Annual Report 2003 NIPPON OIL CORPORATION ANNUAL REPORT 2003 Maximizing Corporate Value as a Comprehensive Energy Company Printed in Japan Profile Investor Information In April 2002, the NOC Group began implementing its second medium-term consolidated Date of Establishment May 10, 1888 management plan, which covers the three years through March 2005. This plan calls for the Paid-in Capital ¥139,436 million Group to strengthen its competitiveness by enhancing the profitability of its core business Head Office in petroleum products while concurrently creating new types of energy businesses. All 3-12, Nishi Shimbashi 1-chome, Minato-ku, Tokyo 105-8412, Japan Phone: (03) 3502-1184 (IR Office) Group units are concertedly working to achieve the plan’s goals, which will promote the Fax: (03) 3502-9862 Website: http://www.eneos.co.jp maximization of shareholder value. Securities Traded Common stock listed on the Tokyo, Osaka, Nagoya, Fukuoka, and Sapporo exchanges Transfer Agent The Chuo Mitsui Trust and Banking Co., Ltd. Head Office, Transfer Agency Department, 8-4, Izumi 2-chome, Suginami-ku, Tokyo 168-0063, Japan Phone: (03) 3323-7111 Major Shareholders (as of March 31, 2003) Number of shares held (thousand shares) (%) Japan Trustee Service Trust and Banking (Trust Unit) 138,260 9.1% Mizuho Corporate Bank, Ltd. 73,887 4.9 The Master Trust Bank of Japan, Ltd. (Trust Unit) 65,150 4.3 Sumitomo Mitsui Banking Corporation 49,398 3.3 Mitsubishi Corporation 45,435 3.0 The Tokyo Marine and Fire Insurance Company, Limited 31,323 2.1 The Bank of Tokyo–Mitsubishi, Ltd. 29,387 1.9 Mitsui Sumitomo Insurance Company, Limited 26,297 1.7 Pension Fund Trustee Mitsui Asset Trust and Banking Company, Limited Contents A Cautionary Note on Forward-Looking Statements (2 Unit) 24,262 1.6 1 Financial and Operating Highlights The financial forecasts, management targets, and any other Sompo Japan Insurance Inc. 20,815 1.4 estimates and projections of the Company presented in 2 A Message from the President this report are based on information available to manage- 5 Progress of the Second Medium-Term Consolidated Management Plan ment as of the date set forth within. Please note that actual results may vary significantly 7 Initiatives from projected forecasts due to various uncertain factors, 22 Review of Operations and, as such, readers should take care when making invest- ment decisions based solely on the forecasts herein. 32 Board of Directors The factors affecting actual results include but are not 33 Financial Section limited to economic conditions, crude oil prices, demand for and market conditions of oil-related products, and 56 Principal NOC Group Companies exchange rate and interest rate trends. 57 Overseas Offices 58 Organization Chart 59 Investor Information Nippon Oil Corporation holds the rights in Japan to the ENEOS trademark and logo. The Company offers its products and services under the ENEOS brand. 59 FINANCIAL AND OPERATING HIGHLIGHTS Nippon Oil Corporation and Consolidated Subsidiaries Financial Highlights Thousands of Millions of yen U.S. dollars Years ended March 31, 2003 and 2002 2003 2002 2003 Net sales .................................................................................................................... ¥4,187,392 ¥3,949,571 $34,894,933 Net income ................................................................................................................ 32,281 24,006 269,008 Cash dividends paid .................................................................................................. 11,591 13,960 96,592 Total assets ............................................................................................................... 3,350,237 3,444,742 27,918,642 Total shareholders’ equity ......................................................................................... 929,987 924,140 7,749,892 * U.S. dollar figures are translated from yen, for convenience only, at the rate of ¥120 to US$1, the approximate rate of exchange on March 31, 2002. Operating Highlights Years ended March 31, 2003, 2002 and 2001 2003 2002 2001 Crude oil imports (million kiloliters) ............................................................................ 63.0 58.7 62.4 Sales of petroleum products*1 (million kiloliters) ........................................................ 53.2 49.0 51.1 Capacity of refining facilities (barrels per stream day) .............................................. 1,217,000 1,227,000 1,227,000*3 Number of employees*2 ............................................................................................. 13,882 14,368 14,895 *1 “Sales of petroleum products” represents the domestic petroleum fuel sales volume of the parent company, including sales to consolidated subsidiaries. *2 The number of employees includes those of Nippon Oil Corporation and all consolidated subsidiaries. *3 This figure represents capacity as of April 1, 2001. Notes: 1. Unless otherwise indicated, all dollar figures herein refer to U.S. currency. Billion is used in the American sense of one thousand million. 2. All “net sales” figures by business segment in this annual report represent sales to third parties. 3. In this report, the term “NOC” and such terms as “the Company,” “our,” and “we” may refer to Nippon Oil Corporation and its consolidated subsidiaries taken as a whole, or to all subsidiaries, affiliates, and associated companies considered part of the NOC Group taken as a whole. When the reference is only to Nippon Oil Corporation, the term “parent company” is used. These terms are used for convenience only. A listing of principal companies and their relationship to NOC is shown on page 56. 1 A MESSAGE FROM THE PRESIDENT Fumiaki Watari, President and Representative Director (CEO) Operating Environment Japan’s economy remained sluggish during fiscal 2003, ended March 31, 2003. Early in the year, exports were robust, and a trend of a decline in capital investment showed signs of ending. However, conditions in the Japanese economy remained harsh due to such factors as the continued weakness of personal consumption and a leveling off of the rise in exports. Trends in Japanese demand for petroleum products reflected trends in the Japanese economy. During the first half of fiscal 2003, demand was lower than in the first half of fiscal 2002. From the start of autumn, however, the suspension of operations at numer- ous nuclear power plants spurred a considerable rise in electric power companies’ demand for heavy fuel oil C. Subsequent cold waves led to a rise in demand for kerosene, causing total demand in fiscal 2003 to be higher than in the previous fiscal year. In distribution markets, the rising number of self-service-format service stations further intensified marketing competition and kept petroleum product prices weak. Reflecting these product demand trends, NOC’s consolidated net sales rose 6.0%, to ¥4,187.3 billion ($34,894 million). The combination of increasing sales volume and thor- oughgoing efforts to reduce costs and boost efficiency in all business segments—along with our use of the gross average method for inventory valuation, which slowed growth in the cost of sales stemming from the rising level of crude oil prices—caused consolidated operating income to rise ¥21.3 billion, to ¥96.5 billion ($804 million). Consolidated net income for the fiscal year amounted to ¥32.2 billion ($269 million), an increase of ¥8.2 billion. 2 Measures Taken during the Year Despite the recent temporary rises in domestic demand for heavy fuel oil C and kerosene, members of Japan’s oil industry realize they cannot anticipate a general rise in domestic demand for petroleum products over the medium term. This—along with the protracted domestic economic recession and deregulatory measures that are intensifying competition among companies based in different energy business sectors— makes it extremely important for oil companies to quickly and effectively reduce costs while taking measures to progressively broaden their profit bases. In view of these circumstances, the NOC Group has drafted its second medium-term consolidated management plan, which covers the three years through March 2005. This plan calls for the Group to strengthen its competitiveness by enhancing the profit- ability of its core business in petroleum products while concurrently creating new types of energy businesses. All Group units are concertedly working to achieve the plan’s goals. Looking back at our efforts to implement the plan since April 2002, as one means of enhancing profitability in petroleum product business, we arranged a refining tie-up with Idemitsu Kosan Co., Ltd., that has helped us optimize Group refining systems and boost refining efficiency. Regarding marketing, we have taken various steps to aug- ment the marketing power and competitiveness of our service stations. For example, we agreed to collaborate with Lawson, Inc., in developing new types of service station complexes, and we reduced the number of our service station management sub- sidiaries to 8, from 15 in July 2003. In line with our traditional management emphasis on environmental protection and product quality, we began marketing ENEOS VIGO, an essentially sulfur-free (10ppm or less) high-octane gasoline and low-sulfur (50ppm or less) diesel fuel, in advance of regulations mandating such low sulfur-content levels. Among our various achievements in new energy business fields, we completed the development of a 1kW-class, LPG-fueled fuel cell for household use and are proceed-