                                    Osaka Gas Housing Equipment Co., Ltd.
                                                                                                                                                                                                                                                                                                                                                                      OG Road Co., Ltd.
                                                                                                                                                                                                                    Products flows
                                                                                                                                                                                                                                                                                                                                                                       Kiccory Co., Ltd.
                                                                                                                                                                                                                    Others
                                                                                                                                                                                                                                                                                                                                               Sale of products and services




32                                                                                                                                                                                                                                                                                                                                                                                                                            33
     Overview of Activities in Fiscal Year 2000                                           reduced by ongoing efforts to minimize supply and sales expenses and                    Total gas sales were 3.5% higher at 7,407 million cubic meters.              4. Rental Real Estate
     Operating Revenues expanded by ¥102.7 billion to ¥951.9 billion. The                 general and administrative expenses.                                               This steady volume growth in gas sales, together with an increase in              It was a successful year for the real estate leasing business. Revenues
     growth reflects a volume increase in gas sales, higher adjustment of gas                  As a result, total expenses were ¥91.3 billion higher at ¥877.8               unit prices under the fuel-cost adjustment system, enabled Osaka Gas              increased by ¥2.3 billion, or 12.5%, over the previous year’s figure to
     unit prices under the fuel-cost adjustment system. Another factor was an             billion. Operating income increased by ¥11.3 billion to ¥74 billion. After         to boost its revenues by 10.6% to ¥55.7 billion over the previous year’s          ¥20.7 billion. Expenses were held in check, and operating income was
     increase in the number of consolidated subsidiaries, from 25 in the                  adjustment for other income and expenses, income before income taxes               level to ¥582.0 billion. Though the cost of sales was higher due to               ¥700 million, or 18.4%, higher at ¥4.5 billion.
     previous business year to 35 in the current year. The cost of sales rose             amounted to ¥63.8 billion, an increase of ¥18.2 billion. Net income was            rising crude oil prices, cost-cutting efforts in all areas of activity were       5. Foods and Restaurants
     because of higher crude oil prices, but the size of the increase was                 ¥8.7 billion higher than the previous year’s result at ¥36 billion.                reflected in operating income, which increased by ¥8 billion, or 7.1%,            There was a steady rise in restaurant chain revenues , which increased by
                                                                                                                                                         (Billions of Yen)   to ¥121.8 billion.                                                                ¥1 billion, or 3.2%, to ¥34.4 billion. Expenses also increased because of
                                                                 Revenues and                      Changes                       Non-consolidated                            2. House Pipe Installation                                                        factors that included the opening of new outlets. However, every effort
                                                                                                                                                         (a)/(b)
                                                                   expenses             Increase/decrease        Ratio(%)           result (b)
                                                                                                                                                                             Revenues in this area declined by ¥300 million, or 0.9%, to ¥37.5 billion.        was made to minimize expenses, with the result that operating income
     Operating revenues                                                9,519                  +1,027             +12.1%                  7,541             1.26
                                                                                                                                                                             Reasons for the reduced result include a fall in the number of new                rose by ¥300 million, or 19.7%, to ¥1.9 billion.
     Cost of sales                                                     5,014                    +891             +21.6%                  3,680             1.36
                                                                                                                                                                             houses. Expenses were minimized through cost-cutting efforts affecting            6. Others
     Selling, general and administrative expenses                      3,763                      +21              +0.6%                 3,267             1.15
                                                                                                                                                                             all activities. As a result, operating income increased by ¥1.3 billion, or       The addition of new consolidated subsidiaries, including Nissho Iwai
     Operating income                                                    740                    +113             +18.1%                   593              1.25
                                                                                                                                                                             490% to ¥1.5 billion.                                                             Petroleum Gas, to the Group was reflected in revenue growth of ¥38.3
     Ordinary income                                                     638                    +182             +40.0%                   539              1.18
                                                                                                                                                                             3. Gas Appliances                                                                 billion, or 30.1%, to ¥165.8 billion. However, expenses also rose, and
     Net income                                                          360                      +87            +32.0%                   329              1.09
                                                                                                                                                                             Revenues followed a healthy trend, led by air conditioners, and there was         operating income remained close to the previous year’s level with a 0.7%
          Return on equity (ROE)                    8.0%
                                                                                                                                                                             an increase of ¥6.3 billion, or 5.3%, to ¥125.8 billion. A concerted drive        increase to ¥15.6 billion.
          Return on assets (ROA)                    2.9%
                                                                                                                                                                             to reduce expenses was reflected in a ¥1.6 billion increase in operating
     Segment Overview                                                                          Non-residential gas sales rose by 4.2% to 5,040 million cubic                 income, which amounted to ¥1.4 billion, compared with a ¥2 billion
     1. Gas and By-Products                                                               meters. This reflects the development of new demand through marketing              operating loss in the previous year.
     An analysis of gas sales shows the number of customers increased by                  efforts, as well as increased sales of gas for air conditioning because of                                                                                                                                                                                  (Billions of Yen)

     96,000 to 6,401,000. In the residential sector, average monthly                      high summer temperatures. Sales of industrial gas exceeded the previous                                      Gas and            Pipeline           Gas             Rental               Foods and                  Other               Elimination
                                                                                                                                                                                                      By-products       installation      appliances       real estate            restaurant                business            and corporate         Consolidated
     household usage remained at the previous year’s level of 34.5 cubic                  year’s level by 3.7%, while commercial sales were 3.4% higher. Sales of
                                                                                                                                                                             Operating revenues          +10.6%             –0.9%             +5.3%          +12.5%                  +3.2%                   +30.1%                                        +12.1%
     meters per household, but total sales were 1.4% higher at 2,244 million              gas for public sector and medical use increased by 9.8%.
                                                                                                                                                                                                         582.0              37.5            125.8             20.7                   34.4                     165.8                  (14.6)                951.9
     cubic meters. Contributing factors include marketing efforts and an
                                                                                                                                                                             Operating income              +7.1%           +490%               —             +18.4%                 +19.7%                     +0.7%                                       +18.1%
     increase in customer numbers.
                                                                                                                                                                                                         121.8                1.5              1.4             4.5                       1.9                   15.6                  (73.0)                 74.0
                                                                      2001 (A)                     2000 (B)                    (A)–(B)                 (A)/(B)

                           Residential use                            6,092 thousands              6,001 thousands                91 thousands          101.5%
         Numbers of
                           Non-residential use                         309                           304                            5                   101.5%
         customers
                           Total                                      6,401                        6,305                          96                    101.5%                                                                                                Operating Income and Net Income                                Net Income per Share
                                                                                                                                                                                                                                                              (Consolidated)                                                 (Consolidated)
      Monthly gas sales    Residential use                             34.5m3/ month                 34.5m3/ month                +0m3/ month           100.0%                                                                                                (Billions of Yen)                                              (Yen)
        volume per
        customers          Overall average                            107.0                        104.9                          2.1m3/ month          102.0%                                                                                                                                 74.0                                                        14.27

                           Residential use                            2,244 millions m    3
                                                                                                   2,213millions m   3
                                                                                                                                  31 millions m   3
                                                                                                                                                        101.4%                                                                                                               66.3
                                                                                                                                                                                                                                                                     63.0            62.7
                           Non-residential use                        5,040                        4,838                         201                    104.2%                                                                                                                                                                                     10.94
                                                                                                                                                                                                                                                              55.1
                                                                                                                                                                                                                                                                                                         Operating Income
                              Industrial use                          3,656                        3,526                         129                    103.7%
                                                                                                                                                                                                                                                                                                                                     8.61   8.56
     Gas sales by volume      Commercial use                           913                           883                          30                    103.4%
                                                                                                                                                                                                                                                                                                  36.0                        6.68
                              Public & Medical use                     471                           429                          42                    109.8%
                                                                                                                                                                                                                                                                                          27.3
                           Whole sale                                  124                           109                          15                    114.0%                                                                                                           21.7     21.6                   Net Income
                           Total                                      7,407                        7,160                         248                    103.5%                                                                                                   16.9




                                         2001 (A)          2000 (B)             (A)–(B)
                                                                                                                                                                                                                                                             FY 1997 1998 1999 2000 2001                                    FY 1997 1998 1999 2000 2001
     Average annual temperature (°C)         17.3            17.1                +0.2




34                                                                                                                                                                                                                                                                                                                                                                        35
                                                                                                                                                                                   Report of Independent Public Accountants
     Financial Overview
                                                                                                                                                      Shareholders’
                                            Total assets          Total liabilities            Shareholders’ equity         Equity ratio             equity per share
                                            (Billions of Yen)       (Billions of Yen)              (Billions of Yen)              (%)                        (Yen)
                                                                                                                                                                                   To the Shareholders and the Board of Directors,
     Consolidated (A)                    1310.9 (+7.5%)           829.2 (+5.4%)                  475.0 (+10.9%)             36.2 (+3.1%)            195.52 (+13.1%)
                                                                                                                                                                                   Osaka Gas Co., Ltd.;
     Non-consolidated (B)                1067.1 (+5.3%)           649.1 (+3.4%)                  418.0 (+8.5%)              39.2 (+3.2%)            172.06 (+10.6%)
     (A)/(B)                                1.23                    1.28                          1.14                       —                            —
                                                                                                                                                                                   We have audited the accompanying consolidated balance sheets of Osaka Gas Co., Ltd. (a Japanese corporation)
                                                                                                                                              (   ) changes from previous year
                                                                                                                                                                                   and subsidiaries as of March 31, 2000, and 2001, and the related consolidated statements of income, shareholders’
     Total assets increased by 7.5% to ¥1,310.9 billion. The main source of                       Total liabilities expanded by 5.4% to ¥829.2 billion. The main                   equity and cash flows for the years then ended, expressed in Japanese yen. Our audits were made in accordance
     growth was the full introduction of accounting standards for financial                reason for this was an increase in interest-bearing debt, primarily                     with generally accepted auditing standards in Japan and, accordingly, included such tests of the accounting records
     products, starting from the year under review. Other factors include the              because of investment in new businesses. Total capital rose by 10.9%                    and such other auditing procedures as we considered necessary in the circumstances.
     introduction of market value accounting for investment securities one                 to ¥475 billion. Reasons for this increase include valuation                               In our opinion, the consolidated financial statements referred to above present fairly the consolidated financial
     year ahead of schedule, and an increase in the number of consolidated                 adjustments on other securities.                                                        position of Osaka Gas Co., Ltd. and subsidiaries as of March 31, 2000 and 2001, and the consolidated results of
     subsidiaries due to share acquisitions.                                                                                                                                       their operations and cash flows for the years then ended in conformity with accounting principles generally accepted

     Overview of Cash Flow Position                                                                                                                                                in Japan applied on a consistent basis during the periods, except as noted in the following paragraphs.
                                                                                                                                                               (Billions of Yen)

                                                                                        2001                             2000                        Increase/Decrease                As explained in Note 2 in the year ended March 31, 2001, Osaka Gas Co., Ltd. and subsidiaries prospectively

     Cash Flows from Operating Activities                                               –140.9                            91.0                                 49.9                adopted new Japanese accounting standards for employees’ retirement benefits, financial instruments and

     Cash Flows from Investing Activities                                               –109.0                          –1,035                                –5.5                 translation of foreign currencies.

     Cash Flows from Financing Activities                                                –27.0                           –16.9                               –10.0                    As explained in Note 2 in the year ended March 31, 2000, Osaka Gas Co., Ltd. and subsidiaries

     Net Increase (Decrease) in Cash and Cash Equivalents                                  4.9                           –29.4                               +34.3                 prospectively adopted new Japanese accounting standards for consolidation and equity method accounting,

     Cash and Cash Equivalents of Newly Consolidated Subsidiaries                          0.9                              4.5                               –3.5                 income taxes and software costs.

     Cash and Cash Equivalents at End of Year                                             28.6                            22.7                                 +5.9                   Also, in our opinion, the U.S. dollar amounts in the accompanying consolidated financial statements have been

     Interest-bearing Debt at End of Year                                                510.1                           491.0                               +19.1                 translated from Japanese yen on the basis set forth in Note 1.



     Cash flows from operating activities increased by ¥49.9 billion to a net              bond issues and borrowing. The higher figure reflects expenditure of ¥27
                                                                                                                                                                                   Osaka, Japan
     inflow of ¥140.9 billion. Reasons for the increase include a rise in net              billion in the form of cash flows relating to financing activities. This
                                                                                                                                                                                   June 28, 2001
     income before adjustment for taxes, etc., and higher depreciation.                    resulted from the acquisition and retirement of Osaka Gas shares
          Cash flows relating to investment activities increased by ¥5.5 billion           amounting to ¥14.6 billion as a way of returning profits to shareholders.
                                                                                                                                                                                                                                                           (A Member Firm of Andersen Worldwide SC)
     to a net outflow of ¥109 billion. Contributing factors included increased                    As a result, cash and cash equivalents increased by ¥4.9 billion
     investment in subsidiaries and associated companies, including Osaka                  during the period under review. The inclusion of items relating to new
     Gas Australia and Nissho Iwai Petroleum Gas.                                          consolidated companies brings total cash and cash equivalents at the
                                                                                                                                                                                   Statement on Accounting Principles and Auditing Standards
          Interest-bearing debt at the end of the period under review                      end of the accounting period to ¥28.6 billion.
                                                                                                                                                                                   This statement is to remind users that accounting principles and auditing standards and their application in practice
     amounted to ¥510.1 billion, an increase of ¥19.1 billion in the form of
                                                                                                                                                                                   may vary among nations and therefore could affect, possibly materially, the reported financial position and results of
                                                                                                                                                                                   operations. The accompanying financial statements are prepared based on accounting principles generally accepted
                                                                                                                                                                                   in Japan, and the auditing standards and their application in practice are those generally accepted in Japan.
                                                                                                                                                                                   Accordingly, the accompanying financial statements and the auditors’ report presented above are for users familiar
                                                                                                                                                                                   with Japanese accounting principles, auditing standards and their application in practice.




36                                                                                                                                                                                                                                                                                                          37
     Consolidated Balance Sheet
     Osaka Gas Co., Ltd.
     March 31, 2000 and 2001



                                                                                                                                                                                       Thousands of                                                                                                                                                                                    Thousands of
                                                                                                                                                       Millions of Yen              U.S. Dollars (Note 1)                                                                                                                                           Millions of Yen                 U.S. Dollars (Note 1)
     ASSETS                                                                                                                                     2000                     2001              2001             LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                             2000                     2001                 2001
     Current Assets:                                                                                                                                                                                        Current Liabilities:
         Cash and time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                ¥     16,624           ¥       29,120      $     235,028             Short-term loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   ¥    47,362           ¥       43,080         $     347,700
         Receivables:                                                                                                                                                                                           Long-term debt due within one year (Note 5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                         24,460                   23,599               190,468
              Trade notes and accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                     94,228                  111,002            895,900             Trade notes and accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                  37,291                   48,103               388,240
              Allowance for doubtful receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                           (728)                    (907)              (7,321)          Accrued income and enterprise taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                     23,787                   25,261               203,882
                                                                                                                                                 93,500                  110,095            888,579             Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        154,199                  123,459               996,441
         Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           33,486                   39,100            315,577                       Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        287,099                  263,502             2,126,731
         Deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                7,775                   11,378              91,832
         Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                43,662                   32,920            265,699
                   Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .               195,047                  222,613          1,796,715         Long-term Debt Due after One Year (Note 5) . . . . . . . . . . . . . . . . . . . . . . . . . . .                                 384,189                  443,500             3,579,500
                                                                                                                                                                                                            Employees’ Retirement Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                          96,706                         —                      —
     Investments and Other Assets:                                                                                                                                                                          Employees’ Severance and Retirement Benefits . . . . . . . . . . . . . . . . . . . . . . .                                              —                 101,279               817,425
         Investment securities                                                                                                                                                                              Reserve for Repairs of Gas Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                             1,957                    1,957                 15,795
              Unconsolidated subsidiaries and affiliated companies . . . . . . . . . . . . . . . . . . . . .                                     19,052                   33,854            273,236         Other Non-current Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                     17,101                   19,035               153,632
              Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          70,938                  120,198            970,121
         Long-term loans receivable (Note 12) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                            14,024                   15,626            126,118
         Deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .               34,373                   19,687            158,894         Minority Interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           3,940                    6,683                 53,939
         Other investments and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                          33,503                   36,517            294,730
         Allowance for doubtful receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                            (350)                  (2,547)            (20,557)
                                                                                                                                                171,540                  223,335          1,802,542         Contingent Liabilities (Note 7)


     Property, Plant and Equipment, at Cost:
         Production facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .              465,417                  491,148          3,964,068         Shareholders’ Equity:
         Distribution facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          1,238,933               1,316,439           10,625,012              Common stock, par value ¥50 per share:
         Service and maintenance facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                       171,151                  170,191          1,373,616                  Authorized—3,901,401 thousand shares in 2001
         Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        289,850                  326,619          2,636,150                    and 3,949,598 thousand shares in 2000
         Construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                   114,667                   58,521            472,324                  Issued—2,429,564 thousand shares in 2001
                                                                                                                                               2,280,018            2,362,918           19,071,170                     and 2,477,761 thousand shares in 2000 (Note 6) . . . . . . . . . . . . . . . . . . . . . .                            132,167                  132,167             1,066,723
              Less accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                      1,437,248            1,512,827           12,210,064
                                                                                                                                                842,770                  850,091          6,861,106             Capital surplus (Note 6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            19,482                   19,482               157,240
                                                                                                                                                                                                                Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        276,883                  288,140             2,325,585
     Intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .             10,158                   14,932            120,517             Net unrealized gains on securities (Note 2 (3)) . . . . . . . . . . . . . . . . . . . . . . . . . . . .                             —                  35,254               284,536
                                                                                                                                                                                                                Treasury stock, at cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .               (9)                      (23)                 (186)
     Deferred assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                       —                        5                   40                    Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           428,523                  475,020             3,833,898
                                                                                                                                           ¥1,219,515             ¥1,310,976          $10,580,920                                                                                                                                        ¥1,219,515            ¥1,310,976             $10,580,920


     See accompanying notes.




38                                                                                                                                                                                                                                                                                                                                                                                                          39
     Consolidated Statements of Shareholders’ Equity                                                                                                                                                    Consolidated Statements of Income
     Osaka Gas Co., Ltd.                                                                                                                                                                                Osaka Gas Co., Ltd.
     Years ended March 31, 2000 and 2001                                                                                                                                                                Years ended March 31, 2000 and 2001



                                                                                                      Shares of Common                              Millions of Yen                                                                                                                                                                                                                         Thousands of
                                                                                                        Stock Issued      Common       Capital        Retained         Net Unrealized Treasury Stock,                                                                                                                                                   Millions of Yen                  U.S. Dollars (Note 1)
                                                                                                         (Thousands)       Stock       Surplus        Earnings        Gain on Securities  at Cost                                                                                                                                                2000                         2001              2001
     Balance at March 31, 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . .                    2,500,463         ¥132,167    ¥19,482        ¥229,217              ¥      —          ¥(19)      Operating Revenues (Note 13) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                        ¥849,225                  ¥951,927          $7,683,027
         Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                                                     27,345                                          Costs and Expenses (Note 13):
         Cash dividends (including interim dividends) . . . . . . . . . . . . .                                                                        (12,502)                                             Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    412,302                   501,490            4,047,538
         Bonuses to directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                                                                (68)                                           Selling, general and administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                           374,199                   376,382            3,037,789
         Common stock purchased and retired . . . . . . . . . . . . . . . . . . .                          (22,702)                                      (4,923)                                                                                                                                                                                 786,501                      877,872         7,085,327
         Cumulative effect of adopting deferred                                                                                                                                                         Operating Income (Note 13) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                      62,724                       74,055            597,700
          income tax accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                                                             36,571                                          Other Income (Expenses):
         Increase due to newly consolidated subsidiaries . . . . . . . . . . .                                                                            1,243                                             Interest and dividend income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                     1,787                        2,201              17,764
         Decrease in treasury stock, net . . . . . . . . . . . . . . . . . . . . . . . .                                                                                                        10          Interest expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           (8,320)                      (7,605)            (61,380)
     Balance at March 31, 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . .                    2,477,761         ¥132,167    ¥19,482        ¥276,883              ¥      —          ¥ (9)          Gain on sale of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                         92                      1,917              15,472
         Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                                                     36,097                                              Effect of change of accounting for employees’ retirement benefits for
         Adoption of new accounting standard for                                                                                                                                                              prior periods (Note 2 (11)) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                       —                      (2,729)            (22,026)
          financial instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                                                                                  35,254                       Loss on write-down of investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                           (3,987)                      (1,058)              (8,539)
         Cash dividends (including interim dividends) . . . . . . . . . . . . .                                                                        (12,349)                                             Loss on write-down of investment securities in
         Bonuses to directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                                                                (66)                                             unconsolidated subsidiaries and affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                        (1,852)                      (4,402)            (35,529)
         Common stock purchased and retired . . . . . . . . . . . . . . . . . . .                          (48,197)                                    (14,629)                                             Gain (loss) on sale of property, plant and equipment, net . . . . . . . . . . . . . . . . . . . . . .                                   492                          (685)              (5,529)
         Increase due to newly consolidated subsidiaries . . . . . . . . . . .                                                                            2,204                                             Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        (4,993)                      (1,849)            (14,923)
         Increase in treasury stock, net . . . . . . . . . . . . . . . . . . . . . . . . .                                                                                                     (14)                                                                                                                                              (16,781)                     (14,210)          (114,690)
     Balance at March 31, 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,429,564 ¥132,167                              ¥19,482 ¥288,140                   ¥35,254              ¥(23)      Income before Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                            45,943                       59,845            483,010
                                                                                                                                                                                                        Income Taxes:
                                                                                                                                           Thousands of U.S. Dollars (Note 1)                               Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       24,069                       28,090            226,715
                                                                                                                          Common      Capital        Retained          Net Unrealized Treasury Stock,
                                                                                                                           Stock      Surplus        Earnings         Gain on Securities  at Cost           Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        (5,429)                      (4,792)            (38,677)
     Balance at March 31, 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,066,723                  $157,240      $2,234,730          $          —         $ (73)      Minority Interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                    42                       (450)              (3,632)
         Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                                291,340                                          Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          ¥ 27,345                  ¥ 36,097          $ 291,340
         Adoption of new accounting standard for financial instruments . . . . . . . . . . .                                                                               284,536
         Cash dividends (including interim dividends) . . . . . . . . . . . . . . . . . . . . . . . .                                                  (99,669)                                                                                                                                                                                              Yen                         U.S. Dollars (Note 1)

         Bonuses to directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                                         (533)                                       Net Income per Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                  ¥ 10.94                   ¥     14.72       $        0.119
         Common stock purchased and retired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                                               (118,071)                                         See accompanying notes.

         Increase due to newly consolidated subsidiaries . . . . . . . . . . . . . . . . . . . . . .                                                    17,788
         Increase in treasury stock, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                                                                             (113)
     Balance at March 31, 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,066,723 $157,240 $2,325,585 $284,536                                           $(186)
     See accompanying notes.




40                                                                                                                                                                                                                                                                                                                                                                                                               41
     Consolidated Statements of Cash Flows                                                                                                                                                                Notes to Consolidated Financial Statements
     Osaka Gas Co., Ltd.                                                                                                                                                                                  Osaka Gas Co., Ltd.
     Years ended March 31, 2000 and 2001                                                                                                                                                                  March 31, 2000 and 2001



                                                                                                                                                                                     Thousands of
                                                                                                                                                    Millions of Yen               U.S. Dollars (Note 1)   1. Basis of presenting consolidated financial statements
                                                                                                                                             2000                      2001              2001             Osaka Gas Co., Ltd. (the “Company”) and its consolidated subsidiaries maintain              In preparing the accompanying consolidated financial statements, certain
     Cash Flows from Operating Activities:                                                                                                                                                                their accounts and records in accordance with the provisions set forth in the           reclassifications have been made in the consolidated financial statements issued
       Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                   ¥ 45,943                  ¥ 59,845       $ 483,010            Japanese Gas Utility Law and related regulations, the Japanese Commercial               domestically in order to present them in a form which is more familiar to readers
       Adjustments to reconcile net income before income taxes to                                                                                                                                         Code and the Securities and Exchange Law and in conformity with accounting              outside Japan. Statements of shareholders’ equity for 2001 and 2000 have been
        net cash provided by operating activities:                                                                                                                                                        principles and practices generally accepted in Japan (“Japanese GAAP”), which           prepared for the purpose of inclusion in the accompanying consolidated financial
          Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .              80,842                    92,461            746,255         are different from the accounting and disclosure requirements of International          statements, although such statements were not required for domestic purposes
          Increase (decrease) in employees’ retirement benefits . . . . . . . . . . . . . . . . . . . . . .                                    2,491                    (6,394)           (51,606)        Accounting Standards.                                                                   and were not filed with the regulatory authorities.
          Interest and dividend income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                      (1,787)                   (2,201)           (17,764)            The accompanying consolidated financial statements are a translation of                 The translation of the Japanese yen amounts into U.S. dollars are included
          Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .               8,320                     7,605             61,380         the audited consolidated financial statements of the Company which were                 solely for the convenience of the reader, using the prevailing exchange rate at
          Loss on write-down of investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                                3,987                     1,058              8,539         prepared in accordance with Japanese GAAP and were filed with the                       March 31, 2001, which was ¥123.90 to U.S.$1.00. The convenience translations
          Loss on write-down of investments in unconsolidated                                                                                                                                             appropriate Local Finance Bureau of the Ministry of Finance as required by the          should not be construed as representations that the Japanese yen amounts have
            subsidiaries and affilates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                   1,852                     4,402            35,529          Securities and Exchange Law.                                                            been, could have been, or could in the future be, converted into U.S. dollars at
          Loss on disposal of property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . .                                    2,923                     3,431            27,692                                                                                                  this or any other rate of exchange.
          Decrease (increase) in receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                           3,463                    (5,417)          (43,721)
          Decrease (increase) in inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                           1,130                    (3,754)          (30,299)
          Increase (decrease) in payables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                      (10,907)                    1,780            14,366          2. Significant accounting policies
          Increase (decrease) in accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                               (964)                    8,584            69,282
                                                                                                                                                                                                          (1) Consolidation                                                                       At the March 31, 2001, the Companies have securities of the category
          Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         (7,530)                   12,383            99,943
                                                                                                                                                                                                          The Company prepared the consolidated financial statements for the year                 (c) and (d) only.
                                                                                                                                              83,820                   113,938           919,596
                                                                                                                                                                                                          ended March 31, 2000 and 2001 in accordance with the revised accounting                     Trading securities are stated at fair market value. Gains and losses
           Interest and dividends received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                       1,782                     2,178            17,579
                                                                                                                                                                                                          principles for consolidated financial statements effective from the year ended          realized on disposal and unrealized gains and losses from market value
           Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          (9,151)                   (7,427)          (59,943)
                                                                                                                                                                                                          March 31, 2000.                                                                         fluctuations are recognized as gains or losses in the period of the
           Income and enterprise taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                      (31,330)                  (27,552)         (222,373)
                                                                                                                                                                                                              The consolidated financial statements include the accounts of the Company           change. Held-to-maturity debt securities are stated at amortized cost.
               Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                            91,064                   140,982         1,137,869
                                                                                                                                                                                                          and its thirty five (twenty five in 2000) significant subsidiaries. Consolidation       Equity securities issued by unconsolidated subsidiaries and affiliated
     Cash Flows from Investing Activities:                                                                                                                                                                of the remaining subsidiaries would have no material effect on the                      companies are stated at moving-average cost. Available-for-sale
        Purchase of property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                            (89,705)                  (93,085)          (751,291)        accompanying consolidated financial statements. Intercompany transactions               securities with available fair market values are stated at fair market
        Purchase of intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .               (3,036)                   (2,188)           (17,659)        and accounts have been eliminated.                                                      value. Unrealized gains and unrealized losses on these securities are
        Purchase of investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                     (2,270)                   (1,999)           (16,134)            The difference between the cost of investments and equity in their net assets       reported, net of applicable income taxes, as a separate component of
        Proceeds from sale of investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                              281                    13,268            107,086         at dates of acquisition of consolidated companies is charged or credited to             shareholders’ equity. Realized gains on sale of such securities are
        Purchase of investments in subsidiaries and affiliates . . . . . . . . . . . . . . . . . . . . . . . .                                  (816)                  (21,212)          (171,203)        income within twenty years. If the difference isn’t significant, it is charged or       computed using moving-average cost.
        Payments for acquisitions of newly consolidated subsidiaries . . . . . . . . . . . . . . . . . .                                          —                     (5,062)           (40,856)        credited to income in the first year of consolidation.                                      Debt securities with no available fair market value are stated at amortized
        Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     (7,979)                    1,230              9,928             Investments in unconsolidated subsidiaries and affiliates are not accounted         cost, net of the amount considered not collectible. Other securities with no
               Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                        (103,525)                 (109,048)          (880,129)        for by the equity method, because they are insignificant.                               available fair market value are stated at moving-average cost.
     Cash Flows from Financing Activities:                                                                                                                                                                    In the elimination of investments in subsidiaries, the assets and liabilities of        If the market value of held-to-maturity debt securities, equity securities
        Net increase (decrease) in short-term loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                           14,423                   (19,100)        (154,157)          the subsidiaries, including the portion attributable to minority shareholders, are      issued by subsidiaries and affiliated companies, and available-for-sale
        Net increase (decrease) in commercial paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                              4,000                   (35,000)        (282,486)          evaluated using the fair value at the time the Company acquired control of the          securities, declines significantly, such securities are stated at fair market value
        Proceeds from long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                      35,775                    54,381          438,910           respective subsidiaries.                                                                and the difference between fair market value and the carrying amount is
        Repayment of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                    (44,826)                  (17,561)        (141,735)                                                                                                  recognized as loss in the period of the decline. If the fair market value of equity
                                                                                                                                                                                                          (2) Consolidated Statements of Cash Flows
        Proceeds from issuance of bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                         29,988                    29,994          242,082                                                                                                   securities issued by subsidiaries and affiliated companies is not readily
                                                                                                                                                                                                          In preparing the consolidated statements of cash flows, cash on hand, readily-
        Repayment of bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .               (38,907)                  (13,666)        (110,299)                                                                                                  available, such securities should be written down to net asset value in the event
                                                                                                                                                                                                          available deposits and short-term highly liquid investments with maturities of
        Proceeds from issuance of stock by a subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . .                                   —                        924            7,458                                                                                                   net asset value declines significantly. Unrealized losses on these securities are
                                                                                                                                                                                                          not exceeding three months at the time of purchase are considered to be cash
        Common stock retired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                (4,923)                  (14,629)        (118,071)                                                                                                  reported in the income statement.
                                                                                                                                                                                                          and cash equivalents.
        Cash dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .              (12,502)                  (12,283)         (99,136)                                                                                                      As a result of adopting the new accounting standard for financial
        Cash dividends paid to minority shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                                 (36)                      (61)            (492)          (3) Securities                                                                          instruments, with respect to securities, income before income taxes increased by
        Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         12                       (15)            (121)          Prior to April 1, 2000, marketable equity securities of the Company and its             ¥1,903 million ($15,359 thousand). The adoption increased securities and
               Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                         (16,996)                  (27,016)        (218,047)          consolidated subsidiaries (the “Companies”) were primarily stated at the lower of       investment securities by ¥56,654 million ($457,256 thousand), and unrealized
     Effect of Exchange Rate Changes on Cash and Cash Equivalents . . . . . . . . . . .                                                          (15)                       (2)             (16)          moving-average cost or market value. Other securities were primarily stated at          gains on securities, net of income taxes, (included in shareholders’ equity) by
     Net Increase (Decrease) in Cash and Cash Equivalents . . . . . . . . . . . . . . . . . . .                                              (29,472)                    4,916           39,677           moving-average cost.                                                                    ¥35,254 million ($284,536 thousand).
     Cash and Cash Equivalents at Beginning of Year . . . . . . . . . . . . . . . . . . . . . . . . .                                         47,737                    22,775          183,818                Effective April 1, 2000, the Companies adopted the new Japanese accounting             Also, based on the examination of the intent of holding each security upon
     Cash and Cash Equivalents of Newly Consolidated Subsidiaries . . . . . . . . . .                                                          4,510                       985            7,950           standard for financial instruments (“Opinion Concerning Establishment of                application of the new accounting standard on April 1, 2000, trading securities
     Cash and Cash Equivalents at End of Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                                 ¥ 22,775                  ¥ 28,676       $ 231,445            Accounting Standard for Financial Instruments” issued by the Business                   as well as held-to-maturity debt securities and available-for-sale securities
                                                                                                                                                                                                          Accounting Deliberation Council on January 22, 1999).                                   maturing within one year from the balance sheet date are included in current
     Supplemental Disclosures of Cash Flow Information:
                                                                                                                                                                                                               In accordance with the new accounting standard, at April 1, 2000, the              assets, and other securities are included in investments and other assets. The
     Cash and Cash Equivalents
                                                                                                                                                                                                          Companies examined the intent of holding each security and classified those             reclassification had no significant effect.
        Cash and time deposits in the balance sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                         ¥ 16,624                  ¥ 29,120       $ 235,028
                                                                                                                                                                                                          securities as (a) securities held for trading purposes (hereafter, “trading
        Time deposits with maturities over three months . . . . . . . . . . . . . . . . . . . . . . . . . . . .                                 (476)                     (444)         (3,583)                                                                                                   (4) Derivatives and hedge accounting
                                                                                                                                                                                                          securities”), (b) debt securities intended to be held to maturity (hereafter, “held-
        Securities purchased under resale agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                               6,627                        —               —                                                                                                     Derivatives are stated at market value. See Note 2.(17).
                                                                                                                                                                                                          to-maturity debt securities”), (c) equity securities issued by subsidiaries and
               Cash and Cash Equivalents at End of Year . . . . . . . . . . . . . . . . . . . . . . . . . . . .                             ¥ 22,775                  ¥ 28,676       $ 231,445
                                                                                                                                                                                                          affiliated companies, and (d) for all other securities that are not classified in any   (5) Allowance for doubtful receivables
                                                                                                                                                                                                          of the above categories (hereafter, “available-for-sale securities”).                   In the year ended March 31, 2000, the allowance for doubtful accounts was
     See accompanying notes.
42                                                                                                                                                                                                                                                                                                                                                                                      43
     determined by the Company and certain consolidated subsidiaries by adding the             At March 31, 2000, the liability for lump-sum payments of the Company             payables denominated in foreign currencies are also translated into Japanese yen                               currency receivable or payable translated using the spot rate at the inception date
     uncollectable amounts individually estimated for doubtful receivables to a            was stated at the present value (as of March 31, 2000 this was 74%) of the            at the year-end rate.                                                                                          of the contract and the book value of the receivable or payable is recognized in
     maximum amount permitted for tax purposes, which is calculated collectively.          amount which would be required if all eligible employees voluntarily retired as            The effect on the consolidated income statement of adopting the Revised                                   income statement in the period which includes the inception date.
         Effective April 1, 2000, the Companies adopted the new accounting                 of the balance sheet date. The present value was decided based on the length of       Accounting Standard was immaterial.                                                                                 If a forward foreign exchange contract or a currency swap contract are
     standard for financial instruments and provided the allowance for doubtful            future service estimated for individual employees. Past service costs were                                                                                                                           executed to hedge a future transaction denominated in a foreign currency, the
                                                                                                                                                                                 (17) Derivative transactions and hedge accounting
     accounts principally at an amount computed based on the actual ratio of bad           charged to income at the time of amendment or actuarial reevaluation of the                                                                                                                          future transaction will be recorded using the contracted forward rate, and no
                                                                                                                                                                                 The new accounting standard for financial instruments, effective from the year
     debts in the past plus the estimated uncollectible amounts based on the               pension plan. The liability for lump-sum payments of certain consolidated                                                                                                                            gains or losses on the forward foreign exchange contract are recognized.
                                                                                                                                                                                 ended March 31, 2001, requires companies to state derivative financial
     analysis of certain individual receivables. The effect of adopting the new            subsidiaries was stated, at 40% of the amount which would be required if all                                                                                                                              Also, if interest rate swap contracts are used as hedges and meet certain
                                                                                                                                                                                 instruments at fair value and to recognize changes in the fair value as gains or
     accounting standard was immaterial.                                                   eligible employees voluntarily retired as of the balance sheet date. Certain                                                                                                                         hedging criteria, the net amount to be paid or received under the interest rate
                                                                                                                                                                                 losses unless derivative financial instruments are used for hedging purposes.
                                                                                           consolidated subsidiaries recognized pension expense when, and to the extent                                                                                                                         swap contract is added to or deducted from the interest on the assets or liabilities
     (6) Inventories                                                                                                                                                                  If derivative financial instruments are used as hedges and meet certain
                                                                                           payments were made to the pension plans.                                                                                                                                                             for which the swap contract was executed.
     Finished goods and merchandise are valued at weighted-average cost, except                                                                                                  hedging criteria, the Companies defer recognition of gains or losses resulting
                                                                                               Effective April 1, 2000, the Companies adopted the new accounting standard,
     certain goods of consolidated subsidiaries which are valued at first-in, first-out                                                                                          from changes in fair value of derivative financial instruments until the related                               (18) Net income per share
                                                                                           “Opinion on Setting Accounting Standard for Employees’ Severance and Pension
     cost or the most recent purchase price methods. Raw materials and supplies are                                                                                              losses or gains on the hedged items are recognized.                                                            The computations of net income per share of common stock shown on the
                                                                                           Benefits,” issued by the Business Accounting Deliberation Council on June 16,
     primarily valued at moving average cost.                                                                                                                                         However, in cases where forward foreign exchange contracts and currency                                   consolidated statements of income are based on the weighted average number of
                                                                                           1998 (the “New Accounting Standard”).
                                                                                                                                                                                 swap contracts are used as hedges and meet certain hedging criteria, forward                                   shares outstanding during each fiscal year.
     (7) Property, plant and equipment                                                         Under the New Accounting Standard, the liabilities and expenses for
                                                                                                                                                                                 foreign exchange contracts and currency swap contracts and hedged items are                                       The diluted net income per share of common stock for the years ended
     Depreciation is provided on the declining-balance method (the straight-line           severance and retirement benefits are determined based on amounts actuarially
                                                                                                                                                                                 accounted for in the following manner:                                                                         March 31, 2000 and 2001 is not shown since there were no outstanding
     method by certain consolidated subsidiaries) over estimated useful lives.             calculated using certain assumptions.
                                                                                                                                                                                      If a forward foreign exchange contract or a currency swap contract are                                    convertible bonds or other common stock equivalents.
     However, the Company and consolidated subsidiaries depreciate buildings                   The Company and its consolidated subsidiaries provided for employees’
                                                                                                                                                                                 executed to hedge an existing foreign currency receivable or payable, the
     acquired on or after April 1, 1998 on the straight-line method.                       severance and retirement benefits at March 31, 2001 based on the estimated
                                                                                                                                                                                 difference, if any, between the Japanese yen amount of the hedged foreign
         Repair and maintenance expenditures, excluding gas holders, are charged to        amounts of projected benefit obligation and the fair value of the plan assets
     income when incurred and major improvements are capitalized.                          at that date.
         Certain capital gains arising from beneficiaries’ contributions or                    The excess of the projected benefit obligation over the total of the fair value
     expropriations of property, deferral of which is permitted for tax purposes, are      of pension assets as of April 1, 2000 and the liabilities for employees’ retirement   3. Additional Information
     offset against the acquisition cost of property purchased. Cumulative capital         benefits recorded as of April 1, 2000 (the “net transition obligation”) amounted
                                                                                           to ¥2,729 million ($22,026 thousand), which was recognized as an expense
                                                                                                                                                                                 (1) Financial instruments                                                                                      (2) Effect of bank holiday on March 31, 2001
     gains offset against the acquisition cost of property, plant and equipment at
                                                                                                                                                                                 Effective April 1, 2000, the Company and its consolidated subsidiaries adopted                                 As financial institutions in Japan were closed on March 31, 2001, amounts that
     March 31, 2000 and 2001 were ¥266,392 million and ¥265,449 million                    during the year. Prior service costs are recognized in expenses when they arise,
                                                                                                                                                                                 the new Japanese accounting standard “Accounting Standards for Financial                                       would normally be settled on March 31, 2001 were collected or paid on the
     ($2,142,446 thousand), respectively.                                                  and actuarial gains and losses are recognized in expenses over ten years
                                                                                                                                                                                 Instruments” (Opinion Concerning the Establishment of Accounting Standard for                                  following business day, April 2, 2001. The effects of the settlements on April 2
                                                                                           commencing with the following period.
     (8) Software costs                                                                                                                                                          Financial Instruments issued by the Business Accounting Deliberation Council                                   instead of March 31 included the following:
                                                                                               As a result of the adoption of the new accounting standard, in the year ended
     In accordance with the provisional rule of the JICPA’s Accounting Committee                                                                                                 on January 22, 1999). The adoption increased income before income taxes by                                     Cash and cash equivalents:
                                                                                           March 31, 2001, severance and retirement benefit expenses increased by ¥458
     Report No.12 “Practical Guidance for Accounting for Research and Development                                                                                                ¥1,337 million ($10,791 thousand).                                                                                  Increased . . . . . . . . . . . . . . . . . . . . . . ¥2,426 million ($19,580 thousand)
                                                                                           million ($3,697 thousand), and income before income taxes decreased by ¥458
     Costs, etc.”(the “Report”), the Company and its consolidated subsidiaries                                                                                                                                                                                                                  Trade notes and accounts receivable:
                                                                                           million ($3,697 thousand) compared with what would have been recorded under
     accounts for internal use software which was included in other assets in the                                                                                                                                                                                                                    Increased . . . . . . . . . . . . . . . . . . . . . . ¥1,677 million ($13,535 thousand)
                                                                                           the previous accounting standard.
     same manner in 2000 and 2001 as in 1999. Pursuant to the Report, however, the                                                                                                                                                                                                              Trade notes and accounts payable:
     Company and its consolidated subsidiaries included software in intangible             (12) Bonuses                                                                                                                                                                                              Increased . . . . . . . . . . . . . . . . . . . . . . ¥4,103 million ($33,115 thousand)
     assets in 2000 and 2001 and depreciated it using the straight-line method over        The Companies follow the general Japanese practice of paying bonuses to
     estimated useful lives.                                                               employees in June and December. Accrued bonus liabilities at the balance sheet
                                                                                           date are calculated based upon management's estimate of annual amounts
     (9) Research and development expenses
                                                                                           thereof and included in accrued expenses. Bonuses to directors, which are
                                                                                                                                                                                 4. Securities
     The Companies charges research and development expenses to selling, general
                                                                                           subject to approval at the general meeting of shareholders, are accounted for as      (1) The following tables summarize acquisition costs, book values (fair values)
     and administrative expenses and manufacturing costs as incurred. Research and
                                                                                           an appropriation of retained earnings.                                                of securities with available fair values as of March 31, 2001:
     development expenses amounted to ¥18,441 million and ¥16,484 million
     ($133,043 thousand) for the years ended March 31, 2000 and 2001.                      (13) Reserve for repairs of gas holders
                                                                                                                                                                                 (a) Available-for-sale securities:
                                                                                           The Company provides for future repairs to gas holders by estimating future
     (10) Income taxes                                                                                                                                                           Securities with available fair values (book values) that exceed acquisition cost :
                                                                                           expenditures and charging to income in equal annual amounts. The difference
     Income taxes comprise corporation tax, prefectural and municipal inhabitants
                                                                                           between the actual expenditure and the amount provided is charged to income in                                                                                                                                                                                                    Thousands of
     taxes and enterprise tax.                                                                                                                                                                                                                                                                                                    Millions of Yen                             U.S. Dollars
                                                                                           the year the repair is completed.
          Effective April 1 ,1999, the Companies adopted the accounting standard,                                                                                                                                                                                                                          Acquisition cost         Book value             Difference          Difference
     which recognizes tax effects of temporary differences between the carrying            (14) Bond and note issue expenses
                                                                                                                                                                                                                        Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . .                  ¥28,432               ¥89,126                ¥60,694           ¥489,863
     amounts of assets and liabilities for tax and financial reporting. The asset and      Bond and note issue expenses are charged to expense when incurred.
                                                                                                                                                                                                                        Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                  120                   125                      5                 40
     liability approach is used to recognize deferred tax assets and liabilities for the
                                                                                           (15) Accounting for leases                                                                                                   Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            ¥28,552               ¥89,251                ¥60,699           ¥489,903
     expected future tax consequences of temporary differences between the carrying
                                                                                           Finance leases which do not transfer ownership are accounted for in the same
     amounts of assets and liabilities for financial reporting purposes and the
                                                                                           manner as operating leases under Japanese GAAP.                                       Securities with available fair values (book values) that do not exceed
     amounts used for income tax purposes. The Companies provided income taxes
                                                                                                                                                                                 acquisition cost :
     at the amounts currently payable in prior years.                                      (16) Translation of foreign currencies
          The amount of deferred income taxes attributable to the net tax effects of the   Short-term receivables and payables denominated in foreign currencies are
                                                                                                                                                                                                                                                                                                                                                                             Thousands of
     temporary differences at 1st April, 1999 is reflected as an adjustment to the         translated into Japanese yen at the year-end rates. Prior to April 1, 2000, long-                                                                                                                                                      Millions of Yen                             U.S. Dollars
     retained earnings brought forward from the previous year.                             term receivables and payable denominated in foreign currencies were translated                                                                                                                                  Acquisition cost         Book value             Difference          Difference
                                                                                           at historical rates.                                                                                                         Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . .                  ¥15,402               ¥12,566                ¥(2,836)           ¥(22,889)
     (11) Employees’ severance and retirement benefits
                                                                                               Effective April 1, 2000, the Companies adopted the revised accounting                                                    Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .               10,008                 8,798                 (1,210)             (9,766)
     The Companies provide two types of post-employment benefit plans,
                                                                                           standard for foreign currency translation, “Opinion Concerning Revision of                                                   Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            ¥25,410               ¥21,364                ¥(4,046)           ¥(32,655)
     unfunded lump-sum payment plans and funded contributory pension plans,
                                                                                           Accounting Standard for Foreign Currency Translation,” issued by the Business
     under which all eligible employees are entitled to benefits based on the level
                                                                                           Accounting Deliberation Council on October 22, 1999 (the “Revised Accounting
     of wages and salaries at the time of retirement or termination, length of
                                                                                           Standard”). Under the Revised Accounting Standard, long-term receivables and
     service and certain other factors.
44                                                                                                                                                                                                                                                                                                                                                                                             45
     (2) The following table summarizes book values of securities with no available                                                                                                                                     In the year ended March 31, 1998, the Company entered into debt assumption                                    pounds due 2003 (¥14,895 million) and loans from banks ( ¥19,156 million).
     fair values as of March 31, 2001:                                                                                                                                                                                  agreements with banks for 6.10% notes payable due 2003 (¥29,000 million).                                        However, the Company remains contingently liable on the amounts
                                          Available-for-sale securities:                                                                                                                                                     In the year ended March 31, 1999, the Company entered into debt                                          assumed by the banks.
                                                                                                                                                                                                         Thousands of   assumption agreements with banks for 5.45% notes payable due 2004                                                Assets pledged as collateral mainly for accounts payable, short-term loans
                                                                                                                                                                                Millions of Yen           U.S Dollars
                                                                                                                                                                                                                        (¥20,000 million).                                                                                            and long-term debt of ¥21,931 and ¥22,518 million ($181,743 thousand) at
                                             Non-listed (non quoted) equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                      ¥9,686                 $78,176         In the year ended March 31, 2000, the Company entered into debt                                          March 31, 2000 and 2001, respectively were as follows:
                                                                                                                                                                                                                        assumption agreements with banks for 8.125% bonds payable in Sterling
     (3) Maturities of available-for-sale securities with maturities are as follows:
                                                                                                                                                                                                                                                                                                                                                                                                                        Thousands of
                                                                                                                                                                    Millions of Yen                                                                                                                                                                                                            Millions of Yen           U.S. Dollars
                                                                                                                                    Within           Over one year but        Over five years but                                                                                                                                                                                        2000                    2001      2001
                                                                                                                                   one year           within five years        within ten years               Total                                            Property, plant and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                        ¥41,967             ¥50,296      $405,940
                                             Govermental bonds and municipal bonds . . . . . . .                                     ¥ —                    ¥18                       ¥      —                ¥ 18                                             Investments in securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                       117                 132         1,066
                                             Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                104                    —                            8,790                8,894                                                                                                                                                                   ¥42,084             ¥50,428      $407,006
                                             Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                —                     11                              —                    11
                                                                                                                                                                                                                                                               The annual maturities of long-term debt are as follows at March 31, 2001:
                                                                                                                                                            Thousands of U.S. Dollars
                                                                                                                                    Within           Over one year but        Over five years but
                                                                                                                                                                                                                                                                                                                                                                                                                        Thousands of
                                                                                                                                   one year           within five years        within ten years               Total
                                                                                                                                                                                                                                                               Years ending March 31,                                                                                                                Millions of Yen     U.S. Dollars
                                             Govermental bonds and municipal bonds . . . . . . .                                     $ —                  $145                    $       —                  $ 145                                             2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           ¥ 23,599        $ 190,468
                                             Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                839                   —                         70,944                  71,783                                           2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .             28,865           232,970
                                             Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                —                    89                            —                       89                                           2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .             37,672           304,052
     (4) Total sales of available-for-sale securities sold in the year ended March 31,                                    gains and losses amounted to ¥1,917 million ($15,472 thousand ) and ¥41                                                              2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .             24,912           201,065
         2001 amounted to ¥13,268 million ($107,086 thousand ) and the related                                            million ($331 thousand ), respectively.                                                                                              2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .             82,733           667,740
                                                                                                                                                                                                                                                               2007 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .               269,318         2,173,673
     (5) Market values and book values of quoted securities included in marketable                                                                                                                                                                                Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         ¥467,099        $3,769,968
     securities and investments at March 31, 2000 were as follows:
                                                                                                                                       Millions of Yen                                 Thousands of U.S. Dollars
                                                                                                                                              2000                                                2000                  6. Shareholders’ equity
                                                                                                                               Book value            Market value                 Book value             Market value   (1) Capital surplus                                                                                               During the year ended March 31, 2001 the Company purchased and retired
                                             Marketable securities . . . . . . . . . . . . . . . . . . . . . .                  ¥     4              ¥     15                    $     38                $      141     The Commercial Code of Japan provides that the entire issue price of shares                                   48,197,000 shares of common stock. As a result the authorized share capital of
                                             Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .             42,000               112,576                     395,666                 1,060,537     must be credited to common stock, provided that, by resolution of the Board of                                the Company was reduced to 3,901,401,000 shares.
                                                                                                                                ¥42,004              ¥112,591                    $395,704                $1,060,678     Directors up to one-half of such issue price may be credited to capital surplus so
                                                                                                                                                                                                                                                                                                                                      (3) Dividends
                                                                                                                                                                                                                        long as the amount accounted for as common stock is equal to at least the
                                                                                                                                                                                                                                                                                                                                      The maximum amount that the Company can distribute as dividends is
                                                                                                                                                                                                                        aggregate par value of the shares issued.
                                                                                                                                                                                                                                                                                                                                      calculated based on the unconsolidated financial statements of the Company in
     5. Long-term debt                                                                                                                                                                                                  (2) Common Stock                                                                                              accordance with the Commercial Code of Japan.
     Long-term debt at March 31, 2000 and 2001, consisted of the following:                                                                                                                                             During the year ended March 31, 2000 the Company purchased and retired
                                                                                                                                                                                                                        27,702,000 shares of common stock. As a result the authorized share capital of
                                                                                                                                                                                                     Thousands of       Company was reduced to 3,949,598,000 shares.
                                                                                                                                                                    Millions of Yen                   U.S. Dollars
                                                                                                                                                             2000                     2001                   2001
                                             Loans principally from banks and insurance companies, principally at
                                              0.536%—6.400%, maturing serially through 2034 . . . . . . . . . . . . . . . . .                              ¥164,641            ¥206,071             $1,663,204          7. Contingent liabilities
                                             5.875% notes payable in Euroyen due 2012 . . . . . . . . . . . . . . . . . . . . . . . .                        10,000              10,000                 80,710          At March 31, 2000 and 2001, the Companies were contingently liable as follows:
                                             2.95% notes payable due 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                50,000              50,000                403,552
                                             3.4% notes payable due 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .               20,000              17,000                137,207                                                                                                                                                                                                          Thousands of
                                             7.125% bonds payable in U.S. dollars due 2007 . . . . . . . . . . . . . . . . . . . .                           48,960              48,960                395,157                                                                                                                                                                                 Millions of Yen           U.S. Dollars
                                             2.9% notes payable due 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .               30,000              30,000                242,131                                                                                                                                                                          2000                     2001      2001
                                             1.35% notes payable due 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                10,000                  —                      —                                                  As guarantor of indebtedness of:
                                             1.47% notes payable due 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                30,000              30,000                242,131                                                     Subsidiaries and affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                 ¥    261                ¥ 2,411      $ 19,459
                                             1.25% notes payable due 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                  10,000              10,000                 80,710
                                                                                                                                                                                                                                                                   Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .             13,480                  8,545        68,967
                                             LIBOR+0.36% bonds payable in U.S. dollars due 2003 . . . . . . . . . . . . . . .                                 4,848               4,848                 39,128
                                                                                                                                                                                                                                                                   Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           6,123                  5,245        42,333
                                             1.95% notes payable due 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                  20,000              20,000                161,421
                                                                                                                                                                                                                                                               Debt assumption agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                       105,454                 83,051       670,306
                                             0.75% notes payable due 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                  10,000              10,000                 80,710
                                                                                                                                                                                                                                                                                                                                                                                   ¥125,318                ¥99,252      $801,065
                                             5.1% notes payable due 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                    200                  —                      —
                                             1.23% notes payable due 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                    —               20,000                161,421
                                             2.06% notes payable due 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                    —                  220                  1,776
                                             0.675% notes payable due 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                       —               10,000                 80,710
                                                                                                                                                            408,649             467,099              3,769,968
                                             Less amounts due within one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                  24,460              23,599                190,468
                                                                                                                                                           ¥384,189            ¥443,500             $3,579,500




46                                                                                                                                                                                                                                                                                                                                                                                                                                      47
                                                                                                                                                                                                                                                                                                                                                                               Thousands of U.S. Dollars
8. Finance leases                                                                                                                                                                                                                                                                                                                                    Notional                Over one               Market     Recognized
Information for non-capitalized finance leases for office equipment at March 31,                                                                                                                                                                       March 31, 2001                                                                                amount                    year                 value     gains or losses
2000 and 2001 is as follows:                                                                                                                                                                                                                           Items not traded on exchanges
                                                                                                                                                                                                                                                           Interest rate swaps:
                                      As lessee (non-capitalized)
                                                                                                                                                                                                                                                               Pay variable, receive fixed. . . . . . . . . . . . . . . . . . . .                   $54,859                 $54,859                $1,065        $1,065
                                                                                                                                                                                            Thousands of
                                                                                                                                                              Millions of Yen                U.S. Dollars                                                      Pay fixed, receive variable. . . . . . . . . . . . . . . . . . . .                    16,626                  15,738                  (379)         (379)
                                                                                                                                                       2000                     2001           2001                                                        Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        $71,485                 $70,597                $ 686         $ 686
                                      Original lease obligations (including finance charges) . . . . . . . . . . . . . . .                             ¥6,527             ¥6,529             $52,695
                                      Payments remaining:
                                      Payments due within one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                   ¥1,371             ¥1,211             $ 9,774           10. Employees’ severance and pension benefits
                                      Payments due over one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                  1,785              1,612              13,011
                                          Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    ¥3,156             ¥2,823             $22,785           As explained in Note 2. Significant Accounting Policies, effective April 1,                                        The liability for severance and retirement benefits included in the
                                                                                                                                                                                                               2000, the Companies adopted the new accounting standard for employees’                                         liability section of the consolidated balance sheet as of March 31, 2001
Lease payments for such leases for the years ended March 31, 2000 and 2001                                                                                                                                     severance and retirement benefits, under which the liabilities and expenses for                                consists of the following:
were ¥1,792 million and ¥1,624 million ($13,107 thousand), respectively.                                                                                                                                       severance and retirement benefits are determined based on amounts obtained
                                                                                                                                                                                                               by actuarial calculations.
                                      As lessor
                                                                                                                                                                                            Thousands of                                                                                                                                                                                                     Thousands of
                                                                                                                                                              Millions of Yen                U.S. Dollars                                                                                                                                                                               Millions of Yen       U.S. Dollars
                                                                                                                                                       2000                     2001           2001                                                    Projected benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          ¥273,628            $2,208,458
                                      Original cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     ¥13,483            ¥11,614             $93,737                                                   Prepaid pension expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                 123                   993
                                      Less accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                   7,993              7,761              62,639                                                   Less unrecognized actuarial differences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                    (17,813)             (143,769)
                                          Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   ¥ 5,490            ¥ 3,853             $31,098                                                   Less fair value of pension assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .             (154,659)           (1,248,257)
                                                                                                                                                                                                                                                           Liability for severance and retirement benefits. . . . . . . . . . . . . . . . . . . . . . . . . . . . .                      ¥101,279            $ 817,425
                                      Receipts remaining:
                                      Receipts due within one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .              ¥ 3,573            ¥ 2,000             $16,142           Included in the consolidated statement of income for the year ended March 31,
                                      Receipts due over one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                5,151              3,672              29,637           2001 are severance and retirement benefit expenses comprised of the following:
                                         Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    ¥ 8,724            ¥ 5,672             $45,779
                                                                                                                                                                                                                                                                                                                                                                                                             Thousands of
Lease receipts under such leases for the years ended March 31, 2000 and 2001                                                                                                                                                                                                                                                                                                            Millions of Yen       U.S. Dollars
were ¥4,412 million and ¥3,404 million ($27,474 thousand), respectively.                                                                                                                                                                               Service costs – benefits earned during the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                         ¥10,534            $ 85,020
                                                                                                                                                                                                                                                       Interest cost on projected benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                       7,210              58,192
                                                                                                                                                                                                                                                       Expected return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                 (6,352)            (51,267)
                                                                                                                                                                                                                                                       Net transition obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .             2,729              22,026
9. Derivative transactions                                                                                                                                                                                                                                 Severance and retirement benefit expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                         ¥14,121            $113,971
The Companies use forward foreign currency contracts, currency swaps and                                          The following summarizes hedging derivative financial instruments used by
interest rate swaps as derivative financial instruments only for the purpose of                               the Companies and items hedged:                                                                  The discount rate and the rate of expected return on plan assets used by the                                   each service year using the estimated number of total service years. Past service
mitigating future risks of fluctuation of foreign currency exchange rates with                                                                                                                                 Company are 2.7 % and 4.0 %, respectively. The estimated amount of all                                         costs are recognized as incurred and actuarial gains/losses are recognized as an
respect to foreign currency payables from the purchase of materials and foreign                               Hedging instruments:                               Hedged items:                                 retirement benefits to be paid at future retirement dates is allocated equally to                              expense in equal amounts over 10 years.
currency bonds and loans payable, and interest rate increases with respect to                                  Interest rate swap contracts                       Interest on bonds and loans
borrowings and bonds within the amounts of such borrowings or foreign                                          Currency swap contracts                            Foreign currency bonds and loans payable
currency payables.                                                                                             Forward foreign exchange contracts                 Foreign currency future purchase
    Forward foreign currency and currency swap contracts and interest rate swap                                 and currency options                                transaction
contracts are subject to risks of foreign exchange rate changes and interest rate
changes, respectively.                                                                                        The Companies evaluate hedge effectiveness by recognizing the association of
    The derivative transactions are executed and managed by the Companies’                                    hedging instruments and hedged items.
Finance Departments in accordance with the established policies and within the                                   The following table summarizes market value information as of March 31,
specified limit on the amounts of derivative transactions allowed.                                            2001 of derivative transactions for which hedge accounting has not been applied:


                                                                                                                                                                  Millions of Yen
                                                                                                                                         Notional        Over one                 Market      Recognized
                                      March 31, 2001                                                                                     amount            year                   value      gains or losses
                                      Items not traded on exchanges
                                          Interest rate swaps:
                                              Pay variable, receive fixed. . . . . . . . . . . . . . . . . . . .                         ¥6,797           ¥6,797                    ¥132        ¥132
                                              Pay fixed, receive variable. . . . . . . . . . . . . . . . . . . .                          2,060            1,950                     (47)        (47)
                                          Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .              ¥8,857           ¥8,747                    ¥ 85        ¥ 85




48                                                                                                                                                                                                                                                                                                                                                                                                                              49
     11. Income taxes                                                                                                                                                                                                      13. Segment information
     The Company is subject to a number of taxes based on income, which, in the                                           The following table summarizes the significant differences between the                           The Companies’ primary business activities include (1) Gas and By-products, (2)
     aggregate, indicate statutory rates in Japan of approximately 36.2% in case of                                   statutory tax rate and the Company’s effective tax rates for financial statement                     Pipeline Installation (3) Gas Appliance (4) Rental Real Estate (5) Foods and
     the Company for the years ended March 31, 2000 and 2001, respectively.                                           purposes for the years ended March 31, 2000 and 2001:                                                Restaurants and (6) Other Businesses.
                                                                                                                                                                                                                                                                                                                         Millions of Yen
                                                                                                                                                                                                   2000          2001                                                                                                Rental                                             Elimination
                                                                                                                                                                                                                                                                        Gas and        Pipeline         Gas           Real             Foods and       Other                and
                                             Statutory tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                    36.2%        36.2%
                                                                                                                                                                                                                           For 2000                                    By-products   Installation    Appliances      Estate            Restaurant     Business           Corporate      Consolidated
                                             Statutory tax rate difference between the Company and certain subsidiaries . . . . . . . . . . .                                                       1.3          0.6
                                                                                                                                                                                                                           Operating revenues
                                             Non-deductible expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                              1.6          0.7           Outside customers . . . . . .           ¥526,056       ¥37,947        ¥119,346      ¥ 5,945             ¥33,100       ¥126,831           ¥      —        ¥ 849,225
                                             Per capita inhabitant tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                        0.4          0.4           Inside group . . . . . . . . . . .           255            —              155       12,463                 308            694             (13,875)             —
                                             Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                1.1          1.0                                                    526,311        37,947         119,501       18,408              33,408        127,525             (13,875)        849,225
                                             Effective tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                    40.6%        38.9%      Cost and expenses . . . . . . . . .          412,505        37,676         119,756       14,587              31,756        111,969              58,252         786,501
                                                                                                                                                                                                                           Operating income . . . . . . . . . .        ¥113,806       ¥ 271          ¥ (255)       ¥ 3,821             ¥ 1,652       ¥ 15,556           ¥ (72,127)      ¥ 62,724

                                                                                                                                                                                                                           Identifiable assets . . . . . . . . . .     ¥702,131       ¥11,455        ¥ 60,208      ¥95,677             ¥21,050       ¥139,919           ¥189,075        ¥1,219,515
     Significant components of the Companies’ deferred tax assets and liabilities as of                                                                                                                                    Depreciation . . . . . . . . . . . . . .      59,257            54           1,580        5,819               1,147          9,324              3,661            80,842
     March 31, 2000 and 2001 are as follows:                                                                                                                                                                               Capital expenditure . . . . . . . . .         65,497            34           1,621        2,040                 561         15,988              8,211            93,952
                                                                                                                                                                                                           Thousands of
                                                                                                                                                                               Millions of Yen              U.S. Dollars   For 2001
                                                                                                                                                                        2000                     2001         2001         Operating revenues
                                                                                                                                                                                                                               Outside customers . . . . . .           ¥581,756       ¥37,589        ¥125,737      ¥ 7,680             ¥34,205       ¥164,960           ¥      —        ¥ 951,927
                                             Deferred tax assets:
                                                                                                                                                                                                                               Inside group . . . . . . . . . . .           268            —              110       13,035                 279            918             (14,610)             —
                                                 Retirement benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                   ¥23,309               ¥22,691         $183,140
                                                                                                                                                                                                                                                                        582,024        37,589         125,847       20,715              34,484        165,878             (14,610)        951,927
                                                 Excess depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                     6,980                 9,713           78,394
                                                                                                                                                                                                                           Cost and expenses . . . . . . . . .          460,155        35,994         124,409       16,192              32,505        150,214              58,403         877,872
                                                 Unrealized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                    3,271                 3,979           32,115        Operating income . . . . . . . . . .        ¥121,869       ¥ 1,595        ¥ 1,438       ¥ 4,523             ¥ 1,979       ¥ 15,664           ¥ (73,013)      ¥ 74,055
                                                 Enterprise taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                  2,789                 3,092           24,956
                                                 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .             8,782                14,476          116,835        Identifiable assets . . . . . . . . . .     ¥686,932       ¥11,525        ¥ 64,000      ¥99,041             ¥22,269       ¥201,929           ¥225,280        ¥1,310,976
                                                 Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                      45,131                53,951          435,440        Depreciation . . . . . . . . . . . . . .      67,072            58           1,436        5,718               1,041         13,774              3,362            92,461
                                                 Valuation allowance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                       (250)                 (237)          (1,913)       Capital expenditure . . . . . . . . .         62,484             0           1,221        7,178               1,508         16,525              2,318            91,234
                                             Net deferred tax assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                   44,881                53,714          433,527
                                                                                                                                                                                                                           For 2001                                                                                 Thousands of U.S. Dollars
                                             Deferred tax liabilities:                                                                                                                                                     Operating revenues
                                                 Special reserve for tax purposes . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                           (1,726)               (5,139)         (41,477)           Outside customers . . . . . .          $4,695,367     $303,382       $1,014,826    $ 61,985            $276,069      $1,331,398      $       —          $ 7,683,027
                                                 Deferred gains on real properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . .                           (1,124)               (1,094)          (8,830)           Inside group . . . . . . . . . . .          2,163           —               888     105,206               2,252           7,409        (117,918)                 —
                                                 Net unrealized gains on securities . . . . . . . . . . . . . . . . . . . . . . . . . . . .                               —                (21,322)        (172,090)                                                   4,697,530      303,382        1,015,714     167,191             278,321       1,338,807        (117,918)          7,683,027
                                                 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                —                 (1,343)         (10,839)       Cost and expenses . . . . . . . . .         3,713,922      290,509        1,004,108     130,686             262,348       1,212,382         471,372           7,085,327
                                             Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                   (2,850)              (28,898)        (233,236)       Operating income . . . . . . . . . .       $ 983,608      $ 12,873       $ 11,606      $ 36,505            $ 15,973      $ 126,425       $ (589,290)        $ 597,700
                                             Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                   ¥42,031               ¥24,816         $200,291
                                                                                                                                                                                                                           Identifiable assets . . . . . . . . . .    $5,544,245     $ 93,019       $ 516,546     $799,362            $179,734      $1,629,774      $1,818,240         $10,580,920
                                                                                                                                                                                                                           Depreciation . . . . . . . . . . . . . .      541,340          468          11,590       46,150               8,402         111,170          27,135             746,255
     Net deferred tax assets are reflected in the consolidated balance sheets as follows:                                                                                                                                  Capital expenditure . . . . . . . . .         504,310           —            9,855       57,934              12,171         133,374          18,708             736,352
                                                                                                                                                                                                           Thousands of
                                                                                                                                                                               Millions of Yen              U.S. Dollars   Corporate operating costs are mainly comprised of expenses of administration               In accordance with the new accounting standard for financial instruments, the
                                                                                                                                                                         2000                    2001         2001         departments. Corporate assets include cash and time deposits, securities and           Company changed the accounting policy of evaluating securities. As a result of
                                             Current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                ¥7,775              ¥11,378          $91,832        assets of administration departments.                                                  this change, in the gas appliances segment identifiable assets (securities and
                                             Investments and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                          34,373               19,687          158,894            In accordance with the new accounting standard for employees’ retirement           investments securities) increased ¥44 million ($355 thousand); in the rental real
                                             Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                       —                    78              629        benefits, the Company changed the accounting policy of providing for                   estate segment identifiable assets (securities and investment securities)
                                             Other non-current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                        (117)               6,171           49,806        employees’ retirement benefits.                                                        increased ¥398 million ($3,212 thousand); in the foods and restaurant segment
                                                                                                                                                                                                                               As a result of this change, in the gas and by-products sales segment               operating income identifiable assets (securities and investments securities)
                                                                                                                                                                                                                           operating income increased ¥1,605 million ($12,954 thousand); in the pipeline          increased ¥67 million ($541 thousand); in the other business segment
                                                                                                                                                                                                                           installation segment operating income increased ¥48 million ($387 thousand); in        identifiable assets (securities and investments securities) increased ¥14,316
     12. Related party transactions                                                                                                                                                                                        the gas appliance segment operating income increased ¥237 million ($1,913              million ($115,545 thousand); and in the elimination and corporate column
     Long-term loans receivable at March 31, 2000 and 2001 include a loan to an                                                                                                                                            thousand); in the rental real estate segment operating income increased ¥19            identifiable assets (securities and investments securities) increased ¥41,828
     unconsolidated subsidiary of ¥13,600 million ($109,766 thousand).                                                                                                                                                     million ($153 thousand) ; in the foods and restaurant segment operating income         million ($337,595 thousand).
                                                                                                                                                                                                                           increased ¥1 million ($8 thousand); in the other business segment operating                Geographic segment information is not shown due to the Company having no
                                                                                                                                                                                                                           income increased ¥123 million ($993 thousand); and in the elimination and              overseas consolidated subsidiaries. Information for overseas sales is not disclosed
                                                                                                                                                                                                                           corporate column operating income increased ¥238 million ($1,921 thousand).            due to overseas sales being not material compared to consolidated net sales.



                                                                                                                                                                                                                           14. Subsequent event
                                                                                                                                                                                                                           At the ordinary shareholders’ meeting of the Company held on June 28, 2001,
                                                                                                                                                                                                                           year end dividends of ¥2.5 per share for a total of ¥6,074 million ($49,023
                                                                                                                                                                                                                           thousand) were approved.
50                                                                                                                                                                                                                                                                                                                                                                                                      51
     Corporate Organization (As of June 29, 2001)



                                                    Secretariat                                                                                           Gas Resources Dept.
                                                          Corporate Research Office
                                                                                                                                                          Production Dept.
                                                    Auditing Dept.                                                                                              Terminals (2)

                                                    Corporate Planning Dept.                                                                                    Plant (1)

                                                          Technology Planning Office                                                                            Gas Science Museum
                                                          Information Planning Office
                                                                                                                                                          Transmission Dept.
                                                    Energy Business Development Dept.
                                                                                                                                                                Transmission Offices (4)
                                                          International Business Office
                                                                   London Office
                                                                   New York Office
        Board of Directors                                         Singapore Office
        Chairman
                                                    Business Development Dept.
        President
        Executive Vice-Presidents                   Tokyo Office

                                                    Corporate Communication Dept.

                                                    General Affairs Dept.
                                                          Legal Office                                                                                    Osaka Business Headquarters

                                                          Compliance Office                                                                                     Depts., Center(5)

                                                    Personnel Dept.                                                                                       Nanbu Business Headquarters
                                                          Employee Welfare & Safety Office                                                                      Depts., Center(5)
                                                          Better Citizenship Development Office                                                                 District Office(1)

                                                    Accounting & Finance Dept.                                                                            Hokutobu Business Headquarters
                                                          Finance Office                                                                                        Depts., Center(5)

                                                                                                                                                          Hyogo Business Headquarters
                Board of Managing Directors         Environment Dept.                                 Distribution & Marketing Planning Dept.
                                                                                                                                                                Dept., Center(5)
                                                    General Safety & Distribution Control Dept.             Sales & Technical Skills Development Center
                                                                                                                                                                District Office(1)
                                                                                                            Residential IT Office
        Board of Corporate Auditors                 Regional Development & Planning Dept.
                                                                                                                                                          Keiji Business Headquarters
              Corporate Auditors Office                   Real Estate Office                          Residential Market Development Dept.
                                                                                                                                                                Depts., Center(5)
        Corporate Auditors                          Purchasing Dept.                                  Commercial & Industrial Market Development Dept.          District Office(1)
                                                                                                            Natural Gas Vehicles Office
                                                    Information & Communication Systems Dept.                                                             Corporate Sales Dept.

                                                    Engineering Dept.                                 Pipeline & Facilities Engineering Dept.                   District Heating & Cooling Office
                                                                                                            Natural Gas Conversion Office
                                                    Research & Development Dept.
                                                          Technology Coordinate Office                Large Customer Sales Dept.
                                                          Intellectual Property Office
                                                                                                      Customer Relations Dept.
                                                    Research Institute for Culture, Energy and Life         Customer Service Office

                                                    Tsuruga LNG Project Dept.
                                                          Tsuruga Office

                                                    Residential Cogeneration Dept.

52                                                                                                                                                                                                  53
         Directors and Corporate Auditors (As of June 29, 2001)



     Chairman
       Shin-ichiro Ryoki

     President
       Akio Nomura
                                    Chairman                                 President
     Executive Vice-Presidents
       Takemi Arimoto
       Shozo Endo                                                                                             Senior Managing Directors
       Hirofumi Shibano

     Senior Managing Directors
       Hironori Yamada
       Yuji Matsumura

     Managing Directors
      Yoshikazu Koyama
      Nobuhiko Hattori
      Hidetoshi Nakatani            Shin-ichiro Ryoki                        Akio Nomura                      Hironori Yamada                   Yuji Matsumura
      Tamotsu Okajima
      Kunishige Asai
      Seishiro Yoshioka

     Directors
       Masaru Ohe                   Executive Vice-Presidents                                                 Managing Directors
       Akio Nakashiba
       Masakazu Kato
       Yukihiro Endo
       Ikuo Okada
       Susumu Mita
       Yoshikazu Ishida
       Takashi Nabari
       Zenzo Ideta
       Chiaki Gomi
                                                                                                              Yoshikazu Koyama            Nobuhiko Hattori       Hidetoshi Nakatani   Tamotsu Okajima
                                    Takemi Arimoto              Shozo Endo                 Hirofumi Shibano
     Corporate Auditors
       Toshio Tsuchiyama
       Kojiro Ambashi
       Keizo Hikasa

     Auditors
       Kojiro Niino
       Reisuke Shimada


                                                                                                              Kunishige Asai              Seishiro Yoshioka



54                                                                                                                                                                                                      55
     Directory                                                                                                        Investor Information (As of July 1, 2001)


     Head Office                                          OVERSEAS REPRESENTATIVE OFFICES                             Date of Establishment:                                                             Conversion Table
     4-1-2, Hiranomachi, Chuo-ku, Osaka 541-0046, Japan   London Office                                               April 10, 1897                                                                     Weight
                                                                                                                                                                                                                                    metric                     Imperial       U. S.
     Tel: (06) 6202-2221                                  3rd Floor, Mutual House, 70 Conduit Street,                                                                                                    kg                         ton                        (short )ton    (long) ton
     Fax: (06) 6227-0745                                  London W1R 9TQ, U. K.                                       Regular General Meeting:
                                                                                                                                                                                                         1                          1 x 10-3                   0.984 x 10-3   1.102 x 10-3
                                                          Tel: (207) 287-8606                                         The regular general meeting of shareholders is held in June each year.
                                                                                                                                                                                                         1,000                      1                          0.9842         1.1023
     Tokyo Office                                         Fax: (207) 287-8607                                         The 2001 Regular General Meeting was held on June 28.                              1,016.0                    1.0160                     1              1.1200
     2-2-1,Otemachi, Chiyoda-ku, Tokyo 100-0004, Japan                                                                                                                                                   907.19                     0.9072                     0.8927         1
     Tel: (03) 3211-2551                                  New York Office                                             Common Stock:
     Fax: (03) 3279-1835                                                                                              Authorized:                                                                        Length
                                                          375 Park Avenue, Suite 2109, New York, NY 10152, U. S. A.
                                                                                                                                                                                                         m                          ft                         yard           mile
                                                          Tel: (212) 980-1666/1667                                    3,901,401 thousand shares
                                                                                                                      Issued:                                                                            1                          3.2808                     1.0936         0.622 x 10-3
                                                          Fax: (212) 832-0946
                                                                                                                                                                                                         0.3048                     1                          0.333          0.189 x 10-3
                                                                                                                      2,429,563 thousand shares
                                                                                                                                                                                                         0.9144                     3                          1              0.568 x 10-3
                                                          Singapore Office                                                                                                                               1,609                      5,280                      1,760          1
                                                          10 Shenton Way, #12-03 MAS Building, Singapore 0207         Listing of Shares:
                                                          Tel: (65) 224-6066                                          Osaka Gas’s shares are listed for trading on the following stock exchanges         Volume (Liquid)
                                                          Fax: (65) 224-3600                                          in Japan: Tokyo, Osaka, Nagoya                                                                                                           Imperial       U. S.
                                                                                                                                                                                                         m3(kl)                     ft3                        gallon         gallon
                                                                                                                                                                                                         1                          35.315                     219.97         264.17
                                                          Los Angeles Liaison Office                                  Number of Shareholders:
                                                                                                                                                                                                         28.32 x 10-3               1                          6.288          7.481
                                                          3000 North Lake Avenue, Suite 920, Pasadena,                199,353
                                                                                                                                                                                                         4.55 x 10-3                0.1606                     1              1.2011
                                                          CA 91101, U. S. A.                                                                                                                             3.78 x 10-3                0.1337                     0.8327         1
                                                          Tel: (818) 304-1082                                         Stock Transaction Units:                                                           1 kl=6.29 barrel; 1 barrel (42 U. S. gallons)=0.159 kl.
                                                          Fax: (818) 304-9327                                         The Company’s stock is traded in units of 1,000 shares.
                                                                                                                                                                                                         Volume (Gas)
                                                                                                                                                                                                         m3(n)                      m3(s)                      SCF
                                                          Research & Development Office                               Common Stock Price Range (Yen)
                                                                                                                      (Tokyo Stock Exchange)                                                             1                          1.055                      37.33
                                                          6-19-9, Torishima, Konohana-ku, Osaka 554-0051, Japan
                                                                                                                                                             FY2000                     FY2001           0.9476                     1                          35.37
                                                          Tel: (06) 6462-3231
                                                                                                                                                      High            Low        High            Low     0.0268                     0.0283                     1
                                                                                                                      First quarter                   440             366        310             252     n: 0˚C, S: 15˚C, SCF: 101.33kPa, 15.5˚C (60˚F)
                                                                                                                      Second quarter                  415             331        315             262
                                                                                                                      Third quarter                   380             242        350             261     Energy
                                                                                                                      Fourth quarter                  275             201        347             285     kcal                       Btu                        MJ             kWh
                                                                                                                                                                                                         1                          3.969                      4.186 x 10-3   1.162 x 10-3
                                                                                                                      Independent Certified Public Accountants:                                          0.2520                     1                          1.055 x 10-3   0.2929 x 10-3
                                                                                                                      Asahi & Co.                                                                        238.9                      948.2                      1              0.2778
                                                                                                                                                                                                         860.1                      3,414                      3.600          1
                                                                                                                                                                                                         1 therm=100,000 Btu
                                                                                                                      Transfer Agent:
                                                                                                                      The Sumitomo Trust & Banking Co., Ltd.                                             Heating Value (Gas)
                                                                                                                      4-5-33, Kitahama, Chuo-ku, Osaka 541-0041, Japan                                   kcal/m3(n)                 Btu/SCF                    MJ/m3(s)
                                                                                                                      Tel: (06) 6833-4700                                                                1                          0.1063                     3.97 x 10-3
                                                                                                                           (0423) 51-2211                                                                9.406                      1                          3.73 x 10-3
                                                                                                                                                                                                         252.1                      26.81                      1
                                                                                                                      The Osaka Gas Co., Ltd. Internet home page contains information provided           1ton of LNG=13 x 106 kcal=52 x 106 Btu

                                                                                                                      for all investors and is constantly updated.
                                                                                                                      The address of the Osaka Gas Co., Ltd. home page is:
                                                                                                                      http://www.osakagas.co.jp
                                                                                                                      For inquiries about this report or requests for other materials, please refer to
                                                                                                                      the contacts listed below:
                                                                                                                      Osaka Gas Co., Ltd.
                                                                                                                      Accounting & Finance Dept., Finance Office, IR Group
                                                                                                                      TEL: +81-6-6202-2221
                                                                                                                      FAX: +81-6-6227-0745
                                                                                                                      E-mail: keiri@osakagas.co.jp
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