To Our Stakeholders. Your support and understanding, as always, will be much appreciated. Yorihiko Kojima President and CEO

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1 M E S S A G E To Our Stakeholders Yorihiko Kojima President and CEO I am pleased to report on Mitsubishi Corporation s (MC) operating results for the first half of fiscal 2007, ending March 31, For the first six months of the current fiscal year, MC posted net income of billion. Not only was this up 32% year on year, but it also marked the third straight year of record interim net income. This recordbreaking performance reflected continued strength in commodities prices, as well as higher operating income, dividend income and equity in earnings of affiliated companies-net and other main earnings items. This was also the reason for all-timehigh core earnings of billion, which bettered the previous mark set last year by 32%. Looking at businesses that contributed handsomely to our earnings, in addition to a strong performance in coking coal, there was a large increase in earnings from copper-related businesses on the back of sharply higher copper prices. In light of this stellar first-half performance, we have raised our projection for fiscal 2007 consolidated net income to billion, an increase of 30.0 billion from our initial forecast of billion. Regarding our dividend policy, we hope to increase direct returns to shareholders by paying dividends in line with operating results in each fiscal year, while adhering to a basic policy of using retained earnings to invest for growth that will ultimately maximize our corporate value. Based on this policy, we set the interim dividend per common share applicable to fiscal 2007 at 18, higher than the 17.5 forecast at the start of the fiscal year. Furthermore, we plan to pay an annual ordinary dividend of around 36 per common share, again higher than the 35 initially planned. However, this dividend is dependent upon MC achieving its current consolidated net income forecast for fiscal In April this year, we entered the second half of our four-year INNOVATION 2007 mediumterm management plan. Called the step period, these two years are positioned as a period for building on our achievements thus far to set the stage for taking MC to an even higher level of excellence in the subsequent jump stage. During this period, we will strengthen core businesses and also create new businesses that meet societal and customer needs. In tandem with these actions, we will implement measures to nurture and retain the people that we need to achieve sustained growth over the medium and long terms as well as reinforce internal systems. Your support and understanding, as always, will be much appreciated. November

2 Fiscal 2007 Interim Results Report Net Income by Segment and Core Earnings ( billions) Core Earnings* Consolidated Net Income bil. Up 32% FY2006 Interim FY2007 Interim FY2007 Forecasts Metals Energy Business New Business Initiative Chemicals Machinery Living Essentials Corporate Consolidated net income for the first half of fiscal 2007 rose 56.5 billion year on year. By segment, the largest contributor to this increase was the Metals Group. Indeed, the Metals Group alone saw its net income climb 45.9 billion to account for approximately 80% of the total increase in MC s consolidated net income. Behind this performance was a year-onyear increase of about 23.0 billion in earnings at Australian subsidiary Mitsubishi Development Pty., Ltd. (MDP), which produces and sells coking coal, a steelmaking raw material, as well as large increases in earnings from copper-related businesses in Chile and Peru. Based on sharply higher prices for metal commodities than were assumed at the start of the fiscal year and healthy growth of businesses in fields other than resources, MC decided to raise its projection of fiscal 2007 consolidated net income to billion, an increase of 30.0 billion from its initial forecast of billion. This revised net income would represent a 14% year-on-year increase. Core earnings = Operating income (before the deduction of provision for doubtful receivables) + Interest * expense-net + Dividend income + Equity in earnings of affiliated companies-net 2

3 In this section, we report on the major items in our interim results for fiscal 2007 and progress with INNOVATION 2007, our medium-term management plan. Changes in Shareholders Equity and Interest-bearing Liabilities ( billions) (Times) 4, , , , , , , , , , , , , , , March 31, 2004 March 31, 2005 March 31, 2006 September 30, Net Interest-bearing Liabilities* Total Shareholders Equity Net Debt-to-Equity Ratio Total shareholders equity rose billion from March 31, 2006 to 2,514.3 billion at September 30, Although MC recorded interim net income of billion, the increase in shareholders equity was only billion due to dividend payments of 37.1 billion and a decrease in net unrealized gains on securities available for sale of 45.2 billion in line with a decrease in unrealized gains on listed shareholdings. Net interest-bearing liabilities at September 30, 2006 were 3,118.5 billion, almost unchanged from March 31, As a result, the net debt-to-equity ratio improved 0.1 point to 1.2, as the strength of MC s balance sheet improved. Net interest-bearing liabilities is defined as gross interest-bearing liabilities minus cash and cash equivalents * and time deposits. The net debt-to-equity ratio is calculated by dividing net interest-bearing liabilities by total shareholders equity. 3

4 Progress With INNOVATION 2007 Review of the Step Period Investment Plan Progress with investment plans for the step period of INNOVATION 2007 may seem slightly behind schedule, but there are still many prospective projects and the sums involved per project are large. Furthermore, an increasing number of investment opportunities is being spawned by restructuring and integration moves in various industries. On the other hand, we are taking a more cautious stance than before in the deliberation and selection of new projects because many projects are in countries or regions where there are political, environmental or other difficulties. Strategic Field (1) Further Strengthening Core Businesses 2-year plan New Investments (Six months ended Sep. 2006) Business Expansion Driven by Additional Investments Energy Metal resources billion yen Sakhalin II, Australian coking coal operations, Australian LNG etc billion yen Food billion yen Capital expenditure at food related subsidiaries etc billion yen Automobile 50.0 billion yen Purchase of Isuzu Motors shares, investment in overseas sales company etc billion yen Overseas IPP billion yen 0 billion yen Other investments billion yen Purchase of Hokuetsu Paper Mills shares etc billion yen Strengthen Trading-related Businesses Steel products Chemical products etc billion yen Subscribed to private placement by Kinsho Corporation etc billion yen 1,050.0 billion yen billion yen Strategic Field (2) Creating New Businesses That Meet Societal and Customer Needs Industrial finance, medical and nursing care-related business billion yen Aircraft leasing etc billion yen Total 1,200.0 billion yen billion yen 4

5 INNOVATION 2007 Step Period Outlook Based on our past performance and the prevailing operating environment, we updated our plan for the step period in April We have positioned this two-year period as a period for taking MC to an even higher level of excellence in the subsequent jump stage. Our goal is create a framework during the step period for ultimately delivering consolidated net income of at least billion during the jump period. MC already expects to reach consolidated net income of billion for fiscal However, it is still uncertain as to whether natural resource prices will remain high. Crude oil, copper, aluminum and other commodity prices may drop temporarily. Even if that happens, we will still work to consistently deliver consolidated net income of at least billion during the jump period by expanding existing businesses and making new investments. Hop Step Jump P/L billion yen Consolidated Net Income billion yen billion yen billion yen billion yen or more ROE 10.7% B/S 13.4% 18.0% 15.9% Target an average ROE of 15% over medium and long term March 2006 Consolidated Total Assets: March trillion yen Other Assets Investment Assets 3.2 trillion yen Other Liabilities Interest-bearing Liabilities (Net) 3.1 trillion yen Shareholders Equity 2.4 trillion yen Investment Assets to Equity Ratio: 1.4 times Debt to Equity Ratio: 1.3 times Other Assets Investment Assets 4.4 trillion yen Liabilities Shareholders Equity around 3.0 trillion yen Investment Assets to Equity Ratio: target within 1.5 times the equity Debt to Equity Ratio: target within 2 times the equity Assumption of Assumption INNOVATION 2007 Foreign Exchange ( /US$) Interest (TIBOR)% 0.25 Crude oil price (US$/BBL) 26.0 Copper (US$/MT) 1,983 Aluminum 1,400 (US$/MT) Outlook ,027 2,484 5

6 GROUP INFORMATION Energy Business Group The Energy Business Group handles a wide range of energy, the source of light, heat and power. Hisanori Yoshimura Executive Vice President Group CEO, Energy Business Group Developing Business in All Domains of the Value Chain, From Upstream to Downstream The Energy Business Group literally fuels the development of industry and improvement in the quality of people s lives. We handle all forms of energy-gas, liquid and solid-that are the source of light, heat and power. Our expansive energy portfolio includes natural gas, including liquefied natural gas (LNG), crude oil, petroleum products, liquefied petroleum gas (LPG), petroleum coke, coal coke and carbon products. Our business model has just as far-reaching a presence. We are involved throughout the energy value chain, from the upstream sector to the downstream sector. We explore for, develop and produce oil and gas. We have investments in LNG liquefaction projects. We import and trade trilaterally. And we have interests in domestic trading and retail businesses. Today, we live in a world where the rising price of energy and depletion of natural resources are well-publicized issues. In response, we are also actively engaged in new energy businesses from the standpoints of securing long-term energy supplies, effectively using energy and protecting the environment. Requiring sophisticated technologies, these businesses include gas-to-liquid (GTL), biomass fuels, hydrogen supplies and fuel cells. Rising to the Challenge by Drawing on MC s Strengths This business group has always worked to remain at the leading edge of the energy industry. It is one of our hallmarks. We were instrumental in bringing the first LNG shipment to Japan, and we were first to introduce crude oil for use in power generation. The trading foundation we have built over the years, the relationships of trust we have with customers around the world, and the extensive network we have developed with major oil companies and primary gas/oil producing countries are some of our main strengths. These and other strengths will underpin our activities as we continue to rise to the various challenges in our industry in the years ahead. Realizing Our Growth Strategy by Unearthing New Business Opportunities As we do so, our actions will be guided by a 6

7 Energy Business Group Organization Group CEO Exploration & Production Unit Energy Business Development Unit Natural Gas Business Div. A Brunei Project Unit/Alaska Project Unit/Malaysia Project Unit/ Australia Unit/Indonesia Project Unit Natural Gas Business Div. B Oman Project Unit/Sakhalin Project Unit/Business Development Unit/ Global Gas Unit/U.S. Terminal Project Unit Petroleum Business Division Petroleum Retail Business Unit/Industrial Petroleum Marketing Unit/ Utility Feedstock Unit/Orimulsion Unit/Thermal Coal Unit/ Petroleum Feedstock Unit/International Petroleum Unit/ Refining & Supply Coordination Unit Carbon & LPG Business Division Carbon Materials Unit/Petroleum Coke Unit/LPG Business Unit/ Namikata Terminal Business Unit Main Group Companies Japan MC Exploration Co., Ltd. MPDC Gabon Co., Ltd. Celt Inc. Mitsubishi Shoji Sekiyu Co., Ltd. Onahama Petroleum Co., Ltd. Astomos Energy Corporation MC Carbon Co., Ltd. Namikata Terminal Co., Ltd. Sekiyu Cokes Kogyo Co., Ltd. Overseas Brunei LNG Sendirian Berhad Japan Australia LNG (MIMI) Pty. Ltd. Sakhalin Energy Investment Co., Ltd. Petro-Diamond Inc. Petro-Diamond Singapore (Pte) Ltd. basic philosophy unveiled in April 2005-to constantly create value and enhance MC s enterprise value with the aim of becoming a true global energy company that contributes to a stable energy supply. This lofty aspiration was our beacon as we engaged in various business activities during the past fiscal year to fulfill our mission of contributing to society through a stable energy supply. We tackled issues head on and we developed businesses with an international focus in regions around the world, including in Japan and elsewhere in Asia where energy demand is growing. As a result of these efforts and other factors, we posted net income of 75.1 billion in fiscal This was a record performance for this business group for the second straight year. On April 1, 2006, we entered the step period of INNOVATION As we begin the second stage of this business plan, dynamic change is taking place in our operating environment. The enforcement of the Kyoto Protocol, the run-up of oil and gas prices, the emergence of resource nationalism and rising geopolitical risks are some of the forces shaping our market landscape. In this era of change, the Energy Business Group is determined to realize its growth strategy by unearthing new business opportunities and seizing on chances. We will continue to set our sights even higher as we develop in step with society. New Structure for the Energy Business Group The oil and gas E&P, new energy development and natural gas businesses are growing businesses. To provide a detailed response to the expected growth going forward and strengthen these businesses, the Energy Business Group adopted a new structure at the beginning of April this year. An executive officer was appointed to be responsible for the oil and gas E&P and new energy development businesses and the natural gas business was split into two divisions: Natural Gas Business Division A and Natural Gas Business Division B. The former is engaged in the production, liquefaction, sale and logistics of LNG through existing LNG projects. The latter is aiming to establish new business models to capitalize on growth in the LNG market. To this end, it is working to quickly launch LNG projects currently under development and to participate in new projects. 7

8 GROUP INFORMATION Energy Business Group s Businesses In this section, we introduce some businesses belonging to the Energy Business Group, which handles a wide range of energy that is vital to the development of industry and improvement in the quality of people s lives. Petro-Diamond Risk Management Ltd. MC s Petroleum Business Division established Petro-Diamond Risk Management Ltd. (PDRM) in the U.K. in February PDRM provides consulting services rooted in MC s vast experience over many years in energy transactions. It also offers energy derivatives structured using the latest financial techniques to energy users as well as producers in Japan and overseas to help them hedge the risk of price fluctuations. Main Overseas Projects of the Energy PDRM (London) Sakhalin II Tunisia Libya Oman Malaysia Brunei Gabon Angola PDS/Diamond Tanker (Singapore) Tangguh Australia NWS Upstream oil and gas projects LNG (liquefaction and receiving terminals) Midstream and downstream oil projects 5th LNG Train in Western Australia Natural Gas Business Div. A is participating in the North West Shelf (NWS) Project in Western Australia through Japan Australia LNG (MIMI) Pty. Ltd., a joint venture with Mitsui & Co., Ltd. The NWS Project is in the process of expanding output by constructing a 5th LNG train with a capacity of approximately 4.2 million tonnes per year. Targeted to come on stream in mid-2008, this new capacity is expected to lift the NWS Project s total output from a 5-train production system to around 15.9 million tonnes per year. MC is entitled to receive 8.33% of this output in accordance with its equity interest in the project. 8

9 Energy Business Group U.S. LNG Receiving Terminal Natural Gas Business Div. B is planning to construct an LNG receiving terminal by 2011 at the Port of Long Beach in California, U.S., under a joint development agreement with oil major ConocoPhillips. Currently, the project is in the process of applying for approval from authorities to construct the facility. With demand for gas in the U.S. expected to rise steadily in the years ahead, this terminal will be a key asset in MC s plans to sell upwards of 6 million tonnes of LNG per year to the West Coast of the U.S. Business Group PDI (Irvine, California) U.S. West Coast Gulf of Mexico Gulf of Mexico Through a wholly owned U.S.- based subsidiary, the Exploration & Production Unit is engaged in crude oil and gas E&P operations in the Gulf of Mexico, U.S. At present, these operations are producing approximately 8,000 BOE (barrels of oil equivalent) per day. In fiscal 2006, MC commenced oil production as an operator for the first time in the Mustang Island Block 726. Frontier Energy Niigata Co., Ltd. Frontier Energy Niigata Co., Ltd. is an electricity wholesaler established in June 2003 by MC s Carbon & LPG Business Division with Nippon Steel Corporation and Nippon Oil Corporation. This joint venture has constructed the world s first thermal power station that burns petroleum coke at the Niigata East Port. Boasting output of 110,000kW, the plant commenced commercial operations in July 2005 following trial operations of about three months. MC is supporting the operations of Frontier Energy Niigata by supplying petroleum coke and helping to recycle by-products (combustion ash) of the power generation process. 9

10 Overseas Feature: Russia Establishing a Stronger Presence in the Fastgrowing Russian Marketplace With Enhanced Business Models In July this year, Russia reaffirmed its presence on the world stage as the host country for the G8 Summit, which was held in the city of Saint Petersburg. A revitalized Russia is attracting attention as a country rich in natural resources. MC has been doing business in this country for more than four decades, dating back to In this overseas feature section, Tetsuaki Omura, General Manager of MC s Moscow Office, looks at the current state of affairs in Russia and MC s businesses. Tetsuaki Omura General Manager, Moscow Office A Growing Economy Backed by Abundant Natural Resources The country of Russia, which stretches from Asia in the east to Europe in the west, is 45 times the size of Japan and close to twice as expansive as the U.S. It is an immense country. It is also a country steeped in history and the arts, which is matched in extensiveness by the natural landscape. Anybody who knows Russia cannot help but be impressed. Among its wonders, Russia s arts, including classical ballet, are world renowned. The Bolshoi Theatre, with a history of more than two centuries, is famed for its opera and ballet. Russia s economy marked a major turning point in 1999 and has grown rapidly since, with real GDP growing at a high rate of 6 to 8% over the past few years. The driving force behind this growth has been natural resources. Russia produces as much oil as Saudi Arabia and it boasts far more reserves of natural gas than any other country in the world. Around one-quarter of Europe s electricity is generated using Russian natural gas. With a strong economy backed by abundant natural resources, Russia also has a growing, relatively wealthy middle class, which is supporting strong growth in demand for consumer goods. This perhaps shows that some of the wealth of natural resources is reaching ordinary citizens in a country that has the smallest population of the four so-called BRICs nations. Now that Russians have firmly taken to shopping, Russia has emerged as an extremely attractive consumer market. 10

11 Provideniya Murmansk Kaliningrad Arkhangelsk Saint Petersburg Norilsk Magadan Moscow Nizhnii Novgorod Kazan Yekaterinburg Volgograd Chelyabinsk Omsk Rostov Sochi Astrakhan Russian Federation Novosibirsk Krasnoyarsk Irkutsk Yakutsk Yuzhno-Sakhalinsk Khabarovsk Major Cities of the Russian Federation ( denotes MC offices) Vladivostok Moscow Office (4F of the building in the foreground) Adopting a More Aggressive Business Approach MC s past approach to business in Russia has been simple. We have purchased mineral resources and other products from Russia for sale through our network, as well as sold goods, machinery and other items needed by Russian customers. However, this business model alone cannot hope to succeed in the Russian market going forward. Indeed, we must transform our business models. In the resource field, for example, it is imperative that we get ourselves involved in projects development. In short, a more aggressive approach to business, whereby we play more of a leading role, is essential. We are therefore implementing three strategies to create such business models in Russia. The first of these strategies is to become comprehensively involved in projects. The idea is to utilize MC s various functions, including finance and logistics, to provide multiple functions matched to the needs of customers and thereby participate together with them in projects. The second strategy is to have greater involvement within the The staff of the Moscow Office with MC president Yorihiko Kojima on his visit in April this year. Russian domestic market. In the consumer goods business, for example, our aim is to entrench our position in markets by building value chains locally and through other actions. Taking on risk in a measured way is the third strategy. Through detailed analysis of country risk and market risk, we will actively take on risk. Organically combining these three strategies, we are determined to create new value by strengthening our approach to business, with a particular focus on the resource field and consumer field, including automobiles. The Moscow Office is providing support to maintain cordial relations with Russia in the Sakhalin natural gas project. We are committed to creating the environment for making this project a success. In the automobile field, sales reached 100,000 vehicles, including Mitsubishi Motors-brand vehicles, in the year ended March 31, Given that this market is expected to grow, we aim to expand our business further going forward. 11

12 An Introduction to MC s Main Businesses in Russia Sakhalin II Oil and Gas Development Project MC is engaged in an oil and gas development project on Sakhalin, Russia, with the Royal Dutch/Shell Group and Mitsui & Co., Ltd. through Sakhalin Energy Investment Co., Ltd. Construction of this project, the first in Russia to produce LNG on Sakhalin Island close to Japan, is employing around 20,000 people from around the world. Work is proceeding toward the commencement of LNG production in an extremely harsh climate where the temperature can drop to more than 30 degrees Celsius below zero during midwinter. LNG plant (under construction) MC employees seconded to Sakhalin Energy Investment Co., Ltd. (from left) Mr. Asada, Mr. Yamagata, Mr. Oyama, Mr. Onishi and Mr. Yokoyama, and (far right) Mr. Oishi, General Manager Yuzhno-Sakhalinsk Office Mitsubishi Motors Sales Business Mr. Akimoto, General Manager, Automobile Department, Moscow Office MC began selling Mitsubishi Motorsbrand automobiles in Russia in 1991 and has continued to conduct activities locally with Russian partner ROLF. These efforts led to a rapid increase in sales units starting in around 2000, with sales nearly doubling every year since Today, Russia is the largest market for Mitsubishi Motors-brand automobiles in Europe. Inside one of ROLF s Mitsubishi dealerships on a busy weekday Toyo Tires Sales Business The luxury car market is growing in Russia as the country s economy grows. Against this backdrop, MC is increasing sales of Toyo Tires, which are becoming established as a high-grade product in this market. MC is actively striving to create an even stronger operating base to continue to drive further growth in this business. Mr. Akimoto is in charge of this business The Toyo Tires booth at the Moscow Motor Show 12

13 Overseas Feature : Russia The State Hermitage Museum The State Hermitage Museum is counted among the three largest art museums in the world and is one of Saint Petersburg s main attractions. It boasts around 2.5 million objects of art, which have been collected since the reign of Empress Elizabeth Petrovna (1741 to 1762). The State Hermitage Museum comprises five buildings, including the Winter Palace, home to the Russian tsars. The museum would measure 27 kilometers in length if all of its 1,050 rooms were joined. Sights and Cuisine in Russia The Golden Ring The region extending northeast from Moscow to the Volga River is dotted with beautiful ancient towns such as Sergiyev Posad and Vladimir that give visitors a taste of what Russia was like during the Middle Ages. Among the towns of this region, which is known as the Golden Ring, is the town of Suzdal. Located approximately 220 kilometers northeast of Moscow and set in picturesque natural surrounds, Suzdal is renowned for its many monasteries and churches built between the 12 and 15th centuries. Russia abounds with attractive art objects and architectural structures that evoke a sense of the country s magical nature and deep history. Visitors can also savor a wonderful array of home cooking with distinct regional tastes. Borscht and Piroshki Borscht is a Russian soup made of beet roots, cabbage and other ingredients. Each region has its own taste, with Borscht made in Russia different to that made in the Ukraine. Piroshki are small baked dumpling-like buns made of flour and stuffed with meat and vegetables. They are a staple food in Russia. Matryoshka Matryoshki (plural form of Matryoshka) are wooden dolls that are synonymous with Russian handicraft. Separating into top and bottom parts, they consist of a set of smaller dolls that fit inside one another. Matryoshka is a Russian nickname for the woman s name Matryona. It is common for these nested dolls to be designed with a farm woman carrying a bundle of grain and sickle in her hands. 13

14 MC s Social Contribution Activities A fundamental principle of MC s corporate culture is to contribute to the wealth of societies by growing with the local and international communities in which we work. Our basic principles on CSR issues are guiding factors in setting our corporate policies. Based on these policies and the watchwords employee effort and continuity, we develop CSR activities in a wide range of fields. We also actively support the participation of employees in philanthropic activities. MC is also committed to contributing to society in a way that meets local needs in order to help the development of local communities globally. Regional Environments Social Welfare Basic Policy on Social Contributions We engage in a wide range of activities that contribute to communities around the world based on an awareness of our responsibility to be a good corporate citizen. Global Communication Culture and Art Education MC conducts various activities that not only address the needs of each regional community but also give consideration to social conditions and cultural and historical backgrounds. In Japan, MC has sponsored the Friendship Camp for Mothers and Children continuously since This annual program is arranged for single-parent mothers and their children living in the Tokyo metropolitan area. In addition, MC runs a soccer school for children in the care of local welfare institutions and has supported Japan Sun Industries and Tokyo Colony, social welfare corporations that employ physically disabled staff, since On a global level, MC launched its Tropical Forest Regeneration Project in Malaysia in MC also helps local communities through such programs as the Overseas Regional Contributions Program and the MC International Scholarship. Moreover, we also support various environmental protection projects through our U.S.-based Mitsubishi International Corporation Foundation and Friendship Camp for Mothers and Children FC Tokyo Soccer School MC International Scholarship (University of the Witwatersrand, South Africa) 14

15 Global Coral Reef Conservation Project Project Locations Project length:approximately six years starting from fiscal 2005 Research conducted from centers covering the three regions of Japan, the Americas and Europe/Africa Japan:Okinawa Prefecture Republic of Seychelles the Mitsubishi Corporation Fund for Europe & Africa. In the year ended March 31, 2006, MC launched the Global Coral Reef Conservation Project, as part of its 50th anniversary initiatives. MC also makes an effort to support the participation of employees in volunteer activities. Initiatives to date include the establishment of a paid-leave program for employees to participate in volunteer activities and of an internal program called MC Volunteer Activity! In the later program, employees earn points for their volunteer activities which are later converted into monetary amounts. The money accumulated at the end of the year is then donated by MC to social welfare and other organizations. Tropiacal Forest Regeneration Experimental Project (Malaysia) Overseas Regional Contributions Program (Support for Singapore Zoo) Employee Volunteer Activities (Creation of picture books for developing countries) About MC s CSR and Social and Environmental Activities Further information can be found in our sustainability report as well as on our website at: Sustainability Report