IDEMITSU KOSAN CO.,LTD. ANNUAL REPORT 2016 Year Ended March 31, 2016 Topics in Fiscal Year 2015
2015 Jun. • Successful appraisal well in the Norwegian Barents Sea Aug. • Completion of Boggabri Coal Mine Expansion Project Oct. • Short-term flow test of exploratory wells for geothermal energy development in Amemasudake area, Hokkaido, Japan • Production capacity increase at the lubricants plant in China Nov. • Idemitsu and Doosan agree to form cooperative partnership in OLED material business • Entered into Memorandum of Understanding with Showa Shell Sekiyu K.K. for the Business Integration
2016 Jan. • Increasing the production capacity for SPS resin XAREC® Feb. • Establishment of Himeji Natural Gas Power Generation Co., Ltd. with Osaka Gas., Ltd. • Opening of first commercial hydrogen station Mar. • Construction begins on one of Japan’s largest geothermal binary power plants • Reached an agreement on financing by subordinated loans
Contents 02 Financial Highlights 23 Material Agreements, etc. 04 To Our Stakeholders 24 Corporate Governance 17 Management Philosophy 34 Directors, Audit & Supervisory Board Members and Executive Officers 18 At a Glance 35 Financial Section 20 Research & Development 92 Investor Information Contribute to society with harmony between the economy and the environment by effectively securing and using energy and by developing functional materials.
Idemitsu Kosan Co.,Ltd. was founded in Moji, Kita-Kyushu in 1911 under the name Idemitsu Shokai to engage in oil distribution. Since its foundation, Idemitsu has worked hard under the fundamental principle of social contribution through business, always maintaining respect for human beings in carrying out business operations. During its 105-year history, the Company has utilized its expertise globally in a wide range of strategic businesses, such as petroleum products, petrochemical products, oil exploration and production, coal, and other businesses. The Idemitsu Group strives to contribute to the creation of a recycling society of the future by focusing on development of businesses in these elds.
Petroleum Products 77.1% • Fuel oil • Lubricants • Transportion of oil
Petrochemical Products 14.6% • Basic chemicals • Performance chemicals NET SALES • Engineering plastics • Plastic processed products ¥3.6 trillion Resources 6.3% • Oil exploration and production • Coal • Geothermal resources • Uranium
Others 2.0% • Electoronic materials • Agricultural biotechnology Note: FY and fiscal year indicated in this annual report refer to the fiscal year from April 1 to March 31 of the following year.
CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS This annual report contains forward-looking statements concerning the future plans, strategies and performance of Idemitsu Kosan Co., Ltd. These forward-looking statements are not historical facts; rather, they represent assumptions and beliefs based on economic and financial data available as of the publication date. Actual operating results may therefore differ substantially from the Company’s expectations due to various factors, including but not limited to the following: (1) global economic conditions; (2) social trends; and (3) changes in the Company’s competitiveness caused by fluctuation of demand for its products and services.
ANNUAL REPORT 2016 01 Financial Highlights
Idemitsu Kosan Co.,Ltd. and Consolidated Subsidiaries Fiscal years ended March 31
Thousands of Millions of yen U.S. dollars*
FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2015 For the year Net sales ¥4,310,348 ¥4,374,696 ¥5,034,995 ¥4,629,732 ¥3,570,202 $31,684,434 Operating income 138,078 110,684 78,197 (104,798) (19,643) (174,326) Net income 64,376 50,167 36,294 (137,958) (35,993) (319,427) Net cash provided by operating activities 159,723 50,780 50,087 172,904 216,368 1,920,199 Net cash provided by investing activities (59,092) (70,891) (179,811) (131,146) (98,052) (870,181) Net cash provided by financing activities (79,462) (45,657) 161,143 (98,253) (105,581) (936,999) Capital expenditures 64,244 71,020 107,472 147,406 57,630 511,448 Depreciation and amortization 61,062 53,988 63,120 66,744 80,282 712,478
At year-end Total assets 2,682,139 2,728,480 2,995,063 2,731,001 2,402,118 21,318,051 Total equity 614,513 687,948 743,786 630,384 537,660 4,771,565 Interest–bearing debt 919,807 896,380 1,081,931 1,006,207 909,586 8,072,293
Per share data** Net income per share 1,609.83 1,254.51 226.90 (862.50) (225.03) (2.00) Net assets per share 14,668.18 16,343.31 4,391.46 3,671.39 3,129.93 27.78 Cash dividends per share 200.0 200.0 125.0 50.0 50.0 0.44
Ratios Return on invested capital (ROIC)*** (%) 9.6 7.7 5.4 (5.6) (0.1) — Return on equity (ROE) (%) 11.7 8.1 5.4 (21.4) (6.6) — Shareholders’ equity ratio (%) 21.9 24.0 23.5 21.5 20.8 — Net debt/equity ratio (times) 1.3 1.2 1.3 1.5 1.6 —
Other data Number of shares issued (thousands of shares)** 40,000 40,000 160,000 160,000 160,000 — Number of employees (people) 8,243 8,684 8,749 8,829 9,203 — * Solely for the convenience of the reader, the consolidated financial statements as of and for the year ended March 31, 2015 have been translated into United States dollars at the rate of ¥112.68 = U.S.$1, the approximate rate of exchange prevailing on March 31, 2016. This translation should not be construed as a representation that all the amounts shown could be converted into U.S. dollars. ** The Company conducted a 1:4 stock split on its common shares with the effective date of January 1, 2014. Cash dividends per share of FY2013 are calculated under the assumption that the stock split had been conducted at the beginning of FY2013. *** ROIC = Operating income****/(total equity + interest - bearing debt) **** Operating income used to calculate ROIC includes equity in earnings/losses of affiliated companies and dividend income.
02 ANNUAL REPORT 2016 Net Sales Operating Income Net Income
Billions of yen Billions of yen Billions of yen 6,000 150 60
125 5,000 40 100 4,000 20 75
3,000 50 0
25 2,000 -20 0 1,000 -40 -25
0 -100 -140 11 12 13 14 15 FY 11 12 13 14 15 FY 11 12 13 14 15 FY
Shareholders’ Equity Interest-Bearing Debt Total Assets Shareholders’ Equity Ratio Net Debt/Equity Ratio
Billions of yen Billions of yen % Billions of yen Times 3,000 900 30 1,200 6
2,500 750 25 1,000 5
2,000 600 20 800 4
1,500 450 15 600 3
1,000 300 10 400 2
500 150 5 200 1
0 0 0 0 0 11 12 13 14 15 FY 11 12 13 14 15 FY 11 12 13 14 15 FY
Shareholders’ Equity Interest-Bearing Debt Shareholders’ Equity Ratio Net Debt/Equity Ratio
Shareholders’ equity = Equity – Minority interests in consolidated subsidiaries Shareholders’ equity ratio = Shareholders’ equity/Total assets ROE = Net income/Average of shareholders' equity at beginning and end of period Net Debt/Equity Ratio = (Interest-bearing debt - cash and cash equivalents and marketable securities)/shareholders' equity
ANNUAL REPORT 2016 03 To Our Stakeholders
Analyses of Operating Results and Financial Position
(1) ANALYSIS OF OPERATING RESULTS
1) GENERAL ECONOMIC CONDITIONS AND ENVIRONMENT SURROUNDING THE IDEMITSU GROUP
During the fiscal year ended March 31, 2016, the Japanese economy, including share prices, had shown a steadily growing trend up until the end of 2015 underpinned by the favorable environment for corporate earnings. However, moving into 2016, the economy had been showing a sign of stagnation, amid growing uncertainty over the Chinese economy and the slowdown in emerging-market economies. The domestic overall demand for petroleum products during fiscal 2015 fell short of its year-earlier level. While demand for transportation fuel, such as gasoline, almost unchanged from the prior fiscal year, demand for kerosene and heavy fuel oil for the power industry decreased, hit by the unusually warm winter. Dubai crude oil prices remained on an upward trend around the spring of 2015. However, they started to drop in the summer on account of a cloudy outlook for China’s economy triggered by the devaluation of the yuan and OPEC’s unwillingness to cut its oil production. The pace of the drop accelerated when OPEC decided at a general assembly held in early December 2015 not to make supply and demand adjustment through reduction in oil production, and the prices temporarily plunged below $30/bbl. Consequently, the average price of Dubai crude oil for fiscal 2015 plummeted $37.9/bbl from the preceding year to $45.5/bbl. Demand for petrochemical products during fiscal 2015 remained consistent with the previous fiscal year. Domestic production fared relatively well supported by a decrease in import volume due to the weaker yen. The price for naphtha, a petrochemical raw material, tumbled by $332/ton from a year earlier to $486/ton. The average exchange rate of the Japanese yen to the US dollar for fiscal 2015 decreased by ¥10.2/$ from the last fiscal Takashi Tsukioka year to ¥121.1/$ due to the further weakening yen, mainly Representative Director & Chief Executive Officer attributable to the continued monetary easing policy of the Bank of Japan and expectations for interest rate rises in the US.
04 ANNUAL REPORT 2016 Crude Oil Price 2) OPERATING RESULTS
USD/bbl Dubai Under these circumstances, the Idemitsu Group’s net sales for 120 fiscal 2015 were ¥3,570.2 billion, down 22.9% from the prior fiscal year, due mainly to drops in crude oil prices.
100 Operating loss was ¥19.6 billion, affected chiefly by the effect of inventory valuation associated with a plunge in crude
80 oil prices and the contracted margins of petroleum products. However, supported primarily by lower costs stemming from
60 declining crude oil prices, operating loss improved by ¥85.2 billion, compared with the previous fiscal year.
40 Net non-operating expenses decreased by ¥0.6 billion from the prior fiscal year to ¥2.3 billion due mainly to increased
20 equity in earnings of nonconsolidated subsidiaries and affiliates. 14 15 FY Ordinary loss improved by ¥85.7 billion from a year earlier, to 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q ¥21.9 billion. Net extraordinary loss was ¥33.1 billion, representing a year- on-year reduction of ¥36.4 billion, helped chiefly by decreased impairment loss in the resources business. Consolidated Operating Income In addition, the Company recorded income tax credit of ¥18.6 billion and net loss attributable to noncontrolling interests Billions of yen of ¥0.4 billion. 150 As a result, net loss attributable to owners of the parent was ¥36.0 billion, an improvement of ¥102.0 billion from the 120 previous fiscal year. 90
60
30
0
-30
-100 11 12 13 14 15 FY
ANNUAL REPORT 2016 05 Volume of Crude Oil Processed 3) PROGRESS AND RESULTS OF BUSINESS Utilization Rate PETROLEUM PRODUCTS SEGMENT Volume of Crude Oil Processed Utilization Rate (Calender-Day Basis) In the petroleum products segment, the Company set as its 1,000 kiloliters % basic strategy the reinforcement of the competitiveness of the 35,000 100 domestic supply and marketing systems and the expansion of business in overseas markets, and took the following actions: 30,000 80 25,000 Fuel oil business 60 In the supply of petroleum products, the Company carried 20,000 out crude oil processing taking the supply-demand and sales 15,000 40 conditions into account and strived to promote reductions in
10,000 supply costs while securing a stable supply of products. In 20 light of a steadily decreasing trend of domestic demand, the 5,000 Company cut the crude distillation unit capacity of the Chiba
0 0 Refinery by 20,000 bbl/day in April 2015. At the same time, it 11 12 13 14 15 FY enhanced products import capacity in Hokkaido and products export capacity in Aichi, thereby improving its ability to quickly respond to changes in domestic demand and supply. In the marketing and sales of petroleum products, the Company reinforced the service stations network through the opening of new service stations and the remodeling and Fuel Product Sales Volume revitalization of existing ones. It also started to allow holders of (Total volume of domestic sales) Rakuten Inc.’s Point Card to earn and use their Rakuten points at its service stations. Furthermore, the Company commenced 1,000 kiloliters participation in the au WALLET reward program launched by 30,000 KDDI CORPORATION and granted shopping points to members
25,000 of the program, in an attempt to increase customer convenience by leveraging the strength of its nationwide network. 20,000 As for business efforts in overseas markets, the Company further proceeded with the construction of the Nghi Son 15,000 Refinery and Petrochemical Complex in Vietnam, with a view to
10,000 embarking on commercial production in fiscal 2017. In addition, the Company addressed the expansion of 5,000 its business in Asia where demand is growing, by further enhancing the organization of IDEMITSU INTERNATIONAL 0 11 12 13 14 15 FY (ASIA) PTE. LTD., a subsidiary in Singapore.
06 ANNUAL REPORT 2016 To Our Stakeholders
Lubricants business Lubricant Sales Volume In fiscal 2015, the total amount of lubricants sold in Japan and
1,000 kiloliters Domestic abroad surpassed 1.1 million kiloliters, hitting an all-time high. Overseas 1,500 Moreover, in order to further promote the business globally, the production capacity was increased at the lubricants plant in Tianjin in China where the Company owns six operating 1,200 bases, thereby meeting growing demand for high-performance lubricants in that country. 900
Consequently, net sales of the petroleum products segment 600 for fiscal 2015 fell 25.5% year-on-year to ¥2,752.7 billion, owing primarily to decreases in crude oil prices. Operating loss 300 was ¥67.4 billion on account of effect of inventory valuation and other factors. However, operating loss improved by ¥44.3 0 11 12 13 14 15 FY billion, compared with the previous fiscal year, due to favorable factors, such as reduced costs associated with lower crude oil * Includes sales of overseas licenses prices, which were partially offset by such factors as decreased margins in petroleum products. Loss arising from inventory valuation included in operating loss was ¥118.6 billion.
PETROCHEMICAL PRODUCTS SEGMENT In the petrochemical products segment, the Company set as its basic strategy the reinforcement of the competitiveness of the basic chemicals business through restructuring of the supply system and enhancement of the profitability of the performance materials business, and took the following actions:
Basic chemicals business In the basic chemicals business, the Company endeavored to strengthen its competitiveness through measures such as importation of larger-sized lots of naphtha and start of acceptance of open-spec naphtha. It also maintained stable operation of major facilities and equipment such as manufacturing facilities for ethylene and aromatic compounds, thereby ensuring a stable supply of olefin and aromatic compounds to petrochemical complexes as well as for the manufacture of the Company’s derivative products.
ANNUAL REPORT 2016 07 Performance materials business Petrochemical Products Sales Volume In the engineering plastics business, the Company had pressed 1,000 tons ahead step by step since 2013 with the consolidation of the ® 4,000 production of polycarbonate resin (Product name: TARFLON ) into Formosa Chemicals & Fibre Corporation (“FCFC”) of 3,500 Taiwan to which the Company had granted a license. In fiscal 3,000 2015, the consolidation of the production of a special grade of 2,500 polycarbonates into FCFC was completed and the operation
2,000 of polycarbonate production facility at the Chiba Plant came to a halt in December 2015. These moves helped the 1,500 Company build stable supply systems with greater competitive 1,000 advantages. With regard to syndiotactic polystyrene resin ® 500 (Product name: XAREC ), which has excellent properties such
0 as superior heat resistance, used for electrical components 11 12 13 14 15 FY for vehicles and mobile devices, the Company had funneled its efforts into research to find new applications and decided to expand the annual production capacity of the Chiba Plant from 7,000 tons to 9,000 tons. In the adhesive materials business, the Company has been planning to construct, in cooperation with FCFC of Taiwan, a new plant to manufacture hydrogenated petroleum resin (Product name: I-MARV®), whose demand has been on the rise as an excellent tackifier for hot-melt adhesives, in order to suit growing customer needs. The Company also strived to expand both domestic and overseas markets for functional soft polypropylene (Product name: L-MODU®), which has a melting point that is significantly lower than that of existing crystalline polypropylene, while conducting research to find product applications other than its traditional use as an adhesive for sanitary items and a modifier for non-woven fabrics.
Consequently, net sales of the petrochemical products segment for fiscal 2015 were ¥520.8 billion, down 18.5% year-on-year, due mainly to drops in naphtha prices. Operating income was ¥42.3 billion, representing an improvement of ¥49.4 billion from the prior fiscal year, supported by reduced costs deriving from lower crude oil and naphtha prices as well as the solid performance of overseas markets. Loss arising from inventory valuation included in operating income was ¥3.5 billion.
08 ANNUAL REPORT 2016 To Our Stakeholders
RESOURCES SEGMENT
In the resources segment, the Company set as its basic strategy the securing of reserves and continuation of stable production of crude oil and gas through exploration activities while making cost-paring efforts and carefully selected investments and the reinforcement of the competitiveness of existing mines by cost reduction and other measures and the restructuring of the coal business through portfolio management, and took the following actions:
Oil exploration and production business Crude Oil Production* In the exploration and production of new oil fields, the 1,000 barrels per day Norway Company commenced commercial production at the Knarr oil UK 40 field in the Norwegian North Sea in March 2015. Vietnam With regard to exploration activities, the Company conducted a survey on the accumulations of oil and gas discovered in the 30 Norwegian Barents Sea and the waters off Vietnam in 2014, and carried out studies toward future development. Moreover, the
20 Company acquired licenses of two blocks, offshore south-west Vietnam, thereby securing strategic reserves for the long term. Including production which had begun at the new oil fields, 10 the Company produced crude oil and natural gas in an amount of 36 thousand barrels (up 7 thousand barrels from a year earlier) of crude oil-equivalent per day in the Norwegian North 0 11 12 13 14 15 FY Sea, the UK North Sea, and Vietnam. *Based on interest owned by Idemitsu Group Net sales of the oil exploration and production business for fiscal 2015 plummeted by 27.2% from the prior year to ¥74.3 billion, affected mainly by a significant drop in crude oil prices. Operating loss was ¥2.9 billion, a decline of ¥16.3 billion from the preceding fiscal year, as favorable factors such as weakened currencies of commodity countries were more than offset by such factors as lower crude oil prices.
ANNUAL REPORT 2016 09 Coal business and others Regarding the coal business, the Company made efforts to enhance the competitiveness of its Australian mines amid stagnant coal prices. In line with the completion of the installation of coal preparation facilities and works to expand production scale at the Boggabri Mine, the Company’s core coal mine in Coal Production* Australia, a structure that ensures stable production of coals of high quality meeting market needs had been established. In Muswellbrook mine Boggabri mine addition, the Company strived to improve productivity and cut Ensham mine Tarrawonga mine costs at all of its mines in Australia and Indonesia. Malinau 1,000 tons As for the uranium business, the Company put on the market 12,000 uranium concentrates produced at the Cigar Lake Mine in Canada. With regard to the geothermal energy business, the 10,000 Company continued the smooth operation in the Takigami area in Oita prefecture and began constructing a binary cycle 8,000 power station in the area. In addition, the Company drilled an
6,000 exploratory well and conducted a short-term flow test in the Amemasudake area of Hokkaido, where it had been carrying 4,000 out surveys aimed at expanding the business, and had been proceeding with the drilling of an exploratory well in the Oyasu 2,000 district of Akita prefecture. The Company had also been conducting ground surface research in the Bandai district of 0 11 12 13 14 15 FY Fukushima prefecture. *Based on interest owned by Idemitsu Group Net sales of the coal business and others for fiscal 2015 increased 9.5% from a year earlier to ¥152.3 billion due to increased domestic sales volume, which was partially offset by drops in coal prices. Operating income was ¥2.3 billion, an improvement of ¥2.6 billion from a year earlier, as favorable factors such as weakened currencies of commodity countries and the effect of cost reduction exceeded such factors as decreases in coal selling prices.
As a result, total net sales of the resources segment slid by 6.0% year-on-year to ¥226.5 billion with operating loss of ¥0.6 billion, a decline of ¥13.7 billion from the preceding fiscal year.
10 ANNUAL REPORT 2016 To Our Stakeholders
OTHER SEGMENTS
Among other segments, as for the electronic materials business, the agricultural biotechnology business, the gas business, and the renewable energy business, the Company had achieved the following:
Electronic materials business In the field of OLED materials, with the aims of cutting OLED manufacturing costs, increasing product competitiveness, and creating new OLED materials, the Company had concluded with Doosan Corporation of Korea a memorandum of understanding concerning mutual utilization of both companies’ patents and their cooperation in manufacturing in the area of OLED materials. In addition, opening an office in Shanghai, China, having a great potential as an OLED display manufacturing location, the Company improved customer service through an enhanced user-centered approach and reinforced operations as one of the largest OLED manufacturers, thereby striving to actively capture demand from the growing display industry.
Agricultural biotechnology business In the field of agricultural and greening materials, the Company launched across the country “IDESURF®,” which helps water infiltrate into the soil quickly and evenly and supplies turf grass roots with an adequate amount of water. In the field of feed additives, applying the technologies related to the “RUMINUP®” series, existing product lines for cows and beef cattle, to new feed mix for chickens, the Company had developed and launched “Crosstop® (for chickens),” which keeps chickens’ intestinal environment in good condition.
Gas business In order to move ahead with study on and preparation for the natural gas power generation business, the Company had decided to establish Himeji Natural Gas Power Generation Co., Ltd. jointly with Osaka Gas Co., Ltd. at the site of the Company’s former Hyogo Refinery (Himeji city, Hyogo prefecture), in April 2016. Regarding the Asia-bound shipment of LNG (liquefied natural gas) from North America by AltaGas Idemitsu Joint Venture Limited Partnership (“AIJVLP”), which the Company established jointly with AltaGas Ltd. of Canada, its commercialization had been suspended for the time
ANNUAL REPORT 2016 11 being. On the other hand, Petrogas Energy Corp., whose shares the Company holds through AIJVLP, endeavored to enhance exports and increase export volume of LPG (liquefied petroleum gas) from the Ferndale terminal (the State of Washington) on the West Coast of the US to Japan.
Renewable energy business As part of efforts to utilize idle land in the renewable energy business, the Company operates solar power generation facilities (mega-solar power plants) in Kitakyushu city, Fukuoka prefecture; Himeji city, Hyogo prefecture; and Iwaki city, Fukushima prefecture. In August 2015, the Company expanded mega-solar power generation facilities in Moji (Kitakyushu city, Fukuoka prefecture). In the field of biomass power generation, the Company constructed the Tosa Power Plant of Tosa Green Power Co., Ltd. with the output capacity of 6,250 kW, whose shares are held by Tosa Electric Railway Co., Ltd., Kochi Prefecture Federation of Forest Owner’s Cooperative Associations and the Company. The Company has a 50% interest in Tosa Green Power Co., Ltd. and the power plant started operation in April 2015. Furthermore, Fukui Green Power Co., Ltd., in which the Company has a 50% interest, starts operation in April 2016.
As a result, net sales for other segments for fiscal 2015 increased by 25.9% to ¥70.2 billion, and operating income increased by 167.8% to ¥8.8 billion, compared with the preceding fiscal year.
4) FORECASTS OF CONSOLIDATED FINANCIAL RESULTS FOR FY2016
The Company expects net sales for fiscal 2016 to be ¥3,260.0 billion, a decrease of 8.7% compared with FY2015, due mainly to expected decrease in average crude oil prices during the fiscal period. Operating income is expected to be ¥113.0 billion, an improvement of ¥132.6 billion, due to an expected recovery of petroleum product margins and the effect from inventory valuation turning into gain from loss, and ordinary income is expected to be ¥112.0 billion, an improvement of ¥133.9 billion compared with FY2015. Net extraordinary loss is expected to be ¥7.0 billion, a reduction of loss of ¥26.1 billion compared with FY2015, due largely to a decrease in impairment loss. Net income attributable to owners of the parent is expected to be ¥70.0 billion, an increase of ¥106.0
12 ANNUAL REPORT 2016 To Our Stakeholders
billion compared with the prior fiscal year.
The above forecasts for the fiscal year ending March 31, 2017 are based on the assumptions below: Dubai Crude Oil Price: US$45 per bbl Foreign Exchange Rate: ¥110 per US$
Dividend per Share (2) BASIC POLICY ON DISTRIBUTION OF PROFITS/DIVIDENDS FOR FY2015 AND Yen FY2016 200 The Company considers the return of profits to shareholders as one of the most important matters and intends to pay 150 stable dividends to shareholders, taking into consideration the strategic investment to enhance existing businesses and to develop future business operations, the improvement of the 100 corporate financial structure, and the business performance. With respect to the year-end dividends for fiscal 2015, the 50 Company determined to pay a dividend of ¥25 per share. As a result, annual dividends for the fiscal year ended March 31, 2016 are ¥50 per share. 0 12 13 14 15 16 FY The Company’s Articles of Incorporation stipulate that the plan Company may, by a resolution of the board of directors, make a distribution out of the Company’s surplus to shareholders pursuant to the provision of Article 459, Paragraph 1 of the Companies Act. The Company has been paying out dividends twice in each fiscal year as interim dividends and year-end dividends since the fiscal year ended March 2008.
ANNUAL REPORT 2016 13 Management Policy
(1) MEDIUM- AND LONG-TERM MANAGEMENT STRATEGY
Management policy The Idemitsu Group sets the management policy “to contribute to a society with harmony between the economy and the environment by effectively securing and using energy and by developing functional materials business on a global scale.” Under this policy, the Company is committed to “Contributing to the domestic energy security and economic development of Asian countries” and “Contributing to the realization of a society in harmony with the environment based on proprietary technologies.” The Company is currently negotiating with SHOWA SHELL SEKIYU K.K. for formation of an integrated company sometime between October 2016 and April 2017. We will formulate a medium-term management strategy for the integrated company at a later date.
(2) MATTERS TO BE ADDRESSED BY THE COMPANY
1) ENVIRONMENT RECOGNITION
Although the Japanese economy has continued to follow a moderate recovery path, business confidence has worsened and uncertainty over the outcome of the government’s growth strategy has increased. Meanwhile, a look at overseas economies finds that while the US economy stays on a track to recovery led chiefly by favorable employment conditions, the recent economic slowdown in China and other emerging and commodity countries has caused a great deal of concern, a situation which is far from rosy. Regarding the demand for energy, the continuous decline in demand for petroleum products is inevitable in Japan. However, expansion in the demand for energy is expected overseas, particularly in the Asian emerging countries.
2) MATTERS TO BE ADDRESSED
a) Petroleum products segment In the fuel oil business, the Company will strengthen efficient production and supply under a system consisting of the three
14 ANNUAL REPORT 2016 To Our Stakeholders
refineries in Hokkaido, Chiba, and Aichi and reinforce its domestic sales network. Furthermore, the Company intends to expand its business in Asian markets where the demand for petroleum products is expected to grow, through the construction of the Nghi Son Refinery in Vietnam and the petroleum products marketing based in Singapore. In the lubricants business, the Company will promote the development of environment-friendly products and functional materials products in response to technological innovation. The Company will also accelerate global deployment through the expansion of overseas production bases in overseas countries. b) Petrochemical products segment In the basic chemicals business, the Company will move ahead with optimization of the supply chain for olefin-related products, including derivative products. It will also promote integration with refineries, diversification of raw materials, etc., thereby endeavoring to further strengthen its competitiveness. In the performance materials business, the Company will concentrate its management resources on and develop the field of engineering plastics such as syndiotactic polystyrene resin and polycarbonate resin as well as that of adhesive materials such as hydrogenated petroleum resin and functional soft polypropylene, positioning such fields as core businesses. c) Resources segment In the oil exploration and production business, while making cost-paring efforts and carefully selected investments, the Company will promote the expansion of reserves through exploration activities and maintain stable production. In the coal business, the Company will strive to strengthen the competitiveness of its entire value chain composed of operation of mines owned by the Company, procurement, logistics, and marketing. As for the uranium business, the Company aims to promote stable production at the Cigar Lake Mine in Canada and its sales. d) Other segments In the electronic materials business, the Company will capture growing demand mainly from the display industry and boost sales driven by continuous technology development, which will ensure high performance of OLED materials and lower manufacturing costs, and promote measures to put its business on a growth track. In the agricultural biotechnology business, the Company will deploy businesses which cater to the demands that contribute
ANNUAL REPORT 2016 15 To Our Stakeholders
to food safety and address the increasing demand for food through developing and producing in-house products, including biological pesticides, chemical pesticides, the RUMINUP® series products that provide feed mixes for cows, and Crosstop® that provides feed mixes for chickens. The Company will globally expand its agricultural biotechnology business including to emerging countries where demands are growing. In the gas business, the Company aims to contribute to Japan’s energy security including the diversification of supply sources, the securing of a stable supply, and achieving an economic advantage due to shorter transportation distances, and will make efforts to further expand export and sales to Asian countries of LPG from North America. The Company will also continue to conduct studies on commercialization of the business through Himeji Natural Gas Power Generation Co., Ltd. In the renewable energy business, the Company will conduct studies on the development of electric power sources such as wind power, biomass, solar light, and geothermal heat (including binary power generation), and expand the electricity retailing business, which will actively utilize renewable energy sources.
The Company will take on the above-mentioned challenges to the best of its ability. Simultaneously, in order to make a leap forward as a “leading company of the industry having the sharpest competitive edge” and “new energy company originated in Japan,” which will be realized through business merger with Showa Shell Sekiyu K.K. (“Showa Shell”), the Company will steadily prepare for the acquisition of shares of, and the subsequent business merger with Showa Shell.
The information regarding future forecasts above are based on information available as of the date of publication of this document. The actual operating results may differ from the forecasts due to various factors in the future.
Takashi Tsukioka Representative Director & Chief Executive Officer
16 ANNUAL REPORT 2016 Management Philosophy
Since its foundation, Idemitsu has practiced the concept of “respect for human beings” in the conduct of business, and the Company strives to realize this ideal and to be trusted and relied on widely by society.
Based on this management philosophy, the Company makes the following five commitments to each stakeholder in the Idemitsu Group’s management policies. The Idemitsu Group will continue to strive to be a corporation that all stakeholders can rely on, through further deepening and developing the management, focusing on humanity.
Creation and provision of new value to customers We provide products, technologies and services that give customers a strong feeling of assurance, greater vitality and absolute satisfaction, as we strive to create new value.
Contribution to society and the environment We make safety the cornerstone of business and strive to preserve and improve the natural environment. We also contribute to communities, culture and society.
Assured returns to shareholders We fulfill our corporate social responsibilities, strive for sound, sustainable growth, and endeavor to generate stable returns for shareholders.
Cooperation with partners We secure the confidence, greater vitality and absolute satisfaction of our customers through cooperation with service station staff and others involved in our businesses, and aim to share results and success.
Pursuit of employees’ growth and self-realization We create a work environment in which each employee can pursue his or her own growth and self-realization. We also make every effort to ensure that each employee is respected.
ANNUAL REPORT 2016 17 At a Glance
Major Subsidiaries Business Segment Business Operations ( ◆ Equity method affiliates) (Overseas companies*)
• Import, refining, production and sale ● Idemitsu Tanker Co., Ltd. of crude oil, petroleum products and ● Idemitsu Retail Marketing Co., Ltd. lubricants, and transportation and Petroleum storage relating thereto ● Apolloretailing Co.,Ltd. • Sale of service station products ● Idemitsu International (Asia) Pte.Ltd.* Products ● Idemitsu Apollo Corporation * ◆ Nghi Son Refinery and Petrochemical LLC*
• Production and sale of petrochemical ● Idemitsu Unitech Co., Ltd. products ◆ Prime Polymer Co., Ltd. Petrochemical ◆ PS Japan Corp. ● Idemitsu SM (Malaysia) Sdn.Bhd.* Products ◆ Formosa Idemitsu Petrochemicals Corporation*
• Investigation, exploration, development ● Idemitsu Petroleum Norge AS* and sale of oil resources, coal, uranium ● Idemitsu Petroleum UK Ltd.* and geothermal resources ● Idemitsu Australia Resources Pty Ltd* Resources ● Idemitsu Canada Resouces Ltd.* ● Idemitsu Oita Geothermal Co.,Ltd.
• Import, purchase and sale of liquefied ◆ Astomos Energy Corp. petroleum gas (LPG) ● Idemitsu Engineering Co., Ltd. • Production and sale of electronic ● Idemitsu Insurance Service, Co.,Ltd. materials ◆ Idemitsu Credit Co., Ltd. Others • Design, construction, maintenance ● SDS Biotech K.K. and management of petroleum-related ● Idemitsu Canada Corporation* facilities ◆ AltaGas Idemitsu Joint Venture Limited • Credit card service Partnership* • Import and sale of agricultural chemicals
18 ANNUAL REPORT 2016 Net Sales Operating Income/Loss
FY2015 ¥2,752.7 billion FY2015 -¥67.4 billion
-¥941.2 billion +¥44.2 billion
FY2014 ¥3,693.9 billion FY2014 -¥111.6 billion
FY2015 ¥520.8 billion FY2015 ¥42.3 billion
-¥118.2 billion +¥49.4 billion
FY2014 ¥639.0 billion FY2014 -¥7.1 billion
FY2015 ¥226.5 billion FY2015 -¥0.6 billion
-¥14.6 billion -¥13.7 billion
FY2014 ¥241.1 billion FY2014 ¥13.1 billion
FY2015 ¥70.2 billion FY2015 ¥8.8 billion
+¥14.4 billion +¥5.5 billion
FY2014 ¥55.8 billion FY2014 ¥3.3 billion
ANNUAL REPORT 2016 19 Research & Development
The Idemitsu Group engages in R&D activities was enhanced by promoting the development concerning petroleum and petrochemical products of environment-friendly high-performance and the natural resources business, as well as for products, refrigerant oil for freezers with global the purpose of starting new businesses. Currently, warming potential (GWP), energy efficient different parts of the Group work closely together to lubricants for manufacturing facilities that help conduct R&D activities. to reduce electric power consumption, as well as environmentally conscious hydraulic oil that In fiscal 2015, the Group’s R&D expenses totaled contributes to improved processing efficiency by ¥12.6 billion, down ¥0.7 billion year on year. This producing less waste water while having a longer amount includes ¥2.7 billion in common R&D useful life. expenditures that cannot be allocated to individual business segments. 2 PETROCHEMICAL PRODUCTS SEGMENT R&D activities in the Petrochemical Products The details, expenses, and results of R&D activities for Segment are aimed at enhancing our competitiveness each segment in fiscal 2015 are outlined below. in performance materials and plastic processed products in the performance materials business. R&D 1 PETROLEUM PRODUCTS SEGMENT expenditures in this segment totaled ¥2.7 billion in In the Petroleum Products Segment, the Group fiscal 2015. is advancing activities to develop environmentally conscious petroleum and lubrication products. In a. In the performance materials business, we are fiscal 2015, R&D expenditures in this segment were working to develop raw materials that impart new ¥3.0 billion. properties to adhesives and high-value-added products incorporating the engineering plastics of a. In the petroleum business, Idemitsu focuses its polycarbonate and syndiotactic polystyrene (SPS) technological development efforts on goals such as resins. Some of our major accomplishments in fiscal upgrading technologies for refining heavy oil, adding 2015 are described below. more value to products, using process technologies to make the petroleum business more competitive, • In the field of functional soft polypropylene improving efficiency at refineries, factories and (product name: L-MODU® that has a much lower offices, energy conservation, and contributing to an crystallization point than traditional crystalline environment-friendly society. polypropylenes, giving it a special softness, the Company has developed new applications for b. In the lubricants business, the Company undertakes use as an adhesive for sanitary products and as global development of products that conserve fuel a modifying material for nonwoven fabrics and for and energy and are environmentally conscious, film, as well as for wood adhesives, resulting in aiming to achieve stable supplies to domestic growth in sales of this material. and overseas markets. Some of our major • In the field of polycarbonate resin (product accomplishments in fiscal 2015 are described below. name: TARFLON®), the Company has developed applications for a new grade of the product with • We enhanced our lineup of automotive lubricant excellent optical properties as well as liquidity, products by developing new ultra-low-viscosity and has launched marketing of the product engine oils that conserve fuel better with to the manufacturers of liquid crystal display advanced durability and drive train lubricants that (LCD) components. The product has since been help cars run quieter. received well in the market. Idemitsu ceased • Our product lineup for industrial lubricants operation of the polycarbonate production
20 ANNUAL REPORT 2016 facility at its Chiba Plant in December 2015. 3 RESOURCES SEGMENT Meanwhile, the Company carefully examined In the coal business, we advanced development of an option from technological perspectives to technologies to improve the quality of coal produced consolidate the production of polycarbonate resin at coal mines and lessen environmental impact into Formosa Chemicals & Fibre Corporation through efficient, clean use of coal. R&D expenditures (hereinafter, “FCFC”), a core firm of Taiwan’s in this segment were ¥0.1 billion. Some of our major Formosa Group, and finally decided to execute accomplishments in fiscal 2015 include the following. the consolidation of its production of all polycarbonates grades into FCFC, aiming to get • Together with construction to expand our underway in fiscal year 2016. Boggabri Mine in Australia, we implemented • In the field of syndiotactic polystyrene resin designs to improve the quality of each product (product name: XAREC®), we promoted in our coal lineup, while exploring the methods development of applications for a new grade to manage quality control at our coal mines that reduces molding cycle time with lower based on the results of combustion tests and gas emissions, and we expanded sales of the analysis of operational data related to the this material for use in automotive electrical boilers in use. We also developed a method components. In addition, the strong reputation it of assessing the practical properties of coal has earned for its excellent electrical properties products that have been blended according to has led to XAREC® seeing use by manufacturers our customer needs. of components for use in radar-sensors for • The Company used technologies to simulate the determining distance between running vehicles. behavior of natural heat generated by coal and field studies at a mine in Indonesia to establish b. In the sheet film business, the Company is measures to prevent natural heat generation at developing grades for packaging materials and coal yards. decorative products for industrial applications. Some • To encourage use of low-grade coal, we of our major accomplishments in fiscal 2015 include partnered with a power company to identify the following. technical issues involved during mixed combustion, study countermeasures, and assess • The lineup of packaging materials has been related costs. We also conducted technological reinforced by promoting the development of evaluation regarding the degree of improvement grades based on the requirements of customers, in low-grade coal and explored new areas of including film grades for bag-in-box type of application for low-grade coal. flexible containers, a reinforced antistatic • We advanced development of technologies film grade (product name: UNICREST®), and related to goals such as improving coal efficiency resealable zipper tapes for automatic packaging and clean burning of coal, and we deployed machines (product name: PLALOC®). technical support and solutions services for users • In the decorations field, the Company promoted of coal, both in Japan and overseas. the enhancement of sheets for use on the exterior of motorcycles, which have been 4 OTHER SEGMENTS adopted more extensively by major motorcycle In addition to the above segments, we also carry out makers. We also promoted the development R&D activities in the electronics materials and agri- of applications for the automotive and home bio businesses. Fiscal 2015 R&D expenditures in this construction fields by introducing newly segment totaled ¥4.1 billion. developed grades. a. In the electronics materials field, R&D activities are
ANNUAL REPORT 2016 21 Material Agreements, etc.
being conducted for new base materials, such as and techniques. We also stay focused on taking steps materials for organic light-emitting diodes (OLED) to develop animal vaccines in the field of livestock and oxide semiconductor materials. Particularly with and materials for the next generation storage battery regard to OLED materials, the Company is advancing toward achieving the effective use of electric power broad-ranging development activities, ranging from represented by electric vehicles in pursuit of new further improving the performance of products and business opportunities based on the current trends in materials to developing next-generation technologies, society and technology suitable for the Company. by working more closely with customers, through joint research with universities, and through other efforts. Some of our major accomplishments in fiscal 2015 include the following.
• Our OLED materials have been adopted by LG Electronics for its new OLED television sets launched in April 2016.
b. In the agri-bio business, technologies that utilize microbial culture and natural products are being adopted to enhance our lineup of products that contribute to food safety and satisfy increasing demand for food in the fields of agriculture and livestock. Some of our major accomplishments in fiscal 2015 include the following.
• In the field of agricultural and landscaping materials, we launched a national marketing roll-out of IDESURF®, a product that helps water infiltrate into the soil quickly and evenly as well as supplying turf grass roots with an adequate amount of water. • In the field of animal feed additives, we developed and launched CROSSTOP® (for chickens), a product that keeps chickens’ normal intestinal balance, based on the technologies related to RUMINUP®, a feed mix for cattle. • SDS Biotech K.K., one of our consolidated subsidiaries, acquired pesticide registration for two of its new agricultural chemicals in Japan.
5 COMPANY-WIDE INITIATIVES (CORPORATE R&D STRATEGY) As part of the corporate R&D strategies, company-wide activities are currently underway, aimed at providing analytical support for the new products developed by the respective research laboratories within the Group by leveraging its highly sophisticated analytical equipment
22 ANNUAL REPORT 2016 Material Agreements, etc.
(1) ACQUISITION OF SHOWA SHELL SEKIYU K.K. (2) MEMORANDUM OF UNDERSTANDING SHARES REGARDING THE BUSINESS INTEGRATION The Company’s Board of Directors meeting held The Company and Showa Shell entered into a on July 30, 2015 reached a resolution to purchase Memorandum of Understanding (hereinafter, the Showa Shell Sekiyu K.K. (hereinafter, “Showa Shell”) “MoU”), effective on November 12, 2015. shares, and a Share Purchase Agreement has been The MoU has no binding effect, and the Company entered into by and between the Company and the and Showa Shell plan to consult with each other subsidiary companies of Royal Dutch Shell plc, a major and separately execute the legally binding Definitive shareholder of Showa Shell, to acquire 33.3% of the Agreement after taking necessary procedures voting rights of Showa Shell. including, among others, obtaining their Board of For further details, please refer to V. Financial Directors’ resolutions. Information, 1. Consolidated Financial Statements and For further details, please refer to V. Financial Other Information. Information, 1. Consolidated Financial Statements and Other Information.
ANNUAL REPORT 2016 23 Corporate Governance
BUSINESS EXECUTION AND Corporate Governance MANAGEMENT SUPERVISION MECHANISMS CORPORATE GOVERNANCE SYSTEM To increase efficiency in executive functions, the Company has adopted the corporate executive OUTLINE OF THE CORPORATE officer system. Executive Officers are appointed by GOVERNANCE SYSTEM the Board of Directors and execute the business by working with the relevant Directors. The Board of Basic Policy Directors meets once a month in principle (16 times Ever since its foundation, Idemitsu has consistently in fiscal 2015), to deliberate and make decisions on held the utmost respect for people and has worked important management issues and to monitor and diligently to be a socially respected and highly trusted supervise the Executive Officers in the execution of company. their responsibilities in accordance with the laws and With this aim in mind, the Company recognizes the ordinances, the Company’s Articles of Incorporation, importance of constructing positive relationships with and Regulations of the Board of Directors. all stakeholders, including customers, shareholders, Idemitsu has also established two advisory business partners, local communities and employees, committees comprising external advisers to the by fulfilling its social responsibility as a good corporate Company’s Board of Directors to strengthen the citizen, improving management transparency and Board’s overall functions. The mechanism to monitor promoting sound and sustainable growth. management encompasses supervision by the Board In line with the philosophy expressed above, of Directors, auditing by statutory auditors, and Idemitsu has adopted the structure of a “company with accounting audits by accounting auditors. In support corporate auditors,” established a robust corporate of these, the Company has established an Internal governance system and continues to engage in Audit Office, which remains independent of the activities aimed at improving its capabilities in this field. operational divisions and is under the direct control The basic policy stated above is that of the entire of the Representative Director and CEO. This office Idemitsu Group. The following details are based on conducts internal audits based on Internal Audit the status as of the Annual YUHO Report submission Regulations and the evaluation of internal controls date, unless otherwise indicated. based on the Regulations for Internal Control over Financial Reporting.
REASONS FOR ADOPTION OF THE CORPORATE GOVERNANCE SYSTEM The Company has adopted the corporate auditor system in view that sufficient auditing functions will be accomplished by corporate auditors whose roles, functions and authority have been reinforced through amendments to the laws and regulations, and the Board of Directors consists mainly of Directors who are conversant with the Company’s businesses. Furthermore, Outside Directors were elected at the 99th Ordinary General Meeting of Shareholders held on June 26, 2014, so that objective opinions that are different from those of inside personnel can be reflected in the Company’s management.
24 ANNUAL REPORT 2016 STATUS OF INTERNAL AUDITING, EVALUATION OF INTERNAL CONTROLS, AUDITING BY STATUTORY AUDITORS, AND AUDITING BY ACCOUNTING AUDITORS
The Internal Audit Office periodically audits and confirms the legality of the business operations, the status of risk management and the business execution of each operating division mainly based on their self- directed internal auditing in accordance with the Self-control Regulations. The results of the internal audits are reported to the Representative Director and CEO, the Director connected with the relevant operating division or business area, and statutory auditors. Internal Auditing If necessary, the Representative Director and CEO, etc., gives instructions to the division in question. Any operating division that receives advice or recommendations in the course of an internal audit prepares a remediation plan for submission to the General Manager of the Internal Audit Office and undertakes improvements. The Internal Audit Office then conducts follow-up audits as needed.
The Internal Audit Office evaluates and confirms the preparation and implementation of internal controls in each executive division based on the Regulations for Internal Controls over Financial Reporting in Status of the order to ensure the reliability of financial reporting for the Group as a whole. Each operating division Evaluation of Internal prepares a remediation plan to address any shortcomings discovered during the evaluation and undertakes Controls over improvements. Financial Reporting The remediation plan and the results of its implementation are submitted to the General Manager of the Internal Audit Office, and the Internal Audit Office conducts reevaluations to gauge the progress of improvements.
All of the Company’s five statutory auditors attend board meetings and conduct audits of the business reports, non-consolidated financial statements and consolidated financial statements presented at the General Meeting of Shareholders and of the day-to-day execution of the duties of the Directors. Standing statutory auditors attend important internal meetings, including meetings of the Management Committee, and execute their auditing duties by interviewing general managers, overseas branch managers and the Auditing by Statutory presidents of subsidiaries. Non-standing statutory auditors carry out audits by visiting major departments Auditors and branches. Meetings are held between statutory auditors and Representative Directors on a quarterly basis in principle. These meetings serve as a forum to raise and deliberate on pertinent issues. Meetings of the Board of Statutory Auditors are held once a month in principle. At these meetings, the board strives to share issues and information among the statutory auditors and request information from the Directors and operating divisions as necessary in order to improve the level of oversight.
Idemitsu’s accounting audit is undertaken by Mr. Katsuhira Isomata, Mr. Motoyuki Suzuki, and Mr. Naoaki Inagaki of Deloitte Touche Tohmatsu LLC. In undertaking the audit, these principal auditors are supported by a team of 8 certified public Auditing by the accountants and 15 other staff. Accounting Auditor There are no vested interests between the accounting auditor and Idemitsu or its executive staff. Furthermore, the audit corporation above has executed an audit agreement with Idemitsu pursuant to independent audit guidelines outlined in the Companies Act and Financial Instruments and Exchange Act. Remuneration is paid to the accounting auditor in accordance with this agreement.
OUTLINE OF THE COMMITTEES committees listen closely to frank opinions from the perspective of third parties and reflect these opinions Advisory Committees in recommendations to the management. In order to maintain the transparency and soundness of the management, the Company has established the Management Advisory Committee following two committees consisting of external experts The Management Advisory Committee is an advisory as advisory organs to the Board of Directors. Both organ that discusses issues related to reforms
ANNUAL REPORT 2016 25 from various viewpoints, including management, for the Evaluation of Internal Controls over Financial technological innovation and the environment. The Reporting, which considers and deliberates on items committee, which meets once every half period in concerning annual preparations and operating policies principle, engages five external advisers who express and evaluation plans, as well as decisions on the their opinions and provide advice. scope of evaluations. The chair of each committee, with the exception of the Management Committee, is Safety and Security Advisory Committee in principle a Director other than the Representative The Safety and Security Advisory Committee was Director and CEO and plays a cross-divisional role established in December 2003 to provide advice on as part of Company-wide internal controls in order matters concerning the strengthening of security, to implement effective operations of committees. An especially on technical issues, in order to prevent overview of each committee is shown below. large-scale disasters at refineries and plants. Due to changes in the current management environment, System for Environmental Issues and Safety there is a pressing need to ensure the safety regarding The Company established a “Global Environmental business expansion, new businesses, and overseas Management Basic Plan” for environmental protection expansion. Accordingly, the committee selects a theme arising from its environmental management and based on the Group’s businesses and then establishes operations, and a “Safety Basic Plan” for ensuring a working group to discuss that topic within the Safety safety and security. The Company also established & Environmental Protection Headquarters to obtain the the Safety & Environmental Protection Headquarters, opinions of external experts. which plans basic policies and important matters related to environmental management, ensures safety and Management Committee and Other security arising from environmental protection efforts Committees in the business operations of Idemitsu and the Idemitsu Idemitsu established the Management Committee Group based on each basic plan above, and promotes to discuss and consider management strategies various related activities. and issues for the Group as a whole and for each Furthermore, the Company has introduced a Special operating division. Furthermore, the Risk Management Committee on Safety subordinate to the Safety & Committee and the Compliance Committee were Environmental Protection Headquarters to consider and established as subordinate organs to the Management deliberate on important issues related to security. Committee. Idemitsu has also established a Committee
Committee Name Committee Chair/Members Meeting Schedule Role
Chair: Representative Director and Discussion and consideration of CEO Twice per month in management issues and strategies Management Committee Members: Members appointed by principle for the Group as a whole and each committee chair operating division
Chair: Managing Director Risk Management Twice per year in Members: Managers of related Promotion of risk management Committee principle departments
Chair: Managing Director Deliberation and planning of important Four times per year Compliance Committee Members: Managers of related policies for thorough compliance and in principle departments the promotion of compliance activities
Committee for the Chair: Managing Director Consideration and deliberation of Evaluation of Internal Members: Related Directors and Twice per year in items related to internal controls over Controls over Financial Executive Officers, General Manager principle financial reporting Reporting of the Internal Audit Office
26 ANNUAL REPORT 2016 Corporate Governance
System for Quality Assurance BASIC POLICY ON THE INTERNAL Idemitsu has created a Quality Assurance Basic Plan for CONTROL SYSTEM AND THE STATUS OF matters related to quality assurance. The Company has INTERNAL CONTROLS also established the Quality Assurance Headquarters that plans basic policies and important matters related Idemitsu’s fundamental policy for its internal control to quality assurance for Idemitsu and the Idemitsu system is to establish a system that maintains Group, and promotes various activities, based on the appropriate business operations throughout the basic plan above. Company. Based on this policy, the Board of Directors Furthermore, Idemitsu has established a Special has determined the systems shown below. Committee on Quality Assurance, which is subordinate Furthermore, the Board of Directors verifies whether to the Quality Assurance Headquarters, to consider and the internal control system has been established promote important matters related to quality assurance. correctly and is operating appropriately, making any necessary revisions to ensure its proper functioning.
1 The Company Board of Directors makes decisions on important matters and supervises business execution, in accordance with the Company’s Regulations of the Board of Directors. System to ensure the 2 The Compliance Committee has been established in the Company to promote compliance execution of the duties of activities in the Company and subsidiaries, in accordance with the Compliance Regulations. Company and subsidiary 3 Compliance is rigorously implemented within the Company by making use of the Compliance Directors and employees Handbook, which sets out Compliance Action Guidelines and specific matters for compliance. in compliance with the 4 The Compliance Consultation Desk, which serves as a contact point for both internal and laws, ordinances and the external communications, is used by employees of the Company and subsidiaries to help resolve Company’s Articles of questions and problems regarding compliance. Incorporation 5 The Internal Audit Office conducts audits to confirm the legality of the business operations by each business division, including subsidiaries, and the status of business execution in accordance with internal regulations.
System related to the Information regarding execution of duties is retained and controlled pursuant to the Regulations preservation and control of the Board of Directors, Regulations on Handling of Documents, Regulations on Handling of of information regarding Circulars, and other rules. Company Directors’ execution of duties
1 The Risk Management Committee, established pursuant to the Risk Management Regulations, promotes risk-management activities. 2 The Crisis Response Guidelines and other internal regulations are the basis for swift and appropriate communication and responses in the event of any serious crises at the Company or subsidiaries. System for internal regulation 3 The Business Continuity Plan (BCP) has been established for responding to risks such as those for risk management of of an earthquake with an epicenter directly beneath the greater Tokyo area or novel strains of losses by the Company and influenza, and BCP implementation, maintenance, and management take place through group- subsidiaries wide efforts. 4 Each operating division uses Self-Inspection Lists and other materials to inspect business risks, pursuant to the Self-control Regulations. 5 The Internal Audit Office conducts audits to check on the status of risk management in each operating division, pursuant to the Internal Audit Regulations.
ANNUAL REPORT 2016 27 1 Pursuant to the Internal Controls over Financial Reporting, a system has been developed to ensure the reliability of financial reporting throughout the Group, and internal controls related to financial reporting are maintained and operated appropriately. 2 Pursuant to the regulations under 1 above, the Committee for the Evaluation of Internal Controls System for internal control over Financial Reporting has been established to deliberate on and consider matters such as over financial reporting those related to annual maintenance and operation methods, evaluation plans, and decisions on the scope of evaluation. 3 The Internal Audit Office periodically assesses the efficacy of internal controls and the details of necessary improvements.
1 Under a resolute stance in opposition to individuals and groups involved in antisocial activities, System for rejecting violence, improper demands, or similar activities, such as organized crime group and racketeers, relationships with antisocial any and all ties to such groups are refused. groups 2 Any approaches by antisocial groups are firmly rejected without backing down, and appropriate responses are taken in accordance with the Manuals on Responding to Antisocial Groups.
1 Executive Officers are appointed to perform business execution efficiently. 2 The roles and authority of the Board of Directors, Representative Directors, and Directors are System to ensure efficient defined clearly under the Official Authority Regulations and the Business Execution Regulations. execution of duties by 3 The Management Committee has been established to discuss and consider management Company Directors strategies and issues for the Group as a whole and for each operating division. Its chair, the Representative Director and CEO, appoints the members of the Management Committee, which meets twice monthly in principle.
1 The Affiliate Management Regulations specify subsidiaries under the direct authority of the Representative Director and CEO and those under the authority of managing divisions and clearly define their management responsibilities. System to ensure fair 2 Subsidiaries periodically report business performance and other matters to their managing execution of duties in the divisions, pursuant to the Affiliate Management Regulations. corporate group, consisting 3 The Affiliate Management Regulations specify the fundamental policy that in principle of the Company and transactions with affiliates shall be based on market prices, to prevent conflicts of interest. its parent company and 4 The Affiliate Management Regulations establish standards for appointment of subsidiary subsidiaries directors and statutory auditors and specify that in principle Idemitsu directors shall not be appointed as directors of subsidiaries. 5 Efforts are made to improve the efficiency of business operations through use of group standard IT infrastructure and consolidation of back-office functions.
System related to employees Statutory auditor staff are allocated as requested by statutory auditors to the Secretariat of Audit & in the event that Company Supervisory Board to assist them in performing their duties. statutory auditors request that they be allocated as assistants
Ensuring the independence 1 Staff shall be allocated to the Secretariat of Audit & Supervisory Board on a full-time basis. from Directors of employees Internal rules in the Human Resources Department stipulate that the consent of the statutory allocated as assistants auditor is required regarding final decisions on transfers, evaluation, and other HR matters to statutory auditors as concerning statutory auditor staff. described above and the 2 The Job Assignment Regulations specify the duties of the Secretariat of Audit & Supervisory performance of instructions Board. to such employees
28 ANNUAL REPORT 2016 Corporate Governance
System for Company 1 Directors, Executive Officers, and the General Manager of the Safety, Environment & Quality and subsidiary Directors, Assurance Department report to the statutory auditors on specified matters pursuant to the employees and subsidiary Business Execution Regulations. statutory auditors who 2 The Internal Audit Office reports to the statutory auditors on the results of audits, pursuant to report to Company statutory the Internal Audit Regulations. auditors or the Audit & 3 The Compliance Committee makes periodic reports to the statutory auditors on the status of Supervisory Board, and other consultation with and handling by the Compliance Consultation Desk. systems for reporting to Company statutory auditors
1 It is prohibited to treat disadvantageously persons who have submitted reports to Company System for ensuring that statutory auditors or the Audit & Supervisory Board as described above as a result of such persons who have submitted reports. reports as described 2 The Compliance Committee has decided that parties who have consulted with the Compliance above do not suffer Consultation Desk shall not suffer disadvantageous treatment as a result of such consultation disadvantageous treatment and ensures that this fact is well understood through means including stating it clearly in the as a result of such reports Compliance Handbook and covering it in training.
Policies related to handling The Company shall bear all costs necessary to fulfill the roles and responsibilities of statutory of expenses and other costs auditors, including auditing of the execution of Directors’ duties and appointment and dismissal of arising in connection with accounting auditors. the execution of statutory auditors’ duties
1 The Representative Director meets with the statutory auditors periodically, in principle once System to ensure effective every quarter. audits by Company statutory 2 The Internal Audit Office maintains close cooperation and coordination with the statutory auditors auditors or the Audit & and the accounting auditors concerning matters such as the internal auditing schedule and audit Supervisory Board visits.
OVERVIEW OF CONTENT OF CONTRACTS direct supervision of the Representative Director and FOR LIMITATION OF LIABILITY CEO, and statutory auditor staff (currently one person), under the direct supervision of the statutory auditors. Pursuant to the provisions of Article 427, Paragraph The status of such audits is as described under “Status 1 of the Companies Act, Idemitsu has concluded with of Internal Auditing, Evaluation of Internal Controls, each Outside Director and each Outside Statutory Auditing by Statutory Auditors, and Auditing by Auditor a Contract for Limitation of Liability limiting Accounting Auditors.” liability for damages as described under Article 423, The Audit & Supervisory Board cooperates Paragraph 1 of the same Act. The limit on amounts of with accounting auditors through means including liability in such contracts is the amount stipulated by coordination of audit schedules and accompanying the laws and regulations. auditors on site visits. It cooperates with the Internal Audit Office through means including reconciliation STATUS OF INTERNAL AUDITING AND of key topics, coordination of audit schedules, AUDITING BY STATUTORY AUDITORS communication of audit results, and communication of results of evaluation of internal controls. It receives Idemitsu’s organization for internal auditing and auditing reports from other sections related to internal controls by statutory auditors consists of the Internal Audit on matters that could have material impacts on Office (currently staffed by 14 persons), under the Idemitsu Group businesses or finances and matters
ANNUAL REPORT 2016 29 that could cause serious damage to the Group. OUTSIDE DIRECTORS AND OUTSIDE The following Idemitsu statutory auditors are highly STATUTORY AUDITORS knowledgeable on financial and accounting subjects. Full-time Statutory Auditor Sakae Hirano has Idemitsu has two Outside Directors and three Outside practical accounting experience with the Company’s Statutory Auditors. Treasury Department, Outside Statutory Auditor Taigi The Outside Directors’ and Outside Statutory Ito has experience as a certified public accountant and Auditors’ relations with Idemitsu are shown below. a university professor, and Outside Statutory Auditor None has any particular vested interests in Idemitsu. Michiyoshi Kuriyama has experience as an officer with a financial institution.
Outside Directors
Name Affiliation Additional Information Reasons for Selection
Eri Yokota University professor No transaction relationship to Appointed based on overall consideration of Idemitsu. Ms. Yokota is a Director factors including her experience and specialized of TOLI Corporation. knowledge as a university professor, her character, and her judgment. Her independence means there is little likelihood of a conflict of interest arising with ordinary shareholders.
Ryosuke Ito Attorney While Idemitsu contracts legal Appointed based on overall consideration of services to Mr. Ito’s law office as factors including his experience and specialized necessary, the compensation it knowledge as an attorney, his character, and his pays for such services is minor, judgment. His independence means there is little totaling less than 1 million yen in likelihood of a conflict of interest arising with this fiscal year. ordinary shareholders.
Outside Statutory Auditors
Name Affiliation Additional Information Reasons for Selection
Taigi Ito Certified public No transaction relationship Appointed based on overall consideration of accountant to Idemitsu. External Audit & factors including his experience and specialized Supervisory Board Member of IT knowledge as a certified public accountant Holdings Corporation, Statutory and university professor, his character, and his Auditor of Mitsubishi Chemical judgment. His independence means there is little Holdings Corporation, and likelihood of a conflict of interest arising with Statutory Auditor of Mitsubishi ordinary shareholders. Chemical Corporation.
Michiyoshi Experience with Formerly employed by Sumitomo Appointed based on overall consideration of Kuriyama other company Bank (now Sumitomo Mitsui factors including his specialized knowledge Banking Corporation). Sumitomo developed through his business experience Bank (now Sumitomo Mitsui with a financial institution, his character, and his Banking Corporation) is one judgment. His independence means there is little of Idemitsu’s main banks. likelihood of a conflict of interest arising with Statutory Auditor of The Zenitaka ordinary shareholders. Corporation; Director of Hanshin Electric Railway Co., Ltd.
30 ANNUAL REPORT 2016 Corporate Governance
Shoichiro Attorney No transaction relationship to Appointed based on overall consideration of Niwayama Idemitsu. factors including his experience and specialized knowledge as an attorney, his character, and his judgment. His independence means there is little likelihood of a conflict of interest arising with ordinary shareholders.
We have adopted criteria for the independence of (f) Individuals with five years of less post-retirement outside directors and outside auditors. our basic policy years who in the past belonged to the organizations is to appoint outside directors and outside auditors or the Company’s trade partners as set forth in with deep insights as specialists based on their items (b) through (e) above. expertise and career background from persons who (g) Spouses or relatives within three degrees do not meet any of the following conditions. of kinship of the officers at the Company Criteria for the Independence of Outside Officers or specified trade partners (exclusive of (a) Individuals who currently belong to or belonged in organizations lacking significance in business the past to the Company or its subsidiaries. relations with the Company). (b) Individuals with 10% or higher major share ownership of the Company according to the The Company has adopted a corporate governance Company’s latest share registry or individuals who system aimed at strengthening the supervisory currently belong to a group or organization with function of the management with the cooperation of major share ownership of the Company. assigned Outside directors and outside auditors in (c) Individuals at the Company’s trading partners order to further improve management efficiency, and or their subsidiaries having annual transactions maintain the financial soundness and transparency of with the Company in excess of 2% of its annual the Company. consolidated sales in the most recent three Outside auditors attend meetings held once a fiscal years. month as a general rule to determine audit plans (d) Consultants, certified accountants, law experts, and discuss the results within the meetings. Outside accounting auditors, or other advisory retainers auditors attend liaison meetings with internal who receive money or other property from the auditors, accounting auditors, and internal control Company worth more than an average of 10 million division representatives. Audit and supervisory board yen per year, excluding compensation for officers in members implement audit functions that cover the the most recent three fiscal years (If organizations overall management of the Group by liaising with the such as corporations and associations receive supervisory board as described in item (2) above. the money or other property from the Company, Outside directors and outside auditors hold regular individuals currently belonging to those meetings aimed at ensuring appropriate cooperation organizations shall fall under this category). with regard to audits by auditors, and internal and (e) Individuals who currently belong to non-profit accounting audits. organizations that receive donations or aid worth more than 2% of the Company’s gross revenue or recurring profit in the latest three fiscal years.
ANNUAL REPORT 2016 31 OFFICER’S COMPENSATION ETC.
Total Amounts of Compensation etc. by Category of Officer, Total Amounts of Compensation etc. by Type, and Numbers of Subject Officers
Total Amount of Category Number Compensation etc. Directors (not including Outside Directors) 10 Directors 584 million yen
Statutory Auditors (not including Outside Statutory Auditors) 3 Statutory Auditors 49 million yen Outside Directors, Outside Statutory Auditors 5 Outside Statutory Auditors 50 million yen Total 18 Directors and Statutory Auditors 684 million yen
Note: Directors and Statutory Auditors do not receive other compensation aside from base pay, such as stock options, bonuses, salaries, or retirement benefits.
Consolidated Total Compensation etc. per on appointment of Directors must be passed by Officer (Only Those Receiving Consolidated a majority of the voting rights represented by the Compensation etc. Totaling 100 Million Yen shareholders present at the meeting who hold one- or More) third or more of all voting rights able to be exercised. The Articles of Incorporation also specify that a Not applicable. resolution on appointment of Directors may not be passed through cumulative voting. Content and Decision Methods for Amounts of Officer’s Compensation etc. and Policies MATTERS SUBJECT TO RESOLUTION IN for Deciding on Methods of Calculation GENERAL MEETING OF SHAREHOLDERS THAT MAY BE COVERED BY A Under a resolution of the 91st Ordinary General RESOLUTION OF THE BOARD OF Meeting of Shareholders held June 27, 2006, officer’s DIRECTORS compensation is limited to no more than 1.2 billion yen per year for Directors and no more than 120 Pursuant to the provisions of Article 426, Paragraph million yen per year for Statutory Auditors. Decisions 1 of the Companies Act, the Articles of Incorporation on compensation for Directors are entrusted by the specify that Directors and Statutory Auditors may, to Board of Directors to the Representative Director, the extent permitted under laws and regulations, be in consultation with the Directors’ Compensation exempted from liability for damages due to neglect of Advisory Committee, whose four members include duties through a resolution of the Board of Directors two Outside Statutory Auditors. Compensation for rather than obtaining the consent of all shareholders. Statutory Auditors is decided through consultation This is intended to enable Directors and Statutory among Statutory Auditors. Auditors to fully perform their expected roles. The Articles of Incorporation also specify that, SPECIFIED NUMBER OF DIRECTORS expect where specified separately in laws or regulations, the matters covered under each item of The Articles of Incorporation specify that the Company’s Article 459, Paragraph 1 of the Companies Act on number of Directors shall not exceed 20 persons. dividends of surplus, etc. may be decided through a resolution of the Board of Directors. This is intended REQUIREMENTS OF RESOLUTIONS ON to enable flexible policies on capital and dividends APPOINTMENT OF DIRECTORS through putting dividends of surplus and related matters under the authority of the Board of Directors. The Articles of Incorporation specify that a resolution
32 ANNUAL REPORT 2016 Corporate Governance
REQUIREMENTS OF SPECIAL of the voting rights represented by the shareholders RESOLUTIONS BY GENERAL MEETING OF present at the meeting who hold one-third or more of SHAREHOLDERS all voting rights able to be exercised. This is intended to facilitate the operation of General Meeting of The Articles of Incorporation specify that the Shareholders by easing the quorum required for special resolutions under Article 309, Paragraph 2 of the resolutions by the General Meeting of Shareholders. Companies Act must be passed by two-thirds or more
Details of Audit Fees etc.
Details of fees paid to certified public accountants and others involved in auditing
Previous consolidated fiscal year This consolidated fiscal year
Category Fees for audit Fees for non-auditing Fees for audit Fees for non-auditing certification services services certification services services (million yen) (million yen) (million yen) (million yen) Filing company 148 20 156 1
Consolidated subsidiaries 76 — 79 —
Total 225 20 236 1
Other key compensation details (Previous consolidated fiscal year) Eighteen Idemitsu consolidated subsidiaries overseas pay fees and other charges for audit certification services to firms that are members of the Deloitte group, belonging to the same network as Idemitsu’s certified public accountants and others involved in auditing.
(This consolidated fiscal year) These Idemitsu consolidated subsidiaries overseas pay fees and other charges for non-audit services (advisory services with regard to business integration) to Deloitte Tohmatsu Financial Advisory LLC and Deloitte Tohmatsu Consulting LLC, belonging to the same network as Idemitsu’s certified public accountants and others involved in auditing.
Details of non-auditing services provided to the filing company by the certified public accountants and others involved in auditing (Previous consolidated fiscal year) The Company pays to the certified public accountants and others involved in auditing remuneration for services including the preparation of letters (comfort letters) from accounting auditors to the lead underwriting firm with regard to the issuance of bonds.
(This consolidated fiscal year) The Company pays to the certified public accountants and others involved in auditing remuneration for internal auditing services with regard to subsidiaries.
Method of deciding on audit fees Not applicable. ANNUAL REPORT 2016 33 Directors, Audit & Supervisory Board Members and Executive Officers
(As of July 1, 2016)
Takashi Tsukioka Yoshihisa Matsumoto Daisuke Seki Hiroshi Seki Representative Director & Representatve Director & Representatve Director & Representative Director & Chief Executive Officer Executive Vice President Executive Vice President Executive Vice President
Katsumi Saito Takashi Matsushita Shunichi Kito Susumu Nibuya Managing Director Managing Director Managing Director Director
AUDIT & SUPERVISORY BOARD MEMBERS Takanori Kuniyasu Sakae Hirano Taigi Ito** Michiyoshi Kuriyama** Shoichiro Niwayama**
Eri Yokota* Ryosuke Ito* Director Director * Outside director IDEMITSU KOSAN CO.,LTD. ** Non-standing Audit & Supervisory Board members ANNUAL REPORT 2016 MANAGING EXECUTIVE OFFICERS EXECUTIVE OFFICERS Year Ended March 31, 2016 Takehiko Kawasaki Itaru Matsuhiro Hisao Sato Yasushi Takakuwa Kazuhisa Harada Kiyoshi Homma Kazuo Maruyama Toshiaki Sagishima Toshiyuki Tanida Yuji Arai Hideto Murakami Seiji Chiba Ichiro Tsukuda Eiji Hagiwara Hiroshi Maesawa
34 ANNUAL REPORT 2016 Financial Section
Contents
36 Management’s Discussion and Analysis
42 Business Risk Factors 48 Consolidated Balance Sheet IDEMITSU KOSAN CO.,LTD. 50 Consolidated Statement of OperationsANNUAL REPORT 2016 51 Consolidated Statement of Comprehensive Income Year Ended March 31, 2016 52 Consolidated Statement of Changes in Equity
54 Consolidated Statement of Cash Flows
55 Notes to the Consolidated Financial Statements
91 Report of Independent Auditors
ANNUAL REPORT 2016 35 Management’s Discussion and Analysis
GENERAL ECONOMIC CONDITIONS AND ENVIRONMENT SURROUNDING THE IDEMITSU GROUP During fiscal year 2015, the Japanese economy maintained a firm tone with rising stock prices reflecting a favorable business climate in the private sector. Since the end of 2015, however, the business sentiment has deteriorated as growth slowed in the emerging economies with the growing uncertainties about the Chinese economy. Domestic demand for petroleum products decreased overall compared to the previous fiscal year. While demand for gasoline and other transportation fuels remained largely unchanged from the previous fiscal year, demand for kerosene and other distillate products decreased due to the unseasonably higher temperatures during the winter. Demand for fuel oil for power generation also fell from the previous year. Dubai crude oil prices remained on a rising trend during the spring but the trend started turning down in the summer, reflecting a growing concern about the Chinese economy in the wake of a devaluation of the Yuan along with OPEC making no cutback in crude oil production. The pace of the decrease accelerated after OPEC decided in its meeting in early December not to make supply adjustments, with prices falling short of $30/bbl temporarily. As a result, the average price for fiscal 2015 was $45.5/bbl, a drop of $37.9/bbl compared with the previous fiscal year. Demand for petrochemical products during fiscal 2015 was consistent with the previous fiscal year. Meanwhile, domestic production remained in a firm tone due to the decrease in imports in terms of volume amid the weakening of the Japanese yen. The average price of naphtha, a petrochemical raw material, dropped to $486/ton, a decrease of $332/ton from the previous fiscal year. The exchange rate of the Japanese yen to the US dollar fell by ¥10.2 from the previous fiscal year to ¥121.1, backed by factors including a continued policy of monetary easing by the Bank of Japan and expectations of rising interest rates in the United States.
36 ANNUAL REPORT 2016 ANALYSIS OF CONSOLIDATED OPERATING RESULTS Net sales Net Sales Consolidated net sales for fiscal 2015 fell 22.9% year
Billions of yen on year to ¥3,570.2 billion due in part to decreases 5,000 in the import prices for crude oil. A breakdown of net sales by business segment is as follows: The Petroleum 4,000 Products Segment had net sales of ¥2,752.7 billion (down 25.5% year on year). The Petrochemical Products 3,000 Segment’s net sales amounted to ¥520.8 billion (down 18.5% year on year), partly due to a decrease in 2,000 naphtha prices. The Resources Segment recorded net sales of ¥226.5 billion (down 6.0% year on year) due to 1,000 a decrease in crude oil prices. Net sales in the Other Businesses Segment amounted to ¥70.2 billion (up 0 25.9% on a year-on-year basis). 11 12 13 14 15 FY
Cost of sales and selling, general, and administrative expenses The cost of sales for fiscal 2015 fell by 25.3% year on year to ¥3,309.2 billion, due partly to drops in prices of crude oil and naphtha. The cost of sales was pushed up by ¥122.2 billion due to a revaluation of inventories, including the effects of a write-down of book values. Selling, general, and administrative expenses were ¥280.7 billion (down 7.5% year on year).
Operating Income and Operating Operating income Income Margin Based on the above results, the consolidated operating
Billions of yen % loss for fiscal 2015 was ¥19.6 billion (up ¥85.2 billion year 150 6 on year). Here follow a breakdown of operating income by business segment. 125 5 The Petroleum Products Segment recorded an operating 100 4 loss of ¥67.4 billion, an increase of ¥44.3 billion on a year- 75 3 on-year basis, due largely to the reduced cost associated
50 2 with the falling crude oil prices and partially offset by negative factors including losses from inventory revaluation 25 1 and lowering margins on petroleum products. This 0 0 operating income figure includes ¥118.6 billion in losses on -25 -1 the valuation of inventories. -100 -2 The Petrochemical Products Segment posted an 11 12 13 14 15 FY operating income of ¥42.3 billion (up ¥49.4 billion year on year), reflecting reduced costs associated with the Operating Income Operating Income Margin falling prices of crude oil and naphtha along with the * Operating income margin: Operating income / Net sales firm petrochemical product prices in overseas markets.
ANNUAL REPORT 2016 37 This operating income figure includes ¥3.5 billion in losses on the valuation of inventories. The Resources Segment suffered an operating loss of ¥0.6 billion (down ¥13.7 billion year on year), due largely to the substantial falls in crude oil prices in the oil exploration and production business and partially offset by positive factors such as currency devaluation in resource-rich countries and cost reduction initiatives implemented in the coal business. The operating income of the Other Segments was ¥8.8 billion (up 167.8% on a year-on-year basis).
Non-operating income and ordinary income Non-operating profit and loss, calculated by subtracting non-operating expenses of ¥24.6 billion from non-operating income of ¥22.3 billion, resulted in a loss of ¥2.3 billion on a net basis, a recovery of ¥0.6 billion year on year. This is due in part to increased equity in earnings of affiliated Interest Coverage Ratio companies. Based on the above results, the ordinary loss came to FY2011 FY2012 FY2013 FY2014 FY2015 ¥21.9 billion (up of ¥85.7 billion year on year). Cash flows from operating activities 159.7 50.8 50.1 172.9 216.4 (Billions of yen) Extraordinary income (loss), and income before Interest expense paid 14.3 13.0 11.0 12.1 11.4 tax provisions (Billions of yen) Extraordinary profit/loss, calculated by subtracting Interest coverage ratio 11.2 3.9 4.5 17.2 19.6 extraordinary expenses of ¥42.6 billion from extraordinary (Times) income of ¥9.6 billion, resulted in an extraordinary loss * Interest coverage ratio = Cash flows from operating activities / of ¥33.1 billion on a net basis, up ¥36.4 billion year on Interest expense paid year. This is attributable to factors including a decrease in impairment losses in the resources business. Based on the above results, the loss before tax provisions Net Income was ¥55.0 billion (up ¥1,221 billion year on year).
Billions of yen Income taxes, and net income attributable to 70 the parent and non-controlling interests 60 Tax expenses consisting of corporate income, inhabitant,
50 business, and deferred taxes totaled ¥18.6 billion, and the ratio of income taxes to loss before income taxes 40 was 33.8%. 30 A net loss attributable to non-controlling interests was 20 ¥0.4 billion. 10 As a result, the consolidated net loss attributable to the
-40 parent for fiscal 2015 was ¥36.0 billion (up ¥102.0 billion year on year). -140 11 12 13 14 15 FY
38 ANNUAL REPORT 2016 Management’s Discussion and Analysis
Total Assets ANALYSIS OF FINANCIAL POSITION
Billions of yen Assets 3,000 Consolidated total assets as of the end of fiscal 2015 stood at ¥2,402.1billion (a decrease of ¥328.9 billion 2,500 compared with the end of the preceding fiscal year), partly
2,000 due to decrease in inventories and notes and accounts receivables-trade resulting from factors including falling 1,500 crude oil price.
1,000 Liabilities 500 Consolidated total liabilities as of the end of fiscal 2015 were ¥1,864.5 billion (down ¥236.2 billion compared 0 with the end of the preceding fiscal year) due to factors 11 12 13 14 15 FY including a decreases in interest-bearing debt (¥909.6 billion) and a decrease in notes and accounts payable-trade due to falling crude oil price.
Net assets Consolidated net assets as of the end of fiscal 2015 totaled ¥537.7 billion (down ¥92.7 billion compared with the Shareholders’ Equity and Shareholders’ Equity Ratio end of the preceding fiscal year), due to factors including the net loss attributable to the parent company along with a
Billions of yen % decrease in the foreign currency adjustment account amid 700 30 the currency devaluation in resource-rich countries. As a result, the shareholders equity ratio as of the end of 600 25 fiscal 2015 was 20.8%, down from 21.5% at the end of the 500 20 previous fiscal year. 400 15 300 10 200 ANALYSIS OF FUNDS AND LIQUIDITY 100 5 0 0 Consolidated Cash Flow Analysis 11 12 13 14 15 FY Cash and cash equivalents (“funds”) as of March 31, Shareholders’ Equity 2016, stood at ¥118.8 billion, an increase of ¥7.6 billion Shareholders’ Equity Ratio from the end of the preceding year. The major factors * Shareholders’ equity: Total equity – Minority interests * Shareholders’ equity ratio: Shareholders’ equity / behind this increase are summarized below. Total assets Net cash provided by operating activities amounted to ¥216.4 billion. Despite a significant net loss before taxes, and factors such as a decrease in depreciation, operating activities generated a net cash flow, helped primarily by an increase in depreciation expense, an inventory revaluation loss, an impairment loss, and other non-out-of-the-pocket expenses and losses incurred for the year, along with a decrease in accounts receivable.
ANNUAL REPORT 2016 39 Net Cash Provided by Operating Activities Net cash used in investment activities was ¥98.1 billion, due mainly to the investments related to Billions of yen maintenance and renovation of refineries, as well as to 200 the oil exploration and production, and the coal business, along with capital injection and inter-company loans extended to affiliated companies. Net cash used in financing activities was ¥105.6 billion, due in part to the fact that repayment of long- 100 term debt surpassed the amount of funds raised through long-term debt.
Fund demand Major items of the operating capital demand of the 0 Idemitsu Group are the procurement costs of raw materials 11 12 13 14 15 FY for manufacturing products, manufacturing costs, operating expenses such as SG&A expenses, and the payment taxes. The major items of operating expenses are personal costs, distribution costs, operational expenses and R&D expenditures. The demand for capital investment funds includes the following, in line with the strategy for each segment. a. Investments to reconstruct sales and supply systems and enhance competitiveness for businesses, including fuel oils, basic chemicals, and renewable energy, along with investments to ensure business expansion through entry into overseas growth markets, b. In the businesses related to oil exploration and production, coal, and uranium, investments to expand production by developing existing holdings and to secure reserves by enhancing exploration, and c. Investments in the business areas including lubricants, performance materials, electronics materials, and agri-bio products with the aim of strengthening the development of environmentally conscious products and business expansion through global development.
40 ANNUAL REPORT 2016 Management’s Discussion and Analysis
Interest-Bearing Debt and Financial policy Net Debt/Equity Ratio The Idemitsu Group currently finances its operating capital and capital expenditures mainly through internal Billions of yen Times funds, borrowings, or the issuance of commercial paper 1,200 3 and corporate bonds. As of the end of fiscal 2015, the
1,000 outstanding amounts of short-term borrowings, long-term debt (including the current portion), and corporate bonds 800 2 (including those maturing in a year or less) stood at ¥185.0 600 billion, ¥659.6 billion, and ¥65.0 billion, respectively. 400 1 The Company finances and loans all the funds required by domestic subsidiaries for their operating capital and 200 for capital expenditures from the Group finances. Outside 0 0 Japan, individual overseas subsidiaries borrow the amounts 11 12 13 14 15 FY required for operating capital and capital expenditures Interest-Bearing Debt locally in their respective local currencies. Net Debt/Equity Ratio In order to procure the funds that will be required for * Figures for interest-bearing debt use the amounts recorded on the consolidated balance sheets as short-term borrowings, operating capital and capital expenditures to sustain commercial paper, corporate bonds and long-term debt, as well as lease obligations. * Net D/E ratio: Calculated as (Interest-bearing debt – Cash and medium- to long-term growth, the Idemitsu Group cash equivalents and marketable securities) / (Equity – Minority interests in consolidated subsidiaries) effectively combines operating cash flows, loans, and the issuance of commercial paper and corporate bonds with commitment line agreements as well as capital Return on Invested Capital reinforcement, while taking into consideration the balance
% regarding our financial position. 10 Idemitsu signed a subordinated syndication loan (the
8 “Suordinated Loan”) contract worth ¥100 billion on March 31, 2016, raising a portion of the funds to be used for 6 acquiring Showa Shell shares. Regarding the Subordinated 4 Loan, the Company understands that it is eligible for 75% 2 equity treatment from the credit rating agency. The loan 0 contract is to be executed concurrently at the time of the -2 share acquisition. -4 The Idemitsu Group has established a system that -6 enables the procurement of funds in a flexible and stable -8 manner by entering a long-term commitment line agreement 11 12 13 14 15 FY with a syndicate consisting of six lenders that allows us to
* Return on invested capital = (Operating income + Equity receive short-term loans during the contract period through in earnings and losses of affiliated companies and March 2017, in order to efficiently procure operating capital dividend income) / (Average of equity at beginning and end of period + Interest-bearing debt) and thus secure sufficient liquidity.
ANNUAL REPORT 2016 41 Business Risk Factors
Matters describing the Idemitsu Group’s business and (2) Market competition financial situation that may affect investors’ decisions The Idemitsu Group’s petroleum products business to invest are discussed below. Information concerning competes with multiple petroleum companies, some of the future is as of the Annual YUHO Report which have a scale of business operations and market submission date. share that are much larger than the Idemitsu Group. In addition, competition in the petroleum market in Japan is fierce due to an excess of refining facilities RISKS IN EACH BUSINESS SEGMENT and service stations. If the Idemitsu Group is unable Petroleum Products Segment to manage its business efficiently under this business (1) Fluctuations in crude oil prices environment, the Idemitsu Group’s financial condition The Idemitsu Group imports almost all of the crude oil and operating results may be substantially affected. required for the production of its petroleum products. The price of crude oil fluctuated substantially in the (3) Suppliers of crude oil to the Group past, and there are concerns that the price of crude oil Since the Idemitsu Group relies on oil-producing will continue to fluctuate in the future due to increasing countries in the Middle East for practically all of its demand from Asian countries; the unstable political imports of crude oil, the Group has been making situation in oil-producing countries in the Middle East efforts to diversify risk in the region by concluding and Africa; movements to nationalize resources in long-term crude oil import agreements with major oil- South American oil-producing countries; trends with producing countries in the Middle East in order to respect to environmental regulations and tax systems stably procure crude oil. However, the risk remains in the oil-consuming countries, including the US; and that the Idemitsu Group’s financial condition and speculative trading in petroleum. operating results may be substantially affected if Furthermore, since the Idemitsu Group imports imports of crude oil are restricted for a prolonged its entire volume of crude oil in US dollars, the period by unstable political situations, crude oil procurement costs of crude oil are affected by the production adjustments or accidents at oil-related currency exchange rate against the US dollar. facilities in the region. The Idemitsu Group strives to link the selling prices of petroleum products to domestic market prices in (4) Demand for petroleum products order to secure its margins. However, should market The Japanese petroleum market has matured, and prices fall due to intensifying competition in the demand for petroleum products is expected to domestic market or other factors, this could have a gradually decline. Furthermore, there is the possibility significant impact on the Group’s financial condition that rising crude oil prices and government measures and operating results. to address global warming based on the Kyoto Protocol The Idemitsu Group employs the gross average will impact future demand for petroleum products. In method for the valuation of inventories. When crude the event that demand for petroleum products declines oil prices are rising, the gross average method is due to these factors, the Idemitsu Group’s financial generally a positive factor for profits because the cost condition and operating results could be affected. of sales is pushed down by inventory assets that were relatively inexpensive at the beginning of the term. Petrochemical Products Segment When crude oil prices are falling, however, the gross (1) Fluctuations in raw material costs average method has a negative impact on profits The Idemitsu Group produces naphtha, a raw material because the cost of sales is pushed up by inventory for petrochemical products at its refineries and also assets that were relatively expensive at the beginning procures it from the market. There is a possibility of the term. that the price of naphtha may be affected by crude oil prices and increasing demand due to the construction
42 ANNUAL REPORT 2016 of new petrochemical production facilities that are unable to develop confirmed resources or to discover planned in China and other countries. If we are unable additional resources. to appropriately transfer fluctuations in the price of naphtha to the price of petrochemical products due b. Crude oil price to fierce market competition or other factors, the In recent years, the operating income from the oil Idemitsu Group’s financial condition and operating exploration and development business has been results could be affected. supported primarily by high crude oil prices. Crude oil prices have fluctuated in the past and the Idemitsu (2) Fluctuations in demand Group’s financial condition and operating results may Asian petrochemicals markets, including the Japanese be affected if the price of crude oil declines in the future market, are currently experiencing intensifying due to political or economic conditions or other factors. competition and therefore may be affected by fluctuations in demand and increases in supply. In the (2) Coal businesses petrochemicals business, the Idemitsu Group is in The Idemitsu Group produces coal at its mines in competition with companies whose business scale Australia and other facilities and sells mainly to the is larger, business bases more established, or that Japanese market and other Asian markets. The are more competitive than the Idemitsu Group in the Idemitsu Group has bolstered its production capacity Japanese and Asian markets. Moreover, although in response to the projected growth in demand for demand for petrochemical products in China and other coal in these regions. However, this demand may not Asian countries has increased in recent years, there is grow due to factors such as a shift to other types of the possibility that demand will decline in the future as energy, environmental regulations or other regulations. a result of an economic slowdown in these countries In addition, even if demand grows, the Idemitsu Group or other factors. The Idemitsu Group’s financial may be in competition with other companies with condition and operating results could be affected by a larger scale of business and a more established such intensification of competition and/or decrease in business base than the Idemitsu Group. Furthermore, demand in the market. the Idemitsu Group’s coal mining operations may be impacted by changes in the weather, accidents, or other uncertainties. The Idemitsu Group’s financial Resources Segment condition and operating results could be affected if the (1) Oil exploration and production businesses demand for coal does not grow as expected or as a a. Securing resources result of competition with other companies. The Idemitsu Group strives to acquire interests in and discover resources that can lead to commercial production. However, if the Idemitsu Group is unable Other Segments to successfully acquire or explore such interests, or is Electronics materials and agricultural biotechnology unable to develop confirmed resources as efficiently as The Idemitsu Group develops products with high scheduled, the Group’s crude oil output may decrease added value in the electronics materials and agri-bio in the future. Furthermore, the Idemitsu Group’s fields with a view to future growth. However, success confirmed resources are concentrated in Norway, and in the development, production and market cultivation it conducts exploration activities in Norway, the United of such products is not guaranteed. If the Group is Kingdom, and Vietnam. The Idemitsu Group’s financial unable to sell these products at a scale large enough condition and operating results could be affected if to be profitable, it may not be able to recover the these exploration and development activities are shut development costs and secure profits. down due to factors such as the political or economic situation in these regions, which would leave it
ANNUAL REPORT 2016 43 OTHER RISKS have been playing important roles in the execution of (1) Investment the businesses of the Company. However, in the case The Idemitsu Group owns large-scale business of strategic business alliances, the Group may be assets, and requires a large amount of investment unable to properly control the management, business for its business activities, such as the maintenance operations and assets of its business alliance partners. and replacement of existing refineries, plants and In addition, there is the possibility that the Group distribution facilities, the acquisition of interests may be affected by certain conditions of the business in oil fields, and oil exploration and development. alliance partners, etc. In such cases, the Idemitsu In fiscal 2015, the Group required ¥57.6 billion for Group’s business, financial condition and operating such investments. The Group intends to continue results may be affected. investments in enhancing the competitiveness of its existing businesses, including petroleum and (4) About the Nghi Son Refinery project petrochemicals, securing earnings in oil exploration As part of the expansion of its oil and petrochemical and development and in its coal businesses, and businesses in Asia, the Idemitsu Group has jointly developing new businesses. However, if the Group established Nghi Son Refinery and Petrochemical is unable to generate the cash flows necessary for LLC (hereinafter “NSRP”) with Kuwait Petroleum such investment or obtain financing for the necessary International, PetroVietnam, and Mitsui Chemicals, Inc. funds, it may not be able to implement the planned (hereinafter collectively referred to as the “Sponsors”, investment and may lose profit-earning opportunities. including Idemitsu). This joint venture will construct the Furthermore, there is a possibility that these Nghi Son Refinery and Petrochemical Complex, which investments will not yield revenues as planned due will be equipped with an oil refinery facilities with a to changes in the economic conditions or the market refining capacity of 200,000 barrels/day and facilities environment. In such cases, the Group’s financial for producing petrochemicals including paraxylene in condition and operating results could be affected. the Nghi Son Economic Zone, Thanh Hoa Province, Socialist Republic of Viet Nam. (2) Interest-bearing debt Construction for the project started in the summer The Idemitsu Group has so far been making efforts to of 2013 and the complex is slated to begin commercial reduce interest-bearing debt, but continues to carry a operations in 2017. The total cost of the project is large amount of liabilities. As of the end of fiscal 2015, estimated at around $9.0 billion, of which $5.0 billion the amount of interest-bearing debt totaled ¥909.6 will be procured on a project finance basis from a billion, while interest paid during the consolidated fiscal syndicate of banks including the Japan Bank for 2015 totaled ¥11.4 billion. International Cooperation, while the remaining $4.0 The Idemitsu Group will continue to work to reduce billion or so will be procured through investment and interest-bearing debt, but it may need additional loans provided by the Sponsors. financing for investment aiming at the continuation and Of the amount procured through the project finance expansion of its businesses. However, if financing is arrangement, the Idemitsu Group has provided a restricted due to a change in the financial situation, loan guarantee to the syndicate of banks for 35.1%, or if the burden of interest expenses increases owing which is equivalent to its stake in the NSRP, until to rising interest rates, the Idemitsu Group’s financial construction is completed. Therefore, if construction condition and operating results could be affected. is not completed on schedule or if the facilities fail to operate under certain conditions after construction (3) Business alliances is completed, then the Idemitsu Group’s financial The Idemitsu Group has promoted business alliances condition and operating results may be affected due to with other companies as a part of its efforts to the execution of the loan guarantee. enhance competitiveness, and these business alliances Furthermore, the Idemitsu Group will shoulder 35.1%
44 ANNUAL REPORT 2016 Business Risk Factors
of the investment and loans provided by the Sponsors, excess of mandated standards. Furthermore, the but if the project does not progress as planned Idemitsu Group may be forced to bear substantial due to changes in Vietnam’s political and economic expenses if Japan or any other country introduces conditions, laws and regulations, and the employment new environmental regulations, or when the Group environment, then the Idemitsu Group’s financial complies with current or future environmental condition and operating results may be affected. regulations. In relation to the efforts to address global The Idemitsu Group has taken out overseas investment warming, if Japan or any foreign country restricts insurance from Incorporated Administrative Agency, emissions of greenhouse gases, or introduces new Nippon Export and Investment Insurance against the carbon taxation, the Idemitsu Group may be required estimated losses from the project, but this insurance may to pay a substantial amount of expenses or to invest not necessarily be sufficient to cover all such losses. a large amount of funds. The Idemitsu Group’s financial condition and operating results may be (5) Accidents, disasters, and disputes significantly affected by liabilities or obligations related The Idemitsu Group’s businesses involve risk factors, to compliance with such environmental or other such as natural disasters, accidents and operation regulations. stoppages at refineries or plants due to natural disasters and accidents. Natural disasters include (7) Intellectual property rights and licenses earthquakes, tsunami, and typhoons, as well as the The Idemitsu Group utilizes intellectual property rights risk of fires and explosions at refineries or plants and licenses to execute its business operations, and in located in Japan where there are many earthquakes. particular patents and corporate secrets play important The Idemitsu Group’s equipment and facilities may roles in the technologies involved in oil refining and be affected by accidents caused by human error or lubricants and in the field of high-value-added products, mechanical faults. The Group’s marine transportation including engineering plastics, performance chemicals, of crude oil and petroleum products, consisting of electronics materials and agri-bio products. In addition, very large crude carriers, are exposed to the risks of the Group files for registration to trademark its brands. piracy and sinking or collisions due to adverse weather However, patents, corporate secrets and brands conditions. In addition, the Idemitsu Group faces the owned by the Group may not necessarily provide risk of labor disputes. If any of the above risks, such sufficient protection for the Group’s intellectual as accidents, disasters or labor disputes, were to property rights. materialize, the Idemitsu Group’s business activities In addition, it is possible that the Group’s corporate may be suspended for a prolonged period of time. secrets will be improperly handled by the Group’s The Group has taken out nonlife insurance against employees, trading partners, or other related parties. estimated losses from accidents or disasters, but this Furthermore, the Idemitsu Group has been granted insurance might not be sufficient to cover such losses. technical licenses by third parties. There is a possibility that the Group will become unable to continue utilizing (6) Environmental regulations these technologies, as licenses may not be renewed The Idemitsu Group’s businesses are subject to a wide or complaints from third parties about infringements of range of legal restrictions concerning environmental intellectual property rights may be received. protection and other matters in Japan and overseas The Idemitsu Group’s businesses and operating where it operates its businesses or has rights and results could be affected if it cannot protect or fully interests. For example, the Idemitsu Group is subject utilize the intellectual property rights required to to regulations on such activities as emissions of conduct its business. pollutants from oil refineries and factories, as well as the processing of waste materials, and may be (8) Fluctuations in foreign exchange rates penalized if it releases environmental pollutants in The Idemitsu Group conducts a large amount of
ANNUAL REPORT 2016 45 Business Risk Factors
foreign currency denominated transactions and has assets and liabilities denominated in foreign currencies. Accordingly, fluctuations in exchange rates affect the profits and losses related to transactions in foreign currencies and these amounts converted into Japanese yen in its financial statements. In addition, fluctuations in exchange rates affect the conversion of revenues or financial statements of overseas consolidated subsidiaries and overseas equity-method affiliates into Japanese yen.
(9) Declines in asset prices The Idemitsu Group posted an impairment loss of ¥35.6 billion on fixed assets for fiscal 2015. In the future, if the value of assets held by the Group declines due to changes in economic conditions, the resulting impairment losses could affect the Group’s financial condition and operating results.
(10) Management of personal information The Idemitsu Group directly or indirectly handles personal information and asset data in its sales of petroleum products and credit card businesses. In the event that this personal data is insufficiently managed or problems arise due to such management, the Group may be forced to bear significant expenses to remedy the problems. Furthermore, if the personal information of customers is improperly handled, or a problem arises with the management of any customer’s personal information, this could lead to reduced confidence in the Idemitsu Group, complaints, or lawsuits, regardless of whether the Idemitsu Group was directly managing that information, and this could affect the Company’s businesses and operating results.
(11) Transactions with shareholders The Company engages in real estate lease transactions with Nissho Kosan Co., Ltd. and the Idemitsu Foundation of Culture and Welfare. The terms of these transactions are determined based on market prices in the vicinity. The Company also makes donations to the Idemitsu Museum of Arts. The amount donated is determined based on such factors as the museum’s management expenses, the scale of the Company’s business and the publicity impact.
46 ANNUAL REPORT 2016 ANNUAL REPORT 2016 47 CONSOLIDATED BALANCE SHEET Idemitsu Kosan Co.,Ltd. and Consolidated Subsidiaries March 31, 2016
Thousands of U.S. dollars Millions of yen (Note 1) 2015 2016 2016 ASSETS Current assets: Cash and cash equivalents (Note 20) ¥111,195 ¥118,787 $1,054,199 Notes and accounts receivable, trade (Note 20) 321,703 259,817 2,305,803 Inventories (Note 6) 513,801 362,746 3,219,263 Accounts receivable, other 63,213 56,599 502,300 Short-term loans 5,988 7,666 68,037 Deferred tax assets (Note 17) 31,969 24,557 217,943 Derivative assets (Notes 20 and 21) 1,502 1,336 11,856 Other 37,440 29,479 261,624 Less: Allowance for doubtful accounts (1,874) (2,330) (20,679) Total current assets 1,084,940 858,661 7,620,350
Property, plant and equipment (Notes 7, 9 and 19): Buildings and structures 143,014 191,512 1,699,612 Machinery and equipment 248,906 235,916 2,093,684 Land (Notes 8 and 10) 589,485 586,690 5,206,695 Construction in progress 111,666 9,379 83,238 Other 42,670 43,084 382,364 Total property, plant and equipment 1,135,743 1,066,583 9,465,595
Intangible fixed assets: Goodwill (Note 9) 10,381 9,699 86,076 Other 14,832 13,866 123,064 Total intangible fixed assets 25,213 23,566 209,140
Investments and other assets: Investments in securities (Notes 5, 10 and 20) 53,579 43,806 388,771 Investments in nonconsolidated subsidiaries 215,873 235,265 2,087,907 and affiliates (Notes 5 and 20) Long-term loans (Note 20) 4,323 20,904 185,521 Guarantee deposits 13,809 13,937 123,692 Long-term prepaid expenses 14,246 11,479 101,879 Exploration and development expenditures 62,760 40,328 357,899 Deferred tax assets (Note 17) 36,645 61,704 547,607 Oil field premium assets (Note 2(U)) 80,190 23,188 205,794 Other 3,864 3,160 28,050 Less: Allowance for doubtful accounts (191) (468) (4,155) Total investments and other assets 485,102 453,308 4,022,968
Total assets ¥2,731,001 ¥2,402,118 $21,318,055
48 ANNUAL REPORT 2016 Thousands of U.S. dollars Millions of yen (Note 1) 2015 2016 2016 LIABILITIES AND EQUITY Current liabilities: Notes and accounts payable, trade (Note 20) ¥366,559 ¥291,676 $2,588,536 Short-term borrowings (Notes 10 and 20) 202,875 184,983 1,641,673 Commercial paper (Notes 10 and 20) 26,997 － － Current portion of long-term debt (Notes 10 and 20) 173,650 108,964 967,021 Accounts payable, other 233,392 256,661 2,277,790 Accrued expenses 41,143 20,860 185,130 Income taxes payable 6,061 3,856 34,225 Accrued bonuses to employees 6,299 6,157 54,649 Derivative liabilities (Notes 20 and 21) 2,494 1,242 11,027 Deferred tax liabilities (Note 17) 262 193 1,715 Other (Note 10) 67,882 62,575 555,336 Total current liabilities 1,127,619 937,171 8,317,106
Long-term liabilities: Long-term debt (Notes 10 and 20) 602,658 615,639 5,463,610 Deferred tax liabilities (Note 17) 32,563 13,011 115,475 Deferred tax liability related to land revaluation (Notes 8 and 17) 92,508 95,795 850,152 Liability for employees' retirement benefits (Notes 2(T) and 11) 15,642 21,351 189,486 Reserve for repair work 26,530 28,440 252,401 Derivative liabilities (Notes 20 and 21) 4,411 23,053 204,591 Oil field premium liabilities (Note 2(U)) 83,098 29,042 257,744 Asset retirement obligations (Note 12) 93,813 79,843 708,581 Other (Note 10) 21,770 21,108 187,333 Total long-term liabilities 972,997 927,286 8,229,377 Total liabilities 2,100,616 1,864,457 16,546,484
Contingent liabilities (Note 13)
Equity (Note 14): Shareholders’ equity: Common stock: 108,606 108,606 963,852 Authorized, 436,000,000 shares in 2015 and 2016 Issued, 160,000,000 shares in 2015 and 2016 Capital surplus 71,131 71,131 631,267 Retained earnings 212,119 168,990 1,499,735 Treasury stock-at cost, 46,776 shares in 2015 and 46,956 shares in 2016 (130) (130) (1,161) Total shareholders' equity 391,727 348,597 3,093,692
Accumulated other comprehensive income (loss): Surplus from land revaluation (Note 8) 157,460 154,263 1,369,041 Deferred gains (losses) on hedging activities, net (Note 21) (7,896) (12,854) (114,076) Unrealized gains (losses) on available-for-sale securities 9,920 4,527 40,181 Foreign currency translation adjustments 34,795 10,764 95,535 Defined retirement benefit plans 1,243 (4,656) (41,328) Total accumulated other comprehensive income 195,522 152,045 1,349,353 Noncontrolling interests in consolidated subsidiaries 43,134 37,018 328,525 Total equity 630,384 537,660 4,771,571 Total liabilities and equity ¥2,731,001 ¥2,402,118 $21,318,055
See notes to consolidated financial statements. ANNUAL REPORT 2016 49 CONSOLIDATED STATEMENT OF OPERATIONS Idemitsu Kosan Co.,Ltd. and Consolidated Subsidiaries Year ended March 31, 2016 Thousands of U.S. dollars Millions of yen (Note 1) 2015 2016 2016
Net sales ¥4,629,732 ¥3,570,202 $31,684,438 Cost of sales (Note 6) 4,431,066 3,309,167 29,367,834 Gross profit 198,666 261,034 2,316,603 Selling, general and administrative expenses (Note 15) 303,464 280,678 2,490,930 Operating income (loss) (104,798) (19,643) (174,327)
Non-operating income (expenses): Interest income 1,216 1,331 11,819 Gain (loss) on foreign exchange, net (3,950) (7,930) (70,376) Dividend income 4,244 5,540 49,170 Interest expense (12,117) (11,361) (100,826) Subsidy income 5,330 2,350 20,862 Gain on sales of fixed assets, net 6,409 5,081 45,096 Gain on sales of investments in securities － 39 349 Gain on sale of affiliate stock － 3,628 32,197 Gain on transfer of business 1,003 474 4,210 Equity in earnings of nonconsolidated subsidiaries and 1,771 9,790 86,883 affiliates, net Impairment loss on fixed assets (Note 9) (70,511) (35,589) (315,848) Loss on disposals of fixed assets (4,781) (2,797) (24,824) Other, net (885) (5,876) (52,153) (72,270) (35,318) (313,439) Income (loss) before income taxes (177,069) (54,961) (487,766)
Income taxes – Current (Note 17) 14,718 9,053 80,346 – Deferred (Note 17) (57,861) (27,637) (245,275) Total income taxes (43,143) (18,584) (164,928) Net income (loss) (133,925) (36,377) (322,838) Net income (loss) attributable to noncontrolling interests 4,033 (383) (3,405) Net income (loss) attributable to owners of the parent (¥137,958) (¥35,993) ($319,433)
Basic net income (loss) per share (in yen and dollars) (Notes 2(W) and 22) (¥862.50) (¥225.03) ($1.99)
Diluted net income per share (in yen and dollars) (Notes 2(W) and 22) － － －
See notes to consolidated financial statements.
50 ANNUAL REPORT 2016 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME Idemitsu Kosan Co.,Ltd. and Consolidated Subsidiaries Year ended March 31, 2016 Thousands of U.S. dollars Millions of yen (Note 1) 2015 2016 2016 Net income (loss) (¥133,925) (¥36,377) ($322,838) Other comprehensive income (loss) (Note 18) Unrealized gains (losses) on available-for-sale securities 4,855 (5,098) (45,243) Deferred gains (losses) on hedging activities, net (5,808) (5,171) (45,897) Foreign currency translation adjustments 11,876 (29,019) (257,535) Defined retirement benefit plans 1,392 (5,893) (52,299) Surplus from land revaluation 10,243 (3,257) (28,912) Share of other comprehensive income (loss) in associates 8,499 (1,744) (15,480) Total other comprehensive income (loss) 31,059 (50,184) (445,369)
Comprehensive income (loss) (Note 18) (¥102,865) (¥86,561) ($768,207)
Total comprehensive income (loss) attributable to (Note 18): Owners of the parent (¥104,772) (¥80,268) ($712,353) Noncontrolling interests 1,906 (6,293) (55,854)
See notes to consolidated financial statements.
ANNUAL REPORT 2016 51 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY Idemitsu Kosan Co.,Ltd. and Consolidated Subsidiaries Year ended March 31, 2016 Thousands Millions of yen Shareholders’ equity
Number of shares of Total common stock Common Capital Retained Treasury shareholders’ outstanding stock surplus earnings stock equity Balance at April 1, 2014 (as previously reported) 159,953 ¥108,606 ¥71,131 ¥359,934 (¥130) ¥539,542
Cumulative effect of accounting change (4,541) (4,541) Balance at April 1, 2014 (as restated) 159,953 ¥108,606 ¥71,131 ¥355,393 (¥130) ¥535,000 Cash dividends,㻌\50.0 per share (7,997) (7,997) Net income (loss) attributable to owners of the parent (137,958) (137,958) Net adjustment to retained earnings due to 2,185 2,185 change in scope of consolidation Acquisitions of treasury stock (0) (0) (0) Disposals of treasury stock 0 (0) 0 0 Adjustment due to sales and revaluation of 497 497 land (Note 8) Items other than changes in shareholders' equity Balance at March 31, 2015 159,953 ¥108,606 ¥71,131 ¥212,119 (¥130) ¥391,727 Cash dividends,㻌\50.0 per share (7,997) (7,997) Net income (loss) attributable to owners of the parent (35,993) (35,993) Net adjustment to retained earnings due to 922 922 change in scope of consolidation Acquisitions of treasury stock (0) (0) (0) Disposals of treasury stock － Adjustment due to sales and revaluation of (60) (60) land (Note 8) Items other than changes in shareholders' equity
Balance at March 31, 2016 159,953 ¥108,606 ¥71,131 ¥168,990 (¥130) ¥348,597
Thousands of U.S. dollars (Note 1) Shareholders’ equity
Total Common Capital Retained Treasury shareholders’ stock surplus earnings stock equity Balance at March 31, 2015 $963,852 $631,267 $1,882,495 ($1,158) $3,476,457 Cash dividends, $0.44 per share (70,976) (70,976)
Net income (loss) attributable to owners of the parent (319,433) (319,433) Net adjustment to retained earnings due to 8,189 8,189 change in scope of consolidation Acquisitions of treasury stock (3) (3) Disposals of treasury stock － Adjustment due to sales and revaluation of (540) (540) land (Note 8) Items other than changes in shareholders' equity Balance at March 31, 2016 $963,852 $631,267 $1,499,735 ($1,161) $3,093,692
(Continued)
52 ANNUAL REPORT 2016 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY Idemitsu Kosan Co.,Ltd. and Consolidated Subsidiaries Year ended March 31, 2016 Thousands Millions of yen Millions of yen Shareholders’ equity Accumulated other comprehensive income Noncontrolli Unrealized Total ng interests Number of Deferred gains (losses) Foreign accumulated Surplus from gains (losses) on available- currency Defined in shares of Total other land on hedging for-sale translation retirement comprehensive consolidated Total common stock Common Capital Retained Treasury shareholders’ revaluation activities, net securities adjustments benefit plans income subsidiaries equity outstanding stock surplus earnings stock equity Balance at April 1, 2014 (as previously reported) ¥147,714 (¥1,196) ¥4,523 ¥12,016 (¥172) ¥162,886 ¥41,358 ¥743,786 Balance at April 1, 2014 (as previously reported) 159,953 ¥108,606 ¥71,131 ¥359,934 (¥130) ¥539,542 Cumulative effect of accounting change (8) (4,549) Cumulative effect of accounting change (4,541) (4,541) Balance at April 1, 2014 (as restated) ¥147,714 (¥1,196) ¥4,523 ¥12,016 (¥172) ¥162,886 ¥41,350 ¥739,237 Balance at April 1, 2014 (as restated) 159,953 ¥108,606 ¥71,131 ¥355,393 (¥130) ¥535,000 Cash dividends,㻌\50.0 per share (7,997) Cash dividends,㻌\50.0 per share (7,997) (7,997) Net income (loss) attributable to owners of the parent (137,958) Net adjustment to retained earnings due to Net income (loss) attributable to owners of the parent (137,958) (137,958) 2,185 change in scope of consolidation Net adjustment to retained earnings due to 2,185 2,185 Acquisitions of treasury stock (0) change in scope of consolidation Disposals of treasury stock 0 Acquisitions of treasury stock (0) (0) (0) Adjustment due to sales and revaluation of (497) (497) － Disposals of treasury stock 0 (0) 0 0 land (Note 8) Items other than changes in shareholders' Adjustment due to sales and revaluation of 10,243 (6,700) 5,396 22,779 1,415 33,134 1,784 34,918 497 497 equity land (Note 8) Balance at March 31, 2015 Items other than changes in shareholders' ¥157,460 (¥7,896) ¥9,920 ¥34,795 ¥1,243 ¥195,522 ¥43,134 ¥630,384 equity Cash dividends,㻌\50.0 per share (7,997) Balance at March 31, 2015 159,953 ¥108,606 ¥71,131 ¥212,119 (¥130) ¥391,727 Net income (loss) attributable to owners of the parent (35,993) Net adjustment to retained earnings due to Cash dividends,㻌\50.0 per share (7,997) (7,997) 922 change in scope of consolidation Net income (loss) attributable to owners of the parent (35,993) (35,993) Acquisitions of treasury stock (0) Disposals of treasury stock － Net adjustment to retained earnings due to Adjustment due to sales and revaluation of 922 922 60 60 － change in scope of consolidation land (Note 8) Acquisitions of treasury stock (0) (0) (0) Items other than changes in shareholders' (3,257) (4,957) (5,392) (24,030) (5,899) (43,538) (6,116) (49,655) Disposals of treasury stock － equity Adjustment due to sales and revaluation of (60) (60) Balance at March 31, 2016 ¥154,263 (¥12,854) ¥4,527 ¥10,764 (¥4,656) ¥152,045 ¥37,018 ¥537,660 land (Note 8) Items other than changes in shareholders' equity Thousands of U.S. dollars (Note 1) Balance at March 31, 2016 159,953 ¥108,606 ¥71,131 ¥168,990 (¥130) ¥348,597 Accumulated other comprehensive income Noncontrolli Unrealized Total Deferred gains (losses) Foreign accumulated ng interests Surplus from gains (losses) on available- currency Defined other in Thousands of U.S. dollars (Note 1) land on hedging for-sale translation retirement comprehensive consolidated Total revaluation activities, net securities adjustments benefit plans income subsidiaries equity Shareholders’ equity Balance at March 31, 2015 $1,397,412 ($70,083) $88,040 $308,801 $11,032 $1,735,203 $382,808 $5,594,469 Cash dividends, $0.44 per share (70,976) Total Common Capital Retained Treasury shareholders’ Net income (loss) attributable to owners of the parent (319,433) stock surplus earnings stock equity Net adjustment to retained earnings due to 8,189 Balance at March 31, 2015 change in scope of consolidation $963,852 $631,267 $1,882,495 ($1,158) $3,476,457 Acquisitions of treasury stock (3) － Cash dividends, $0.44 per share (70,976) (70,976) Disposals of treasury stock Adjustment due to sales and revaluation of 540 540 － Net income (loss) attributable to owners of the parent (319,433) (319,433) land (Note 8) Items other than changes in shareholders' (28,912) (43,993) (47,859) (213,265) (52,360) (386,390) (54,283) (440,674) Net adjustment to retained earnings due to equity 8,189 8,189 change in scope of consolidation Balance at March 31, 2016 $1,369,041 ($114,076) $40,181 $95,535 ($41,328) $1,349,353 $328,525 $4,771,571 Acquisitions of treasury stock (3) (3) Disposals of treasury stock － See notes to consolidated financial statements. Adjustment due to sales and revaluation of (540) (540) land (Note 8) Items other than changes in shareholders' equity Balance at March 31, 2016 $963,852 $631,267 $1,499,735 ($1,161) $3,093,692
(Continued)
ANNUAL REPORT 2016 53 CONSOLIDATED STATEMENT OF CASH FLOWS Idemitsu Kosan Co.,Ltd. and Consolidated Subsidiaries Year ended March 31, 2016 Thousands of U.S. dollars Millions of yen (Note 1) 2015 2016 2016 Operating activities: Income (loss) before income taxes (¥177,069) (¥54,961) ($487,766) Adjustments for: Depreciation and amortization 66,744 80,282 712,486 Impairment loss on fixed assets (Note 9) 70,511 35,589 315,848 (Gain) loss on sales of tangible fixed assets, net (6,409) (5,081) (45,096) (Increase) decrease in notes and accounts receivable, trade 108,175 61,291 543,944 (Increase) decrease in inventories 209,752 149,734 1,328,844 Increase (decrease) in notes and accounts payable, trade (84,283) (72,883) (646,817) (Increase) decrease in accounts receivable, other (749) 8,543 75,824 Increase (decrease) in accounts payable, other (3,651) 28,858 256,106 Increase (decrease) in liability for employees' retirement benefits (4,051) (198) (1,763) Payment of income taxes (28,295) (13,290) (117,946) Other, net 22,230 (1,516) (13,456) Net cash provided by (used in) operating activities 172,904 216,368 1,920,207
Investing activities: Purchases of investment securities (27,331) (25,008) (221,946) Proceeds from sales and redemption of securities 6,198 405 3,602 Proceeds from sale of affiliate stock － 5,991 53,172 Purchases of tangible fixed assets (111,698) (60,149) (533,812) Proceeds from sales of tangible fixed assets 16,975 11,879 105,422 Purchases of intangible fixed assets (1,247) (575) (5,109) Disbursements for long-term loans (183) (17,970) (159,480) Proceeds from collection of long-term loans receivable 889 1,334 11,842 (Increase) decrease in short-term loans receivable, net (1,267) (1,649) (14,638) Payments for investments in capital of affiliates (643) (914) (8,118) Other, net (12,837) (11,393) (101,117) Net cash provided by (used in) investing activities (131,146) (98,052) (870,183)
Financing activities: Increase (decrease) in short-term borrowings, net (118,539) (20,549) (182,369) Increase (decrease) in commercial paper, net (32,997) (26,997) (239,597) Proceeds from long-term debt 183,055 163,997 1,455,424 Repayments of long-term debt (121,898) (213,820) (1,897,590) Purchases of treasury stock (0) (0) (3) Proceeds from sales of treasury stock 0 － － Cash dividends paid (7,997) (7,997) (70,976) Cash dividends paid to noncontrolling shareholders (102) (419) (3,719) Other, net 226 205 1,827 Net cash provided by (used in) financing activities (98,253) (105,581) (937,005) Effect of exchange rate changes on cash and cash equivalents 3,216 (6,183) (54,879) Net increase (decrease) in cash and cash equivalents (53,279) 6,551 58,138 Cash and cash equivalents at beginning of year 159,991 111,195 986,826 Net increase (decrease) in cash and cash equivalents resulting 4,483 1,040 9,233 from change in scope of consolidation Cash and cash equivalents at end of year ¥111,195 ¥118,787 $1,054,199
See notes to consolidated financial statements.
54 ANNUAL REPORT 2016 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Idemitsu Kosan Co.,Ltd. and Consolidated Subsidiaries
1． Basis of Presentation of Consolidated Financial Statements
The accompanying consolidated financial statements have been prepared in accordance with the provisions set forth in the Japanese Financial Instruments and Exchange Act and its related accounting regulations and in accordance with accounting principles generally accepted in Japan ("Japanese GAAP"), which are different in certain respects as to the application and disclosure requirements of International Financial Reporting Standards.
In preparing these consolidated financial statements, certain reclassifications and rearrangements have been made to the consolidated financial statements issued domestically in order to present them in a form which is more familiar to readers outside Japan. In addition, certain reclassifications have been made in the 2015 consolidated financial statements to conform to the classifications used in 2016.
The consolidated financial statements are stated in Japanese yen, the currency of the country in which Idemitsu Kosan Co.,Ltd. (the "Company") is incorporated and operates. Japanese yen figures less than a million yen are rounded down to the nearest million yen, except for per share data. The translations of Japanese yen amounts into U.S. dollar amounts are included solely for the convenience of readers outside Japan and have been made at the rate of ¥112.68 to $1, the approximate rate of exchange at March 31, 2016. Such translations should not be construed as representations that the Japanese yen amounts could be converted into U.S. dollars at that or any other rate.
2．Summary of Significant Accounting Policies (A) Principles of Consolidation The consolidated financial statements as of and for the year ended March 31, 2016, include the accounts of the Company and its significant subsidiaries (together, the "Group"). Under the control and influence concepts, those companies in which the Company, directly or indirectly, is able to exercise control over operations are fully consolidated, and those companies over which the Group has the ability to exercise significant influence are accounted for by the equity method (see (C) below).
All significant intercompany balances and transactions have been eliminated in consolidation. All material unrealized profit included in assets resulting from transactions within the Group is also eliminated. The excess of the cost of acquisition over the fair value of the net assets of an acquired subsidiary at the date of acquisition is amortized over periods ranging from 5 years to 20 years. The account balance of investment costs over the net equity of subsidiaries acquired is included in goodwill in the accompanying consolidated balance sheet.
The number of consolidated subsidiaries as of March 31, 2015 and 2016, is as follows: Consolidated subsidiaries 2015 2016 Domestic 19 18 Overseas 48 49 Total 67 67
Consolidation of the remaining subsidiaries would not have a material effect on the accompanying consolidated financial statements.
Certain subsidiaries, such as Idemitsu Cuu Long Petroleum Co., Ltd. and 46 overseas subsidiaries and certain affiliates, employ December 31 as their balance sheet date. For consolidating the accounts of these subsidiaries and applying the equity method to the investments in these affiliates, the Company uses their financial statements as of their respective financial year-end, and necessary adjustments have been made where significant intercompany transactions took place between such different year-end dates.
SDS Biotech K.K., which was consolidated using December 31 as its balance sheet date, with necessary adjustments where significant intercompany transaction took place, changed its fiscal year-end to March 31, starting from the fiscal year ended March 31, 2016, and as such, the Company consolidated 15 months of its operations from January 1, 2015 to March 31, 2016.
ANNUAL REPORT 2016 55 (B) Unification of Accounting Policies Applied to Foreign Subsidiaries for the Consolidated Financial Statements In May 2006, the Accounting Standards Board of Japan (the "ASBJ") issued ASBJ Practical Issues Task Force (PITF) No. 18, "Practical Solution on Unification of Accounting Policies Applied to Foreign Subsidiaries for the Consolidated Financial Statements" which was subsequently revised in February 2010 and March 2015 to reflect revisions of the relevant Japanese GAAP or accounting standards in other jurisdictions. PITF No. 18 prescribes that the accounting policies and procedures applied to a parent company and its subsidiaries for similar transactions and events under similar circumstances should in principle be unified for the preparation of the consolidated financial statements. However, financial statements prepared by foreign subsidiaries in accordance with either International Financial Reporting Standards or generally accepted accounting principles in the United States of America (Financial Accounting Standards Board Accounting Standards Codification—"FASB ASC") tentatively may be used for the consolidation process, except for the following items that should be adjusted in the consolidation process so that net income is accounted for in accordance with Japanese GAAP, unless they are not material: (a) amortization of goodwill; (b) scheduled amortization of actuarial gain or loss of pensions that has been directly recorded in equity; (c) expensing capitalized development costs of R&D; and (d) cancellation of the fair value model of accounting for property, plant and equipment and investment properties and incorporation of the cost model of accounting.
(C) Investments in Nonconsolidated Subsidiaries and Affiliates Investments in nonconsolidated subsidiaries and affiliates are, in principle, accounted for by the equity method. The number of nonconsolidated subsidiaries and affiliates to which the equity method is applied as of March 31, 2015 and 2016, is as follows: Equity method entities 2015 2016 Nonconsolidated subsidiaries 5 4 Affiliates 23 24 Total 28 28
Investments in the remaining unconsolidated subsidiaries and affiliates are stated at cost. If the equity method of accounting had been applied to the investments in these companies, the effect on the accompanying consolidated financial statements would not be material.
(D) Unification of Accounting Policies Applied to Foreign Associated Companies for the Equity Method In March 2008, the ASBJ issued ASBJ Statement No. 16, "Accounting Standard for Equity Method of Accounting for Investments" which was subsequently revised in line with the revisions to PITF No. 18 above. The standard requires adjustments to be made to conform the associate's accounting policies for similar transactions and events under similar circumstances to those of the parent company when the associate's financial statements are used in applying the equity method unless it is impracticable to determine such adjustments. In addition, financial statements prepared by foreign affiliates in accordance with either International Financial Reporting Standards or generally accepted accounting principles in the United States of America tentatively may be used in applying the equity method if the following items are adjusted so that net income is accounted for in accordance with Japanese GAAP, unless they are not material: (a) amortization of goodwill; (b) scheduled amortization of actuarial gain or loss of pensions that has been directly recorded in equity; (c) expensing capitalized development costs of R&D; and (d) cancellation of the fair value model of accounting for property, plant and equipment and investment properties and incorporation of the cost model of accounting.
(E) Foreign Currency Translation All monetary assets and liabilities in foreign currencies are translated into yen at the exchange rates prevailing at the respective balance sheet dates. With respect to translation of the foreign currency-denominated financial statements of overseas consolidated subsidiaries, all profits and losses of foreign subsidiaries are translated into yen using the average rate for the period. Also, all balance sheet items, except for equity, are translated at the current rates of foreign exchange prevailing at the balance sheet date, whereas equity items are translated at the historical rates. Differences arising from translation of foreign currency financial statements are recorded in the consolidated balance sheet as translation adjustments in equity.
(F) Cash Equivalents Cash equivalents are short-term investments that are readily convertible into cash and that are exposed to insignificant risk of changes in value. Cash equivalents include time deposits, certificates of deposit and commercial paper, all of which mature or become due within three months of the date of acquisition.
56 ANNUAL REPORT 2016 (G) Allowance for Doubtful Accounts The Group provides an allowance for doubtful accounts based on the percentage of bad debt losses written off against the balance of total receivables in addition to the amount deemed necessary to cover estimated future losses by reviewing individual accounts.
(H) Inventories Inventories are principally stated at the lower of cost or net selling value, using the average method. Losses resulting from application of the lower of cost or net selling value method are included in cost of sales in the accompanying consolidated statement of operations.
(I) Securities Securities are classified into three categories: “Held-to-maturity securities,” “Equity securities issued by nonconsolidated subsidiaries and affiliates,” and “Available-for-sale securities.”
Held-to-maturity securities: Shown as current assets if the maturity period is within one year, or as investments in securities if the maturity period is over one year and stated at amortized cost, which is determined using the straight-line method. Equity securities issued by nonconsolidated subsidiaries and affiliates: Carried at cost determined by the moving-average method, unless they are deemed impaired in value, but accounted for by the equity method for consolidation purposes. Available-for-sale securities: Shown as current assets if the maturity period is within one year or as investments in securities if the maturity period is over one year or undefined. Those with readily determinable market values are stated at fair market value and those without readily determinable market values are carried at cost determined by the moving-average method. The resulting unrealized gains/losses are recorded as “Unrealized gains (losses) on available-for-sale securities” in a separate component of equity, net of tax effects thereon. Where the values are considered impaired, such impairments are charged to income.
(J) Derivatives and Hedging Activities Derivatives The Group utilizes forward exchange contracts, foreign currency options, interest rate swaps and options, and crude oil and petroleum product swaps and forward contracts to hedge the risks of exchange rate fluctuations, interest rate fluctuations, and price fluctuations of crude oil and petroleum products, respectively. The Company borrows foreign currency-denominated loans to hedge the risks of exchange rate fluctuations of overseas investments in securities and foreign subsidiaries’ equity. Purchases of derivative financial instruments are limited to the amounts of the hedged items and are not used for speculation or dealing purposes. Internal rules have been established with respect to the purposes, policies, procedures, approvals and reporting for derivatives. Hedge effectiveness with respect to the hedged items is constantly monitored.
Hedge Accounting Where the transactions do not satisfy the conditions for hedge accounting stipulated in the accounting standard for financial instruments, such derivative arrangements and financial instruments are valued at fair value and the resulting gains or losses are included in the consolidated statement of operations for the current year, whereas the deferral method of accounting is applied to transactions which qualify for hedge accounting. Under hedge accounting, unrealized gains or losses on the hedge instruments are carried as a component of equity in the consolidated balance sheet, until the profits or losses on the corresponding hedged items are realized.
(K) Property, Plant and Equipment Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation of property, plant and equipment of the Company and its subsidiaries is mainly computed by the straight-line method.
(L) Intangible Fixed Assets Software for internal use is amortized using the straight-line method over the estimated useful life of the software, generally 5 years. Other intangible fixed assets are amortized using the straight-line method over the respective estimated useful life.
ANNUAL REPORT 2016 57 (M) Bond Issue Costs Bond issue costs are charged to income as incurred.
(N) Asset Retirement Obligations In March 2008, the ASBJ issued ASBJ Statement No. 18, “Accounting Standard for Asset Retirement Obligations” and ASBJ Guidance No. 21, “Guidance on Accounting Standard for Asset Retirement Obligations.” Under this accounting standard, an asset retirement obligation is defined as a legal obligation imposed either by law or contract that results from the acquisition, construction, development and normal operation of a tangible fixed asset and is associated with the retirement of such tangible fixed asset. The asset retirement obligation is recognized as the sum of the discounted cash flows required for the future asset retirement and is recorded in the period in which the obligation is incurred if a reasonable estimate can be made. Upon initial recognition of a liability for an asset retirement obligation, an asset retirement cost is capitalized by increasing the carrying amount of the related fixed asset by the amount of the liability. The asset retirement cost is subsequently allocated to expense through depreciation over the remaining useful life of the asset.
(O) Research and Development Costs Research and development costs are charged to income as incurred.
(P) Leases Non-cancellable lease transactions that transfer substantially all risk and rewards associated with the ownership of assets are accounted for as finance leases. Equipment held for lease is depreciated by the straight-line method over the respective lease periods. All other lease transactions are accounted for as operating leases.
However, finance lease transactions which do not transfer the ownership of the leased property to the lessee and which commenced prior to April 1, 2008, are continuously accounted for as ordinary operating leases.
(Q) Income Taxes The income taxes of the Company and its domestic subsidiaries consist of corporate income taxes, local inhabitants’ taxes and enterprise taxes. Enterprise taxes are deductible when paid as expenses for the purpose of calculation of other income taxes. The asset and liability approach is used to recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets, liabilities and net operating loss. Deferred taxes are measured by applying currently enacted income tax rates to the temporary differences.
(R) Reserve for Repair Work The Company and its consolidated subsidiaries are required periodically to repair oil tanks, machinery and equipment and vessels. A reserve for the repair work on oil tanks, machinery and equipment and vessels is provided for the current portion of the estimated total cost of such work.
(S) Accrued Bonuses to Employees Accrued bonuses to employees are provided for based on the estimated amount to be paid to employees after the consolidated balance sheet date for their services rendered during the current period.
(T) Liability for Employees’ Retirement Benefits The employees of the Company and its subsidiaries are generally covered by point-based retirement benefit plans under which the retiring employees are entitled to lump-sum payments and/or pension payments. Also, certain subsidiaries have defined contribution plans.
Effective April 1, 2000, the Company adopted a new accounting standard for retirement benefits and accounted for the liability for retirement benefits based on the projected benefit obligations and plan assets at the balance sheet date. The projected benefit obligations are attributed to periods on a straight-line basis. Actuarial gains and losses are amortized on a straight-line basis over 10 years within the average remaining service period. Past service costs are recognized in the period in which they are incurred.
58 ANNUAL REPORT 2016 In May 2012, the ASBJ issued ASBJ Statement No. 26, "Accounting Standard for Retirement Benefits" and ASBJ Guidance No. 25, "Guidance on Accounting Standard for Retirement Benefits," which replaced the accounting standard for retirement benefits that had been issued by the Business Accounting Council in 1998 with an effective date of April 1, 2000, and the other related practical guidance, and were followed by partial amendments from time to time through 2009.
(1) Under the revised accounting standard, actuarial gains and losses and past service costs that are yet to be recognized in profit or loss are recognized within equity (accumulated other comprehensive income), after adjusting for tax effects, and any resulting deficit or surplus is recognized as a liability (liability for retirement benefits) or asset (asset for retirement benefits). (2) The revised accounting standard does not change how to recognize actuarial gains and losses and past service costs in profit or loss. Those amounts are recognized in profit or loss over a certain period no longer than the expected average remaining service period of the employees. However, actuarial gains and losses and past service costs that arose in the current period and have not yet been recognized in profit or loss are included in other comprehensive income, and actuarial gains and losses and past service costs that were recognized in other comprehensive income in prior periods and then recognized in profit or loss in the current period, are treated as reclassification adjustments. (3) The revised accounting standard also made certain amendments relating to the method of attributing expected benefit to periods, the discount rate, and expected future salary increases.
This accounting standard and the guidance for (1) and (2) above are effective for the end of annual periods beginning on or after April 1, 2013, and for (3) above are effective for the beginning of annual periods beginning on or after April 1, 2014, or for the beginning of annual periods beginning on or after April 1, 2015, subject to certain disclosure in March 2015, all with earlier application being permitted from the beginning of annual periods beginning on or after April 1, 2013. However, no retrospective application of this accounting standard to consolidated financial statements in prior periods is required.
The Company applied the revised accounting standard and guidance for retirement benefits for (1) and (2) above, effective March 31, 2014, and for (3) above, effective April 1, 2014.
With respect to (3) above, the Company changed the method of attributing the expected benefit to periods from a straight-line basis to a benefit formula basis, the method of determining the discount rate from using the period which approximates the expected average remaining service period to using different discount rates according to the estimated timing of benefit payment and recorded the effect of (3) above as of April 1, 2014, in retained earnings. As a result, retained earnings as of April 1, 2014, decreased by ¥ 4,541 million ($ 37,792 thousand).
(U) Oil field premium assets/liabilities With respect to the premium to be paid to the assignor of the Snorre Field based on the agreement made at the time of acquisition of the Snorre Field, the amount of oil field premium liabilities was posted in liabilities and the same amount was recorded in assets as oil field premium assets. The amount of oil field liabilities, which was calculated by estimating the amount of future expenditures based on reserves of crude oil and future prices of crude oil, was discounted at relevant discount rates. The oil field premium assets are amortized in proportion to crude oil production and oil field premium liabilities are deducted upon payments.
(V) Appropriation of Retained Earnings The Company may make dividend payments as an appropriation of retained earnings by resolution of the Board of Directors pursuant to the provisions of Article 459, paragraph 1 of the Companies Act of Japan (the “Companies Act”).
(W) Net Income Per Share Basic net income per share is computed by dividing net income attributable to common shareholders by the weighted-average number of common shares outstanding for the period, retroactively adjusted for stock splits.
Diluted net income per share reflects the potential dilution that could occur if securities were exercised or converted into common stock. Diluted net income per share of common stock assumes full conversion of the outstanding convertible notes and bonds at the beginning of the year (or at the time of issuance) with an applicable adjustment for related interest expense, net of tax, and full exercise of outstanding warrants.
ANNUAL REPORT 2016 59 (X) Consumption Tax Consumption tax is generally imposed at a flat rate of 8% in Japan on all domestic consumption of goods and services, with certain exceptions. Items in the consolidated statement of operations are presented on a net basis of consumption tax. Net amounts of consumption tax to be recouped or paid are recorded as “Other” in current assets or current liabilities as the case may be in the consolidated balance sheet.
(Y) Impairment of Fixed Assets Fixed assets are required to be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss shall be recognized in the consolidated statement of operations by reducing the carrying amount of impaired assets or a group of assets to the recoverable amount to be measured as the higher of net selling price or value in use.
(Z) Change in Presentation Methods “Disbursements for long-term loans” and “Proceeds from collection of long-term loans receivable” which were included in “(Increase) decrease in loans receivable, net” under the cash flows from investing activities for the year ended March 31, 2015 are reported as separate items because of an increase in their significance. To reflect this change in presentation, reclassification has been made for the consolidated statement of cash flows for the previous fiscal year. As a result, in the consolidated statement of cash flows for the previous fiscal year, (¥560) million (($4,978) thousand) in “(Increase) decrease in loans receivable, net” in the cash flows from investing activities has been reclassified as “Disbursements for long-term loans” of (¥183) million (($1,630) thousand), “Proceeds from collection of long-term loans receivable” of ¥889 million ($7,896 thousand) and “(Increase) decrease in short-term loans receivable, net” of (¥1,267) million (($11,244) thousand).
(AA) Accounting Changes and Error Corrections In December 2009, the ASBJ issued ASBJ Statement No. 24, "Accounting Standard for Accounting Changes and Error Corrections" and ASBJ Guidance No. 24, "Guidance on Accounting Standard for Accounting Changes and Error Corrections." Accounting treatments under this standard and guidance are as follows: (1) Changes in Accounting Policies— When a new accounting policy is applied following revision of an accounting standard, the new policy is applied retrospectively unless the revised accounting standard includes specific transitional provisions, in which case the entity shall comply with the specific transitional provisions. (2) Changes in Presentation— When the presentation of financial statements is changed, prior-period consolidated financial statements are reclassified in accordance with the new presentation. (3) Changes in Accounting Estimates— A change in an accounting estimate is accounted for in the period of the change if the change affects that period only, and is accounted for prospectively if the change affects both the period of the change and future periods. (4) Corrections of Prior-Period Errors—When an error in the prior-period consolidated financial statements is discovered, those consolidated financial statements are restated.
(AB) New Accounting Pronouncements On March 28, 2016, the ASBJ issued ASBJ Guidance No. 26, "Guidance on Recoverability of Deferred Tax Assets," which included certain revisions of the previous accounting and auditing guidance issued by the Japanese Institute of Certified Public Accountants. While the new guidance continues to follow the basic framework of the previous guidance, it provides new guidance for the application of judgment in assessing the recoverability of deferred tax assets.
The previous guidance provided a basic framework which included certain specific restrictions on recognizing deferred tax assets depending on the company's classification in respect of its profitability, taxable profit and temporary differences, etc.
The new guidance does not change such basic framework but, in limited cases, allows companies to recognize deferred tax assets even for a deductible temporary difference for which it was specifically prohibited to recognize a deferred tax asset under the previous guidance, if the company can justify, with reasonable grounds, that it is probable that the deductible temporary difference will be utilized against future taxable profit in some future period.
The new guidance is effective for the beginning of annual periods beginning on or after April 1, 2016. Earlier application is permitted for annual periods ending on or after March 31, 2016. The new guidance shall not be applied retrospectively and any
60 ANNUAL REPORT 2016 adjustments from the application of the new guidance at the beginning of the reporting period shall be reflected within retained earnings or accumulated other comprehensive income at the beginning of the reporting period.
The Company expects to apply the new guidance on recoverability of deferred tax assets effective April 1, 2016, and is in the process of measuring the effects of applying the new guidance in future applicable periods.
3．Changes in Accounting Policies (Adoption of Accounting Standard for Business Combinations) In September, 2013, the ASBJ issued revised ASBJ Statement No. 21, "Accounting Standard for Business Combinations," revised ASBJ Guidance No. 10, "Guidance on Accounting Standards for Business Combinations and Business Divestitures," and revised ASBJ Statement No. 22, "Accounting Standard for Consolidated Financial Statements." Major accounting changes are as follows:
(a) Transactions with noncontrolling interest - A parent's ownership interest in a subsidiary might change if the parent purchases or sells ownership interests in its subsidiary. The carrying amount of noncontrolling interest is adjusted to reflect the change in the parent's ownership interest in its subsidiary while the parent retains its controlling interest in its subsidiary. Under the previous accounting standard, any difference between the fair value of the consideration received or paid and the amount by which the noncontrolling interest is adjusted is accounted for as an adjustment of goodwill or as profit or loss in the consolidated statement of income. Under the revised accounting standard, such difference is accounted for as capital surplus as long as the parent retains control over its subsidiary.
(b) Presentation of the consolidated balance sheet - In the consolidated balance sheet, "minority interest" under the previous accounting standard is changed to "noncontrolling interest" under the revised accounting standard.
(c) Presentation of the consolidated statement of income - In the consolidated statement of income, "income before minority interest" under the previous accounting standard is changed to "net income" under the revised accounting standard, and "net income" under the previous accounting standard is changed to "net income attributable to owners of the parent" under the revised accounting standard.
(d) Provisional accounting treatments for a business combination - If the initial accounting for a business combination is incomplete by the end of the reporting period in which the business combination occurs, an acquirer shall report in its financial statements provisional amounts for the items for which the accounting is incomplete. Under the previous accounting standard guidance, the impact of adjustments to provisional amounts recorded in a business combination on profit or loss is recognized as profit or loss in the year in which the measurement is completed. Under the revised accounting standard guidance, during the measurement period, which shall not exceed one year from the acquisition, the acquirer shall retrospectively adjust the provisional amounts recognized at the acquisition date to reflect new information obtained about facts and circumstances that existed as of the acquisition date and that would have affected the measurement of the amounts recognized as of that date. Such adjustments shall be recognized as if the accounting for the business combination had been completed at the acquisition date.
(e) Acquisition-related costs - Acquisition-related costs are costs, such as advisory fees or professional fees, which an acquirer incurs to effect a business combination. Under the previous accounting standard, the acquirer accounts for acquisition-related costs by including them in the acquisition costs of the investment. Under the revised accounting standard, acquisition-related costs shall be accounted for as expenses in the periods in which the costs are incurred.
The above accounting standards and guidance for (a) transactions with noncontrolling interest, (b) presentation of the consolidated balance sheet, (c) presentation of the consolidated statement of income, and (e) acquisition-related costs are effective for the beginning of annual periods beginning on or after April 1, 2015. Earlier application is permitted from the beginning of annual periods beginning on or after April 1, 2014, except for (b) presentation of the consolidated balance sheet and (c) presentation of the consolidated statement of income. In case of earlier application, all accounting standards and guidance above, except for (b) presentation of the consolidated balance sheet and (c) presentation of the consolidated statement of income, should be applied simultaneously.
Either retrospective or prospective application of the revised accounting standards and guidance for (a) transactions with
ANNUAL REPORT 2016 61 noncontrolling interest and (e) acquisition-related costs is permitted. In retrospective application of the revised standards and guidance, the accumulated effects of retrospective adjustments for all (a) transactions with noncontrolling interest and (e) acquisition-related costs which occurred in the past shall be reflected as adjustments to the beginning balance of capital surplus and retained earnings for the year of the first-time application. In prospective application, the new standards and guidance shall be applied prospectively from the beginning of the year of the first-time application.
The revised accounting standards and guidance for (b) presentation of the consolidated balance sheet and (c) presentation of the consolidated statement of income shall be applied to all periods presented in financial statements containing the first-time application of the revised standards and guidance.
The revised standards and guidance for (d) provisional accounting treatments for a business combination are effective for a business combination which occurs on or after the beginning of annual periods beginning on or after April 1, 2015. Earlier application is permitted for a business combination which occurs on or after the beginning of annual periods beginning on or after April 1, 2014.
The Company applied the revised accounting standards and guidance for (a) transactions with noncontrolling interest, (b) presentation of the consolidated balance sheet, (c) presentation of the consolidated statement of income, and (e) acquisition-related costs above, effective April 1, 2015, and (d) provisional accounting treatments for a business combination above for a business combination which occurred on or after April 1, 2015. The revised accounting standards and guidance for (a) transactions with noncontrolling interest and (e) acquisition-related costs were applied prospectively.
With respect to (b) presentation of the consolidated balance sheet and (c) presentation of the consolidated statement of income, the applicable line items in the 2015 consolidated financial statements have been accordingly reclassified and presented in line with those in 2016.
The adoption of these revised standards has no impact on the consolidated financial statements.
4．Additional Information (Agreement to Purchase Showa Shell Sekiyu K.K.Share) On July 30, 2015, the Company’s Board of Directors’ meeting reached a resolution to purchase Showa Shell Sekiyu K.K. (“Showa Shell”) shares with 33.3% voting rights from subsidiary companies of Royal Dutch Shell plc and a share purchase agreement was entered into between the Company and such subsidiary companies on the same day. The details are as follows:
(a) Names of sellers The Shell Petroleum Company Limited The Anglo-Saxon Petroleum Company Limited
(b) Overview of Showa Shell i. Company name: Showa Shell Sekiyu K.K. ii. Main business: oil business and energy solutions business iii. Scale: Capital: ¥34,197 million ($303,487 thousand) Consolidated sales: ¥2,177,625million ($19,325,745 thousand) (fiscal year ended December 31, 2015)
(c) Schedule for share transfer The transfer of the shares is planned for September 2016. (Execution of the share transfer is contingent upon the completion of the Japan Fair Trade Commission’s corporate merger review)
(d) Number of shares to be purchased, purchase price, and shareholding after purchase Number of shares to be purchased: 125,261,200 Purchase price: ¥169,103 million ($1,500,736 thousand) (¥1,350 ($11.98) per share) Shareholding after purchase: 33.3% of voting rights
62 ANNUAL REPORT 2016
(e) Method of funding share purchase The share purchase is planned to be funded through borrowings. The Company entered into a syndicate loan agreement for ¥100 billion ($887,468 thousand) subject to subordination (“Subordinated Loan”) with financial institutions on March 31, 2016. 75% of the Subordinated Loan will be treated as equity by a credit rating agency for credit rating purposes. The execution of the Subordinated Loan is expected at the time of the share purchase.
(Execution of Memorandum of Understanding Regarding the Business Integration) On November 12, 2015, the Company signed a Memorandum of Understanding for the Business Integration of Idemitsu Kosan Co.,Ltd. and Showa Shell Sekiyu K.K. (collectively the “Companies”) (the “MoU”) based on the spirit of equal partnership with Showa Shell. The MoU has no binding effect and the Companies plan to consult with each other and separately execute a legally binding definitive agreement after taking necessary procedures including, among others, obtaining their Board of Directors’ resolutions.
(a) Objectives of the Business Integration The Companies have agreed to create an industry-leading player with an unparalleled competitive position by combining the strengths and management resources of the Companies. The new company (the “NewCo”) will lead the effort to resolve various structural issues in the industry to improve the lives of Japanese citizens through more efficient and stable energy supplies.
(b) Method of the Business Integration The Companies have set a merger as the basic structure of the Business Integration subject to further consideration and discussion, and will definitely agree on the method of the Business Integration.
(c) Schedule of the Business Integration The schedule of the Business Integration will be discussed further, with the aim to commence due diligence of the Companies and their subsidiaries after the signing of the MoU, followed by the signing of a binding definitive agreement providing for the definitive details and terms of the Business Integration, approval at the shareholders meetings of both parties, and the launch of the NewCo on April 1, 2017. However, if necessary, changes to the schedule may be made upon consultation between the Companies for certain reasons such as delays in the review process by the relevant competition law authorities, delays in the progress of post-merger integration preparation required for a smooth start of operations on Day 1, and for other reasons.
(d) Name of the New Company The name of the NewCo is currently undetermined and is scheduled to be decided upon further discussion between the Companies.
(e) Location of the Head Office of the NewCo The Companies have yet to decide the location of the NewCo’s head office, but are planning to use a location different from the current offices of the Companies by the effective date of the Business Integration or as soon as possible thereafter.
(f) Structure of the Board of Directors While the structure of the Board of Directors will be decided upon further discussions between the Companies, representative directors and executive directors are expected to comprise an equal number of representatives from each company.
5．Securities Year ended March 31, 2015 (A) Held-to-maturity securities with fair value as of March 31, 2015, are summarized as follows: Millions of yen Unrealized Carrying value Fair value gains (losses) Securities with fair value exceeding carrying value: Others (securities other than equity securities and government/municipal bonds) ¥50 ¥50 ¥0
ANNUAL REPORT 2016 63
(B) Available-for-sale securities with carrying value and acquisition cost as of March 31, 2015, are summarized as follows: Millions of yen Acquisition Unrealized Carrying value cost gains (losses) (1) Securities with carrying value exceeding acquisition cost: Equity securities ¥36,030 ¥22,692 ¥13,338 (2) Securities with carrying value not exceeding acquisition cost: Equity securities 2,464 2,784 (319) Total ¥38,495 ¥25,476 ¥13,019
Year ended March 31, 2016 (A) Held-to-maturity securities with fair value as of March 31, 2016, are summarized as follows: Millions of yen Unrealized Carrying value Fair value gains (losses) Securities with fair value exceeding carrying value: Others (securities other than equity securities and government/municipal bonds) － － －
Thousands of U.S. dollars Unrealized Carrying value Fair value gains (losses) Securities with fair value exceeding carrying value: Others (securities other than equity securities and government/municipal bonds) － － －
(B) Available-for-sale securities with carrying value and acquisition cost as of March 31, 2016, are summarized as follows: Millions of yen Carrying Acquisition Unrealized value cost gains (losses) (1) Securities with carrying value exceeding acquisition cost: Equity securities ¥23,584 ¥16,332 ¥7,252 (2) Securities with carrying value not exceeding acquisition
cost: Equity securities 7,176 8,789 (1,612) Total ¥30,761 ¥25,121 ¥5,639
Thousands of U.S. dollars Carrying Acquisition Unrealized value cost gains (losses) (1) Securities with carrying value exceeding acquisition cost: Equity securities $209,307 $144,944 $64,362 (2) Securities with carrying value not exceeding acquisition
cost: Equity securities 63,692 78,002 (14,310) Total $272,999 $222,946 $50,052
64 ANNUAL REPORT 2016
Available-for-sale securities sold during the fiscal years ended March 31, 2015 and 2016, are as follows: Thousands of Millions of yen U.S. dollars 2015 2016 2016 Proceeds from sales ¥0 ¥404 $3,590 Total gains 0 ¥39 $349 Total losses ¥0 － －
6．Inventories Inventories as of March 31, 2015 and 2016, consist of the following: Thousands of Millions of yen U.S. dollars 2015 2016 2016 Merchandise and finished products ¥315,999 ¥220,876 $1,960,211 Work in process 683 666 5,917 Raw materials and supplies 197,118 141,203 1,253,134 Total ¥513,801 ¥362,746 $3,219,263 Write-downs, net of reversal of write-downs recognized during the prior fiscal year, of ¥14,860 million and ¥2,970 million ($26,362 thousand) are included in the cost of sales for the fiscal years ended March 31, 2015 and 2016, respectively.
7．Property, Plant and Equipment Accumulated depreciation of property, plant and equipment is ¥2,127,978 million and ¥2,171,787 million ($19,273,943 thousand) as of March 31, 2015 and 2016, respectively.
(Investment Property) In November 2008, the ASBJ issued ASBJ Statement No. 20, "Accounting Standard for Investment Property and Related Disclosures" and issued ASBJ Guidance No. 23, "Guidance on Accounting Standard for Investment Property and Related Disclosures."
The Company and certain subsidiaries own office buildings, crude oil storage tanks and commercial facilities including land for rental and unused assets, in areas such as Tokyo, Osaka and overseas. The net of rental income and related expenses for those properties is ¥1,557 million and ¥558 million ($4,957 thousand) for the fiscal years ended March 31, 2015 and 2016, respectively. The rental income is included in net sales and the expenses are included in selling, general and administrative expenses in the consolidated statement of operations. The amounts in the consolidated balance sheet of relevant investment properties as of March 31, 2015 and 2016, changes during the fiscal years then ended, and their fair values are as follows:
Millions of yen 㻌 㻌 Carrying amount 㻌 㻌 Fair value April 1, 2014 Changes during the fiscal year 㻌 March 31, 2015 March 31, 2015 ¥104,436 ¥7,807 ¥112,244 ¥93,144
Millions of yen 㻌 㻌 Carrying amount 㻌 㻌 Fair value April 1, 2015 Changes during the fiscal year March 31, 2016 March 31, 2016 ¥112,244 (¥3,196) ¥109,048 ¥90,027
Thousands of U.S. dollars 㻌 㻌 Carrying amount 㻌 㻌 Fair value April 1, 2015 Changes during the fiscal year March 31, 2016 March 31, 2016 $996,131 ($28,364) $967,767 $798,964
1. Carrying amount recognized in the consolidated balance sheet is net of accumulated depreciation and accumulated impairment losses, if any.
ANNUAL REPORT 2016 65 2. Increase during the fiscal years ended March 31, 2015 and 2016, primarily represents the increase of certain properties such as idle assets of ¥6,674 million and ¥361 million ($3,206 thousand), and decrease primarily represents sales and disposals of assets of ¥2,183 million and ¥710 million ($6,305 thousand), respectively. 3. Fair value of properties as of March 31, 2015 and 2016, is measured by the Group in accordance with its real-estate appraisal standard.
8．Land Revaluation The Company revaluated its land used for business activities in accordance with the “Law of Land Revaluation” on March 31, 2002. The difference between the revalued amount and the book value is stated as “Surplus from land revaluation” in equity after deducting the related deferred tax liability. “Surplus from land revaluation” is not available for dividend payments. The fair value as of March 31, 2015 and 2016, declined by ¥150,587 million and ¥149,552 million ($1,327,232 thousand), respectively, compared to the book value after the revaluation.
9．Impairment Loss on Fixed Assets For purposes of applying the accounting standard for impairment of fixed assets, the Group categorizes operating assets by business segment, whereas idle assets are assessed on an individual basis. The Group writes down the carrying amount of assets or asset groups where there has been a significant decline in profitability and value compared to the recoverable amount, and records the impairment losses as non-operating expenses.
The recoverable amounts of idle assets are determined by their net selling price at disposition. The net selling price of idle assets with certain significance is based on appraisal determined in accordance with real estate appraisal standards. In the oil exploration and production business and the coal mining business, the recoverable amount of the respective asset group is estimated with useable value, which is estimated by discounting future cash flows projected by the qualified professionals based on the remaining reserve at a discount rate of 12% (pre-tax) or 7.0 % (post-tax).
(A) Loss on impairment of fixed assets for the fiscal year ended March 31, 2015, consists of the following: Impairment loss
Use Location Type of asset Millions of yen (Idle assets) Factory Chiba factory and other Machinery, equipment (Ichihara, Chiba) and other and others ¥2,198 Service stations Takamae service station (Takasaki, Gunma) and 8 other service Land 245 stations Buildings and others 197 443 Oil depot and others Wakakusa ground (Shunan, Yamaguchi) and others Land 1,319 Buildings and others 790 2,109 (Business assets) Oil exploration Licensed blocks located in UK Machinery and 13,919 and production Continental Shelf and other equipment Goodwill and others 35,799 49,719 Coal mining Licensed blocks located in Australia Machinery, equipment and others 16,039 Total ¥70,511
66 ANNUAL REPORT 2016 (B) Loss on impairment of fixed assets for the fiscal year ended March 31, 2016, consists of the following: Impairment loss Thousands of Use Location Type of asset Millions of yen U.S. dollars (Idle assets) Service stations Yakeyamachuo service station Land ¥440 $3,906 (Kure, Hiroshima) and 13 other service 253 2,252 stations Buildings and others 693 6,158 Oil depot and others The former site of the Hyogo refinery Land 322 2,863 (Himeji, Hyogo) and others Buildings and others 327 2,907 650 5,771 (Business assets) Oil exploration Licensed blocks located in Norway and Machinery and 34,245 303,918 and production UK Continental Shelf and other equipment and others Total ¥35,589 $315,848
10．Short-Term Borrowings and Long-Term Debt (A) Short-term borrowings Short-term borrowings are principally unsecured bank borrowings and notes maturing within one year. It is customary in Japan for such borrowings to be rolled over each year. The weighted average interest rates for the fiscal years ended March 31, 2015 and 2016, are approximately 0.31% and 0.44%, respectively.
(B) Short-term borrowings, commercial paper and the current portion of long-term debt as of March 31, 2015 and 2016, are as follows: Thousands of Millions of yen U.S. dollars 2015 2016 2016 Loans from banks, insurance companies and government agencies: Unsecured ¥202,875 ¥184,983 $1,641,673 Commercial paper 26,997 － － Current portion of long-term debt 173,650 108,964 967,021 Current portion of lease obligations * 25 － － Total ¥403,548 ¥293,947 $2,608,695 * Current portion of lease obligations is included in “Other” current liabilities.
To raise working capital efficiently, the Company entered into commitment line contracts with six banks. Total credit lines as of March 31, 2015 and 2016, are ¥140,000 million ($1,242,456 thousand) and ¥100,000 million ($887,468 thousand), respectively. This facility had not been utilized in either of the two fiscal years.
(C) Long-term debt as of March 31, 2015 and 2016, is as follows:
Thousands of
Millions of yen U.S. dollars 2015 2016 2016 Loans from banks, insurance companies and government agencies: Unsecured ¥711,308 ¥659,603 $5,853,777 Unsecured straight bonds 65,000 65,000 576,854 Lease obligations* 25 － － 776,334 724,603 6,430,632 Less: Current portion of long-term debt (173,650) (108,964) (967,021) Less: Current portion of lease obligations (25) － － Net ¥602,658 ¥615,639 $5,463,610 * Lease obligations (excluding current portion) are included in “Other” long-term liabilities.
ANNUAL REPORT 2016 67 The weighted average interest rates applicable to short-term borrowings, commercial paper and long-term debt as of March 31, 2015 and 2016, are as follows: 2015 2016 Short-term borrowings 0.31% 0.44% Commercial paper 0.10% － Current portion of long-term debt (excluding lease obligations) 0.88% 0.72% Long-term debt (excluding current portion) 0.75% 0.71%
Annual maturities of loans within long-term debt outstanding as of March 31, 2016, are as follows: Long-term loans
Thousands of Year ending March 31 Millions of yen U.S. dollars 2017 ¥108,964 $967,021 2018 69,430 616,172 2019 46,277 410,694 2020 41,151 365,208 2021 85,811 761,546 2022 and thereafter 307,969 2,733,133 Total ¥659,603 $5,853,777
The net book value of assets pledged as collateral as of March 31, 2015 and 2016, is as follows: Thousands of Millions of yen U.S. dollars 2015 2016 2016 Land ¥337,963 ¥337,963 $2,999,319 Investments in securities 6,456 6,382 56,646 Total ¥344,419 ¥344,346 $3,055,965
As of March 31, 2015 and 2016, the land in the above table is pledged to a bank as collateral for revolving mortgage. No borrowing secured by the collateral is outstanding at March 31, 2015 and 2016. In addition, the Company pledged investments in securities of Nghi Son Refinery and Petrochemical LLC (“NSRP”), the Company’s equity method affiliate, amounting to ¥76,867 and ¥95,572 ($848,180) million as of March 31, 2015 and 2016, respectively, and long-term loans receivable from NSRP amounting to ¥14,973 million ($132,881) as of March 31, 2016 as collateral for NSRP’s borrowings from financial institutions.
68 ANNUAL REPORT 2016 11．Retirement Benefits to Employees The Company and its subsidiaries maintain a corporate pension fund system and lump-sum retirement payment plans, which are defined benefit retirement plans covering substantially all employees. The benefit amounts are primarily calculated based on a point system. Certain subsidiaries maintain a defined contribution pension plan. Retirement benefits trust is set up for certain defined benefit corporate pension plans. The simplified method is used to calculate defined benefit obligation for the defined benefit plans of certain subsidiaries in accordance with applicable accounting standards.
(A) Defined benefit plans (1) The changes in defined benefit obligation for the years ended March 31, 2015 and 2016, are as follows (*):
Thousands of Millions of yen U.S. dollars 2015 2016 2016 Balance at beginning of year (as previously ¥102,707 ¥110,345 $979,283 reported) Cumulative effect of accounting change 7,065 － － Balance at beginning of year (as restated) 109,773 110,345 979,283 Current service cost 3,069 3,244 28,794 Interest cost 1,214 945 8,389 Actuarial (gains) losses 2,655 3,456 30,671 Benefits paid (6,699) (7,142) (63,385) Others 331 (296) (2,630) Balance at end of year ¥110,345 ¥110,552 $981,122 (*) The defined benefit obligation of the plans for which the Group uses the simplified method is not included in this table (see (3) below).
(2) The changes in plan assets for the years ended March 31, 2015 and 2016, are as follows (*):
Thousands of Millions of yen U.S. dollars 2015 2016 2016 Balance at beginning of year ¥89,926 ¥95,071 $843,728 Expected return on plan assets 2,319 2,098 18,626 Actuarial gains (losses) 4,487 (5,105) (45,310) Contributions from the employer 2,457 2,497 22,167 Benefits paid (4,723) (4,979) (44,189) Others 603 0 5 Balance at end of year ¥95,071 ¥89,583 $795,028 (*) The plan assets of the plans for which the Group uses the simplified method are not included in this table (see (3) below).
(3) The changes in the liability for employees’ retirement benefits of the plans for which the Group uses the simplified method for the years ended March 31, 2015 and 2016, are as follows:
Thousands of Millions of yen U.S. dollars 2015 2016 2016 Balance at beginning of year ¥145 ¥100 $888 Net periodic benefit costs 364 231 2,051 Benefits paid (265) (155) (1,383) Contributions from the employer (145) (133) (1,181) Balance at end of year ¥100 ¥42 $374
ANNUAL REPORT 2016 69 (4) Reconciliation between the liability recorded in the consolidated balance sheet and the balances of defined benefit obligation and plan assets
Thousands of Millions of yen U.S. dollars 2015 2016 2016 Defined benefit obligation ¥110,997 ¥111,149 $986,417 Plan assets (97,249) (91,808) (814,776) 13,747 19,340 171,641 Unfunded defined benefit obligation 1,626 1,670 14,827 Net liability (asset) arising from
defined benefit obligation ¥15,374 ¥21,011 $186,468
Thousands of Millions of yen U.S. dollars 2015 2016 2016 Liability for employees’ retirement
benefits ¥15,642 ¥21,351 $189,486 Asset for employees’ retirement benefits (267) (340) (3,017) Net liability (asset) arising from
defined benefit obligation ¥15,374 ¥21,011 $186,468 (*) The amounts in the above tables include the balances of the plans for which the Group uses the simplified method.
(5) The components of net periodic benefit costs for the years ended March 31, 2015 and 2016, are as follows:
Thousands of Millions of yen U.S. dollars 2015 2016 2016 Service cost ¥3,069 ¥3,244 $28,794 Interest cost 1,214 945 8,389 Expected return on plan assets (2,319) (2,098) (18,626) Recognized actuarial (gains) losses 78 131 1,163 Net periodic benefit costs calculated using
simplified method 364 231 2,051 Net periodic benefit costs ¥2,407 ¥2,453 $21,772
(6) Amounts recognized in other comprehensive income (before income tax effect) in respect of defined retirement benefit plans for the years ended March 31, 2015 and 2016
Thousands of Millions of yen U.S. dollars 2015 2016 2016 Actuarial (gains) losses (¥1,910) ¥8,430 $74,818
(7) Amounts recognized in accumulated other comprehensive income (before income tax effect) in respect of defined retirement benefit plans as of March 31, 2015 and 2016
Thousands of Millions of yen U.S. dollars 2015 2016 2016 Unrecognized actuarial (gains) losses (¥1,648) ¥6,781 $60,185
70 ANNUAL REPORT 2016 (8) Plan assets (i) Components of plan assets Plan assets as of March 31, 2015 and 2016, consist of the following (**): 2015 2016 Debt investments 47% 47% Equity investments 28 26 Alternative investments 21 20 Others 4 7 Total 100% 100% (*) The total plan assets include 13% and 11% of retirement benefit trust assets for certain corporate pension plans as of March 31, 2015 and 2016, respectively. (**) The plan assets for which the Group uses the simplified method are not included in this table.
(ii) Method of determining the expected rate of return on plan assets
The expected rate of return on plan assets is determined considering the long-term rates of return which are expected currently and in the future from the various components of the plan assets.
(9) Assumptions used for the years ended March 31, 2015 and 2016, are set forth as follows (*): 2015 2016 Discount rate 1.1% 0.9% Expected rate of return on plan assets 2.9% 2.6% (*)The discount rate and expected rate of return on plan assets for the years ended March 31, 2015 and 2016, are shown as a weighted average.
In calculating benefit obligation, the Group primarily uses the salary increase index by age based on the point system.
(B) Defined contribution retirement benefit plans Required contribution amounts to the defined contribution plans for the years ended March 31, 2015 and 2016, are ¥55 million and ¥55 million ($492 thousand), respectively.
ANNUAL REPORT 2016 71 12．Asset Retirement Obligations Asset retirement obligations recognized in the consolidated balance sheet are as follows:
(A) Outline of the relevant asset retirement obligations The Group has recognized the costs of restoration to the original state resulting from real estate leasing agreements on land for service stations facilities and the removal costs for petroleum and coal production facilities on the expiry of production or period of mining rights as asset retirement obligations, based on a reasonable estimation.
(B) Calculation method for the relevant asset retirement obligations The estimated periods for the actual expenditure of costs are based on the useful life of the principal facilities for service stations facilities and the estimated effective mining period from the startup of operations for oil exploration and production and coal mining. The discount rates to be applied for the fiscal years ended March 31, 2015 and 2016, vary from 1.5% to 5.0% and 1.5% to 5.0%, respectively.
(C) The changes in asset retirement obligations for the fiscal years ended March 31, 2015 and 2016, are as follows: Thousands of
Millions of yen U.S. dollars 2015 2016 2016 Balance at beginning of year 㻌 ¥56,692 ¥94,223 $836,200 Additional provisions associated with the acquisition 㻌 of property, plant and equipment㻌 11,119 79 707 Reconciliation associated with passage of time 2,230 3,066 27,216 Reduction associated with settlement of asset 㻌 retirement obligations㻌 (643) (778) (6,909) Changes in estimates (decreases) *1 25,285 (7,439) (66,023) Other increases (decreases) *2 (461) (8,873) (78,745) Balance at end of year ¥94,223 ¥80,278 $712,449 Note: *1 The Company changed the estimates of the asset retirement costs during the fiscal year ended March 31, 2015, because it became clear that the estimated costs at certain overseas subsidiaries will increase when the production ceases or the exploration rights terminate. The Company changed the estimates of the asset retirement costs during the fiscal year ended March 31, 2016, because it became clear that the estimated costs at certain overseas subsidiaries will decrease when the production ceases or the exploration rights terminate. The breakdown of changes in estimates for the year ended March 31, 2016, are: increase of ¥3,973 million ($35,262 thousand) and decrease of ¥11,412 million ($101,285 thousand). *2 Other increases (decreases) primarily relate to changes in foreign exchange rates for the fiscal years ended March 31, 2015 and 2016.
13．Contingent Liabilities (A) Debt guarantees The Group provides guarantees and items of a similar nature to financial institutions for indebtedness of the following parties as of March 31, 2015 and 2016: Thousands of Millions of yen U.S. dollars 2015 2016 2016 Employees ¥432 ¥310 $2,754 Nonconsolidated subsidiaries and affiliates 5,997 2,848 25,282 Other 3,982 3,591 31,871 Total ¥10,413 ¥6,750 $59,907
(B) Construction completion guarantee The Company provides a construction completion guarantee related to the project financing for the Nghi Son Refinery and Petrochemical Complex Project in Vietnam by Nghi Son Refinery and Petrochemical Limited Liability Company, whose construction commenced in the previous fiscal year. The Company’s portion of construction completion guarantee outstanding as of March 31, 2016, was ¥132,004 million ($1,171,496 thousand).
72 ANNUAL REPORT 2016 14．Equity Japanese companies are subject to the Companies Act. The significant provisions in the Companies Act that affect financial and accounting matters are summarized below:
(A) Dividends Under the Companies Act, companies can pay dividends at any time during the fiscal year in addition to the year-end dividend upon resolution at the shareholders’ meeting. Additionally, for companies that meet certain criteria including (1) having a Board of Directors, (2) having independent auditors, (3) having the Board of Statutory Auditors, and (4) the term of service of the directors being prescribed as one year rather than the normal two-year term by its articles of incorporation, the Board of Directors may declare dividends (except for dividends-in-kind) at any time during the fiscal year if the company has prescribed so in its articles of incorporation. The Company meets all the above criteria, and accordingly, the Board of Directors may declare dividends (except for dividends-in-kind) at any time during the fiscal year.
Semiannual interim dividends may also be paid once a year upon resolution by the Board of Directors if the articles of incorporation of the company so stipulate. The Companies Act provides certain limitations on the amounts available for dividends or the purchase of treasury stock. The limitation is defined as the amount available for distribution to the shareholders, but the amount of net assets after dividends must be maintained at no less than ¥ 3 million.
(B) Increases / decreases and transfer of common stock, reserve and surplus The Companies Act requires that an amount equal to 10% of dividends must be appropriated as a legal reserve (a component of retained earnings) or as additional paid-in capital (a component of capital surplus), depending on the equity account charged upon the payment of such dividends, until the aggregate amount of legal reserve and additional paid-in capital equals 25% of the common stock. Under the Companies Act, the total amount of additional paid-in capital and legal reserve may be reversed without limitation. The Companies Act also provides that common stock, legal reserve, additional paid-in capital, other capital surplus and retained earnings can be transferred among the accounts within equity under certain conditions upon resolution of the shareholders.
(C) Treasury Stock The Companies Act also provides for companies to purchase treasury stock and dispose of such treasury stock by resolution of the Board of Directors. The amount of treasury stock purchased cannot exceed the amount available for distribution to the shareholders which is determined by a specific formula.
15．Research and Development Expenses Research and development expenses charged to income for the fiscal years ended March 31, 2015 and 2016, are ¥13,238 million and ¥12,553 million ($111,408 thousand), respectively.
ANNUAL REPORT 2016 73 16．Related Party Transactions Significant transactions of the Company and its subsidiaries with related parties for the years ended March 31, 2015 and 2016, are as follows:
Thousands of Millions of yen U.S. dollars 2015 2016 2016 Collection of accounts receivable during the year (*1) ¥568,372 ¥953,388 $8,461,022
Thousands of Millions of yen U.S. dollars 2015 2016 2016 Undertaking of capital increase of affiliates: Nghi Son Refinery and Petrochemical LLC (*2) ¥21,432 ¥21,915 $194,491
Thousands of Millions of yen U.S. dollars 2015 2016 2016 Undertaking of project completion guarantee: Nghi Son Refinery and Petrochemical LLC on Nghi Son ¥83,828 ¥132,004 $1,171,496
Refinery and Petrochemical Complex in Vietnam (*2)
The balances due to or from a related party at March 31, 2015 and 2016, are as follows:
Thousands of Millions of yen U.S. dollars 2015 2016 2016 Accounts receivable, other (*1) ¥42,691 ¥34,164 $303,202
(*1) The collection of accounts receivable represents transactions with Idemitsu Credit Co., Ltd. (“Idemitsu Credit”). When customers make payment at service stations operated by the Company’s contracted retailers using credit card services provided by Idemitsu Credit, Idemitsu Credit collects credit service receivables from the customers at respective payment due dates. The collected cash is then paid to the Company after deducting the amount to be paid to the contracted retailers. The balance of accounts receivable represents outstanding receivables from Idemitsu Credit at year-end. (*2) As of March 31, 2016, the Company holds a 35.1% equity interest in Nghi Shon Refinery and Petrochemical LLC (“NSRP”). In addition to the above, the Company pledged investments in securities of NSRP amounting to ¥76,867 and ¥95,572 ($848,180) million as of March 31, 2015 and 2016, respectively, and long-term loans receivable from NSRP amounting to ¥14,973 million ($132,881) as of March 31, 2016 as collateral for NSRP’s borrowings from financial institutions.
74 ANNUAL REPORT 2016 17．Income Taxes The Company and its domestic subsidiaries are subject to Japanese national and local income taxes which, in the aggregate, resulted in normal effective statutory tax rates of approximately 35% and 33% for the fiscal years ended March 31, 2015 and 2016, respectively.
(A) The tax effects of significant temporary differences and tax loss carryforwards which resulted in deferred tax assets and liabilities at March 31, 2015 and 2016, are as follows: Thousands of Millions of yen U.S. dollars 㻌 2015 2016 2016 Loss carryforwards ¥50,940 ¥66,828 $593,079 Asset retirement obligation (*1) 55,343 44,361 393,698 Impairment loss on fixed assets 8,916 10,001 88,758 Liability for employees’ retirement benefits 7,305 9,411 83,521 Reserve for repair work 8,689 8,728 77,464 Estimated sales discounts for the year 6,530 5,479 48,628 Amortization of software 6,045 4,770 42,334 Non-deductible impairment in values of investment securities 2,336 4,629 41,089 Deferred losses on hedging activities 3,541 2,620 23,259 Accrued bonuses to employees 2,003 1,905 16,910 Allowance for doubtful accounts 676 1,035 9,189 Unrealized losses on available-for-sale securities 101 468 4,157 Business tax for previous years 205 311 2,760 Other (*1 and *2) 14,739 12,749 113,148 Subtotal deferred tax assets 167,373 173,302 1,538,001 Less: valuation allowance (16,217) (26,627) (236,311) Total deferred tax assets 151,156 146,674 1,301,690
Special amortization of overseas development costs, etc. (*1) (83,703) (44,842) (397,961) Special tax reserve on property, plant and equipment (16,636) (15,709) (139,418) Unrealized gains on available-for-sale securities (4,065) (1,994) (17,698) Adjustment amount of change in the valuation method for (1,739) (1,562) (13,868) inventories Deferred gains on hedging activities (38) (549) (4,878) Reserve for loss on overseas investments (285) (198) (1,761) Other (*1) (8,898) (8,760) (77,743) Total deferred tax liabilities (115,367) (73,617) (653,330) Net deferred tax assets (liabilities) (*3) ¥35,788 ¥73,057 $648,359 *1 Deferred tax assets arising from asset retirement obligation primarily relating to overseas subsidiaries and deferred tax liabilities relating to overseas special amortization of development costs are presented separately under Asset Retirement Obligation, Special amortization of overseas development costs, etc. and Others from FY2015. FY2014 amounts which were included in Other are presented to conform to the FY2015 classification.
*2 Deferred tax asset arising from business structure improvement expenses presented separately in FY2014 is included in other as it is not material in FY2015.
*3 Net deferred tax assets (liabilities) are included in the consolidated balance sheet as follows: Thousands of Millions of yen U.S. dollars 2015 2016 2016 Current assets ─── deferred tax assets ¥31,969 ¥24,557 $217,943 Investments and other assets ─── deferred tax assets 36,645 61,704 547,607 Current liabilities ─── deferred tax liabilities (262) (193) (1,715) Long-term liabilities ─── deferred tax liabilities (32,563) (13,011) (115,475) Net deferred tax assets (liabilities) ¥35,788 ¥73,057 $648,360
ANNUAL REPORT 2016 75 In addition to the above, deferred tax liabilities related to land revaluation are ¥92,508 million and ¥95,795 million ($850,152 thousand) as of March 31, 2015 and 2016, respectively.
(B) A reconciliation between the normal effective statutory tax rates and the actual effective tax rates reflected in the accompanying consolidated statement of operations for the fiscal years ended March 31, 2015 and 2016, is as follows:
2015 2016 Statutory tax rate 35.64% 33.06% Increase (decrease) in taxes resulting from: Differences in tax rates applied to foreign subsidiaries (6.47) 27.47 Valuation allowance (1.74) (23.25) Decrease in deferred tax assets caused by statutory tax rate change (3.04) (8.14) Equity in earnings and losses of nonconsolidated subsidiaries and affiliates, net 0.36 7.02 Non-deductible expenses for tax purposes (0.19) (1.23) Tax credits (0.15) 0.91 Amortization of goodwill (*1) (0.69) (0.74) Other 0.65 (1.27) Effective income tax rate 24.37% 33.81% *1 Amortization of goodwill which was included in Other in FY2014 is presented separately.
New tax reform laws enacted in March 2016 in Japan changed the normal effective statutory tax rate for the fiscal years beginning on or after April 1, 2016, to 30.86% and to 30.62% for the fiscal years beginning on or after April 1, 2018. The effect of these changes was to decrease deferred tax assets, net of deferred tax liabilities, by ¥3,670 million ($32,576 thousand) and accumulated other comprehensive income for unrealized gain on available-for-sale securities by ¥86 million ($765 thousand), and increase defined retirement benefit plan by ¥113 million ($1,004 thousand), deferred loss on derivatives under hedge accounting by ¥79 million ($708 thousand), and land revaluation surplus by ¥5,385 million ($47,793 thousand), with a decrease of ¥5,385 million ($47,793 thousand) in related deferred tax liability, in the consolidated balance sheet as of March 31, 2016, and to increase income taxes—deferred in the consolidated statement of operations for the year then ended by ¥5,378 million ($44,756 thousand).
76 ANNUAL REPORT 2016 18．Other Comprehensive Income The components of other comprehensive income for the fiscal years ended March 31, 2015 and 2016, are as follows: Thousands of Millions of yen U.S. dollars 2015 2016 2016 Unrealized gains (losses) on available-for-sale securities: Gains (losses) arising during the year ¥6,667 (¥7,498) ($66,547) Reclassification adjustments to profit or loss 221 (39) (348) Amount before income tax effect 6,889 (7,537) (66,895) Income tax effect (2,034) 2,439 21,652 Total ¥4,855 (¥5,098) ($45,243) Deferred gains (losses) on hedging activities, net: Gains (losses) arising during the year ¥1,544 (¥6,654) ($59,058) Reclassification adjustments to profit or loss (8,588) (664) (5,895) Amount before income tax effect (7,044) (7,319) (64,953) Income tax effect 1,236 2,147 19,056 Total (¥5,808) (¥5,171) ($45,897) Surplus from land revaluation: Income tax effect ¥10,243 (¥3,257) ($28,912) Total ¥10,243 (¥3,257) ($28,912) Foreign currency translation adjustments: Adjustments arising during the year ¥12,126 (¥28,988) ($257,264) Reclassification adjustments to profit or loss － (51) (456) Amount before income tax effect 12,126 (29,040) (257,721) Income tax effect (249) 20 185 Total ¥11,876 (¥29,019) ($257,535) Defined retirement benefit plans: Adjustments arising during the year ¥1,831 (¥8,561) ($75,982) Reclassification adjustments to profit or loss 78 131 1,163 Amount before income tax effect 1,910 (8,430) (74,818) Income tax effect (517) 2,537 22,519 Total ¥1,392 (¥5,893) ($52,299) Share of other comprehensive income (loss) in affiliates: Gains (losses) arising during the year ¥8,756 (¥1,740) ($15,445) Reclassification adjustments to profit or loss (256) (3) (35) Total ¥8,499 (¥1,744) ($15,480)
Total other comprehensive income ¥31,059 (¥50,184) ($445,369)
ANNUAL REPORT 2016 77 19．Lease Transactions (A) Lessee (1) Finance leases Finance lease transactions which commenced on or before March 31, 2008, and do not transfer the ownership of the leased property to the lessee are accounted for as operating leases. Pro forma information regarding the leased property, such as acquisition cost and accumulated depreciation, has not been presented because it is not material.
(2) Operating leases The amount of future lease payments under operating leases as of March 31, 2015 and 2016, is as follows: Thousands of Millions of yen U.S. dollars 2015 2016 2016 Scheduled maturities of future lease payments: Due within one year ¥4,875 ¥9,952 $88,323 Due over one year 13,101 42,047 373,159 ¥17,976 ¥51,999 $461,483
(B) Lessor The Group operates a finance sublease business. Future lease income under finance leases that do not transfer the ownership of the leased assets to the sublessee has not been presented because it is not material.
20．Financial Instruments and Related Disclosures (A) Policy for financial instruments The Group raises funds for capital investment through bank borrowings and issuance of bonds. Cash surpluses, if any, are invested in low-risk and short-term instruments. Short-term working capital is generated through bank borrowings and issuance of commercial paper. Derivatives are used, not for speculative purposes, but to manage exposure to financial risks as described in (B) below. The Company and certain consolidated subsidiaries have applied hedge accounting.
(B) Types of financial instruments and related risk Notes and accounts receivable, trade are exposed to credit risk in relation to customers. Short-term investments and investments in securities are exposed to market risk. The Group also has long-term loans receivable from group companies, etc.
Substantially all notes and accounts payable, trade have payment due dates within six months. Although the Group is exposed to foreign currency exchange risk arising from import payables denominated in foreign currencies, forward foreign exchange contracts are arranged to reduce the risk, after netting receivables in the same currencies.
Short-term borrowings are used mainly in connection with operating activities such as purchases of raw materials, and long-term debt is used principally for the purpose of making capital investments. Long-term debt with variable interest rates is exposed to interest rate fluctuation risk, but the Group utilizes interest rate swap transactions as a hedging instrument to reduce such risk.
Regarding derivatives, the Group enters into foreign exchange forward contracts and foreign currency option transactions to reduce the foreign currency exchange risk arising from the receivables and payables denominated in foreign currencies, and enters into interest rate swap transactions to reduce fluctuation risk arising from interest payable on long-term debt bearing interest at variable rates. The Group also enters into crude oil and petroleum product swaps and forward contracts to hedge the risk of price fluctuations of crude oil and petroleum products. Information regarding the method of hedge accounting, hedging instruments and hedged items, hedging policy, and the assessment of the effectiveness of hedging activities is found in Note 2(J).
(C) Risk management for financial instruments (1) Monitoring of credit risk (the risk that customers or counterparties may default) In accordance with the internal policies of the Group for managing credit risk arising from receivables, each related division of the Group monitors the creditworthiness of its customers and manages the terms and conditions of payment, price, and collateral and identifies the default risk of customers at an early stage. The Group believes that the credit risk of derivatives is insignificant as it enters into derivative transactions only with financial institutions, etc., which have a sound credit profile.
78 ANNUAL REPORT 2016
(2) Monitoring of market risks (the risks arising from fluctuations in foreign exchange rates, interest rates, prices of crude oil and petroleum products, and others) For trade receivables and payables denominated in foreign currencies, the Company and certain consolidated subsidiaries identify the foreign currency exchange risk for each currency on a monthly basis and enter into foreign exchange forward contracts and currency option transactions to hedge such risk. In order to mitigate the interest rate risk for loans payable bearing interest at variable rates, the Group enters into interest rate swap transactions (pay-fixed, received-variable). The Company and certain consolidated subsidiaries also enter into crude oil and petroleum product swaps and forward contracts in order to mitigate the risk of price fluctuations of crude oil and petroleum products.
For short-term investments and investments in securities, the Group holds a minimum number of shares of the companies with which the Group has business relationships. The Group reviews the market prices of listed shares quarterly and the financial position of the issuers of unlisted shares annually. The Board of Directors of the Company annually approves the plan for derivative transactions under internal rules established with respect to the purposes, policies, procedures, approvals and reporting for derivatives. In conducting derivative transactions, the division in charge of each derivative transaction follows the internal rules. Reports including actual transaction data are submitted monthly to the derivative committee and quarterly to the management committee. Consolidated subsidiaries have established similar internal rules and follow them in conducting derivative transactions in principle.
(3) Monitoring of liquidity risk (the risk that the Group may not be able to meet its obligations on scheduled due dates) The Group manages its liquidity risk by holding adequate volumes of liquid assets, along with adequate financial planning by the Treasury department. Consolidated subsidiaries raise funds by using loans from the Company, based on their financing plan.
(D) Supplementary explanation of the estimated fair value of financial instruments The fair value of financial instruments is based on their quoted market price, if available. When there is no quoted market price available, fair value is reasonably estimated. Since various assumptions and factors are reflected in estimating the fair value, different assumptions and factors could result in different fair values. In addition, the notional amounts of derivatives in Note 21 are not necessarily indicative of the actual market risk involved in derivative transactions.
(Fair Value of Financial Instruments) Carrying value of financial instruments recorded in the consolidated balance sheets as of March 31, 2015 and 2016, their fair values and unrealized gains (losses) are as follows. In addition, financial instruments of which market values are not available or fair values are extremely difficult to determine are not included in the table below.
March 31, 2015 Millions of yen Carrying Unrealized amount Fair value gains (losses) Cash and cash equivalents ¥111,195 ¥111,195 －㻌 Notes and accounts receivable, trade 321,703 321,703 － Investments in securities 38,545 38,545 ¥0 Long-term loans 4,323 4,337 13 Total assets ¥475,768 ¥475,782 ¥13 Notes and accounts payable, trade 366,559 366,559 － Short-term borrowings 202,875 202,875 － Commercial paper 26,997 26,997 － Current portion of long-term debt 173,650 173,650 － Long-term debt 602,658 608,491 ¥5,832 Total liabilities ¥1,372,741 ¥1,378,574 ¥5,832 Derivative transactions * (¥5,404) (¥5,404) －㻌 * Net debits and credits arising from derivative transactions are presented in each net value, and the value of a net debit after totaling of credit and debit is shown in parentheses.
ANNUAL REPORT 2016 79 March 31, 2016 Millions of yen Unrealized gains Carrying amount Fair value (losses) Cash and cash equivalents ¥118,787 ¥118,787 －㻌 Notes and accounts receivable, trade 259,817 259,817 － Investments in securities 30,761 30,761 － Long-term loans 20,904 21,047 ¥142 Total assets ¥430,271 ¥430,413 ¥142 Notes and accounts payable, trade 291,676 291,676 － Short-term borrowings 184,983 184,983 － Commercial paper － － － Current portion of long-term debt 108,964 108,964 － Long-term debt 615,639 621,366 ¥5,726 Total liabilities ¥1,201,263 ¥1,206,990 ¥5,726 Derivative transactions * (¥22,858) (¥22,858) －
Thousands of U.S. dollars Unrealized March 31, 2016 Carrying amount Fair value gains (losses) Cash and cash equivalents $1,054,199 $1,054,199 － Notes and accounts receivable, trade 2,305,803 2,305,803 － Investments in securities 272,999 272,999 － Long-term loans 185,521 186,787 $1,265 Total assets $3,818,524 $3,819,789 $1,265 Notes and accounts payable, trade 2,588,536 2,588,536 － Short-term borrowings 1,641,673 1,641,673 － Commercial paper － － － Current portion of long-term debt 967,021 967,021 － Long-term debt 5,463,610 5,514,430 $50,819 Total liabilities $10,660,842 $10,711,661 $50,819 Derivative transactions * ($202,861) ($202,861) － * Net debts and credits arising from derivative transactions are presented in each net value, and the value of a net debit after totaling of credit and debit is shown in parentheses.
Note: 1. Calculation method of fair values of financial instruments and securities and derivatives transactions
Cash and cash equivalents Cash and cash equivalents are based on their book values since all deposits are short-term, thus fair values approximate book value.
Notes and accounts receivable, trade Notes and accounts receivable, trade approximate book value since they are settled in the short term.
Investments in securities With respect to fair values of investments in securities, fair values of stocks are based on quotations from the stock exchange, and those bonds are based on quotations from the stock exchange or quotations presented by a financial institution.
Long-term loans The fair value of long-term loans is based on the present value, which is estimated by discounting future cash flows at a discount rate that would be applied to a similar new loan.
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Notes and accounts payable, trade, short-term borrowings, commercial paper and the current portion of long-term debt Notes and accounts payable, trade, short-term borrowings, commercial paper and the current portion of long-term debt approximate book value since they are settled in the short term.
Long-term debt The fair value of loans is determined by discounting the cash flows related to the loan at an estimated interest rate to be applied to a similar new borrowing. The fair value of bonds payable is based on the quoted market price.
Note: 2. Carrying amount of financial instruments whose fair value cannot be reliably determined Thousands of
Millions of yen U.S. dollars 2015 2016 2016 Investments in securities that do not have a quoted market price in an active market ¥199,205 ¥224,259 $1,990,233
Note: 3. Redemption schedule for receivables and short-term investments with maturities at March 31, 2015 and 2016
March 31, 2015 Millions of yen Over 1 year Over 5 years
Within 1 year within 5 years within 10 years Over 10 years Cash and cash equivalents ¥111,195 － － － Notes and accounts receivable, trade 321,703 － － － Investments in securities: Held-to-maturity securities 50 － － － Long-term loans － ¥3,696 ¥375 ¥251 Total ¥432,948 ¥3,696 ¥375 ¥251
March 31, 2016 Millions of yen Over 1 year Over 5 years
Within 1 year within 5 years within 10 years Over 10 years Cash and cash equivalents ¥118,787 －㻌 －㻌 －㻌 Notes and accounts receivable, trade 259,817 － － － Investments in securities: Held-to-maturity securities － － － － Long-term loans － ¥19,567 ¥1,061 ¥275 Total ¥378,605 ¥19,567 ¥1,061 ¥275
Thousands of U.S. dollars Over 1 year Over 5 years Within 1 year within 5 years within 10 years Over 10 years Cash and cash equivalents $1,054,199 － － － Notes and accounts receivable, trade 2,305,803 － － － Investments in securities: Held-to-maturity securities － － － － Long-term loans － $173,655 $9,418 $2,448 Total $3,360,002 $173,655 $9,418 $2,448
Note: 4. The redemption schedule for long-term debt is presented in Note 10.
ANNUAL REPORT 2016 81 21．Derivatives and Hedging Activities March 31, 2015 (A) Derivative transactions to which hedge accounting is not applied (1) Currency related Millions of yen Unrealized March 31, 2015 Notional amount Fair value gains (losses) Contract Maturing after amount one year Forward foreign exchange contracts, etc.: Selling U.S. dollars, etc. ¥30,044 － ¥242 ¥242 Buying U.S. dollars, etc. 71,895 － 192 192 Total ¥101,939 － ¥434 ¥434
(2) Commodity related Millions of yen Unrealized March 31, 2015 Notional amount Fair value gains (losses) Maturing after Contract amount one year Commodity swap contracts: Selling petroleum products ¥31,194 － ¥2,453 ¥2,453 Buying petroleum products 16,437 － (691) (691) Total ¥47,632 － ¥1,762 ¥1,762
(B) Derivative transactions to which hedge accounting is applied (1) Currency related Millions of yen March 31, 2015 Hedged item Notional amount Fair value Contract amount Maturing after one year Forward foreign exchange contracts: Selling U.S. dollars Notes and accounts receivable, trade ¥26,411 － (¥1,997) Buying U.S. dollars Fixed assets － － － Total ¥26,411 － (¥1,997)
(2) Interest rate related Millions of yen March 31, 2015 Hedged item Notional amount Fair value Maturing after Contract amount one year Interest rate swap contracts: Pay-fixed, receive-variable Long-term debt ¥394,555 ¥264,360 (¥5,361) Total ¥394,555 ¥264,360 (¥5,361)
82 ANNUAL REPORT 2016 (3) Commodity related Millions of yen March 31, 2015 Hedged item Notional amount Fair value Maturing after Contract amount one year Commodity swap contracts: Selling petroleum products Crude oil and ¥108 － ¥0 Buying petroleum products petroleum products 661 ¥122 105 Total ¥769 ¥122 ¥106
Notes: 1. Fair value is computed based on exchange rates and prices obtained from correspondent financial institutions. 2. Unrealized gains and losses in the table above are debited (credited) in the accompanying consolidated statement of operations.
March 31, 2016 (A) Derivative transactions to which hedge accounting is not applied (1) Currency related Millions of yen Unrealized March 31, 2016 Notional amount Fair value gains (losses) Contract Maturing amount after one year Forward foreign exchange contracts, etc.: Selling U.S. dollars, etc. ¥39,768 － ¥156 ¥156 Buying U.S. dollars, etc. 51,520 － (283) (283) Total ¥91,288 － (¥127) (¥127)
Thousands of U.S. dollars Unrealized March 31, 2016 Notional amount Fair value gains (losses) Contract Maturing amount after one year Forward foreign exchange contracts, etc.: Selling U.S. dollars, etc. $352,935 － $1,384 $1,384 Buying U.S. dollars, etc. 457,225 － (2,520) (2,520) Total $810,160 － ($1,135) ($1,135)
(2) Commodity related Millions of yen Unrealized March 31, 2016 Notional amount Fair value gains (losses) Contract Maturing amount after one year Commodity swap contracts: Selling petroleum products ¥38,360 － ¥2,866 ¥2,866 Buying petroleum products 56,318 ¥31,935 (15,161) (15,161) Total ¥94,679 ¥31,935 (¥12,294) (¥12,294)
ANNUAL REPORT 2016 83 Thousands of U.S. dollars Unrealized March 31, 2016 Notional amount Fair value gains (losses) Contract Maturing after amount one year Commodity swap contracts: Selling petroleum products $340,437 － $25,441 $25,441 Buying petroleum products 499,811 $283,413 (134,549) (134,549) Total $840,249 $283,413 ($109,107) ($109,107)
(B) Derivative transactions to which hedge accounting is applied (1) Currency related Millions of yen March 31, 2016 Hedged item Notional amount Fair value Contract Maturing after amount one year Forward foreign exchange contracts: Selling U.S. dollars, etc. Notes and accounts receivable, trade ¥14,934 － ¥24 Buying U.S. dollars, etc. Short-term － borrowings 318 1 Total ¥15,253 － ¥25
Thousands of U.S. dollars March 31, 2016 Hedged item Notional amount Fair value Contract Maturing after amount one year Forward foreign exchange contracts: Selling U.S. dollars, etc. Notes and accounts receivable, trade $132,543 － $216 Buying U.S. dollars, etc. Short-term － borrowings 2,829 9 Total $135,373 － $226
(2) Interest rate related Millions of yen March 31, 2016 Hedged item Notional amount Fair value Contract Maturing after amount one year Interest rate swap contracts: Pay-fixed, receive-variable Long-term debt ¥343,337 ¥283,277 (¥10,146) Total ¥343,337 ¥283,277 (¥10,146)
Thousands of U.S. dollars March 31, 2016 Hedged item Notional amount Fair value Contract Maturing after amount one year Interest rate swap contracts: Pay-fixed, receive-variable Long-term debt $3,047,012 $2,513,998 ($90,043) Total $3,047,012 $2,513,998 ($90,043)
84 ANNUAL REPORT 2016 (3) Commodity related Millions of yen March 31, 2016 Hedged item Notional amount Fair value Contract Maturing after amount one year Commodity swap contracts: Selling petroleum products Crude oil and － － － Buying petroleum products petroleum products ¥112 ¥82 ¥20 Total ¥112 ¥82 ¥20
Thousands of U.S. dollars March 31, 2016 Hedged item Notional amount Fair value Contract Maturing after amount one year Commodity swap contracts: Selling petroleum products Crude oil and － － － Buying petroleum products petroleum products $1,000 $733 $183 Total $1,000 $733 $183
Notes: 1. Fair value is computed based on exchange rates and prices obtained from correspondent financial institutions. 2. Unrealized gains and losses in the table above are debited (credited) in the accompanying consolidated statement of operations.
22. Net Income Per Share Reconciliation of the differences between basic and diluted net income per share ("EPS") Reconciliation of the differences between basic and diluted EPS for the years ended March 31, 2015 and 2016, is as follows:
U.S. Millions of yen Thousands of shares Yen Dollars
Net income (loss) attributable to owners of Weighted average the parent shares EPS Year ended March 31, 2015: Basic EPS: Net income (loss) attributable to common shareholders (¥137,958) 159,953 (¥862.50) Effect of dilutive securities: Dilution of subsidiary stock － Diluted EPS: Net income (loss) for computation (¥137,958) 159,953 －* Year ended March 31, 2016: Basic EPS: Net income (loss) attributable to common shareholders (¥35,993) 159,953 (¥225.03) ($1.99) Effect of dilutive securities: Dilution of subsidiary stock － Diluted EPS: Net income (loss) for computation (¥35,993) 159,953 －* －* * Diluted EPS for the year ended March 31, 2015 and 2016, is not calculated because of the net loss for the year despite the existence of dilutive securities.
ANNUAL REPORT 2016 85 23．Subsequent Events The following appropriation of retained earnings at March 31, 2016, was approved at the Board of Director’s meeting held on May 10, 2016: Thousands of
Millions of yen U.S. dollars Year-end cash dividends, ¥25 (U.S. $0.22) per share ¥3,998 㻌 $35,488
24．Segment Information
Years ended March 31, 2015 and 2016 Under ASBJ Statement No. 17, "Accounting Standard for Segment Information Disclosures" and ASBJ Guidance No. 20, "Guidance on Accounting Standard for Segment Information Disclosures," an entity is required to report financial and descriptive information about its reportable segments. Reportable segments are operating segments or aggregations of operating segments that meet specified criteria. Operating segments are components of an entity about which separate financial information is available and such information is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Generally, segment information is required to be reported on the same basis as is used internally for evaluating operating segment performance and deciding how to allocate resources to operating segments.
(A) Description of reportable segments The Company’s business segments cover the Group’s business units for which separate financial information is available on the business units for the whole Group and for which the Company’s Board of Directors carries out a periodic review in order to determine the allocation of management resources and to evaluate their operating performance.
Taking into consideration the nature of the products and the business standing in the Group, the Company recognizes three reportable segments, Petroleum products, Petrochemical products and Resources. In addition, other business segments are summarized under Others.
The Petroleum products segment is engaged in the manufacturing and sales of fuel oils and lubricant oils. The Petrochemical products segment is involved in the manufacturing and sales of basic chemicals as raw materials for various petrochemical products, as well as solvents and various functional materials. The Resources segment carries out exploration, development, production and sales of energy resources, including crude oil and coal, etc.
(B) Methods of measurement for the amounts of sales, income (loss), assets and other items for each reportable segment The accounting policies of each reportable segment are consistent with those disclosed in Note 2, “Summary of Significant Accounting Policies.”
86 ANNUAL REPORT 2016 (C) Information about sales, income (loss), assets and other items is as follows: Year ended March 31, 2015 Millions of yen Reportable segment 㻌 㻌 㻌 㻌 Petroleum Petrochemical Recon- 㻌 products products Resources Total Others Total ciliation Consolidated Net sales: 㻌 㻌 㻌 㻌 㻌 㻌 㻌 㻌 Customers ¥3,693,908 ¥638,977 ¥241,076 ¥4,573,961 ¥55,770 ¥4,629,732 － ¥4,629,732 Inter-segment 11,852 5,950 7 17,810 5,023 22,833 (¥22,833) － Total ¥3,705,760 ¥644,927 ¥241,083 ¥4,591,772 ¥60,794 ¥4,652,566 (¥22,833) ¥4,629,732 Segment profit (loss) (¥111,634) (¥7,083) ¥13,072 (¥105,645) ¥3,270 (¥102,374) (¥2,424) (¥104,798) Segment assets 1,729,765 389,819 590,100 2,709,685 98,070 2,807,756 (76,754) 2,731,001 Other items: Depreciation and 27,494 8,650 29,038 65,184 935 66,119 624 66,744 amortization Amortization of 717 34 2,364 3,116 289 3,405 － 3,405 goodwill Equity in earnings (losses) of nonconsolidated (503) 4,352 － 3,849 (2,147) 1,702 68 1,771 subsidiaries and affiliates, net Impairment loss on 2,553 2,198 65,758 70,511 － 70,511 － 70,511 fixed assets Investment in equity 87,105 37,077 4,420 128,602 69,948 198,550 － 198,550 method affiliates Unamortized balance 8,156 285 55 8,497 1,883 10,381 － 10,381 of goodwill Capital expenditures ¥30,764 ¥8,286 ¥105,966 ¥145,017 ¥1,880 ¥146,898 ¥508 ¥147,406
ANNUAL REPORT 2016 87 Year ended March 31, 2016 Millions of yen Reportable segment 㻌 㻌 㻌 㻌 Petroleum Petrochemical Recon- 㻌 products products Resources Total Others Total ciliation Consolidated Net sales: 㻌 㻌 㻌 㻌 㻌 㻌 㻌 㻌 Customers ¥2,752,675 ¥520,790 ¥226,533 ¥3,499,999 ¥70,203 ¥3,570,202 － ¥3,570,202 Inter-segment 10,316 5,682 2 16,000 4,961 20,961 (¥20,961) － Total ¥2,762,991 ¥526,472 ¥226,535 ¥3,515,999 ¥75,164 ¥3,591,164 (¥20,961) ¥3,570,202 Segment profit (loss) (¥67,350) ¥42,276 (¥626) (¥25,699) ¥8,760 (¥16,939) (¥2,703) (¥19,643) Segment assets 1,549,021 366,439 379,327 2,294,787 104,602 2,399,390 2,727 2,402,118 Other items: Depreciation and 28,436 8,563 41,513 78,513 1,134 79,648 634 80,282 amortization Amortization of 706 34 － 741 491 1,232 － 1,232 goodwill Equity in earnings (2,009) 10,092 986 8,978 781 9,759 30 9,790 (losses) of nonconsolidated subsidiaries and affiliates, net Impairment loss on 1,016 327 34,245 35,589 － 35,589 － 35,589 fixed assets Investment in equity 105,681 44,041 5,148 154,871 60,763 215,635 － 215,635 method affiliates Unamortized balance 7,020 251 － 7,272 2,427 9,699 － 9,699 of goodwill Capital expenditures ¥28,297 ¥5,478 ¥21,402 ¥55,178 ¥1,675 ¥56,853 ¥777 ¥57,630
Year ended March 31, 2016 Thousands of U.S. dollars Reportable segment 㻌 㻌 㻌 㻌 Petroleum Petrochemical Recon- 㻌 products products Resources Total Others Total ciliation Consolidated Net sales: 㻌 㻌 㻌 㻌 㻌 㻌 㻌 㻌 Customers $24,429,135 $4,621,854 $2,010,414 $31,061,405 $623,033 $31,684,438 － $31,684,438 Inter-segment 91,552 50,426 20 141,999 44,028 $186,027 ($186,027) － Total $24,520,688 $4,672,281 $2,010,434 $31,203,404 $667,061 $31,870,465 ($186,027) $31,684,438 Segment profit (loss) ($597,712) $375,193 ($5,557) ($228,077) $77,745 ($150,331) ($23,995) ($174,326) Segment assets $13,747,083 $3,252,033 $3,366,412 $20,365,529 $928,318 $21,293,847 $24,208 $21,318,055 Other items: Depreciation and 252,360 76,002 368,421 696,785 10,072 706,857 5,628 712,486 amortization Amortization of 6,272 305 － 6,578 4,363 10,942 － 10,942 goodwill (18,633) 89,563 8,753 79,683 6,932 86,616 267 86,883 Equity in earnings (losses) of nonconsolidated subsidiaries and affiliates, net Impairment loss on 9,022 2,907 303,918 315,848 － 315,848 － 315,848 fixed assets Investment in equity 937,893 390,852 45,692 1,374,438 539,258 1,913,696 － 1,913,696 method affiliates Unamortized balance 62,305 2,231 － 64,537 21,539 86,076 － 86,076 of goodwill Capital expenditures $251,128 $48,622 $189,937 $489,688 $14,867 $504,555 $6,895 $511,451
88 ANNUAL REPORT 2016 Notes: 1. The segment “Others” refers to the total of other business segments that are not included in the reportable segments, including engineering businesses, insurance businesses, electronic materials businesses, agricultural biotechnology businesses and renewable energy businesses. 2. The amount of reconciliation for the segment profit (loss) mainly represents research and development costs, which do not belong to reportable segments. 3. The segment profit (loss) of the reportable segments is reconciled to the amount of operating income in the consolidated statement of operations. 4. The amount of reconciliation for the segment assets represents elimination among the reportable segments and the amount of Company assets that are not allocated to the reportable segments. 5. The amounts of reconciliations for depreciation and amortization and capital expenditures mainly represent depreciation and increases in fixed assets for research and development that do not belong to the reportable segments. 6. The amounts of reconciliation for equity in earnings (losses) of nonconsolidated subsidiaries and affiliates, net are due to elimination of inter-segment transactions.
(D) Related Information Year ended March 31, 2015 1. Information for each product and service Since the consolidated business segment information includes similar information, descriptions have been omitted.
2. Geographic segment information (1) Sales Millions of yen Asia and North Japan Oceania America Europe Other Total ¥3,708,080 ¥544,739 ¥263,205 ¥104,794 ¥8,912 ¥4,629,732
Note: 1. Areas are segmented based on their geographical proximity. 2. The principal countries or region included in each region is as follows: Asia and Oceania : China, Australia, South Korea, Singapore, etc. North America : USA and Canada Europe : UK , Norway , etc. Others : South America, etc.
(2) Property, plant and equipment
Millions of yen Asia and Japan Oceania Europe Other Total ¥837,085 ¥130,090 ¥163,450 ¥5,117 ¥1,135,743
Note: 1. Areas are segmented based on their geographical proximity. 2. The principal countries or region included in each region is as follows: Asia and Oceania : Australia, Malaysia, South Korea, Indonesia, etc. Europe : UK and Norway Others : USA, Canada, etc.
3. Principal customer information Of the net sales to outside customers, no customer accounted for 10% or more of net sales in the consolidated statement of operations. Thus, this information has been omitted.
ANNUAL REPORT 2016 89 Year ended March 31, 2016 1. Information for each product and service Since the consolidated business segment information includes similar information, descriptions have been omitted.
2. Geographic segment information (1) Sales Millions of yen Asia and North Japan Oceania America Europe Other Total ¥2,677,913 ¥576,857 ¥222,394 ¥86,698 ¥6,339 ¥3,570,202
㻌 Thousands of U.S. dollars 㻌 Asia and North Japan Oceania America Europe Other Total $23,765,647 $5,119,430 $1,973,681 $769,420 $56,258 $31,684,438
Note: 1. Areas are segmented based on their geographical proximity. 2. The principal countries or region included in each region is as follows: Asia and Oceania : China, Australia, South Korea, Singapore, etc. North America : USA and Canada Europe : UK , Norway, etc. Others : South America, etc.
(2) Property, plant and equipment
Millions of yen Asia and Japan Oceania Europe Other Total ¥826,652 ¥120,776 ¥89,367 ¥29,786 ¥1,066,583
Thousands of U.S. dollars Asia and Japan Oceania Europe Other Total $7,336,284 $1,071,858 $793,105 $264,347 $9,465,595
Note: 1. Areas are segmented based on their geographical proximity. 2. The principal countries or region included in each region is as follows: Asia and Oceania : Australia, Malaysia, South Korea, Indonesia, etc. Europe : UK and Norway, etc. Others : USA, Canada, etc.
3. Principal customer information Of the net sales to outside customers, no customer accounted for 10% or more of net sales in the consolidated statement of operations. Thus, this information has been omitted.
90 ANNUAL REPORT 2016 ANNUAL REPORT 2016 91 Investor Information
(As of March 31, 2016)
COMPANY NAME REGULAR GENERAL SHAREHOLDERS’ MEETING Idemitsu Kosan Co.,Ltd. June of each year
HEAD OFFICE NUMBER OF SHARES ISSUED 1-1, Marunouchi 3-chome, Chiyoda-ku, Tokyo, Japan 160,000,000 shares
INCORPORATED NUMBER OF SHAREHOLDERS March 30, 1940 (Founded June 20, 1911) 17,040
REFINERIES TRANSFER AGENT Hokkaido, Chiba and Aichi Sumitomo Mitsui Trust Bank, Limited 1-4-1, Marunouchi, Chiyoda-ku, Tokyo PETROCHEMICAL PLANTS 100-8233, Japan Chiba and Tokuyama INDEPENDENT AUDITORS NUMBER OF EMPLOYEES Deloitte Touche Tohmatsu LLC 9,203 (consolidated)
FISCAL YEAR April 1 to March 31
MAJOR SHAREHOLDERS Number of Percentage of Name shares total shares (Thousands) (%) Nissho Kosan K.K. 27,120 16.95 Idemitsu Culture and Welfare Foundation 12,392 7.75 Idemitsu Museum of Arts Foundation 8,000 5.00 Idemitsu Employee Stockholders Committee 6,080 3.80 The Bank of Tokyo-Mitsubishi UFJ, Ltd. 5,142 3.22 Sumitomo Mitsui Banking Corporation 5,142 3.22 IR CONTACT Sumitomo Mitsui Trust Bank, Limited 5,142 3.22 Investor Relations Office Treasury Department, Japan Trustee Services Bank, Ltd. (Trust account) 4,175 2.61 Idemitsu Kosan Co.,Ltd. Japan Trustee Services Bank, Ltd. (Trust account 9) 3,287 2.06 1-1, Marunouchi 3-chome, Chiyoda-ku, Tokyo, The Master Trust Bank of Japan, Ltd. (Trust account) 3,067 1.92 100-8321, Japan (Note) Phone: +81-3-3213-9307 The shareholding ratios are calculated by excluding the shares of treasury stock of the Company (46,956 shares). Fax: +81-3-3213-3158
92 ANNUAL REPORT 2016 www.idemitsu.co.jp
IDEMITSU KOSAN CO.,LTD. ANNUAL REPORT 2016 Year Ended March 31, 2016