Showa Shell Sekiyu K.K. Corporate Report 2013 Showa Shell Sekiyu K.K. Corporate Report
Corporate Report 2013 [Year ended December 31, 2012] Powering A New Stage of Growth
Showa Shell Sekiyu K.K. Powering a New Stage of Growth The search for an appropriate means of supplying energy into the future is progressing on a global scale, and in Japan energy sources are becoming an ever more common subject of discussion. Calling upon the strength forged over a history spanning 113 years in Japan, the Showa Shell Group has devoted itself to playing a central role in providing a stable supply of energy over the long term. Going forward, we will contribute to shaping the future of energy in accordance with the needs of today’s society. Energy is directly linked to our daily lives and to industrial activity. We are working to create new value by supplying this energy in an optimal and reliable manner while also providing advanced new energy sources that will power the next generation. The Showa Shell Group believes that this is our way toward becoming a global energy solution provider.
Become the most profitable refiner in Japan Become a global leader Management Philosophy / Code of ConductExpand business scale and the source of power generation Philosophy Develop new products or business Mindset Oil Business: models for future growth Solar Business: Electric Power Business:
Medium-Term Fostering seeds for future growth: Business Action Plan
HSSE / Compliance
Foundation To Become the Global Energy Solution Provider that Society and Customers Require
1 Over the past several years, the Showa Shell Group has continued to evolve as it strives to transform into an organization that can lead the industry over the next 50 years. These efforts have started producing results. Looking toward the future, we will take a realistic perspective, without fear of the changing times, as we boldly pursue the creation of new value. We believe that the Showa Shell Group is growing toward the next stage at an accelerated pace. Shigeya Kato Chairman, Representative Director, and Chief Executive Officer (CEO)
Management Philosophy Showa Shell Sekiyu K.K. can only achieve a further leap and perpetual growth by constantly making its contribution to society, while secur- ing reasonable profits and constructing a strong management base and sound corporate constitution. With this in mind, we set our corporate creed as follows: 1. We will always endeavor for a breakthrough or technological innovation with a spirit of customer first, and for continual growth of the Company, discharging our social responsibilities, including environmental preservation, a stable supply of energy, and operational safety. 2. We will implement Japanese-style management adaptable to changes at our own discretion and on our own responsibility, while maintaining close relationships with Shell Group companies and cultivating our international business sense. 3. We will aim to achieve our corporate goals and form a group of positive people full of vitality associated with each other through a noble ideal and trust. 4. We will endeavor to improve productivity through an effort calling for everybody participation for thinking and sweating together and construct an affluent future on the base of the Company’s unshakable footing. Code of Conduct We share a set of core values—honesty, integrity, and respect for people. We also firmly believe in the fundamental importance of trust, openness, teamwork, and professionalism, and pride in what we do.
Please see our website for the text of our Code of Conduct. http://www.showa-shell.co.jp/english/profile/mp/action.html
Editorial Policy
The Showa Shell Group’s objective, based on its Management Philosophy, is to collaborate with its various stakeholders to “become the energy solution provider that society and our customers require.” We believe that our corporate social responsibility (CSR) activities are core to ac- complishing this goal. For this reason and to provide a more comprehensive view of the Group’s management and business activities, this report includes non-financial information regarding CSR and other matters along with management policies, strategies, and business conditions. Reporting Period Information contained in this report is based on corporate performance during fiscal 2012 (January 1, 2012, through December 31, 2012). In some cases, the report also describes activities conducted in fiscal 2013. Scope of Reporting In principle, this report covers the 31 consolidated subsidiaries and 13 equity-method affiliates that constituted the Showa Shell Group as of December 31, 2012. In the event that reporting is outside this scope, this fact is indicated. Reference Guidelines for Presentation of Non-Financial Information ISO 26000, International Organization for Standardization: International guidance on social responsibility Global Reporting Initiative (GRI) Sustainability Reporting Guidelines Version 3.0 (G3): International guidelines on corporate sustainability reporting Environmental Reporting Guidelines (2012 version), Ministry of the Environment of Japan Caution Regarding Business Forecasts and Forward-Looking Statements Business forecasts and other forward-looking statements regarding Showa Shell found in this report reflect the management’s assessment based on data available to it at the time the report was published. Readers are cautioned that actual business results may differ materially from these statements due to changes in economic conditions, market trends, exchange rates, and other factors.
2 CONTENTS P4 P12 P24 Profile PROFILE MANAGEMENT REVIEW OF MESSAGE OPERATIONS Management Message
4 Our Value Chain and Strengths 12 Message from the CEO 24 Business Highlights 6 Our History 16 Interview with the COO 26 Oil Business
8 Our Medium-Term Business Action Plan 22 Message from the CFO 34 Energy Solution Business Review of Operations 10 Financial and Non-Financial Highlights 36 Energy Solution Business (Solar Business) 43 Energy Solution Business (Electric Power Business) 45 Research and Development P46 P50 P60 HUMAN RESOURCES HSSE COMMUNITY AND Human Resources SOCIAL CONTRIBUTION ACTIVITIES HSSE 47 Formulation of the Talent Vision 51 HSSE Promotion and Management System 61 Eighth Environmental Photo Contest “Things 48 Creation of a Worker-Friendly 52 Goal Zero Movement to Preserve and Correct around Our Town” Environment 54 Health 62 Major Initiatives in 2012 54 Safety 55 Security
56 The Environment Community and Social Contribution Activities P63 P71 Website CORPORATE FINANCIAL SECTION CSR BOOK 2013 GOVERNANCE AND CORPORATE DATA Corporate Governance
CSR Book 2013
Showa Shell Sekiyu K.K.
2013 / 07 / 01 [15:37]
64 Corporate Governance Structure 72 Twelve-Year Summary of Selected Details pertaining to other CSR initia-
65 Outside Directors and Auditors Financial Data Financial Section and tives are described in CSR Book 2013,
66 Executive Remuneration 74 Business Risks Corporate Data 66 Internal Control System 76 Consolidated Financial Statements which is available on our website. 69 Interview with Outside Director 81 Notes to the Consolidated Financial 70 Board of Directors and Corporate Auditors Statements http://www.showa-shell.co.jp/ 95 Independent Auditor’s Report english/csr/index.html 96 Network 98 Major Subsidiaries and Affiliates 99 Investor Information
3 PROFILE
Our Value Chain and Strengths We are creating new value by pursuing synergies that exceed the boundaries of individual businesses.
Oil Business Procurement Refining We procure crude oil from Our refineries refine crude oil We produce gasoline, diesel oil, oil producing countries. into such products as gasoline, kerosene, heavy fuel oil, lubri- kerosene, diesel oil, heavy fuel oil, cants, asphalt, raw materials for raw materials for petrochemical petrochemical products, liquid products, and LPG. petroleum gas (LPG), and other oil products, and sell these prod- ucts to customers throughout STRENGTH STRENGTH Japan via contract dealers. Flexible crude oil procurement High utilization rate at refiner- leveraging the networks of the ies that are “top class” in Japan Shell Group and Saudi Aramco in terms of competitiveness
Transport
Raw Material Procurement
Energy Solution BUSINESS SOLAR Synergies We procure raw materials for the Business production of CIS thin-film solar modules. In our solar business, under the brand name Solar Frontier, we develop and manufacture CIS thin-film solar modules. In the electric power business, we
operate power plants and sell BUSINESS POWER ELECTRIC Power Plant Operation power to customers. We operate power plants that use byproducts from the petroleum refining process as fuel, natural gas-fired power stations built on former facility sites, and solar power plants utilizing CIS thin-film solar modules. Synergies
Research and Development and Cultivation of Next-Generation Services Development We continuously develop Showa Shell is developing next- and provide new services. generation products and services to drive future growth.
HSSE (Health, Safety, Security, Environment)
4 Profile Management Message
Oil Depots Sales Our petroleum products Service stations operated are stored in refinery tanks by our contract dealers and oil depots. and retailers sell our gaso- Customers line, kerosene, diesel oil, and other products to Review of Operations customers. We also sell Plants Distribution industrial fuels, jet and Our plants produce lubricants We distribute our marine fuels, lubricants, General and asphalt. petroleum products asphalt, and LPG through Households throughout Japan contract dealers. on ships, tank trucks, and other modes of transportation. Human Resources
Manufacturing Solar Module Sales Our plants manufacture Japan and We sell CIS thin-film solar modules in Japan CIS thin-film solar modules. overseas through sales agents and home builders. Industrial and Overseas subsidiaries sell these modules Other Customers HSSE around the world. Distribution Power Plant Development STRENGTH and Construction
We develop, design, operate, and provide Community and Social Contribution Activities Technologies for creat- maintenance for solar power plants. ing next-generation CIS thin-film solar modules STRENGTH that feature superior Business model providing high-value cost competitiveness services for all areas of the supply and performance chain on a “one-stop” basis Corporate Governance Financial Section and Corporate Data
HSSE (Health, Safety, Security, Environment) STRENGTH HSSE based on the Shell Group’s international standards
5 PROFILE
Our History Our underlying motivation is the gene that drives us to provide energy that meets the needs of society.
Showa Shell’s history in Japan spans 113 years. Throughout this history, we have continued to provide energy that meets the needs of society, changing our focus as the times demanded. When industry was burgeoning, our focus was on heavy fuel oil. During the rise of motorization, we emphasized gasoline. Furthermore, we began research and development of solar modules after the oil shock in the 1970s, driven forward by our passion to address the issue “what should we do for resource-scarce Japan to secure a stable supply of energy if the supply of oil from the Middle East is depleted”. Today, our Oil Business is generating stable profits, and we are pursuing further growth by developing our solar business and electric power business. In addition, we are looking ahead and advancing R&D ventures, bearing in mind what would be the energy required by the next generation.
Shell Sekiyu K.K Research and develop- Showa Shell Saudi Aramco established in 1900 ment of solar modules Sekiyu K.K. became a major Showa Oil Co., Ltd., commenced established shareholder established in 1942 1978 1985 2004
Shell Art Award Research and development Commercialization established of CIS thin-film solar decided modules commenced 1956 1993 2005
New high-performance Electricity sales gasoline FORMULA business began Shell Super X launched 1987 2003
Shell Helix series of Shell Pura high-octane Gas to liquids luxury automobile oils automobile gasoline (GTL) kerosene launched launched launched 1996 2002 2005
Number of directors significantly HSSE-MS Environmental photo reduced introduced contest started Executive officer system adopted 1997 2001 2005
6 Profile Management Message Review of Operations
Core Business Share of Net Sales Oil Business (Fiscal 2012) Human Resources Become the most profitable refiner in Japan Ohgimachi Factory Consideration regarding of the Keihin participation in a Refinery closed paraxylene project began % 2011 2012 96.6
Growth Driver HSSE Energy Solution Business Commercial production Project investment began at the Kunitomi Plant company established Solar Business Sales growth rate in Energy Solution Business Community and Social 2011 2013 Become a global leader Contribution Activities 271.1% (over 2-year period) Electric Power Business Operations at the Expansion of Expand business scale Ohgishima Power Ohgishima Power and the source of Station commenced Station decided power generation Corporate Governance 2010 2012 2010 2011 2012
Latent Potential for Future Growth Electric vehicle (EV) quick charger installation Research and Development services began Develop new products or business models 2009
for future growth Financial Section and Corporate Data Capabilities Supporting Corporate Value Half of directors made Management structure outside directors reforms implemented Management Foundation Earning greater trust from society and 2013 2013 maximizing corporate value
7 PROFILE
Our Medium-Term Business Action Plan
Organic Growth in Existing Businesses Step Changes—Growing through Structural Business Transformations
Oil Business Become the most profitable refiner in Japan While demand for oil products is experiencing a structural decline in Japan stemming from the falling birthrate, aging population, and increased concern for energy savings among consumers, a certain degree of demand is expected to continue into the future. Overseas, meanwhile, demand for oil products and petrochemicals is expected to rise in conjunction with economic growth, particularly in Asia.
Declining oil product demand in Japan
Maintain scale of domestic sales
Improve margin in pursuit of high added-value
Cut costs throughout the supply chain
Energy Solar Business: Solution Become a global leader Business The solar module market is forecast to expand on a global scale going forward. Solar Frontier K.K. will work to achieve ongoing growth by succeeding in the rapidly growing Japanese market and expanding operations into overseas markets.
Succeeding in the Commence full-fledged Japanese market expansion onto the global market Thoroughly cut costs by utilizing technological Leverage foundation capabilities for CIS thin-film Capture growing established in Japan solar modules global demand to grow further
Develop high-value-added business model
Management Earning greater trust from society and Foundation maximizing corporate value The Company has instituted a new management system that will enable it to respond more flexibly to changes in the business environment. With this system in place, it is advancing its business while devel- oping competitive human resources, managing risks related to HSSE, and practicing strict compliance.
8 Aiming to “become the energy solution provider that society and our customers require,” we will pursue organic growth Powering by improving the efficiency and profitability of existing
a New Stage of Growth businesses and implement “Step Changes” by allocating Profile business resources toward achieving future growth.
Step Changes—Growing through Structural Business Transformations Management Message
In addition to growing existing businesses, the Showa Shell Group is implementing “Step Changes”— growth through structural business transformations—as it works to evolve its business into one that will continue to grow into the future. Review of Operations
Growing demand for aromatic petrochemicals in Asia
Expand petrochemicals business Human Resources
Pursue strategic alliances with other companies
Electric Power Business:
Expand business scale and the source HSSE of power generation In Japan, the tight supply and demand balance for electricity is expected to continue into the future. To address this issue, the Showa Shell Group is working to develop its electric power business into Community and Social the third pillar of its business through the Step Change of expanding the scale of this business and the Contribution Activities range of power sources it utilizes. In this manner, we will contribute to a stable supply of electricity.
Oil Expand generation capacity to LNG
1 GW-class Corporate Governance Solar
Bio-mass, etc.
Research and Develop new products or business models Financial Section and Corporate Data Development for future growth Showa Shell is constantly considering the best possible form of energy for society and custom- ers, and, together with the Shell Group and our strategic partners, we are advancing the development of products and services related to next-generation energy accordingly.
9 FINANCIAL AND NON-FINANCIAL HIGHLIGHTS
Showa Shell Sekiyu K.K. and Consolidated Subsidiaries Years ended 31 December 2012 2011 2010 2009 2008
For the year: Yen Million Net sales ¥2,629,261 ¥2,771,418 ¥2,346,081 ¥2,022,520 ¥3,272,801 Operating income (loss) 14,697 60,288 36,701 (57,142) (12,283) Ordinary income (loss) 12,674 61,807 42,148 (56,455) (10,065) CCS ordinary income (loss)*1 11,224 30,020 34,286 (11,691) 45,697 Net income (loss) after taxes 1,013 23,110 15,956 (57,619) (16,221)
At year-end: Yen Million Total shareholders’ equity*2 ¥ 249,826 ¥ 255,865 ¥ 240,204 ¥ 235,517 ¥ 306,813 Total assets 1,233,193 1,208,442 1,193,149 1,172,739 1,209,956 Net interest-bearing debt*3 247,552 262,800 280,108 275,837 206,363 Depreciation and amortization 43,620 43,329 33,949 35,277 31,239 Capital expenditures 20,987 39,559 81,733 49,933 37,606 Capital employed*4 515,554 534,228 541,256 533,590 586,290 Research and development expenses 5,840 5,041 4,700 2,637 2,233
Cash flows: Yen Million Cash flows from operating activities ¥ 41,922 ¥ 50,551 ¥ 89,836 ¥ (7,395) ¥ 26,631 Cash flows from investing activities (17,747) (24,560) (82,510) (47,761) (42,932) Free cash flow*5 24,174 25,991 7,325 (55,156) (16,301) Cash flows from financing activities (21,391) (31,159) (8,671) 4,371 72,337
Per share data: Yen Net income (loss) after taxes per share ¥ 2.69 ¥ 61.36 ¥ 42.37 ¥ (152.99) ¥ (43.07) Total shareholders’ equity per share 663.33 679.37 637.78 625.33 814.63 Dividends per share 18.00 18.00 18.00 36.00 36.00
Key indicators: % Return on equity (%) 0.4% 9.3% 6.7% — — Shareholders’ equity ratio*6 20.3 21.2 20.1 20.1% 25.4% Current ratio*7 104.3 103.2 90.2 83.0 95.4 Gearing ratio*8 49.8 50.7 53.8 53.9 40.2 Number of employees 5,848 5,947 5,761 5,439 5,229
Group oil refineries Amount and rate of industrial waste output 107 92 135 186 144 (tonnes/year)
CO2 emissions (kilotonnes/year) 4,754 5,872 5,673 5,641 6,031 Unit energy consumption*9 7.16 7.67 7.96 7.90 8.05
Showa Shell Group companies and business partners Total recordable case frequency*10 (%) 1.4 1.7 1.8 2.1 1.5
* 1 CCS ordinary income (ordinary income on Current Cost of Supply basis): Ordinary income based on costs excluding inventory valuation effects * 2 Total shareholders’ equity = Total net assets – Minority interests * 3 Net interest-bearing debt = Interest-bearing debt – Cash and deposits * 4 Capital employed = Total shareholders’ equity + Total debts * 5 Free cash flow = Cash flows from operating activities + Cash flows from investing activities * 6 Shareholders’ equity ratio = Total shareholders’ equity / Total assets * 7 Current ratio = Total current assets / Total current liabilities * 8 Gearing ratio = (Total debts – Cash and deposits) / (Capital employed – Cash and deposits) * 9 Unit energy consumption: Energy consumption (kiloliters of crude oil equivalent) / Equivalent feedstock volume (megaliter) * 10 Per 1 million labor hours: Figures include Showa Shell Group companies and business partners, and recordable cases of all occupational accidents, including those that do not result in lost work time.
10 Performance In 2009, performance decreased significantly due to a rapid decline in the prices of crude oil and oil products. However, since 2010, operating income in the Oil Business has been stable and our Energy Solution Business has been progressively growing into a new pillar of
operations. Consequently, the Company has been generating a certain degree of income on a consolidated basis. Profile
Net Sales Ordinary Income (Loss) Net Income (Loss) after Taxes Net Sales Ordinary IncomeOrdinary (Loss)income (loss) Net Income (Loss) after Taxes (Yen Billion) (Yen Billion) Ordinary income (loss) (Yen Billion) (Yen Billion) (Yen Billion) CCSOrdinary ordinary income income (loss) (loss) (Yen Billion) (Yen4,000 Billion) (Yen70 Billion) CCS ordinary income (loss) (Yen30 Billion) 4,000 70 CCS ordinary income (loss) 30 4,000Net Sales Ordinary70 Income (Loss) Net30 Income (Loss) after Taxes
Ordinary income (loss) Management Message (Yen3,000 Billion) (Yen35 Billion) (Yen Billion) 3,000 35 CCS ordinary income (loss) 0 4,0003,000 3570 30 0 0 2,000 0 2,000 0 3,0002,000 350 -30 0 1,000 -35 -30 -30 1,000 -35 2,0001,000 -350 0 -70 -60 -30 0 2008 2009 2010 2011 2012 -70 2008 2009 2010 2011 2012 -60 2008 2009 2010 2011 2012 1,0000 2008 2009 2010 2011 2012 -70-35 2008 2009 2010 2011 2012 -60 2008 2009 2010 2011 2012 2008 2009 2010 2011 2012 2008 2009 2010 2011 2012 2008 2009 2010 2011 2012
0 -70 -60 2008 2009 2010 2011 2012 2008 2009 2010 2011 2012 2008 2009 2010 2011 2012 Review of Operations Financial The Company’s financial position deteriorated temporarily due to increased funding requirements resulted from the decrease in earnings Position in 2009 and large-scale investments in the solar business in 2010. However, we still managed to maintain a sound financial position. The level of dividends was decreased in 2010 to fund growth investment in the solar business and have remained at this level since. Cash Flow / Gearing Ratio Total Shareholders’ Equity / Shareholders’ Equity Ratio Net Income (Loss) after Taxes per Share / Dividends per Share Cash FlowOperating / Gearing cash flow Ratio Gearing ratio Total Shareholders’Total Equity shareholders’ / Shareholders’ equity Equity Ratio Net Income Net(Loss) income after Taxes(loss) afterper Share taxes /per Dividends share per Share Cash(Yen Billion) Flow / Gearing Ratio (%) (Yen Billion) (%) (Yen) (Yen) Operating cash flow Gearing ratio TotalShareholders’ shareholders’ equity equity ratio NetDividends income per (loss) share after taxes per share (Yen Billion) OperatingInvesting cash cash flow flow Gearing ratio (%) (Yen Billion) Total shareholders’ equity (%) (Yen) Net income (loss) after taxes per share (Yen) (Yen100 Billion) Investing cash flow 60(%) (Yen400 Billion) Shareholders’ equity ratio 28(%) (Yen)100 Dividends per share (Yen)40 Cash100 FlowInvesting / Gearing cash flow Ratio 60 Total400 Shareholders’Shareholders’ Equity / Shareholders’ equity ratio Equity Ratio28 Net100 Income (Loss)Dividends after per Taxes share per Share / Dividends per40 Share 100 60 400 28 10050 2040 50 Operating cash flow Gearing ratio 45 300 Total shareholders’ equity 21 50 Net income (loss) after taxes per share 20 (Yen Billion) (%) (Yen Billion) (%) (Yen)50 (Yen)20 50 Investing cash flow 45 300 Shareholders’ equity ratio 21 0 Dividends per share 0
50 45 300 21 Human Resources 100 60 400 28 1000 400 0 30 200 14 -500 0 0 30 200 14 -5050 20 500 4530 300200 2114 -100-50 -50 15 100 7 -1000 0 -100 -50 15 100 7 -150 -500 3015 200100 147 -150-50 -100 0 0 0 -200-150 -100 2008 2009 2010 2011 2012 0 0 2008 2009 2010 2011 2012 0 -200-100 2008 2009 2010 2011 2012 -100-50 2008 2009 2010 2011 2012 150 1000 2008 2009 2010 2011 2012 70 -200 2008 2009 2010 2011 2012 2008 2009 2010 2011 2012 2008 2009 2010 2011 2012 -150 2008 2009 2010 2011 2012
-100 0 0 0 -200 2008 2009 2010 2011 2012 2008 2009 2010 2011 2012 2008 2009 2010 2011 2012 Business In 2010, investment in the solar business was primarily focused on the Kunitomi Plant. Also, R&D initiatives were accelerated in this business, Model leading to a rise in related expenses. In regard to employee numbers, the percentage of total employees attributed to the Energy Solution HSSE Changes Business increased as a result of the expansion of the solar business. Capital Expenditures by Business Research and Development Expenses Number of Employees by Segment Capital Expenditures by Business Research and Development Expenses Number of OilEmployees Business Energy by Segment Solution Business Capital(Yen Billion) ExpendituresOil Business by Business Research(Yen Billion) and Development Expenses Number of Employees by Segment OilSolar Business business OilOthers Business Energy Solution Business 100(Yen Billion) Oil Business 6.0(Yen Billion) 6,000 Oil Business Energy Solution Business (Yen Billion) Solar business (Yen Billion) Others 100 SolarOthers business 6.0 6,000 Others Capital100 ExpendituresOthers by Business 6.0Research and Development Expenses Number6,000 of Employees by Segment Others Oil Business Energy Solution Business (Yen75 Billion) Oil Business 4.5(Yen Billion) 5,000 Community and Social 75 Solar business 4.5 5,000 Others Contribution Activities 10075 6.04.5 6,0005,000 Others 50 3.0 4,000 50 3.0 4,000 7550 4.53.0 5,0004,000 25 1.5 3,000 25 1.5 3,000 5025 3.01.5 4,0003,000 0 0 0 0 2008 2009 2010 2011 2012 0 2008 2009 2010 2011 2012 0 2010 2011 2012 250 2008 2009 2010 2011 2012 1.50 2008 2009 2010 2011 2012 3,0000 2010 2011 2012 2008 2009 2010 2011 2012 2008 2009 2010 2011 2012 2010 2011 2012
0 0 0 2008 2009 2010 2011 2012 2008 2009 2010 2011 2012 2010 2011 2012 Corporate Governance
HSSE Total recordable case frequency was down due to efforts to raise safety awareness and prevent reoccurrence of accidents implemented as part of the Goal Zero Movement. CO2 emissions decreased due to higher operational efficiency at Group refineries as well as the benefits Total Recordable Case Frequency Unit Energy Consumption CO2 Emissions/Group Refinery Capacity Utilization Rate (%) Total Recordable Caseof investments Frequency conducted to improveUnit energyEnergy efficiency Consumption at these facilities. CO2 Emissions/Group Refinery Capacity Utilization Rate (%) Total(Showa RecordableShell Group companies Case and Frequency business partners)Unit (Group Energy oil refineries) Consumption CO(Group2 Emissions/Group oil refineries) Refinery Capacity Utilization Rate (%) (Showa Shell Group companies and business partners) (Group oil refineries) (Group oil refineries) CO2 emissions (Showa(%) Shell Group companies and business partners)(%) (Group oil refineries) (Kilotonnes/year)(Group oil refineries) COUtilization2 emissions rate (%) CO2 emissions (%)2.0 (%)8.0 (Kilotonnes/year)8,000 100(%) Total(%) Recordable Case Frequency Unit(%) Energy Consumption CO(Kilotonnes/year)2 Emissions/Group RefineryUtilization Capacity Utilizationrate Rate(%) (%) 2.0 8.0 8,000 Utilization rate 100 (Showa2.0 Shell Group companies and business partners) (Group8.0 oil refineries) (Group8,000 oil refineries) 100 CO2 emissions (%)1.5 (%)6.0 (Kilotonnes/year)6,000 75(%) 1.5 6.0 6,000 Utilization rate 75 2.01.5 8.06.0 8,0006,000 10075 Financial Section and 1.0 4.0 4,000 50 1.0 4.0 4,000 50 Corporate Data 1.51.0 6.04.0 6,0004,000 5075 0.5 2.0 2,000 25 0.5 2.0 2,000 25 1.00.5 4.02.0 4,0002,000 2550 0 0 0 0 0 2008 2009 2010 2011 2012 0 2008 2009 2010 2011 2012 0 2008 2009 2010 2011 2012 0 0.50 2008 2009 2010 2011 2012 2.00 2008 2009 2010 2011 2012 2,0000 2008 2009 2010 2011 2012 250 2008 2009 2010 2011 2012 2008 2009 2010 2011 2012 2008 2009 2010 2011 2012
0 0 0 0 2008 2009 2010 2011 2012 2008 2009 2010 2011 2012 2008 2009 2010 2011 2012
11 MESSAGE FROM THE CEO
Shigeya Kato Chairman, Representative Director, and Chief Executive Officer (CEO)
12 Profile
Transforming to achieve Management Message growth as a sustainable energy company Review of Operations
Showa Shell has been reforming its business structures to develop a solid corporate foundation to support its continued growth. In pursuit of such growth, we are leveraging our highly transparent governance systems
and highly competent human resources that are able to flexibly respond Human Resources to changes in the business environment. HSSE Community and Social Contribution Activities
Performance in Over the past several years, the Showa Shell Group has been undertaking new challenges Corporate Governance to create further value and fuel future growth. In this process, we have overcome several Fiscal 2012 hardships while carefully predicting future trends in domestic demand and resource prices. In 2012, we began reaping the benefits of these efforts. Highly volatile global financial markets and crude oil prices placed temporary pressures on the profitability of our Oil Business. However, the profitability improvement measures we had implemented up until then allowed us to generate stable profits on a full-year basis, regardless of these pressures.
Turning to our Energy Solution Business, performance in the electric power business re- Financial Section and
mained stable while the solar business achieved a large improvement in profitability, and I Corporate Data believe that we have successfully laid the foundations for the next growth spurt in these businesses. Going forward, we will relentlessly work to push Showa Shell to the next stage of growth through the ongoing pursuit of business transformations so that we will evolve the Company into an organization that leads the industry over the next 50 years.
13 MESSAGE FROM THE CEO
The business environment for the energy industry is currently growing rapidly on a Medium-Term global scale. Meanwhile in Japan, the ideal form of energy is being reconsidered in light Business Action of the country’s experience with the Great East Japan Earthquake. The Showa Shell Group aims to address these changes head-on and regards them as growth opportunities, Plan—Guiding the thereby realizing its vision to “become the energy solution provider that society and our Showa Shell Group customers require.” In 2012, we formulated the Medium-Term Business Action Plan to guide us on this quest. to the Next Stage The plan calls for us to implement concrete initiatives based on two approaches: pursu- of Growth ing organic growth by strengthening existing businesses and implementing “Step Changes” to give form to the Showa Shell of the future. Organic growth is core to the plan, and we will pursue such growth by stably supplying products and enhancing profitability in our Oil Business while strengthening the competitiveness of the solar business in the global market. At the same time, we realize that taking on bold new challenges, as we did 35 years ago when we first entered the solar business, will be absolutely essential if Showa Shell is to transform into a sustainable energy company that society and our customers require. For this reason, we will implement Step Changes that entail us stepping into new business areas. I have high expectations for the benefits of such Step Changes in the development of our electric power business. In advancing the measures described in the Medium-Term Business Action Plan, it is vital that all employees are equally aware of the significance of this plan and share a sense of determination toward achieving our goals. Devoted action based on a steadfast will is the most important factor in driving the Showa Shell Group to the next stage of growth. Such action will require the development of a strong corporate culture that helps give form to the Talent Vision, which encourages us to take action based on a clear and realistic view of the business environment and social needs while placing an emphasis on teamwork. I in- tend to guide the Showa Shell Group in developing just such a corporate culture.
Corporate Showa Shell has developed strong corporate governance systems that are focused on the interests of shareholders and therefore ensure the transparency of management while also Governance enabling quick decision-making and business execution. Since 2009, we have adhered to a policy of having half of the Board of Directors consist of outside directors, and subse- quently five out of the eight directors appointed at the General Shareholders’ Meeting held in March 2013 were outside directors. This has effectively strengthened the oversight and monitoring functions of the Board of Directors. In addition, as our Energy Solution Business is growing and we have firmly established a business structure consisting of two pillars—this business and the Oil Business—we have
Board of Directors
Group executive management CEO COO CFO
Companywide issues Strategic issues Risk Management Committee
Oil Business Management Energy Solution Business Executive Committee Management Executive Committee Chairman: Executive Officer, Chairman: Executive Officer, Oil Business COO Energy Solution Business COO Division-related issues Business execution
14 instituted a new management system to clarify the division of management responsibility. Under this system, chief operating officers will be appointed to the Oil Business and the
Energy Solution Business to serve as the highest managing officer for their respective Profile business segment. The highest level of management for the Company will consist of the Group’s Chief Executive Officer (CEO), Chief Operating Officer (COO), and Chief Finan- cial Officer (CFO). I feel that this gives us a management system strong enough to push the Showa Shell Group to the next stage of growth. Management Message
Shareholder The Company practices the basic policy of issuing stable and appealing dividends to shareholders while taking into consideration the Company’s financial position and poten- Returns tial future growth opportunities. In 2010, we reduced the level of dividends to secure funds for large-scale investments in the solar business. However, the cash flows in this Review of Operations business are improving, as is our financial position. Going forward, we will work to our fullest to realize stable and appealing dividends while eying a balance between the need to conduct strategic investments to advance measures described in the Medium-Term Busi- ness Action Plan and maintain a sound financial position.
The Showa It is absolutely important for a company to generate income through its business activities Human Resources to fuel its growth over the long term. In addition, I believe that it is also necessary for a Shell Group’s company to be accepted by society as a good corporate citizen, which should be ac- Corporate Value complished by contributing to society through corporate activities. Showa Shell plays an important role in society by providing a stable supply of the energy that supports our daily lives as well as economic activity. We take great pride in this fact. At the same time, as a company with long history of 113 years of supplying energy in accordance with changing social needs, we are aware of our responsibility
to propose a next-generation energy mix appropriate for the future of society. After the HSSE oil shock of the 1970s, we commenced research and development of solar modules with the aim of supplying energy without relying on oil. This forward-thinking mentality will continue to guide us in the future as we advance the measures outlined in the Medium-Term Business Action Plan in order to continue growing together with society. Community and Social Contribution Activities
Shigeya Kato Chairman, Representative Director, and CEO Corporate Governance Financial Section and Corporate Data
15 INTERVIEW WITH THE COO Powering a New Stage of Growth
By advancing the strategies of the Medium-Term Business Action Plan, we will build a solid operating foundation for our ongoing growth.
Jun Arai Representative Director, Chief Operating Officer (COO)
16 Operating income was down year on year when the influences of inventory evaluations Q1 A are excluded. However, we improved the profitability of our Energy Solution Business
quarter by quarter, and I believe that fiscal 2012 was a great step toward a brighter future. Profile How was performance In the Oil Business, the price of crude oil experienced a rapid decline of approximately in fiscal 2012, and how 30% in the second quarter, resulting in the deterioration of operating conditions. Profitability would you evaluate this worsened accordingly, leading us to record losses in the second quarter, and income declined on a full-year basis. Nevertheless, the measures we implemented to boost profitability in the performance? Management Message latter half of the year proved successful, and, if the impacts of this tough period are excluded, Price of Dubai Crude Oil we were able to generate stable income, as initially forecasted. (2012) Turning to our Energy Solution Business, we were able to capture the surging demand in the fourth quarter for the solar business, and performance in the electric power business proved (US$/Barrel) 130 stable due to the tight supply and demand situation for electricity in Japan. Recording profits for the first time in our Energy Solution Business during the fourth quarter truly convinced us that our 120 efforts are making solid progress, and resulted in strong financial performance as well. Tariff Review of Operations 110 changes under the feed-in tariff scheme for renewable energy, which were initially expected to
100 be decided in the spring, were finally decided in June. The rise in demand occurred later than forecast due to this delay. Regardless, we were able to cut costs to a greater degree than we 90 had planned, and operating loss remained within the level we had initially projected.
80 1st 2nd 3rd 4th Operating Income by Segment CCS ordinary income for the Oil Business quarter quarter quarter quarter Operating income for the Energy Solution Business 23.4 (Yen Billion) 15.6 15 14.7 12.3 Human Resources 11.1 10 7.5
5 1.6 0.1 0
–3.5 –5 –4.3 –4.6 –5.6 –5.1 –8.7 –9.2 –7.3 –10 2011/1Q 2011/2Q 2011/3Q 2011/4Q 2012/1Q 2012/2Q 2012/3Q 2012/4Q HSSE First, I would like to talk about the Oil Business. As a result of the 2011 closure of the Q2 A Ohgimachi Factory of the Keihin Refinery, fixed costs were down during fiscal 2012 and the utilization rate of other Group refineries remained high throughout the year. I believe Specifically, what measures this was our first step toward long-term improvement in competitiveness. Community and Social were implemented during On the sales side of operations, the number of customers using the Ponta joint point card, Contribution Activities the year? which is accepted throughout a retail network consisting of over 50 companies, increased, and we rolled-out other full-fledged retail measures, such as the “Shell EasyPay” payment sys- tem, which allows for quick payments when fueling. These measures have established a strong reputation among contract dealers and customers, and we expect to see further expansion in our customer base starting in fiscal 2013.
In the petrochemical field, with the aim of boosting the competitiveness of Group refineries Corporate Governance going forward, consideration progressed regarding the possibilities of shifting production from oil products to petrochemicals and participating in a joint business with GS Caltex Corpora- tion of South Korea in the future. I believe these efforts have laid foundations for further progress in fiscal 2013 and onward. In the solar business, production at the Kunitomi Plant, which manufactures next-generation CIS thin-film solar modules, was gradually accelerated. Also, raw material procurement costs
declined. R&D ventures enabled us to improve the output of our modules to a greater extent than Financial Section and
planned, and the output range of our product lineup rose to 155–165W, from 145–155W Corporate Data at the beginning of the year. As a result of these efforts, production cost per watt decreased by approximately 20% for the entire year. In sales, we focused on selling products domestically in light of the robust demand in Japan stemming from the feed-in tariff scheme. While domestic sales represented only 30% of total sales in fiscal 2011, this ratio grew to approximately 60% in fiscal 2012. We plan to further increase our focus on domestic sales in fiscal 2013.
17 INTERVIEW WITH THE COO: POWERING A NEW STAGE OF GROWTH
In 2009, we formulated EPOCH 2010, Showa Shell’s medium-term business vision for Q3 A the Company 5–10 years in the future. This vision illustrated our goal to be the “energy Showa Shell recently an- solution provider that society and our customers require.” After this plan was launched, we saw the occurrence of a number of events that would significantly impact the future of the energy nounced its Medium-Term market. These included the Lehman Shock, which resulted in a global financial crisis, as well Business Action Plan, as the Great East Japan Earthquake of 2011, the ensuing nuclear power plant issues, and the which is oriented toward global shale gas revolution. Conditions are changing for all of Showa Shell’s businesses. De- achieving growth over mand for oil products is decreasing in Japan due to the impacts of the declining birthrate and the medium- to long-term. aging population as well as increased environmental awareness and a stronger trend toward higher energy efficiency. Meanwhile, intense competition is expected in our Energy Solution What is the backdrop Business, particularly in the solar business for which the market is expected to expand into the for the formulation of future. Faced with these challenges, we felt it was essential to develop a concrete action plan this report? that outlines how we should proceed in this environment going forward. The Medium-Term Business Action Plan was formulated as our plan for achieving the Showa Shell Group’s vision in such an environment. Looking ahead, there are many uncertain factors that will impact the future of both of our businesses. However, I realize that risks and changes are always accompanied by opportunities, and I feel that it is important to take a forward-thinking approach toward such risks and changes to capture the growth opportunities they present. Through the plan, I hope to share this mindset with all of the Group’s employees as well as our various other stakeholders. Based on this mindset, the Showa Shell Group will unite and push forward in its quest to become an organization that is viewed as necessary to society and consumers.
Key strategic pillars under the Medium-Term Business Action Plan Global Business Expansion
Oil Business Solar Business Become the most profitable refiner Become a global leader in Japan Strong Domestic Fostering seeds for Business Base Electric Power Business future growth Expand business scale and the Develop new products or business source of power generation models for future growth
HSSE, Compliance
Enhancing Profitability of the Oil Business Q4 A I am confident that oil products will continue to play an important role in society as a What initiatives will be source of primary energy. Demand for these products is gradually declining in Japan. None- theless, we will continue to offer a stable supply of oil products while maintaining the high implemented in the oil, level of quality we have always provided. Moreover, we will pursue more efficient supply solar, and electric power methods and raise the value of our products. We believe that our Oil Business has significant businesses that will serve potential to continue growing, and will improve existing operations through these and other as pillars for supporting means to achieve ongoing organic growth. With regard to efficiency, I think it is important for Showa Shell to be No.1, the most competitive company in the industry. To this end, we will Showa Shell’s future relentlessly cut costs and improve profitability. Furthermore, technological innovation will be growth, and how will advanced so that we may implement measures to win greater levels of support from customers business resources be by improving the value of our products and services. allocated? On the production side, Showa Shell was the first in the industry to complete the rationaliza- tion of its refining capabilities. However, we will not stop there. Next, we will work to improve the value of the Group’s refineries. Brisk demand for xylene and other aromatic petrochemicals is expected in Asia going forward. To meet this demand, we will extract these chemicals from gasoline, which is experiencing a structural decrease in demand. In this manner, we will es- tablish systems at our refineries to enable us to respond flexibly to such shifts in demand. In
18 regard to sales, it will be key for us to improve the value of our service stations. To this end, we have introduced new point of sale (POS) systems and IT tools. These strategic systems will supplement the Ponta card and “Shell EasyPay” systems already in place, and enable custom- Profile ers to purchase fuel and automotive items at our service stations with less hassle and greater convenience. We expect this will lead to the expansion of our customer base. For lubricants, asphalt, and other products, we will strengthen sales of high-value-added products that meet customer needs. Management Message
Enhancing Competitiveness of the Solar Business Fiscal 2012 proved to be a major turning point for Showa Shell’s solar business, which has a long history spanning over 30 years. This turning point was marked by the profits we recorded for the first time during the fourth quarter in our Energy Solution Business. I think this event was very meaningful, not only for the Showa Shell Group employees of today but also for the past Group members that supported us during the early years of solar module technology development. Review of Operations A report by a certain investigation company stated that global demand for solar modules had risen from approximately 27 GW in 2011 to around 31 GW in 2012. However, while de- mand is expected to continue growing, the supply glut is forecasted to continue. In light of this situation, it will be of the utmost importance to be able to quickly supply solar modules and systems that are superior in terms of both economic and environmental performance. Showa Shell aims to advance onto the global stage and become one of its top players going forward. We realize that accomplishing this will require us to develop a technological advantage over competitors as well as a business model that allows us to generate appropriate profits. Human Resources First, it is necessary that we develop more sophisticated technologies that enable solar power to provide significant economic benefits in comparison to standard electricity prices. If this level of economic rationality is realized, demand for solar systems will rise even without the support of the feed-in tariff scheme or subsidies. Solar Frontier K.K. aims to continue ad- vancing research and development geared toward quickly accomplishing this. With regard to business models, we must develop a business model that enables us to comprehensively provide solar power generation systems. This is because solar modules are
merely electronic devices, and they cannot generate energy on their own, but rather need to HSSE be included in such systems. As such, we are developing a business model that allows us to provide high-value-added services for all areas of the supply chain on a one-stop basis, includ- ing research and development, module production, and system design, as well as develop- ment, construction, operation, and maintenance of solar power plants. As one facet of our Community and Social efforts to create such a business model, Solar Frontier established a joint investment company Contribution Activities with Development Bank of Japan Inc. in March 2013. We have thus established a system for promoting solar power plant development in Japan and improving the profitability of our op- erations in downstream areas of the supply chain.
Expanding the Electric Power Business
As a company that deals in a source of primary energy and is working to become an energy Corporate Governance solution provider, perhaps our entry into the electric power business was inevitable. At the moment, we are supplying electricity mainly from the first and second units of the Ohgishima Power Station, a natural gas-fired thermal power plant located on land held by the Company and operated jointly with Tokyo Gas Co., Ltd. In fiscal 2012, we approved plans to construct a third unit at the power station. Going forward, we will expand the scale of our in-house power generation while also broadening the range of the clean and efficient power resources
we employ to include such resources as biomass. This business represents an important energy Financial Section and solution we provide, and we will continue to develop it from a long-term perspective with a Corporate Data particular emphasis on economic benefits for businesses.
Allocating Business Resources The Medium-Term Business Action Plan calls for the cash flows generated throughout the period of the plan to be allocated in a balanced manner to three areas: (1) investments
19 INTERVIEW WITH THE COO: POWERING A NEW STAGE OF GROWTH
to maintain operational safety and stability, (2) strategic capital investments for future growth, and (3) allocation toward maintaining a strong financial position and issuing share- holder returns. As a supplier of energy, investment to maintain the operational safety and stability of our plants and investment to improve the competitiveness of existing production facilities is abso- lutely essential to achieve organic growth. At the same time, we must invest strategically in the Step Changes that will shape the future of the Showa Shell Group. In order to conduct such investments, a sound financial position will be required. In recognition of these facts, we will allocate resources to investments based on clear business strategies, financial position mainte- nance, and the issuance of stable and appealing returns to our shareholders, who are among the important of our stakeholders.
Fiscal 2013 will be an important year as it marks the start of the Medium-Term Business Q5 A Action Plan. In the Oil Business, we plan to shut down the Yokkaichi Refinery—one of our principal refin- What initiatives will be eries—for a large scale, mandatory periodic maintenance effort for the first time in four years. implemented during fiscal This will be a difficult undertaking, but we are devoted to completing the maintenance and 2013, the first year of the restarting the plant on schedule. In sales, we will accelerate the implementation of retail Medium-Term Business measures with the aim of expanding our customer base. In addition, we will work together Action Plan? with our nationwide network of contract dealers to strategically expand sales of kerosene and diesel oil, which is increasing in relative importance amidst the gradual decline in gasoline demand. We are also planning a variety of initiatives with regard to lubricants and asphalt to ensure we can stably supply these products and increase the ratio of sales for high-value- added products. Moving on to our Energy Solution Business, in the solar business we will run the Kunitomi Plant at full capacity throughout fiscal 2013, and will further increase the ratio of domestic sales from fiscal 2012. Demand in this business is robust, and we are already receiving business offers for fiscal 2014 and beyond. We also hope to steadily expand the track record of our one-stop service business model, which we believe will be the key to future growth. At the same time, our R&D efforts must not be delayed under any circumstances, and we will continue to advance development efforts geared toward cutting costs and improving the output of our products. In fiscal 2013, we are planning the introduction of new products, and will advance the development of new technologies to support further growth. In the electric power business, the tight supply and demand situation for electricity in Japan is forecasted to continue. Accordingly, we will contribute to Japanese society by providing a stable supply of electricity. By accomplishing this, we will work to stabilize revenues in this business.
The Showa Shell Group’s policy is to prioritize improving its operations from the perspec- Q6 A tives of health, safety, security, and the environment (HSSE) as well as compliance. Lever- aging our solid foundations in these areas, we will unite our staff of enthusiastic employees to What are your policies for pursue the goals of the Medium-Term Business Action Plan. This, I feel, will form the foundation developing the foundation for growth in the medium term. of the Company to ensure In regard to HSSE, we will improve the level of our efforts in this area by accumulating continued growth? knowledge and experience in-house while also acting as a member of the Shell Group and implementing initiatives in accordance with globally recognized best practices. One example of our initiatives in this area would be the introduction of the Shell Group’s Process Safety For more information regarding system. This system prescribes measures for the accurate management of risk factors throughout the Company’s HSSE initiatives, operations at our incredibly complex refineries, thereby reducing the risk of major accidents please refer to page 50. and other dangers. As for compliance, our business is growing increasingly more diverse and more global, and For more information regarding the it is ever more important for each employee to properly understand laws and regulations and Company’s compliance initiatives, act accordingly. We have continued to conduct compliance-related education programs up please refer to pages 66–67. until this point, and will further improve these programs so that our employees have the confi- dence of knowing they are acting appropriately in their business activities.
20 Talent Vision Furthermore, we realize that the Medium-Term Business Action Plan will be advanced by the efforts of every single person in the Showa Shell Group, from management to the general staff.
For this reason, we must be sure that our human resources are motivated. It goes without saying Profile Initiative that the type of human resources required to shape the Group’s future will change. In recognition of this, we are enhancing our personnel and education systems in accordance with the Talent Vision that was established in fiscal 2011. We also encourage employees to communicate amongst themselves and with management so that everyone throughout the Group is in line with
Outbound Team Spirit Management Message the same vision and so that business may progress efficiently throughout the Group. I am work- ing to develop a corporate culture that encourages all members of the Showa Shell Group to For more information regarding be highly motivated toward accomplishing their goals, dedicated to constant self-improvement, Talent Vision, please refer to not hindered by failure, and willing to take on new challenges even should they fail. pages 46–47. By establishing a foundation cemented by HSSE and compliance and supporting the ca- pable human resources that will advance our plans, we will work to accomplish the goals outlined in the Medium-Term Business Action Plan and lead the Company to success. Review of Operations
I feel that providing oil products, solar modules, electricity, and various other energy- Q7 A related products in accordance with future social needs is the Showa Shell Group’s mission as an energy provider. Moreover, I believe that working toward fulfilling this mission What do you feel is the will create shared value between the Group and society and customers. shared value between the Following the March 2011 Great East Japan Earthquake, there was a period during which Showa Shell Group and people in the stricken regions were unable to use electricity or gas as they waited for electric- society? ity networks and city gas pipelines to be restored. Under these extreme circumstances, what Human Resources was used to supply heat and light and operate emergency response vehicles and helicopters? For more information regarding The answer is oil-based fuels. Oil is much easier to store and transport than electricity or gas, community and social contribu- making it an incredibly viable option in times of emergency. Furthermore, as a company that tion activities, please refer to deals in both oil and solar modules, we are able to construct disaster-proof service stations. As pages 60–62. they are equipped with solar modules for power, these service stations can supply fuel even during blackouts and supply water from their tanks. I think this sort of disaster preparedness represents a significant value that we provide to society.
When it comes to addressing CO2 emissions and other environmental issues, it is extremely HSSE important to consider the most eco-friendly way to use oil, as oil will continue to be an indis- pensable source of energy into the future. The pursuit of higher fuel efficiency among automo- bile manufacturers is truly a virtuous quest. For us to provide value to society, we must work to develop fuels and oil in response to trends such as this. In regard to operating our refineries, Community and Social we will conduct investments geared toward reducing the amount of crude oil used to run Contribution Activities equipment. As for solar modules, it is clear what we must do; we must contribute to the spread of electricity generation using this source of clean power. Another form of value we can pro- vide is represented by our short manufacturing process for next-generation CIS thin-film solar
modules, as it emits less CO2. In these ways, we will contribute to society through our business to the greatest extent possible, working to create a better society for the next generation.
Furthermore, it is important for the Company to actively participate in the development of Corporate Governance local communities and society, and thereby contribute to the creation of a more sustainable and more abundant future. In recognition of this fact, Showa Shell conducts a number of community- and social-supporting activities. With a particular emphasis on supporting the education of the next generation of children and young people that will be directly responsible for shaping the future of society, these activities include the Shell Art Award, the environmental photo contest, and an energy education program for children. We will continue conducting these and other
activities with the aim of raising interest in energy, improving awareness with regard to the im- Financial Section and
portance of protecting the environment and saving energy, and helping invigorate society. Corporate Data Going forward, Showa Shell will continue to contribute to the future of energy in resource- scarce Japan as it works to play a key role in the development of a sustainable society.
Jun Arai Representative Director, COO
21 MESSAGE FROM THE CFO
Financial Strategies Supporting the Medium-Term Business Action Plan
Douglas Wood Director, Chief Financial Officer
Investment Strategies Over the past five years, Showa Shell has continuously invested in its mainstay Oil Business with the aim of maintaining the safety and reliability of operations and boosting profit- ability across all areas of the supply chain. Throughout this period, another major focus of investments was the solar business that we commercialized in 2005. Such investments were dedicated to expanding the business and raising cost competitiveness. The Medium-Term Business Action Plan we launched in 2013 calls for the cash flows generated over the period of the plan—the five years from fiscal 2013 to 2017—to be Cash Flow allocated to three key areas in a balanced manner. These are (1) maintaining our existing (Yen Billion) 100 businesses, (2) strategic investment for future growth, and (3) ensuring the strength of our financial position and provision of attractive dividends to shareholders. We think it very 75 important to keep the cash flow allocation for these areas in good balance. As we aim to 50 keep moving ahead on the growth path, we will observe our basic policy to make invest- ments within the operating cash flows we generate over the plan period while controlling 25 our borrowings at an appropriate level. We will carefully evaluate both the strategic 0 benefits and monetary return of these investments.
-25 Strengthening Financial Position -50 A reliable financial base is of the utmost importance if we are to evolve into the “energy -75 solution provider that society and our customers require.” As we have seen in the past, it
-100 is probable that in the future the unexpected influences of external factors, such as political 2008 2009 2010 2 011 2012 or economic conditions or consumer trends, could temporarily disrupt business activities or Operating cash flow results in performance against plans. No matter how such factors influence us, we need to Investing cash flow be able to continuously perform our important social mission of providing a safe and stable Free cash flow supply of energy. We must therefore maintain a strong financial position in order to ensure we can fulfill this mission as well as secure growth into the future. Since 2009, we have invested in the Kunitomi Plant in Miyazaki Prefecture as our flag- ship solar manufacturing plant. This investment resulted in a substantial increase in net
Investment Plans Under the Medium-Term Business Action Plan Oil Business Operational maintenance: to reinforce the operational safety of major facilities such as refineries to comply with legal and regulatory requirements, to save energy consumption throughout all areas of the supply chain, to expand the sales network by development of new service stations, etc. Strategic investment options: to expand production capacity for petrochemicals, to conduct business rationalization including the formation of business alliances. Energy Solution Business Operational maintenance: to improve productivity for existing plants in the solar business, to expand and update R&D facilities. Strategic investment options: to install production facilities for commercializing new products in the solar business, to construct a model plant to examine new technologies for commercialization in the solar business, to expand power generation capacity for the electric power business.
22 interest-bearing debt. In the meantime, the solar business has faced a market environment Net Interest-Bearing Liabilities / which has been worse than our initial expectations (and indeed those of other market par- Gearing Ratio ticipants). Despite this, because we had sought progressively to strengthen our financial base, Profile (Yen Billion) (%) we were able to manage these challenges whilst still maintaining a robust balance sheet. 300 60 In the fourth quarter of fiscal 2012, the solar business turned positive on an EBITDA (earnings before interest, taxes, depreciation and amortization) basis. As we have been 250 50 focused on maximizing operating cash flow across our businesses, we feel that the Management Message Company is sufficiently prepared to implement the investment strategies outlined in the 200 40 Medium-Term Business Action Plan. To help the realization of these strategies, we will 150 30 continue to strengthen our financial position to minimize the costs of funding and also to ensure an optimal mix of sources of finance to secure a stable flow of capital. 100 20
Fund-Raising Policies 50 10 The Company raises funds from financial institutions and capital markets. We make fund- Review of Operations ing decisions based on a comprehensive analysis of factors including conditions in the fi- 0 0 nancial market and interest rate trends as we work to diversify fund sources and lower 2008 2009 2010 2011 2012 funding costs. The Company employs loans from a wide range of financial institutions in- Net interest-bearing liabilities Gearing ratio cluding city banks, regional banks, industry-based cooperative financial institutions, and governmental financial institutions. We thereby aim to diversify the range of lenders from which we borrow. In addition, having acquired and maintained the appropriate credit ratings, we also actively raise funds from capital markets by issuing corporate bonds and Breakdown of Debt Human Resources commercial paper. Our business requires a large amount of fixed assets, and we need to (As of December 31, 2012) take into consideration the time required to recover the associated capital investment. We therefore seek to maintain an appropriate ratio of long-term to short-term debt in order to Short-term ensure stability of funding. loans payable Furthermore, we manage the funds for the entire Showa Shell Group through a central- Long-term loans payable ized system. As the Company handles funding, management, and allocation to subsidiar- Current portion of bonds ies, we are able to keep funding costs low and ensure the efficient management of funds. Commercial paper
Financial Risk Management Bonds payable HSSE The Company maintains revolving credit contracts totaling up to ¥160 billion with finan- cial institutions as part of a contingency plan to ensure the liquidity of capital under extraor- dinary circumstances. Of this amount, ¥150 billion is committed to disaster response Credit Ratings (As of December 31, 2012) purposes. As such, in the event that a major natural disaster damages our core production Community and Social facilities, we will have access to sufficient capital to minimize the impacts on our ability to Rating and Japan Credit Contribution Activities Investment Rating Agency, provide a stable supply of energy or quickly resume operations should they be halted. Information, Inc. Ltd. The Company has also taken out property and casualty insurance in consideration of all Long-term ratings A– A risks above a certain threshold. We believe this will allow us to minimize the impacts of Short-term ratings large-scale natural disasters or accidents on our performance and prevent disruptions to a -1 J -1 business management should such events occur.
Moreover, the Company limits exposure to foreign exchange risks with regard to crude Corporate Governance oil import as well as export of petroleum products and solar panels by hedging against exchange rate risks to the extent of the actual amounts of foreign currency-denominated receivables and payables. Finally, regarding counterparty credit risk, we have in place disciplined credit risk evaluation and management processes for our businesses.
Shareholder Returns Financial Section and
In fiscal 2012, we paid a dividend of ¥18 per share, the same as in the previous fiscal Corporate Data year. Going forward, we will continue to distribute stable and attractive dividends while appropriately controlling financial risks related to the Medium-Term Business Action Plan and securing the resources necessary to maintain a sound financial position and imple- ment growth strategies.
23 REVIEW OF OPERATIONS
BUSINESS HIGHLIGHTS
Oil Business
Business Environment certain degree of demand will continue into the future. A large portion of Showa Shell’s oil products are sold in the In overseas markets, demand for oil products is forecast to Japanese market, and demand in this market is currently de- grow, particularly in Asia and the Middle East, where demand creasing due to a falling birthrate and an aging population, as will be driven by economic growth. In addition, xylene and well as the drive to reduce energy usage. However, oil is a other aromatic petrochemicals are expected to see brisk de- major source of primary energy, and we therefore believe that a mand centered on Asia.
Oil Demand Forecast for Japan and the Rest of Asia
(Millions of barrels per day) Source: Compiled from IEA World Energy Outlook 2012 New Policies Scenario 40 Japan Asia and Oceania (excluding Japan)
30
20
10
0 2011 2015 2020 2025 2030 2035 Forecast
Performance in 2012 Outlook for 2013 (As of February 2013) Net sales were down year on year as a result of the decline in We project that an appropriate supply and demand balance export volumes of oil products due to closure of the Ohgimachi will be maintained throughout 2013. In this year, the Company Factory of the Keihin Refinery in 2011. will work to expand its customer base with a focus on retail CCS ordinary income* decreased due to lower profit margins measures and continue selling high-value-added products that of domestic sales, as a result of the rapid decline in crude oil meet the needs of industrial customers. As a result of these efforts, prices in the second quarter. we are forecasting year-on-year increases in operating income. * CCS ordinary income (ordinary income on a Current Cost of Supply basis): Ordinary income based on costs excluding inventory valuation effects
Net Sales Operating Income (Yen Billion)(Yen Billion) (Yen Billion)(Yen Billion) 3,000 3,000 100 100 2,695.22,695.2 2,539.72,539.7 87.2 87.2 2,304.02,304.0 75 75 2,000 2,000 55.4 55.4 45.5 45.5 50 50 43.5 43.543.5 43.5 37.7 37.7 28.1 28.1 1,000 1,000 26.6 26.6 25 25
0 0 0 0 2010 2010 2011 2011 2012 2012 2013 (Forecast)2013 (Forecast) 2010 2010 2011 2011 2012 2012 2013 (Forecast)*2013 (Forecast)* OperatingOperating income incomeCCS ordinary CCS ordinaryincome income * Note: *Forecasts Note: Forecasts for 2013 for include 2013 operatinginclude operating income figuresincome recorded figures recorded under “other” under and “other” “adjustment.” and “adjustment.” 24 Profile
Energy Solution Business Management Message Review of Operations Business Environment supported by the feed-in tariff scheme for renewable energy* Our solar business is conducted by wholly owned subsidiary and other measures promoting the introduction of solar power Solar Frontier K.K. As one source of renewable energy, strong systems. demand for solar modules is forecasted in the global market. * For more information regarding the feed-in tariff scheme for renewable energy, please refer to page 40. Demand is growing rapidly, especially in Japan, where it is
Global Solar Module Demand Forecast (By Regions) Human Resources
(MW)
60,000 Asia (excluding Japan) 45,000 Japan Africa 30,000 Middle East Central and South America 15,000 North America HSSE Europe 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: IHS Inc. Forecast
Performance in 2012 Outlook for 2013 (As of February 2013) Community and Social Contribution Activities Net sales increased year on year primarily due to the increase in In the solar business, we will continue to reduce production costs sales in the solar business. while further expanding sales in the domestic market, and oper- The supply glut in the solar module market persisted, and operat- ating income in the electric power business is expected to remain ing conditions remained harsh as a result. Amidst these conditions, stable. As a result, performance is projected to improve signifi- we substantially reduced production costs, and expanded sales in cantly, leading the Energy Solution Business to generate a profit the Japanese market, where solar modules benefit from relatively for the first time on a full-year basis.
high profitability. These sales increases were strongest in the fourth Corporate Governance quarter. As a result, operating loss in the solar business showed a substantial year-on-year decrease. Meanwhile, the electric power business continued to generate stable operating income. Net Sales Operating Income (Loss) (Yen Billion)(Yen Billion) (Yen Billion)(Yen Billion) 2.5 2.5 100 100 0 0
78.2 78.2 Financial Section and
75 75 -10 -10 Corporate Data 65.7 65.7 -11.5 -11.5 -15.4 -15.4 50 50 -20 -20
28.8 28.8 25 25 -30 -30 -28.8 -28.8
0 0 -40 -40 2010 2010 2011 2011 2012 2012 2013 (Forecast)2013 (Forecast) 2010 2010 2011 2011 2012 2012 2013 (Forecast)2013 (Forecast)
25 REVIEW OF OPERATIONS
Oil Business Aiming to Receive Overwhelming Customer Support With a foundation built on reinforced competitiveness and reliable supply capabilities, Showa Shell’s Oil Business contributes to society through the ongoing supply of products and services that meet the demands of customers.
26 Showa Shell’s Oil Business has a long history in Japan, span- ning over 100 years. Throughout this history, we have con- Profile tinued to grow by quickly responding to changes in the operating environment while providing a safe and stable supply of the oil products society needs together with the
services that customers expect. We hold this spirit of service Management Message even today. As demand for oil products declines in Japan, we will stay true to this spirit as we leverage our nationwide network of contract dealers in pursuit of higher levels of prof- itability. At the same time, we are expanding the scope of our petrochemical operations from Japan into overseas mar- kets in our quest to ensure that Showa Shell continues to Review of Operations Tsuyoshi Kameoka grow into the future. Executive Officer Vice President Oil Business COO
Up until now, Showa Shell’s Oil Business primarily focused on hydraulic actuation oil that contributes to energy savings and selling oil products in Japan. However, due to such trends as helps extend the lifespan of machinery. As for asphalt, we offer improved fuel efficiency in automobiles and increased concern the CARIMEX Series, which makes road pavement more dura- for energy savings among consumers, as well as the shift toward ble. Furthermore, we are implementing initiatives to preemptively Human Resources alternative fuel sources seen among industrial customers, de- address changes in the demand structure. As a forerunner in mand for oil products in Japan has continued to decrease since pursuing improved operational efficiency, Showa Shell closed it peaked in 1999. Regardless, oil maintains an important posi- the Ohgimachi Factory of the Keihin Refinery in 2011. This de- tion as a source of primary energy, and it can therefore be ex- cisive action not only enabled us to cut fixed costs, it also al- pected that demand for oil will continue to represent over 30% lowed us to increase efficiency by raising the utilization rate at of total energy demand even as far into the future as 2030. other Group refineries. At the same time, we will improve the Meanwhile, overseas oil demand is expected to remain strong, efficiency of our operations across all areas of the supply chain.
particularly in emerging markets. Specifically, we expect ongo- As one facet of these efforts, in March 2013 we concluded HSSE ing strong demand in the rapidly growing markets of Asia for a basic agreement with TonenGeneral Sekiyu K.K. to seek syn- raw materials for petrochemical products, such as xylene that is ergy opportunities with regard to our oil product supply system. used in synthetic fibers. Guided by Showa Shell’s Medium-Term Going forward, we will continue to reinforce the Company’s Business Action Plan, we recognize that such changes in the competitiveness while also working to offer a stable supply of oil Community and Social business environment represent opportunities for us to achieve products with operational safety as our highest priority. Contribution Activities higher levels of competitiveness. In accordance with this plan, Next, aiming to achieve Step Changes—growth through we will advance strategies targeting improved profitability structural business transformations—we will expand our petro- based on the two pillars of achieving organic growth and grow- chemical business and pursue alliances with other companies in ing through structural business transformations, which we call this business. “Step Changes.” As mentioned previously, gasoline demand in Japan is ex-
To achieve organic growth, we will maintain the current scale pected to continue declining. Meanwhile, Asia and other re- Corporate Governance of domestic sales while improving profit margins by raising the gions are rich with business opportunities driven by robust value of our products and services. At the same time, we will cut demand for petrochemicals. We see the expansion of Showa costs throughout the supply chain. Shell’s petrochemical business as a means of addressing both of As one facet of these efforts, we aim to expand our customer these circumstances. As one facet of our efforts in this area, in base by winning the satisfaction of a diverse range of custom- 2012 the Company began considering participation in a para- ers. In this pursuit, we will leverage the strong network of contract xylene project with GS Caltex Corporation of South Korea and
dealers we have established throughout our long history to ad- Taiyo Oil Co., Ltd. Financial Section and vance strategies geared toward further differentiating our service In these ways, Showa Shell will continue to develop its Oil Corporate Data stations. These will include offering services such as “Shell Business based on producing and selling petroleum products in EasyPay,” a system that enables customers to refuel and make a safe and stable manner. We will also reform our operations by payments quickly and easily, and the Ponta joint point card. We responding flexibly to changes in the business environment, and will also offer customers a robust lineup of high-value-added pursue higher levels of competitiveness to evolve Showa Shell products. In lubricants, we will provide Shell Tellus S4 ME, a into a company that receives overwhelming customer support.
27 REVIEW OF OPERATIONS
The Showa Shell Group aims to build an efficient supply system by main- taining a high utilization rate at Group refineries and adjusting refining capacity to match changes in the supply and demand balance, while Refining securing a safe and stable supply of oil products. and Supply Becoming a Top-Class Refiner in Asia Showa Shell conducts petroleum refining at its three refineries: the Yokkaichi Refinery of Showa Yokkaichi Sekiyu Co., Ltd., the Keihin Refinery of Toa Oil Co., Ltd., and the Yamaguchi Refinery of Seibu Oil Co., Ltd. We also purchase petroleum products from Fuji Oil Co., Ltd., with which we have in place a business alliance, and supply these products to markets in Japan Showa Shell Group and overseas. refineries A law entitled “Sophisticated Methods of Energy Supply Structures” has been enacted in
*Figures in parentheses Japan with the aim of promoting the effective use of fossil fuels. This law requires oil refining indicate refining capacity companies to raise their cracking unit installation ratio to a specified level or higher by March 31, 2014. To bolster its competitiveness, ahead of this obligation being made official, Showa Shell resolved to close the Ohgimachi Factory of the Keihin Refinery, which processed 120,000
Yamaguchi Refinery of barrels per day of crude oil. As planned, this facility was closed in September 2011. This move Seibu Oil Co., Ltd. realized reductions in fixed costs and enabled us to raise the utilization rate at other Group (120,000 barrels per day) refineries. Today, our refineries are operating at nearly full capacity, except for when they are shut down while undergoing mandatory maintenance. Keihin Refinery of Due to these efforts preceding the enactment of this law, the Showa Shell Group’s refineries Toa Oil Co., Ltd. (65,000 barrels per day) now boast the highest utilization rate in Japan. However, we are not satisfied with this position, and aim to achieve an unrivaled status in Japan in terms of profitability going forward. Further- Yokkaichi Refinery of Showa Yokkaichi Sekiyu Co., Ltd. more, it will be necessary to secure a level of competitiveness that is “top class” in Asia if we (210,000 barrels per day) are to pursue new business opportunities in the region. Showa Shell is conducting a number of investments geared toward establishing such a posi- tion. These will include capital investment at Group refineries for raising production yield of high-value-added products made from low-cost materials as well as investments targeting more efficient use of the fuel at refineries themselves. As another initiative targeting enhanced com- petitiveness, in 2011 we established an alliance with Mitsubishi Chemical Corporation at the complex linking our Yokkaichi Refinery and its adjacent Yokkaichi Plant. Through this project, we will pursue further energy efficiency through the reciprocal use of the facilities and oil re- sources of both parties. The Japanese government is supporting this project to raise the com- plex’s competitiveness and promote the effective use of petroleum resources. Ultimately, this project will enable us to forgo processing the equivalent of approximately 70,000 kiloliters Heavy oil cracking unit (flexi-coker) at the Keihin Refinery of crude oil, which equates to a reduction in CO2 emissions of approximately 180,000 tons per year. Another major factor that will contribute to competitiveness will be ensuring the safe and stable operation of our refineries. Operational accidents not Refinery Utilization Rate for the Showa Shell Group only cause severe economic losses, but also lead to distrust and Japanese Industry from the surrounding communities, which can endanger the
(%) Showa Shell Group Industry average ability of the facility to continue operations. Unplanned halts 100 in operations due to facility malfunctions or human error have a significant negative impact on the profitability of refineries. 90 To prevent such situations from occurring, the Showa Shell Group takes advantage of the Shell Group’s operational 80 know-how to maintain operational safety in accordance with
70 globally recognized best practices. In this way, we are work- Showa Shell Group refineries: Keihin Refinery of Toa Oil Co., Ltd. ing to ensure that our refineries continue to operate in a safe 60 Yokkaichi Refinery of Showa Yokkaichi Sekiyu Co., Ltd. and stable manner. Yamaguchi Refinery of Seibu Oil Co., Ltd. Source: Statistics of the Petroleum Association of Japan 50 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2 011 2012
28 Reinforcing Efficient Supply Systems in Japan and Overseas The environment surrounding oil supply and demand is changing all the time, affected by inter- national economic situations, trends regarding energy sources, refining capacity addition or Profile reduction, and consumption trends. Showa Shell is always pursing optimal levels of opera- tional efficiency in response to changes in domestic and international demand. In accordance of such changes, we decide the mix of products to be manufactured, and flexibly adjust crude oil procurement, refinery utilization rate and processing modes, and product sales plans both Management Message in Japan and overseas. Showa Shell procures crude oil in a flexible manner The Shell Group’s Global Trading Network through its alliance with Saudi Aramco, other companies in other Middle Eastern oil producing nations, and the Shell Group. Leveraging these alliances, we strive to procure crude oil in the manner that is best suited to Group refineries. Our alliance with Saudi Aramco—our Calgary London Rotterdam Review of Operations primary supplier—enables us to flexibly choose types of Houston Tokyo crude oil to procure, and adjust tanker shipping sched- Dubai Barbados Philippines ules in accordance with our needs. Singapore At the same time, Showa Shell has in place an agile and flexible system for exporting its products through the Shell Group’s global trading network, which boasts world-class trading volume. This allows us to optimally control the supply of products within Japan. Human Resources
Realizing Sustainable and Efficient Operations Through Domestic Alliances Aiming to further solidify our systems for stably and efficiently supplying oil products, we con- cluded a basic agreement with TonenGeneral Sekiyu K.K. to seek synergy opportunities with regard to our oil product supply system. In accordance with this agreement, we are thoroughly evaluating methods of maximizing synergistic benefits through efforts in four areas: joint opera-
tion of crude vessels, increased synergy effects realized by sharing feedstock between both HSSE parties refineries in Kawasaki, joint operation of depots and terminals, and domestic marine transport of oil products and products exchange. To continue providing a stable supply of oil products to our customers, it will be critical to rationalize operating systems across the supply chain to achieve higher levels of sustainability. Community and Social To accomplish this, we will consider the possibility of alliances with other companies or any Contribution Activities other possibility as we aggressively pursue increased efficiency in our operations.
Expanding into Asia through International Alliances Asian demand for petrochemicals continues to rise together with economic development. In the petrochemical arena—where Showa Shell is selling mixed xylene, benzene, propylene, and
other raw materials for petrochemical products produced dur- Corporate Governance ing the petroleum refining process—we are expanding our Forecast of Northeast Asian Demand for Paraxylene operations in search of business opportunities in Asia, where we expect further growth in demand for these products. We (Millions of tonnes) are stepping up production of raw materials for petrochemi- 30,000 Japan, South Korea, and Taiwan China cal products, such as mixed xylene, and considering embark- ing on ventures related to the production of paraxylene, which 20,000
is made from mixed xylene. Based on a memorandum of un- Financial Section and derstanding with GS Caltex Corporation of South Korea and Corporate Data Taiyo Oil Co., Ltd., signed in 2012, the Company has been 10,000 considering participation in a project to increase the annual production at GS Caltex’s paraxylene plant in South Korea from 1.35 million tons per year to 2.35 million tons per year, 0 making it one of the world’s largest plants. 2007 2008 2009 2010 2 011 2012 2013 2014 2015 2016 2017 Source: Prepared by Showa Shell based on industry think tank information
29 REVIEW OF OPERATIONS
Together with its contract dealers, we are providing high-value-added products and services that meet society’s needs as we aim to achieve an overwhelming lead in customer satisfaction. Sales Domestic Fuel Sales Expanding Customer Base through Services Fine-Tuned to Customer Needs In Japan, Showa Shell provides fuel products, such as gasoline, kerosene, diesel oil, and heavy fuel oil, through its contract dealers to customers via service stations and to industrial users in the manufacturing, transportation, electric power generation, agriculture, forestry, and fishing industries. To boost profits in the Japanese market, which is forecast to dwindle, it is essential to build a strong customer base by expanding our sales network and enhancing our marketing capabili- ties. Accomplishing this will require that we continue to improve the value of products and services that we provide to customers. In regard to sales at our service stations, we are working to encourage as many customers as possible to utilize our service stations by providing them with highly convenient services. As one facet of these efforts, in March 2010 we introduced the Ponta joint point card, a point service that boasts one of the largest memberships in Japan. This point card can be used at Lawson convenience stores, as well as a variety of retailers, service providers, and mail-order sales companies. It can even be used at financial institutions, and the number of organizations adopting this card continues to grow. The Ponta card was introduced with the aim of capturing new and repeat customers, and we are already seeing a rise in customers to our service sta- tions as a result, demonstrating the significant contributions of this service to expanding our customer base. Furthermore, in 2012 we introduced “Shell EasyPay” as a speedy fueling and settlement system to simplify purchasing procedures at self-service stations. This system employs a key- holder with a contactless IC chip containing information on fueling patterns, such as type and amount of fuel, and preregistered credit card data. The introduction of this system greatly simpli- fied fueling, contributing to substantial improvements in customer convenience. Not simply limited to fueling, Showa Shell’s service stations offer a wide range of services to support automobiles and motoring. To encourage customers to visit our stations, we work to- gether with contract dealers to provide service that is fine-tuned to meet differing needs related to regional location and other characteristics. With regard to sales for industrial customers, we are working with our contract dealers on measures to cultivate new customers, expand our customer base, and bolster sales focused on middle distillates such as kerosene and diesel oil. We believe that human resources capable of reading customer needs and able to respond quickly are indispensable in these business activities. Accordingly, we are cultivating the staff of our service stations via the proprietary training system we have developed over the years. Ponta Members
(Million People) (Companies) 6,000 Members (left scale) 60 Participating sponsors (right scale) 5,000 50
4,000 40
3,000 30
2,000 20
1,000 10
0 0 As of the start of service in December 31, December 31, December 31, New “Shell EasyPay” payment system that employs a keyholder-like March 2010 2010 2 011 2012 device containing a contactless IC chip
30 COLUMN
Shell Brand Profile Showa Shell Sekiyu has received rights to use the Shell brand from the Shell Group. These rights give us access to the brand’s “Pecten” scallop shell em-
blem, and other ascetic elements of the brand. The Management Message ascetic elements of this brand are uniform around the world, and are recognized for their image of innova- tiveness and reliability, and the ability to utilize these is of extreme value to the Company’s sales activities. Starting in 2012, we began introducing the new design for Shell-brand service stations, which is used
in over 100 countries across the globe. This entails Review of Operations extensive use of the Pecten emblem so that it may serve as the face of stations, and employing LED lighting and other eco-friendly fixtures. A sense of reliability is an intrinsic part of the Shell brand, and the Shell Group has accordingly established stringent stan- dards for health, safety, security, and environment (HSSE). The Company develops its domestic operations in accordance with these standards. Going forward, we will continue to advance our business activities based on the Shell Group’s international standards as
we pursue higher levels of innovativeness and reliability in our quest to be the company customers and society chose. Human Resources
For more information regarding the Company’s HSSE initiatives, please refer to page 50.
Lubricants, Asphalt, Jet Fuel, and Marine Fuel HSSE Expanding Sales of High-Value-Added Products Showa Shell sells lubricants, mainly through its contract dealers, for transport-related and indus- trial applications. Production activity at factories in Japan has a major effect on demand for Community and Social lubricants. However, we have been witnessing a gradual rise in the need for products that im- Contribution Activities prove the efficiency of factory operations and increase energy savings. To meet such needs, Showa Shell is working to expand sales of high-value-added products such as oil that reduces the need for oil changes and oil that helps extend the lifespan of machinery while also realizing energy savings. By providing such products that exceed customer expectations with regard to value and reliability, we have gradually expanded our share of the market. At the same time,
we have aligned our product lineup with that of the Shell Group to the greatest extent possible. Corporate Governance This enables customers to procure products smoothly in both Japan and overseas. Moreover, consolidating our complex product lineup makes it easier for customers to understand the Shell Tellus S4 ME products we offer. Hydraulic actuation oil that In addition to these product initiatives, we are cultivating human resources capable of contributes to energy savings precisely anticipating customer needs and offering proposals based on abundant knowledge and helps extend the lifespan of machinery regarding the diverse range of lubricants and their various applications and characteristics. Financial Section and Corporate Data
31 REVIEW OF OPERATIONS
We also sell asphalt primarily through our contract dealers. Asphalt demand is influenced by trends in public spending and private-sector capital investment. Therefore, it can be expected that a stable supply of asphalt will be in high demand going forward in light of the ongoing effort to reconstruct after the Great East Japan Earthquake and the need to maintain and repair aging social infra- structure. As Japan’s only integrated manufacturer of asphalt, we are committed to providing a stable supply of asphalt to respond to this demand. We are also providing high-value-added products to contribute to safe and convenient lifestyles by developing technologies for recycling roadway paving materials and eco-friendly products that preemptively address market needs. At the same time, we are cul- Fuel carriers refueling aircraft tivating human resources capable of providing service that exceeds customer expectations when supplying such products. Domestic demand for jet and other airplane fuels is on a downward trend, as is demand for shipping fuel, such as bunker fuel oil, owing to ongoing energy conservation efforts. As a member of the Shell Group, we are leveraging its worldwide network to meet customer needs throughout the world. Also, we are placing an emphasis on sales of high-value-added prod- ucts, and have launched Shell Alexia S4 wide range, marine-use cylinder oil for customers us- ing marine fuel as one effort in this area.
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Lineup of High-Value-Added Products
Shell Alexia S4 In September 2012, Showa Shell began sales of Shell Alexia S4, the Shell Group’s wide range, marine-use cylinder oil. This product can be used in various vessels and engines and under a wide range of condi- tions, such as those pertaining to fuel type, engine load, and weather. As ship operators would have previously been required to change cylin- der oil based on operating conditions, Shell Alexia S4 frees them from this hassle. It also helps prevent engine wear. This high-value-added product has been highly evaluated for its ability to curb the process of changing lubricants and contribute to cost reductions, and has estab- lished a strong reputation among customers.
CARIMEX Series The CARIMEX Series is a line of asphalt products that is long-lasting even under heavy traffic conditions. For this series, CARIMEX HD was used in the Sagami Traverse Road, a section of the Metropolitan Inter- City Expressway opened in March 2013. With its excellent drainage and low-noise properties, CARIMEX HD has made driving on this sec- tion of road extremely comfortable. Furthermore, we have introduced CARIMEX ART into this series. This eco-friendly product helps lower the amount of heat produced when mixing asphalt and aggregates, thereby reducing heat waste during the creation of asphalt concrete. Expressway paved using CARIMEX HD
32 LPG Sales Providing Home Solutions for All Customers’ Needs
We sell LPG (mainly propane for household use and butane for industrial applications) through Profile our contract dealers. Demand for LPG is decreasing in accordance with the trend toward all- electricity-powered homes and the switch to city gas. However, since the Great East Japan Earthquake people have been re-acknowledging the benefits of eco-friendly LPG as a decen- tralized source of energy that is useful in the case of disaster. Management Message Under these conditions, we are endeavoring to leverage the advantages of LPG home deliv- ery. We also distribute CIS thin-film solar modules made by Solar Frontier K.K. and Shell Lin- kLife, a home security product. In this way, we aim to provide home solutions, thereby further increasing the value we provide to customers. Furthermore, we are concentrating on the cultiva- tion of human resources together with contract dealers to enhance our ability to keep in close communication with customers and propose solutions to address the issues these customers face. By reinforcing our sales capabilities in this manner, we aim to expand our customer base. Review of Operations
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Initiatives to Improve HSSE Together with Business Partners As part of our efforts to ensure that we can supply LPG in a safe manner that guar- antees peace of mind for customers, we hold the LP Gas Plant HSSE Contest and Human Resources conduct a full range of training programs to support contract dealers in cultivating safety awareness and implementing voluntary measures to improve safety. Represen- tatives from over 100 LP gas plants (filling stations and automated gas stands) par- ticipate in the annual LP Gas Plant HSSE Contest, where they undergo evaluations of HSSE-related areas of their operations, with plants that are judged superior re- ceiving awards. This event helps these representatives gain an understanding of how to address HSSE issues and improve their capabilities in this area. HSSE
Aiming for Partnerships and Human Resource Development Community and Social Sustainable Growth in Cooperation with our Contract Dealers Contribution Activities Providing petroleum products involves cooperation with numerous business partners. Showa Shell’s contract dealers are particularly important partners, as they spearhead our brand and maintain close ties with local communities. They provide products and services to match com- munity needs and play an important role in interacting with customers. In each business field, we have a “Showa Shell Dealer’s Association,” consisting of the
contract dealers. Through this association, we raise awareness and insight about the business Corporate Governance environment and share our business vision. We also hold training sessions and competitions to help dealers learn and share information with each other. We also recognize the significant importance to our brand of employees at contract dealers, who are on the front lines of sales interactions. These include staff at service stations, who con- tribute to a safe and convenient motoring environment for our customers, and staff involved in the sale of lubricants, asphalt, and LPG to various industries. The Showa Shell Group understands
that establishing more trust for its technologies and services from customers is an important way Financial Section and to boost customer satisfaction. To this end, we have in place internal qualification and training Corporate Data programs that are designed to enhance staff expertise as well as their technical knowledge. By concentrating on the training of human resources, we provide added value that goes beyond mere product sales, in order to ensure sustainable growth with our contract dealers, as they are key business partners.
33 REVIEW OF OPERATIONS
Energy Solution Business Toward the Next Stage of Growth By providing energy solutions that are both economical and ecological, Showa Shell’s Energy Solution Business is helping to achieve a sustainable society.
34 With an Oil Business at the foundation of our operations, Showa Shell has developed a unique history. We are a com- Profile pany that is responding to society’s changing energy demands as an energy provider. Through our Energy Solution Business, we are helping to address global energy challenges, from
global warming to providing safe, reliable, and economical Management Message electricity. Showa Shell sees providing and growing these solutions as one of our core missions. Review of Operations Hiroto Tamai Executive Officer Vice President Energy Solution Business COO
Solar Business Electric Power Business At Showa Shell, we trace our legacy in solar module develop- Showa Shell entered the electric power business to more effec- ment back to the 1970s. Experiencing the oil shock first-hand tively utilize the assets associated with our core Oil Business, as an oil company, we committed ourselves to finding a stable and we have bolstered our generation capacity accordingly. As Human Resources supply of energy for resource-scarce Japan. Our attention part of these operations, Showa Shell constructed power plants soon turned to CIS thin-film solar technology for its economi- that generate electricity using byproducts created during the cal, ecological advantages, and in 2005 we succeeded in petroleum refining process. In addition, the Ohgishima Power commercializing it. Station, a natural gas-fired thermal power plant in which Showa The market for solar energy is now rapidly expanding. Ap- Shell holds a stake, was built on a vacant site where oil storage proximately 30 GW were installed worldwide in 2012, and facilities once stood. this number is projected to double over the next five years. Solar The electricity supply and demand situation in Japan is ex-
energy is taking on an important role in the projected future en- pected to remain tight. Looking to respond to this situation, we HSSE ergy mix, and countries are implementing measures to promote approved plans for the construction of a third unit at the Ohgi- its growth. At present, China, the United States, and Japan are shima Power Station in 2012. And in 2013 we plan to begin driving this demand. operating power plants that utilize solar modules manufactured But competition between module manufacturers has also in- by Solar Frontier. Community and Social tensified, and the market is currently faced with a glut of solar Despite the fact that electricity is an increasingly indispensable Contribution Activities modules. As such, the industry has entered a “shakeout” phase part of our daily lives, Japan still faces challenges in stably sup- in which it is difficult for even leading manufacturers to survive if plying this essential form of energy. To address these challenges, they are weak in cost performance or funding. we plan to increase generation capacity over the period of our It was under these conditions that our subsidiary, Solar Frontier Medium-Term Business Action Plan by exploring how to more K.K., established its standing as a highly reliable solar module effectively utilize our existing assets and constructing eco-friendly
manufacturer in Japan and as the world’s largest provider of CIS solar and biomass power generation facilities. We will continue Corporate Governance thin-film solar modules. The competitiveness of our 900 MW to grow the supply of clean and safe power, responding to soci- Kunitomi Plant, which began production in 2011, was central to ety’s needs while enhancing our business performance. growing our sales and strengthening our market presence. On the back of this, Solar Frontier successfully improved quarterly earnings throughout 2012. Looking to future growth, it will be important to achieve a level of
cost performance that will bring us to grid parity. And we must do Financial Section and so ahead of the competition. We will also offer high-value-added Corporate Data services to provide customers peace of mind when purchasing our products, including strong warranties and after-sales maintenance services. By offering our customers such high-value products and services, we will strive to first become the leader in the Japanese market before expanding worldwide in the medium term.
35 REVIEW OF OPERATIONS
Solar Business
Subsidiary Solar Frontier K.K. produces and sells CIS thin-film solar modules that feature both economical and ecological benefits and employ Showa Shell’s proprietary technology. We aim to continue growing this business by developing superior technologies and increasing their use throughout the world, thereby enriching people’s lives while contributing to the realization of a sustainable society.
CIS thin-film solar module Q&A Q What is CIS and what are its ecological benefits CIS is an eco-friendly thin-film solar module technology that uses key ingredients A copper (C), indium (I), and selenium (S) to generate electricity. Solar Frontier’s CIS thin-film solar modules differ from standard crystalline silicon modules in both their material makeup and manufacturing process. While most solar modules use crystalline silicon to gener-
*1 Energy payback time (EPT): ate electricity, Solar Frontier’s modules use a proprietary copper, indium, and selenium-based compound. The period required for a With a semiconductor layer about 1/100th the thickness of a crystalline silicon solar cell, Solar module to generate the same Frontier’s CIS solar modules require fewer resources to produce. Combined with fewer production steps amount of electricity consumed during the manufacturing and a less energy-intensive production process, Solar Frontier’s modules offer an energy payback time process of the module. (EPT)*1 far better than crystalline silicon modules. Solar Frontier’s modules also do not use cadmium and are lead-free*2. By committing to a more *2 As defined by the Restriction of Hazardous Substances eco-friendly design, Solar Frontier offers its customers greater peace of mind when developing both (RoHS) Directive rooftop and ground-mounted installations.
EPT Comparison Voluntarily Meeting High Standards
(When annual production volume is approximately 100 MW) Crystalline Silicon Monocrystalline (Years) 2.0 Polycrystalline EPT= Significant Solar Frontier’s CIS thin-film approx. 1.5 yrs. reduction HIT(Heterojunction with intrinsic thin layer) solar modules EPT= Spherical approx. 1.1 yrs. EPT= approx. 0.9 yrs. Thin-film Compound CIS (CIGS) Does not contain cadmium 1.0 Cadmium telluride Contains cadmium
Silicon Amorphous silicon
Microcrystalline
0 Crystalline Amorphous CIS thin-film Organic Dye sensitization Hybrid silicon solar silicon solar module Organic thin-film module Source: Investigation on Solar Power System Generation, New Energy and Industrial Technology Development Organization (NEDO)
36 Q How well do Solar Frontier’s CIS thin-film modules perform compared to other solar modules CIS thin-film solar modules produce more electricity (kilowatt-hours per kilowatt- A peak) in actual operating conditions than standard crystalline silicon solar modules. This improves the economics for both system owners and end users. Profile
Real-world data and independent tests have verified that Solar Frontier’s CIS thin-film solar modules gener- ate more electricity in actual operating conditions than crystalline silicon and other thin-film solar modules. Power Generation by Month for Each Module Management Message Total power generated (kWh) Total irradiation (kWh/m2)
1,800 180 Solar irradiation on inclined surface Compound 1,400 140 (Solar Frontier’s products) Amorphous silicon 1,000 100 Monocrystalline silicon Polycrystalline silicon Spherical silicon
600 60 Review of Operations Apr. May Jun. Jul. Aug. Sep. Oct. Nov. Dec. Jan. Feb. Mar. Source: Hokuto Site, NEDO Megasolar Project, NTT Facilities Inc.
CIS thin-film solar modules produce more kilowatt-hours due to: 1. High performance in low-light conditions Module conversion efficiencies found on product datasheets are calculated using light intensity of 1,000 W/m2 in a controlled test environment. However, actual operating conditions usually involve a range between 400–800 W/m2, less than the intensity used in testing. Solar Frontier’s CIS thin-film solar modules are tuned to operate at higher levels than standard crystalline silicon modules within this Human Resources more realistic range.
2. High performance in hot temperatures Shade Solar modules are adversely affected by high temperatures. Solar Frontier’s CIS solar panels ＋have a low temperature coefficient, enabling them to perform better in hotter conditions than standard crystal-
－ line silicon modules. Flow of electricity 3. High performance in partial shading Under partially shaded conditions that would severely affect crystalline silicon modules, Solar Frontier’s
CIS thin-film solar modules have more stable output due to their circuitry design. HSSE
Crystalline silicon Shade CIS thin-film Shade ＋ solar module ＋ solar module When a cell in the module Shadow may cause a temporary Community and Social Contribution Activities ceases to generate electricity, － drop in output, but has only a Flow of electricity Flow of electricity the entire circuit ceases to function. minimal effect on the entire module. －
4. The “light soaking” effect Following initial exposure to light, the output of CIS thin-film solar modules rises slightly to a stable conversion efficiency that is higher than labeled at the factory. Shade ＋ Corporate Governance Q How reliable are Solar Frontier’s CIS thin-film solar modules in the long term Flow of electricity － Made in Japan, Solar Frontier’s CIS thin-film solar modules are designed, A built, and certified for long-term performance. Solar Frontier’s CIS thin-film solar modules have passed internal and third-party comprehensive quality
tests, including for resistance to long-term weathering, high-velocity impact, and desert heat. All Solar Financial Section and
Frontier products are made in Japan using highly-automated production lines that were developed at Corporate Data
*Granted by the Japan Electrical Solar Frontier’s Atsugi Research Center (ARC). Safety & Environment Technology Solar Frontier is recognized as the first Japanese manufacturer to offer a 20-year performance war- Laboratories (JET) after successful ranty in Japan. It is also the first company in Japan to acquire the JETPVm certification mark*, which completion of tests to photovoltaic (PV) modules to ascertain safety examines product design quality, production processes, and the PV manufacturer’s ability to provide and reliability long-term product warranty and customer support.
37 REVIEW OF OPERATIONS
Speed is essential to succeeding in the solar business. One of the key elements Solar Frontier utilizes in expanding its business globally is its world-class technological capabilities. Technology Strengthening Cost Competitiveness Development Improving conversion efficiency* is a key factor in reducing the manufacturing cost of solar modules. Since its foundation, Solar Frontier has successfully set new CIS efficiency records each year. As part of its research and development efforts at the ARC, Solar Frontier uses a pilot plant that employs the same production process as its factories. In March 2011, the ARC set a world record CIS conversion efficiency of 17.2% on a 30cm x 30cm sub-module, and
*Conversion efficiency: An index using exceeded this record in February 2012 with 17.8% efficiency. The ARC also achieved conver- standard testing conditions to indicate sion efficiency of 19.7% on a 0.5cm x 0.5cm CIS cell in January 2013—a world record for how efficiently solar modules convert thin-film solar cells that do not contain cadmium, and very close to the world record of 20.3% the energy from sunlight into electric- for thin-film solar cells that do. ity. Higher conversion efficiency repre- sents higher output per unit of sunlight. Solar Frontier today manufactures CIS modules with conversion efficiencies exceeding 13%, thereby achieving the nameplate efficiency figure of polycrystalline silicon solar modules. Go- ing forward, Solar Frontier will continue to focus on improving the conversion efficiency of its solar modules and transferring its laboratory achievements to its factories.
Developing High-Value-Added Products Solar Frontier is performing research and development related to new products that have the potential to open new markets. While Solar Frontier is currently manufacturing solar modules with CIS semiconductor layers deposited on a substrate glass, its technologies have significant poten- tial to be adapted for use in high-value-added products. Such products include, for example, modules that can be incorporated into construction materials or applied to curved surfaces. New products will be a key ingredient in the medium- to long-term growth of the company.
Ventures for Future Growth Since 2010, Solar Frontier and IBM Corporation (U.S.) have performed joint research and development on CZTS (copper, zinc, tin, sulfur, and selenium) solar modules. These modules
The Atsugi Research Center (ARC) in are made from materials that are both affordable and easy to obtain. As such, they present Kanagawa Prefecture has installed a pilot significant opportunities for cost competitiveness, making them ideal for mass production. plant that employs the same production Solar Frontier and IBM successfully achieved conversion efficiency of 11.1% in August process as actual factories. This enables faster transitions from research and 2012, setting a new world record for CZTS solar panels. Solar Frontier will continue to inves- development to mass production. tigate the potential of CZTS with the aim of creating a new driver of future growth.
Energy Conversion Improvement Roadmap
AA 19.7% Atsugi AA 17.8% Research Center 0.5cm x 0.5cm cell taken from 30cm x 30cm submodule AA 15.7% Energy Conversion 30cm square sub-module AA: Aperture Area 15%
165W 13.4% Transfer of technology to products AA 14.6% 180W 14.7% 14% 160W 13.0% AA 15.9% AA 14.2% 170W 13.9% 13% 150W 12.2% AA 15.0% AA 13.3%
12% 2010 2011 2012 2013 2016
38 Solar Frontier manufactures the majority of its CIS thin-film solar panels at the Kunitomi Plant, one of the largest solar panel factories in the world. Profile Achieving Full Operations at the Kunitomi Plant Production Plant In February 2011, Solar Frontier began commercial operations at the Kunitomi Plant. With a production capacity of 900 MW, it is one of the largest solar module factories in the world and the largest in Japan. Efforts in 2011 were concentrated on bringing operations online at the Management Message plant. After this was accomplished, Solar Frontier focused its attention in 2012 on boosting operational efficiency and enhancing the performance of products manufactured at this plant, thereby significantly reducing production costs. As a result, Solar Frontier successfully increased solar module output from 145–155W at the beginning of 2012 to 155–165W at the begin- Production Plant ning of 2013, while also reducing material procurement costs. In early 2013, Solar Frontier *Figures in parentheses indicate production capacity began operating the Kunitomi Plant at full capacity to meet the sharp rise in demand in Japan. These developments reduced production costs significantly below 2011 levels. Review of Operations The Kunitomi Plant is scheduled to continue running at full production throughout 2013, and First Miyazaki Plant (20 MW) will pursue higher levels of efficiency to further strengthen cost competitiveness. Second Miyazaki Plant (60 MW) The Second Miyazaki Plant (MP2), which began operation in 2009 and boasts a produc- Kunitomi Plant (900 MW) tion capacity of 60 MW, primarily produces smaller CIS solar modules for residential use. Solar Frontier has continued to improve production efficiency at MP2 and enhance the perfor- mance of its products, achieving a production capacity that exceeded the originally planned capacity in 2012. Production at MP2 was halted at the end of 2012 to make adjustments for the production of new, Human Resources differentiated products. The plant resumed pro- duction in July 2013. HSSE
Kunitomi Plant Community and Social Contribution Activities
Increasing Solar Frontier’s Future Production Capacity Solar Frontier aims to be a global leader in the field of solar energy. Backed by its production technology, the company plans to increase its production capacity from its current scale of approximately 1 GW (1,000 MW). Key to this will be the ARC, where research and develop-
ment to draw out the potential of CIS thin-film solar modules and their mass production technol- Corporate Governance ogy is being conducted. Continuous transfer of ARC know-how to Solar Frontier’s production facilities will be the driver of its cost competitiveness and technological leadership. Solar Frontier intends to introduce its CIS thin-film solar module technologies into new facto- ries based on the successful model of its factories in Japan. Decisions on locations for new factories will depend on a number of considerations. These include access to markets with high demand, presence of the infrastructure needed for efficient operation, and the beneficial rela-
tionships with complementary companies. Financial Section and Corporate Data
39 REVIEW OF OPERATIONS
In addition to focusing on sales in Japan amidst high demand, Solar Frontier is strengthening its system operations through the development of a high-value-added business model. This model will be an important tool Sales Strategy for expanding our operations in the global market.
Growing Demand In light of global warming, safety, and other issues pertaining to energy, there is a global movement to accelerate the spread of renewable energy. This is subsequently driving new de- mand for solar power systems. Market growth in Europe, which was previously the highest worldwide, has begun to taper off. However, growth remains strong in the United States and China, and Japan has also recently seen strong demand due to the influence of its feed-in tariff (FIT) scheme for renewable energy. Furthermore, medium- to long-term increases in demand are expected in Asia, the Middle East, and other regions where economic growth is brisk and sunlight is abundant. As solar power systems become increasingly more common, the costs of introducing these systems will decrease further, making them even more economically sound. As a result, solar energy will increasingly play a role in the world as a power source with both economic and environmental benefits. Solar Frontier began ramping up sales of its products in Japan in the latter half of 2012 to respond to growth in demand. In addition to promoting sales of solar modules, it is also devel- oping a sales model that includes a comprehensive lineup of high-value-added services for Bustling activity at PV EXPO 2012 solar power systems. This will be an essential component of Solar Frontier’s growing global leadership in the field of solar energy solutions.
Feed-in Tariff Scheme for Renewable Energy The FIT scheme was introduced in Japan in July 2012 with the goals of improving Japan’s energy self-sufficiency and safety, addressing global warming, furthering the development of industry, and making renewable energy an important component of Japan’s power supply. Under this scheme, electric utilities are required to purchase all electricity generated from renewable energy sources (solar, wind, hydroelectric, geothermal, and biomass power) at a fixed price over a defined period of time. The terms of this scheme are defined by the Act on Special Measures concerning the Procurement of Renewable Electric Energy by Operators of Electric Utilities. The purchase prices of this scheme are revised in April of each year, and these prices remain fixed until the following March. Until March 2013, the purchase price applicable for solar power systems with outputs of over 10 kW was set at ¥42.0 per kilowatt-hour. This became ¥37.8 per kilowatt-hour starting in April 2013. Systems smaller than 10 kW are applicable for a purchase price of ¥38.0 per kilowatt-hour.
Domestic Solar Module Shipment Volume
(MW) 3,000 Non-residential Residential
2,000
1,000
0 2008 2009 2010 2 011 2012 Source: Japan Photovoltaic Energy Association
40 Reliable Japanese Products for Households Nationwide Demand for residential-use solar power systems has continued to grow as a result of the the *The Excess Electricity Purchasing
Excess Electricity Purchasing Scheme for Photovoltaic Power* and subsidies provided by mu- Scheme for Photovoltaic Power: Profile Under this scheme, electric utilities are nicipal governments. As electricity rates rise and solar costs fall, demand for these systems is mandated to purchase the unused surplus expected to continue growing into the future. of electricity that has been generated at Solar Frontier aims to increase sales of residential-use solar power systems. In this quest, it their customers’ PV facilities of less than 10 kW. This scheme was introduced in will leverage the strengths of its CIS thin-film solar modules together with its growing brand
Japan in 2009. Management Message recognition. These strengths include high-quality production in Japan, superior aesthetic design, and increased reliability and customer support. However, in order to expand sales further, it will be necessary to strengthen sales capabilities. To this end, Solar Frontier is reinforcing its network of sales agents throughout Japan. In addition to Review of Operations contract dealers in the Oil Business, which have close ties to local communities, Solar Frontier is expanding its network to include residential home builders, refurbishment specialists, and building contractors. Solar Frontier is also bolstering its sales capabilities by educating sales agents about its products and by offering support for their sales activities. Human Resources CIS thin-film solar modules made Reliable, Income-Generating Products and Services that by Solar Frontier installed on a Satisfy Owners Nationwide house in Japan Following the introduction of the FIT scheme for renewable energy, the construction of solar power plants accelerated across Japan. Since the income of plant owners is directly linked to the actual electricity generated, these systems must be reliable as they are expected to operate for lengthy periods (over 20 years). This long lifetime requirement has served to increase the
importance of reliable post-installation services in purchasing decisions. Solar Frontier provides HSSE economical and highly reliable products and services to satisfy the needs of its customers, and sales have increased as a result.
High-Value-Added Business Model Community and Social Contribution Activities There are a number of steps involved in the process of setting up large-scale solar (“megasolar”) projects, and various tasks must be conducted throughout their 20-year operational lifetime. This includes selecting a site for the project, designing the facilities, arranging funding, procur- ing materials, receiving approval for facilities, conducting negotiations with power utilities, constructing facilities, and connecting the power source to the power grid. Tasks to be com- pleted after commencing operations are equally diverse, and include assigning managers,
monitoring the site to ensure stable generation, inspecting and cleaning facilities, and submit- Corporate Governance ting periodic reports to authorities.
Process of Starting Up Solar Power Plant Operation
Owners / Investors Financial Section and Corporate Data Fund Material Planning Design procurement procurement Construction Start up Operation
41 REVIEW OF OPERATIONS
Through its business in Japan and over- seas, Solar Frontier has accumulated a breadth of knowledge related to areas spanning from the development of solar power systems to their operation. Leverag- ing this knowledge, Solar Frontier aims to provide customers high-value-added ser- vices on a one-stop basis for all of their megasolar project needs. To assist Solar Frontier in its operations, the company conducts projects on a joint basis with various business partners. On the engineering front, it has established a strategic partnership with Germany’s Kunitomi No.1 Megasolar BELECTRIC, a contractor of megasolar construction projects around the world. As part of this This 3.3 MW megasolar facility was alliance, Solar Frontier established PV CIStems as a joint venture with BELECTRIC in March constructed on idle land owned by Yano Industry, and 2.2 MW of this 2012. Located in Germany, this company provides solar power systems. Initially, business generation capacity is operated by activities that took advantage of this partnership were conducted overseas, but in 2012 Solar Solar Frontier. Frontier began leveraging the benefits of this partnership in Japan as well. As one example of these efforts, it started two megasolar projects on idle land owned by Yano Industry Co., Ltd., in Miyazaki Prefecture. Also, in March 2013 Solar Frontier established a joint investment company with the Devel- opment Bank of Japan Inc. (DBJ) with the purpose of investing in megasolar projects in Japan. This company leverages Solar Frontiers’ solar power system development expertise to support the speedy completion of megasolar projects. In 2013, Solar Frontier will continue to build on its experience and expertise regarding megasolar projects in Japan. In developing this foundation, it will thereby improve profitabil- ity. Once firmly established in Japan, Solar Frontier will apply this experience to its overseas expansion efforts. Solar power plant constructed by BELECTRIC using Solar Frontier’s products in Brandenburg, Germany
Global Solar Module Demand Forecast (By Application)
(MW) 60,000 Non-residential Residential 45,000 Independent power source
30,000
15,000
0 2010 2 011 2012 2013 2014 2015 2016 2017
Forecast
Source: IHS Inc.
42 Electric Power Business Profile Management Message Review of Operations
Showa Shell has progressively expanded the scale of the electric power business by effectively utilizing its existing assets. Through this business, we are working to stably provide the electricity necessary for people and society, while employing more efficient and cleaner sources of power. Human Resources
Highly Efficient Natural Gas-Fired Thermal Power Plant— Ohgishima Power Station In Japan, deregulation has opened the door for new operators, including Showa Shell, to sell electricity to special and conventional high-voltage power users, defined as those users with contract demand of over 50 kW.
To provide energy solutions by making effective use of a former crude oil storage site, in HSSE 2003 we established Ohgishima Power Co., Ltd., with Tokyo Gas Co., Ltd. In 2010, this company began operating the first and second units of the Ohgishima Power Station (Yoko- hama, Kanagawa Prefecture; output of approximately 800,000 kW). The station is powered by natural gas, which is a relatively clean energy source, and achieves highly efficient power Community and Social generation by introducing a leading-edge, energy-saving combined cycle gas turbine*. The Contribution Activities plant also has the advantage of its location, as natural gas can be supplied by the nearby To- kyo Gas terminal, and it is close to the Tokyo metropolitan area—where electricity is most needed—thereby keeping transmission losses to a minimum. Showa Shell receives approxi- mately 200,000 kW of the Ohgishima Power Station’s total output of around 800,000 kW. This output is primarily sold to customers in the Tokyo metropolitan area.
In October 2012, Ohgishima Power decided to construct a third unit (with an output of Corporate Governance approximately 400,000 kW) at the Ohgishima Power Station on a plot of land adjacent to the first and second units. Construction was commenced thereafter. Legally required environmental impact assessments at the third unit have already been completed, and the facility is scheduled to begin operation in early 2016. Leveraging this facility, we will quickly increase the degree to which we contribute to the provision of a stable supply of power to Japan’s electricity market. Financial Section and
* Combined cycle gas turbine: In addition to gas being burned to run the generator turbine, exhaust heat is also Corporate Data dedicated to steam generation. This steam is routed to a steam turbine for power generation. By employing this leading-edge system, the Ohgishima Power Station achieves high energy conversion efficiency, of around 58% (lowest heat value standard, power-generating terminal).
43 REVIEW OF OPERATIONS
Power Plant Utilizing Byproducts from Petroleum Refining Processes Showa Shell’s subsidiary Genex Co., Ltd., is an electricity wholesaler that supplies electric power by effectively utilizing off-gas and heavy oil (asphalt) created during petroleum refining processes conducted at the Keihin Refinery of Toa Oil Co., Ltd. Genex’s power plant employs a cogeneration system that delivers high overall energy efficiency. This system is operated in an Genex’s Mizue Power Station optimal manner by both Genex and the Keihin Refinery, which contains Genex’s plant. The electricity generated by this system is sold to Tokyo Electric Power Company, Incorporated and is also supplied to the Keihin Refinery in tandem with steam to meet the power needs of that facility.
Solar Power Plants Using Solar Frontier’s CIS Thin-Film Solar Modules Showa Shell aims to effectively utilize the land previously used for oil business facilities and leverage Solar Frontier K.K.’s superior CIS thin-film solar modules. To this end, in January 2013 the Company concluded an agreement with COSMO OIL CO., LTD., and Development Bank of Japan Inc. to conduct a joint large-scale solar (“megasolar”) project. This project entails the establishment of a joint venture company and the construction of solar power plants using Solar Frontier’s CIS thin-film solar modules. Such plants will be constructed at a total of eight locations, including the former site of Ohgishima Oil Terminal Co., Ltd., which was a joint venture be- tween subsidiary Toa Oil and COSMO OIL; as well as the sites of former COSMO OIL depots. Some of the plants are scheduled to begin selling power to utilities during 2013. The Showa Shell Group also operates other facilities that generate electricity for use by Group facilities or sale to power utili- ties. These include megasolar genera- tion facilities installed on the roofs and grounds of solar module produc- tion plants and the Niigata Yukiguni- gata Megasolar Power Plant, which employs specialized construction methods and calculated angles to enable solar power to be generated in snow-heavy Niigata Prefecture.
Niigata Yukigunigata Megasolar Expanding Power Generation Capacity Through Various Power Sources in Response to Social Needs Showa Shell aims to contribute to the electricity market in Japan by providing a stable supply of electricity generated using clean energy sources and offered at competitive prices. In order to accomplish this, we plan to expand our generation capacity to around 1 million kW. At the same time, the Showa Shell Group will work to expand electricity supplies using eco-friendly and sustainable power sources, such as biomass and other new power sources in addition to those that we are currently using. By developing power sources in response to the needs of society and customers, we will provide Japan with a stable supply of electricity.
44 Research and Development Profile R&D efforts in the oil business will be conducted while fully leveraging the benefits of our partnership with the Shell Group. In the solar business, efforts will be focused on CIS thin-film solar modules, which are created using technologies with particularly high potential for the future. Showa Shell will also work to develop technologies and products that will contribute Management Message to the realization of a low-carbon society.
Oil Business Striving to continue providing the products that society and customers need, Showa Shell is Review of Operations pursuing the development and commercialization of high-quality, high-performance fuels, lubri- cants, greases, asphalt, and other products that offer strong environmental and energy-saving performance through its R&D structure centered on the Central Research Laboratory. The Com- pany is also developing next-generation clean energy systems. Furthermore, Showa Shell ex- changes human resources and the latest intelligence with Shell R&D centers in the United States, the Netherlands, and Germany to develop cutting-edge technologies.
Developing High-Value-Added Products—Shell Heat Clean Human Resources Shell Heat Clean is a fuel made specifically for oil fan heaters. It is made from materials pro- duced through GTL* processes at a Shell Group-operated plant in Malaysia. The product has superior combustion qualities and is more eco-friendly than conventional kerosene, as it has less than 1/10th the sulfur content. The fuel also produces less kerosene odor and has a long shelf life prior to deterioration. We sell this product at service stations, and also offer home-delivery services through Internet sales. Shell Heat Clean has won the support of customers for its per- * GTL (gas to liquids) is a refining process formance as well as for the convenience of the home delivery services provided for this product. that converts natural gas into liquid fuel.
For more examples of high-value-added products, please refer to pages 31–32 This method is gaining attention for its HSSE ability to create next-generation fuel that Energy Solution Business—Solar Business features less sulfur and fewer odors than petroleum fuels. Established in 2009, the Atsugi Research Center (ARC) conducts R&D ventures geared toward increasing the output of existing solar module products, improving production technologies, and Community and Social developing and commercializing high-value-added products. ARC employs the same equip- Contribution Activities ment as is used in factories conducting commercial production, thereby smoothing the process of introducing developed technologies into commercial production lines. Leveraging this center, we have developed an R&D structure that enables us to realize the speedy development and commercialization of technologies that is needed to survive in this rapidly evolving industry. For details on technology developments related to the solar business, please refer to page 38 Corporate Governance Atsugi Research Center (ARC)
COLUMN Public Symposiums Held by Energy Sustainability Forum In 2007, Showa Shell established the Energy Sustainability Forum in collaboration with the Integrated Research System for Sustain- ability Science (IR3S) operated by the University of Tokyo. The forum was designed to pursue the development of a long-term vision
for the future of energy. Since 2008, the forum has held a total of eight public symposiums, and we have offered suggestions to Financial Section and Corporate Data society through the discussions held therein. The eighth symposium, held in February 2013, was on the theme of new energy de- velopments after the Great East Japan Earthquake and progress toward the realization of a low-carbon society. At this symposium, suggestions were offered by experts from a wide range of viewpoints on subjects including new energy developments and the difficulties of introducing new energy sources in Japan as well as methods of making Japan more self-sufficient in terms of energy. For more information, please refer to the Company’s website: http://www2.ir3s.u-tokyo.ac.jp/esf/
45 Human Resources
Developing Competitive Talent Vision
Human Resources Initiative In order to become a globally competitive energy solution provider and accurately respond to customers’ various needs, it is important that our human resources be highly motivated toward advancing our business strategies. To this Team end, we strategically develop competitive human resources Outbound by communicating our Talent Vision and by developing Spirit training systems and a working environment.
46 Formulation of the Talent Vision
In recent years, there have been drastic changes in Showa Shell’s business environment including the establishment of highly competitive Profile refineries overseas and the growing presence of overseas solar module manufacturers leveraging the scales of their economies, making it necessary for the Group to develop its business in a harsher business environment. In such an environment, we must rapidly advance business strategies if we are to respond to future market changes and continue improving corporate value. It will be our human re- sources that advance these strategies, and we are therefore aware of the fact that it will be impossible to continue developing our Management Message business without competitive human resources. Based on this realization, we formulated our new Talent Vision and began enhancing training systems in 2011. Then in 2012, we launched training programs targeting the dissemination of this vision and the increased competitiveness of our human resources. Initiative Talent Vision Taking events and changes happening around seriously with a sense of Our Talent Vision defines the credo and behavioral guidelines that ownership, setting the goal autonomously, and acting for better result. we expect employees to adhere to as we strive toward sustain- Outbound Review of Operations able growth and development. The three pillars of this vision are Always attempting to understand clients’ needs, broadening one’s mind Initiative, Outbound, and Team Spirit. These are the characteris- outward, making continuous originality and ingenuity, and acting. tics we intend for our employees to share, regardless of age, qualification, or position. Team Spirit Valuing teamwork and contributing to the team by having an attitude of growing together with the team members, for making better result than working individually. Human Resources
Training Programs Development of Competency Improvement of Adaptability to Development of Professional Talent Others and Way of Thinking Global Business Environment
HR Division & Support for HR Division Business Segments Test Business Segments Self-Education
Training Programs GM of General Managers
Toward Training Programs of Elective Elective Manager New Managers, MBO, Domestic Advanced Support for Overseas TOEIC Test and Managers Realization Off-Site Courses by Specialized Specialized Off-Site (Offered HSSE Training Business Skill Dev. Skill Dev. Training Companywide) Correspondence Basic Management Training Segment Courses by Courses Shell of the Education / Business Outside of Overseas Solid English Leadership Training Segments the Company Training Talent Vision Employees Training by Schooling Basic Leadership Training
Studying Community and Social Training Programs of Contribution Activities Junior Basic New Grads and Based on Abroad Employees Courses by Number of Years Program HR Division (1～3 Years) at the Company
Pre- Training before Entering Employment
Feedback from Participants in Corporate Governance Training Systems New Leadership Training Our training systems are focused on strategically strengthening human resources through programs in three areas: development • Discussions with employees from other divisions ex- of competency and way of thinking, development of professional posed me to perspectives I was not yet aware of, and talent, and improvement of adaptability to an ever increasing were therefore very worthwhile. global business environment. In these areas, we are conducting • The high level of output at the training was highly
seminars for specific business fields to which any Group -em constructive. Financial Section and
ployee may attend; training arranged based on number of years • It was a beneficial opportunity to systematically learn Corporate Data worked, qualifications, and position; and voluntary training to leadership skills. share the Talent Vision among all employees and help realize • I realized the importance of clear goals when address- this vision. ing challenges, and will take careful consideration of this in the future.
47 HUMAN RESOURCES
Creation of a Worker-Friendly Environment
Our employees are vital growth drivers for Showa Shell and they are valuable stakeholders. In recognition of this fact, we are commit- ted to developing a comfortable workplace environment in which they are able to develop their skills. We are enhancing employee welfare systems and conducting employee opinion surveys, and have also formulated a Policy for Diversity and Inclusiveness with the aim of developing a workplace culture in which employees respect their colleagues’ differences and have ample access to diverse ideas and values, and in which they are able to learn and growth through this awareness.
Respect for Human Rights Reemployment of People Retiring We comply with international labor standards and respect each at Retirement Age of our employees. Showa Shell’s Code of Conduct requires us to We have in place a reemployment system for reemploying ambi- conduct business as a responsible member of society, observe tious and capable people aged 60 and over, putting the knowl- laws, and respect fundamental human rights. With regard to edge and expertise they have accumulated over the course of ensuring the human rights of workers, we promote initiatives to their careers to good use. In 2012, 45.5% of employees that create opportunities for fair and impartial treatment eliminating retired after reaching the normal retirement age of 60 expressed discrimination, on many fronts: from hiring, transfers, treatment, the desire to use this reemployment system. and educational opportunities to retirement. Employment of Women Discussions with Labor Unions We have in place welfare systems to correspond to women’s life We engage in discussions with our labor unions on a regular events, such as pregnancy and maternity, and strive to create an basis. These discussions are held on a variety of themes, includ- environment in which women can be motivated to work to their ing management issues, workplace culture, workflow improve- fullest and continue working over the long term. As of December ment, and work-life balance. Through intensive discussions, we 31, 2012, women accounted for 20.4% of our workforce, and exchange opinions regarding issues faced by management and we continue to promote women in the workplace. employees, consider possible solutions, and otherwise seek out ways of creating a workplace environment in which all employ- Employing Differently Abled People ees can utilize their skills to the fullest extent. The Integrated Hu- We are actively developing a workplace environment in which man Resources Division emails the results of such discussions to differently abled people can work to their fullest. Going forward, all employees, and these results are also posted on our intranet. we will continue to employ people with disabilities, aiming to exceed the legally mandated level of having 2.0% of our total Efforts to Ensure Fair, Impartial, staff accounted for by such individuals. and Diverse Hiring We have in place a structure to make fair and impartial hiring decisions without regard to nationality, gender, or disability sta- tus, and adhere to the Japan Business Federation (Nippon Keidanren)’s Corporate Charter for Screening and Employing New Graduates. Specific efforts to ensure fair, impartial, and Employment Situation diverse hiring include the appointment of a Fair Hiring and Hu- (Showa Shell on a non-consolidated basis) man Rights Director. * As of December 31, 2012
Number of employees 946
Average age 44.5 years old
Average length of employment 20.6 years
Female employment ratio 20.4%
Number of new graduates hired in 2012 26
Women among new graduates hired over past 20 years 42.0%
Number of mid-career personnel hired in 2012 7
48 Profile Management Message Review of Operations Systems to Promote a Work-Life Balance System User Testimony We have in place a number of programs that enable individual I have taken advantage of Showa Shell’s childcare leave employees to choose their own working style, based on their indi- system twice, once for each of my two children. When I vidual situation and stage of life. The range of programs we sup- was carrying my second child, my physical condition dete- ply exceeds legally required levels. In this manner, we aim to riorated. Showa Shell’s shortened-work hour system was an create employee-friendly workplaces where employees can take immense help at this time, as it allowed me to work based advantage of their skills and find their work fulfilling. We have
on my condition during my pregnancy. Now my eldest is Human Resources provided a full range of systems that enable female employees to in elementary school and my youngest is in nursery school. work flexibly surrounding such life events as pregnancy and mater- I still actively use Showa Shell’s support systems to take nity, while enabling them to make full use of their skills. We have leave when my children are sick or otherwise in need of a childcare leave system as well as a shortened-work hour system me. However, the support that Showa Shell offers is not and other systems designed to accommodate their needs. We only limited to its systems. I am also also have various programs that encourage a work-life balance. incredibly grateful for the corporate Both male and female employees can take advantage of these culture that is understanding toward systems to accommodate flexible working styles and voluntary my efforts to balance my work with activities. For these efforts, Showa Shell has acquired the next- HSSE my children. generation certification mark known as “Kurumin” from Japan’s Aya Yoshida Ministry of Health, Labour and Welfare every year since 2007. International Sales Division Going forward, to further encourage the use of these pro- grams, we will continue improving the operation of these pro- Community and Social grams in response to the needs of employees wishing to take Contribution Activities part while also cultivating a corporate culture that is conducive to Employee Opinion Surveys the use of these systems. Employee opinion surveys are instituted each year. The ques- tions presented in these surveys are the same for the Shell Systems and Usage Numbers Group, and include questions related to issues with manage- * Figures in parentheses indicate number of men ment or particular divisions and improving workplace environ- 2010 2011 2012
ments. In 2012, 96.0% of employees responded to these Corporate Governance Childcare or nursing care leave 9 (1) 5 (1) 11 (1) surveys. Division-specific issues discovered through responses Shortened working hours for are discussed at related operating sites under the guidance of 4 (1) 4 (1) 3 (0) childcare or nursing care division heads, and improvements are pursued thereafter. Leave to care for a sick child 26(15) 27(17) 27(16) Key Results of the Shell People Survey Telecommuting 6 (1) 4 (1) 5 (1)
Self-development leave of
0 1 (1) 2 (1) Financial Section and absence Human Employee Diversity and Corporate Data resources Community service leave 1 (1) 2 (2) 0 satisfaction inclusiveness development More information regarding systems for promoting work-life balance can be found in CSR Book 2013, available on the Company’s website. Favorable Neutral Unfavorable http://www.showa-shell.co.jp/english/csr/index.html
49 HSSE
Establishing Strong Corporate Foundations In accordance with its Management Philosophy, Showa Shell has formulated a Basic Policy for Health, Safety, Security, and Environment (HSSE). Over the almost 30 years since the establish- ment of Showa Shell Sekiyu K.K. in 1985, we have continued to pursue ongoing HSSE perfor- mance improvements in line with this policy. We consider HSSE initiatives of foremost importance in fulfilling our social responsibility as an energy company. Accordingly, we are promoting these activities throughout the Group, with direction from top management.
HSSE Definitions
Provide a working environment Ensure the personal and physical that ensures workplaces and Health Safety safety of sites and other locations, businesses are safe, healthy, and and maintain product quality. comfortable for employees.
Prevent threats due to crimes, disaster, and other emergencies, Security Environment Preserve regional and global and respond appropriately in environments. emergency situations.
More information regarding HSSE policies can be found on the Company’s website. http://www.showa-shell.co.jp/english/profile/mp/hsse.html
50 HSSE Promotion and Management System
HSSE Promotion System Profile In 2012, we advanced HSSE initiatives with the HSSE Committee as the highest HSSE decision-making body. This committee approves HSSE-related plans, conducts performance reviews, supervises progress, and otherwise guides HSSE promotion activities throughout the Group. In May 2013, the HSSE Committee was replaced by the newly established Risk Management Committee, which now serves as the Management Message highest HSSE decision-making body. The Group’s Chief Operating Officer (COO) chairs this new committee as it manages HSSE, compliance, and all other aspects of internal control. The committee meets four times a year, and important items raised during these meetings are reported to the Board of Directors. Under the Risk Management Committee, we have established site-level meeting teams as well as four subcommittees devoted to different areas of discussion, with the membership of these subcommittees including represen- tatives from related Group companies and heads of departments and offices in the Showa Shell head office.
Company level Showa Shell Group HSSE Conference Review of Operations Strives to share HSSE activity information to improve the HSSE performance of each Showa Shell Group company.
Product Safety Sub-Committee
Risk Management Discusses the overall safety of products, from development to disposal, to ensure that the Company’s products do Reports not have a negative impact on users, their property, or the environment, either in their handling, use, or after use. Committee Chair: COO Security Liaison Committee Meeting (SLCM)
Discusses guidelines, policies, and proposals regarding security (crisis management).
HSSE Sub-Committee Human Resources
Follows the fundamental policies regarding HSSE and discusses matters pertaining to the formulation of HSSE XXXXXXX plans, progress monitoring, and performance reviews.
Safety and Hygiene Committees (At All Work Sites) HSSE Conference (At All Work Sites)
Established at the head office and each work site, these committees dis- Investigates various matters related to HSSE at all work sites. cuss matters regarding safety, such as the causes of occupational acci- dents and recurrence prevention plans, as well as matters regarding hygiene, such as the prevention of health problems among employees,
and efforts to maintain and improve their health. HSSE Workplace level
HSSE Management System (HSSE-MS) The Shell Group has developed the HSSE-MS as a voluntary system to track and continuously improve HSSE performance, and this system is also employed by us. In addition, our Group refineries and other principal operating sites have acquired certification under Community and Social the ISO 14001 international environmental management standard, and we have instituted an environmental management system Contribution Activities based on this standard.
A list of operating sites that have acquired ISO 14001 certification can be found in CSR Book 2013 available on the Company’s website. http://www.showa-shell.co.jp/english/csr/index.html
HSSE Priority Strategy Act Plan Hazard and Effects Risk Management Committee Corporate Governance Management Process (HEMP)*1 Correction Plan/Recurrent HSSE Action Plan Risk Assessment Matrix Prevention Policy Each Division *2 Each Division/Companywide (RAM) Accident (on a Case-by-Case Basis) Do Causal Analysis (TRIPOD*3) Follow-up Review Check HSSE (Self) Audit (Periodic) Financial Section and Corporate Data
*1 Hazard and Effects Management Process (HEMP): A process used to *2 Risk Assessment Matrix (RAM): A management table for assessing the confirm the disaster potential (hazards) related to tasks and equipment, and effects and incidence probability of risks by person, capital, environment, to envision the damage those hazards might cause. The risks of a hypotheti- and popularity categories. cal disaster are then assessed using a Risk Assessment Matrix (RAM), and *3 TRIPOD: An accident analysis technique used by the Shell Group. the highest risks are analyzed using a HEMP Worksheet. Once an area for improvement is confirmed, a corrective measures plan is formulated.
51 HSSE
Goal Zero Movement
We realize the extreme importance of preventing accidents that result in lost work time, and are approaching this task from the perspectives of both the hard and soft elements of operations. Hard element initiatives include developing risk management proce- dures and manuals, whereas soft element initiatives include spreading safety awareness. The Goal Zero Movement is a soft element initiative geared toward spreading safety awareness. This movement was initially conducted during the safety reinforcement period in 2011, and we have continued to conduct this movement since then.
Importance of Safety Management Jun Arai Representative Director, Chief Operating Officer, Chairman of the Risk Management Committee “HSSE and compliance must be prioritized above all else.” I am always reminding employees of this fact. Ensuring the safety of Showa Shell Group employees is, of course, the responsibility of the Company. However, we should also be aware of the fact that we cannot improve corporate value without guaranteed safety. The Goal Zero Movement discussed in this report has already had a positive influ- ence, as evidenced by surveys and feedback from operating sites, and we intend to continue conducting this movement throughout the Group going forward. Goal Zero is our aim to reduce to zero the number of major accidents involving people that result in lost work time—a goal we are always pursuing. However, there is no easy way of accomplishing this goal. In 2012, the movement was advanced under the slogan of “Everyone, boldly and imaginatively pursue Goal Zero!” In 2013, our advance to- ward the achievement of Goal Zero will continue under guidance of Showa Shell’s COO Arai visiting the Keihin Refinery of Toa Oil Co., Ltd., in July 2012 senior management as we remind all employees of the importance of a high level of safety awareness in their everyday work.
Safety Day 2012— Goal Zero Declarations A Day to Think About Safety To prevent occupational accidents, we compiled a list of the The Shell Group has been holding Safety Day on an ongoing measures and actions needed to prevent the realization of the basis as a day dedicated to focusing even more so on safety, risks present in each division. These were then used to create thereby helping to further educate employees on the subject of Goal Zero Declaration posters, which were displayed to raise safety. Safety Day 2012 was held on June 6 at Shell Group safety awareness among employees, and we also implemented operating sites around the world, with the theme of “Time for preventative measures. Safety.” Showa Shell instituted its own Safety Day in Japan on that day Examples of Goal Zero Declarations as well, with workshops held for small groups on the department We shall always use seat belts when we drive or ride in and section level. In addition, employees viewed safety education cars. (Head office division) videos, and we held forums We will not procrastinate or neglect response to issues. in which employees could (Refinery) discuss signs of possible We shall use pointing-and-calling alerts during safety oversights, areas to operations. (Depot) improve in everyday opera- We shall always use protective gear when conducting tions, and other safety-related experiments or other tasks. (R&D center) themes, as well as how such knowledge can be reflected Goal Zero Movement Newsletter Including in one’s work. Statements from Executives Our executives have written statements ex- pressing their commitment toward accom- plishing Goal Zero. These were included in a newsletter containing articles on safety, and distributed to employees to raise the motivation of all Group employees to par- ticipate in the Goal Zero Movement.
52 Goal Zero Movement Surveys In 2012, HSSE representatives at each division and site conducted surveys with regard to the activities being conducted as part of the
Goal Zero Movement. The ratio of positive responses was high for all questions, demonstrating the extent to which this movement has Profile become entrenched at operating sites. The survey also helped clarify the issues faced in the movement, such as the difficulty of using the same tools to advance activities—a result of Showa Shell’s diverse range of operations.
Survey Results Management Message Are Goal Zero Declarations periodically confirmed Was Safety Day beneficial? at meetings, etc.? 95% 92%
• Confirmation is conducted at the start of all-hands meetings and • It was a good opportunity to discuss safety within teams. morning meetings, helping raise safety awareness. • Further consideration of office safety measures is necessary. • Making declarations has been set as a goal, allowing all Review of Operations employees to work while remaining considerate of safety.
Are actions related to Were statements written Goal Zero Declarations % by executives helpful? % conducted on a voluntary basis? 97 96
• The movement is in its second year, and it has become well • Statements enabled focus areas to be shared among divisions,
entrenched at the workplace. helping raise safety awareness. Human Resources
• Declarations are confirmed through group readings at meetings, • Heads of operating sites issued safety-related messages from XXXXXXX etc., raising safety awareness among all employees. their own perspective, providing an opportunity to become aware as well as helping raise safety awareness.
HSSE Site Visits by Executives Total Recordable Case Frequency Since 2006, Showa Shell has had all of its executives partici- We have been continually advancing the Goal Zero Movement pate in site visits to its refineries, oil depots, and other work sites and working to prevent the reoccurrence of accidents that result
to observe and talk with on-site staff about activities aimed at in lost work time by conducting investigations for each occur- HSSE preventing work-related and facility accidents. In 2012, with the rence of such accidents and instituting prevention measures aim of further improving HSSE, executives visited 73 sites, where throughout the Group. As a result, total recordable case fre- they helped spread the shared Company stance toward accom- quency, calculated as the frequency of accidents per one million plishing Goal Zero. labor hours, has declined. However, we are still seeing the Community and Social occurrence of serious occupational accidents. For this reason, Contribution Activities we have introduced the Shell Group’s Life-Saving Rules, and will continue implementing measures to reduce and hopefully eliminate occupational accidents. For details on Life-Saving Rules, please refer to page 54.
Total Recordable Case Frequency Corporate Governance (Showa Shell Group companies and business partners)
（%） 2.0
1.4 1.5
1.0 Financial Section and Corporate Data
0.5
0 2008 2009 2010 2011 2012 *1 Incidence rates (%) are per 1 million labor hours. *2 Figures include Showa Shell Group companies and business partners. *3 Recordable cases of all occupational accidents, including those that do not result in lost work time.
53 HSSE
Health
It is a social responsibility of Showa Shell to secure a safe workplace environment for its employees, and we also realize that such an environment is essential to the continuation of our business activities. Based on the Labor Standards Act, the Occupational Health and Safety Act, and such internal rules as HSSE, we have formulated the Safety and Hygiene Management Rule to ensure the safety of our workplaces and the mental and physical health of our employ- ees. We endeavor to create an appropriate working environment in accordance with these regulations.
Safety and Hygiene Committees assess employees’ mental health and to provide employees In accordance with the Occupational Health and Safety Act, with other opportunities to check their own health status. Further- Safety and Hygiene Committees have been established with more, in 2012 medical staff (industrial counselors and health membership consisting of representatives from the Company and nurses) held individual interviews with all employees in order to from labor unions. These committees provide opportunities to develop an understanding of each employee’s mental condi- discuss circumstances related to occupational health and safety tion, and to offer advice or suggest work style changes should throughout the Company. Feedback regarding issues is provided problems be discovered. periodically and areas needing improvement are identified. Health Counseling Desk Employee Health Management and We have set up a Health Counseling Desk on Heart and Body Mental Health Health Plaza, an intranet site dedicated to sharing information on On the health front, we conduct employee health exams twice health-related topics. This site enables employees to seek coun- each year. If an employee is called for a reexamination, we en- seling regarding their physical or mental health with full privacy. courage them to undergo extensive testing. We have conducted the Japan Productivity Center (JPC) Mental Health Inventory (JMI) every other year since 2001 to
Safety
Showa Shell works to enhance safety awareness. In addition to having in place the Safety Rule, we have defined ways of responding quickly in the event of an accident—prescribing how to determine the causes of accidents and how to prevent recurrence—and have put in place a safety recognition system. In particular, we conduct the Safety & Quality First (SQF) Campaign with our contract dealers and business partners to ensure safety and quality assurance measures, with the aim of achieving zero accidents.
Life-Saving Rules The Shell Group’s Life-Saving Rules have been defined to prevent accidents and are applicable to all Shell Group employees around the world. In formulating these rules, the Shell Group analyzed the primary causes of major occupational accidents that occurred during the Group’s operations over the nine-year period from 2000 to 2008, and a total of 12 rules were estab- lished based on these analyses. In 2013, Showa Shell began employing these rules. We are working to spread awareness regarding these rules and to en- sure that they are adhered to. To this end, we have distributed posters and cards featuring the 12 icons associated with the rules to all divisions, operating sites, business partners, and af- filiated companies. Going forward, we will pursue higher levels of safety aware- ness through these and other activities as we work to eliminate accidents.
54 Security
As a company that handles the energy that is essential to our way of life, our social mission is to provide a stable supply of Profile products and services even in the event of disaster or other emergency. Accordingly, we have in place structures to ensure business continuity, have drafted emergency response plans, and conduct regular drills as part of our efforts to strengthen our Group crisis management system.
Disaster Drills at Refineries and Risk Management System Spanning Management Message Other Workplaces the Entire Supply Chain We hold comprehensive disaster drills in cooperation with busi- The Showa Shell Group deals in energy, an important part of ness partners and government bodies that anticipate a large- social infrastructure. As such, the establishment of systems to en- scale earthquake at our refineries and other workplaces. sure that we can continue to supply energy even under extreme Conducting such drills on an ongoing basis enhances employ- circumstances is among our most important responsibilities to ees’ response skills, and we revise and improve our systems to society. For this purpose, we have formulated a business continu- Review of Operations assure the safety of refineries and other workplaces. ity plan (BCP). This plan includes provisions to guarantee that the products can be ordered and shipped anywhere in Japan, even if an earthquake directly below the Tokyo metropolitan area, an outbreak of a new strain of influenza, or some other disruption occurs. The plan also provides for the continuation of these ac- tivities in the event that the head office ceases to function due to such disruptions. We conduct yearly drills based on the content of this plan. Through drills, we rehearse setting up an alternative Human Resources
Disaster Control Headquarters in the Kinki Branch, evaluate the XXXXXXX process leading up to the enactment of the BCP, and practice taking orders and subsequently shipping ordered oil products without the current systems in place by using email and fax. Such drills are conducted through collaboration with our affiliates spanning the entire supply chain, from the Group refineries to Refinery disaster drill business partners that transport our products and the contract
dealers that operate our service stations. After the Great East Ja- HSSE Fire-Fighting Drills pan Earthquake, we revised the BCP to incorporate even more In the event of fire, a quick response is essential to prevent the fire detailed division-specific measures and also bolstered our infra- from turning into a major disaster. structure for enacting the plan, which entailed introducing com- Showa Shell works to improve employees’ basic understand- munication facilities for conducting satellite phone calls as well Community and Social ing of fire-fighting and conducts fire-fighting drills using actual as other equipment. Contribution Activities fires that have been specially designed to prepare employees to fight various types of fires. The Niigata Disaster Control Training Center, which opened in 1993, serves as a site for fire drills for company employees, as well as people from affiliated compa- nies and service stations. In recent years, we have also been
working to fulfill our responsibility as a company that contributes Corporate Governance to local communities by opening the center for use as a site for companies in and outside Niigata Prefecture, and as a drill site for a fire-fighting school. In the 19 years since the center first opened, some 4,987 people have undergone training there.
Comprehensive disaster response drill (alternative Disaster Control Headquarters in the Kinki Branch) Financial Section and Corporate Data
Fire-fighting drill at the Niigata Disaster Control Training Center
55 HSSE
The Environment
Showa Shell has established an appropriate environmental management system (EMS), which it utilizes as it works to reduce the en- vironmental impacts of its operations. At the same time, we are advancing an ongoing campaign to help prevent global warming by
reducing overall CO2 emissions from society through the development and provision of eco-friendly products that meet society’s needs.
The Showa Shell Group’s Business Model for Preventing Global Warming
CO2 emission reductions 1 Promote expansion of solar power usage
2 Implement efficiency improvement and energy-saving measures centered on the Oil Business, Sell high-value-added products with reduced environmental impact
Ongoing initiatives
Structure for Promoting Medium-Term Environmental Action Plan Environmental Preservation With regard to environmental initiatives, we have formulated a Formulated in accordance with the abovementioned Basic Policy Medium-Term Environmental Action Plan out of recognition for the for Health, Safety, Security, and Environment, our Environmental need to manage such activities in a focused and systematic man- Preservation Guidelines spell out our basic policy for protecting ner. We review the plan’s medium-term objectives on an annual the environment in the course of our business. Based on these basis. In 2012, we achieved our goals of reducing unit energy guidelines, we operate an HSSE-MS to determine, evaluate, consumption (achieve an average reduction of 13% for fiscal and manage environmental risks, to improve our environmental years 2008–2012 against fiscal 1990 levels) and of achieving performance on a continuous basis. Our refineries and other zero emissions at refineries (an industrial waste output rate of 1% principal work sites have acquired certification under the ISO or less). In addition, we promote the usage of solar power through 14001 international environmental management standard, and means such as establishing sales methods for megasolar systems we create systematic environmental preservation measures. using CIS thin-film solar modules. In 2013, we will formulate a A list of operating sites that have acquired ISO 14001 new Medium-Term Environmental Action Plan, and the entire Com- certification can be found in CSR Book 2013 available on pany will work together to realize the goals contained therein. the Company’s website. More information regarding the Medium-Term Environmental http://www.showa-shell.co.jp/english/csr/index.html Action Plan can be found in CSR Book 2013, available on the Company’s website. http://www.showa-shell.co.jp/english/csr/index.html
Preventing Environmental Pollution
Atmospheric Pollution Prevention Water Pollution Prevention Sulfur oxides (SOx) and nitrogen oxides (NOx) are produced by The water used at oil refineries is strictly managed so that it meets fuel oils and gases in refinery furnaces and boilers. The Group environmental regulations related to chemical oxygen demand strictly maintains SOx emissions below regulated levels by using (COD)* and oil content. Coolant water is confirmed to have no low-sulfur fuel oil and sulfur-free fuel gas treated with gas-cleaning oil content before it is discharged into the ocean. Water quality equipment. Efforts to prevent atmospheric pollution by NOx is managed through wastewater purification, either through oil emissions also include improved combustion methods achieved separators, chemical treatment using flocculating agents, or through the introduction of low NOx burners, and the installation through the use of activated sludge treatment equipment. Showa of flue gas denitration equipment. Shell uses very large crude carriers (VLCCs), all of which are
56 double-hulled tankers, reducing the risk of crude oil leakage even and provide feedback based on the knowledge and experience in the unlikely event of hull damage due to running aground or a gained from our own countermeasures. collision. Also, to curtail the movement of microorganisms that Profile might cause environmental or human health problems and to Chemical Substance Management System preserve biodiversity, the ballast water that is loaded when the In accordance with laws and regulations and HSSE manage- vessel is empty is replaced in the open ocean before the vessel ment rules, Showa Shell has drawn up regulations on the man- arrives at its destination. agement of chemical substances, chemical substance Management Message * Chemical oxygen demand (COD): An indicator of the degree of water management regulations related to products, and regulations on pollution. Higher COD values indicate higher levels of water pollution. the management of toxic and poisonous substances. These regulations are aimed at preventing negative effects on Soil Contamination Countermeasures people, property, and the environment of products that we use, The Showa Shell Group conducts soil contamination surveys as well as their containers, packaging, and chemical products and implements countermeasures at approximately 1,000 ser- used. In addition, we are reinforcing our overall management vice station sites. We continue to conduct these surveys when system, spanning development to use and disposal. Review of Operations facilities are closed or remodeled. We also participate in a committee for reviewing the application of the Water Pollution Control Act and the Soil Contamination Countermeasures Act,
Waste Reduction Initiatives
Industrial Waste Reduction at Group Refineries Reducing Waste and Promoting Recycling in Human Resources
The petroleum refining process generates industrial waste, in- the Solar Business XXXXXXX cluding sludge and disposable catalysts. The Group is building Group company Solar Frontier K.K. is a member of PV Cycle, a a Companywide waste management system to ensure the opti- European organization established to promote the collection and mum disposal of waste and reuse of resources. As a result of recycling of end-of-life solar panels. Solar Frontier is also partici- ongoing efforts to promote the recycling of industrial waste, in pating in the joint development of Japan’s first technology for so- 2012 final waste output by refineries amounted to 0.3% of the lar power system recycling, a project being promoted by the total amount generated, or 107 tonnes. Accordingly, the Group Kitakyushu Foundation for the Advancement of Industry, Science
has continued to meet its zero-emissions goal (emissions of 1% or and Technology. HSSE less) since 2008. In addition, packaging for solar modules was changed from conventional cardboard boxes to reusable packaging using corner pieces, thereby reducing waste production. This change was instituted in conjunction with the start of operations at the Community and Social Kunitomi Plant in 2011. This packaging method won a Large- Contribution Activities Amount and Rate of Final Industrial Waste Output sized Equipment Packaging Category Award in the 2012 Japan from Group Refineries Packaging Contest held by the Japan Packaging Institute.
(Tonnes/year) (Waste output rate) 5,000 5.0 Waste output amount Waste output rate
4,000 4.0 Corporate Governance
3,000 3.0
2,000 Zero emissions achieved at 2.0 refineries industrywide (Waste output rate of 1% or less) 1,000 1.0 0.3%
107 Financial Section and 0 0 2005 2006 2007 2008 2009 2010 2011 2012 Corporate Data
Solar module packaging method
57 HSSE
Preventing Environmental Pollution and Reducing Waste
Efforts during Crude Oil Procurement CO2 Emissions and Unit Energy Consumption at When the VLCCs that we use when procuring crude oil pass Group Refineries
through a strait or enter the ports they serve, they travel at reduced (Kilotonnes/year) (Unit) speeds to reduce both fuel consumption and CO2 emissions. 15,000 12.00 Refinery industry average 10.19 reduction of 13% for fiscal years Production Initiatives 12,000 2008–2012 against fiscal 1990 levels Target value: 8.87 10.00 Refineries 9.45 9,000 To promote energy conservation by maximizing the effective use 8.56 8.00 of energy generated during oil refining processes, we invest in 7.16 6,000 equipment such as heat exchangers, waste heat recovery boil- 4,754 3,965 ers, and exhaust gas recycling equipment. The Petroleum Asso- 6.00 ciation of Japan (PAJ) is promoting its Low-Carbon Society 3,000 Implementation Plan, which calls for energy-saving measures to be taken to replace a total of 530 megaliters of crude oil per year 0 4.00 1990 2005 2006 2007 2008 2009 2010 2011 2012 by fiscal 2020. Showa Shell is actively promoting energy-saving CO2 emissions Unit energy consumption (Industrywide) measures at its refineries, and is striving to reduce its CO2 emis- Unit energy consumption (Showa Shell) sions, using “unit energy consumption” as its indictor. In 2012, unit energy consumption was 7.16 (kiloliters/megaliter), down 24% from fiscal 1990 levels. This surpasses the level that the PAJ Plant we have improved production efficiency, and also realized has introduced (average reduction of 13% for fiscal years more efficient transportation by changing the materials used to 2008–2012 against fiscal 1990 levels), as well as the average package solar modules. industry value. On the operations front as well, we are reducing environmental impact through such measures as adjusting freezer temperatures Solar Module Plants and exhaust fans to achieve efficient operations. In addition, a CIS thin-film solar modules are designed and manufactured with portion of the electricity used in our plants is supplied by mega a high degree of environmental awareness, from the materials solar facilities installed on the they use to their recycling processes. Compared with modules site of our Second Miyazaki made of crystalline silicon, the generation layer of these modules Plant and the roof of our Kuni- is only 1/100th as thick, which saves raw materials. Also, the tomi Plant. These facilities production process is simple and short, and they can be pro- have a combined generation duced with relatively little energy. Furthermore, at the Kunitomi capacity of three megawatts. Kunitomi Plant
Showa Shell Total Adverse Environmental Impact for 2012
• Fuel (crude oil equivalent) 1,591 megaliters • Energy 61 petajoules • Electric power 202,753 megawatts • Fuel (crude oil equivalent) 184 megaliters • Water 32,531 megaliters • Energy 7 petajoules* • Seawater 115,000 megaliters
IN IN
Crude oil procurement and transport Manufacturing plants (refineries)
OUT OUT
• CO2 emissions 4,754 kilotonnes • CO2 emissions 509 kilotonnes • Total waste 42,079 tonnes • Sulfur oxides (SOx) 2,689 tonnes • Nitrogen oxides (NOx) 2,176 tonnes *Fuel calculations are in petajoules (1 PJ = 1015 J) • Soot dust 37 tonnes
58 Logistics Initiatives other power companies. Solar modules were installed at an ad- Ground Shipments ditional 241 service stations, making for a total of 455 service
We are working to curtail CO2 emissions by avoiding sudden stations at December 31, 2012, over half of the service stations Profile acceleration—which also has safety implications—as well as owned by Showa Shell. stopping engines when vehicles are idling and making distribu- tion routes more efficient. In response to the electric power short- Development and Sales of High-Value-Added ages in the summer of 2012, we restricted the hours of operation Products with Reduced Environmental Impact Management Message of truck delivery pumps to cut peak time power use. Showa Shell is developing and selling a wide variety of high- value-added products that contribute to reductions in the environ- Maritime Shipments mental impacts of customers during usage. These include Shell In marine transportation, we promote the use of larger domestic Pura, a high-octane automobile gasoline that substantially cuts vessels and endeavor to reduce CO2 emissions by improving harmful gas emissions; Shell Helix, a lubricant that contributes to transportation efficiency and reducing fuel consumption. We energy savings; and New Melophalt, asphalt that ameliorates keep two fuel-efficient electrical propulsion vessels in continuous the summer rise in road surface temperatures. Furthermore, Review of Operations operation, and have raised energy efficiency on all vessels by through the manufacture and sale of CIS thin-film solar modules, using a fuel-saving supplement. We are also keeping fuel con- we are also encouraging the spread of renewable energy. sumption low by monitoring transport speeds. For more information on high-value-added products, please refer to pages 31–32 and 45 Initiatives at Sales Locations In 2011, after the Great East Japan Earthquake, Japan was Initiatives at Offices presented with a tight supply and demand situation for electricity At offices and other operating sites, we are conducting the ECO during the summer months. To help address this issue, we in- TRY21 environmental action program based on the directive of Human Resources stalled solar modules on the upper canopies of several of its “do what you can.” In 2012, we extended the period over XXXXXXX service stations located in the service areas of Tokyo Electric which we encourage employees to wear cooler clothes in the Power Company, Incorporated, and Tohoku Electric Power Co., hot summer months to cut back on air conditioner usage (Cool Inc. Solar modules were installed on 214 service stations, over Biz), turned off lights during lunch breaks, turned off PC monitors half of the stations in these areas. In this manner, we are imple- when they were not being used, and conducted meetings with- menting unique energy-saving and environmental preservation out using paper materials. measures.
Furthermore, in 2012 the government of Japan issued a re- HSSE quest that electricity be conserved during the winter months. Showa Shell responded by expanding the scope these efforts to the service areas of The Kansai Electric Power Company, Incor- porated, Kyushu Electric Power Company, Incorporated, and Community and Social Contribution Activities
• Gasoline 9,060 megaliters • Jet fuel 2,158 megaliters • Heating oil 2,830 megaliters • Fuel (crude oil equivalent) 85 megaliters • Diesel oil 4,999 megaliters • Energy 3 petajoules • Heavy fuel oil 3,562 megaliters • Fuel (crude oil equivalent) 134 megaliters • Electric power 271,077 megawatts • Other petroleum • Energy 5 petajoules products 4,616 megaliters • Water 3,811 megaliters Corporate Governance
IN IN IN
Other manufacturing plants Distribution and marketing Customers (consumption) For asphalt, lubricant, LPG, Ground and marine shipments, petrochemical products, etc. oil depots, and service stations (approx. 3,600 stations) Financial Section and Corporate Data
OUT OUT OUT
• CO2 emissions 173 kilotonnes • Total waste 12,741 tonnes • CO2 emissions 228 kilotonnes • CO2 emissions 67,958 kilotonnes • Wastewater 497,353 tonnes
59 Community and Social Contribution Activities
Support for Educating the Next Generation of Children Showa Shell conducts environmental preservation and international Support community support activities with an emphasis on supporting the edu- education for the next cation of the children and young people that will be directly respon- generation sible for shaping the future of society. Through these efforts, we are working as an energy solution provider to provide a different type of “energy” to local communities and society as a whole. In this Environmental International preservation community report, we would like to focus on one of these various activities: activities support activities our environmental photo contest.
60 Eighth Environmental Photo Contest “Things to Preserve and Correct around Our Town”
Showa Shell’s environmental environmental and social issues, and we have seen schools take Profile photo contest was created advantage of this opportunity in a number of ways, such as with the goal of providing or- having students construct collages or other artistic works and then dinary citizens with a chance write short essays on their feelings with regard to the pictures. to look at the scenery around Furthermore, we have established a school category in which Management Message them, become aware of the we present awards to entire schools, and over 110 schools en- environmental issues present tered this category in 2012. therein, and think of how to resolve these issues. This contest was Award-winning works are then exhibited in shopping malls first held in 2005, and we have been able to hold it every year and other facilities throughout Japan. This enables the winner’s since thanks to the support of the Ministry of the Environment and passion toward the environment to inspire the people that see several companies and organizations that also agree with the their work, and then spread to the surrounding communities and ideals embodied in the contest. Due to such support, we success- then ideally throughout society. Review of Operations fully held our 8th environmental photo contest in 2012. Participants in the contest were asked to take pictures of the Environmental Photo Contest in Kumamoto close-to-home scenery they want to preserve as well as scenes —Spreading Awareness— that represent issues they want to correct as soon as possible. Inspired by Showa Shell’s environmental photo contest and its These pictures were then submitted together with their comments. ideals, Kumamoto Prefecture began holding its own contest, ap- The 8th environmental photo contest attracted a total of 3,438 propriately named “Things to Preserve and Correct around Our entries in the junior category and 240 in the general category. Town in Kumamoto,” in 2007. This contest is expected to help The junior category of this contest is utilized by schools across raise environmental awareness and town pride among young Human Resources
Japan as a means of teaching students about the environment children and other Kumamoto residents alike. We hope to con- XXXXXXX or as a homework assignment for summer vacation. To schools, tinue spreading awareness by encouraging other organizations this contest serves as an opportunity to make students aware of to launch similar initiatives.
Winning Submission in the Junior Category of the 8th Environmental Photo Contest When the contest was first started, entries were primarily focused on themes such as waste disposal, water pollution, and gas XXXXXXX
exhaust. However, in recent years we have seen a rise in submissions on various other environmental themes, such as biodiver- HSSE sity, introduced species issues, depopulation, eco-friendly lifestyles, and proper family relationships. The winner of the gold medal in the junior category of the 8th environmental photo contest was Emi Matsumoto, who submitted a remarkable work on the theme of “life.” Title: The Cycle of Life Community and Social Contribution Activities Corporate Governance
COMMENT Emi Matsumoto (14) Fukushima Prefecture When two lives have to compete for survival, the result is always death. Life is extinguished to fuel the life of another; this
type of death can be said to have a purpose. This is the proper cycle of life that we should work to protect. However, Financial Section and when life collides with the lifeless on an asphalt plain, the result is a meaningless death, and sadly this type of meaningless Corporate Data death is becoming all too common. Our actions are disrupting the normal cycle of life and death. If we are to protect an environment for the living, we must reevaluate how we look at life.
Other award-winning submissions can be viewed on the following website. http://www.showa-shell.co.jp/photo/
61 COMMUNITY AND SOCIAL CONTRIBUTION ACTIVITIES
Discussion with Teachers from Schools Receiving Awards in the 8th Environmental Photo Contest
In late October 2012, an award ceremony was held for the recipients of copper, silver, and gold medals in the 8th environ- mental photo contest as well as for the schools that had received awards in the school category. We took advantage of this op- portunity to speak with the teachers of award-winning schools. We asked why they chose to participate in the contest. Mr. Matou, a science teacher at Tohrei Gakuen Fujisawa Junior High School, saw an art work book for the contest and thought it would be the perfect assignment for summer vaca- Mr. Matou, Tohrei Gakuen Fujisawa Junior High School (center) Mr. Nakagawa, Shimotsui Nishi Elementary School, Kurashiki City (left) tion homework to help students learn about environmental is- Tomoji Nakamura, General Manager, Public Affairs Division, Showa Shell sues. Mr. Nakagawa, of Shimotsui Nishi Elementary School Sekiyu K.K. (right) in Kurashiki City, had previously conducted an environmental education program for fifth grade students called “Clean topics. For this reason, Mr. Matou looks forward to the possi- Project” in which students participated in cleanup activities at bility of having Showa Shell and other companies conduct the beach and other areas of the community. He decided to classes at his school on environmental issues and other sub- have students participate in the contest to help deepen their jects. Mr. Nakagawa expressed his desire for classes to be understanding of the environment. conducted by a provider of solar modules, as these modules The next topic was the wish for company support in educat- are a source of renewable energy. It is our hope to incorpo- ing the next generation of children. Tohrei Gakuen Fujisawa rate the opinions of these two teachers in future environmental Junior High School holds special classes 10 times a year. photo contests, as well as other programs geared toward These classes can be arranged freely on a wide range of supporting the education of the next generation of children.
Aside from the environmental photo contest, Showa Shell con- Major Initiatives in 2012 ducted a wide range of other community and social contribution Support activities in 2012. Some of these activities are listed on this page. education for Environmental the next preservation Further, CSR Book 2013, available on the Company’s web- generation activities site, contains more detailed information regarding these activi- ties and other activities, as well as other CSR-related information.
CSR Book 2013 Contents Shell Art Award 2012 Project for the Reforestation Our Value Chain and Strengths As a Company of Mt. Fuji HSSE Corporate governance HSSE Promotion and Together with our customers Support Support education for education for Management System Together with our shareholders the next the next generation generation Goal Zero Movement and investors Health Together with our employees Safety Together with our business Security partners The Environment Together with communities and Medium-Term Environmental society Support for the participation of the Program enabling students from Action Plan (2010–2012) Results and review of CSR activities Tsukuba West Symphony Junior special-needs schools to experience Medium-Term Environmental in 2012 and future targets Orchestra in overseas concerts our workplaces Action Plan (2013–2015) ISO 26000 Comparison Table Status of ISO 9001 Support International (Product Quality) Certification education for Environmental community Status of ISO 14001 the next preservation support generation activities activities (Environmental) Certification Status of OHSAS 18001 Certification Environmental Accounting CSR Book 2013
Showa Shell Sekiyu K.K.
CSR Book 2013 2013 / 07 / 01 [15:37] Energy education program for Provision of office space to children in summer vacation Refugees International Japan http://www.showa-shell.co.jp/english/csr/index.html
62 Corporate Governance
Global Management Structure Showa Shell strives to improve the transparency Corporate Governance Structure Reforms and efficiency of management as part of its Instituted in March 2013 continued quest for ongoing growth and higher corporate value. To this end, we are developing Term of office for directors shortened to 1 year optimal corporate governance systems that incorporate objective opinions from external perspective and are responsive to changes in Majority of directors made outside directors society and legislation.
Each business segment assigned a COO
63 CORPORATE GOVERNANCE
Corporate Governance Structure
To enhance its management efficiency in response to ongoing Meanwhile, the Group’s Chief Executive Officer (CEO), Chief changes in the business environment, the Company has clarified Operating Officer (COO), and Chief Financial Officer (CFO) responsibilities and authority, strengthened the business execu- will make decisions regarding medium- to long-term strategies tion oversight function, accelerated decision-making, and raised and important matters that exceed the boundaries of business the efficiency of business execution. divisions and impact the entire Group. Furthermore, the Risk Management Committee was estab- Efforts to Build a Corporate Governance System lished to handle all areas of risk management for the entire 1997 Number of directors reduced from 26 to 22 Company. The committee also serves as an advisory body to the Number of directors reduced from 18 to 11 Board of Directors and the Group’s COO, who chairs the com- 1999 Executive officer system adopted mittee. In this way, we have further strengthened the foundations Executive officer system revised supporting the Company. 2003 Management Executive Committee established These new management systems will be utilized effectively to Outside directors increased by 1 advance the strategies described in the Medium-Term Business 2005 Outside directors increased by 1 Action Plan as we pursue improved corporate value for the 2007 Executive retirement allowance system abolished Showa Shell Group. Outside directors increased by 1 2009 (4 of 8 directors now outside directors) Board of Directors and Directors Outside directors increased by 1 2013 (5 of 8 directors now outside directors) The Company’s Board of Directors comprises eight directors, five Term of directors shortened from 2 years to 1 year of whom are outside directors. The Board is charged with mak- ing important decisions, including those of business strategy, and In March 2013, the Showa Shell Group reformed its corpo- supervising the execution of business. rate governance structure to enable management to function The Chairman and Representative Director chairs the Board of better on a global scale. Reforms implemented include the clari- Directors, which has a limited number of members and makes fication of responsibility and the strengthening of governance decisions promptly. To encourage big-picture, objective manage- systems. In addition, the term of office for directors was shortened ment that incorporates diverse viewpoints, the majority of the di- from two years to one, the number of outside directors was in- rectors are outside directors. To provide outside directors with creased, and a Chief Operating Officer (COO) was assigned ample time for deliberation at Board of Directors’ meetings, in each business segment. We believe these reforms will enable meeting materials are distributed and explained ahead of time, management to respond more flexibly to changes in the business enabling lively deliberation at each meeting. environment. Under the new system, business execution in the Furthermore, two of the five outside directors are independent Oil Business Center and the Energy Solution Business Center will directors, thereby ensuring that the interests of general sharehold- be performed by their respective COOs, who will respond in a ers are protected and that the Company’s management main- flexible manner to the rapidly changing business environment. tains an objective perspective.
Board of Directors Board of Auditors and Auditors The Company has introduced an auditor system. The Board of Group executive CEO management Auditors is composed of two standing auditors and two highly COO CFO independent outside auditors. Outside auditors in particular are selected for their broad-based knowledge and independence, Companywide issues Risk Management as well as the objectivity, neutrality, and specialized expertise Strategic issues Committee that the auditing process requires. Auditors perform a supervisory (Combination of the function for the management team. Internal Control Promotion Committee and the Auditors formulate auditing standards and audit plans, attend HSSE Committee) Board of Directors’ and other important meetings, receive the status of operations from directors and executive officers, and Oil Business Management Energy Solution Business audit divisions, offices, subsidiaries, and other organizations. In Executive Committee Management Executive this manner, they conduct business audits related to the execution Chairman: Executive Officer, Committee of business by the Board of Directors, as well as accounting au- Oil Business COO Chairman: Executive Officer, Energy Solution dits. The auditors also receive reports on internal audits con- Business COO ducted by the Internal Audit Division and receive reports on audit Division-related issues results and information on items for consideration by the account- Business execution ing auditors.
64 To ensure the viability of audits by auditors, an audit support committee is chaired by the COO of their respective business structure is in place in which dedicated audit staff are assigned to segment, enabling management duties to be carried out swiftly assist the auditors. Furthermore, the Internal Audit Division, account- in each business. Profile ing auditors, and management departments in charge of internal Various other committees, such as the Investment Committee control support auditors through ongoing communication. To sup- and the Ordering Committee, are in place to provide advice on port outside auditors, Board of Directors’ meeting materials and important decisions. This structure is designed to incorporate materials pertaining to important issues at other important meetings specialized points of view into decision-making. Management Message are distributed to them ahead of time. If necessary, such materials are explained to these auditors before and after such meetings. Accounting Audits The Company has appointed PricewaterhouseCoopers Aarata Executive Officer System and as its accounting auditor, which performs audits and is paid Management Executive Committees compensation for these audits. The Company employs an executive officer system to speed de- cision-making and to improve the efficiency of business execu- Audit Compensation Review of Operations tion by clearly defining the authority and responsibilities of (Year Ended December 31, 2012) directors and executive officers. Showa Shell Consolidated Management Executive Committees have been established (Yen million) subsidiaries (Yen million) for the Oil Business and the Energy Solution Business as the de- Compensation based on cision-making bodies for important items of business execution in audit certification activities 116 53 these businesses. These committees meet twice a month. Each Compensation based on non-audit activities 0 0 Human Resources
Outside Directors and Auditors
To ensure management transparency, five of the Company’s their differing viewpoints. eight directors and two of the Company’s four auditors are out- In 2012, the outside directors attended approximately 90% of side officers. The outside officers provide big-picture, objective, the Board of Directors’ meetings. Also, the outside auditors at- and diverse viewpoints and require explanations from manage- tended approximately 90% of the Board of Directors’ and the ment. The outside officers engage in active deliberation at meet- Board of Auditors’ meetings.
ings of the Board of Directors and Board of Auditors based on HSSE
Outside Directors (As of March 28, 2013) Name Position / background Reason for appointment Yoshihiko Miyauchi Independent Director Mr. Miyauchi was selected for his broad-based knowledge, including management from a Community and Social Chairman, Director Japanese perspective and his extensive experience as an outside director at other companies, Contribution Activities Representative Officer with the expectation that his appointment would strengthen the management supervisory function Group CEO, ORIX Corporation from an objective standpoint. Yukio Masuda Independent Director Having many years of experience in the energy business segment at Mitsubishi Corporation, Advisor, Mitsubishi Corporation Mr. Masuda was selected for his extensive knowledge of the energy business in Japan and overseas, with the expectation that his appointment would strengthen the management supervisory function. Ahmad O. Al-Khowaiter Chief Engineer, Saudi Aramco Mr. Al-Khowaiter was selected for his deep understanding of the oil business at Aramco, with (Saudi Arabia) the expectation that his appointment would strengthen the management supervisory function from a global standpoint. Corporate Governance Minoru Takeda General Manager, Mr. Takeda was selected for his deep understanding of the multinational oil business of the Shell Shell Upstream International Group and his experience at Japanese oil companies, with the expectation that his appointment would strengthen the management supervisory function. Chiew Nguang-Yong Director, Shell Chemicals Mr. Nguang-Yong was selected for the knowledge he acquired through his involvement in the Seraya Pte Ltd (Singapore) development of the Shell Group’s globally expansive business, with the expectation that his appointment would strengthen the management supervisory function.
Outside Auditors (As of March 28, 2013) Financial Section and
Name Position / background Reason for appointment Corporate Data Midori Miyazaki Independent Auditor Ms. Miyazaki was selected for her multifaceted involvement as a professor at Chiba Shoka Dean, Chiba Shoka University, University and her broad-ranging insight, with the expectation that her perspective, unaffected Department of Policy Information by the standard economic sphere, would strengthen the auditing function. Kenji Yamagishi Independent Auditor Mr. Yamagishi was selected for experience in important posts at the Bar Association and his Attorney broad-based knowledge and deep scholarly understanding as an attorney, with the expectation President of The Japan that he would strengthen management supervision from the standpoints of the legality and Federation of Bar Associations appropriateness of business execution.
65 CORPORATE GOVERNANCE
Summary of Liability Limitation Agreement relation to the limitation of liability specified in Clause 1, Article Outside directors (Yoshihiko Miyauchi, Yukio Masuda, Ahmad 423, of the Companies Act. Amounts of liability under this O. Al-Khowaiter, Minoru Takeda, and Chiew Nguang-Yong) agreement shall be the higher amount of ¥10 million and the and outside auditors (Midori Miyazaki and Kenji Yamagishi) amount designated by the Companies Act. entered into a liability limitation agreement with the Company in
Executive Remuneration
The total remuneration to all directors decided by the resolution Director and Auditor Remuneration of the General Shareholders’ Meeting held on March 30, (Year Ended December 31, 2012)
1994, is ¥65 million or less per month. Within the limit of the Executive category Total Total remuneration Number of total amount, monthly base remuneration to each director is de- remuneration by category executives (Yen million) (Yen million) subject to termined using a remuneration table by rank, except for Douglas Base Bonuses bonuses (People) Wood, for whom base remuneration is determined by a second- remuneration Directors ment contract with the Shell Group. 350 350 – 5 (excluding outside directors) The total remuneration to all auditors decided by the resolution Auditors 72 72 – 3 of the General Shareholders’ Meeting held on March 28, (excluding outside auditors)
2008, is ¥10 million or less per month. Within the limit of the Outside directors 54 54 – 6 total amount, remuneration to each auditor is determined by the and auditors
mutual agreement among all auditors. The above includes remuneration paid to three executives: one director who The amount of bonus to directors and auditors is based on the resigned and one auditor who retired at the close of the 100th General consideration of economic circumstances and business perfor- Shareholders’ Meeting held on March 30, 2012; and one director who retired at the close of the 101st General Shareholders’ Meeting held on mance during the period, and determined each year by the reso- March 28, 2013. The number of directors and auditors as of December 31, lution of a General Shareholders’ Meeting. 2012, was eight and four, respectively. Retirement allowances to directors and auditors were abol- ished as of the General Shareholders’ Meeting held on March 29, 2007.
Internal Control System
The Company has stipulated its Code of Conduct to provide We have also established the General Rule for Procurement to general and universally applicable guidelines for the develop- ensure that our procurement activities are fair, transparent and ment of corporate activities. In addition to legal compliance, this based on consideration for social and environmental facets, in- code specifies responsibilities toward society, by the observance cluding compliance with laws and corporate ethics, resource of high corporate ethical standards. protection, and environmental preservation. We also offer Pro- To ensure operational appropriateness, the Company has curement Guidelines to business partners to facilitate their under- formulated a Basic Policy on Internal Control and established an standing of our considerations regarding procurement. internal control system to provide autonomous monitoring as the We conduct compliance training to ensure that employees Company pursues its business. To create a more effective internal understand the importance of compliance put into practice. We control system for the entire Showa Shell Group, the Company distribute our Compliance Book, which explains policies on has encouraged the formulation and thorough understanding of specific actions, and also conduct web-based learning on these internal control regulations at affiliated companies and confirms policies once or more each year. To supplement this book, we their operational status. have established the Room of Compliance intranet site, which enables employees to easily search for relevant case studies and Compliance laws with regard to specific areas of compliance. In addition, The Showa Shell Group recognizes that compliance among the we conduct training and web-based learning that incorporate Group and its employees is paramount to fulfilling its social re- concrete case studies of legal and other types of compliance. In sponsibility as it goes about its business activities. Accordingly, particular, we conduct regular training at each division with re- the Group continues pursuing compliance initiatives. spect to the Antitrust Law, using specific examples from each divi- The Group has formulated a variety of compliance-related sion and responding to issues raised by working-level employees. regulations, including Compliance Rules for the Antitrust Law, Furthermore, as our operations become increasingly more global, Government Anticorruption Rules, Insider Trading Control Rule, interactions with government officials are expected to become Environmental Preservation Guidelines, and Export Control Rule. ever more common. In light of this fact, in 2012 we conducted
66 Corporate Governance System and Internal Control System Profile General Shareholders’ Meeting
Nominations Reports Nominations Reports Nominations Reports
Board of Directors Auditors Accounting Directors Management Message Chairman and Auditors [Management and Control] Representative Director Auditing Board of Coordination Auditors
Reports Reports Reports Monitoring Reports Auditing Auditing
Committee Risk Management Committee Reports Audit Oil Business Energy Solution Monitoring Reports Review of Operations Management Business Manage- Reports Planning Information Compliance Executive ment Executive approval Disclosure Committee Committee Committee Sub-Committee Internal Audit Reports Notice Executive Officer, Executive Officer, Division Oil Business Energy Solution Coordination VOP VOP COO Business COO internal external Harassment Executive Executive consulting consulting consulting Directors/ Directors/ [Business Execution] service service service Executive Officers Executive Officers Human Resources Reports Reports Notice Notice Reports Instructions Instructions Auditing
Business Divisions and Affiliated Companies
training and web-based learning with regard to Government Risk Management Anticorruption Rules. Previously, the Company had one committee for managing risks
As a whistle-blowing system, we have introduced an employee related to health, safety, security, and environment (HSSE) and HSSE consultation service, Voice of People (VOP), that encourages em- another for other risks. However, in May 2013 we established ployees to raise corporate ethics concerns and to offer construc- the Risk Management Committee as a body for governing all tive proposals to the Company, and have created routes to receive risks faced by the Company with the aim of facilitating more ef- employee input both within and outside the Company. We have ficient and flexible management. As an advisory body to the Community and Social formulated Rules of the Group Companies’ Help Line, “Voice of Board of Directors and the Group’s COO, who chairs the com- Contribution Activities People (VOP),” covering the system’s operation, and systems are mittee, the Risk Management Committee discusses and makes in place to protect the confidentiality of people undergoing consul- decisions regarding the establishment and operation of systems tation and to prevent them from adverse impacts. We have ex- related to internal control, corporate risk management, informa- tended the application of these systems beyond our own tion management, and HSSE management. The committee also employees to include employees at the Company’s subsidiaries. offers suggestions to the Oil Business Management Executive
Showa Shell’s policy with regard to criminal organizations is Committee and the Energy Solution Business Management Ex- Corporate Governance to handle them in accordance with the law, with the view that ecutive Committee. organizations of this kind represent a threat to the order and To manage risks related to HSSE, in line with its basic policies safety of civil society. The departments in charge of related mat- the Company has formulated Regulations for Disaster Control ters have been designated, and contact Headquarters and other related regulations and drawn up a is maintained with the police and other business continuity plan (BCP). In addition, the Company up- external specialist institutions. dates its Emergency Communication Flow Chart, which is pre-
pared for in case of an accident or disaster, and conducts drills Financial Section and
on a constant basis. When accidents and disasters do occur, the Corporate Data underlying causes are investigated and the findings are utilized for recurrence prevention measures that are disseminated throughout the Company. As lessons in particular from the Great East Japan Earthquake, Compliance Book which struck on March 11, 2011, the Company has updated its
67 CORPORATE GOVERNANCE
crisis management plan (CMP) and its Code of Conduct for Information Management and Disclosure Emergency. The Company has also reviewed its BCP in anticipa- We have established rules for appropriately managing the Com- tion of an earthquake striking directly below the Tokyo metropoli- pany’s information assets. These regulations assign to depart- tan area and is undertaking initiatives to further promote its crisis ment managers the responsibility for managing information and management. Based on the HSSE-MS, the Health, Safety, Secu- spell out the control method that is required at each level of rity and Environment (HSSE) Division monitors execution of the confidentiality, including “secret” and “restricted to internal use Plan-Do-Check-Act (PDCA) process throughout the Company and only.” Furthermore, in light of the increasing use of social media, regularly audits the status of HSSE management. Moreover, the we have developed guidelines for employees using such media Risk Management Committee conducts management reviews on a private basis to prevent them for making statements with and works continuously to make improvements. regard to the Company that could be misunderstood or acci- With regard to risks that need to be checked from a Compa- dently leak information. nywide perspective, such as the compliance and HSSE promo- We have also formulated a Basic Policy for Information Disclo- tion structures and the business control structure, we have sure. Based on this policy, to promote an understanding and fair established business control checklists to enable comprehensive evaluation of the Group among various stakeholders, we work to monitoring. Using these checklists, executives and division heads ensure that important information is disclosed equitably, accu- evaluate the risk management systems of their divisions on a rately, and in a timely manner. We have set up the Information yearly basis, implementing improvement measures as necessary. Disclosure Sub-Committee as the institution in charge of managing The results of these efforts are reported to the Risk Management this process and making judgments on the handling of information Committee. to be disclosed. To comply with timely disclosure regulations, we For risks faced by specific divisions, each year Showa Shell publicize information via the system for transmitting disclosure in- prepares a Companywide business control matrix. We use this formation in a timely manner provided by the Tokyo Stock Ex- matrix to identify the risks associated with business targets and change (TDnet), as well as on our website. We also work to ascertain the level of impact and control status of these risks. disclose other information quickly and proactively, based on the Measures are formulated in response to identified risks, and a judgment of the Information Disclosure Sub-Committee. review of measures implemented in the previous fiscal year is Our investor relations (IR) activities targeting shareholders and reported to the Risk Management Committee together with a other investors include large meetings or conference calls for se- plan for measures in the current fiscal year. curities analysts and institutional investors in Japan every quarterly For details on HSSE management, please refer to page 51. performance announcement. We distribute presentation materials For details on crisis management, please refer to page 55. for performance results on our website. In addition to maintaining communication with institutional investors in Japan and overseas Accuracy of Financial Reporting through investor visits and conferences, we disseminate informa- Based on the internal control reporting system stipulated by the tion for individual investors, chiefly via our website. Financial Instruments and Exchange Act, Showa Shell has submit- Furthermore, we distribute annual shareholder meeting convo- ted a report on internal controls since 2009. Before this system cation notices at an early date and have in place a system was applied, the Company had reconfirmed the flow of opera- whereby shareholders can exercise their voting rights over the tions in each division, identified potential risks, and encouraged Internet. These activities are designed to promote participation in the creation of rules to prevent risks, with the aim of ensuring shareholder meetings. Furthermore, we publish a business report operational accuracy as well as the reliability of financial report- booklet for shareholders (in Japanese only), and seek to enhance ing. We are continuously improving these activities even after communication through shareholder questionnaires. establishment of the current system, with specialized units being primarily responsible for conducting appropriate evaluations and monitoring. In 2012, we evaluated the effectiveness of the Group’s internal controls on financial reporting and submitted a report to the authorities with the evaluation results. The Showa Shell Group’s initiatives go beyond merely respond- ing to legal requirements. We seek to ensure further improvements in operational transparency, effectiveness, and efficiency.
68 Interview with Outside Director The following is a statement from Independent Director Yukio Masuda with regard to Showa Shell Sekiyu K.K.’s corporate governance systems, and how they can contribute to future Profile improvements in corporate value.
Yukio Masuda Independent Director
Yukio Masuda has served as an Independent Director at the Company since Management Message March 2009. He is also currently an advisor to Mitsubishi Corporation. He has a long history in Mitsubishi’s energy business segment, and was a representative director from June 2001 to June 2006.
Q. How would you evaluate Showa Shell’s corporate governance systems? I believe that a company’s corporate value and the very meaning officers to exchange opinions directly with management, thereby for its existence are created through sustainable growth achieved ensuring a focus on the needs of minority shareholders while also Review of Operations under the guidance of sound management. Corporate gover- improving the transparency and fairness of management. nance therefore refers to the systems that allow for decisions to be The new management system that was instituted in conjunc- made to realize such sustainable growth. In other words, corpo- tion with the start of the Medium-Term Business Action Plan rate governance is the systems that are used to improve perfor- should display its merits going forward. In this rapidly changing mance and grow a company without causing problems. operating environment, the ability to respond flexibly by making Looking at the corporate governance systems of Showa Shell speedy decisions on the operating side of business is more im- from this perspective, I would first like to say that the Board of portant than ever. In light of this, two COOs were appointed Human Resources Directors is truly fulfilling its purpose. Not only are the majority of under the new management system, one for each business divi- its members outside directors, but they also come from different sion. I think this was a brilliant decision as it enables business backgrounds and have different areas of expertise. As such, de- execution to be conducted quickly while also clarifying the re- liberations are incredibly spirited, and opinions based on a vari- sponsibilities of management. I look forward to seeing Showa ety of perspectives are presented. Moreover, in-house members Shell practice speedy management. The Board of Auditors is of management are very receptive toward the opinions of these also functioning effectively. At meetings of the Board of Direc- outside directors, adding further energy to debates. tors, management is presented with requests from auditors. This Also, two outside directors and two outside auditors are inde- demonstrates the fact that the supervisory functions of auditors HSSE pendent officers. The Company arranges opportunities for these are active and incredibly sound.
Q. What role do you feel you should play as an outside director and as an independent director? I devoted a good part of my career to the energy business of information, business suggestions, and other forms of business Community and Social Mitsubishi Corporation, and in the past I have worked together execution support on a daily basis. Through these efforts, I am Contribution Activities with a number of global energy companies, including Royal working to play a greater part in the management of the Com- Dutch Shell plc. It is my hope to make use of this experience to pany and deepen my contributions. I am also well aware of my assist Showa Shell in developing its business on a global scale, duty to protect the interests of general shareholders, and I there- and the suggestions I make at the meetings of the Board of Di- fore am also careful to retain a perspective that sufficiently con- rectors are geared toward this end. Aside from my contributions siders the medium- to long-term development of the Company as at these meetings, I provide Showa Shell’s management with I participate in management. Corporate Governance Q. What do you see as necessary for Showa Shell to further improve its corporate value? Going forward, it will be necessary for both Showa Shell’s Oil Today, the speed at which the operating environment and busi- Business and its Energy Solution Business to win out against an nesses evolve is faster than it has ever been. As such, manage- even harsher operating environment. It is always people who ment must be prepared to take on new challenges. To facilitate move a company, and in an environment as difficult as the current this, all employees must fully understand the policies made by the one, it is ever more important that management and employees Board of Directors and the measures developed by the Manage- Financial Section and
be unified under a shared belief. Everyone working at the Showa ment Executive Committees. This is more important than ever. At Corporate Data Shell Group must advance the strategies detailed in the Medium- the same time, it is critical that the Company timely communicate Term Business Action Plan with a high degree of motivation. The with markets, shareholders, and media sources to enable them to end result of such efforts, I believe, will lead to increased value better understand its activities. for shareholders and all other stakeholders of the Company.
69 BOARD OF DIRECTORS AND CORPORATE AUDITORS (As of March 28, 2013)
J K L I
G E C D F H
A B
Chairman, Representative Director, Executive Officer Vice Presidents Brooks Herring Chief Executive Officer Energy Solution Business COO Reporting to CEO; in charge of Special A Shigeya Kato Hiroto Tamai Missions, Transformation Team and Energy Energy Solution Business Center (President, Solution Business Center (Solar Frontier K.K.) Representative Director, Representative Director, Solar Frontier K.K.) Chief Operating Officer Executive Officers B Jun Arai Oil Business COO Masayuki Kobayashi Tsuyoshi Kameoka Oil Business Center (Supply, Oil Products, Director, Chief Financial Officer Oil Business Center Crude Oil & Marine, and Marine) C Douglas Wood Tsutomu Yoshioka Group Functions (Finance & Control, Senior Executive Officers Group Functions (Finance & Control and Credit & Financial Risk Management, Atsuhiko Hirano Credit & Financial Risk Management) Procurement, and IT Planning) General Manager, Energy Solution Business Center (Director, Solar Frontier K.K.) Hiroyuki Murata Outside Directors Tomonori Okada Oil Business Center (Sales and Branch D Yoshihiko Miyauchi Oil Business Center (Research & Development Office) E Yukio Masuda and Laboratory), Group Functions (Corporate Kenichi Morishita F Ahmad O. Al-Khowaiter Planning (including Corporate Governance) and Oil Business Center (Marketing Planning, G Minoru Takeda Overseas Intellectual Property Strategy) Retail Sales, Retail EPOCH Project Team and H Chiew Nguang-Yong Corporate Executive Officers Commercial Sales) Auditors Misao Hamamoto Tatsuya Suzuki I Tadamitsu Fukuchi Oil Business Center (Manufacturing, Distribution Oil Business Center (Manager in Metropoli- tan Branch) J Kiyotaka Yamada & Operations, New Business Promotion and Import Terminal) Satoru Kuriyagawa Outside Auditors Tomoaki Itou General Manager, Energy Solution Business K Midori Miyazaki General Manager, Energy Solution Business Center (Director, Solar Frontier K.K.) L Kenji Yamagishi Center (Director, Solar Frontier K.K.) Makoto Abe Yuri Inoue Oil Business Center (International Sales, Group Functions (Legal (including Personal Data Lubricants & Bitumen and Home Solution) Protection)) Hiroshi Watanabe Katsuaki Shindome Group Functions (Corporate Planning Group Functions (Public Affairs, Secretariat, (including Corporate Governance)) HSSE, Human Resources, Internal Control Promotion and General Affairs)
The Chief Executive Officer directly supervises Internal Audit and takes charge in General Business Principle. The Chief Operating Officer directly supervises the Petro Chemical Business Promotion Team. 70 Profile Management Message Review of Operations Human Resources HSSE Community and Social Contribution Activities
FINANCIAL SECTION AND CORPORATE DATA
72 Twelve-Year Summary of Selected Financial Data
74 Business Risks Corporate Governance 76 Consolidated Balance Sheets
78 Consolidated Statements of Income and Consolidated Statements of Comprehensive Income
79 Consolidated Statements of Changes in Net Assets
80 Consolidated Statements of Cash Flows
81 Notes to the Consolidated Financial Statements Financial Section and
95 Independent Auditor’s Report Corporate Data
96 Network
98 Major Subsidiaries and Affiliates
99 Investor Information
71 TWELVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
Showa Shell Sekiyu K.K. and Consolidated Subsidiaries Yen Million Years ended December 31 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 For the year: Net sales ¥2,629,261 ¥2,771,418 ¥2,346,081 ¥2,022,520 ¥3,272,801 ¥3,082,641 ¥2,921,287 ¥2,268,488 ¥1,839,445 ¥1,726,917 ¥1,620,359 ¥1,664,954 Cost of sales 2,481,144 2,582,339 2,183,535 1,956,623 3,161,950 2,874,422 2,728,137 2,056,023 1,665,978 1,570,155 1,460,458 1,513,626 Gross profit 148,117 189,078 162,545 65,896 110,851 208,219 193,149 212,465 173,466 156,761 159,901 151,328 Selling, general and administrative expenses 133,419 128,790 125,844 123,038 123,134 119,405 118,847 114,084 113,280 120,787 123,500 123,274 Operating income (loss) 14,697 60,288 36,701 (57,142) (12,283) 88,813 74,301 98,381 60,185 35,974 36,400 28,053 Ordinary income (loss) 12,674 61,807 42,148 (56,455) (10,065) 92,709 77,675 100,497 61,927 38,188 40,101 29,052 CCS ordinary income (loss)*1 11,224 30,020 34,286 (11,691) 45,697 44,271 58,074 53,279 40,426 36,336 29,312 40,119 Net income (loss) after taxes 1,013 23,110 15,956 (57,619) (16,221) 43,729 46,249 58,370 2,362 21,000 18,665 2,610 At year-end: Total shareholders’ equity*2 ¥ 249,826 ¥ 255,865 ¥ 240,204 ¥ 235,517 ¥ 306,813 ¥ 338,933 ¥ 309,411 ¥ 275,232 ¥ 226,955 ¥ 234,773 ¥ 221,604 ¥ 212,168 Total assets 1,233,193 1,208,442 1,193,149 1,172,739 1,209,956 1,339,114 1,195,015 1,145,191 905,823 882,299 916,690 909,902 Net interest-bearing debt*3 247,552 262,800 280,108 275,837 206,363 166,655 173,881 162,180 106,229 105,568 142,880 145,272 Depreciation and amortization 43,620 43,329 33,949 35,277 31,239 26,708 27,329 23,979 24,653 25,138 26,729 28,598 Capital expenditures 20,987 39,559 81,733 49,933 37,606 23,617 32,540 17,442 12,408 11,574 13,823 7,690 Capital employed*4 515,554 534,228 541,256 533,590 586,290 522,068 499,939 467,063 341,738 355,725 372,136 383,107 Cash flows: Cash flows from operating activities ¥ 41,922 ¥ 50,551 ¥ 89,836 ¥ (7,395) ¥ 26,631 ¥ 44,796 ¥ 29,312 ¥ 25,806 ¥ 29,598 ¥ 54,704 ¥ 23,262 ¥ 83,277 Cash flows from investing activities (17,747) (24,560) (82,510) (47,761) (42,932) (25,687) (28,883) (28,548) (19,194) (7,874) (10,710) 31,067 Free cash flow*5 24,174 25,991 7,325 (55,156) (16,301) 19,108 429 (2,742) 10,403 46,830 12,551 114,344 Cash flows from financing activities (21,391) (31,159) (8,671) 4,371 72,337 (21,029) (13,712) 20,725 (17,700) (39,167) (30,474) (106,997) Per share data: Net income (loss) after taxes per share (yen) ¥ 2.69 ¥ 61.36 ¥ 42.37 ¥ (152.99) ¥ (43.07) ¥ 116.12 ¥ 122.95 ¥ 155.31 ¥ 6.14 ¥ 55.96 ¥ 49.69 ¥ 6.95 Total shareholders’ equity per share (yen) 663.33 679.37 637.78 625.33 814.63 899.90 822.20 732.08 605.25 627.07 592.18 565.36 Dividends per share (yen) 18 18 18 36 36 36 36 35 30 25 25 20 Payout ratio (%)*6 224.9 310.3 30.3 — — 29.8 32.4 24.5 355.5 46.9 50.0 268.9 Performance and financial indicators: Return on sales (operating profit basis) (%) 0.6% 2.2% 1.6% — — 2.9% 2.5% 4.4% 3.3% 2.1% 2.2% 1.7% Return on sales (net income basis) (%) 0.0 0.8 0.7 — — 1.4 1.6 2.6 0.1 1.2 1.2 0.2 Return on assets (%) 0.1 1.9 1.3 — — 3.3 3.9 5.1 0.3 2.4 2.0 0.3 Return on equity (%)*2, 7 0.4 9.3 6.7 — — 13.5 15.8 23.2 1.0 9.2 8.6 1.2 Shareholders’ equity ratio (%)*2, 8 20.3 21.2 20.1 20.1% 25.4% 25.3 25.9 24.0 25.1 26.6 24.2 23.3 Current ratio (%)*9 104.3 103.2 90.2 83.0 95.4 102.3 95.9 91.0 83.8 80.5 76.2 76.0 Gearing ratio (%)*10 49.8 50.7 53.8 53.9 40.2 33.0 36.0 37.1 31.9 31.0 39.2 40.6 Number of shares outstanding at year-end 376,623 376,624 376,625 376,627 376,630 376,633 376,323 375,863 374,868 374,303 374,125 375,280 (thousand shares)*11 Operations data: Crude oil refined (thousand kl)*12 21,053 26,212 25,168 25,804 26,784 28,413 27,554 28,555 28,371 28,387 26,786 28,959 Group refinery capacity utilization rate (%)*12 91.6 93.2 84.2 86.3 89.4 95.1 92.2 95.6 92.4 94.3 89.6 94.6 Petroleum product sales volume (thousand kl)*13 27,223 30,462 29,637 29,198 31,581 32,262 31,461 30,702 38,244 39,840 39,827 41,905 Number of service stations*14 3,633 3,782 3,948 4,143 4,305 4,481 4,575 4,746 4,853 5,017 5,228 5,474 Number of self-service stations*14 978 963 960 947 852 719 583 413 308 267 195 97
* 1 CCS ordinary income (ordinary income on a Current Cost of Supply basis): Ordinary income based on costs excluding inventory valuation effects * 2 The definition of “shareholders’ equity” was revised under the new Corporation Law in 2006, and “shareholders’ equity” under the new law excludes minority interests. Please note referred numbers above are based on the new definition of “shareholders’ equity,” not including minority interests. “Return on equity” and “Shareholders’ equity ratio” are also calculated using these numbers. * 3 Net interest-bearing debt = Interest-bearing debt – Cash and deposits * 4 Capital employed = Total shareholders’ equity + Total debts * 5 Free cash flow = Cash flows from operating activities + Cash flows from investing activities * 6 Payout ratio = Dividends per share/Net income per share (non-consolidated) * 7 Return on equity = Net income/Average total shareholders’ equity * 8 Shareholders’ equity ratio = Total shareholders’ equity/Total assets * 9 Current ratio = Total current assets/Total current liabilities *10 Gearing ratio = (Total debts – Cash and deposits)/(Capital employed – Cash and deposits) *11 Treasury stock is excluded. The amount of treasury stock includes Showa Shell Sekiyu stock held by affiliates accounted for by the equity method. *12 Total for Yokkaichi Refinery, Keihin Refinery, and Yamaguchi Refinery. *13 Volume of oil products sales includes sales of gasoline, jet fuel, heating oil, diesel oil, heavy fuel oil, naphtha, LPG, lubricants, bitumen, crude for burning, coal, cokes, and cargo trade. (Figures from the 2005 financial year onward do not include cargo trade.) *14 Individual service station data.
72 Showa Shell Sekiyu K.K. and Consolidated Subsidiaries Yen Million Years ended December 31 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001
For the year: Profile Net sales ¥2,629,261 ¥2,771,418 ¥2,346,081 ¥2,022,520 ¥3,272,801 ¥3,082,641 ¥2,921,287 ¥2,268,488 ¥1,839,445 ¥1,726,917 ¥1,620,359 ¥1,664,954 Cost of sales 2,481,144 2,582,339 2,183,535 1,956,623 3,161,950 2,874,422 2,728,137 2,056,023 1,665,978 1,570,155 1,460,458 1,513,626 Gross profit 148,117 189,078 162,545 65,896 110,851 208,219 193,149 212,465 173,466 156,761 159,901 151,328 Selling, general and administrative expenses 133,419 128,790 125,844 123,038 123,134 119,405 118,847 114,084 113,280 120,787 123,500 123,274 Management Message Operating income (loss) 14,697 60,288 36,701 (57,142) (12,283) 88,813 74,301 98,381 60,185 35,974 36,400 28,053 Ordinary income (loss) 12,674 61,807 42,148 (56,455) (10,065) 92,709 77,675 100,497 61,927 38,188 40,101 29,052 CCS ordinary income (loss)*1 11,224 30,020 34,286 (11,691) 45,697 44,271 58,074 53,279 40,426 36,336 29,312 40,119 Net income (loss) after taxes 1,013 23,110 15,956 (57,619) (16,221) 43,729 46,249 58,370 2,362 21,000 18,665 2,610 At year-end: Total shareholders’ equity*2 ¥ 249,826 ¥ 255,865 ¥ 240,204 ¥ 235,517 ¥ 306,813 ¥ 338,933 ¥ 309,411 ¥ 275,232 ¥ 226,955 ¥ 234,773 ¥ 221,604 ¥ 212,168 Total assets 1,233,193 1,208,442 1,193,149 1,172,739 1,209,956 1,339,114 1,195,015 1,145,191 905,823 882,299 916,690 909,902
Net interest-bearing debt*3 247,552 262,800 280,108 275,837 206,363 166,655 173,881 162,180 106,229 105,568 142,880 145,272 Review of Operations Depreciation and amortization 43,620 43,329 33,949 35,277 31,239 26,708 27,329 23,979 24,653 25,138 26,729 28,598 Capital expenditures 20,987 39,559 81,733 49,933 37,606 23,617 32,540 17,442 12,408 11,574 13,823 7,690 Capital employed*4 515,554 534,228 541,256 533,590 586,290 522,068 499,939 467,063 341,738 355,725 372,136 383,107 Cash flows: Cash flows from operating activities ¥ 41,922 ¥ 50,551 ¥ 89,836 ¥ (7,395) ¥ 26,631 ¥ 44,796 ¥ 29,312 ¥ 25,806 ¥ 29,598 ¥ 54,704 ¥ 23,262 ¥ 83,277 Cash flows from investing activities (17,747) (24,560) (82,510) (47,761) (42,932) (25,687) (28,883) (28,548) (19,194) (7,874) (10,710) 31,067 Free cash flow*5 24,174 25,991 7,325 (55,156) (16,301) 19,108 429 (2,742) 10,403 46,830 12,551 114,344 Human Resources Cash flows from financing activities (21,391) (31,159) (8,671) 4,371 72,337 (21,029) (13,712) 20,725 (17,700) (39,167) (30,474) (106,997) Per share data: Net income (loss) after taxes per share (yen) ¥ 2.69 ¥ 61.36 ¥ 42.37 ¥ (152.99) ¥ (43.07) ¥ 116.12 ¥ 122.95 ¥ 155.31 ¥ 6.14 ¥ 55.96 ¥ 49.69 ¥ 6.95 Total shareholders’ equity per share (yen) 663.33 679.37 637.78 625.33 814.63 899.90 822.20 732.08 605.25 627.07 592.18 565.36 Dividends per share (yen) 18 18 18 36 36 36 36 35 30 25 25 20 Payout ratio (%)*6 224.9 310.3 30.3 — — 29.8 32.4 24.5 355.5 46.9 50.0 268.9 Performance and financial indicators: Return on sales (operating profit basis) (%) 0.6% 2.2% 1.6% — — 2.9% 2.5% 4.4% 3.3% 2.1% 2.2% 1.7%
Return on sales (net income basis) (%) 0.0 0.8 0.7 — — 1.4 1.6 2.6 0.1 1.2 1.2 0.2 HSSE Return on assets (%) 0.1 1.9 1.3 — — 3.3 3.9 5.1 0.3 2.4 2.0 0.3 Return on equity (%)*2, 7 0.4 9.3 6.7 — — 13.5 15.8 23.2 1.0 9.2 8.6 1.2 Shareholders’ equity ratio (%)*2, 8 20.3 21.2 20.1 20.1% 25.4% 25.3 25.9 24.0 25.1 26.6 24.2 23.3 Current ratio (%)*9 104.3 103.2 90.2 83.0 95.4 102.3 95.9 91.0 83.8 80.5 76.2 76.0
10 Community and Social Gearing ratio (%)* 49.8 50.7 53.8 53.9 40.2 33.0 36.0 37.1 31.9 31.0 39.2 40.6 Contribution Activities Number of shares outstanding at year-end 376,623 376,624 376,625 376,627 376,630 376,633 376,323 375,863 374,868 374,303 374,125 375,280 (thousand shares)*11 Operations data: Crude oil refined (thousand kl)*12 21,053 26,212 25,168 25,804 26,784 28,413 27,554 28,555 28,371 28,387 26,786 28,959 Group refinery capacity utilization rate (%)*12 91.6 93.2 84.2 86.3 89.4 95.1 92.2 95.6 92.4 94.3 89.6 94.6 Petroleum product sales volume (thousand kl)*13 27,223 30,462 29,637 29,198 31,581 32,262 31,461 30,702 38,244 39,840 39,827 41,905 14 Number of service stations* 3,633 3,782 3,948 4,143 4,305 4,481 4,575 4,746 4,853 5,017 5,228 5,474 Corporate Governance Number of self-service stations*14 978 963 960 947 852 719 583 413 308 267 195 97
* 1 CCS ordinary income (ordinary income on a Current Cost of Supply basis): Ordinary income based on costs excluding inventory valuation effects * 2 The definition of “shareholders’ equity” was revised under the new Corporation Law in 2006, and “shareholders’ equity” under the new law excludes minority interests. Please note referred numbers above are based on the new definition of “shareholders’ equity,” not including minority interests. “Return on equity” and “Shareholders’ equity ratio” are also calculated using these numbers. * 3 Net interest-bearing debt = Interest-bearing debt – Cash and deposits * 4 Capital employed = Total shareholders’ equity + Total debts * 5 Free cash flow = Cash flows from operating activities + Cash flows from investing activities * 6 Payout ratio = Dividends per share/Net income per share (non-consolidated)
* 7 Return on equity = Net income/Average total shareholders’ equity Financial Section and * 8 Shareholders’ equity ratio = Total shareholders’ equity/Total assets Corporate Data * 9 Current ratio = Total current assets/Total current liabilities *10 Gearing ratio = (Total debts – Cash and deposits)/(Capital employed – Cash and deposits) *11 Treasury stock is excluded. The amount of treasury stock includes Showa Shell Sekiyu stock held by affiliates accounted for by the equity method. *12 Total for Yokkaichi Refinery, Keihin Refinery, and Yamaguchi Refinery. *13 Volume of oil products sales includes sales of gasoline, jet fuel, heating oil, diesel oil, heavy fuel oil, naphtha, LPG, lubricants, bitumen, crude for burning, coal, cokes, and cargo trade. (Figures from the 2005 financial year onward do not include cargo trade.) *14 Individual service station data.
73 BUSINESS RISKS
The Showa Shell Group has created a system to monitor and manage financial year under review. This list is not meant to be, and should be not business risk, and endeavors to mitigate the risks associated with its busi- construed as, a comprehensive list of every risk affecting the Group. Fur- ness operations. Among such risks, we consider the following to be im- thermore, the matters discussed here concerning future circumstances are portant risks related to the businesses of the Showa Shell Group and its those matters evaluated by the Showa Shell Group at the end of the finan- financial position that could have a material effect on the decisions of cial year under review. investors. The risks described below are those risks evaluated to be mate- rial by the Showa Shell Group (on a consolidated basis) at the end of the
1. RISKS RELATED TO THE EFFECTS OF ENERGY DEMAND AND MARKET CONDITIONS
Domestic demand for oil products is affected by, and changes with, powered cell market is also affected by factors such as the supply-demand factors such as the economic situation in Japan and domestic energy balance and price competition with other companies in the industry. supply and demand. Moreover, Japan’s domestic oil products market These fluctuating factors also exert an influence on the quantities and is affected by factors such as the demand trend, price competition with prices of products that the Showa Shell Group sells, including exports, other companies in the industry, overseas prices for oil products, and and cause changes to the Group’s earnings. comparative price competition with other forms of energy. The solar
2. RISKS RELATED TO CHANGES IN PRICES OF CRUDE OIL AND MATERIALS, AND EXCHANGE RATES
A) Impact on sales margin and working capital However, if it is difficult to reflect these changes in sales prices due to Because the cost of sales on a yen basis of oil products the Group sells factors such as the global market environment, the changes will cause domestically is affected by changes in crude oil prices and foreign ex- fluctuations in the Group earnings. change rates, the basic policy is to reflect these influences in its sales In addition, there is a possibility that the amount of working capital the prices. The cost of sales on a yen basis of solar panels the Group sells Group requires will increase if there is a rise in crude oil or raw material domestically and overseas is also affected by changes in material prices prices or a rapid change in foreign exchange rates. and foreign exchange rates. The basic policy is to reflect these influences in its sales prices.
b) Impact of inventory valuation of inventory valuation that is relatively inexpensive at the beginning of the The Group mainly uses the weighted-average method to value invento- period, which is a positive factor for earnings. ries. When prices for crude oil, raw materials, and products decline, the As this illustrates, there is a possibility that changes in prices of crude Group’s cost of sales is increased by the effect of inventory valuation that oil, materials, and products will affect the Group’s operating results and is relatively expensive at the beginning of the period, which is a negative its financial position. factor for earnings. When prices for crude oil, raw materials, and products rise, on the other hand, the cost of sales is reduced by the effect
3. RISKS RELATED TO SOURCES OF CRUDE OIL AND MATERIALS PROCUREMENT
The Group procures crude oil from overseas, mainly countries in the alternative supply source cannot be ensured. There is also a possibility Middle East. There is a possibility that the financial position and operating that the financial position and operating results of the Group will be results of the Group will be affected by obstacles to its procurement of affected by obstacles to its procurement of the rare metals that are used crude oil such as a case where international political climate, in addition for solar panels, such as an unexpected adverse situation arising in the to that in an oil producing country adversely and an appropriate supplying district.
4. RISKS CONCERNING COMPETITION WITH OTHER COMPANIES OR TECHNICAL INNOVATION
The Group is exposed to tough competition with other oil companies due efforts to maintain and improve competitiveness, including strategic to refinery overcapacity and excess number of service stations in addition alliances and collaboration, there is a possibility that its financial position to declining domestic oil demand. With rapid technical innovation in the and business performance will be affected if it cannot operate with solar business, change in the technical standards and cost-competitive adequate efficiency under such a competitive environment. edge will affect the global competition. Although the Group will make
74 5. RISKS RELATED TO ENVIRONMENTAL REGULATIONS AND TAX LEVIES
In the event that new environmental regulations regarding carbon dioxide that the financial position and operating results of the Group will be Profile emissions or fossil fuel consumption are introduced in the future in Japan, affected in the event that changes in governmental subsidy policies in there is a possibility that the financial position and operating results of the various countries influence domestic and global demand trends for solar Group will be affected because of bearing additional capital expenditures powered cells. or incremental costs. Regarding the solar business, there is a possibility Management Message
6. RISKS RELATED TO TERMINATION OR RESTRICTION OF BUSINESS ACTIVITIES AS THE RESULT OF DISASTER, ACCIDENT, ETC.
The Group has enacted a basic policy concerning health, safety, security, facility of the Group, including its refineries and plants for producing solar and environmental conservation (environment), based on HSSE panels, will face obstacles to its operations in the event that a situation management rules, and strives to ensure safe operations and minimize such as a disaster beyond the anticipated scope occurs, and this would
risks that arise in the event of a disaster or the spread of contagious affect the Group’s financial position and operating results. There is also a Review of Operations diseases such as a new strain of influenza, through the use of appropriate possibility of being similarly affected by the termination or restriction of its insurance, including property and casualty insurance, as well as business activities as the result of an occurrence such as a serious formulation of the risk control plan and the Business Continuity Plan with industrial injury, equipment accident, or information system fault. its related discipline. There is a possibility, however, that each office and
7. RISKS RELATED TO THE ESTABLISHMENT OF INTERNAL CONTROL SYSTEMS
The Group strives to enhance compliance by appointing a director in the established internal control system does not function effectively and Human Resources charge of the Group’s Code of Conduct, implementing compliance rules the Group is not able to avoid compliance risks completely, there is a for the antitrust law, establishing and operating a risk management possibility that the trust of its stakeholders will be lost, and the financial system, and by implementing internal audits. However, in the event that position and business performance of the Group will be affected.
8. RISKS RELATED TO INTELLECTUAL PROPERTY RIGHTS
In addition to competition in technology development, strategy for are insufficient, there may still be possibilities of disputes regarding the intellectual property rights is becoming increasingly important. infringement of intellectual property rights and outflows of know-how. HSSE Accordingly, the Company has formed a specialized unit to manage and Such circumstances may have an impact on the financial condition and strengthen the protection of its intellectual property rights, including know- the management performance of the Group. how. However, in the event that there are areas where these measures Community and Social 9. RISKS RELATED TO PRODUCT LIABILITY Contribution Activities
The Group manufactures products based on strict quality control standards legally liable, and there is a possibility that such an event will lower the and has product liability insurance in case a product defect does occur. brand image of the Group and have a resultant impact on the financial However, in the event of a largescale recall or lawsuit due to an position and operating results of the Group. unforeseen situation, there is a possibility that the Group will become
10. RISKS RELATED TO CONTROL OF PERSONAL DATA Corporate Governance
The Group obtains and uses personal data, including information on its misused for some reason, there is a possibility that the Group will become customers, in relation to its businesses such as product sales, and has legally liable, and there is also a possibility that the Group brand image created in-house management systems for the administration of this data. will be damaged, and that the financial position and business Although the Group strives to protect such information with extreme performance of the Group will be negatively affected. caution, in the event that such data is disclosed outside the Group and Financial Section and
11. RISKS RELATED TO RETIREMENT BENEFITS Corporate Data
The Group’s pension benefit obligations and costs are computed by revised, these changes will affect the amount of the pension benefit actuarial calculation, and basic rates such as the discount rate and the obligation and the costs recognized in the future because the effects will expected rate of return on pension plan assets have been set as actuarial be cumulative and will be recognized regularly in the future periods. assumptions. In the event that actual numerical values for the basic rates differ from these assumptions, or in the event that the assumptions are
75 CONSOLIDATED BALANCE SHEETS
Showa Shell Sekiyu K.K. and Consolidated Subsidiaries Yen Million As of December 31, 2012 and 2011 2012 2011 ASSETS Current assets Cash and deposits (Notes 11 and 15) ¥ 18,175 ¥ 15,562 Notes and accounts receivable–trade (Notes 11, 15 and 18) 377,552 325,622 Merchandise and finished goods 152,362 143,721 Work in process 1,985 943 Raw materials and supplies (Note 15) 123,141 129,280 Deferred tax assets (Note 8) 6,642 7,322 Other current assets (Notes 11 and 12) 32,057 37,107 Allowance for doubtful accounts (591) (856) Total current assets 711,325 658,704
Noncurrent assets Property, plant and equipment Buildings and structures 103,422 109,486 Tanks 10,314 10,892 Machinery, equipment and vehicles 147,409 167,247 Land 157,735 158,856 Construction in progress 5,478 1,843 Other property, plant and equipment 6,303 6,245 Total property, plant and equipment (Notes 6, 14 and 15) 430,662 454,571
Intangible assets Goodwill 1,409 1,731 Leasehold rights 4,025 4,057 Software 4,857 4,983 Other intangible assets 240 259 Total intangible assets 10,532 11,031
Investments and other assets Investment securities (Notes 5 and 11) 37,684 38,701 Long-term loans receivable 5,740 6,159 Deferred tax assets (Note 8) 21,614 22,977 Other investments and other assets (Notes 11 and 12) 16,306 17,047 Allowance for doubtful accounts (672) (750) Total investments and other assets 80,672 84,135 Total noncurrent assets 521,867 549,737 Total assets ¥1,233,193 ¥1,208,442 The accompanying notes are an integral part of these financial statements.
76 Yen Million 2012 2011
LIABILITIES Profile Current liabilities Notes and accounts payable–trade (Notes 11 and 18) ¥ 336,884 ¥ 294,276 Short-term loans payable (Notes 7, 11 and 15) 65,933 58,340 Current portion of bonds (Notes 7 and 11) 15,000 — Accounts payable–other (Notes 11 and 15) 172,522 177,452 Management Message Income taxes payable 6,604 3,725 Accrued expenses 9,840 10,341 Provision for employees’ bonuses 2,359 2,359 Provision for directors’ bonuses 4 32 Commercial paper (Notes 7 and 11) 26,000 52,000 Other current liabilities (Notes 7 and 11) 47,148 39,824
Total current liabilities 682,297 638,351 Review of Operations
Noncurrent liabilities Bonds payable (Notes 7 and 11) 20,000 35,000 Long-term loans payable (Notes 7, 11 and 15) 138,794 133,022 Deferred tax liabilities (Note 8) 3,539 3,711 Provision for employees’ retirement benefits (Note 9) 74,493 75,335 Provision for directors’ retirement benefits (Note 4) — 479 Human Resources Provision for special repairs 15,890 16,308 Other noncurrent liabilities (Notes 7 and 10) 24,394 27,080 Total noncurrent liabilities 277,111 290,938 Total liabilities 959,409 929,290
Net assets Shareholders’ equity Capital stock Authorized 440,000,000 shares HSSE Issued 376,850,400 shares in 2012 and 2011 34,197 34,197 Capital surplus 22,113 22,113 Retained earnings 193,250 199,182 Treasury stock Community and Social 227,342 shares as of December 31, 2012 Contribution Activities and 226,299 shares as of December 31, 2011 (184) (184) Total shareholders’ equity 249,375 255,308 Accumulated other comprehensive income Unrealized gain (loss) on available-for-sale securities 325 557 Deferred gain (loss) on derivatives under hedge accounting 125 — Total accumulated other comprehensive income 450 557
Minority interests 23,957 23,286 Corporate Governance Total net assets 273,783 279,152 Total liabilities and net assets ¥1,233,193 ¥1,208,442 Financial Section and Corporate Data
77 CONSOLIDATED STATEMENTS OF INCOME
Showa Shell Sekiyu K.K. and Consolidated Subsidiaries Yen Million Years ended December 31, 2012 and 2011 2012 2011 Net sales (Notes 18 and 19) ¥2,629,261 ¥2,771,418 Cost of sales (Notes 9, 18 and 19) 2,481,144 2,582,339 Gross profit 148,117 189,078 Selling, general and administrative expenses (Notes 9 and 13) 133,419 128,790 Operating income 14,697 60,288 Non-operating income Interest income 165 213 Dividends income 1,583 258 Foreign exchange gains — 1,507 Reversal of allowance for doubtful accounts 317 — Equity in earnings of affiliates (Note 19) — 1,804 Gain on investments in silent partnerships 1,421 1,472 Other 1,673 1,385 5,161 6,642 Non-operating expenses Interest expense 2,365 2,423 Sales discounts 1,936 1,700 Foreign exchange losses 175 — Equity in losses of affiliates (Note 19) 924 — Other 1,781 998 7,183 5,123 Ordinary income 12,674 61,807 Extraordinary income Gain on sales of property, plant and equipment 1,733 8,951 Gain on sales of investment securities and others (Note 5) 1 284 Reversal of provision for special repairs — 62 Subsidies 1,871 3,546 Other 392 1,251 3,998 14,094 Extraordinary loss Loss on disposal of property, plant and equipment 1,943 3,210 Loss on valuation of investment securities 20 53 Impairment loss (Notes 14 and 19) 978 11,423 Expenses related to upgrading of equipment 517 — Other 834 4,504 4,293 19,191 Income before income taxes and minority interests 12,379 56,710 Income taxes (Note 8) Current 8,163 4,136 Deferred 1,744 28,445 Total income taxes 9,908 32,581 Income before minority interests 2,470 24,129 Minority interests in income 1,457 1,018 Net income ¥ 1,013 ¥ 23,110
Yen 2012 2011 Per share data Net income–primary ¥ 2.69 ¥ 61.36 Not prepared due to Not prepared due to Net income–diluted having no dilutive shares having no dilutive shares Dividend 18.00 18.00 Net assets 663.33 679.37 The accompanying notes are an integral part of these financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Showa Shell Sekiyu K.K. and Consolidated Subsidiaries Yen Million Years ended December 31, 2012 and 2011 2012 2011 Income before minority interests ¥2,470 ¥24,129 Other comprehensive income Unrealized gain (loss) on available-for-sale securities (214) (477) Deferred gain (loss) on derivatives under hedge accounting 125 — Share of other comprehensive income in affiliates (14) (89) Total other comprehensive income (Note 17) (104) (566) Comprehensive income 2,366 23,562 Total comprehensive income attributable to: Owners of the parent 906 22,549 Minority interests ¥1,460 ¥ 1,012 The accompanying notes are an integral part of these financial statements.
78 CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
Showa Shell Sekiyu K.K. and Consolidated Subsidiaries Yen Million Years ended December 31, 2012 and 2011 2012 2011
Shareholders’ equity Profile Capital stock Balance at the beginning of current period ¥ 34,197 ¥ 34,197 Changes of items during the period Total changes of items during the period — — Balance at the end of current period 34,197 34,197 Capital surplus Balance at the beginning of current period 22,113 22,113 Management Message Changes of items during the period Disposal of treasury stock — (0) Total changes of items during the period — (0) Balance at the end of current period 22,113 22,113 Retained earnings Balance at the beginning of current period 199,182 182,959 Changes of items during the period Dividends from surplus (6,780) (6,780) Net income 1,013 23,110 Change of scope of consolidation (164) (107) Review of Operations Total changes of items during the period (5,932) 16,222 Balance at the end of current period 193,250 199,182 Treasury stock Balance at the beginning of current period (184) (183) Changes of items during the period Purchase of treasury stock (0) (0) Disposal of treasury stock — 0 Total changes of items during the period (0) (0) Balance at the end of current period (184) (184)
Total shareholders’ equity Human Resources Balance at the beginning of current period 255,308 239,087 Changes of items during the period Dividends from surplus (6,780) (6,780) Net income 1,013 23,110 Purchase of treasury stock (0) (0) Disposal of treasury stock — 0 Change of scope of consolidation (164) (107) Total changes of items during the period (5,932) 16,221 Balance at the end of current period 249,375 255,308 Accumulated other comprehensive income Unrealized gain (loss) on available-for-sale securities Balance at the beginning of current period 557 1,117 HSSE Changes of items during the period Net changes of items other than shareholders’ equity (231) (560) Total changes of items during the period (231) (560) Balance at the end of current period 325 557 Deferred gain (loss) on derivatives under hedge accounting Balance at the beginning of current period — — Community and Social Changes of items during the period Contribution Activities Net changes of items other than shareholders’ equity 125 — Total changes of items during the period 125 — Balance at the end of current period 125 — Total accumulated other comprehensive income Balance at the beginning of current period 557 1,117 Changes of items during the period Net changes of items other than shareholders’ equity (106) (560) Total changes of items during the period (106) (560) Balance at the end of current period 450 557 Minority interests Corporate Governance Balance at the beginning of current period 23,286 22,801 Changes of items during the period Purchase of shares of consolidated subsidiaries (214) — Net changes of items other than shareholders’ equity 884 485 Total changes of items during the period 670 485 Balance at the end of current period 23,957 23,286 Total net assets Balance at the beginning of current period 279,152 263,006 Changes of items during the period Dividends from surplus (6,780) (6,780) Financial Section and Net income 1,013 23,110 Corporate Data Purchase of treasury stock (0) (0) Disposal of treasury stock — 0 Change of scope of consolidation (164) (107) Purchase of shares of consolidated subsidiaries (214) — Net changes of items other than shareholders’ equity 778 (74) Total changes of items during the period (5,368) 16,146 Balance at the end of current period ¥273,783 ¥279,152
79 CONSOLIDATED STATEMENTS OF CASH FLOWS
Showa Shell Sekiyu K.K. and Consolidated Subsidiaries Yen Million Years ended December 31, 2012 and 2011 2012 2011 Net cash provided by (used in) operating activities Income before income taxes and minority interests ¥ 12,379 ¥ 56,710 Depreciation and amortization 43,620 43,329 Impairment loss 978 11,423 Loss (gain) on disposal of property, plant and equipment 1,943 3,210 Loss (gain) on sales of property, plant and equipment (1,733) (8,951) Loss (gain) on valuation of investment securities 20 53 Increase (decrease) in allowance for doubtful accounts (342) 476 Increase (decrease) in provision for employees’ retirement benefits (842) 2,943 Increase (decrease) in provision for special repairs (417) 4,621 Interest and dividends income (1,748) (472) Interest expense and sales discounts 4,301 4,124 (Increase) decrease in notes and accounts receivable–trade (51,930) (34,817) (Increase) decrease in inventories (3,542) (37,663) Increase (decrease) in notes and accounts payable 35,216 22,406 Other, net 12,564 (9,697) Sub-total 50,466 57,698 Interest and dividends income 1,756 480 Interest expense paid (4,304) (4,061) Income taxes (paid) refunded (5,996) (3,565) Net cash provided by (used in) operating activities 41,922 50,551 Net cash provided by (used in) investing activities Purchase of property, plant and equipment (20,041) (42,900) Purchase of intangible assets (2,058) (2,193) Proceeds from sales of property, plant and equipment 3,427 15,886 Purchase of investment securities (74) (8) Proceeds from sales of investment securities 6 14 Net (increase) decrease in short-term loans receivable 2,203 4,091 Payments for long-term loans receivable (942) (4) Collection of long-term loans receivable 4 4 Other, net (272) 550 Net cash provided by (used in) investing activities (17,747) (24,560) Net cash provided by (used in) financing activities Net increase (decrease) in short-term loans payable 17,561 8,471 Net increase (decrease) in commercial paper (26,000) (63,000) Proceeds from long-term loans payable 8,500 35,300 Repayments of long-term loans payable (12,696) (3,260) Redemption of bonds — (200) Purchase of treasury stock (0) (0) Repayments of lease obligations (1,400) (1,165) Cash dividends paid (6,780) (6,780) Cash dividends paid to minority shareholders (575) (544) Other, net — 20 Net cash provided by (used in) financing activities (21,391) (31,159) Net increase (decrease) in cash and cash equivalents 2,783 (5,168) Cash and cash equivalents at beginning of period 14,466 19,746 Decrease in cash and cash equivalents resulting from exclusion of a subsidiary from consolidation (270) (111) Cash and cash equivalents at end of period ¥ 16,979 ¥ 14,466
Reconciliation between cash and cash equivalents at year-end Yen Million and cash and deposits on the balance sheets 2012 2011 Cash and deposits on the balance sheets ¥18,175 ¥15,562 Time deposit exceeding 3 months (1,196) (1,095) Cash and cash equivalents ¥16,979 ¥14,466
80 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements of Showa Shell certain respects from the application and disclosure requirements of Inter- Profile Sekiyu K.K. (the “Company”) and its consolidated subsidiaries (together, national Financial Reporting Standards. the “Companies”) have been prepared in accordance with the provisions As permitted by the Financial Instruments and Exchange Act of Japan, set forth in the Financial Instruments and Exchange Act of Japan and its fractions below ¥1 million are rounded off. This causes certain totals in related accounting regulations, and in conformity with accounting princi- the financial statements to not be equivalent to the sums of each item. ples and practices generally accepted in Japan, which are different in Management Message
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(1) POLICIES OF CONSOLIDATION (3) VALUATION METHOD FOR MAJOR ASSETS a) Consolidated subsidiaries as of December 31, 2012 a) Securities (31 companies) Securities with market value are stated at market value. Net unrealized Showa Yokkaichi Sekiyu Co., Ltd. K.K. Rising Sun
gains or losses on these securities are reported net of tax as a component Review of Operations Nippon Grease Co., Ltd. Genex Co., Ltd. Leef Energy K.K. On-Site Power Co., Ltd. of net assets. Cost of securities sold is calculated primarily by the moving Wakamatsu Gas K.K. Showa Shell Sempaku K.K. average method. Nissho Koyu K.K. Heiwa Kisen Kaisha, Ltd. Nagase Oil Ltd. Chuo Shell Sekiyu Hanbai K.K. Securities with no market value are stated at historical cost, based on Jonen Co. Tokyo Shell Pack K.K. Toa Oil Co., Ltd. K.K. Shinyo Sekiyu the moving average method. Shoseki Kako Co., Ltd. Shoseki Engineering & b) Derivatives and hedging activities Petro Star Kansai Co., Ltd. Construction Co., Ltd. Nakagawa Oil Co., Ltd. Solar Frontier K.K. Derivatives are used in the management of foreign currency risk, com- K.K. Sun Road Enessance Holdings Co., Ltd. modity price risk, and interest rate risk.
Other 8 companies Human Resources Derivative financial instruments and foreign currency transactions are Enessance Sapporo and Hakodate Gas, which had previously been classified and accounted for as follows: (1) all derivatives are recognized our consolidated subsidiaries, were merged with Enessance Hokkaido. The as either assets or liabilities and measured at fair value, and gains or number of consolidated subsidiaries decreased as a result of this merger. losses on derivative transactions are recognized in the consolidated state- Shoseki Overseas Oil Development Co., Ltd., which had previously ment of income and (2) for derivatives used for hedging purposes, if such been our consolidated subsidiary, has dissolved and stopped all operat- derivatives qualify for hedge accounting because of high correlation and ing activities and consequently, was found to be immaterial and was ex- effectiveness between the hedging instruments and the hedged items, cluded from our consolidated subsidiaries. The number of consolidated gains or losses on derivatives are deferred until maturity of the hedged
subsidiaries decreased as a result of this exclusion. HSSE transactions. Certain subsidiaries, such as Watani Energy Co., are excluded from The foreign currency forward contracts employed to hedge foreign consolidation because their influence is immaterial to the consolidated exchange exposures are measured at fair value and the unrealized financial statements. gains/losses are recognized in income. Forward contracts applied for b) Accounting closing dates forecasted (or committed) transactions are also measured at fair value but Community and Social The account closing dates of the consolidated subsidiaries are as follows. Contribution Activities the unrealized gains/losses are deferred until the underlying transactions Account closing date Number of subsidiaries are completed. September 30 7 The commodity futures (or forward) contracts employed to hedge October 31 1 commodity price exposures are measured at fair value and the unrealized December 31 23 gains/losses are recognized in income. Future (or forward) contracts The consolidated financial statements incorporate the accounts of the qualifying and designated as hedges are also measured at fair value parent company and those of the other subsidiaries as of their respective but the unrealized gains/losses are deferred until the hedged transac- Corporate Governance account closing dates, with adjustments for significant transactions occur- tion occurs. ring subsequent to their accounting closing dates, but prior to the parent’s The interest rate swaps which qualify for hedge accounting and meet balance sheet date. specific matching criteria are not remeasured at market value but the dif- ferential paid or received under the swap agreements are recognized (2) EQUITY-METHOD AFFILIATES and included in interest expense or income. Equity-method affiliates as of December 31, 2012: (13 companies) c) Inventories Seibu Oil Co., Ltd. Joyo Shell Sekiyu Hanbai K.K. Japan Oil Network Co., Ltd. Mieseki Shoji K.K. Inventories are stated at the lower of cost, determined by the weighted Financial Section and Central Sekiyu Gas Co., Ltd. Dia shoseki Co. Ltd. average method, or net selling value for the Company and subsidiaries. Corporate Data Shell Tokuhatsu K.K. Niigata Joint Oil Stockpiling Co., Ltd. Ogishima Power Co., Ltd. Marubeni Energy Corporation Toyotsu Petrotex Corporation Shell Sekiyu Osaka Hatsubaisho K.K. TS Aromatics Ltd.
Certain 20%- to 50%-owned companies, such as Kyoudo Gas K.K., are excluded from equity-method affiliates because their influence is im- material to the consolidated financial statements.
81 (4) DEPRECIATION AND AMORTIZATION OF MAJOR ASSETS e) Provision for special repairs a) Property, plant and equipment Estimated accrued expenses on inspections and maintenance on refining (Excluding lease assets) machinery and oil tanks are provided. Periodical inspections on oil tanks The straight-line method has been adopted. The same standard as stipu- are required under the Fire Service Act. lated in the Corporate Tax Law is applied to the useful economic lives and the residual values. The main refining facilities at the Yokkaichi Refinery of (6) CONSUMPTION TAX Showa Yokkaichi Sekiyu Co., Ltd., are depreciated with estimated useful Consumption tax is imposed at the flat rate of 5% on all domestic con- economic lives of 20 years. sumption of goods and services (with certain exemptions). The consump- b) Intangible assets (Excluding lease assets) tion tax withheld upon sale and consumption tax paid by the Companies The straight-line method has been adopted. Software for in-house use is on their purchases of goods and services is not included in revenue and amortized based on the straight-line method over the expected useful cost or expense items, respectively, in the accompanying consolidated economic life of 5 years. statements of income. c) Lease assets Lease assets are depreciated using the straight-line method over the lease (7) AMORTIZATION OF GOODWILL term with a residual value of zero. Goodwill is amortized evenly over a period not exceeding 20 years, Financial lease transactions that are deemed to not transfer owner- which is determined in consideration of the reasons it was recorded. ship of the leased property to the lessee whose transaction date is before Goodwill is expensed in the year it arises when it is immaterial. December 31, 2008 are accounted for as operating lease transactions. (8) APPROPRIATION OF RETAINED EARNINGS (5) BASIS OF PROVISIONS Under the Companies Act of Japan, the appropriation of retained earn- a) Allowance for doubtful accounts ings on the current fiscal year is determined by resolution of the shareholders’ For doubtful debts, provisions are calculated individually based on the meeting held after the fiscal year-end. Therefore, the appropriation estimated uncollectible amounts. For other debts, provisions are calculat- of the retained earnings for the current fiscal year is not reflected in these ed based on the actual ratio of the past doubtful debt losses. financial statements. b) Provision for employees’ bonuses Accrued bonuses for the current fiscal year are provided based on the (9) CASH AND CASH EQUIVALENTS estimated bonuses to be paid in the following year. Cash and cash equivalents in the consolidated statements of cash flows c) Provision for directors’ bonuses consists of cash on hand, deposits readily convertible into cash, and For directors’ bonuses, provisions are calculated based on the estimated short-term investments with low risk of price fluctuations and with a matu- bonuses to be paid in the following year. rity of 3 months or less at the time of acquisition. d) Provision for employees’ retirement benefits Accrued retirement benefits are provided based on the estimated PBO (10) RECLASSIFICATION and pension assets as at the current fiscal year-end. Actuarial differences Certain comparative accounts in the consolidated financial statements for are amortized evenly within the following 10–14 years, which is the av- the year ended December 31, 2011 have been classified to conform to erage remaining service years of employees. The past service liabilities the 2012 presentation. are amortized evenly within 10–14 years, which was the average re- maining service years of employees when it arises. Differences due to changes in the accounting standards are amortized evenly over the fol- lowing 15 years, which was the average number of remaining service years of employees at that time.
3. NEW ACCOUNTING PRONOUNCEMENTS
(Accounting Standard for Retirement Benefits) “Under the revised accounting standard, actuarial gains and losses and On May 17, 2012, the Accounting Standards Board of Japan (the past service costs shall be recognized within net assets in the consolidated “ASBJ”) issued ASBJ Statement No. 26, “Accounting Standard for Retire- balance sheets, after adjusting for tax effects, and the funding deficit or sur- ment Benefits,” and ASBJ Guidance No. 25, “Guidance on Accounting plus shall be recognized as a liability or asset. Standard for Retirement Benefits,” which replaced the Accounting Stand- The Companies expect to apply the revised accounting standard from ard for Retirement Benefits that had been issued by the Business Account- the end of the fiscal year ending December 31, 2014. However, the amend- ing Council in 1998 with effective date of April 1, 2000 and the other ment of the calculation method for present value of defined benefit obliga- related practical guidances, being followed by partial amendments from tions and current service cost will be adopted from the beginning of the fiscal time to time through 2009. year ending December 31, 2015.”
82 4. ADDITIONAL INFORMATION
(Accounting changes and error corrections) instruments and set the environment for the adoption of hedge account- Profile In December 2009, the ASBJ issued ASBJ Statement No. 24, “Account- ing. This application was made in order to present the Companies’ finan- ing Standard for Accounting Changes and Error Corrections,” and ASBJ cial position and financial performance more properly, by appropriately Guidance No. 24, “Guidance on Accounting Standard for Accounting reflecting in financial statements its initiatives to manage the risk of ex- Changes and Error Corrections.” This accounting standard and the change rate and price variation of commodities.
guidance are applicable to accounting changes and corrections of prior- Management Message period errors which are made from the beginning of the fiscal year that (Directors’ retirement benefits) begins on or after January 1, 2012. Certain consolidated subsidiaries had been provided with payments for the mandatory retirement benefits to directors as a reserve based on (Application of hedge accounting) internal rules. However, in accordance with the abolishment of the Until the previous fiscal year, gains and losses with respect to forward executive retirement benefit system, a resolution was passed at the exchange contracts for hedging of forecasted transactions denominated annual shareholders’ meeting of each certain consolidated subsidiaries in foreign currencies and commodity futures contracts for hedging of ex- concerning the previous fiscal year to approvefinal payments to incum- Review of Operations port of oil products had been recognized by estimating the fair value of bent directors for the retirement benefits that had accrued in their the contract. However, the Companies have adopted hedge accounting respective terms of office. and have applied deferral hedge accounting for the contracts which meet As a result, the provision for directors’ retirement benefits was fully the criteria of hedge accounting from the current fiscal year. reversed in the current fiscal year and the amount of ¥347 million for The Companies have adopted hedge accounting because the outstanding final payments of retirement benefits has been included in Companies reviewed the risk management system regarding financial “Other” in the noncurrent liabilities section. Human Resources 5. SECURITIES
(1) INVESTMENT SECURITIES Yen Million 2012 2011 Securities ¥ 8,202 ¥ 8,343 Security investments in non-consolidated subsidiaries and affiliates 29,482 30,358 ¥37,684 ¥38,701 HSSE (2) SECURITIES WITH MARKET VALUE Yen Million 2012 Historical Market value Unrealized gain (loss) Securities with unrealized gains: Community and Social Equity securities ¥1,113 ¥2,423 ¥1,309 Contribution Activities Securities with unrealized losses: Equity securities 2,786 2,284 (502) Yen Million 2011 Historical Market value Unrealized gain (loss) Securities with unrealized gains:
Equity securities ¥1,166 ¥2,233 ¥1,067 Corporate Governance Securities with unrealized losses: Equity securities 2,737 2,614 (122)
(3) SECURITIES SOLD Yen Million 2012 2011 Proceeds from sales of securities during the year ¥4 ¥8 Realized gains 1 7 Realized losses 0 0 Financial Section and Corporate Data (4) SECURITIES WITH NO MARKET VALUE Yen Million 2012 2011 Unquoted securities Equity securities ¥3,494 ¥3,494 ¥3,494 ¥3,494
83 6. INVESTMENT AND RENTAL PROPERTY
The Company and certain subsidiaries own some rental properties, such as office buildings and commercial facilities including land in Tokyo and other areas. The net of rental income and operating expenses for those rental properties for the years ended December 31, 2012 and 2011 were ¥1,279 million and ¥1,871 million, and the net gains (loss) on sales and disposal of those properties for the years ended December 31, 2012 and 2011 were ¥1,129 million and ¥7,934 million, respectively. An impairment loss of ¥3 million was recorded for the year ended December 31, 2011. The carrying amounts, changes in such balances, and fair values of such properties are as follows. Yen Million Carrying amount Fair value December 31, 2011 Increase (Decrease) December 31, 2012 December 31, 2012 ¥24,524 ¥212 ¥24,736 ¥69,829
Yen Million Carrying amount Fair value December 31, 2010 Increase (Decrease) December 31, 2011 December 31, 2011 ¥31,505 ¥(6,981) ¥24,524 ¥73,455
Notes: 1. The carrying amount recognized in the balance sheet is net of accumulated depreciation and accumulated impairment losses, if any. 2. The increase during the fiscal year ended December 31, 2011 primarily represents the properties becoming idle of ¥1,066 million, and the decrease primarily represents sales and dis- posals of ¥7,556 million and depreciation of ¥488 million. 3. The increase during the fiscal year ended December 31, 2012 primarily represents the properties becoming idle of ¥2,469 million, and the decrease primarily represents sales and dis- posals of ¥1,942 million and depreciation of ¥315 million. 4. The fair value of properties is measured by the Company based mainly on real-estate appraisal standards.
7. SHORT-TERM AND LONG-TERM DEBTS
(1) SHORT-TERM DEBTS Yen Million 2012 2011 Short-term loans payable ¥63,236 ¥45,675 Commercial paper 26,000 52,000 Short-term lease obligations 1,369 1,126 ¥90,606 ¥98,801
Note: The weighted average interest rates on short-term debt outstanding at the year-end were as follows; % 2012 2011 Short-term loans payable 0.14 0.15 Commercial paper 0.11 0.12
(2) LONG-TERM DEBTS Yen Million 2012 2011 Loans from banks, other financial institutions, etc., due through 2022 ¥141,491 ¥145,687 Long-term lease obligations 2,517 2,686 1.66 percent unsecured straight bond due in 2013 15,000 15,000 0.52 percent unsecured straight bond due in 2014 10,000 10,000 0.97 percent unsecured straight bond due in 2017 10,000 10,000 ¥179,009 ¥183,374 Less: Long-term bond due within one year 15,000 — Less: Long-term loan due within one year 2,697 12,665 ¥161,312 ¥170,709
Note: The weighted average interest rates on long-term debt (excluding the one due in 1 year) from banks outstanding as of December 31, 2012 and 2011 were 1.02% and 1.08%, respectively. Annual maturities of bonds Yen Million 2012 Within one year ¥15,000 More than one year and less than two years 10,000 More than two years and less than three years — More than three years and less than four years — More than four years and less than five years 10,000 More than five years — ¥35,000
84 Annual maturities of long-term debts (Excluding bonds) Yen Million 2012 Profile Within one year ¥ 2,697 More than one year and less than two years 27,704 More than two years and less than three years 53,225 More than three years and less than four years 998 More than four years and less than five years 8,756
More than five years 50,627 Management Message ¥144,009
(3) COMMITMENT-LINE CONTRACTS The Company maintains a revolving credit contract available up to ¥150 billion with a banking syndicate and an overdraft contract up to ¥10 billion with Mizuho Corporate Bank Ltd. There was no balance as at December 31, 2012 under these contracts. Review of Operations 8. INCOME TAXES
(1) SIGNIFICANT COMPONENTS OF DEFERRED TAX ASSETS AND DEFERRED TAX LIABILITIES Yen Million 2012 2011 Deferred tax assets: Provision for employees’ retirement benefits ¥ 27,059 ¥ 27,722 Impairment loss 17,777 19,125 Loss on liquidation of business 3,420 4,262 Loss on valuation of investment securities 1,029 1,148 Human Resources Allowance for doubtful accounts 477 450 Net loss carried forward 24,012 17,864 Other 11,957 12,143 Sub-total 85,735 82,716 Valuation allowance (47,566) (42,941) Total deferred tax assets ¥ 38,168 ¥ 39,774 Deferred tax liabilities: Reserve for advanced depreciation on property, plant and equipment transaction ¥ (9,146) ¥ (8,812) Valuation difference on available-for-sale securities (437) (360)
Other (3,895) (4,014) HSSE Total deferred tax liabilities (13,479) (13,187) Net deferred tax assets (liabilities) ¥ 24,688 ¥ 26,587
(2) RECONCILIATION BETWEEN THE EFFECTIVE STATUTORY TAX RATE AND THE ACTUAL TAX RATE Community and Social Contribution Activities % 2012 2011 Effective statutory tax rate 40.7 40.7 (Adjustments) Entertainment expense and others that are not deductible permanently 4.5 1.5 Dividends income and others that are not taxable permanently (4.4) (0.2) Changes in valuation allowance 38.8 13.4 Inhabitant tax on per capita basis 1.2 0.3
Differences arising from changes in tax rates — 3.7 Corporate Governance Other (0.8) (1.9) Actual tax rate 80.0 57.5 Financial Section and Corporate Data
85 (3) ADJUSTMENT OF DEFERRED TAX ASSETS AND DEFERRED TAX LIABILITIES DUE TO CHANGES IN THE EFFECTIVE STATUTORY TAX RATE The ”Act for Partial Revision of the Income Tax Act, etc. for the Purpose of In accordance with the change, the effective statutory tax rates Creating a Taxation System Responding to Changes in Economic and for the Companies to calculate the amounts of deferred tax assets and Social Structures” (Act No. 114 of 2011) and the ”Act on Special Meas- deferred tax liabilities have been applied as follows depending on the ures for Securing Financial Resources Necessary to Implement Measures reversal timing of each temporary difference. for Reconstruction from the Great East Japan Earthquake” (Act No. 117 Timing of reversal Tax rate December 31, 2012 and before 40.7% of 2011) were issued on December 2, 2011 and the income tax rate January 1, 2013 through December 31, 2015 38.0% is to be changed accordingly with effect from business terms beginning January 1, 2016 onward 35.6% on April 1, 2012 and onward. Due to the change, the net deferred tax assets decreased by ¥2,024 million and income taxes–deferred charge for the year ended December 31, 2011 increased by ¥2,074 million.
9. PROVISION FOR EMPLOYEES’ RETIREMENT BENEFITS
The Companies operate various kinds of retirement benefit plans, such as a contributory pension plan, a defined-benefit corporate pension, and a severance payment plan. (1) PROVISION FOR EMPLOYEES’ RETIREMENT BENEFITS Yen Million 2012 2011 Retirement benefit obligations ¥(102,846) ¥(104,979) Pension assets 18,625 17,280 Unfunded retirement benefit obligations (84,221) (87,699) Unrecognized actuarial differences 10,539 12,757 Unrecognized past service cost (reduction in obligations) (Note 2) (1,037) (745) Unrecognized transition differences due to accounting changes 263 381 Sub-total (74,455) (75,305) Prepaid pension expenses (37) (30) Provision for employees’ retirement benefits ¥ (74,493) ¥ (75,335)
Notes: 1. The discount rate determined using the yield of bonds at the closing date of the current financial year. 2. A past service obligation (decrease in obligations) arose because the parent company and a consolidated subsidiary changed their plan. 3. The Company’s retirement benefit scheme includes two consolidated subsidiaries. In addition, due to a change of scope of consolidation, one subsidiary consolidated in the prior year was not consolidated in the current year. 4. Except for the Company and three of the consolidated subsidiaries, the simple method is used for calculating retirement benefit obligations. 5. In-house pension schemes are mainly those in which employees retiring at retirement age or voluntarily at above the age of 55 contribute 50% of their retirement benefits to their company, which then pays it out over 180 months or until the death of the pensioners. 6. The Company has introduced a retirement benefit system in which employees choose from a scheme for advance cash payment of retirement allowance and pension (full payment of retire- ment allowance and pension equivalent amount included in salary), and a lump-sum retirement benefit scheme; the benefit obligations of employees choosing the lump-sum scheme are also included. 7. An employee pension trust has been set.
(2) THE NET PERIODIC PENSION EXPENSE RELATED TO THE RETIREMENT BENEFITS Yen Million 2012 2011 Service cost (Note 1) ¥2,112 ¥2,048 Interest cost 1,979 2,370 Expected return on pension assets (361) (290) Amortization of unrecognized actuarial differences 1,965 1,485 Amortization of unrecognized past service costs (110) (76) Amortization of unrecognized transition differences due to accounting changes 117 117 Other (Note 2) 264 214 ¥5,967 ¥5,869
Notes: 1. The retirement benefit costs of consolidated subsidiaries that use a simple method are included in “Service cost.” 2. This amount mainly represents payments for defined contribution pension plans.
(3) ASSUMPTIONS USED IN CALCULATION OF THE ABOVE INFORMATION As of December 31, 2012 As of December 31, 2011 Allocation method for retirement benefit expenses Periodical straight line Periodical straight line Discount rate 2.0% 2.0% Expected rate of return 1.0% 0.0% Period for amortization of past service cost 10–14 years 10–14 years Period for amortization of actuarial differences 10–14 years 10–14 years Period for amortization of transition differences due to accounting changes 15 years 15 years
Note: The calculation of the discount rate is based on yield rates at the closing date of the fiscal year.
86 10. ASSET RETIREMENT OBLIGATIONS
(1) OVERVIEW OF ASSET RETIREMENT OBLIGATIONS Profile The Companies estimate obligations of restoration under the lease agreements of real estate in connection with land for Service station facilities and offices.
(2) CALCULATION METHOD OF ASSET RETIREMENT OBLIGATIONS
The Companies estimate used periods between 10 and 50 years and discounts rates ranging from 1.085 to 2.391%. Management Message
(3) CHANGES IN THE TOTAL AMOUNT OF ASSET RETIREMENT OBLIGATIONS Yen Million 2012 2011 Balance at beginning of year (Note) ¥3,455 ¥3,372 Additional provisions associated with the acquisition of property, plant and equipment 158 70 Reconciliation associated with passage of time 56 55
Reduction associated with settlement of asset retirement obligations (84) (43) Review of Operations Balance at end of year ¥3,586 ¥3,455
Note: The beginning balance for the year ended December 31, 2011 represents the balance after adopting the “Accounting Standard for Asset Retirement Obligations” (ASBJ Statement No. 18) and “Guidance on Accounting standard for Asset Retirement Obligations” (ASBJ Guidance No. 21 issued on March 31, 2008) which are effective for the year ended December 31, 2011.
11. FINACIAL INSTRUMENTS AND RELATED DISCLOSURES
(1) GROUP POLICY FOR FINANCIAL INSTRUMENTS foreign exchange risk associated with receivables and payables in for-
The Companies, based on their capital investment plans, raise necessary eign currencies, and swaps, which are used to hedge market price fluc- Human Resources funds through bank loans, issues of corporate bonds, and other sources. tuations risk associated with crude oil and petrochemical products. In addition, to obtain short-term working capital, the Companies raise funds through bank loans, issues of commercial paper (CP), and other (3) RISK MANAGEMENT FOR FINANCIAL INSTRUMENTS sources. The Companies use derivatives to reduce the risk of fluctuations Credit risk management in commodity prices, foreign exchange rates, and interest rates. Deriva- Credit risk is the risk of economic loss arising from a counterparty’s failure tives are not used for speculative purposes. to repay or service debt according to the contractual terms. The Companies manage their credit risk from receivables by monitor- (2) NATURE AND EXTENT OF RISKS ARISING FROM FINAN- ing of payment terms and balances of each customer and recognizing HSSE CIAL INSTRUMENTS credit standing of major customers to identify the default risk of customers Receivables, such as trade notes and trade accounts, are exposed to at an early stage. customer credit risk. Investment securities are mainly equity instruments of Market risk management (foreign exchange risk and customers and suppliers of the Companies. interest rate risk) Community and Social Payment terms of payables, such as trade notes and trade accounts, Foreign currency trade payables are exposed to market risk resulting from Contribution Activities are less than three months. Moreover, payables in foreign currencies fluctuations in foreign currency exchange rates. Such foreign exchange are exposed to the market risk of fluctuation in foreign currency risk is hedged principally by foreign currency forward contracts. exchange rates. Interest-rate swaps are used to manage exposure to market risks from Maturities of bank loans, commercial paper, and bonds, which are changes in interest rates of loan payables. Investment securities are man- for the purpose of capital investment and working capital, are less than aged by monitoring market values and financial positions of issuers on a seven years after the balance sheet date. Moreover, variable interest rate regular basis. To manage the risk of derivatives, the Companies have Corporate Governance debt is exposed to market risks from changes in variable interest rates. prepared a set of internal rules and implemented them in line with only In addition to foreign currency forward contracts and interest-rate real demand. swaps, derivatives mainly include options, which are used to hedge Financial Section and Corporate Data
87 (4) FAIR VALUES OF FINANCIAL INSTRUMENTS Fair values of financial instruments are based on the quoted price in active markets. If the quoted price is not available, other rational valuation techniques are used. Also, please see Note 12 for details of fair value for derivatives. (a) Fair value of financial instruments Yen Million December 31, 2012 Carrying amount Fair value Unrealized gain (loss) Cash and deposits ¥ 18,175 ¥ 18,175 ¥ — Notes and accounts receivable–trade 377,552 377,552 — Investment securities 4,707 4,707 — Total ¥400,435 ¥400,435 ¥ — Notes and accounts payable–trade ¥336,884 ¥336,884 ¥ — Accounts payable–other 172,522 172,522 — Short-term loans payable (Note 1) 63,236 63,236 — Commercial paper 26,000 26,000 — Bonds payable (Note 2) 35,000 35,346 346 Long-term loans payable (Note 1) 141,491 144,059 2,568 Total ¥775,134 ¥778,049 ¥2,914 Derivatives (Note 3) ¥ 1,597 ¥ 1,597 ¥ —
Notes: 1. The current portion of Long-term loans payable is included in Long-term loans payable. 2. The current portion of Bonds payable is included in Bonds payable. 3. Net debts and credits arising from derivative transactions are presented in each net value, and a value of a net debt after totaling of credit and debt is shown in parentheses.
Yen Million December 31, 2011 Carrying amount Fair value Unrealized gain (loss) Cash and deposits ¥ 15,562 ¥ 15,562 ¥ — Notes and accounts receivable–trade 325,622 325,622 — Investment securities 4,848 4,848 — Total ¥346,033 ¥346,033 ¥ — Notes and accounts payable–trade ¥294,276 ¥294,276 ¥ — Accounts payable–other 177,452 177,452 — Short-term loans payable (Note 1) 45,675 45,675 — Commercial paper 52,000 52,000 — Bonds payable 35,000 35,418 418 Long-term loans payable (Note 1) 145,687 147,719 2,031 Total ¥750,091 ¥752,540 ¥2,449 Derivatives (Note 2) ¥ 364 ¥ 364 ¥ —
Notes: 1. The current portion of Long-term loans payable is included in Long-term loans payable. 2. Net debts and credits arising from derivative transactions are presented in each net value, and a value of a net debt after totaling of credit and debt is shown in parentheses.
ASSETS LIABILITIES Cash and deposits and Notes and accounts Notes and accounts payable–trade, Accounts payable– receivable–trade other, Short-term loans payable, and Commercial paper The carrying values of these items approximate fair value because of their The carrying values of these items approximate fair value because of their short maturities. short maturities. Investment securities Bonds payable The fair values of investment securities are measured at the quoted market The fair values of bonds payable are calculated by the total amount of price of the stock exchange for the equity instruments. The information of principal and interest at discounted interest rates based on the expected the fair value for the investment securities by classification is included in rate of new issuance. Note 5. Long-term loans payable The fair values of long-term loans payable are calculated by the total amount of principal and interest at discounted interest rates based on the expected rate of new debts.
DERIVATIVES The information of the fair value for derivatives is included in Note 12. (b) Financial instruments whose fair value cannot be reliably determined Yen Million 2012 2011 Investments in equity instruments that do not have a quoted market price in an active market ¥32,976 ¥33,852
88 (5) MATURITY ANALYSIS FOR FINANCIAL ASSETS Yen Million Due after one year Due after five years December 31, 2012 Due in one year or less through five years through ten years Due after ten years Profile Cash and deposits ¥ 18,175 ¥ — ¥— ¥— Notes and accounts receivable–trade 376,675 876 — — Total ¥394,851 ¥876 ¥— ¥— Management Message Yen Million Due after one year Due after five years December 31, 2011 Due in one year or less through five years through ten years Due after ten years Cash and deposits ¥ 15,562 ¥— ¥— ¥— Notes and accounts receivable–trade 325,622 — — — Total ¥341,184 ¥— ¥— ¥—
Please see Note 7 for annual maturities of long-term debt and obligations under leases, respectively. Review of Operations 12. DERIVATIVES
(1) CONDITIONS OF TRANSACTIONS In the normal course of business, the Companies use derivatives contracts, and options of crude oil, oil products, and tanker freight. to manage their exposures to market risks in compliance with All such derivatives involve risks, including the credit risk of their internal policies. nonperformance by counterparties. In order to minimize the The Companies do not use derivatives for speculative pur- credit risk of nonperformance by counterparties, the Companies
poses. These instruments include foreign exchange contracts, enter into derivative contracts with major financial institutions and Human Resources foreign currency options, interest rate swaps, futures, forward trading companies that have a high credit rating.
(2) CURRENT VALUE OF DERIVATIVES Derivative transactions to which hedge accounting is not applied as of December 31, 2012 and 2011 Yen Million December 31, 2012 Notional amount Notional amount due after one year Fair value Unrealized gain (loss) Foreign currency forward contracts To buy (US$) ¥69,234 ¥ — ¥1,575 ¥1,575 HSSE To sell (US$) 19,476 — (259) (259) ¥1,315 ¥1,315 Commodity-related transactions—Crude oil futures contracts To sell ¥ 839 ¥ — ¥ (29) ¥ (29) Community and Social Commodity-related transactions—Oil products futures contracts Contribution Activities To buy ¥ 1,614 ¥ — ¥ 140 ¥ 140 To sell 1,603 — (111) (111) Commodity-related transactions—Crude oil forward contracts To buy ¥ 35 ¥ — ¥ 73 ¥ 73 Commodity-related transactions—Oil products forward contracts To buy ¥ 124 ¥ — ¥ 1 ¥ 1 To sell 127 — 2 2
¥ 75 ¥ 75 Corporate Governance Financial Section and Corporate Data
89 Yen Million December 31, 2011 Notional amount Notional amount due after one year Fair value Unrealized gain (loss) Foreign currency forward contracts To buy (US$) ¥50,532 ¥ — ¥ (25) ¥ (25) To buy (€) 15,069 — (129) (129) To sell (US$) 8,070 — (2) (2) To sell (€) 4,044 — 16 16 ¥ (141) ¥(141) Commodity-related transactions—Crude oil futures contracts To buy ¥ 447 ¥ — ¥ 13 ¥ 13 To sell 2,299 — (40) (40) Commodity-related transactions—Oil products futures contracts To buy ¥ 981 ¥ — ¥ 46 ¥ 46 To sell 703 — (29) (29) Commodity-related transactions—Crude oil forward contracts To buy ¥10,872 ¥35 ¥ 75 ¥ 75 To sell 15,767 — 296 296 Commodity-related transactions—Oil products forward contracts To buy ¥ 2,002 ¥ — ¥ 7 ¥ 7 To sell 8,169 — 136 136 ¥ 506 ¥ 506
Derivative transactions to which hedge accounting is applied as of December 31, 2012 Yen Million Notional amount due December 31, 2012 Hedge accounting method Hedged item Notional amount after one year Fair value Foreign currency forward contracts To buy (US$) Deferral hedge Foreign forecasted ¥ 589 ¥ — ¥ 16 accounting transactions ¥ 16 Interest rate swap Special hedge Interest of Long-term ¥15,000 ¥15,000 ¥ (92) (fixed rate payment, floating rate receipt) accounting treatment loans payable ¥ (92) Commodity-related transactions— Crude oil futures contracts To buy Deferral hedge Crude oil ¥ 80 ¥ — ¥ 6 accounting Commodity-related transactions— Crude oil forward contracts To buy Deferral hedge Crude oil ¥ 972 ¥ — ¥196 accounting To sell Deferral hedge Crude oil 1,230 — 6 accounting Commodity-related transactions— Oil products forward contracts To buy Deferral hedge Oil products ¥ 928 ¥ — ¥ (3) accounting To sell Deferral hedge Oil products 2,380 — (15) accounting ¥190
13. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Major elements of selling, general and administrative expenses for the years ended December 31, 2012 and 2011 Yen Million 2012 2011 Transportation ¥ 38,787 ¥ 37,521 Salaries 35,536 35,990 Rents 6,225 6,013 Depreciation 7,294 7,274 Research and development expenses 5,840 5,041 Other 39,735 36,949 ¥133,419 ¥128,790
90 14. IMPAIRMENT LOSS
As a minimum unit for generating cash flows, service stations were as- The impairment loss was recorded at the amount by which the carry- Profile sessed for impairment individually, and other property, plant and equip- ing amount of each asset group exceeded its recoverable value. For the ment were grouped by segments of management accounting. Assets year ended December 31, 2012, the Companies recognized an impair- used for rent and idle assets were assessed individually. ment loss of ¥978 million on 47 groups (¥11,423 million on 61 groups Recoverable value was assessed by comparing the estimated net in 2011) of impaired property, plant and equipment, which was ac- selling price and value in use. The net selling price was mainly adopted counted for as an extraordinary loss. Impairment loss recorded primarily Management Message for idle assets and value in use for other assets. related to the significant decrease in the market value of the Companies’ In the case of material assets, such net selling price is determined by land as well as to the overall deterioration of their business environment. real-estate appraisal standards. Impaired asset groups consisted of the following: To calculate value in use, the future cash flows were discounted at 3.5% (4.5% in 2011).
Yen Million Review of Operations 2012 Land Others Total Service stations (17 groups) ¥ 21 ¥121 ¥143 Idle assets (30 groups) 357 476 834 ¥978
Yen Million 2011 Human Resources Machinery Land and equipment Others Total Service stations (23 groups) ¥386 ¥ — ¥ 207 ¥ 593 Plant (1 group) — 4,677 3,904 8,581 Idle assets (37 groups) 225 — 2,021 2,247 ¥11,423
15. COLLATERAL ASSETS
(1) COLLATERAL ASSETS HSSE Yen Million 2012 Cash and deposits ¥ 3,568 Notes and accounts receivable–trade 1,445 Raw materials and supplies 76 Community and Social Buildings and structures 13,721 Contribution Activities Tanks 4,596 Machinery, equipment and vehicles 52,398 Land 21,583 Other 0 ¥97,391
(2) SECURED DEBTS Corporate Governance Yen Million
2012 Long-term loans payable ¥ 5,404 Short-term loans payable 1,301 Accounts payable–other 55,468 ¥62,174
16. CONTINGENT LIABILITIES Financial Section and Corporate Data The Companies had the following contingent liabilities as of December 31, 2012 and 2011. Yen Million 2012 2011 Guarantees for: Non-consolidated subsidiaries, affiliates, and other companies ¥2,175 ¥3,495 Employees (housing loan) 649 748 ¥2,824 ¥4,243
91 The Company is subject to legal proceedings claims and liabilities which arise in the ordinary course of business. In the opinion of management, the amount of the ultimate liability with respect to those actions will not materially affect the Companies’ financial position or results of operations and cash flows.
17. COMPREHENSIVE INCOME
The components of other comprehensive income for the year ended December 31, 2012 were as follows: Yen Million 2012 Unrealized gain (loss) on available-for-sale securities Gains (losses) arising during the year ¥(146) Reclassification adjustments to profit or loss 9 Amount before income tax effect (137) Income tax effect (77) Total ¥(214) Deferred gain (loss) on derivatives under hedge accounting Gains (losses) arising during the year ¥(127) Reclassification adjustments to profit or loss 329 Amount before income tax effect 201 Income tax effect (76) Total ¥ 125 Share of other comprehensive income in affiliates Gains (losses) arising during the year ¥ (29) Reclassification adjustments to profit or loss 14 Total ¥ (14) Total other comprehensive income ¥(104)
18. RELATED PARTY TRANSACTIONS
When transactions of the Company with its related parties are more than 10% of the consolidated sales proceeds, or 10% of the total amount of the consolidated cost of sales and selling, general and administrative expenses, they are disclosed. The Company discloses material balances and transactions with related parties when such balances and transactions represent more than 1% of the consolidated total assets.
(1) RELATED PARTIES–CORPORATIONS For the year ended December 31, 2012
Capital Voting right share Yen Million Name (Million) owing (Share owned) Transactions Closing balances Saudi Arabian Oil Co., Ltd. ¥ — (Indirect 15.0%) Purchases of crude oil and ¥788,706 Accounts payable (trade) ¥59,209 oil products Seibu Oil Co., Ltd. ¥8,000 Direct 38.0% Purchase of oil products 448,261 Accounts payable (trade) 48,000 Advanced purchase of — Accounts receivable (trade) 32,260 crude oil Marubeni Energy Corporation ¥2,350 Direct 33.4% Sale of oil products 157,205 Accounts receivable (trade) 18,232 Shell Chemicals Japan Ltd. ¥ 250 NA Sales of oil products and 126,100 Accounts receivable (trade) 17,676 petrochemicals Shell Eastern Trading (Pte) Ltd. US$714 NA Purchases of crude oil and 199,277 Accounts payable (trade) 15,324 oil products
For the year ended December 31, 2011
Capital Voting right share Yen Million Name (Million) owing (Share owned) Transactions Closing balances Saudi Arabian Oil Co., Ltd. ¥ — (Indirect 15.0%) Purchases of crude oil and ¥805,205 Accounts payable (trade) ¥37,437 oil products Seibu Oil Co., Ltd. ¥8,000 Direct 38.0% Purchase of oil products 462,652 Accounts payable (trade) 46,804 Advanced purchase of — Accounts receivable (trade) 19,622 crude oil Marubeni Energy Corporation ¥2,350 Direct 33.4% Sale of oil products 130,716 Accounts receivable (trade) 14,443 Shell Chemicals Japan Ltd. ¥ 250 NA Sales of oil products and 322,705 Accounts receivable (trade) 9,662 petrochemicals Shell Eastern Trading (Pte) Ltd. US$714 NA Purchases of crude oil and 241,876 Accounts payable (trade) 23,435 oil products
Notes: 1. The prices of crude oil and oil products are determined by negotiations in the consideration of market price. 2. Consumption tax is not included.
92 (2) RELATED PARTIES–INDIVIDUALS There are no material transactions and balances of the Companies with related individuals, including shareholders and directors, representing more than
¥10 million for the years ended December 31, 2012 and 2011. Profile
19. SEGMENT INFORMATION
(1) OVERVIEW OF REPORTABLE SEGMENTS The “Oil business” manufactures and sells gasoline, naphtha, kero-
The Companies’ reportable segments are those for which separately sene, diesel oil, fuel oil, lubricants, LP gas, asphalt, and petrochemical Management Message financial information is available and the Board of Directors carries out products. The “Energy solution business” incorporates the manufacture periodic review to allocate management resources and evaluate business and sale of solar cells modules and wholesale supplies of electricity. performance. The Companies are mainly engaged in the manufacture and sale (2) METHODS OF MEASUREMENT FOR THE AMOUNTS OF of energy-related products including oil products, solar cells, and electric- SALES, PROFIT (LOSS), ASSETS, LIABILITIES, AND OTHER ity. The Company and its subsidiaries, serving as independent manage- ITEMS FOR EACH REPORTABLE SEGMENT ment units of each business, create comprehensive strategies and The accounting policies of each operating segment are consistent with Review of Operations implement business activities about its products and services. those disclosed in Note 2, “SUMMARY OF SIGNIFICANT ACCOUNT- The Companies activities are composed of two reportable segments, ING POLICIES.” “Oil business” and “Energy solution business,” each of which is involved Segment profit is stated on an operating income basis. Inter-segment in the sale of products and services. The businesses which are not in- sales and transfers are determined based on the prevailing market prices. cluded in reportable segments are shown in “Other.”
(3) INFORMATION ABOUT SALES, PROFIT (LOSS), ASSETS, LIABILITIES, AND OTHER ITEMS IS AS FOLLOWS. Human Resources For the year ended December 31, 2012 Yen Million Reportable segment Energy solution Oil business business Sub-total Other Total Adjustments Consolidated Sales Sales to customers ¥2,539,754 ¥ 78,262 ¥2,618,016 ¥11,245 ¥2,629,261 ¥ — ¥2,629,261 Inter-segment sales and transfers 9,284 7,451 16,735 4,328 21,064 ¥(21,064) ¥ — Total ¥2,549,038 ¥ 85,713 ¥2,634,752 ¥15,574 ¥2,650,326 ¥(21,064) ¥2,629,261 Segment profit (loss) ¥ 28,128 ¥ (15,435) ¥ 12,693 ¥ 2,031 ¥ 14,724 (27) 14,697
Segment assets ¥1,053,639 ¥156,166 ¥1,209,806 ¥35,523 ¥1,245,329 ¥(12,135) ¥1,233,193 HSSE Other: Depreciation and amortization ¥ 26,649 ¥ 16,412 ¥ 43,062 ¥ 557 ¥ 43,620 ¥ — ¥ 43,620 Amortization of goodwill and negative goodwill 212 (28) 183 — 183 — 183 Equity in losses of affiliates (974) 49 (924) — (924) — (924) Community and Social Contribution Activities Impairment loss 978 — 978 — 978 — 978 Goodwill at December 31, 2012 (228) (86) (314) — (314) — (314) Increase in property, plant and equipment and intangible assets 18,325 4,635 22,961 294 23,256 — 23,256
Notes: 1. The segment “Other” refers to the total of other business segments that are not included in the reportable segments, including real estate, construction works, and sale and lease of auto accessories, etc. 2. The adjustments of segment profit ¥(27) million mainly represents elimination of inter-segment transactions. 3. The adjustments of segment assets ¥(12,135) million mainly represents elimination of inter-segment receivables. 4. Segment profit is adjusted with operating income in the consolidated statements of income. Corporate Governance Financial Section and Corporate Data
93 For the year ended December 31, 2011 Yen Million Reportable segment Energy solution Oil business business Sub-total Other Total Adjustments Consolidated Sales Sales to customers ¥2,695,278 ¥ 65,799 ¥2,761,078 ¥10,339 ¥2,771,418 ¥ — ¥2,771,418 Inter-segment sales and transfers 2,640 4,956 7,596 3,865 11,462 (11,462) — Total ¥2,697,918 ¥ 70,756 ¥2,768,674 ¥14,205 ¥2,782,880 ¥(11,462) ¥2,771,418 Segment profit (loss) ¥ 87,267 ¥ (28,895) ¥ 58,371 ¥ 2,056 ¥ 60,427 ¥ (138) ¥ 60,288 Segment assets ¥1,029,751 ¥156,915 ¥1,186,666 ¥35,283 ¥1,221,950 ¥(13,507) ¥1,208,442 Other: Depreciation and amortization ¥ 27,754 ¥ 14,939 ¥ 42,693 ¥ 636 ¥ 43,329 ¥ — ¥ 43,329 Amortization of goodwill and negative goodwill 371 (28) 342 — 342 — 342 Equity in earnings of affiliates 1,870 (66) 1,804 — 1,804 — 1,804 Impairment loss 2,841 8,581 11,423 — 11,423 — 11,423 Goodwill at December 31, 2011 (136) (115) (251) — (251) — (251) Increase in property, plant and equipment and intangible assets 14,465 27,272 41,738 177 41,915 — 41,915
Notes: 1. The segment “Other” refers to the total of other business segments that are not included in the reportable segments, including real estate, construction works, and sale and lease of auto accessories, etc. 2. The adjustments of segment profit ¥(138) million mainly represents elimination of inter-segment transactions. 3. The adjustments of segment assets ¥(13,507) million mainly represents elimination of inter-segment receivables. 4. Segment profit is adjusted with operating income in the consolidated statements of income.
(4) RELATED INFORMATION a) Information for each product and service Disclosure of this information is not presented since similar information is included in segment information. b) Geographic segment information 1) Sales Disclosure of this information is not presented since domestic sales make up more than 90% of consolidated sales. 2) Property, plant and equipment Disclosure of this information is not presented since property, plant and equipment located in Japan makes up more than 90% of consolidated net book value. c) Information by major customer For the year ended December 31, 2012 Disclosure on this information is not presented since there were no customers that accounted for more than 10% of consolidated sales.
For the year ended December 31, 2011 Information by major customer for the year ended December 31, 2011 is as follows. Yen Million Name Sales Segment Shell Chemicals Japan Ltd. ¥322,720 Oil business
94 INDEPENDENT AUDITOR’S REPORT Profile Management Message Review of Operations Human Resources HSSE Community and Social Contribution Activities Corporate Governance Financial Section and Corporate Data
95 NETWORK (As of April 1, 2013)
Hokkaido Branch
Niigata Petroleum Import Terminal
Tohoku Branch
Yokkaichi Refinery of Showa Yokkaichi Sekiyu Co., Ltd.
Yamaguchi Refinery of Chubu Branch Ishioka Training Center Seibu Oil Co., Ltd. Chugoku Branch Head Office Metropolitan Branch Kinki Branch Kanto Branch Solar Frontier K.K. Head Office
Central Research Laboratory Atsugi Research Center
Keihin Refinery of Toa Oil Co., Ltd. Kyushu Branch
Head Office Internal Audit Division Energy Solution Business Center Solar Frontier Petro Chemical Business Promotion Team • Power Business Division Transformation Team • Solar Frontier K.K. First Miyazaki Plant Second Miyazaki Plant Oil Business Center Group Functions Kunitomi Plant • Commercial Sales Division • Overseas Intellectual Property Strategy Department • Lubricants & Bitumen Division • Health, Safety, Security and Environment (HSSE) Division • Supply Division • Integrated Corporate Planning Division • Research & Development Division • Integrated Finance & Control Division • Crude Oil & Marine Division • Public Affairs Division • International Sales Division • Credit & Financial Risk Management Team • New Business Promotion Division • IT Planning Department • Manufacturing Division • Integrated Human Resources Division • Marketing Planning Division • General Affairs Division • Oil Products Division • Internal Control Promotion Division • Sales Division • Secretariat Department • Home Solution Division • Procurement Team • Retail Sales Division • Integrated Legal Division • Retail EPOCH Project Team • Distribution & Operations Division
96 Refineries and import terminals Offices, depots, LPG terminals, and asphalt terminals Profile * Head Office, branches, R&D center, and other business locations Management Message
Royal Dutch Shell plc (Netherlands)
Solar Frontier Europe
(Germany) Review of Operations
Solar Frontier Alcobar Office Solar Frontier Americas (Saudi Arabia) (United States) Saudi Aramco (Saudi Arabia) * Human Resources
Abu Dhabi Representative Office (UAE) HSSE * Photographs: Provided by Royal Dutch Shell plc and Saudi Aramco Community and Social Contribution Activities
Ishioka Training Center Lubricants Blending Plants LPG Terminals
• Yokohama • Shimizu Central Research Laboratory • Kobe • Hekinan
Branches Depots Asphalt Terminals Corporate Governance • Hokkaido Branch • Kushiro Nishiko • Yokohama • Tohoku Branch • Shiogama • Takamatsu
• Metropolitan Branch • Sado • Mie • Kanto Branch • Hiroshima • Chubu Branch • Karatsu Solar Module Plants and • Kinki Branch Research Centers • Chugoku Branch • Atsugi Research Center • Kyushu Branch Group Refineries • First Miyazaki Plant
• Yokkaichi Refinery of Showa Yokkaichi Financial Section and • Second Miyazaki Plant
Sekiyu Co., Ltd. Corporate Data Niigata Petroleum • Keihin Refinery of Toa Oil Co., Ltd. • Kunitomi Plant Import Terminal • Yamaguchi Refinery of Seibu Oil Co., Ltd.
97 MAJOR SUBSIDIARIES AND AFFILIATES (As of December 31, 2012)
Company name Major businesses Consolidated subsidiaries (31 companies) Showa Yokkaichi Sekiyu Co., Ltd. Oil refining Toa Oil Co., Ltd. Oil refining Showa Shell Sempaku K.K. Domestic and international shipping operations Heiwa Kisen Kaisha, Ltd. Depots operation Shipping brokerage Shoseki Engineering & Construction Co., Ltd. Design and construction of mainly oil-related industrial facilities and service stations Nippon Grease Co., Ltd. Grease and lubricant sales Solar Frontier K.K. Development, manufacture, and sales of solar modules and systems Shoseki Kako Co., Ltd. Manufacture, sales, and installation of waterproofing materials Manufacture and sales of oil products and bitumen paving materials K.K. Rising Sun Automobile parts sales Equipment lease Insurance agent On-Site Power Co., Ltd. Dispersed power provision Wakamatsu Gas K.K. Sales of oil products City gas business Genex Co., Ltd. Power production Leef Energy K.K. Oil products sales K.K. Sun Road Oil products sales Jonen Co. Oil products sales K.K. Shinyo Sekiyu Oil products sales Chuo Shell Sekiyu Hanbai K.K. Oil products sales Tokyo Shell Pack K.K. Oil products sales Nakagawa Oil Co., Ltd Oil products sales Petro Star Kansai Co., Ltd. Oil products sales Nissho Koyu K.K. Oil products sales Nagase Oil Ltd. Oil products sales Enessance Holdings Co., Ltd. Sales of liquefied gas Construction related to high pressure gas and oil Sales of residential and office automation equipment 8 other companies
Equity-method affiliates (13 companies) Seibu Oil Co., Ltd. Oil refining Japan Oil Network Co., Ltd. Storing Niigata Joint Oil Stockpiling Co., Ltd. Stockpiling Dia Shoseki Co., Ltd. Oil products sales Shell Sekiyu Osaka Hatsubaisho K.K. Oil products sales Central Sekiyu Gas Co., Ltd. Oil products sales Mieseki Shoji K.K. Oil products sales Shell Tokuhatsu K.K. Oil products sales Joyo Shell Sekiyu Hanbai K.K. Oil products sales Marubeni Energy Corporation Oil products sales Toyotsu Petrotex Corporation Oil products sales TS Aromatics Ltd. Sales of petrochemical products Ohgishima Power Co., Ltd. Power production
98 INVESTOR INFORMATION (As of December 31, 2012)
Date of Establishment: January 1,1985 Authorized Number of Shares: 440,000,000 shares Profile Number of Shares Issued: 376,850,400 shares Paid-in Capital: ¥34,197,585,900 Number of Employees: 946 Total Number of Service Stations: 3,633 Number of Shareholders: 63,793 Management Message Securities Listing: Tokyo Stock Exchange Ticker Code: 5002 Transfer Agent: Sumitomo Mitsui Trust Bank, Limited 2-8-4, Izumi, Suginami-ku, Tokyo 168-0063, Japan Independent Auditors: PricewaterhouseCoopers Aarata
General Shareholders’ Meeting: March Review of Operations
Number of shares held Percentage of total common Major Shareholders (Thousands) shares outstanding The Shell Petroleum Co., Ltd. 125,261.2 33.24% Aramco Overseas Company B.V. 56,380.0 14.96 The Master Trust Bank of Japan, Ltd. (Trust Account) 14,210.2 3.77 Japan Trustee Services Bank, Ltd. (Trust Account) 13,712.0 3.64 Human Resources The Anglo-Saxon Petroleum Co., Ltd. 6,784.0 1.80 Kawasaki Kisen Kaisha, Ltd. 3,503.7 0.93 Trust & Custody Services Bank, Ltd. (Securities Investment Trust Account) 3,032.7 0.80 Japan Trustee Services Bank, Ltd. (Trust Account 4) 2,365.0 0.63 Deutsche Securities Inc. 2,016.7 0.54 SSBT OD 05 OMNIBUS ACCOUNT—TREATY CLIENTS 2,010.3 0.53 Total 229,275.9 60.84 HSSE
Stock Price Range Stock price (left) TOPIX (right) (Yen) (Yen) 900 1,200 900 1,200 Community and Social 750 Contribution Activities 750 1,000 1,000 600 600 800 450 800 450
300 600 300 600 2011 2012
2011 2012 Corporate Governance Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sep. Oct. Nov. Dec. Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sep. Oct. Nov. Dec. Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sep. Oct. Nov. Dec. Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sep. Oct. Nov. Dec.
Trading Volume (Thousands of shares) (Thousands of shares) 100,000 100,000
75,000 75,000 Financial Section and
50,000 Corporate Data 50,000
25,000 25,000
0 0 2011 2012 2011 2012 Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sep. Oct. Nov. Dec. Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sep. Oct. Nov. Dec. Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sep. Oct. Nov. Dec. Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sep. Oct. Nov. Dec.
99 July 2013 Showa Shell Sekiyu K.K. Printed in Japan
Daiba Frontier Bldg., 2-3-2, Daiba, Minato-ku, Tokyo 135-8074, Japan Tel: +81-3-5531-5591 http://www.showa-shell.co.jp/english/
Showa Shell Sekiyu has been selected for the FTSE4Good Index (a socially responsible investment index) for nine consecutive years starting in 2004.
This corporate report was printed using vegetable oil ink and a waterless printing process.