Chiyoda Corporation
Annual Report 2007

Plain-text annual report

CHIYODA CORPORATION Annual Report 2007 Fiscal Year Ended March 31, 2007 New Horizons, Infinite Experience Photo: Courtesy of RasGas Contents Profile..................................................................................................... Financial Highlights .............................................................................. 1 2 To Our Shareholders and Investors ...................................................... 3 Progress Report: Double Step-Up Plan 2008........................................ 6 Review of Operations 8 Overseas ........................................................................................... Domestic .......................................................................................... 10 Projects Logistics.............................................................................. 12 Topics: Increasing LNG Plant Capacity.................................................. 14 Topics: Technologies Update ................................................................ 16 Corporate Governance Board of Directors, Corporate Auditors and Executive Officers ...... 18 Initiatives to Enhance Corporate Governance............................... 20 Internal Control System .................................................................. 21 Risk Management............................................................................ 22 Corporate Social Responsibility (CSR)............................................. 23 Six-Year Summary of Selected Financial Data ..................................... 24 Management’s Discussion and Analysis of Operating Results and Financial Condition.................................. 25 Global Network ..................................................................................... 30 Corporate Information.......................................................................... 32 CSR Report Chiyoda published an annual environment report until 2005. Since 2006, we have been publishing a Corporate Social Responsibility (CSR) Report that introduces our activities relat- ed to the economy, society, energy and the environment. Website Previous annual reports, CSR reports and investor relations materials, press releases and other information about Chiyoda are available on our website at http://www.chiyoda-corp.com/en/ Cover Page LNG Plant Train 5 for Ras Laffan Liquefied Natural Gas Co., Ltd. (II) (Photo: Courtesy of RasGas) Forward-Looking Statements This annual report contains forward-looking statements about Chiyoda Corporation’s outlooks, plans, forecasts, results and other items that may take place in the future. Such statements are based on data available as of June 28, 2007. Unknown risks and other uncertainties that happen in the future may cause our actual results to be different from the forward-looking statements contained in this report. The risks and uncertainties include business and economic conditions, competitive pressure, changes to laws and regulations, addition or elimination of products, exchange rate fluctuation, among many more. Profile Since its establishment in 1948, Chiyoda Corporation has engaged in engineering and construction work and ser- vices at numerous industrial plants both in Japan and overseas in the fields of oil, natural gas and other energy sources; petrochemicals and chemicals; pharmaceuticals; and general industrial machinery. Thirty-five years ago in 1972, Chiyoda’s founder was already emphasizing that sustainable social development should progress by harmonizing nature and industrial development in a booklet entitled Legacy for the Twenty-first Century. We are one of the first companies to state our intention to contribute to sustainable social development through our engineering and technology by providing appropriate solutions to the various energy and environmental issues we currently face, and have been putting those words into action ever since. This booklet is available on our website. With almost 60 years of technological experience, Chiyoda is working to build on its position as the “Reliability No. 1” project company with a high level of customer and investor trust, not only in terms of technology but also in terms of our people and management. At the same time, we will continue to improve our financial strength and to raise our corporate value. Enhance our business and contribute to the development of a sustainable society as an integrated engineering company through the use of our collective wisdom and painstakingly developed technology. Corporate Philosophy The Chiyoda Group’s Strengths Superior technologies, including project execution capabilities, and the people that support them Technological Superiority Human Resources 2. Chiyoda Group Human Resources Chiyoda is working to create an environ- ment in which our people can make their dreams a reality through engineering. We cultivate professionals through on-the-job training and career development programs according to individual competencies. This supports our ability to successfully execute projects. 1. Technological Superiority Chiyoda’s core elemental technologies encompass environmentally responsible tech- nologies, catalysts and energy-saving technologies, while execution technologies focus on managing the costs and schedules of projects in progress and ensuring reliable quality. Our execution tech- nologies are supported by the most advanced information technology, which currently applies to our project execution at every stage from design and procurement to construction of ultra-large-scale liquefied natural gas (LNG)* plants and other facilities. This technology is embodied in our integrated project engineering software, “i-Plant 21,” which Chiyoda devel- oped and continues to enhance. (Please refer to page 17.) * LNG is manufactured by liquefying natural gas. Demand for this clean energy is increasing. 1 CHIYODA CORPORATION ANNUAL REPORT 2007 Financial Highlights Years Ended March 31, 2007, 2006 and 2005 For the Year Revenues Cost of revenues Operating income Income before income taxes and minority interests Net income At Year-End Total assets Total equity Long-term debt Working capital Current ratio (%) Per Common Share (Yen and U.S. dollars) Earnings per share (EPS) Book value per share (BPS) Dividends per share Ratios (%) Return on assets (ROA) Return on equity (ROE) Millions of yen Change Thousands of U.S. dollars 2007 2006 2005 2007/2006 2007 ¥484,895 445,159 28,700 37,935 ¥390,875 360,322 20,729 21,906 ¥267,655 247,905 11,078 12,049 24.1% 23.5 38.5 73.2 $4,109,280 3,772,534 243,220 321,483 23,532 19,400 12,863 21.3 199,424 ¥442,953 77,415 10,067 66,592 118.9 ¥279,721 55,509 10,169 51,431 125.1 ¥182,893 36,873 215 22,231 115.9 58.4% 39.5 (1.0) 29.5 (6.2) points $3,753,839 656,059 85,314 564,339 ¥ 122.41 400.56 15.0 ¥ 101.27 288.88 10.0 ¥ 68.62 193.22 6.0 20.9% 38.7 50.0 $ 1.04 3.39 0.13 10.2% 35.5 10.0% 42.0 7.1% 43.1 0.2 points (6.5) Note: 1. U.S. dollar amounts are translated, for convenience only, at the rate of ¥118 = US$1, the approximate exchange rate at March 31, 2007. 2. Yen amounts are rounded down to the nearest million. U.S. dollar amounts and percentages are rounded to the nearest unit. Operating Income and Operating Margin Billions of yen % Billions of yen Net Income and ROE Revenues by Industry 30 25 20 15 10 5 0 0.9 1.5 03 5.3 5.9 28.7 4.1 20.7 2.8 5.9 11.1 04 05 06 07 Operating Income (left axis) Operating Margin (right axis) 6 5 4 3 2 1 0 25 20 15 10 5 0 23.5 35.5 43.1 42.0 19.4 12.9 33.7 6.6 12.6 2.0 03 04 05 06 07 Net Income (left axis) ROE (right axis) % 50 40 30 20 10 0 Gas & Power Petroleum & Petrochemicals 9% 14% Fine Industries & Others 77% Revenues by Region Japan Middle East Russia Asia and Others 3% 10% 22% 65% 2 CHIYODA CORPORATION ANNUAL REPORT 2007 To Our Shareholders and Investors Takashi Kubota President & CEO Chiyoda Is Stepping Up Its Efforts to Become the “Reliability No. 1” Project Company The fiscal year ended March 2007 was the second year of Chiyoda’s medium-term management plan, Double Step-Up Plan 2008 (DSP 2008). We achieved our targets ahead of schedule by steadily implementing our strategies and initiatives, and revenues and earnings increased for the fourth consecutive fiscal year. In fiscal year 2008, the third year of DSP 2008, we will further promote our Reliability Program and work to strengthen risk management. The entire Group will also work in concert to achieve the twin objectives of being the “Reliability No. 1” project company and a company able to sustain earnings growth. As President and Chief Executive Officer of Chiyoda Career Summary Corporation from April 1, 2007, my focus is to accelerate DSP 2008 and the accomplishment of its twin objectives. We will continue our best efforts to meet all stakeholders’ 1969: Joined Chiyoda Corporation 1995: Project General Manager, Second Overseas Project Division 1998: Director; General Manager, Asia & Australia Project Division 2001: Managing Director, International Project Operation 2004: Director; Deputy General Manager, Domestic Project Operation expectations, and appreciate your continuing support 2005: Managing Director, Technology & Engineering through fiscal year 2008. 2007: President & CEO 3 CHIYODA CORPORATION ANNUAL REPORT 2007 Fiscal Year 2007 Results: 1. Intellectual Property for the Future: Increased Revenues and Earnings Development of Our Business Foundation Due to increased energy demand worldwide, aggressive To expand our business foundation, we will leverage capital investments by the oil, gas and petrochemical indus- our intellectual assets, consisting of elemental and project try continued in fiscal year 2007 in both domestic and over- execution technologies. We continue to sell licenses for seas markets. Chiyoda Thoroughbred 121 (CT-121*) in the United States, In this market environment, Chiyoda was awarded new and are strengthening sales activities in Europe as well. contracts for two gas processing plant projects in Qatar. At (Please refer to page 17.) At the same time, a facility in the same time, we successfully completed a large-scale liq- Indonesia started operation as the second commercial plant uefied natural gas (LNG) plant in Qatar with an annual applying another type of Chiyoda’s original desulfurization capacity of 4.7 million tons in world-record time. In Japan, technologies (CASOX*). Moreover, we plan to support the our performance exceeded our annual plan for both new effective development and exploitation of small and medi- contracts and revenues, mainly in the field of oil and petro- um-sized gas fields by participating in a national research chemicals. and development project with our own CO2 Reforming As a result, revenues and earnings increased for the Catalyst*. In addition, we will begin demonstration testing fourth consecutive fiscal year. The backlog of contracts on actual equipment of a titania catalyst* for applications increased 9.2 percent, or ¥88,141 million, to ¥1,048,679 such as sulfur-free diesel fuel, and plan to complete the million. Consolidated revenues increased 24.1 percent, or construction of the first commercial facility using acetic acid ¥94,020 million, to ¥484,895 million. Gross profit increased production technology (ACETICA*) in autumn 2007. 30.1 percent, or ¥9,183 million, to ¥39,736 million due to In addition, we will continue to develop “i-Plant 21” the increase in revenues and an increase of 0.4 percentage project engineering software. In executing current ultra- points in the gross margin. Net income increased 21.3 per- large-scale LNG plant projects, we are gaining valuable cent, or ¥4,132 million, to ¥23,532 million. experience and project execution technology where “i- Fiscal Year 2008 Management Policy: ciency of procurement, materials and shipping manage- Plant 21” has also generated value by increasing the effi- New Horizons, Infinite Experience ment. (Please refer to page 17.) We expect to complete construction contracts totaling ¥550 billion in fiscal year 2008, one of the highest levels in 2. Environmentally Responsible Technologies: our company’s history. While executing such a large vol- Strengthening Core Businesses ume of projects, we will carefully manage various risks, As Chiyoda’s founder, Dr. Akiyoshi Tamaki, wrote in such as the tight market for skilled labor and the difficulties Legacy for the Twenty-first Century, Chiyoda has never in securing a sufficient number of workers. wavered in its commitment to use its technology to con- Given this environment, I have made “New Horizons, tribute to society. Today, this commitment encompasses the Infinite Experience” our slogan for 2008, under which we broadly recognized concept of corporate social responsibility. will work to strengthen the foundation of our engineering Because Chiyoda’s petroleum and gas technologies are business for the next generation. This slogan implies that linked to environmental issues such as CO2 emissions, pro- we will clear the way to the future for the next generation tecting nature has long been an important component of by using Chiyoda’s superior technologies and human Chiyoda’s corporate DNA. From this base, we will sow the resources. The following introduces our three management seeds of our next strategies by promoting clean energy (gas), pillars to accelerate successful completion of DSP 2008 clean fuel and clean coal technologies, as well as enhancing toward sustained growth and future development. energy-saving and health and safety technologies. *Original technologies developed by Chiyoda. 4 CHIYODA CORPORATION ANNUAL REPORT 2007 To Our Shareholders and Investors From the above perspectives, we are working on “bottomless” refining technology to produce sulfur-free fuel and clean fuel from heavy oil, as well as using our engineering capabilities at the shut down maintenance (SDM) phase of the refineries, which covers the entire life of the plant. For domestic chemical refinery integration (CRI), which integrates large oil refining facilities with petrochemical plant functions to raise energy efficiency, we are expanding our domestic services to Asia and the Middle East. Another focus is the promotion of clean coal technologies, including power generation and petrochemical raw materials that employ coal gasifica- tion. Moreover, in Asia including Japan, Chiyoda will begin offering a low-grade exergy recovery system for which it received the Director-General's Award from the Japanese Agency for Natural Resources and Energy in 2007. 3. People-Oriented Management Aiming to increase corporate value, Chiyoda is partic- ularly increasing its focus on safety, together with health, the environment and quality. We will also enhance our system of internal controls to comply with the Financial Instruments and Exchange Law (“J-SOX Act”) while assiduously implementing CSR-based management by promoting our initiatives that contribute to society, the economy and environmental protection. Securing and cultivating human resources is a critical issue. The basis of Chiyoda’s career development is on- the-job training. We assign new employees to train at overseas construction sites to experience plant engineer- ing as reality, not merely as a plan on the table. Thereafter, three-year term rotated assignments allow each employee to choose to be part of the specialist An Inspired Engineering Company that Makes Dreams into Realities One of Japan’s most pressing tasks will be to ensure its future by using technology to overcome issues such as its dependence on external sources of energy and its aging society. Within this milieu, Chiyoda aims to become an inspired engineering company. Engineering is the key to transforming dreams into realities. Chiyoda is a place where challenging work is a delight and employees have a sense of achievement. Continuously Enhance Shareholder Value We intend to continuously enhance shareholder value through improved performance while investing in tech- nologies to create next-generation businesses. In considera- tion of our current performance, dividends per share for fis- cal year 2007 were ¥15.00, an increase of ¥5.00 compared with the previous fiscal year. “Reliability No. 1, Your Partner for Success” is the Chiyoda Group rallying cry. We look forward to your con- tinued support over the medium-to-long term as we work to further increase shareholder value. ranks, or aim for project management, depending on July 2007 their competencies. Through all the methods and systems it employs, Chiyoda is preparing an environment in which Chiyoda people can make their dreams a reality through engi- neering. This is another important component of Chiyoda’s corporate DNA. Takashi Kubota President & CEO 5 CHIYODA CORPORATION ANNUAL REPORT 2007 Progress Report: Double Step-Up Plan 2008 Double Step-Up Plan 2008 (DSP 2008): Current Status of the Medium-Term Management Plan Double Step-Up Plan 2008 (DSP 2008) Progress Report Aiming to Be the “Reliability No. 1” Project Company and a Company par excellence Able to Sustain Earnings Growth Step up the schedule for DSP 2008 and accelerate implementation of key measures from four perspectives Business Strategy Current Progress S1 Clients Build long-term partnerships with clients by promoting Plant Lifecycle Engineering based on superior technologies. • Further upgrade Reliability Program Engineering criticality study, Uninterrupted start-up S2 Execution Further strengthen project execution capabilities by promoting Smart EPC* to utilize the Group’s collective strengths. • Upgrade risk management skills (Cold Eye Review) • Upgrade construction IT and procurement IT • Strengthen Group operations structure (global workforce of 6,300) • Utilize lessons learned / Promote knowledge management S3 Finance Establish a consistently sound financial position able to support the creation of next-generation businesses. • Enrich capital stock • Enhance profitability of license sales and selectively invest in new technologies S4 Human Resources Create an energetic organization and refine employee skills. • BSC: Balanced Score Card Integrated Management • Hire/retain professional personnel * Engineering, Procurement and Construction (EPC) In the context of LNG projects, the final contracting phase in the development of the export portion of the LNG chain. The project developer will award EPC contracts for specific phases of the work that define the terms under which the contractor will conduct detailed design, procurement, construction and commissioning of the facilities. The Chiyoda Group is now executing a medium-term trillion. The quality and reliability of Chiyoda’s work have management plan called Double Step-Up Plan 2008 (DSP been highly appreciated by both domestic and overseas cus- 2008). Since fiscal year 2006, we have been working to tomers, which has allowed us to continuously acquire new take a double step up with the objectives of being the contracts. In Japan, where we have achieved a high level of “Reliability No. 1” project company and an excellent com- customer satisfaction, the amount of new contracts has pany able to sustain earnings growth. doubled in three years. Another factor contributing to the continued increase in 1. DSP 2008: Steady Progress earnings is business process improvement through integrat- Over the two fiscal years that we have been implement- ed operation of our group companies. As material and ing DSP 2008, we have accelerated four key strategies built equipment costs rise, Chiyoda’s efficient and timely commu- into DSP 2008 in the areas of clients, execution, finances, nication with vendors and construction contractors at an and human resources. We are proceeding smoothly and earlier stage minimizes risks. Another key factor has been achieving the objectives of our business plan ahead of the development of our “i-Plant 21” software. With inte- schedule. grated project engineering systems, we are improving our Among other things, our strong emphasis on the engineering productivity. Reliability Program is based on a focus on clients. As a result, From a financial perspective, Chiyoda increased total equity we achieved a year-end backlog of contracts exceeding ¥1 to ¥77.4 billion as of March 2007 from ¥55.5 billion a year 6 CHIYODA CORPORATION ANNUAL REPORT 2007 DSP 2008 FINANCIAL PERFORMANCE TARGETS (Years ended/ending March 31) Revenues Operating Income Net Income Dividends per Share Billions of yen DSP 2008 Projection Billions of yen DSP 2008 Projection Billions of yen DSP 2008 Projection Yen DSP 2008 Projection: At least 10 yen 600 500 400 300 200 100 0 550.0 484.9 390.9 290 310 340 340 06 (Actual) 07 (Actual) 08 (Est.) 09 30 20 10 0 28.7 30.0 20.7 11.5 17.5 20.5 20.5 06 (Actual) 07 (Actual) 08 (Est.) 09 30 20 10 0 23.5 23.5 19.4 10.5 11.0 11.5 11.5 06 (Actual) 07 (Actual) 08 (Est.) 09 20 15 10 5 0 18 15 10 06 (Actual) 07 (Actual) 08 (Est.) earlier. We are planning to reinforce our financial strength, 2009 and beyond, we are aiming to acquire new contracts taking into account our future-oriented investments. that exceed projections for fiscal year 2008. Lastly, we consider human resources the most important area for sustaining our growth. We use our balanced score- 3. Progress of Measures under DSP 2008: Established card comprehensive management system and continue to a Global Organization of 6,300 People and make an effort to recruit and cultivate professionals who Implemented Measures in Four Strategic Areas can drive project execution. In April 2007, Chiyoda increased its professional work- force by 700 people from a year earlier to establish a 6,300- 2. Outlook for Fiscal Year 2008: Continued Solid person global organization in order to cope with the current Performance increased volume of large-scale projects. Chiyoda’s primary policies for new contracts in fiscal year Aiming for the DSP 2008 management vision of being 2008 focus on pre-EPC activities such as Front-End the “Reliability No. 1” project company and a company par Engineering and Design (FEED*) works for overseas projects, excellence able to sustain earnings growth, the entire which we expect to materialize in subsequent years, and Chiyoda Group is working in concert to implement the four contracts for large-scale domestic projects. Based on these perspectives (clients, execution, finance and human policies, we forecast new contracts totaling ¥250.0 billion. resources) of DSP 2008. We believe that market conditions will remain firm due to medium- and long-term demand for energy. In fiscal year 4. Distribution of Earnings DSP 2008 targets sustainable satisfaction balanced among our stakeholders, including customers and business partners, shareholders, and employees. Customers and Business Partners Environment Society Chiyoda Group Shareholders Employees Raise dividends and corporate value Economy Secure talented personnel and increase motivation Chiyoda’s earnings distribution policy during the term of DSP 2008 is to reflect consolidated performance in distributing earnings while maintaining a balance of satisfaction among all stakeholders, including shareholders, customers, business part- ners and employees. For fiscal year 2008, we project cash divi- dends totaling ¥18.00 per share given the status of our progress in executing our medium-term management plan and our expectation that we will achieve its targets. * Front-End Engineering and Design (FEED) In the context of LNG projects, generally the second contracting phase in the development of the export portion of the LNG chain. The FEED contract provides the maximum possible definition for the work that the EPC contractor will ultimately perform in order to minimize the possibility of contract cost changes. 7 CHIYODA CORPORATION ANNUAL REPORT 2007 Review of Operations Overseas In fiscal year 2007, new contracts totaled ¥402,409 mil- lion on a consolidated basis, remaining at a high level despite a decrease of ¥289,101 million, or 41.8 percent, compared with the previous fiscal year, when Chiyoda had acquired new contracts for large-scale LNG plants one year ahead of schedule, resulting in a record high level of new contracts. Revenues increased ¥92,799 mil- lion, or 32.5 percent, to ¥378,345 million and the back- log of contracts increased ¥40,082 million, or 4.6 per- cent, to a record high ¥903,136 million. Revenues, New Contracts and Backlog of Contracts Billions of yen 1,000 800 600 400 200 0 07 05 06 04 03 Revenues New Contracts Backlog of Contracts Market Trends and Results LNG Plant Train 5 for Ras Laffan Liquefied Natural Gas Co., Ltd. (II) (Photos: Courtesy of RasGas) In overseas markets, natural gas producing nations and energy majors continued to invest vigorously in the gas value chain – development of gas fields, construction of LNG plants, arrangements for LNG carri- ers and construction of LNG receiving terminals – against a backdrop of continuing growth in global demand for natural gas. Amid these circumstances, Chiyoda received orders for two gas processing plant projects in Qatar thanks to high customer evaluation of its innovative execution approach using Chiyoda’s Reliability Program. As for ongoing projects, in November 2006 Chiyoda completed the 4.7 million tons per annum (mtpa) LNG plant (Train 5) of Ras Laffan Liquefied Natural Gas Co., Ltd. (II) in Qatar. The entire engineering, pro- curement and construction (EPC) project was completed in a remarkably short period of 28 months from the effective date of the contract. Full-scale field construction also began for three other large-scale LNG plants in Qatar, including two trains each with an annual capacity at the 7.8 million ton level, and a large- scale LNG project in Sakhalin, Russia. Regional Activities Asia: New orders included phase 2 construction of storage tanks in Singapore. Middle East: In Qatar, Chiyoda demonstrated its overwhelming strength by successfully negotiating and securing a series of natural gas and LNG related project contracts. Chiyoda acquired contracts for two large-scale projects – the Al Khaleej Gas Phase 2 project and the Pearl Gas-to-Liquids (GTL) project – by earning strong customer trust in its vast and unparalleled experience and technical capabilities in large- scale plant construction gained through completed and ongoing projects, as well as its wealth of techno- logical expertise that meets specific customer needs. The Al Khaleej Gas Phase 2 project for ExxonMobil in Qatar is an EPC project. Having already per- formed front-end engineering and design (FEED) as the joint venture leader, Chiyoda won the Phase 2 contract with French engineering firm Technip. Scheduled for completion in summer 2009, the project is expected to meet Qatar’s growing demand for natural gas and establish a solid base for the country’s industrial development. 8 CHIYODA CORPORATION ANNUAL REPORT 2007 Overseas Contracts Location Client MAJOR NEW CONTRACTS Project Capacity Unit Completion Qatar Qatar Singapore U.S.A. U.S.A. ExxonMobil Middle East Gas Marketing Ltd. Qatar Shell GTL Ltd. Vopak Terminal Singapore Pte. Ltd. Black & Veatch Corporation Southern Company Services, Inc. Al Khaleej Gas Phase 2 project Feed gas preparation works of Pearl GTL project Integrated Tank Terminal (Phase 2) (Chiyoda Singapore (Pte) Limited) Licensing of CT-121 Technology for Flue Gas Desulfurization x2 Licensing of CT-121 Technology for Flue Gas Desulfurization x2 1,250* MMSCFD MMSCFD 1,600 m3 165,000 MW 1,950 MW 1,700 MAJOR BACKLOG OF CONTRACTS Qatar Qatar Qatar Qatar Qatar Qatar Russia Russia Qatar Liquefied Gas Co., Ltd. (2) Qatar Liquefied Gas Co., Ltd. (2) Ras Laffan Liquefied Natural Gas Co., Ltd. (3) Ras Laffan Liquefied Natural Gas Co., Ltd. (3) Qatar Liquefied Gas Co., Ltd. (3) Qatar Liquefied Gas Co., Ltd. (4) Sakhalin Energy Investment Co., Ltd. Sakhalin Energy Investment Co., Ltd. LNG Plant (EPC) (Train 4) LNG Plant (EPC) (Train 5) LNG Plant (EPC) (Train 6) LNG Plant (EPC) (Train 7) LNG Plant (EPC) (Train 6) LNG Plant (EPC) (Train 7) LNG Plant (EPC) (Train 1) LNG Plant (EPC) (Train 2) MAJOR COMPLETED CONTRACTS Qatar Qatar Ras Laffan Liquefied Natural Gas Co., Ltd. (II) ExxonMobil Middle East Gas Marketing Ltd. LNG Plant (EPC) (Train 5) Al Khaleej Gas Phase 1 project 7.8 7.8 7.8 7.8 7.8 7.8 4.8 4.8 4.7 — mtpa mtpa mtpa mtpa mtpa mtpa mtpa mtpa mtpa — 2009 2010 2007 2010~ 2010~ 2007 2008 2008 2009 2008 2009 2008 2008 2006 2006 MMSCFD = Million standard cubic feet per day m3 = Cubic meters MW = Megawatts mtpa = Million tons per annum *As sales gas As leader of a consortium with Hyundai Heavy Industries of South Korea, Chiyoda acquired a contract to provide EPC for the feed gas preparation work of the Pearl GTL project for Royal Dutch Shell in the Ras Laffan Industrial City in Qatar. When completed, this project will be one of the largest GTL plants in the world, with a daily output of 140,000 barrels. Chiyoda is undertaking to construct two world-class gas processing trains with a total processing capacity of 800MMSCFD each (1,600MMSCFD in total; equivalent to annual capacity of 8 million tons of LNG) that will supply feed gas to the core unit of the GTL plant. The project is scheduled for completion at the end of 2010. Russia and Central Asia: In 2003, Chiyoda signed a contract for two trains of 4.8mtpa LNG plants in Sakhalin, one of the largest in the world. Full-scale construction is under way, with completion scheduled for 2008. Russia has the world’s largest natural gas reserves, and this project, the first of its kind in Russia, will be the cornerstone for subsequent natural gas-related projects in this coun- try. The experience gained by the Chiyoda Group through its execution will set the stage for securing more contracts in this country. Other Regions: In the United States, amid a trend toward stronger environmental regulation, Chiyoda continued marketing activities for its own CT-121 flue gas desulfurization process technology. Unlike EPC, the CT-121 license business entails the supply of technolo- gy, thereby providing engineering companies with a low-risk business model for achieving steady earnings. Looking ahead, Chiyoda will use CT-121 and its other technological assets effectively by licensing them to bolster earnings. At the same time, Chiyoda aims to develop a broad range of businesses in response to tightening energy-related regulations for conservation of the global environment. Strategies and Initiatives for Fiscal Year 2008 Execution of ongoing projects in fiscal year 2008 will stress the three large-scale LNG projects in Qatar, where onsite construction is reaching its peak, and two large-scale gas processing plant projects for which Chiyoda acquired contracts in fiscal year 2007. In parallel with these efforts, Chiyoda will strategically and selectively pursue new contracts, not only in the field of LNG and gas, but also for petroleum and petrochemical projects such as oil field development, refineries, and production facilities for olefins and other petrochemicals, for which robust investment is expected. 9 CHIYODA CORPORATION ANNUAL REPORT 2007 Domestic In fiscal year 2007, new contracts in the domestic market were ¥155,297 million on a consolidated basis, an increase of ¥42,577 million, or 37.8 percent, compared with the previous fiscal year. Revenues increased 1.2 per- cent to ¥106,550 million. The backlog of contracts also reached a high level, increasing ¥48,058 million, or 49.3 percent, to ¥145,542 million. Market Trends and Results Petroleum Revenues, New Contracts and Backlog of Contracts Billions of yen 200 160 120 80 40 0 07 05 06 04 03 Revenues New Contracts Backlog of Contracts Kashima Aromatics Complex (Photo: Courtesy of Kashima Aromatics Co., Ltd.) In the petroleum sector, smooth progress of ongoing projects resulted in higher earnings. Due to a strong drive at petroleum companies to invest in facility and expansion to meet market demand, new con- tracts exceeded initial forecasts, including contracts for new large-scale projects for processing heavy oil and producing feedstock for petrochemicals and petrochemical products. Public Utilities In Japan’s electric power and gas sector, regulatory boundaries have been removed in areas such as energy supply. In addition, individual and industry-wide efforts to reduce carbon dioxide emissions, together with persistently high prices for crude oil, have caused a shift to LNG as a fuel. These factors have stimulated investment in new construction and expansion of large-scale LNG receiving terminal pro- jects and LNG distribution infrastructure such as satellite terminals. Chiyoda acquired contracts with several customers for such projects. Petrochemicals and General Chemicals In the petrochemical sector, the drive to invest was high due to a significant improvement in corporate profits as Japanese chemical companies reflected high crude oil prices in petrochemical product prices. In addition to expansion into China and other Asian markets, a move toward joint investment by chemical and oil companies in petrochemical businesses was evident. In addition, companies aggressively enhanced their development efforts to create competitive original products, including specialty chemicals with added value. Chiyoda unfailingly acquired contracts in fields where it has a technological advantage. Pharmaceuticals In the pharmaceutical sector, the drive to invest in production capacity strengthened industrywide among companies of all sizes in response to significant changes. These included industry realignment due to mergers, an increase in integration and efficiency of R&D facilities and plants at all companies, enhance- ment and acceleration of new product development capability, aggressive activity in contract manufactur- ing, expansion of domestic market share by overseas companies, and the growth of generic drugs. 10 CHIYODA CORPORATION ANNUAL REPORT 2007 MDXA Plant (Photo: Courtesy of Mitsubishi Gas Chemical Company, Inc.) LNG Satellite Terminal (Chiyoda Kosho Co., Ltd.) (Photo: Courtesy of Furukawa-Sky Aluminum Corp.) Review of Operations Domestic Contracts Location Client MAJOR NEW CONTRACTS Project Capacity Unit Completion Yamaguchi Chiba Ibaraki Tochigi Shiga Seibu Oil Co., Ltd. Fuji Oil Co., Ltd. Eisai Co., Ltd. Hisamitsu Pharmaceutical Co., Inc. Maruho Co., Ltd. CCR Unit Expansion of No. 7 Naphtha Hydrodesulfurization Plant Expansion of L-2 Unit Utsunomiya No. 2 Plant Hikone Plant, No. 4 Unit (Chiyoda TechnoAce Co., Ltd.) MAJOR BACKLOG OF CONTRACTS Kashima Aromatics Co., Ltd. Ibaraki Okayama Mitsubishi Gas Chemical Company, Inc. Ehime Japan Oil, Gas and Metals National Corporation Aromatics Complex Plant MXDA (m-Xylenediamine) Plant LPG Underground Storage Terminal in Namikata 25,000 21,000 — — — 420,000 20,000 — MAJOR COMPLETED CONTRACTS Ehime Kanagawa Kanagawa Taiyo Oil Co., Ltd. Nippon Petroleum Refining Co., Ltd. Toa Oil Co., Ltd. BTX Plant Lube Oil/Grease Mixing and Filling Plant Fiscal Year 2006 Regular Maintenance of Mizue Plant (Chiyoda Kosho Co., Ltd.) 37,000 — — BPSD = Barrels per stream day TPY = Tons per year BPSD BPSD — — — TPY TPY — BPSD — — 2009 2008 2007 2007 2008 2007 2007 2009 2006 2006 2006 With its reliable engineering capabilities, Chiyoda steadily acquired contracts from major customers to provide consulting and validation services to help them meet FDA requirements. Industrial Machinery In the field of electronic components for mobile phones, LCDs and plasma televisions, a specialty area of Chiyoda, final product manufacturers delayed investment based on careful market assessment. As a result, projects are in a temporary adjustment phase. However, capital investment in fields such as high- performance film is expected to remain firm over the medium term. Chiyoda continued to secure con- tracts for new projects because of its accumulated experience and project management capabilities. Environment Chiyoda secured contracts for CT-121 flue gas desulfurization projects as a result of high market appraisal for this innovative technology. Strategies and Initiatives for Fiscal Year 2008 In fiscal year 2008, Chiyoda will continue to take up projects that allow it to leverage its technologies and project management capabilities, and the Company will conduct strategic marketing by concentrating resources on priority areas and offering design proposals at the early stage of such projects. In the domes- tic market, Chiyoda will work to increase new contracts for the entire Group and improve overall gross profit by promoting marketing that is consistent with Group-wide efforts, with a focus on Plant Lifecycle Engineering. 11 CHIYODA CORPORATION ANNUAL REPORT 2007 Projects Logistics Unhindered procurement of materials and equipment is key to the steady implementation of ongoing plant construction projects. While working to establish and inculcate a culture of safety and to deepen mutual trust with business partners, Chiyoda continues to focus on four priority initiatives: (1) order management; (2) quality control; (3) schedule control; and (4) transport management. By doing so, we aim to provide procurement that contributes to earnings and the realization of our management vision, “Reliability No. 1.” Performance in Fiscal Year 2007 During fiscal year 2007, we continued to handle our ordering operations based on the proposition, imple- mented in the previous fiscal year, that ordering should contribute to earnings. At the same time, we carried out procurement for timely delivery to construction sites of materials and equipment ordered in the previous fiscal year. We evaluated our overall procurement activities based on indices in more than ten categories, including products subject to delivery delay and the severity of the delay, the ratio of air freight to total transport cost, and the rate of divergence between shipping allocation plans and actual performance. As a result, virtually all our procurement activities proceeded according to plan. Procurement Risk Factors and Response Risk factors in the current procurement environment include materials and equipment cost increases, and reduction in quality from suppliers at full capacity due to ongoing projects. We respond to each of these with prudent order management and customer consultation, as well as thorough quality and schedule control based on the abundant manufacturing experience of our seasoned production experts. Taking its response to these risk factors into account, the Chiyoda Group offers its customers particular val- Purchase Orders by Product Purchase Orders by Region Subcontracts by Category Fiscal Year 2007 Fiscal Year 2007 Fiscal Year 2007 Instruction of improved auto-welding machine operation. Supervision of the welding of a large-scale reactor. Pressure vessels Piping Rotary motors, devices Instrumentation Electrical Consulting, other Europe Asia Japan U.S.A./Canada Middle East Others Civil engineering/construction Piping Installation Instrumentation Insulation/coating Other construction Equipment Electrical Tanks 12 CHIYODA CORPORATION ANNUAL REPORT 2007 Review of Operations ue in four areas: (1) price competitiveness (making competitive estimates, ensuring availability, choosing reli- able suppliers with dependable prices, delivery and quality, finding unusual price fluctuations, and offering proposals for avoiding risk); (2) formulating cost reduction strategies (supporting project engineers with value- added procurement information); (3) implementing reliable schedule and quality control and transport man- agement; and (4) face-to-face procurement services (listening to the project engineer’s requests and respond- ing directly, and providing up-to-date information on procurement status and suppliers). By doing so, we aim to be the number-one procurement service in the industry. In particular, Chiyoda continues to work to strengthen its competitiveness by using its comprehensive informa- tion technology to improve efficiency and reduce costs. One specific example is MARIAN®, which facilitates inte- grated management structure and implementation from the assembly of design equipment and supplies to site loading and unloading. Another is our contingent procurement management systems for across-the-board super- vision of ordering, schedule, budget and procurement man-hour control, and cost management for procurement of materials and equipment. Enhancing Procurement IT (Overview of MARIAN®*) 3D-PDS MATERIAL CODE PIPING SPEC BOM EQUIPMENT NO. REQ/SPEC PO WH CONTROL Eng. Database EDMS Account System PROPS CONSTRUCTION SITE Current and Future Initiatives E P C DATA BASE STANDARD BOM/MTO REQUISITION PURCHASING EXPEDITE QUALITY CONTROL TRANSPORTATION SITE MARIAN ® In the case of 7.8mtpa ultra-large-scale LNG plant: Part & component types: 30,000 Number of parts & components: 10 million RFQ/PO QUOTATION MANUF. SCH. INSPECTION DATA SHIPPING DATA SUPPLIER *MARIAN®: Intergraph Process Power & Offshore. A procurement and supply chain management solution. FORWARDER BOM = Bill of Material MTO = Material Take Off REQ = Requisition SPEC = Specification 3D-PDS = 3-Dimensional Plant Design System EDMS = Engineering Database Management System PROPS = Procurement Progress Status Control System WH = Warehouse RFQ = Request for Quotation PO = Purchase Order Part of the Qatar Project will reach its shipping peak during fiscal year 2008. In response, we will continue to strengthen our preventative inspection framework at manufacturers’ plants, guided by the two basic premises of more reliable schedule and quality control as we aim to strengthen our “Reliability No. 1” position. In addition, we will make full use of our comprehensive information technology system, including our contingent procurement management systems for delivery of materials and equipment, among other purposes, as we promote stronger competitiveness through improved efficiency and cost reductions. 13 CHIYODA CORPORATION ANNUAL REPORT 2007 Topics: Increasing LNG Plant Capacity The Shift to Larger-Scale LNG Plants Natural Gas (LNG 14) that it had developed AP-X, a new The cost of producing, transporting and storing LNG is process for next-generation large-scale LNG plants that higher than for other fossil fuels. Efforts to reduce costs enhances the existing C3-MR process it had been licens- through economies of scale have been ongoing. ing. This development has had a significant impact on Commercial LNG production began in 1964, with the LNG production. Qatargas Trains 4 and 5, which Chiyoda development of an LNG plant in Algeria by Sonatrach S.A. is currently constructing in Qatar, both employ the AP-X Annual production capacity was 400,000 tons. In the process. Each has a capacity of 7.8mtpa, a substantial 1970s, Chiyoda constructed its first LNG facilities in the increase in size compared to previous capacities. RasGas U.A.E., Trains 1 and 2 of an LNG plant for Abu Dhabi Gas Trains 6 and 7 and Qatargas Trains 6 and 7, a series of Liquefaction Company (ADGAS), and each has a produc- projects in Qatar which Chiyoda has acquired contracts tion capacity of 1.1 million tons per annum (mtpa). Since for and is currently constructing, will also use the AP-X then, Chiyoda has been constructing increasingly larger- process to achieve the same production capacity of scale LNG plants. In the 1980s, a 1.75mtpa and a 2.3mtpa 7.8mtpa. plant were constructed at Arun and Bontang in Indonesia. In the 1990s, ADGAS Train 3 in the U.A.E., and Trains 1, 2 The Technologies Supporting Large-Scale LNG Plants and 3 of an LNG plant for Qatar Liquefied Gas Co., Ltd. Dynamic Simulation (Qatargas) were completed, with capacities ranging from LNG plant capacity depends on the size of the compres- 2.0mtpa to 2.5mtpa. The scale of LNG plants has contin- sor, its driver and the heat-exchanger. How these units ued to grow in the current decade with the completion of should be configured is a crucial issue in increasing plant plants for Oman Liquefied Natural Gas LLC (Oman LNG) size. In conventional engineering, pressure, temperature and Qalhat LNG S.O.A.C. (Qalhat) in Oman, at 3.3mtpa and duty specifications for main components are based on each; Trains 3, 4 and 5 of a plant for Ras Laffan Liquefied process design data, with a degree of allowance for pre- Natural Gas Co. Ltd. (RasGas) in Qatar, at 4.7mtpa each; dicted off-design performance. However, increasing plant and Trains 1 and 2 of a plant for Sakhalin Energy size complicates system configurations. To maintain reliabil- Investment Co., Ltd. in Sakhalin, Russia, now under con- ity, dynamic simulation is essential for understanding over- struction, at 4.8mtpa each. all plant behavior during start-up and emergency shut- In 2004, Air Products and Chemicals, Inc. (APCI), a down and to accurately reflect all design elements such as major licensor of LNG production processes, announced equipment design conditions, instrumentation plans and at the 14th International Conference on Liquefied safeguard systems. Chiyoda’s Experience in Increasing LNG Plant Capacity Under Construction RasGas II Train 3 RasGas II Ras Laffan, Qatar 4.7mtpa 2003 Qatargas 2 Train 4 & 5 Qatargas 2 Ras Laffan, Qatar 7.8mtpa x 2 2007, 2008 Qatargas Train 1 & 2 Qatargas Ras Laffan, Qatar 2.0mtpa x 2 1997 RasGas II Train 4 RasGasII Ras Laffan, Qatar 4.7mtpa 2005 RasGas(3) Train 6 & 7 RasGas(3) Ras Laffan, Qatar 7.8mtpa x 2 2008, 2009 Qatargas Train 3 Qatargas Ras Laffan, Qatar 2.0mtpa 1998 1.1mtpa 1.75mtpa 2.5mtpa 3.0mtpa ADGAS Train 1 & 2 ADGAS Das Island, U.A.E. 1.1mtpa x 2 1976 ADGAS Train 3 ADGAS Das Island, U.A.E. 2.5mtpa 1994 RasGas II Train 5 RasGas II Ras Laffan, Qatar 4.7mtpa 2006 3.3mtpa 4.7mtpa 4.8mtpa7.8mtpa Qalhat LNG Qalhat LNG Qalhat, Oman 3.3mtpa 2005 Qatargas 3&4 Train 6 & 7 Qatargas 3&4 Ras Laffan, Qatar 7.8mtpa x 2 2008, 2009 Arun Train 4 & 5 Pertamina Arun, Indonesia 1.75mtpa x 2 1983 Oman LNG Train 1 & 2 Oman LNG Qalhat, Oman 3.3mtpa x 2 2000 Sakhalin LNG Train 1 & 2 Sakhalin Energy Sakhalin, Russia 4.8mtpa x 2 2008 Bontang Train E, F, G Pertamina Bontang, Indonesia 2.3mtpa 1989, 1993, 1997 Qatargas Debottlenecking Qatargas Ras Laffan, Qatar +1.0mtpa x 3 2003, 2004, 2005 1970 1975 1980 1985 1990 1995 2000 2005 2009 14 CHIYODA CORPORATION ANNUAL REPORT 2007 Correlation between Electrical, Steam and Fuel Systems for an LNG Plant An Example of Acoustic Fatigue Analysis Exhaust HRSG Inlet air Fuel Process air Gas turbine G M/G VFD Compressor X Transformer X Main electrical bus Fuel Boiler High-pressure steam header Steam turbine Steam turbine Air-cooled condenser Compressor Process air Electrical load Pump Compressor Fan Process steam (low-pressure) Air-cooled condenser Diameter : 50 inch S, Mises SNEG, (fraction = -1.0) (Ave. Crit. : 75%) +9.777e-01 +8.971e-01 +8.164e-01 +7.358e-01 +6.551e-01 +5.745e-01 +4.938e-01 +4.132e-01 +3.325e-01 +2.519e-01 +1.712e-01 +9.060e-02 +9.950e-03 HRSG (heat recovery steam generator) M/G (motor/generator) VFD (variable frequency drive) G (generator) Optimizing the Energy Balance as shown above, Chiyoda used acoustic fatigue analysis With a capacity of 7.8mtpa, the largest LNG plants in the (the relationship between sound and structure when the world require a total of 450MW in electric power as well as the safety valve is fully open) to develop a suitable reinforcing thermal equivalent of 300MW of steam energy. An optimal bal- design for a large-diameter flare pipe for a 7.8mtpa plant. ance of fuel, electric power and steam energy is therefore Large-diameter pipes are extremely heavy, so the distribu- extremely important. The diagram above shows the correlation tion of pipe weight must also incorporate a consideration between electric power, steam and fuel systems for a 7.8mtpa of deformation in concrete beams, which are generally LNG plant. In this combined cycle system, three 120MW gas tur- thought to be rigid structures. “Design by analysis,” which bines drive the compressor while surplus power runs a generator employs engineering methods backed by advanced analysis that supplies power to the electrical system via a variable fre- technologies, is the foundation of Chiyoda’s large-scale quency drive (VFD). Such hybrid facilities incorporate key VFD LNG plant designs. LNG plant technologies that optimize the balance of mechani- cal, electrical and steam energy by combining mechanical and Integrated Project Engineering IT Tool electric power. A wide variety of advanced mechanical, electrical, In addition to conventional integrated engineering data- instrumentation, control and other technologies is essential. bases and 3D design, another extremely important factor in ultra-large-scale projects is management of large quantities The Shift from “Design by Rule” to of equipment and materials such as piping, steel and bulk “Design by Analysis” electrical and instrumentation materials. Chiyoda’s original In conventional equipment, once machinery, piping and “i-Plant 21” project engineering IT tool plays a key role by civil and architectural design conditions have been set, cer- linking equipment and materials management with man- tain standards and specifications apply. This concept is agement of design, procurement, onsite construction called “design by rule.” As the scale of plants increases, materials and construction. This series of IT tools, which the however, applying existing rules can result in weaknesses Company has been developing since the mid-1990s, and or overdesigned components that have a negative impact its precise application are what make Chiyoda’s ultra-large- on other portions of the plant. For this reason, Chiyoda scale plant construction work possible. introduced the concept of “design by analysis.” For example, 15 CHIYODA CORPORATION ANNUAL REPORT 2007 Topics: Technologies Update CO2 Reforming Technology This patented technology makes it possible to use natur- al gas and carbon dioxide to produce the synthesis gas required for GTL technology. Most appealing about this reforming process is its ability to convert carbon dioxide into an energy source. A pilot plant began operating in 2001 in the Yufutsu gas field in Hokkaido, Japan and research at this facility was successfully completed in fiscal 2005. Chiyoda is now making preparations to build a demonstration plant that may lead to the commercialization of this technology. Titania Catalyst Titania catalyst, jointly developed by Chiyoda and French company Axens, has a very high activity for hydrodesulfur- ization (HDS), enabling production of sulfur-free diesel oil at temperatures around 10-20°C lower than with convention- al alumina catalyst. Chiyoda licenses titania catalyst for ultra-deep HDS to Axens and aims to supply it for the treat- ment of diesel oil to meet the sulfur content regulations that will be enforced globally in years to come. Sulfur-free (less than 10 ppm) regulations for diesel oil came into effect in Japan in 2007. Chiyoda and Axens plan to supply a com- mercial titania catalyst product globally starting in Europe, where sulfur-free diesel regulations will be implemented in 2009. Carbon Dioxide Capture Using LNG Cold Energy Chiyoda implemented a project for CO2 separation and integrated utilization of the recovered CO2, using LNG cold energy, for Nippon Petroleum Refining Co., Ltd. and Mitsubishi Chemical Corporation. This system separates out liquefied carbon dioxide from the refinery off-gas, and uses it as feedstock for petrochemicals production in an integrat- ed way throughout the complex. Pilot Plant at Yufutsu (Photo: Courtesy of JOGMEC) Titania Catalyst CO2 and Cold Energy Recovery Unit (Photo: Courtesy of Nippon Petroleum Refining Co., Ltd. and Mitsubishi Chemical Corporation) 16 CHIYODA CORPORATION ANNUAL REPORT 2007 Topics CT-121 Experience Flue Gas Desulfurization (FGD) Chiyoda Thoroughbred 121 (CT-121) FGD process is a unique technology using the wet limestone-gypsum method for the highly effi- cient removal of SOx. It is currently in use at more than 80 generating units in Japan and over- seas. To date more than 30 licenses were granted, primarily for coal-fired power stations in the United States. • Over 30 years • 10 countries • 80 units, 35,990MW • 21% market share in Japan • 22% market share in USA (As of June 2007) Installed Plants Under Construction i-Plant 21 i-Plant 21 is an integrated and intelligent project engineering system for execution throughout the whole project lifecycle. It provides a uniform platform to realize project engineering with high quality, low cost and limited schedule. The chart shows the concept for i-Plant 21, which consists of seven major sub-systems covering front-end engineering to plant completion. It is integrated electronically and utilizes standardized data and work-flow. The seven major sub-systems are i- FRONT, i-ENG, i-3D, i-MAT, i-FIELD, i-PMS and i-DMS. i-FRONT Front End Engineering ENGINEERING i-DMS Project Document Management i-ENG Engineering Database i-3D Integrated 3D Plant Design PROCUREMENT CONSTRUCTION i-MAT Material Management i-FIELD Construction Management i-PMS Project Management 17 CHIYODA CORPORATION ANNUAL REPORT 2007 Corporate Governance Board of Directors, Corporate Auditors and Executive Officers (Fiscal Year 2008) Board of Directors Chairman of the Board Nobuo Seki President & CEO Takashi Kubota* EVP, CSR Nobuyasu Kamei* EVP, Corporate Management & Finance and CFO Hiroshi Shibata* SMD, International Project Operation Madoka Koda* MD, Projects Logistics Atsuo Minamoto MD, Technology & Engineering Sumio Nakashima MD, Domestic Project Operation Satoru Yokoi MD, International Project Operation Hiroshi Ogawa Note: All members of the Board of Directors serve concurrently as Executive Officers * Representative Director & Member of Executive Committee Corporate Auditors Akira Kadoyama Hiroshi Ida** Hideaki Fujioka** Yukihiro Imadegawa** **Outside Corporate Auditor 18 CHIYODA CORPORATION ANNUAL REPORT 2007 (As of July 1, 2007) SEO, Corporate Strategy Fumio Nagata SEO, Corporate Management & Finance Takaharu Saegusa SEO, General Manager, Project Management Administration Division Masahiko Mochizuki SEO, General Manager, Russia Project Division, Project Director of SEG Team Hideo Kobayashi Executive Officers EO, Executive Assistant to International Project Operation Hidehiro Shinohara EO, Technology & Engineering Takeo Kawase EO, General Manager, Petroleum & Chemical Project Division Tsuyoshi Kakizaki EO, Executive Assistant to International Project Operation, Senior Site Manager of RGX6 Team Wataru Shimono EO, International Project Operation, General Manager, Qatar Project Division 2, Project Director of RGX5 Team & RGX6 Team Osamu Imahara EO, International Project Operation Hiroshi Shimada Abbreviations: EVP: Executive Vice President SMD:Senior Managing Director MD: Managing Director SEO: Senior Executive Officer EO: Executive Officer EO, Domestic Project Operation, General Manager, Domestic Business Development Operation Eisaku Yamashita EO, General Manager, Administration & Personnel Division Toshiyuki Ohnuma EO, Deputy Project Director of SEG Team Koichi Shirakawa EO, Projects Logistics Takao Kamiji EO, General Manager, Finance Division Katsutoshi Kimura 19 CHIYODA CORPORATION ANNUAL REPORT 2007 The Chiyoda Group believes that CSR-oriented management that earns the support and trust of all its stakeholders, including shareholders, customers, and employees, is the basis of its corporate activities. We are aiming for sustain- able growth while addressing ongoing management reinforcement and operations safety, and ensuring transparency. As it accomplishes its medium-term management plan “Double Step-Up Plan 2008,” Chiyoda is also committed to the core management issues of continuously enhancing corporate governance and upgrading and bolstering its internal control system. Initiatives to Enhance Corporate Governance To ensure accurate execution of its operations, Chiyoda has adopted the executive officer system to separate the functions of directors, who are responsible for management supervision, from those of the executive officers, who are responsible for the execution of business operations. The Board of Directors is composed of eight directors, including four representative directors. The Board supervises the execution of business activities by the executive officers and makes decisions on management policies and the execution of business activities. Some authority has been transferred to the Executive Committee to expedite decision making about busi- ness activities and to respond appropriately to rapidly changing social and economic conditions. The Executive Committee, made up of the four representa- tive directors, handles some decision making about business execution and examines matters before they are submitted for the resolution of the Board of Directors. In principle, the Executive Committee meets every week, and met 50 times in fiscal year 2007. The executive officers regularly report to the directors on the status of business execution in their respective areas of authority at the Board of Directors meeting. Chiyoda has also adopted the corporate auditor system. The Corporate Auditors Committee is made up of four members, including two full-time corporate auditors, and three of the members are outside corporate auditors. The independent auditors work closely with the corporate auditors and hold regular meetings where they report to the Corporate Auditors Committee, such as meetings on the annual audit plan and the fiscal year-end audit. The corporate auditors attend meetings of the Board of Directors, the Executive Committee and the executive officers, as well as other important meetings. They express their opinion on the directors’ execution of their duties from an auditing point of view as to whether there has been any wrongdoing, violations of the law or the Company’s articles of incorporation, or management decisions that run counter to good faith man- agement principles. The outside corporate auditors attend meetings of the Board of Directors, the Corporate Auditors Committee, and the execu- tive officers. The Board of Directors and the Corporate Auditors Committee meet monthly; each outside corporate officer attend- ed more than 90 percent of these meetings in fiscal year 2007. Incentives for Directors Chiyoda offers incentives through its performance-linked compensation system, introduced in 2006. To increase incentives to further raise company results based on our management policies, we operate the performance-linked compensation system within one percent of consolidated net income, with an upper limit of ¥200 million annually. Chiyoda’s Corporate Governance System (Fiscal Year 2007) General Meeting of Shareholders Appointment Report Appointment Report Appointment Board of Directors Corporate Auditors Committee 8 Directors Audit 4 Corporate Auditors, including 3 outside Auditors Report Independent Auditors Appointment Report Report Appointment Report Audit Accounting audit Executive officers Representative directors (4) Executive Committee Organization for execution of business activities 20 CHIYODA CORPORATION ANNUAL REPORT 2007 Corporate Governance Compensation for Directors and Corporate Auditors Chiyoda’s Internal Control System A breakdown of compensation made to directors and corporate auditors in fiscal year 2007 is shown below. (Millions of Yen) Number 8 4 Basic Compensation 196 48 Performance-linked Compensation 34 — Directors Corporate Auditors Notes: 1. The total amount of compensation was ¥285 million for directors and ¥57 million for cor- porate auditors. The total amount of compensation for the three outside corporate auditors was ¥34 million. The total amount of compensation includes the cost of a reserve for retire- ment benefits for directors and corporate auditors. 2. The compensation limit for directors, excluding the portion paid as salary to directors holding concurrent positions as employees of the Company, was ¥25 million per month, pursuant to a resolution of the 73rd Ordinary General Meeting of Shareholders on June 28, 2001. The com- pensation limit for corporate auditors was ¥7 million per month, pursuant to a resolution of the 67th Ordinary General Meeting of Shareholders on June 29, 1995. 3. Performance-linked compensation is maintained within one percent of consolidated net income, with a limit of ¥200 million annually, pursuant to a resolution of the 78th Ordinary General Meeting of Shareholders on June 22, 2006. Internal Control System Chiyoda is continuously improving its internal control system by ensuring reliability in financial reporting, compli- ance with laws and regulations and effective and efficient business operations by managing various risks. Specifically, the Company implements measures under the framework outlined below. Internal Control Steering Committee The Company established the Internal Control Steering Committee in May 2006 to strengthen its internal control system. The committee is composed of the heads of divi- sions related to internal control and chaired by the manager of the Operational Auditing Office. The committee mem- bers exchange information concerning internal control areas and coordinate internal control activities in each department for more effective and efficient business opera- tions under an appropriate internal control system. When necessary, the committee offers proposals on the internal control system to the Executive Committee. Ensuring Reliability in Financial Reporting The Operational Auditing Office, established in April 2005, supports the establishment of the internal control system in the Chiyoda Group to fulfill requirements of the Financial Instruments and Exchange Law that will take effect in March 2009. It also plans and implements audits of the entire Group from an independent perspective based on both the overall structure and the basic elements of control. The Operational Auditing Office reports on internal con- trols to the Executive Committee as well as to the President and CEO for self-evaluation of the internal control system. Corporate Governance System Board of Directors Executive Committee Delegates Representative Directors (4) Proposals Business promotion departments Internal audit for each area Group companies Internal Control Steering Committee Cooperation with corporate auditors and independent auditors Operational Auditing Office Export control group Safety, Quality and Environmental (SQE) Division Health, Safety and Environment (HSE) Management Office Quality Management Office CSR Division Compliance Management Office Social Environmental Office Information Security Management Office Crisis managers Project Management Administration Division Corporate Planning Division Administration & Personnel Division Compliance We have instituted the Chiyoda Group Code of Behavior and ensure that all officers and employees are familiar with it. Also, we set company rules as needed, ensure respect for the laws, regulations and corporate standards, and work to promote legal and fair business activities. In addition, to develop a control environment by cohesive- ly promoting management that stresses CSR at the corporate level, we have established the CSR Division. It oversees the Compliance Management Office, Social Environmental Office and Information Security Management Office. In order to strengthen CSR and compliance systems in line with the parent company, Chiyoda also works in collab- oration with its domestic subsidiaries to build CSR and com- pliance management structures appropriate to each compa- ny’s type of operations. To increase the effectiveness of these structures, Chiyoda also takes measures such as establishing a compliance counseling and reporting system shared by the subsidiaries and the parent company. We have also established the Safety, Quality and Environmental (SQE) Division to address the risks involved in compliance in areas including occupational safety and hygiene, environment and product quality. This Division undertakes such activities as creating manuals, promoting familiarity with relevant information, and conducting training and accident/disaster prevention activities. In particular, we recognize that, in addition to fulfilling legal responsibilities, maintaining or improving the safety and health of all personnel is an essential requirement for plant construction that leads to a high level of customer satisfaction, which is the basis of our corporate develop- ment. 21 CHIYODA CORPORATION ANNUAL REPORT 2007 Risk Management Information Management Chiyoda stores and manages business documents and other information in accordance with document handling regulations and other internal policies. For information security management, the Chiyoda Group manages information assets appropriately according to the Chiyoda Information Security Management System, which complies with international information security management system standards. Group Management To ensure appropriate business operations are applied for the entire Chiyoda Group, we follow a policy of creating internal control systems for significant Group companies that are consistent throughout the Group, based on harmo- nizing their approaches with that of the parent company. Specifically, we establish organizations that function as internal control committees, which respond to the type of operation of each respective company, and work to pro- mote self-control systems, regularly evaluating the docu- mentation and status of maintenance and operations of business flow and risk management. The Group Corporate Management Division manages and maintains an under- standing of overall Group management and the Operational Auditing Office takes overall responsibility for internal auditing, which is conducted based on a harmo- nized approach with the parent company. Cooperation with Audits by Corporate Auditors The Corporate Auditors Committee designates that directors or employees report to the corporate auditors con- cerning the activities of departments related to internal con- trol of the Chiyoda Group, regularly or as important matters occur. In addition, the representative directors regularly meet with corporate auditors to confirm the effectiveness of cor- porate auditors’ audits. At such meetings they also discuss the reports of directors and employees to the corporate auditors as well as cooperation between the corporate auditors and the Operational Auditing Office. The Chiyoda Group works to enhance the structure and operation of its risk management system in order to handle the various risks of corporate management and business operation and to carry out business activities smoothly on an ongoing basis. Group Risk Management Based on Chiyoda’s risk management system and related manual, risk managers and crisis managers have been appointed to carry out day-to-day preventative manage- ment as well as to deal with any incidents and minimize their consequences. Project Risk Management Business at the Chiyoda Group involves the concurrent execution of numerous projects. Because of this, it is crucial to predict and address the various risks involved in execut- ing business as much as possible. Otherwise, business oper- ation in general would be directly and substantially affected by a lack of reliable risk management for each project. It is also important to ensure that the entire company addresses and limits the effect of risks in the event they materialize and threaten project execution. We manage the risk involved in accepting and executing projects through a system of self controls that includes the Take-up Review Committee, the Price Estimate Policy Evaluation Committee and the Proposal Review Board. In addition, we have also established the Project Management Administration Division, which conducts risk management of project execution plans by assuming an internal control function through project audits and the Chiyoda Group’s original Cold Eye Review System. Cold Eye Review System • Project divisions and others in charge of executing projects clarify and address their own risks ahead of time, but tend to focus on project execu- tion itself and may often miss future risks. • At this point, an administrative department not directly involved in project execution completes an objective third-party (cold eye) check, then uses that result and response to guide and advise the project team. • The result of the check is reported to the management team, which gives instruction as necessary. This series of activities is referred to as the Cold Eye Review System. A cold eye review ensures that a project is in as sound a state as possible by means of risk analysis based on consistent monitoring from the pre-order stage, through studies at the start of preparation of estimates or before sub- mission of bids to the implementation stage, followed by regular audits and the Milestone Gate Monitoring System* at every stage of the project. The Chiyoda Group works to strengthen its internal control system and ensure transparency through risk countermeasures by the departments that execute these projects and a system of double-checks by administrative departments. * Milestone Gate Monitoring System: Support and advice given at each stage of project execution. 22 CHIYODA CORPORATION ANNUAL REPORT 2007 Corporate Governance Corporate Social Responsibility (CSR) Our Corporate Social Responsibility (CSR) is to realize the Chiyoda Corporate Philosophy. Chiyoda Corporate Philosophy Enhance our business and contribute to the develop- ment of a sustainable society as an integrated engineer- ing company through the use of our collective wisdom and painstakingly developed technology. Chiyoda Group CSR Vision As an integrated engineering company, the Chiyoda Group pledges to constantly strive to increase its corpo- rate value and earn the trust and understanding of all stakeholders by adhering to the following principles. 1. A Reliable Company 2. Environmental Initiatives 3. Social Contributions through Business Activities 4. Respect for Human Rights 5. Commitment to Fairness Efforts for Stakeholders • For customers: Conduct customer satisfaction surveys • For shareholders: Participate in conferences with overseas investors and hold meetings by telephone • For local communities: Provide internships and local clean-up activities as well as promote employment oppor- tunities • For business partners and related companies: Establish mutually fair collaboration • For employees: Conduct employee satisfaction surveys Wind Power Generation Facility at Koyasu Office & Research Park Contribution to Global Environment and Society We have established the Corporate Environmental Policy, and have addressed global environment problems through our activities: • Develop original technologies such as CO2 reforming for synthesis gas production in the GTL process, flue gas desulfurization technologies, and titania-based catalyst for ultra-deep desulfurization of diesel oil, etc., as explained on pages 16 and 17. • Provide advanced engineering solutions to increase sup- plies of LNG, which represents a cleaner energy source than other major energy sources, using the expertise accu- mulated at our LNG plant projects shown on page 14. • Install energy-saving facilities at our offices such as bio- fueled cogeneration and wind power generation. Apart from the above, we contribute to society by: • Localizing plant construction operations, thus transfer- ring know-how and creating jobs in the communities where we build plants. Note: For details, please refer to the CSR Report. 23 CHIYODA CORPORATION ANNUAL REPORT 2007 Six-Year Summary of Selected Financial Data 2007 2006 2005 2004 2003 2002 Millions of yen Thousands of U.S. dollars 2007 For the Year Revenues ¥484,895 ¥390,875 ¥267,655 ¥206,817 ¥166,367 ¥141,387 $4,109,280 Cost of revenues 445,159 360,322 247,905 192,710 155,924 136,762 3,772,534 Operating income 28,700 20,729 11,078 5,881 1,548 (5,202) 243,220 (loss) Income before income taxes and minority interests 37,935 21,906 12,049 5,370 2,509 1,861 321,483 Net income 23,532 19,400 12,863 6,647 2,000 121 199,424 At Year-End Total assets ¥442,953 ¥279,721 ¥182,893 ¥142,860 ¥120,297 ¥129,314 $3,753,839 Total equity Long-term debt Working capital Current ratio (%) 77,415 10,067 66,592 118.9 55,509 36,873 22,767 16,670 15,103 10,169 215 10,316 10,422 10,672 51,431 22,231 15,719 125.1 115.9 115.0 7,526 108.4 1,387 101.4 656,059 85,314 564,339 Per Common Share (Yen and U.S. Dollars) Earnings per share (EPS) Book value per share (BPS) ¥122.41 ¥101.27 ¥ 68.62 ¥ 35.91 ¥10.79 ¥ 0.65 $1.04 400.56 288.88 193.22 123.04 90.01 81.47 3.39 0.13 Dividends per share 15.0 10.0 6.0 — — — Other Statistics Revenues per employee ¥170.7 ¥150.5 ¥110.1 ¥84.3 ¥66.0 ¥51.9 $1,446.6 Ratios (%) Return on assets (ROA) 10.2% 10.0% 7.1% 4.8% 1.9% (2.5)% Return on equity (ROE) 35.5 42.0 43.1 33.7 12.6 0.8 Notes: 1. U.S. dollar amounts are translated, for convenience only, at the rate of ¥118 = US$1, the approximate exchange rate at March 31, 2007. 2. Yen amounts are rounded down to the nearest million. U.S. dollar amounts and percentages are rounded to the nearest unit. 24 CHIYODA CORPORATION ANNUAL REPORT 2007 Management’s Discussion and Analysis of Operating Results and Financial Condition Review of Operating Results Summary During fiscal year 2007, the year ended March 31, 2007, the overseas plant market drew strength from expanding energy demand worldwide and continued aggressive invest- ment in the gas value chain by gas-producing countries and Energy Majors. As a result, new contracts and ongoing pro- jects remained strong for the Chiyoda Group. In Japan, new contracts and revenues for the Chiyoda Group exceeded projections, centered on the petroleum and petrochemical sectors, because of energetic capital investment by companies in those sectors. Although new contracts decreased 30.7 percent com- pared with the previous fiscal year to ¥557,707 million, revenues increased 24.1 percent compared with the previ- ous fiscal year to ¥484,895 million, primarily because major ongoing projects got fully under way. Operating income increased 38.5 percent year-on-year to ¥28,700 million as the gross profit margin increased and the ratio of selling, general and administrative (SG&A) expenses to revenues improved. Income before income taxes and minority inter- ests increased 73.2 percent year-on-year to ¥37,935 million due to various factors including an increase in interest income from an increase in jointly controlled assets of joint venture. Net income increased 21.3 percent compared with the previous fiscal year to ¥23,532 million. New Contracts and Revenues New contracts decreased 30.7 percent compared with the previous fiscal year to ¥557,707 million. New contracts overseas decreased 41.8 percent year-on-year to ¥402,409 million, and new contracts in Japan increased 37.8 percent year-on-year to ¥155,297 million. Revenues increased 24.1 percent compared with the previous fiscal year to ¥484,895 million. Overseas revenues increased 32.5 percent year-on- year to ¥378,345 million, and revenues in Japan increased 1.2 percent year-on-year to ¥106,550 million. The following is a summary of engineering operations, which account for nearly all of the Chiyoda Group’s activities. Power and Gas The investment environment was favorable because of strong demand for gas, with new contracts for two large- scale gas processing plants in Qatar and new large-scale projects in Japan. The Chiyoda Group completed a large- scale plant in Qatar in a short time and began full-scale construction at projects in Qatar and Sakhalin. As a result, although new contracts decreased 39.2 percent compared with the previous fiscal year to ¥420,797 million, revenues increased 30.6 percent year-on-year to ¥371,574 million. Petroleum, Petrochemicals and Gas Chemicals In the petroleum sector, new contracts and revenues remained steady. In the petrochemical sector, new con- tracts for chemical refinery integration increased. New con- tracts increased 16.2 percent compared with the previous fiscal year to ¥85,773 million, and revenues increased 12.9 percent year-on-year to ¥69,629 million. General Chemicals and Industrial Machinery The general chemicals sector was more willing to make capital investments due to factors including industry reorga- nization and structural reform. In the industrial machinery sector, capital investment remained solid. New contracts increased 25.6 percent compared with the previous fiscal year to ¥33,258 million, and revenues decreased 2.5 per- cent year-on-year to ¥31,090 million. Environment and Others In the environment sector, Chiyoda’s internally developed flue gas desulfurization process, CT-121, continued to con- tribute to revenues. As a result of this and other factors, new contracts increased 55.5 percent compared with the previous fiscal year to ¥11,091 million, while revenues decreased 27.9 percent year-on-year to ¥5,815 million. Gross Profit Gross profit increased 30.1 percent compared with the previous fiscal year to ¥39,736 million. Primary factors included the increase in revenues and improvement in the gross profit margin, which rose 0.4 percentage points to 8.2 percent from 7.8 percent for the previous fiscal year. 25 CHIYODA CORPORATION ANNUAL REPORT 2007 SG&A Expenses and Operating Income Income Taxes and Net Income SG&A expenses increased 12.3 percent compared with the previous fiscal year to ¥11,036 million. Factors included an increase of ¥497 million in personnel expenses and an increase of ¥393 million in research and development expenses. However, greater efficiency among administrative divisions supported an improvement of 0.2 percentage points in the ratio of SG&A expenses to revenues to 2.3 percent from 2.5 percent for the previous fiscal year. As a result of the above, operating income increased 38.5 percent compared with the previous fiscal year to ¥28,700 million because of higher revenues and improve- ments in the gross profit margin and in the ratio of SG&A expenses to revenues. The operating margin increased 0.6 percentage points to 5.9 percent from 5.3 percent for the previous fiscal year. Other Income (Expenses) and Income before Income Taxes and Minority Interests Other income – net improved to ¥9,235 million from ¥1,177 million for the previous fiscal year. Interest and divi- dend income increased to ¥8,511 million from ¥2,668 mil- lion for the previous fiscal year because of increased interest income from jointly controlled assets of joint venture. Net financial income, calculated as interest and dividend income less interest expense, therefore increased to ¥8,201 million from ¥2,366 million for the previous fiscal year. Equity in earnings of associated companies increased to ¥375 million from ¥193 million for the previous fiscal year. Foreign exchange loss increased to ¥629 million from ¥174 million for the previous fiscal year because the approximate exchange rate of ¥118 to US$1 as of March 31, 2007 rep- resented a depreciation of ¥1 from a year earlier and because of hedging costs for comprehensive forward for- eign exchange contracts. However, loss on partial termina- tion of a defined benefit pension plan totaling ¥1,995 mil- lion in the previous fiscal year did not recur. As a result, income before income taxes and minority interests increased 73.2 percent compared with the previ- ous fiscal year to ¥37,935 million. Current income taxes increased 262.0 percent compared with the previous fiscal year to ¥16,209 million, primarily because of the increase in income before income taxes and minority interests. Deferred income taxes decreased to ¥1,866 million because deferred tax assets were reassessed and recalculated to determine the amount that is likely to be recovered based on projected taxable earnings in the three-year period ending March 2010. Income taxes net of deferrals therefore increased to ¥14,343 million. As a result of the above, net income increased 21.3 per- cent compared with the previous fiscal year to ¥23,532 mil- lion. Net income per share increased to ¥122.41 from ¥101.27 for the previous fiscal year. Results by Geographic Segment Revenues by geographic segment exclude intersegment revenues. In Japan, the Chiyoda Group’s backlog of contracts was strong, and revenues increased 25.9 percent compared with the previous fiscal year to ¥476,813 million. Operating income increased 29.0 percent year-on-year to ¥28,191 million. In Asia, revenues decreased 33.7 percent compared with the previous fiscal year to ¥8,082 million. Operating income totaled ¥507 million, compared to an operating loss total- ing ¥1,051 million for the previous fiscal year. In North America, all revenues were eliminated upon consolidation, centered on intra-Group support including communication among sales operations. Operating income totaled ¥2 million, compared to a marginal operating loss in the previous year, mainly because of the small scale of activities. In other regions, the Chiyoda Group operated with only personnel needed for communication. All revenues were eliminated upon consolidation. There was no operating income, compared to an operating loss of ¥17 million for the previous fiscal year. 26 CHIYODA CORPORATION ANNUAL REPORT 2007 Management’s Discussion and Analysis Research and Development Activities Chiyoda Corporation and Chiyoda Advanced Solutions Corporation undertake research and development activities for the Chiyoda Group. They work in the three main areas of (1) energy and the environment; (2) new chemical sec- tors; and (3) stronger engineering capabilities, with the objective of developing products and technologies that con- tribute in ways such as uncovering business, promoting contracts, increasing added value and establishing techno- logical advantages. The Chiyoda Group employs approximately 50 research and development staff, primarily at its Research and Development Center. Research and development expenses (excluding consumption taxes) increased 48.5 percent com- pared with the previous fiscal year to ¥1,204 million. Dividend Policy The Chiyoda Group works to consistently develop itself and create next-generation businesses as a growing, prof- itable company. The Chiyoda Group also works constantly to maintain a strong financial structure by adding to inter- nal reserves while considering shareholder returns in paying dividends. The Chiyoda Group paid cash dividends totaling ¥15.00 per share for the year ended March 2007. Moreover, the Chiyoda Group expects to pay cash dividends totaling ¥18.00 per share for the year ending March 2008. Sources of Capital and Liquidity Capital Requirements and Financial Policy Costs associated with domestic and overseas plant con- struction orders represent the Chiyoda Group’s primary capital requirement. SG&A expenses are another major cap- ital requirement, including personnel expenses such as employee salaries and benefits, and subcontracting expens- es. Personnel expenses associated with employees engaged in research and development are the primary component of the Chiyoda Group’s research and development expenses. The Chiyoda Group currently funds working capital, cap- ital expenditures and other capital requirements using inter- nal capital resources and external borrowings. The Chiyoda Group has prepared for future working capital require- ments by establishing a short-term committed line of credit totaling ¥15.0 billion. Moreover, the Chiyoda Group expects to deploy internal capital resources to fund planned capital expenditures relat- ed to investment in information technology. At present, the Chiyoda Group believes that its new con- tract performance, financial position, ability to generate cash from operating activities and unused portion of the short-term committed line of credit will provide sufficient access to the capital required to fund growth. Cash Flow Net cash provided by operating activities increased to ¥35,532 million from ¥5,237 million for the previous fiscal year. Increase in jointly controlled assets of joint venture used cash totaling ¥124,724 million, a significant increase from the previous fiscal year as a result of an increase in large-scale joint venture projects. However, income before income taxes and minority interests increased to ¥37,935 million, and depreciation and amortization totaled ¥1,507 million. Moreover, changes in working capital (represented by the sum of decrease in trade notes and accounts receivable, and costs and estimated earnings on long-term construction contracts; increase in costs of construction contracts in progress; increase in trade notes and accounts payable; and increase in advance receipts on construction contracts) pro- vided cash totaling ¥129,445 million. Jointly controlled assets of joint venture mainly represents the Chiyoda Group’s share of cash and cash equivalents at joint ventures. Net cash provided by operating activities prior to adjustment for jointly controlled assets of joint venture was ¥160,256 million. Net cash used in investing activities totaled ¥3,458 mil- lion. In the previous fiscal year, investing activities provided net cash totaling ¥1,052 million. Proceeds from collections of long-term loans decreased to ¥610 million from ¥3,341 million in the previous fiscal year, while payments for pur- chase of investment securities increased to ¥2,419 million 27 CHIYODA CORPORATION ANNUAL REPORT 2007 from ¥1,273 million for the previous fiscal year. Capital expenditures for IT-related software and other investments, calculated as the sum of purchases of property, plant and equipment and purchase of intangible assets, totaled ¥1,780 million, compared to ¥1,855 million for the previous fiscal year. Net cash used in financing activities increased to ¥2,191 million from ¥1,338 million for the previous fiscal year. Factors included the use of cash totaling ¥1,915 million for payment of cash dividends in reflection of solid results in the previous fiscal year. As a result of the above, cash and cash equivalents at the end of the year increased by ¥30,173 million from a year earlier to ¥77,052 million. Assets, Liabilities and Equity Total assets increased 58.4 percent from a year earlier to ¥442,953 million. Current assets increased 62.9 percent from a year earlier to ¥418,037 million. Factors included an increase in jointly controlled assets of joint venture as a result of an increase in large-scale joint venture projects, and the increase in cash and cash equivalents as a result of the improvement in net cash provided by operating activities. Net property, plant and equipment increased 5.4 percent from a year earlier to ¥7,465 million, primarily reflecting IT- related capital investment. Investments and other assets increased 9.0 percent from a year earlier to ¥17,451 million, primarily reflecting an increase in investment securities. Current liabilities increased 71.3 percent from a year ear- lier to ¥351,445 million. Factors included an increase of ¥129,839 million in advance receipts on construction con- tracts to ¥231,818 million. Moreover, notes and accounts payable – trade increased ¥911 million from a year earlier to ¥86,813 million, and income taxes payable increased ¥9,081 million from a year earlier to ¥13,071 million. Non- current liabilities decreased 24.6 percent from a year earlier to ¥14,093 million. Factors included a decrease in liability for retirement benefits of ¥6,116 million from a year earlier to ¥2,277 million. Interest-bearing liabilities, calculated as the sum of the current portion of long-term debt and long- term debt, decreased 0.5 percent from a year earlier to ¥10,164 million. Total equity increased 39.5 percent from a year earlier to ¥77,415 million. A primary factor was an increase of ¥21,521 million in retained earnings as a result of the increase in net income. As of March 31, 2007, the ratio of total equity to total assets decreased 2.3 percentage points from a year earlier to 17.5 percent. Outlook for the Year Ending March 31, 2008 The Chiyoda Group will work to balance the execution of ongoing projects with efforts to obtain new contracts for projects in which the Chiyoda Group can exercise its tech- nological excellence. Among ongoing projects, the Chiyoda Group aims to counter rising material costs and a shortage of construction workers to move forward as planned with three ultra-large- scale LNG projects in Qatar. We will also work to steadily execute other projects in Japan and overseas. Given these conditions, and assuming an exchange rate of ¥115 to US$1, for the year ending March 31, 2008 the Chiyoda Group projects consolidated new contracts of ¥250,000 million, consolidated revenues of ¥550,000 mil- lion, consolidated ordinary income of ¥38,500 million, and consolidated net income of ¥23,500 million. Business Risks and Other Risks Primary issues that could affect investor decisions regarding investment risk, such as material issues related to the Chiyoda Group’s financial position, performance and cash flow and the Chiyoda Group’s response to such issues, include but are not limited to the issues outlined below. The Chiyoda Group recognizes the potential occurrence of these risks and works to avoid them to the maximum extent possible. The Chiyoda Group also moves to respond as quickly as possible to minimize the impact of issues that present risks when they occur. As of June 28, 2007, Chiyoda Group management acknowledges the issues that may present risks in the future outlined below and has made them the focus of risk management. 28 CHIYODA CORPORATION ANNUAL REPORT 2007 Management’s Discussion and Analysis the world, and improving the skills of construction workers at each job site. Terrorism, Conflicts in Neighboring Countries, Strikes, Anarchy and Natural Disasters Terrorism or conflicts anywhere in the world may cause direct losses, delays in procuring or delivering materials and equipment, threats to the safety of workers on site, cessa- tion of construction work, and other problems at construc- tion sites in Japan and overseas. Such incidents could result in losses and expenses that the Chiyoda Group could not pass on to clients, which could affect the Chiyoda Group’s performance. The Chiyoda Group has structured a threat management system that includes cooperation with clients and other related parties to support rapid initial response should such issues occur. Plant Accidents Serious accidents including explosions or fire may occur due to various causes at plants that the Chiyoda Group is constructing or has completed. The Chiyoda Group could be judged responsible for such accidents, which could impact the Chiyoda Group’s performance. The Chiyoda Group works to avoid or minimize this risk in ways such as taking all possible measures to preclude the occurrence of accidents, including quality control and safety management. Other countermeasures include maintaining appropriate insurance coverage and negotiating contracts that rationally allocate client responsibility for damages. Changes in Exchange Rates In overseas construction projects, construction payments are often in different currencies than payments for vendors and / or subcontractors. Foreign currency exchange rates may therefore affect the financial results of the projects. The Chiyoda Group works to avoid and minimize such foreign currency fluctuation risks by using forward foreign exchange contracts and matching planned outlays in multiple currencies with construction payments and receivables. Rising Equipment and Resource Prices and Material Shortages Plant construction entails a time lag between estimates and bids and orders for equipment, resources, materials and subcontracted construction. Consequently, actual prices for equipment and materials may exceed those pro- jected in estimates and bids. Moreover, restricted supplies of metals such as copper, nickel, aluminum and zinc may cause problems including delays in the delivery and mobi- lization of equipment and materials. Resulting delays in the progress of construction projects could affect the Chiyoda Group’s results. The Chiyoda Group works to avoid and minimize these risks to the best of its ability by diversifying procurement in ways such as using multiple suppliers in various regions worldwide, considering bundled purchases, ordering equip- ment and materials at an early stage, and structuring coop- erative relationships with suppliers. Shortages of Construction Workers and Increased Subcontractor Expenses Plant construction entails a time lag between estimates and bids and orders for subcontracting. Large-scale con- struction projects can magnify the impact of such time lag, which may result in labor costs that exceed those projected in estimates and bids. In particular, lack of qualified, skilled workers may require countermeasures that increase costs. The Chiyoda Group works to minimize the impact of these issues by structuring cooperative relationships with qualified construction companies, deploying personnel skilled in various professions from various regions around 29 CHIYODA CORPORATION ANNUAL REPORT 2007 Global Network (As of July 1, 2007) Head Office Yokohama Head Office 12-1, Tsurumichuo 2-chome, Tsurumi-ku Yokohama 230-8601, Japan Tel: (81) 45-521-1231 Fax: (81) 45-503-0200 Koyasu Office & Research Park 13, Moriya-cho 3-chome, Kanagawa-ku Yokohama 221-0022, Japan Tel: (81) 45-441-1268 Fax: (81) 45-441-1297 Research & Development Center Tel: (81) 45-441-9132 Fax: (81) 45-441-9728 Osaka Office 14-10, Nishinakajima 5-chome, Yodogawa-ku Osaka 532-001, Japan Tel: (81) 6-6390-3411 Fax: (81) 6-6889-5101 Overseas Offices Abu Dhabi Office Clock Tower Bldg. Al Najda Street Abu Dhabi, U.A.E., P.O. Box 43928 Tel: (971) 2-671-7161 Fax: (971) 2-671-7162 Beijing Office Room No. 1028, China World Tower 1, Jianguomenwai Street, Beijing, 100004, China Tel: (86) 10-6505-2678 Fax: (86) 10-6505-1118 Jakarta Office 9th Floor, MidPlaza Bldg. Jalan Jenderal Sudirman Kav. 10-11 Jakarta, 10220, Indonesia Tel: (62) 21-570-7579 Fax: (62) 21-570-6276 Korea Representative Office 1358-8, Tal-dong Nam-ku Ulsan, Korea Tel: Fax: (82) 52-256-5723 (82) 52-256-5721/5722 Middle East Headquarters Doha Office Al Mana Tower Airport Road, Doha Qatar, P.O. Box 20243 Tel: Fax: (974) 4622-716 (974) 4622-875/6 The Hague Representative Office Chiyoda Petrostar Ltd. Parkstraat 83, 2514 JG The Hague, The Netherlands Tel: (31) 70-385-9453 Fax: (31) 70-346-3779 Major Subsidiaries & Affiliated Companies Overseas Engineering Business Chiyoda Corporation (Shanghai) 29F-Room E, Pufa Tower, No. 588, Pudong Rd. (S), Pudong New Area, Shanghai 200120, China Tel: (86) 21-5877-6266 Fax: (86) 21-5877-6366 Chiyoda International Corporation Services: Business activities in the U.S.A. 1177 West Loop South, Suite 680 Houston, TX 77027, U.S.A. Tel: (1) 713-965-9005 Fax: (1) 713-965-0075 Chiyoda Malaysia Sdn. Bhd. Services: Design and construction for orders received in Malaysia 15th Floor, Menara Maxisegar Jalan Pandan Indah, 4/2 Pandan Indah, 55100 Kuala Lumpur, Malaysia Tel: (60) 3-4297-0988 Fax: (60) 3-4297-0800 URL: http://www.chiyoda.com.my/ Chiyoda Nigeria Limited Services: Construction of industrial facilities in Nigeria Abuja Office C/O Peniel Apartments Room No. B2C Plot 171, IBB Way, Adetokunbo Ademola Crescent, Wuse I I, Abuja, Nigeria Tel: (234) 9-4130961 Fax: (234) 9-4130961 Lagos Office Lindev Plaza 1st Floor 16, Amodu Ojikutu Street Off Bishop Oluwole Street, Victoria Island, Lagos, Nigeria Tel: Fax: (234) 1-2612565 (234) 1-2613291/2612565/4627238 Services: Design and construction of industrial facilities for orders received in Saudi Arabia Al-Khobar Office P.O. Box 31707, Al-Khobar 31952 The Kingdom of Saudi Arabia Tel: (966) 3-864-0839 Fax: (966) 3-864-0986 Jeddah Head Office P.O. Box 6188, Jeddah 21442 The Kingdom of Saudi Arabia Tel: (966) 2-647-0558 Fax: (966) 2-647-1908 Tlx: 601062 MOTSIM Chiyoda Philippines Corporation Services: Design services related to overseas projects Chiyoda Bldg. Meralco Avenue Corner, General Araneta Street, San Antonio, Pasig City, Metro Manila, Philippines Tel: (63) 2-636-1001/8 Fax: (63) 2-636-1013/1023 URL: http://www.chiyodaphil.com.ph Chiyoda Singapore (Pte) Limited Services: Design and construction of industrial facilities 14 International Business Park Jurong East, Singapore 609922 Tel: (65) 6563-3488 Fax: (65) 6567-5231 URL: http://www.chiyoda.com.sg/ Chiyoda (Thailand) Limited 140/39 ITF Tower II, Suite H 18th Floor, Silom Road, Kwaeng Suriyawong, Khet Bangrak, Bangkok 10500, Thailand Tel: Fax: (66) 2-231-6260 (66) 2-231-6258/6259 L&T-Chiyoda Limited Services: Design services related to overseas projects B.P. Estate, National Highway No. 8, Chhani Baroda-391740, Gujarat State, India Tel: Fax: (91) 265-2774985 (91) 265-2771003/2772855 PT. Chiyoda International Indonesia Services: Construction of industrial facilities in Indonesia MENARA HIJAU, 10th Floor Suite 1001 Jl. Mt. Haryono Kav. 33 Jakarta Selatan 12770, Indonesia Tel: (62) 21-798-4680 Fax: (62) 21-798-6174 Project Companies Oman, Qatar, Russia 30 CHIYODA CORPORATION ANNUAL REPORT 2007 Milan Representative Office Chiyoda & Public Works Co., Ltd. Viale Della Liberazione 18, 20124 Milan, Italy Tel: (39) 02-303517-111 Fax: (39) 02-303517-35 Singapore Human Resources Office 10 Anson Road, #03-02, International Plaza, Singapore 079903 Tel: (65) 6324-0080 Fax: (65) 6324-0090 Services: Industrial design and construction for orders received in Myanmar SEDONA HOTEL Room 307 ~ 309 No. 1, Kaba Aye Pagoda Road, Yankin Township, Yangon, Myanmar Tel: (95) 1-545605 Fax: (95) 1-545227 The Netherlands Italy Korea China Russia Japan Saudi Arabia Oman India Myanmar Nigeria Malaysia U.A.E. Qatar Thailand Philippines Singapore Indonesia U.S.A. Head Office Overseas Offices Project Companies Subsidiaries & Affiliated Companies Domestic Major Subsidiaries & Affiliated Companies Domestic Engineering Business Chiyoda Advanced Solutions Corporation Services: Advanced engineering consulting 1-25, Shinurashima-cho 1-chome Kanagawa-ku, Yokohama 221-0031, Japan Tel: (81) 45-441-1260 Fax: (81) 45-441-1264 URL: http://www.chiyoda-as.co.jp/ Chiyoda Keiso Co., Ltd. Services: Electrical and instrumentation design, construction services 13, Moriya-cho 3-chome, Kanagawa-ku Yokohama 221-0022, Japan Tel: (81) 45-441-1433 Fax: (81) 45-441-1434 URL: http://www.ckc.chiyoda.co.jp/ Chiyoda Kosho Co., Ltd. Services: Domestic construction and maintenance 34-26, Tsurumichuo 4-chome, Tsurumi-ku Yokohama 230-0051, Japan Tel: (81) 45-506-7662 Fax: (81) 45-506-7667 URL: http://www.cks-ykh.co.jp/ Chiyoda TechnoAce Co., Ltd. Services: Pharmaceuticals, civil engineering construction for domestic oil facilities Arrowhead International Corporation Services: Travel services, shipping and air freight agent 13, Moriya-cho 3-chome, Kanagawa-ku Yokohama 221-0022, Japan Tel: (81) 45-441-9600 Fax: (81) 45-450-5236 URL: http://www.cta.chiyoda.co.jp/ 7-8, Shibakoen 1-chome, Minato-ku Tokyo 105-0011, Japan Tel: (81) 3-5470-0880 Fax: (81) 3-5470-0890 URL: http://www.arrowhead.co.jp/ Chiyoda U-Tech Co., Ltd. Arrow Mates Co., Ltd. Services: Consulting and human resources Services: Placement of technicians and office placement services 15-19, Tsurumichuo 2-chome, Tsurumi-ku Yokohama 230-0051, Japan Tel: (81) 45-502-7618 Fax: (81) 45-503-5399 URL: http://www.utc-yokohama.com/ Other Businesses Arrow Business Consulting Corporation Services: Consulting services for finance and accounting 32-1, Tsurumichuo 4-chome, Tsurumi-ku Yokohama 230-0051, Japan Tel: (81) 45-502-5774 Fax: (81) 45-502-5753 staff; educational research, re- employment support and administra- tive, personnel and procurement services 43, Hon-cho 4-chome, Naka-ku Yokohama 231-0005, Japan Tel: (81) 45-662-1126 Fax: (81) 45-662-1173 URL: http://www.arrowmates.co.jp/ IT Engineering Limited Services: Business and system development, computer management, information management 1-25, Shinurashima-cho 1-chome, Kanagawa-ku Yokohama 221-0031, Japan Tel: (81) 45-441-9123 Fax: (81) 45-441-1466 URL: http://www.ite.co.jp/ 31 CHIYODA CORPORATION ANNUAL REPORT 2007 Corporate Information (As of March 31, 2007) Chiyoda Corporation Head Office: 12-1, Tsurumichuo 2-chome Tsurumi-ku Yokohama 230-8601, Japan Tel: (81) 45-521-1231 Fax: (81) 45-503-0200 Established: January 20, 1948 Paid-in Capital: ¥12,928 million Number of Employees: 1,222 (Non-Consolidated) 2,947 (Consolidated) Annual Fiscal Close: March 31 Shareholders’ Meeting: June Number of Shares per Unit: 1,000 Stock Code: ISIN: JP3528600004 SEDOL 1:6191704 JP 6366 TSE: Transfer Agent of Common Stock: Mitsubishi UFJ Trust and Banking Corporation 1-4-5 Marunouchi, Chiyoda-ku, Tokyo Authorized Shares: 650,000,000 Capital Stock Issued: 193,125,529 Number of Shareholders: 12,461 URL: http://www.chiyoda-corp.com ORGANIZATIONAL CHART Shareholders’ Meeting Corporate Auditors Committee (As of July 1, 2007) Board of Directors Executive Committee SQE Division CSR Division Operational Auditing Office Corporate Management & Finance Technology & Engineering Projects Logistics Corporate Planning Division Administration & Personnel Division Finance Division Project Management Administration Division Research Institute of Technology Innovation & Strategy Procurement Division Technology Planning Division Process Technology Division Engineering Division International Project Operation Domestic Project Operation Petroleum & Chemical Project Division Project Service Division Domestic Business Development Operation Gas Value Chain Project Division Construction Division Domestic Projects - Oil & Petrochemical Qatar Project Division 1 International Business Development Qatar Project Division 2 International Business Development Division 1 Russia Project Division International Business Development Division 2 Domestic Projects - Pharmaceutical/ Fine/Energy Industries Domestic Projects - Liquefied Gas Terminal International Business Development Division 3 32 CHIYODA CORPORATION ANNUAL REPORT 2007 MAJOR SHAREHOLDERS Breakdown by Shareholder Mitsubishi Corporation Mitsubishi UFJ Trust and Banking Corporation The Bank of Tokyo-Mitsubishi UFJ, Ltd. The Master Trust Bank of Japan, Ltd. (Trust Account) Japan Trustee Services Bank, Ltd. (Trust Account) State Street Bank and Trust Company 505103 State Street Bank and Trust Company Tokio Marine & Nichido Fire Insurance Co., Ltd. BNP PARIBAS Securities (Japan) Limited Meiji Yasuda Life Insurance Company Number of shares Percentage of total (%) 19,851,220 10.27 9,034,000 9,033,925 8,862,000 8,745,000 7,253,899 5,795,749 2,760,844 2,756,000 2,549,960 4.67 4.67 4.58 4.52 3.75 3.00 1.42 1.42 1.32 11.25% 29.24% Total 193,125 thousand 38.69% 17.47% 3.35% Financial institutions Securities companies Other corporations Foreign companies and foreign individuals Individuals and others Monthly Stock Price Range on the Tokyo Stock Exchange (Yen) High High Opening Closing Closing Opening Low Low Blue: Opening Price > Closing Price White: Closing Price > Opening Price Nikkei average (closing price) 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 FY2003 FY2004 FY2005 FY2006 FY2007 Monthly Trading Volume (Thousands of Shares) (Yen) 16,000 12,000 8,000 4,000 0 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 FY2003 FY2004 FY2005 FY2006 FY2007 33 CHIYODA CORPORATION ANNUAL REPORT 2007 4,000 3,000 2,000 1,000 0 120,000 100,000 80,000 60,000 40,000 20,000 0 12-1, Tsurumichuo 2-chome, Tsurumi-ku, Yokohama 230-8601, Japan Tel: (81) 45-521-1231 Fax: (81) 45-503-0200 http://www.chiyoda-corp.com/en/ Printed in Japan with soy ink on recycled paper. Chiyoda Corporation and Consolidated Subsidiaries Consolidated Financial Statements for the Years Ended March 31, 2007 and 2006, and Independent Auditors’ Report 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 12-1, Tsurumichuo 2-chome, Tsurumi-ku, Yokohama 230-8601, Japan Tel: (81) 45-521-1231 Fax: (81) 45-503-0200 http://www.chiyoda-corp.com/en/ Printed in Japan. 

Continue reading text version or see original annual report in PDF format above