ANNUAL REPORT 2017 Year Ended March 31, 2017 Topics in Fiscal Year 2016

2016 Apr. • Formed a petroleum products marketing company, Idemitsu Q8 Petroleum LLC, in Vietnam Sep. • Concluded to construct hydrogenated hydrocarbon resin plants in Taiwan Nov. • Signed a collaboration in OLED materials development with Merck Nov. • Concluded to modify ethylene plants of Chiba LLP’s Dec. • Concluded to expand production capacity of OLED materials plants in Korea Dec. • Acquired 31.3% of Showa Shell Sekiyu K.K. shares from Royal Dutch Shell Dec. • Commenced production at Laffan Refinery 2, Idemitsu has 2% stake, in Qatar

2017 Jan. • Established OLED materials development company in Switzerland Mar. • Commencement of commercial operation of geothermal binary power plants in Oita Mar. • Reduced refining capacity to 500K bpd in accordance with the government guidance

Contents 02 Financial Highlights 27 Material Agreements, etc. 04 To Our Stakeholders 28 Corporate Governance 21 Management Philosophy 39 Directors, Audit & Supervisory Board Members and Executive Officers 22 At a Glance 41 Financial Section 24 Research & Development 91 Investor Information Contribute to society with harmony between the economy and the environment by effectively securing and using energy and by developing functional materials.

Idemitsu Kosan Co.,Ltd. was founded in Moji, Kita-Kyushu in 1911 under the name Idemitsu Shokai to engage in oil distribution. Since its foundation, Idemitsu has worked hard under the fundamental principle of social contribution through business, always maintaining respect for human beings in carrying out business operations. During its 106-year history, the Company has utilized its expertise globally in a wide range of strategic businesses, such as petroleum products, petrochemical products, oil exploration and production, coal, and other businesses. The Idemitsu Group strives to contribute to the creation of a recycling society of the future by focusing on development of businesses in these fields.

P P • Fuel oil • Lubricants • Transportion of oil

P P NET SALES • Basic chemicals • Performance chemicals • Engineering plastics • Plastic processed products

R • Oil exploration and production • Coal • Geothermal resources • Uranium

O Note: FY and fiscal year indicated in this annual report refer to the fiscal year from April 1 to March 31 of the following year. • Electoronic materials • Agricultural biotechnology CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS This annual report contains forward-looking statements concerning the future plans, strategies and performance of Idemitsu Kosan Co.,Ltd. These forward-looking statements are not historical facts; rather, they represent assumptions and beliefs based on economic and financial data available as of the publication date. Actual operating results may therefore differ substantially from the Company’s expectations due to various factors, including but not limited to the following: (1) global economic conditions; (2) social trends; and (3) changes in the Company’s competitiveness caused by fluctuation of demand for its products and services.

ANNUAL REPORT 2017 01 Financial Highlights

Idemitsu Kosan Co.,Ltd. and Consolidated Subsidiaries Fiscal years ended March 31

Thousands of Millions of yen U.S. dollars*

FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2016 For the year Net sales ¥4,374,696 ¥5,034,995 ¥4,629,732 ¥3,570,202 ¥3,190,347 $28,437,002 Operating income 110,684 78,197 (104,798) (19,643) 135,234 1,205,406 Net income 50,167 36,294 (137,958) (35,993) 88,164 785,854 Net cash provided by operating activities 50,780 50,087 172,904 216,368 53,539 477,225 Net cash provided by investing activities (70,891) (179,811) (131,146) (98,052) (214,817) (1,914,765) Net cash provided by financing activities (45,657) 161,143 (98,253) (105,581) 136,143 1,213,509 Capital expenditures 71,020 107,472 147,406 57,630 46,102 410,931 Depreciation and amortization 53,988 63,120 66,744 80,282 70,200 625,730

At year-end Total assets 2,728,480 2,995,063 2,731,001 2,402,118 2,641,633 23,546,069 Total equity 687,948 743,786 630,384 537,660 619,932 5,525,740 Interest–bearing debt 896,380 1,081,931 1,006,207 909,586 1,052,336 9,379,945

Per share data** Net income per share 1,254.51 226.90 (862.50) (225.03) 551.19 4.91 Net assets per share 16,343.31 4,391.46 3,671.39 3,129.93 3,649.83 32.53 Cash dividends per share 200.0 125.0 50.0 50.0 50.0 0.45

Ratios Return on invested capital (ROIC)*** (%) 7.1 4.7 (6.3) (0.7) 8.6 — Return on equity (ROE) (%) 8.1 5.4 (21.4) (6.6) 16.3 — Shareholders’ equity ratio (%) 24.0 23.5 21.5 20.8 22.1 — Net debt/equity ratio (times) 1.2 1.3 1.5 1.6 1.6 —

Other data Number of shares issued (thousands of shares)** 40,000 160,000 160,000 160,000 160,000 — Number of employees (people) 8,684 8,749 8,829 9,203 9,139 — * Solely for the convenience of the reader, the consolidated financial statements as of and for the year ended March 31, 2017 have been translated into United States dollars at the rate of ¥112.19 = U.S.$1, the approximate rate of exchange prevailing on March 31, 2017. This translation should not be construed as a representation that all the amounts shown could be converted into U.S. dollars. ** The Company conducted a 1:4 stock split on its common shares with the effective date of January 1, 2014. Cash dividends per share of FY2013 are calculated under the assumption that the stock split had been conducted at the beginning of FY2013. *** ROIC = Operating income****/(total equity + interest - bearing debt) **** Operating income used to calculate ROIC includes equity in earnings/losses of affiliated companies and dividend income.

02 ANNUAL REPORT 2017 Net Sales Operating Income Net Income

Billions of yen Billions of yen Billions of yen 6,000 150 90

125 5,000 60 100 4,000 75 30 3,000 50

25 0 2,000 0 -30 1,000 -25

0 -100 -150 12 13 14 15 16 F 12 13 14 15 16 F 12 13 14 15 16 F

Shareholders’ Equity Interest-Bearing Debt Total Assets Shareholders’ Equity Ratio Net Debt/Equity Ratio

Billions of yen Billions of yen Billions of yen imes 3,000 900 30 1,200 6

2,500 750 25 1,000 5

2,000 600 20 800 4

1,500 450 15 600 3

1,000 300 10 400 2

500 150 5 200 1

0 0 0 0 0 12 13 14 15 16 F 12 13 14 15 16 F 12 13 14 15 16 F

Shareholders equity = quity Minority interests in consolidated subsidiaries Shareholders equity ratio = Shareholders equity/Total assets RO = Net income/Average of shareholders equity at beginning and end of period Net ebt/quity Ratio = (Interest-bearing debt - cash and cash equivalents and marketable securities)/shareholders equity

ANNUAL REPORT 2017 03 To Our Stakeholders

Analyses of Operating Results and Financial Position

(1) Analysis of Operating Results

1) General Economic Conditions and Environment Surrounding the Idemitsu Group

During the fiscal year ended March 31, 2017, the Japanese economy continued its mild upward momentum amid the improving consumer spending and employment conditions as well as the upturn in business confidence centered on the manufacturing industry in the context of a steady US economy, the progress of a weakened yen, and the recovery of Chinese economic performance. As for the domestic demand for petroleum products during fiscal 2016, while demand for gasoline slightly decreased due to the reaction to increased demand in fiscal 2015 caused by favorable summer weather, demand for middle distillate such as kerosene slightly increased thanks to lower temperatures than the previous fiscal year. While the operation of ethylene manufacturing facilities rose due to increased demand for petrochemical raw materials, demand for heavy fuel oil for the power industry decreased caused by the diversification of power sources. As a result, the overall demand for petroleum products remained almost unchanged from the previous fiscal year. Dubai crude oil prices remained on an upward trend around spring of 2016. However, they dropped as summer approached amid widening recognition of an excess supply. Thereafter, prices turned to an upward trend and exceeded $50/bbl because OPEC agreed to cut its oil production in late September and furthermore, they also agreed with non- OPEC countries to make a concerted effort to cut output in December. Nonetheless, they turned to a downward trend in March on account of the effect of increasing crude oil inventory in the US. Consequently, the average price of Dubai crude oil for fiscal 2016 rose $1.4/bbl from the preceding year to $46.9/bbl. Demand for petrochemical products during fiscal 2016 Takashi Tsukioka increased from the previous fiscal year. Domestic production Representative Director & Chief Executive Officer fared relatively well supported by a decrease in import volume due to the weaker yen. The annual average price of naphtha, a petrochemical raw material, dropped $48/ton from the previous fiscal year to $438/ton.

04 ANNUAL REPORT 2017 The exchange rate of the Japanese yen to the US dollar Crude Oil Price remained at an underlying trend of a strong yen until the SDl ubai middle of the year due to the influence of the Brexiters’ victory 70 in the EU exit vote in the UK. Afterwards the trend turned to a weak yen due to the expectation of an economic stimulus

0 package from Donald Trump, the winner of the US presidential election. The average exchange rate for fiscal 2016 increased

0 by ¥11.7/$ from the previous fiscal year to ¥109.4/$.

0 2) Operating Results 30 Under these circumstances, the Idemitsu Group’s net sales

20 for fiscal 2016 were ¥3,190.3 billion, down 10.6% from the 15 16 F previous fiscal year, due mainly to drops in crude oil prices on 1 2 3 1 2 3 a yen basis affected by the strong yen. Operating income was ¥135.2 billion improving by ¥154.9 billion in comparison with the previous fiscal year, affected chiefly by the improved margins of petroleum products, the Consolidated Operating Income increased profit in the resources business, and the effect of inventory valuation which turned profitable after a significant Billions of yen loss in the previous fiscal year. Net non-operating income was 10 ¥4.7 billion due mainly to the decreased currency revaluation loss, an increase by ¥7.0 billion from net non-operating loss 120 for the previous fiscal year. Ordinary income improved by 0 ¥161.9 billion from the previous fiscal year to ¥140.0 billion.

0 Net extraordinary loss was ¥17.0 billion, representing a year- on-year reduction of ¥16.1 billion, helped chiefly by decreased 30 impairment loss in the resources business.

0 In addition, the Company recorded income taxes of ¥32.5 billion and net income attributable to noncontrolling interests 30 of ¥2.4 billion. 100 As a result, net income attributable to owners of the parent 12 13 14 15 16 F was ¥88.2 billion, an improvement of ¥124.2 billion from the previous fiscal year.

ANNUAL REPORT 2017 05 Volume of Crude Oil Processed 3) Progress and Results of Business Utilization Rate Petroleum Products Segment oume of rude i rocessed tiiatio ate (aedera asis) In the petroleum products segment, the Company set as its 1000 kiloliters basic strategy the reinforcement of the competitiveness of the 3,000 100 domestic supply and marketing systems and the expansion of business in overseas markets, and took the following actions: 30,000 0 2,000 Fuel Oil Business 0 In the supply of petroleum products, the Company carried 20,000 out crude oil processing taking supply-demand and sales 1,000 0 conditions into account, and strived to promote reductions in

10,000 supply costs while still securing a stable supply of products. 20 Pursuant to the Second Announcement of Sophisticated ,000 Methods of Energy Supply Structures, the Company cut its

0 0 crude distillation unit capacity at the Hokkaido Refinery by 12 13 14 15 16 F 10,000 bbl/day, the Chiba Refinery by 10,000 bbl/day, and the Aichi Refinery by 15,000 bbl/day by the end of March 2017, respectively. The Company responded to changes in the balance of domestic supply and demand which was steadily decreasing and decided to integrate the Chiba Refinery and Petrochemical Plant within fiscal 2017, working toward the Fuel Product Sales Volume construction of a more competitive production structure. (Total volume of domestic sales) In the marketing and sales of petroleum products, the Company continuously reinforced its network of service 1000 kiloliters stations through opening new service stations, and remodeling 30,000 and revitalizing the existing ones. It also introduced a POS

2,000 system before its competitors and started to handle the SoftBank Card (prepaid card). In this way, the Company 20,000 attempted to increase customer convenience by leveraging the strength of its nationwide network. 1,000 As for business efforts in overseas markets, the

10,000 construction of Nghi Son Refinery and Petrochemical Complex in Vietnam has been completed in April 2017, with a view to ,000 embarking on commercial production in fiscal 2017. Also, in order to develop the fuel oil wholesale and retail business in 0 12 13 14 15 16 F Vietnam, the Company established Idemitsu Q8 Petroleum LLC with Kuwait Petroleum International Ltd. In Qatar, a Middle Eastern country, Laffan Refinery 2 constructed by Laffan Refinery Company Limited 2, in which the Company has invested, was completed and started production. In order to expand the business in growing overseas markets such as the Pacific Rim region and the Middle East, the Company improved the structure of overseas branches centering on IDEMITSU INTERNATIONAL (ASIA) PTE.LTD., a subsidiary in Singapore.

06 ANNUAL REPORT 2017 To Our Stakeholders

Lubricants Business Lubricant Sales Volume In fiscal 2016, the total amount of lubricants sold in Japan and

1000 kiloliters omestic abroad was close to 1.2 million kiloliters, hitting an all-time erseas 1,00 high. Moreover, working toward the construction of a strong sales and supply structure as well as the development and expansion of highly functional products for the global market, 1,200 the Company started operations of a new factory in Thailand and enhanced R&D functions in the US. 00

Consequently, net sales in the petroleum products segment 00 for fiscal 2016 fell 11.4% year-on-year to ¥2,438.2 billion, owing primarily to decreases in crude oil prices on a yen basis. 300 Operating income was ¥77.0 billion improving by ¥144.4 billion in comparison with the previous fiscal year on account of the 0 12 13 14 15 16 F improved product margins and the effect of inventory valuation which turned profitable after a significant loss in the previous cudes saes of oerseas iceses fiscal year. Profit arising from inventory valuation included in operating income was ¥31.0 billion.

Petrochemical Products Segment

In the petrochemical products segment, the Company set as its basic strategy the reinforcement of the competitiveness of the basic chemicals business through restructuring of the supply system and enhancement of the profitability of the performance materials business, and took the following actions:

Basic Chemicals Business In the basic chemicals business, working toward enhanced competitiveness through the diversification of raw materials, the Company decided to improve ethylene manufacturing facilities of the Chiba Chemical Manufacturing LLP which was jointly operated with Mitsui Chemicals, Inc. Also, under a favorable market environment, it maintained the stable operation of its major facilities and equipment such as manufacturing facilities for ethylene and aromatic compounds, thereby ensuring a stable supply of olefin and aromatic compounds to petrochemical complexes as well as for manufacture of the Company’s derivative products.

ANNUAL REPORT 2017 07 Performance Materials Business Petrochemical Products Sales Volume In the engineering plastics business, the Company had 1000 tons pressed ahead step by step since 2013 with the consolidation ,000 of the production of polycarbonate resin (Product name: TARFLON®) into Formosa Chemicals & Fibre Corporation 3,00 (“FCFC”) of Taiwan to which the Company had granted a 3,000 license. In fiscal 2016, the Company completed consolidation 2,00 of the production of special grade polycarbonates into FCFC

2,000 and started supply for high value-added applications such as chassis for information equipment and optical components 1,00 for vehicles. In this way, stable supply systems with greater 1,000 competitive advantages were established. With regard to ® 00 syndiotactic polystyrene resin (Product name: XAREC ),

0 which has excellent properties such as superior heat 12 13 14 15 16 F resistance, electrical insulation, and chemical resistance, used for electrical components for vehicles and mobile devices, the Company stepped up efforts to find new applications and expanded the annual production capacity of the Chiba Plant from 7,000 tons to 9,000 tons in April 2016. In the adhesive materials business, the Company began constructing, in cooperation with Formosa Petrochemical Corporation of Taiwan, a new plant to manufacture hydrogenated petroleum resin (Product name: I-MARV®), whose demand has been on the rise as an excellent tackifier for hot-melt adhesives, in order to suit growing customer needs. The Company also strived to expand both domestic and overseas markets for functional soft polypropylene (Product name: L-MODU®), which has a melting point that is significantly lower than that of existing crystalline polypropylene, while conducting research to find product applications other than its traditional use as an adhesive for sanitary items and a modifier for non-woven fabrics.

Consequently, net sales in the petrochemical products segment for fiscal 2016 were ¥461.2 billion, down 11.4% year-on-year, due mainly to drops in naphtha prices. Operating income fell 5.5% year-on-year to ¥40.0 billion because of such factors as the impact of currency exchange owing to the strong yen which surpassed favorable factors including the expanded margins of products like styrene monomer. Profit arising from inventory valuation included in operating income was ¥2.1 billion.

08 ANNUAL REPORT 2017 To Our Stakeholders

Resources Segment

In the resources segment, the Company set as its basic policy the continuation of stable production, the appreciation of assets held by the Company through thorough cost reduction and productivity improvement, and reviewing the asset portfolio. Actions taken are as follows:

Oil Exploration and Production Business Crude Oil Production* With regard to exploration activities, the Company discovered 1000 arrels per day orwa accumulations of oil and gas in the Cara structure of the 0 Norwegian North Sea in September 2016. Moreover, the ietam Company conducted studies related to the future development 0 of oil and gas fields which were discovered off the coast of Vietnam in 2014.

30 In the existing oil fields, the Company carried out operation improvement activities in addition to stable operation and

20 production. Therefore, it produced crude oil and natural gas in an amount of 43 thousand barrels of crude oil-equivalent

10 per day in the Norwegian North Sea, the UK North Sea, and Vietnam.

0 Net sales in the oil exploration and production business for 12 13 14 15 16 F fiscal 2016 decreased by 1.4% from the prior year to ¥73.6 ased o iterest owed b demitsu roup billion, affected mainly by a drop in crude oil prices despite an increase in production volume. Operating income was ¥8.5 billion, an improvement of ¥11.4 billion from the previous fiscal year, as favorable factors such as the weakened currencies of Coal Production* commodity countries offset the lower crude oil prices.

Muswebrook mie oabri mie Coal Business and Others sham mie Tarrawoa mie Regarding the coal business, amid a wide swing in coal prices Maiau 1000 tons due mainly to China’s policy trend, the Company made efforts 1,000 to enhance competitiveness through improving productivity at all of its mines including those in Indonesia and cost reduction 12,000 through integrated purchasing and others. Consequently, 10,000 the Company produced a record-high of approximately 13 million tons of coals in total from its own mines in Australia ,000 and Indonesia. Moreover, three companies, namely the ,000 Company, NYK Trading Corporation, and NYK Line, agreed to jointly sell “ULTY”, NYK Trading’s optimization system to ,000 control coal boilers, and to jointly develop a new ULTY model 2,000 that integrates the existing ULTY with the Company’s highly

0 efficient combustion technique. 12 13 14 15 16 F As for the uranium business, the Company sells uranium ased o iterest owed b demitsu roup concentrates produced at the Cigar Lake Mine in Canada.

ANNUAL REPORT 2017 09 With regard to the geothermal energy business, the Company continued smooth operations in the Takigami area of Oita Prefecture and started commercial operations of a binary cycle power station with a generating capacity of 5,050 kW in the area from March 2017. In addition, the Company carried out surveys aimed at expanding business in the Amemasudake district of Hokkaido, the Oyasu district of Akita Prefecture, and the Bandai district of Fukushima Prefecture. Net sales in the coal business and others for fiscal 2016 decreased 0.3% from the preceding fiscal year to ¥153.7 billion due mainly to the commodity countries’ weakened currencies against the yen despite increases in coal prices. Operating income was ¥8.1 billion, an improvement of ¥5.9 billion from the preceding fiscal year, owing to the weakened currencies of commodity countries and the effect of cost reduction.

As a result, total net sales of the resources segment slid by 0.7% year-on-year to ¥227.3 billion with operating income of ¥16.6 billion, an increase in ¥17.2 billion from the preceding fiscal year.

Other Segments

Among other segments, as for the electronic materials business, the agricultural biotechnology business, the gas business, and the renewable energy business, the Company had achieved the following:

Electronic Materials Business In the field of OLED materials, the Company enhanced the production capacity of its factory in Paju-si, Korea and added more evaluation equipment in the factory allowing the Company to respond to the rising demand for OLED materials along with the future expansion of the popularity of OLED displays. Furthermore, with the aims of facilitating the development of high-performance OLED materials, the Company concluded with Merck KGaA of Germany a collaboration agreement concerning mutual utilization of both companies’ patents in the field of OLED materials. It also established an OLED materials development company in Basel, Switzerland to succeed to the development structure from BASF Schweiz AG, a partner for technological exchanges.

10 ANNUAL REPORT 2017 To Our Stakeholders

Agricultural Biotechnology Business In the field of agriculture and greening materials, the Company is currently working on activities to expand the sales of its microbe control agent, a disinfectant, to advanced producers’ groups through its sales subsidiary, Idemitsu Agri co., ltd. In the field of feed additives, the Company progressed with efforts to increase the adoption of “RUMINUP®” which has the effect of keeping the intestinal environment of cows and beef cattle normal, and “Crosstop®” which has the same effect on chickens at mainly large-scale farms in Japan as well as efforts to develop channels to sell these products overseas.

Gas Business In order to move ahead with studies on and preparation for the natural gas power generation business, the Company established Himeji Natural Gas Power Generation Co., Ltd. in April 2016 through joint capital investment with Osaka Gas Co., Ltd. on the site of the Company’s former Hyogo Refinery (Himeji City, Hyogo Prefecture) and is currently implementing a commercialization study. Petrogas Energy Corp., whose shares the Company holds through AltaGas Idemitsu Joint Venture Limited Partnership which the Company jointly established with AltaGas Ltd. of Canada, endeavored to enhance exports of LPG (liquefied petroleum gas) from the Ferndale terminal (the State of Washington) on the West Coast of the US to Japan and other Asian countries.

Renewable Energy Business As part of efforts to utilize idle land in the renewable energy business, the Company operates solar power generation facilities (mega-solar power plants) in Moji Ward, Kitakyushu City; Himeji City, Hyogo Prefecture; and Iwaki City, Fukushima Prefecture. In the field of biomass power generation, Tosa Green Power Co., Ltd. with an output capacity of 6,250 kW, 50% of whose shares are held by the Company, and Fukui Green Power Co., Ltd. with an output capacity of 7,000 kW, 10% of whose shares are held by the Company, are in operation.

As a result, net sales for other segments for fiscal 2016 decreased by 8.6% to ¥63.6 billion, and operating income decreased by ¥3.7 billion to ¥5.1 billion, compared with the preceding fiscal year.

ANNUAL REPORT 2017 11 4) Forecasts of Consolidated Financial Results for FY2017

The Company expects net sales for FY2017 to be ¥3,500.0 billion, an increase of 9.7% compared with FY2016, due mainly to expected increase in average crude oil prices during the fiscal period. Operating income is expected to be ¥124.0 billion, a drop of 8.3%, because the effect of inventory valuation in the previous fiscal year has disappeared despite an expected recovery of petroleum product margins, and ordinary income is expected to be ¥140.0 billion, almost unchanged from the preceding fiscal year. Net extraordinary loss is expected to be ¥6.0 billion, a reduction of loss of ¥11.0 billion compared with FY2016, due largely to a decrease in impairment loss. Net income attributable to owners of the parent is expected to be ¥89.0 billion, an increase of 0.9% compared with the prior fiscal year.

The above forecasts for the fiscal year ending March 31, 2018 are based on the assumptions below: Dubai Crude Oil Price: US$50 per bbl Foreign Exchange Rate: ¥110 per US$

(2) Overview concerning Financial Position

1) Overview of Financial Position

Total assets as of March 31, 2017 were ¥2,641.6 billion, an increase of ¥239.5 billion compared with the end of the previous fiscal year, due partly to an investment into Showa Shell Sekiyu K.K. (“Showa Shell”) and increases in accounts receivable-trade and inventories owing to a rise in crude oil prices. Total liabilities as of March 31, 2017 were ¥2,021.7 billion, an increase of ¥157.2 billion compared with the end of the previous fiscal year, which was attributable partly to an increase in interest-bearing debt (¥1,052.3 billion) and an increase in notes and accounts payable-trade due to the rise in crude oil prices. Total net assets were ¥619.9 billion, an increase of ¥82.3 billion compared with the end of the previous fiscal year, which was attributable to net income attributable to owners of the parent of ¥88.2 billion recorded during FY2016. As a result, the equity ratio as of March 31, 2017 was

12 ANNUAL REPORT 2017 To Our Stakeholders

22.1%, improved by 1.3% from 20.8% at the end of the preceding fiscal year.

2) Analysis of Cash Flows

Cash and cash equivalents (“funds”) as of March 31, 2017 were ¥90.1 billion, a decrease of ¥28.7 billion compared with the end of the preceding fiscal year. Major factors for this decrease are as follows: Net cash provided by operating activities amounted to ¥53.5 billion, as the positive impact of factors such as income before income taxes and depreciation exceeded the negative impact of factors such as increases in accounts receivable-trade and inventories due to a rise in crude oil prices. Net cash used in investing activities amounted to ¥214.8 billion, due mainly to the acquisition of Showa Shell shares and investments in maintenance and rehabilitation of facilities at refineries. Net cash provided by financing activities amounted to ¥136.1 billion, attributable primarily to an increase in funding from mainly short-term loans payable and commercial paper.

(3) Basic Policy on Distribution of Profits/ Dividend per Share Dividends for FY2016 and FY2017

en The Company considers the return of profits to shareholders 10 as one of the most important matters and intends to pay stable dividends to shareholders, taking into consideration the strategic investment to enhance existing businesses and to develop future business operations, the improvement of the 100 corporate financial structure, and the business performance. With respect to the year-end dividends for fiscal 2016, the Company determined to pay a dividend of ¥25 per share. As 0 a result, annual dividends for the fiscal year ended March 31, 2017 are ¥50 per share. The Company’s Articles of Incorporation stipulate that the Company may, by a resolution of the board of directors, make 0 13 14 15 16 17 F a distribution out of the Company’s surplus to shareholders plan pursuant to the provision of Article 459, Paragraph 1 of the Companies Act. The Company has been paying out dividends twice in each fiscal year as interim dividends and year-end dividends since the fiscal year ended March 2008.

ANNUAL REPORT 2017 13 Management Policy

(1) Medium- and Long-term Management Strategy

The Company’s 4th Medium-term Management Plan for the period from fiscal year 2013 to 2015 sets the management policy “to contribute to a society with harmony between the economy and the environment by effectively securing and using energy and by developing functional materials business on a global scale.” Under this policy, the Company has promoted business restructuring to realize sustainable growth, and has proactively made strategic investments. Looking ahead, the Company defines the period from fiscal year 2017 to 2020 or so as the phase where achievements of the 4th Medium-term Management Plan will be taken in and further growth area will be unfolded, and will work on business challenges.

(2) Regarding Considering of the Business Integration with Showa Shell

The Company entered into a Share Purchase Agreement to purchase Showa Shell shares from the subsidiary companies of Royal Dutch Shell plc (hereinafter, “RDS”) on July 30, 2015, and since November 2015 Idemitsu has been consulting with Showa Shell toward Business Integration. On December 19, 2016, the Company received a notice from the Japan Fair Trade Commission, to the effect that the Japan Fair Trade Commission will not issue a cease and desist order, provided that remedial measures proposed by the Company and Showa Shell are taken. On the same date, Idemitsu also completed the acquisition of 117,761,200 shares of Showa Shell (31.3% of the voting rights) from RDS. Furthermore, on May 9, 2017, the Company and Showa Shell signed an agreement regarding formation of an alliance between the two Company groups to enhance and promote business collaboration. The outline of the agreement is as follows:

14 ANNUAL REPORT 2017 To Our Stakeholders

1) Objectives

The two Companies will form the Alliance as equal business partners, and extensively deepen business collaboration, while restarting or accelerating the processes for the Integration. The Companies want to make the most use of the time prior to achievement of the Integration and realize synergies during that period in order to further enhance the Companies’ corporate value.

2) Name of the Alliance

As an alliance with leading competitiveness in Asia, we set the alliance values of the Collaboration as anticipating changes in the business environment, making continuous efforts for self- evolution and boldly striving for upcoming innovations. With that in mind, we will call the Alliance as follows: “Brighter Energy Alliance.”

3) Details of the Alliance a) Realizing Synergies from the Integration in the Domestic Petroleum Business We will realize synergies through the Alliance prior to the Integration by intensively discussing and executing the following items as part of the preparation for the Integration: • Optimization of crude oil purchase and transport • Optimization of production planning • Interchange of finished products and intermediate products, especially at the scheduled shut down maintenance period of a refinery • Improvement of efficiency of logistics network (land and marine) • Reduction of refinery cost • Implementation of best practices to save energy and improve refinery margin • Reduction of procurement costs by enhancing joint procurement b) Synergy Target We will aim to achieve the Integration swiftly and to realize 50 billion yen of annual synergies within five years, as we publicly announced in November 2015. As part of this effort, we will strive to realize more than 25 billion yen of annual synergies within three years from April 2017.

ANNUAL REPORT 2017 15 Initiatives for Synergies are as follows. Section Initiatives Expected Effect Purchase of Crude 1) Joint purchase of crude oil 1 Billion Yen Oil 2) Joint allocation of VLCC (Very Large Crude Carrier)/reduction of chartered VLCC cost Supply 1) Earnings improvement by integration of production planning model 12 Billion Yen • Maximization of profitability of heavy oil upgrading units to optimize heavy components • Optimization of crude allocation for each refinery 2) Interchange of finished oil products and intermediate products (within the Companies and their affiliates) • Cooperation at scheduled shut down maintenance period of a plant • Optimize imports and exports • Reduction of domestic transportation cost for heavy fuel oil (Keihin area - Chukyo area - Yamaguchi area) Manufacturing and 1) Implementation of best practice to improve refinery margin 7 Billion Yen Procurement • Reduction in refining cost and others 2) Joint procurement • Sub-materials (catalysts/chemicals, etc.) • Construction/construction materials Logistics and Sales 1) Mutual utilization of oil terminal 4 Billion Yen 2) Cooperative distribution (land and marine) Administrative Joint procurement (IT system, corporate-related expenses, etc.) 1 Billion Yen Sectors Total More Than 25 Billion Yen Note: The future prospects described above are based on the information currently available to the Company and certain premises deemed reasonable. Actual synergy effects and the like may be substantially different, depending on various factors.

c) Alignment of Business Strategies in Overlapping Business Areas between the Companies

d) Considering Strategies for the Alliance Group and the Integrated New Company

e) Promotion of Harmonization between Personnel of the Companies

f) Development of New Services from the Perspective of Customers

g) Further Promotion of Social Contribution Activities

h) Promotion of Initiatives to Realize a Low-Carbon Society

The Company will take on the above-mentioned challenges to the best of its ability. Simultaneously, in order to make a leap forward as a “leading company of the industry having

16 ANNUAL REPORT 2017 To Our Stakeholders

the sharpest competitive edge” and “new energy company originated in Japan,” the Company will accelerate an alliance between the two Company groups and will promote the consulting with Showa Shell toward the Business Integration.

(3)Matters to Be Addressed by the Company

1) Environment Recognition

The Japanese economy has continued to follow a moderate recovery path in terms of consumer spending and employment. Meanwhile, a look at overseas economies finds that while overall the world’s economies, centering on the US and Asian countries, are forecasted to stay brisk, the outlook is unclear, partly because some developed countries are apparently inclined to adopt protectionist policies and partly because geopolitical risks have been heightened due to such problems as mounting tensions in North Korea and Syria. Regarding the demand for petroleum products, a medium- to long-term decline is inevitable in Japan as electric vehicles (EVs) and plug-in hybrid vehicles (PHVs) are gradually gaining in popularity and also as energy conservation efforts get underway. However, steady expansion in demand is expected overseas, particularly in the Asian emerging countries.

2) Matters to be addressed

Petroleum Products Segment

In the fuel oil business in Japan, the Company aims to promptly create synergies by strengthening and promoting business collaboration with Showa Shell. As for the overseas business, the Company intends to expand its business in Asian markets where demand is expected to grow, through the start of commercial operation of the Nghi Son Refinery and Petrochemical Complex in Vietnam and petroleum products marketing based in Singapore. In the lubricants business, the Company will promote the development of environment-friendly products and functional materials products in response to technological innovation. The Company will also accelerate global deployment through the expansion of overseas production bases.

ANNUAL REPORT 2017 17 Petrochemical Products Segment

In the basic chemicals business, the Company will move ahead with optimization of the supply chain for olefin-related products, including derivative products. It will also promote integration with refineries, diversification of raw materials, etc., thereby endeavoring to further strengthen its competitiveness. As part of the effort, the Chiba Refinery and the Chiba Plant will be integrated into the new entity called Chiba Complex in October 2017. Meanwhile, the start of commercial operation of the Nghi Son Refinery and Petrochemical Complex in Vietnam should result in sales expansion of paraxylene and benzene. In the performance materials business, the Company will concentrate its management resources on and develop the field of engineering plastics such as syndiotactic polystyrene resin and polycarbonate resin as well as that of adhesive materials such as hydrogenated petroleum resin and functional soft polypropylene, positioning such fields as core businesses. With regard to hydrogenated petroleum resin, the Company made a decision to construct a hydrogenated hydrocarbon resin manufacturing unit (production capacity of 25 thousand tons/year) in Taiwan with Formosa Petrochemical Corp. (“FPCC”) in September 2016, and Idemitsu and FPCC have established a joint venture company called “Idemitsu Formosa Specialty Chemicals Corporation.”

Resources Segment

The common challenge for the resources businesses is to steadily take in achievements of a series of measures implemented during the 4th Medium-term Management Plan period, including investments to expand production capacities (such as the Knarr oil field and the Boggabri Mine), portfolio reviews, and cost reductions. In the oil exploration and production business, the Company will secure reserves through stable production at the existing oil fields and carefully selected exploration activities, while progressively reducing costs and investments. In the coal business, the Company will strive to strengthen the competitiveness of its entire value chain composed of operation of mines owned by the Company, procurement, logistics, and marketing.

18 ANNUAL REPORT 2017 To Our Stakeholders

In addition, the Company will support combustion technologies developed by the Coal and Environment Research Laboratory and will promote biomass co-combustion and the like as response measures towards a low carbon society. As for the uranium business, the Company aims to promote stable production at the Cigar Lake Mine in Canada and its sales.

Other Segments

In the electronic materials business, the Company enhanced its development structure by establishment Idemitsu OLED Materials Europe AG in Switzerland in January 2017 as an OLED materials development company. The Company will capture growing demand and boost sales driven by continuous technology development, which will ensure high performance of OLED materials and lower manufacturing costs, and promote measures to put its business on a growth track. In the agricultural biotechnology business, the Company will deploy businesses which cater to the demands that contribute to food safety and address the increasing demand for food through expanding and enhancing overseas business development, including biological pesticides, chemical pesticides, the RUMINUP® series products that provide feed mixes for cows, and Crosstop® that provides feed mixes for chickens. In the gas business, the Company will continue to conduct studies on commercialization of the business through Himeji Natural Gas Power Generation Co., Ltd., and will make efforts to further expand export and sales to Asian countries of LPG from North America. In the renewable energy business, the Company will conduct studies on the development of electric power sources such as wind power, biomass, solar, and geothermal energy, and expand the power retailing business, which will actively utilize renewable energy sources.

The following are three important issues for the Idemitsu Group as a whole: • Continuation of the structural reforms in basic businesses (fuel oils and basic chemicals) in Japan • Continuation of overseas business development, and • Expansion of high functional material businesses (lubricants, performance materials, and electronic materials)

ANNUAL REPORT 2017 19 To Our Stakeholders

The Company will work on the enhancement of corporate value by establishing a stable revenue base as well as formulating sustainable growth strategies.

The information regarding future forecasts above are based on information available as of the date of publication of this document. The actual operating results may differ from the forecasts due to various factors in the future.

Takashi Tsukioka Representative Director & Chief Executive Officer

20 ANNUAL REPORT 2017 Management Philosophy

Since its foundation, Idemitsu has practiced the concept of “respect for human beings” in the conduct of business, and the Company strives to realize this ideal and to be trusted and relied on widely by society.

Based on this management philosophy, the Company makes the following five commitments to each stakeholder in the Idemitsu Group’s management policies. The Idemitsu Group will continue to strive to be a corporation that all stakeholders can rely on, through further deepening and developing the management, focusing on humanity.

Creation and Provision of New Value to Customers We provide products, technologies and services that give customers a strong feeling of assurance, greater vitality and absolute satisfaction, as we strive to create new value.

Contribution to Society and the Environment We make safety the cornerstone of business and strive to preserve and improve the natural environment. We also contribute to communities, culture and society.

Assured Returns to Shareholders We fulfill our corporate social responsibilities, strive for sound, sustainable growth, and endeavor to generate stable returns for shareholders.

Cooperation with Partners We secure the confidence, greater vitality and absolute satisfaction of our customers through cooperation with service station staff and others involved in our businesses, and aim to share results and success.

Pursuit of Employees’ Growth and Self-realization We create a work environment in which each employee can pursue his or her own growth and self-realization. We also make every effort to ensure that each employee is respected.

ANNUAL REPORT 2017 21 At a Glance

Major Subsidiaries Business Segment Business Operations ( ◆ Equity method affiliates) (Overseas companies*)

• Import, refining, production and sale ● Idemitsu Tanker Co., Ltd. Petroleum of crude oil, petroleum products and ● Idemitsu Retail Marketing Co., Ltd. Products lubricants, and transportation and storage relating thereto ● Apolloretailing Co.,Ltd. • Sale of service station products ● Idemitsu International (Asia) Pte.Ltd.* ● Idemitsu Apollo Corporation * ◆ Nghi Son Refinery and Petrochemical LLC*

• Production and sale of petrochemical ● Idemitsu Unitech Co., Ltd. Petrochemical products Prime Polymer Co., Ltd. Products ◆ ◆ PS Japan Corp. ● Idemitsu SM (Malaysia) Sdn.Bhd.* ◆ Formosa Idemitsu Petrochemicals Corporation*

• Investigation, exploration, development ● Idemitsu Petroleum Norge AS* Resources and sale of oil resources, coal, uranium ● Idemitsu Petroleum UK Ltd.* and geothermal resources ● Idemitsu Australia Resources Pty Ltd* ● Idemitsu Canada Resouces Ltd.* ● Idemitsu Oita Geothermal Co.,Ltd.

Others • Import, purchase and sale of liquefied ◆ Astomos Energy Corp. petroleum gas (LPG) ● Idemitsu Engineering Co., Ltd. • Production and sale of electronic ● Idemitsu Insurance Service, Co.,Ltd. materials ◆ Idemitsu Credit Co., Ltd. • Design, construction, maintenance ● SDS Biotech K.K. and management of petroleum-related ● Idemitsu Canada Corporation* facilities ◆ AltaGas Idemitsu Joint Venture Limited • Credit card service Partnership* • Import and sale of agricultural chemicals ◆ Showa Shell Sekiyu K.K.

22 ANNUAL REPORT 2017 Net Sales Operating Income/Loss

F2016 illio F2016 illio illio illio

F2015 ¥2,751.0 billion F2015 -¥67.4 billion

F2016 illio F2016 illio

illio illio

F2015 ¥520.8 billion F2015 ¥42.3 billion

F2016 illio F2016 illio

illio illio

F2015 ¥228.8 billion F2015 -¥0.6 billion

F2016 illio F2016 illio

illio illio

F2015 ¥69.6 billion F2015 ¥8.8 billion

ANNUAL REPORT 2017 23 Research & Development

The Idemitsu Group engages in R&D activities oils with enhanced quality in conformity with the concerning petroleum and petrochemical products API GF-5 standard. and the natural resources business, as well as for • Our product lineup for industrial lubricants the purpose of starting new businesses. Currently, was enhanced by promoting the development different parts of the Group work closely together to of environment-friendly high-performance conduct R&D activities. products, refrigerant oil for freezers with global warming potential (GWP), energy efficient In fiscal 2016, the Group’s R&D expenses totaled lubricants for manufacturing facilities that help ¥13.1 billion, up ¥0.6 billion year on year. This amount to reduce electric power consumption, as well includes ¥2.7 billion in common R&D expenditures that as environmentally conscious hydraulic oil that cannot be allocated to individual business segments. contributes to improved processing efficiency by producing less waste water while having a longer The details, expenses, and results of R&D activities for useful life. each segment in fiscal 2016 are outlined below. 2. Petrochemical Products Segment 1. Petroleum Products Segment R&D activities in the Petrochemical Products In the Petroleum Products Segment, the Group Segment are aimed at enhancing our competitiveness is advancing activities to develop environmentally in performance materials and plastic processed conscious petroleum and lubrication products. In products in the performance materials business. R&D fiscal 2016, R&D expenditures in this segment were expenditures in this segment totaled ¥2.7 billion in ¥3.2 billion. fiscal 2016.

a. In the petroleum business, Idemitsu focuses its a. In the performance materials business, we are technological development efforts on goals such as working to develop raw materials that impart new developing total optimal processing technologies for properties to adhesives and high-value-added refining heavy oil equipment, clarifying the corrosion products incorporating the engineering plastics of mechanism when using poor-quality crude oil and polycarbonate and syndiotactic polystyrene (SPS) considering relevant countermeasures, developing resins. Some of our major accomplishments in fiscal Petroleomics Technology with the aim of adding 2016 are described below. more value to petroleum products, using process technologies to make the petroleum business more • In the field of functional soft polypropylene competitive, improving efficiency at refineries, (product name: L-MODU® that has a much lower factories, and offices, energy conservation, and crystallization point than traditional crystalline contributing to an environment-friendly society. polypropylenes, giving it a special softness, the Company has developed new applications for b. In the lubricants business, the Company undertakes use as an adhesive for sanitary products and as global development of products that conserve fuel a modifying material for nonwoven fabrics and for and energy and are environmentally conscious, film, as well as for wood adhesives, resulting in aiming to achieve stable supplies to domestic growth in sales of this material. and overseas markets. Some of our major • In the field of polycarbonate resin (product accomplishments in fiscal 2016 are described name: TARFLON®), the Company has developed below. applications for a new grade of the product with excellent transparency and liquidity. The product • We enhanced our lineup of automotive lubricant has since been received well in the market of products by developing next-generation engine various lighting components, including those

24 ANNUAL REPORT 2017 for automobiles as well as liquid crystal display 3. Resources Segment (LCD) components. Idemitsu ceased operation In the coal business, we advanced development of of the polycarbonate production facility at its technologies to improve the quality of coal produced Chiba Plant in December 2015. In fiscal 2016, at coal mines and lessen environmental impact the Company consolidated the production of through efficient, clean use of coal. R&D expenditures polycarbonate resin into Formosa Chemicals & in this segment were ¥0.2 billion. Some of our major Fibre Corporation (hereinafter, “FCFC”), a core accomplishments in fiscal 2016 include the following. firm of Taiwan’s Formosa Group, and further In light of the enforcement of the Paris Agreement in enhanced its competitiveness in the market. particular, we enhanced development of clean coal • In the field of syndiotactic polystyrene resin technologies in harmony with the environment. (product name: XAREC®), we rolled out applications for a grade that reduces molding • We embarked on market development for woody cycle time with lower gas emissions, and we biomass that will lead to the reduction of CO2 expanded sales of this material for use in emissions, and have established the evaluation automotive electrical components and others. In technology. By means of this, we have selected addition, the strong reputation it has earned for the optimal wood pellet for co-combustion with its excellent radio wave transmitting property and coal, and have been engaging in consulting sales electrical properties has led to XAREC® seeing to customers. expanded use by manufacturers of components • In collaboration with the NYK Group, Idemitsu for use in radar-sensors for determining distance started to expand sales of the control between running vehicles and by manufacturers optimization system for coal-fired boilers of electric vehicle components. (product name: ULTY), which is owned by NYK Trading Corporation. In addition, we b. In the sheet film business, the Company is embarked on the development of a new type developing grades for packaging materials and ULTY, whose functions are designed to be decorative products for industrial applications. upgraded by merging Idemitsu’s high-efficiency Some of our major accomplishments in fiscal 2016 coal combustion technology, and have been include the following. contributing to customers’ efforts to reduce CO2 emissions from coal-fired boilers. • The lineup of packaging materials has been • Idemitsu’s coal evaluation system has been reinforced by promoting the development of adopted by several national projects overseas, grades based on the requirements of customers, from which we also received orders for including the improved sheet grade for prepared technology consulting services related to power food packages used by suppliers to convenience plant operations to avoid troubles due to poor- stores (product name: MULTILAY®), and the quality coal. improved zipper tape grade with its straight line • To encourage use of low-grade coal, we cut property (product name: PLALOC®). partnered with Japan Oil, Gas and Metals • In the decorations field, the Company promoted National Corporation (JOGMEC) to engage in the enhancement of sheets for use on the research and development by using Indonesian exterior of motorcycles, which have been lignite. The achievements include the restraint adopted more extensively by major motorcycle of self-generating heat due to the blending with makers. We also promoted the development bituminous coal and the simultaneous synthesis of applications for the automotive and home of improved coal and synthetic oil as a result of construction fields by introducing newly hydrothermal reaction. developed grades.

ANNUAL REPORT 2017 25 Research & Development

4. Other Segments 5. Company-wide Initiatives (Corporate R&D Strategy) In addition to the above segments, we also carry out As part of the corporate R&D strategies, company- R&D activities in the electronics materials and agri- wide activities are currently underway, aimed at bio businesses. Fiscal 2016 R&D expenditures in this providing analytical support for the new products segment totaled ¥4.3 billion. developed by the respective research laboratories within the Group by leveraging its highly sophisticated a. In the electronics materials field, R&D activities are analytical equipment and techniques. We also stay being conducted for new base materials, such as focused on taking steps to develop animal vaccines materials for organic light-emitting diodes (OLED) in the field of livestock and materials for the next and oxide semiconductor materials. Particularly with generation storage battery toward achieving the regard to OLED materials, the Company is advancing effective use of electric power represented by electric broad-ranging development activities, ranging from vehicles in pursuit of new business opportunities further improving the performance of products and based on the current trends in society and technology materials to developing next-generation technologies, suitable for the Company. by working more closely with customers, through joint research with universities, and through other efforts. Some of our major accomplishments in fiscal 2016 include the following.

• In November 2016, we and Merc in Germany concluded a collaboration agreement that allows each party to use the other party’s OLED material- related patents in certain areas. • In January 2017, we established an organic light- emitting diodes (OLED) materials development company in the Swiss Confederation, which is a world-class advanced center for research and development in the fine chemical field.

b. In the agri-bio business, technologies that utilize microbial culture and natural products are being adopted to enhance our lineup of products that contribute to food safety and satisfy increasing demand for food in the fields of agriculture and livestock. One of our major accomplishments in fiscal 2016 include the following.

• SDS Biotech K.K., one of our consolidated subsidiaries, acquired pesticide registration for two of its new agricultural chemicals in Japan.

26 ANNUAL REPORT 2017 Material Agreements, etc.

AGREEMENT TO PURCHASE SHOWA SHELL concluded with the subsidiary companies of Royal SEKIYU K.K. SHARE AND DISCUSSIONS TOWARD Dutch Shell plc and the acquisition of Showa Shell BUSINESS INTEGRATION shares with 31.3% voting rights was completed. Discussions toward business integration of the In its meeting held on July 30, 2015, the Company’s Company and Showa Shell were undertaken based board of directors approved a resolution to purchase on a Memorandum of Understanding for the Business Showa Shell Sekiyu K.K. (“Showa Shell”) shares Integration of Idemitsu Kosan Co.,Ltd. and Showa with 33.3% voting rights from subsidiary companies Shell Sekiyu K.K. (“MoU”) concluded November 12, of Royal Dutch Shell plc, and a share purchase 2015. Companies will continue discussions toward agreement was entered into by between the Company business integration respecting the spirits of the MoU, and such subsidiary companies on the same day. with the goal of creating an industry-leading player with In addition, in its meeting held on December 19, an unparalleled competitive position. Through these 2016, the Company’s board of directors approved a discussions, the Company and Showa Shell have resolution to conclude an agreement on amendment signed an agreement on May 9, 2017 to enhance and of the above share purchase agreement, and on promote business collaboration business prior to the the same day this agreement on amendment was business integration of both companies.

(a) Names of sellers The Shell Petroleum Company Limited The Anglo-Saxon Petroleum Company Limited

(b) Overview of acquiree i. Company name: Showa Shell Sekiyu K.K. ii. Main business: oil business and energy solutions business iii. Scale: Capital: ¥34,197 million Consolidated sales: ¥1,726,075 million (fiscal year ended December 31, 2016)

(c) Schedule for share transfer The acquisition of the shares was completed on December 19, 2016.

(d) Number of shares to be purchased, purchase price, and shareholding after purchase Before the Amendment After the Amendment Number of Shares to be purchased 125,261,200 117,761,200 ¥169,103 million ¥158,978 million Purchase price (¥1,350 per Share) (¥1,350 per Share) Ownership % after the purchase 33.3% of the voting rights 31.3% of the voting rights

(e) Method of funding share purchase The funds were raised through a bridge loan.

ANNUAL REPORT 2017 27 Corporate Governance

inside personnel can be reflected in the Company’s Corporate Governance management.

Corporate Governance System Business Execution and Management Outline of the Corporate Governance Supervision Mechanisms System To increase efficiency in executive functions, the Company has adopted the corporate executive Basic Policy officer system. Executive Officers are appointed by Ever since its foundation, Idemitsu has consistently the Board of Directors and execute the business by held the utmost respect for people and has worked working with the relevant Directors. The Board of diligently to be a socially respected and highly trusted Directors meets once a month in principle (23 times company. in fiscal 2016), to deliberate and make decisions on With this aim in mind, the Company recognizes the important management issues and to monitor and importance of constructing positive relationships with supervise the Executive Officers in the execution of all stakeholders, including customers, shareholders, their responsibilities in accordance with the laws and business partners, local communities and employees, ordinances, the Company’s Articles of Incorporation, by fulfilling its social responsibility as a good corporate and Regulations of the Board of Directors. citizen, improving management transparency and Idemitsu has also established two advisory promoting sound and sustainable growth. committees comprising external advisers to the In line with the philosophy expressed above, Company’s Board of Directors to strengthen the Idemitsu has adopted the structure of a “company with Board’s overall functions. The mechanism to monitor corporate auditors,” established a robust corporate management encompasses supervision by the Board governance system and continues to engage in of Directors, auditing by statutory auditors, and activities aimed at improving its capabilities in this field. accounting audits by accounting auditors. In support The basic policy stated above is that of the entire of these, the Company has established an Internal Idemitsu Group. The following details are based on Audit Office, which remains independent of the the status as of the Annual YUHO Report submission operational divisions and is under the direct control date, unless otherwise indicated. of the Representative Director and CEO. This office conducts internal audits based on Internal Audit Regulations and the evaluation of internal controls Reasons for Adoption of the Corporate based on the Regulations for Internal Control over Governance System Financial Reporting. The Company has adopted the corporate auditor system in view that sufficient auditing functions will be accomplished by corporate auditors whose roles, functions and authority have been reinforced through amendments to the laws and regulations, and the Board of Directors consists mainly of Directors who are conversant with the Company’s businesses. Furthermore, Outside Directors have been elected since the 99th Ordinary General Meeting of Shareholders held on June 26, 2014, so that objective opinions that are different from those of

28 ANNUAL REPORT 2017 Status of Internal Auditing, Evaluation of Internal Controls, Auditing by Statutory Auditors, and Auditing by Accounting Auditors

The Internal Audit Office periodically audits and confirms the legality of the business operations, the status of risk management and the business execution of each operating division mainly based on their self- directed internal auditing in accordance with the Self-control Regulations. The results of the internal audits are reported to the Representative Director and CEO, the Director connected with the relevant operating division or business area, and statutory auditors. Internal Auditing If necessary, the Representative Director and CEO, etc., gives instructions to the division in question. Any operating division that receives advice or recommendations in the course of an internal audit prepares a remediation plan for submission to the General Manager of the Internal Audit Office and undertakes improvements. The Internal Audit Office then conducts follow-up audits as needed.

The Internal Audit Office evaluates and confirms the preparation and implementation of internal controls in each executive division based on the Regulations for Internal Controls over Financial Reporting in Status of the order to ensure the reliability of financial reporting for the Group as a whole. Each operating division Evaluation of Internal prepares a remediation plan to address any shortcomings discovered during the evaluation and undertakes Controls over improvements. Financial Reporting The remediation plan and the results of its implementation are submitted to the General Manager of the Internal Audit Office, and the Internal Audit Office conducts reevaluations to gauge the progress of improvements.

All of the Company’s four statutory auditors attend board meetings and conduct audits of the business reports, non-consolidated financial statements and consolidated financial statements presented at the General Meeting of Shareholders and of the day-to-day execution of the duties of the Directors. Standing statutory auditors attend important internal meetings, including meetings of the Management Committee, and execute their auditing duties by interviewing general managers, overseas branch managers and the Auditing by Statutory presidents of subsidiaries. Non-standing statutory auditors carry out audits by visiting major departments Auditors and branches. Meetings are held between statutory auditors and Representative Directors on a quarterly basis in principle. These meetings serve as a forum to raise and deliberate on pertinent issues. Meetings of the Board of Statutory Auditors are held once a month in principle. At these meetings, the board strives to share issues and information among the statutory auditors and request information from the Directors and operating divisions as necessary in order to improve the level of oversight.

Idemitsu’s accounting audit is undertaken by Mr. Katsuhira Isomata, Mr. Motoyuki Suzuki, and Mr. Naoaki Inagaki of Deloitte Touche Tohmatsu LLC. In undertaking the audit, these principal auditors are supported by a team of 10 certified public Auditing by the accountants and 24 other staff. Accounting Auditor There are no vested interests between the accounting auditor and Idemitsu or its executive staff. Furthermore, the audit corporation above has executed an audit agreement with Idemitsu pursuant to independent audit guidelines outlined in the Companies Act and Financial Instruments and Exchange Act. Remuneration is paid to the accounting auditor in accordance with this agreement.

ANNUAL REPORT 2017 29 Outline of the Committees discuss that topic within the Safety & Environmental Protection Headquarters to obtain the opinions of Advisory Committees external experts. In order to maintain the transparency and soundness of the management, the Company has established the Nomination and Compensation Advisory Committee following two committees consisting of external experts In addition to the two committees described above, as advisory organs to the Board of Directors. Both The Company has set up the Nomination and committees listen closely to frank opinions from the Compensation Advisory Committee, which consists of perspective of third parties and reflect these opinions independent outside directors and independent outside in recommendations to the management. auditors. This committee advises on matters related to the selection of directors and candidate auditors Management Advisory Committee proposed by Representative Director & Chief Executive The Management Advisory Committee is an advisory Officer for the submission to a general meeting of organ that discusses issues related to overall shareholders. management reforms. The committee, which meets In addition, the Nomination and Compensation once every half period in principle, engages three Advisory Committee also advises on matters related to external advisers who express their opinions and directors’ compensation in response to a consultation provide advice. from the Board of Directors.

Safety and Security Advisory Committee Management Committee and Other The Safety and Security Advisory Committee Committees has provided advice on matters concerning the Idemitsu established the Management Committee strengthening of security, especially on technical to discuss and consider management strategies issues, in order to prevent large-scale disasters at and issues for the Group as a whole and for each refineries and plants. Due to changes in the current operating division. Furthermore, the Risk Management management environment, there is a pressing need to Committee and the Compliance Committee were ensure the safety regarding business expansion, new established as subordinate organs to the Management businesses, and overseas expansion. Accordingly, Committee. Idemitsu has also established a Committee the committee selects a theme based on the Group’s for the Evaluation of Internal Controls over Financial businesses and then establishes a working group to Reporting, which considers and deliberates on items

Committee Name Committee Chair/Members Meeting Schedule Role

Chair: Representative Director and Discussion and consideration of CEO Twice per month in management issues and strategies Management Committee Members: Members appointed by principle for the Group as a whole and each committee chair operating division

Chair: Director Risk Management Twice per year in Members: Managers of related Promotion of risk management Committee principle departments

Chair: Director Deliberation and planning of important Four times per year Compliance Committee Members: Managers of related policies for thorough compliance and in principle departments the promotion of compliance activities

Committee for the Chair: Director Consideration and deliberation of Evaluation of Internal Members: Related Directors and Twice per year in items related to internal controls over Controls over Financial Executive Officers, General Manager principle financial reporting Reporting of the Internal Audit Office

30 ANNUAL REPORT 2017 Corporate Governance

concerning annual preparations and operating policies System for Quality Assurance and evaluation plans, as well as decisions on the Idemitsu has created a Quality Assurance Basic Plan for scope of evaluations. The chair of each committee, matters related to quality assurance. The Company has with the exception of the Management Committee, is also established the Quality Assurance Headquarters in principle a Director other than the Representative that plans basic policies and important matters related Director and CEO and plays a cross-divisional role to quality assurance for Idemitsu and the Idemitsu as part of Company-wide internal controls in order Group, and promotes various activities, based on the to implement effective operations of committees. An basic plan above. overview of each committee is shown below. Furthermore, Idemitsu has established a Special Committee on Quality Assurance, which is subordinate System for Environmental Issues and Safety to the Quality Assurance Headquarters, to consider and The Company established a “Global Environmental promote important matters related to quality assurance. Management Basic Plan” for environmental protection arising from its environmental management and operations, and a “Safety Basic Plan” for ensuring Basic Policy on the Internal Control System safety and security. The Company also established and the Status of Internal Controls the Safety & Environmental Protection Headquarters, which plans basic policies and important matters related Idemitsu’s fundamental policy for its internal control to environmental management, ensures safety and system is to establish a system that maintains security arising from environmental protection efforts appropriate business operations throughout the in the business operations of Idemitsu and the Idemitsu Company. Based on this policy, the Board of Directors Group based on each basic plan above, and promotes has determined the systems shown below. various related activities. Furthermore, the Board of Directors verifies whether Furthermore, the Company has introduced a Special the internal control system has been established Committee on Safety subordinate to the Safety & correctly and is operating appropriately, making any Environmental Protection Headquarters to consider and necessary revisions to ensure its proper functioning. deliberate on important issues related to security.

1 The Company Board of Directors makes decisions on important matters and supervises business execution, in accordance with the Company’s Regulations of the Board of Directors. System to ensure the 2 The Compliance Committee has been established in the Company to promote compliance execution of the duties of activities in the Company and subsidiaries, in accordance with the Compliance Regulations. Company and subsidiary 3 Compliance is rigorously implemented within the Company by making use of the Compliance Directors and employees Handbook, which sets out Compliance Action Guidelines and specific matters for compliance. in compliance with the 4 The Compliance Consultation Desk, which serves as a contact point for both internal and laws, ordinances and the external communications, is used by employees of the Company and subsidiaries to help resolve Company’s Articles of questions and problems regarding compliance. Incorporation 5 The Internal Audit Office conducts audits to confirm the legality of the business operations by each business division, including subsidiaries, and the status of business execution in accordance with internal regulations.

System related to the Information regarding execution of duties is retained and controlled pursuant to the Regulations preservation and control of the Board of Directors, Regulations on Handling of Documents, Regulations on Handling of of information regarding Circulars, and other rules. Company Directors’ execution of duties

ANNUAL REPORT 2017 31 1 The Risk Management Committee, established pursuant to the Risk Management Regulations, promotes risk-management activities. 2 The Crisis Response Guidelines and other internal regulations are the basis for swift and appropriate communication and responses in the event of any serious crises at the Company or subsidiaries. System for internal regulation 3 The Business Continuity Plan (BCP) has been established for responding to risks such as those for risk management of of an earthquake with an epicenter directly beneath the greater Tokyo area or novel strains of losses by the Company and influenza, and BCP implementation, maintenance, and management take place through group- subsidiaries wide efforts. 4 Each operating division uses Self-Inspection Lists and other materials to inspect business risks, pursuant to the Self-control Regulations. 5 The Internal Audit Office conducts audits to check on the status of risk management in each operating division, pursuant to the Internal Audit Regulations.

1 Pursuant to the Internal Controls over Financial Reporting, a system has been developed to ensure the reliability of financial reporting throughout the Group, and internal controls related to financial reporting are maintained and operated appropriately. 2 Pursuant to the regulations under 1 above, the Committee for the Evaluation of Internal Controls System for internal control over Financial Reporting has been established to deliberate on and consider matters such as over financial reporting those related to annual maintenance and operation methods, evaluation plans, and decisions on the scope of evaluation. 3 The Internal Audit Office periodically assesses the efficacy of internal controls and the details of necessary improvements.

1 Under a resolute stance in opposition to individuals and groups involved in antisocial activities, System for rejecting violence, improper demands, or similar activities, such as organized crime group and racketeers, relationships with antisocial any and all ties to such groups are refused. groups 2 Any approaches by antisocial groups are firmly rejected without backing down, and appropriate responses are taken in accordance with the Manuals on Responding to Antisocial Groups.

1 Executive Officers are appointed to perform business execution efficiently. 2 The roles and authority of the Board of Directors, Representative Directors, and Directors are System to ensure efficient defined clearly under the Official Authority Regulations and the Business Execution Regulations. execution of duties by 3 The Management Committee has been established to discuss and consider management Company Directors strategies and issues for the Group as a whole and for each operating division. Its chair, the Representative Director and CEO, appoints the members of the Management Committee, which meets twice monthly in principle.

1 The Affiliate Management Regulations specify subsidiaries under the direct authority of the Representative Director and CEO and those under the authority of managing divisions and clearly define their management responsibilities, and subsidiaries periodically report business System to ensure fair performance and other matters. execution of duties in the 2 The Affiliate Management Regulations specify the fundamental policy that in principle corporate group, consisting transactions with affiliates shall be based on market prices, to prevent conflicts of interest. of the Company and 3 The Affiliate Management Regulations establish standards for appointment of subsidiary its parent company and directors and statutory auditors and specify that in principle Idemitsu directors shall not be subsidiaries appointed as directors of subsidiaries. 4 Efforts are made to improve the efficiency of business operations through use of group standard IT infrastructure and consolidation of back-office functions.

32 ANNUAL REPORT 2017 Corporate Governance

System related to employees Statutory auditor staff are allocated as requested by statutory auditors to the Secretariat of Audit & in the event that Company Supervisory Board to assist them in performing their duties. statutory auditors request that they be allocated as assistants

Ensuring the independence 1 Staff shall be allocated to the Secretariat of Audit & Supervisory Board on a full-time basis. from Directors of employees Internal rules in the Human Resources Department stipulate that the consent of the statutory allocated as assistants auditor is required regarding final decisions on transfers, evaluation, and other HR matters to statutory auditors as concerning statutory auditor staff. described above and the 2 The Job Assignment Regulations specify the duties of the Secretariat of Audit & Supervisory performance of instructions Board. to such employees

System for Company 1 Directors, Executive Officers, and the General Manager of the Safety, Environment & Quality and subsidiary Directors, Assurance Department report to the statutory auditors on specified matters pursuant to the employees and subsidiary Business Execution Regulations. statutory auditors who 2 The Internal Audit Office reports to the statutory auditors on the results of audits, pursuant to report to Company statutory the Internal Audit Regulations. auditors or the Audit & 3 The Compliance Committee makes periodic reports to the statutory auditors on the status of Supervisory Board, and other consultation with and handling by the Compliance Consultation Desk. systems for reporting to Company statutory auditors

1 It is prohibited to treat disadvantageously persons who have submitted reports to Company System for ensuring that statutory auditors or the Audit & Supervisory Board as described above as a result of such persons who have submitted reports. reports as described 2 The Compliance Committee has decided that parties who have consulted with the Compliance above do not suffer Consultation Desk shall not suffer disadvantageous treatment as a result of such consultation disadvantageous treatment and ensures that this fact is well understood through means including stating it clearly in the as a result of such reports Compliance Handbook and covering it in training.

Policies related to handling The Company shall bear all costs necessary to fulfill the roles and responsibilities of statutory of expenses and other costs auditors, including auditing of the execution of Directors’ duties and appointment and dismissal of arising in connection with accounting auditors. the execution of statutory auditors’ duties

1 The Representative Director meets with the statutory auditors periodically, in principle once System to ensure effective every quarter. audits by Company statutory 2 The Internal Audit Office maintains close cooperation and coordination with the statutory auditors auditors or the Audit & and the accounting auditors concerning matters such as the internal auditing schedule and audit Supervisory Board visits.

Overview of content of Contracts for Auditor a Contract for Limitation of Liability limiting Limitation of Liability liability for damages as described under Article 423, Paragraph 1 of the same Act. The limit on amounts of Pursuant to the provisions of Article 427, Paragraph liability in such contracts is the amount stipulated by 1 of the Companies Act, Idemitsu has concluded with laws and regulations. each Outside Director and each Outside Statutory

ANNUAL REPORT 2017 33 Status of Internal Auditing and Auditing by reports from other sections related to internal controls Statutory Auditors on matters that could have material impacts on Idemitsu Group businesses or finances and matters Idemitsu’s organization for internal auditing and that could cause serious damage to the Group. auditing by statutory auditors consists of the Internal The following Idemitsu statutory auditors are highly Audit Office (currently staffed by 13 persons), under knowledgeable on financial and accounting subjects. the direct supervision of the Representative Director Full-time Statutory Auditor Sakae Hirano has practical and CEO, and statutory auditor staff (currently two accounting experience with the Company’s Treasury persons), under the direct supervision of the statutory Department, Outside Statutory Auditor Taigi Ito has auditors. The status of such audits is as described experience as a certified public accountant and a under “Status of Internal Auditing, Evaluation of Internal university professor. Controls, Auditing by Statutory Auditors, and Auditing by Accounting Auditors.” Outside Directors and Outside Statutory The Audit & Supervisory Board cooperates Auditors with accounting auditors through means including coordination of audit schedules and accompanying the Idemitsu has four Outside Directors and two Outside auditors on site visits. It cooperates with the Internal Statutory Auditors. Audit Office through means including reconciliation The Outside Directors’ and Outside Statutory of key topics, coordination of audit schedules, Auditors’ relations with Idemitsu are shown below. communication of audit results, and communication None has any particular vested interests in Idemitsu. of results of evaluation of internal controls. It receives

Outside Directors

Name Affiliation Additional Information Reasons for Selection

Eri Yokota University professor No transaction relationship to Appointed based on overall consideration of Idemitsu. Ms. Yokota is a Director factors including her experience and specialized of TOLI Corporation. knowledge as a university professor, her character, and her judgment. Her independence means there is little likelihood of a conflict of interest arising with ordinary shareholders.

Ryosuke Ito Attorney While Idemitsu contracts legal Appointed based on overall consideration of services to Mr. Ito’s law office as factors including his experience and specialized necessary, the compensation it knowledge as an attorney, his character, and his pays for such services is minor, judgment. His independence means there is little totaling less than 1 million yen in likelihood of a conflict of interest arising with this fiscal year. ordinary shareholders.

Takeo Kikkawa University professor While Mr. Kikkawa serves Appointed based on overall consideration of as a member of Idemitsu’s factors including his experience and specialized Management Advisory Committee, knowledge as a university professor, his the compensation he receives for character, and his judgment. His independence the service is minor, totaling 1 means there is little likelihood of a conflict of million yen this fiscal year. interest arising with ordinary shareholders. He is a Director of Mitsubishi Chemical Holdings Corporation.

34 ANNUAL REPORT 2017 Corporate Governance

Mackenzie Former diplomat No transaction relationship to Appointed based on overall consideration of Clugston University professor Idemitsu. Mr. Clugston is a factors including his experience and specialized Director of KAMEDA SEIKA CO., knowledge as a former diplomat and university LTD., an Advisor to Sapporo professor, his character, and his judgment. His Holdings Limited, and a professor independence means there is little likelihood of Kwansei Gakuin University. of a conflict of interest arising with ordinary shareholders.

Outside Statutory Auditors

Name Affiliation Additional Information Reasons for Selection

Taigi Ito Certified public No transaction relationship Appointed based on overall consideration of accountant to Idemitsu. External Audit & factors including his experience and specialized Supervisory Board Member of IT knowledge as a certified public accountant Holdings Corporation, Statutory and university professor, his character, and his Auditor of Mitsubishi Chemical judgment. His independence means there is little Holdings Corporation, and likelihood of a conflict of interest arising with Statutory Auditor of Mitsubishi ordinary shareholders. Chemical Corporation.

Shoichiro Attorney No transaction relationship to Appointed based on overall consideration of Niwayama Idemitsu. factors including his experience and specialized knowledge as an attorney, his character, and his judgment. His independence means there is little likelihood of a conflict of interest arising with ordinary shareholders.

We have adopted criteria for the independence of (d) Consultants, certified accountants, law experts, outside directors and outside auditors. our basic policy accounting auditors, or other advisory retainers is to appoint outside directors and outside auditors who receive money or other property from the with deep insights as specialists based on their Company worth more than an average of 10 million expertise and career background from persons who yen per year, excluding compensation for officers in do not meet any of the following conditions. the most recent three fiscal years (If organizations Criteria for the Independence of Outside Officers such as corporations and associations receive (a) Individuals who currently belong to or belonged in the money or other property from the Company, the past to the Company or its subsidiaries. individuals currently belonging to those (b) Individuals with 10% or higher major share organizations shall fall under this category). ownership of the Company according to the (e) Individuals who currently belong to non-profit Company’s latest share registry or individuals who organizations that receive donations or aid worth currently belong to a group or organization with more than 2% of the Company’s gross revenue or major share ownership of the Company. recurring profit in the latest three fiscal years. (c) Individuals at the Company’s trading partners (f) Individuals with five years of less post-retirement or their subsidiaries having annual transactions years who in the past belonged to the organizations with the Company in excess of 2% of its annual or the Company’s trade partners as set forth in consolidated sales in the most recent three items (b) through (e) above. fiscal years.

ANNUAL REPORT 2017 35 (g) Spouses or relatives within three degrees Outside auditors attend meetings held once a of kinship of the officers at the Company month as a general rule to determine audit plans or specified trade partners (exclusive of and discuss the results within the meetings. Outside organizations lacking significance in business auditors attend liaison meetings with internal relations with the Company). auditors, accounting auditors, and internal control division representatives. Audit and supervisory board The Company has adopted a corporate governance members implement audit functions that cover the system aimed at strengthening the supervisory overall management of the Group by liaising with the function of the management with the cooperation of supervisory board as described in item (2) above. assigned Outside directors and outside auditors in Outside directors and outside auditors hold regular order to further improve management efficiency, and meetings aimed at ensuring appropriate cooperation maintain the financial soundness and transparency of with regard to audits by auditors, and internal and the Company. accounting audits.

Officer’s Compensation etc.

Total amounts of compensation etc. by category of officer, total amounts of compensation etc. by type, and numbers of subject officers Total amount of Category Number compensation etc. Directors (not including Outside Directors) 8 Directors 502 million yen

Statutory Auditors (not including Outside Statutory Auditors) 2 Statutory Auditors 49 million yen Outside Directors, Outside Statutory Auditors 5 Outside Statutory Auditors 50 million yen Total 15 Directors and Statutory Auditors 601 million yen

Note: Directors and Statutory Auditors do not receive other compensation aside from base pay, such as stock options, bonuses, salaries, or retirement benefits.

Consolidated total compensation etc. per officer (only members include two Outside Statutory Auditors. those receiving consolidated compensation etc. Compensation for Statutory Auditors is decided totaling 100 million yen or more) through consultation among Statutory Auditors.

Not applicable. Specified Number of Directors

Content and decision methods for amounts of The Articles of Incorporation specify that the Company’s officer’s compensation etc. and policies for deciding number of Directors shall not exceed 20 persons. on methods of calculation Requirements of Resolutions on Under a resolution of the 91st Ordinary General Appointment of Directors Meeting of Shareholders held June 27, 2006, officer’s compensation is limited to no more than 1.2 billion yen The Articles of Incorporation specify that a resolution per year for Directors and no more than 120 million on appointment of Directors must be passed by yen per year for Statutory Auditors. Decisions on a majority of the voting rights represented by the compensation for individual Directors are entrusted by shareholders present at the meeting who hold one- the board meetings in consultation with the Nomination third or more of all voting rights able to be exercised. Compensation Advisory Committee, whose four The Articles of Incorporation also specify that a

36 ANNUAL REPORT 2017 Corporate Governance

resolution on appointment of Directors may not be Article 459, Paragraph 1 of the Companies Act on passed through cumulative voting. dividends of surplus, etc. may be decided through a resolution of the Board of Directors. This is intended Matters Subject to Resolution in General to enable flexible policies on capital and dividends Meeting of Shareholders that May Be through putting dividends of surplus and related Covered by a Resolution of the Board of matters under the authority of the Board of Directors. Directors Requirements of Special Resolutions by Pursuant to the provisions of Article 426, Paragraph General Meeting of Shareholders 1 of the Companies Act, the Articles of Incorporation specify that Directors and Statutory Auditors may, to The Articles of Incorporation specify that the the extent permitted under laws and regulations, be resolutions under Article 309, Paragraph 2 of the exempted from liability for damages due to neglect of Companies Act must be passed by two-thirds or more duties through a resolution of the Board of Directors of the voting rights represented by the shareholders rather than obtaining the consent of all shareholders. present at the meeting who hold one-third or more of This is intended to enable Directors and Statutory all voting rights able to be exercised. This is intended Auditors to fully perform their expected roles. to facilitate the operation of General Meeting of The Articles of Incorporation also specify that, Shareholders by easing the quorum required for special expect where specified separately in laws or resolutions by the General Meeting of Shareholders. regulations, the matters covered under each item of

Details of Audit Fees etc.

Details of fees paid to certified public accountants and others involved in auditing Previous consolidated fiscal year This consolidated fiscal year

Category Fees for audit Fees for non-auditing Fees for audit Fees for non-auditing certification services services certification services services (million yen) (million yen) (million yen) (million yen) Filing company 156 1 168 12

Consolidated subsidiaries 79 — 66 —

Total 236 1 234 12

Other key compensation details (Previous consolidated fiscal year) Twenty Idemitsu consolidated subsidiaries overseas pay fees and other charges for audit certification services to firms that are members of the Deloitte group, belonging to the same network as Idemitsu’s certified public accountants and others involved in auditing.

(This consolidated fiscal year) These Idemitsu consolidated subsidiaries overseas pay fees and other charges for non-audit services (advisory services with regard to business integration) to Deloitte Tohmatsu Financial Advisory LLC and Deloitte Tohmatsu Consulting LLC, belonging to the same network as Idemitsu’s certified public accountants and others involved in auditing.

ANNUAL REPORT 2017 37 Corporate Governance

Details of non-auditing services provided to the filing company by the certified public accountants and others involved in auditing (Previous consolidated fiscal year) The Company pays to the certified public accountants and others involved in auditing remuneration for internal auditing services with regard to subsidiaries.

(This consolidated fiscal year) The Company pays to the certified public accountants and others involved in auditing remuneration for internal auditing services with regard to subsidiaries.

Method of deciding on audit fees Not applicable.

38 ANNUAL REPORT 2017 Directors, Audit & Supervisory Board Members and Executive Officers

(As of September 30, 2017)

Takashi Tsukioka Daisuke Seki Takashi Matsushita Shunichi Kito Representative Director and Executive Vice President and Executive Vice President and Executive Vice President and Chief Executive Officer Representative Director Director Director

Susumu Nibuya Kazuo Maruyama Toshiaki Sagishima Kiyoshi Homma Managing Director Director Director Director

AUDIT & SUPERVISORY BOARD MEMBERS Takanori Kuniyasu Sakae Hirano Taigi Ito** Shoichiro Niwayama**

* Outside director Eri Yokota* Ryosuke Ito* Takeo Kikkawa* Mackenzie Clugston* ** Non-standing Audit & Director Director Director Director Supervisory Board members

MANAGING EXECUTIVE OFFICERS EXECUTIVE OFFICERS

Takehiko Kawasaki Masashi Yokomura Shinji Araki Yuji Arai Hajime Nakamoto Hiroshi Maesawa Kazuhisa Harada Soichi Kobayashi Atsushi Yamamoto Itaru Matsuhiro Toshiyuki Tanida Eiji Hagiwara Shinichi Naruuchi

ANNUAL REPORT 2017 39 40 ANNUAL REPORT 2017 FINANCIAL SECTION

Contents

42 Management’s Discussion and Analysis

47 Business Risk Factors

52 Consolidated Balance Sheets

54 Consolidated Statements of Operations

55 Consolidated Statements of Comprehensive Income

56 Consolidated Statements of Changes in Equity

58 Consolidated Statements of Cash Flows

59 Notes to Consolidated Financial Statements

90 Independent Auditor’s Report

ANNUAL REPORT 2017 41 Management’s Discussion and Analysis

Analysis of Consolidated Operating Results

Net Sales Net Sales Consolidated net sales for fiscal 2016 fell 10.6% year

Billions of yen on year to ¥3,190.3 billion, due in part to decreases ,000 in the import prices for crude oil in yen terms. A breakdown of net sales by business segment is as ,000 follows: The Petroleum Products Segment had net sales of ¥2,438.2 billion (down 11.4% year on year). The 3,000 Petrochemical Products Segment’s net sales amounted to ¥461.2 billion (down 11.4% year on year), partly 2,000 due to a decrease in naphtha prices. The Resources Segment had net sales ¥227.3 billion (down 0.7% year 1,000 on year) due to weakened currencies of commodity countries. 0 12 13 14 15 16 F Cost of sales and selling, general, and administrative expenses The cost of sales for fiscal 2016 fell by 16.3% year on year to ¥2,770.9 billion, due partly to drops in prices of crude oil and naphtha. The amount of inventory valuation was improved by ¥155.3 billion due to a revaluation of inventories, including the effects of a write-down of book values. Selling, general, and administrative expenses were ¥284.3 billion (up 1.3% year on year).

Operating Income and Operating Operating income Income Margin Based on the above results, the consolidated operating

Billions of yen income for fiscal 2016 was ¥135.2 billion (up ¥154.9 10 billion year on year). Here follow a breakdown of operating income by business segment. 12 The Petroleum Products Segment recorded an 100 operating income of ¥77.0 billion, an increase of ¥144.4 7 3 billion on a year-on-year basis, due largely to improving

0 2 margins on petroleum products and the inventory revaluation that turned into a profit from a substantial 2 1 loss in the previous fiscal year. This operating income 0 0 figure includes ¥31.0 billion in profits on the valuation of 2 1 inventories. 100 2 The Petrochemical Products Segment posted an 12 13 14 15 16 F operating income of ¥40.0 billion (down ¥2.3 billion year on year), due mainly to exchange impact by the strong perati come perati come Mari yen. This operating income figure includes ¥2.1 billion in perati icome mari perati icome et saes profits on the valuation of inventories.

42 ANNUAL REPORT 2017 The Resources Segment posted an operating income of ¥16.6 billion (up ¥17.2 billion year on year), due to currency devaluation in commodity countries and cost reduction initiatives implemented in the coal business. The operating income of the Other Segments was ¥5.1 billion (down 42.3% on a year-on-year basis).

Non-operating income and ordinary income Non-operating profit and loss, calculated by subtracting non-operating expenses of ¥14.4 billion from non- operating income of ¥19.1 billion, resulted in a profit of ¥4.7 billion on a net basis, a recovery of ¥7.0 billion year on year, partly due to a decrease in foreign exchange valuation losses on foreign currency-denominated borrowings of overseas subsidiaries. Based on the above results, the ordinary income came to ¥140.0 billion (up of ¥161.9 billion year on year).

Interest Coverage Ratio Extraordinary income (loss), and income before tax provisions FY2012 FY2013 FY2014 FY2015 FY2016 Extraordinary profit/loss, calculated by subtracting Cash flows from operating extraordinary expenses of ¥19.8 billion from activities 50.8 50.1 172.9 216.4 53.5 (Billions of yen) extraordinary income of ¥2.9 billion, resulted in an Interest expense paid 13.0 11.0 12.1 11.4 9.3 extraordinary loss of ¥17.0 billion on a net basis, (Billions of yen) up ¥16.1 billion year on year. This is attributable to Interest coverage ratio 3.9 4.5 17.2 19.6 5.7 factors including a decrease in impairment losses in the (Times) resources business. * Interest coverage ratio = Cash flows from operating activities / Based on the above results, the income before tax Interest expense paid provisions was ¥140.0 billion (up ¥178.0 billion year on year).

Net Income Income taxes, and net income attributable to the parent and non-controlling interests Billions of yen Tax expenses consisting of corporate income, 0 inhabitant, business, and deferred taxes totaled ¥32.5 billion, and the ratio of income taxes to income before

0 income taxes was 26.4%. A net income attributable to non-controlling interests was ¥2.4 billion. 30 As a result, the consolidated net income attributable to the parent for fiscal 2016 was ¥88.2 billion (up 0 ¥124.2 billion year on year).

10 12 13 14 15 16 F

ANNUAL REPORT 2017 43 Total Assets Analysis of Financial Position

Billions of yen Assets 3,000 Consolidated total assets as of the end of fiscal 2016 stood at ¥2,641.6 billion (an increase of ¥239.5 billion 2,00 compared with the end of the preceding fiscal year),

2,000 partly due to acquisition of Showa Shell Sekiyu K.K. (Showa Shell) shares and increase in inventories and 1,00 notes and accounts receivables-trade resulting from factors including rising crude oil price. 1,000

00 Liabilities Consolidated total liabilities as of the end of fiscal 2016 0 were ¥2,217.0 billion (up ¥157.2 billion compared with 12 13 14 15 16 F the end of the preceding fiscal year) due to factors including increases in interest-bearing debt (¥1,523.0 billion) and an increase in notes and accounts payable- trade due to rising crude oil price.

Net assets Consolidated net assets as of the end of fiscal 2016 totaled ¥619.9 billion (up ¥82.3 billion compared with Shareholders’ Equity and the end of the preceding fiscal year), due to factors Shareholders’ Equity Ratio including the net income attributable to the parent

Billions of yen company. 700 30 As a result, the shareholders equity ratio as of the end of fiscal 2016 improved 1.3%, from 20.8% at the end of 00 2 the previous fiscal year to 22.1% 00 20 00 1 300 10 Analysis of Funds and Liquidity 200 100 Consolidated cash flow analysis 0 0 Cash and cash equivalents (“funds”) as of March 31, 12 13 14 15 16 F 2017, stood at ¥90.1 billion, a decrease of ¥28.7 billion Sharehoders uit from the end of the preceding year. The major factors Sharehoders uit atio behind this increase are summarized below. Sharehoders euit Tota euit Miorit iterests Sharehoders euit ratio Sharehoders euit Net cash provided by operating activities amounted to Tota assets ¥53.5 billion. This is because cash inflows due to factors such as net income (loss) before taxes and depreciation expense exceeded cash outflows due to factors such as increases in notes and accounts receivable, trade, and inventories owing to the price hike of crude oil.

44 ANNUAL REPORT 2017 Management’s Discussion and Analysis

Net Cash Provided by Operating Activities Net cash used in investment activities was ¥214.8 billion, due mainly to the acquisition of Showa Shell Billions of yen shares and the increased investments related to 200 maintenance and renovation of refineries. Net cash raised in financing activities was ¥136.1 billion, due in part to the increased fund procurement from short-term borrowings and commercial paper.

100 Fund demand Major items of the operating capital demand of the Idemitsu Group are the procurement costs of raw materials for manufacturing products, manufacturing costs, operating expenses such as SG&A expenses, 0 and the payment taxes. The major items of operating 12 13 14 15 16 F expenses are personal costs, distribution costs, operational expenses and R&D expenditures. The demand for capital investment funds includes the following, in line with the strategy for each segment. a. Investments to reconstruct sales and supply systems and enhance competitiveness for businesses, including fuel oils, basic chemicals, along with investments to ensure business expansion through entry into overseas growth markets, b. In the businesses related to oil exploration and production, coal, and uranium, investments to stable operation of existing holdings and to secure reserves by exploration, and c. Investments in the business areas including lubricants, performance materials, electronics materials, and agri-bio products with the aim of strengthening the development of environmentally conscious products and business expansion through global development.

ANNUAL REPORT 2017 45 Management’s Discussion and Analysis

Interest-Bearing Debt and Financial policy Net Debt/Equity Ratio The Idemitsu Group currently finances its operating capital and capital expenditures mainly through internal Billions of yen imes funds, borrowings, or the issuance of commercial paper 1,200 3 and corporate bonds. As of the end of fiscal 2016, the

1,000 outstanding amounts of short-term borrowings, long- term debt (including the current portion), and corporate 00 2 bonds (including those maturing in a year or less) stood 00 at ¥287.1 billion, ¥594.6 billion, and ¥65.0 billion, 00 1 respectively. The Company finances and loans all the funds required 200 by domestic subsidiaries for their operating capital 0 0 and for capital expenditures from the Group finances. 12 13 14 15 16 F Outside Japan, individual overseas subsidiaries borrow teresteari ebt the amounts required for operating capital and capital et ebtuit atio expenditures locally in their respective local currencies. iures for iterestbeari debt use the amouts recorded o the cosoidated baace sheets as shortterm borrowis, In order to procure the funds that will be required for commercia paper, corporate bods ad oterm debt, as we as ease obiatios. et ratio acuated as (terestbeari debt ash ad operating capital and capital expenditures to sustain cash euiaets ad marketabe securities) (uit Miorit iterests i cosoidated subsidiaries) medium- to long-term growth, the Idemitsu Group effectively combines operating cash flows, loans, and the issuance of commercial paper and corporate bonds Return on Invested Capital with commitment line agreements as well as capital reinforcement, while taking into consideration the balance regarding our financial position. 10 The Idemitsu Group has established a system that 8 enables the procurement of funds in a flexible and 6 stable manner by entering a long-term commitment line 4 agreement with a syndicate consisting of six lenders 2 that allows us to receive short-term loans during 0 the contract period through March 2018, in order -2 to efficiently procure operating capital, thus secure -4 sufficient liquidity, and smooth finances in case of

-6 occasion of disaster.

-8 12 13 14 15 16 F

* Return on invested capital = (Operating income + Equity in earnings and losses of affiliated companies and dividend income) / (Average of equity at beginning and end of period + Interest-bearing debt)

46 ANNUAL REPORT 2017 Business Risk Factors

Matters describing the Idemitsu Group’s business and (2) Market competition financial situation that may affect investors’ decisions The Idemitsu Group’s petroleum products business to invest are discussed below. Information concerning competes with multiple petroleum companies, some of the future is as of the Annual YUHO Report which have a scale of business operations and market submission date. share that are much larger than the Idemitsu Group. In addition, competition in the petroleum market in Japan is fierce due to an excess of refining facilities Risks in Each Business Segment and service stations. If the Idemitsu Group is unable Petroleum Products Segment to manage its business efficiently under this business (1) Fluctuations in crude oil prices environment, the Idemitsu Group’s financial condition The Idemitsu Group imports almost all of the crude oil and operating results may be substantially affected. required for the production of its petroleum products. The price of crude oil fluctuated substantially in the (3) Suppliers of crude oil to the Group past, and there are concerns that the price of crude oil Since the Idemitsu Group relies on oil-producing will continue to fluctuate in the future due to increasing countries in the Middle East for practically all of its demand from Asian countries; the unstable political imports of crude oil, the Group has been making situation in oil-producing countries in the Middle East efforts to diversify risk in the region by concluding and Africa; movements to nationalize resources in long-term crude oil import agreements with major oil- South American oil-producing countries; trends with producing countries in the Middle East in order to respect to environmental regulations and tax systems stably procure crude oil. However, the risk remains in the oil-consuming countries, including the US; and that the Idemitsu Group’s financial condition and speculative trading in petroleum. operating results may be substantially affected if Furthermore, since the Idemitsu Group imports imports of crude oil are restricted for a prolonged its entire volume of crude oil in US dollars, the period by unstable political situations, crude oil procurement costs of crude oil are affected by the production adjustments or accidents at oil-related currency exchange rate against the US dollar. facilities in the region. The Idemitsu Group strives to link the selling prices of petroleum products to domestic market prices in (4) Demand for petroleum products order to secure its margins. However, should market The Japanese petroleum market has matured, and prices fall due to intensifying competition in the demand for petroleum products is expected to domestic market or other factors, this could have a gradually decline. Furthermore, there is the possibility significant impact on the Group’s financial condition that rising crude oil prices and government measures to and operating results. address global warming based on the Paris Agreement The Idemitsu Group employs the gross average will impact future demand for petroleum products. In method for the valuation of inventories. When crude the event that demand for petroleum products declines oil prices are rising, the gross average method is due to these factors, the Idemitsu Group’s financial generally a positive factor for profits because the cost condition and operating results could be affected. of sales is pushed down by inventory assets that were relatively inexpensive at the beginning of the term. (5) Nghi Son Refinery and Petrochemical Complex When crude oil prices are falling, however, the gross Project average method has a negative impact on profits As part of the expansion of its oil and petrochemical because the cost of sales is pushed up by inventory businesses in Asia, the Idemitsu Group jointly assets that were relatively expensive at the beginning established Nghi Son Refinery and Petrochemical of the term. LLC (hereinafter “NSRP”) with Kuwait Petroleum International, PetroVietnam, and Mitsui Chemicals, Inc.

ANNUAL REPORT 2017 47 (hereinafter collectively referred to as the “Sponsors,” that the price of naphtha may be affected by crude oil including Idemitsu). This joint venture has been prices and increasing demand due to the construction constructing the Nghi Son Refinery and Petrochemical of new petrochemical production facilities that are Complex, which is equipped with oil refinery facilities planned in China and other countries. If we are unable with a refining capacity of 200,000 barrels/day and to appropriately transfer fluctuations in the price of facilities for producing petrochemicals including naphtha to the price of petrochemical products due paraxylene in the Nghi Son Economic Zone, Thanh to fierce market competition or other factors, the Hoa Province, Socialist Republic of Viet Nam. Idemitsu Group’s financial condition and operating Construction for the project was completed at the results could be affected. end of April 2017 and the complex intends to begin commercial operations in fiscal 2017. (2) Fluctuations in demand The total cost of the project is estimated at around Asian petrochemicals markets, including the Japanese $9.0 billion, of which $5.0 billion will be procured on a market, are currently experiencing intensifying project finance basis from a syndicate of banks including competition and therefore may be affected by the Japan Bank for International Cooperation, while the fluctuations in demand and increases in supply. In the remaining $4.0 billion or so will be procured through petrochemicals business, the Idemitsu Group is in investment and loans provided by the Sponsors. competition with companies whose business scale Of the amount procured through the project finance is larger, business bases more established, or that arrangement, the Idemitsu Group has provided a loan are more competitive than the Idemitsu Group in the guarantee to the syndicate of banks for 35.1%, which Japanese and Asian markets. Moreover, although is equivalent to its stake in the NSRP. Therefore, if demand for petrochemical products in China and other the facilities fail to operate under certain conditions Asian countries has increased in recent years, there is after construction is completed, the Idemitsu Group’s the possibility that demand will decline in the future as financial condition and operating results may be a result of an economic slowdown in these countries affected due to execution of the loan guarantee. or other factors. The Idemitsu Group’s financial Furthermore, the Idemitsu Group will shoulder 35.1% condition and operating results could be affected by of the investment and loans provided by the Sponsors, such intensification of competition and/or decrease in but if the project does not progress as planned due to demand in the market. changes in Vietnam’s political and economic conditions, laws and regulations, and employment environment, then the Idemitsu Group’s financial condition and Resources Segment operating results may be affected. (1) Oil exploration and production businesses The Idemitsu Group has taken out overseas a. Securing resources investment insurance from the official export credit The Idemitsu Group strives to acquire interests in agency of Japan, Nippon Export and Investment and discover resources that can lead to commercial Insurance, against the estimated losses from the production. However, if the Idemitsu Group is unable project, but this insurance may not necessarily be to successfully acquire or explore such interests, or is sufficient to cover all such losses. unable to develop confirmed resources as efficiently as scheduled, the Group’s crude oil output may decrease in the future. Furthermore, the Idemitsu Group’s Petrochemical Products Segment confirmed resources are concentrated in Norway, and (1) Fluctuations in raw material costs it conducts exploration activities in Norway, the United The Idemitsu Group produces naphtha, a raw material Kingdom, and Vietnam. The Idemitsu Group’s financial for petrochemical products at its refineries and also condition and operating results could be affected if procures it from the market. There is a possibility these exploration and development activities are shut

48 ANNUAL REPORT 2017 Business Risk Factors

down due to factors such as the political or economic Other Risks situation in these regions, which would leave it (1) Investment unable to develop confirmed resources or to discover The Idemitsu Group owns large-scale business additional resources. assets, and requires a large amount of investment for its business activities, such as the maintenance b. Crude oil price and replacement of existing refineries, plants and In recent years, the operating income from the oil distribution facilities, the acquisition of interests exploration and development business has been in oil fields, and oil exploration and development. supported primarily by high crude oil prices. Crude In fiscal 2016, the Group required ¥46.1 billion for oil prices have fluctuated in the past and the Idemitsu such investments. The Group intends to continue Group’s financial condition and operating results may investments in enhancing the competitiveness of be affected if the price of crude oil declines in the future its existing businesses, including petroleum and due to political or economic conditions or other factors. petrochemicals, securing earnings in oil exploration and development and in its coal businesses, and (2) Coal businesses developing new businesses. However, if the Group The Idemitsu Group produces coal at its mines in is unable to generate the cash flows necessary for Australia and other facilities and sells mainly to the such investment or obtain financing for the necessary Japanese market and other Asian markets. The funds, it may not be able to implement the planned Idemitsu Group has bolstered its production capacity investment and may lose profit-earning opportunities. in response to the projected growth in demand for Furthermore, there is a possibility that these coal in these regions. However, this demand may not investments will not yield revenues as planned due grow due to factors such as a shift to other types of to changes in the economic conditions or the market energy, environmental regulations or other regulations. environment. In such cases, the Group’s financial In addition, even if demand grows, the Idemitsu Group condition and operating results could be affected. may be in competition with other companies with a larger scale of business and a more established (2) Interest-bearing debt business base than the Idemitsu Group. Furthermore, The Idemitsu Group has been making efforts to reduce the Idemitsu Group’s coal mining operations may be interest-bearing debt, but continues to carry a large impacted by changes in the weather, accidents, or amount of liabilities. As of the end of fiscal 2016, other uncertainties. The Idemitsu Group’s financial the amount of interest-bearing debt totaled ¥1,052.3 condition and operating results could be affected if the billion, while interest paid during the consolidated fiscal demand for coal does not grow as expected or as a 2016 totaled ¥9.3 billion. result of competition with other companies. The Group will continue to work to reduce interest- bearing debt, but it may need additional financing for investment aimed at the continuation and expansion of Other Segments its businesses. However, if financing is restricted due Electronics materials and agricultural biotechnology to a change in the financial situation, or if the burden The Idemitsu Group develops products with high of interest expenses increases owing to rising interest added value in the electronics materials and agri-bio rates, the Group’s financial condition and operating fields with a view to future growth. However, success results could be affected. In addition, part of the in the development, production and market cultivation interest-bearing debt has general restrictive financial of such products is not guaranteed. If the Group is covenants imposed, and therefore if our financial unable to sell these products at a scale large enough position substantially changes in the future, that could to be profitable, it may not be able to recover the affect the Group’s fund procurement. development costs and secure profits.

ANNUAL REPORT 2017 49 (3) Business alliances and business integration (5) Environmental regulations The Idemitsu Group has promoted business alliances The Idemitsu Group’s businesses are subject to a wide with other companies as part of its efforts to enhance range of legal restrictions concerning environmental competitiveness, and these business alliances have protection and other matters in Japan and overseas been playing an important role in the execution of the where it operates its businesses or has rights and Company’s businesses. Moreover, the Group has also interests. For example, the Idemitsu Group is subject been considering business integration for the purpose to regulations on such activities as emissions of of enhancing the fuel oil business and so on. However, pollutants from oil refineries and factories, as well in the cases of strategic business alliances and the as the processing of waste materials, and may be business integration, the Group may be unable to penalized if it releases environmental pollutants in properly control the management, business operations excess of mandated standards. Furthermore, the and assets of its business alliance partners. In Idemitsu Group may be forced to bear substantial addition, business alliances and business integration expenses if Japan or any other country introduces may be affected by factors such as certain conditions new environmental regulations, or when the Group of the relevant counterparties and the Group’s complies with current or future environmental environment, or due to these factors the Group may regulations. In relation to the efforts to address global be unable to sufficiently gain initially-expected benefits warming, if Japan or any foreign country restricts or synergy effects, etc. In such cases, the Group’s emissions of greenhouse gases, or introduces new business, financial condition and operating results may carbon taxation, the Idemitsu Group may be required be materially affected. to pay a substantial amount of expenses or to invest a large amount of funds. The Idemitsu Group’s (4) Accidents, disasters, and disputes financial condition and operating results may be The Idemitsu Group’s businesses involve risk factors, significantly affected by liabilities or obligations related such as natural disasters, accidents and operation to compliance with such environmental or other stoppages at refineries or plants due to natural regulations. disasters and accidents. Natural disasters include earthquakes, tsunami, and typhoons, as well as the (6) Intellectual property rights and licenses risk of fires and explosions at refineries or plants The Idemitsu Group utilizes intellectual property rights located in Japan where there are many earthquakes. and licenses to execute its business operations, and in The Idemitsu Group’s equipment and facilities may particular patents and corporate secrets play important be affected by accidents caused by human error or roles in the technologies involved in oil refining and mechanical faults. The Group’s marine transportation lubricants and in the field of high-value-added products, of crude oil and petroleum products, consisting of including engineering plastics, performance chemicals, very large crude carriers, are exposed to the risks of electronics materials and agri-bio products. In addition, piracy and sinking or collisions due to adverse weather the Group files for registration to trademark its brands. conditions. In addition, the Idemitsu Group faces the However, patents, corporate secrets and brands risk of labor disputes. If any of the above risks, such owned by the Group may not necessarily provide as accidents, disasters or labor disputes, were to sufficient protection for the Group’s intellectual materialize, the Idemitsu Group’s business activities property rights. may be suspended for a prolonged period of time. In addition, it is possible that the Group’s corporate The Group has taken out nonlife insurance against secrets will be improperly handled by the Group’s estimated losses from accidents or disasters, but this employees, trading partners, or other related parties. insurance might not be sufficient to cover such losses. Furthermore, the Idemitsu Group has been granted technical licenses by third parties. There is a possibility that the Group will become unable to continue utilizing

50 ANNUAL REPORT 2017 Business Risk Factors

these technologies, as licenses may not be renewed (10) Transactions with shareholders or complaints from third parties about infringements of The Company engages in real estate lease intellectual property rights may be received. transactions with Nissho Kosan Co., Ltd. and the The Idemitsu Group’s businesses and operating Idemitsu Foundation of Culture and Welfare. The results could be affected if it cannot protect or fully terms of these transactions are determined based utilize the intellectual property rights required to on market prices in the vicinity. The Company also conduct its business. makes donations to the Idemitsu Museum of Arts. The amount donated is determined based on such factors (7) Fluctuations in foreign exchange rates as the museum’s management expenses, the scale of The Idemitsu Group conducts a large amount of the Company’s business and the publicity impact. foreign currency denominated transactions and has assets and liabilities denominated in foreign currencies. Accordingly, fluctuations in exchange rates affect the profits and losses related to transactions in foreign currencies and these amounts converted into Japanese yen in its financial statements. In addition, fluctuations in exchange rates affect the conversion of revenues or financial statements of overseas consolidated subsidiaries and overseas equity-method affiliates into Japanese yen.

(8) Declines in asset prices The Idemitsu Group posted an impairment loss of ¥10.9 billion on fixed assets for fiscal 2016. In the future, if the value of assets held by the Group declines due to changes in economic conditions, the resulting impairment losses could affect the Group’s financial condition and operating results.

(9) Management of personal information The Idemitsu Group directly or indirectly handles personal information and asset data in its sales of petroleum products and credit card businesses. In the event that this personal data is insufficiently managed or problems arise due to such management, the Group may be forced to bear significant expenses to remedy the problems. Furthermore, if the personal information of customers is improperly handled, or a problem arises with the management of any customer’s personal information, this could lead to reduced confidence in the Idemitsu Group, complaints, or lawsuits, regardless of whether the Idemitsu Group was directly managing that information, and this could affect the Company’s businesses and operating results.

ANNUAL REPORT 2017 51 CONSOLIDATED BALANCE SHEETS Idemitsu Kosan Co.,Ltd. and Consolidated Subsidiaries March 31, 2016 and 2017

Thousands of U.S. dollars Millions of yen (Note 1) 2016 2017 2017 ASSETS Current assets: Cash and cash equivalents (Note 19) ¥118,787 ¥90,093 $803,042 Notes and accounts receivable, trade (Note 19) 259,817 327,402 2,918,285 Inventories (Note 5) 362,746 430,861 3,840,463 Accounts receivable, other 56,599 61,950 552,195 Short-term loans 7,666 5,272 46,996 Deferred tax assets (Note 16) 24,557 16,763 149,420 Derivative assets (Notes 19 and 20) 1,336 48 433 Other 29,479 30,007 267,470 Less: Allowance for doubtful accounts (2,330) (2,629) (23,442) Total current assets 858,661 959,770 8,554,866

Property, plant and equipment (Notes 6, 8 and 18): Buildings and structures 191,512 182,869 1,629,994 Machinery and equipment 235,916 203,493 1,813,830 Land (Notes 7 and 9) 586,690 584,350 5,208,580 Construction in progress 9,379 7,808 69,600 Other 43,084 43,564 388,308 Total property, plant and equipment 1,066,583 1,022,086 9,110,314

Intangible fixed assets: Goodwill (Note 8) 9,699 7,623 67,947 Other 13,866 14,501 129,260 Total intangible fixed assets 23,566 22,124 197,207

Investments and other assets: Investments in securities (Notes 4, 9 and 19) 43,806 43,334 386,258 Investments in nonconsolidated subsidiaries 235,265 394,302 3,514,593 and affiliates (Notes 4 and 19) Long-term loans (Note 19) 20,904 36,666 326,823 Guarantee deposits 13,937 14,645 130,542 Long-term prepaid expenses 11,479 10,611 94,581 Exploration and development expenditures 40,328 46,161 411,457 Deferred tax assets (Note 16) 61,704 57,188 509,749 Oil field premium assets (Note 2(U)) 23,188 30,617 272,906 Other 3,160 4,582 40,845 Less: Allowance for doubtful accounts (468) (457) (4,078) Total investments and other assets 453,308 637,652 5,683,681

Total assets ¥2,402,118 ¥2,641,633 $23,546,069

52 ANNUAL REPORT 2017 Thousands of U.S. dollars Millions of yen (Note 1) 2016 2017 2017 LIABILITIES AND EQUITY Current liabilities: Notes and accounts payable, trade (Note 19) ¥291,676 ¥331,602 $2,955,720 Short-term borrowings (Notes 9 and 19) 184,983 287,054 2,558,646 Commercial paper (Notes 9 and 19) － 104,005 927,046 Current portion of long-term debt (Notes 9 and 19) 108,964 80,512 717,640 Accounts payable, other (Note 9) 256,661 232,548 2,072,808 Accrued expenses 20,860 18,500 164,899 Income taxes payable 3,856 14,529 129,506 Accrued bonuses to employees 6,157 8,247 73,515 Derivative liabilities (Notes 19 and 20) 1,242 2,100 18,718 Deferred tax liabilities (Note 16) 193 328 2,930 Other (Note 9) 62,575 65,550 584,277 Total current liabilities 937,171 1,144,978 10,205,710

Long-term liabilities: Long-term debt (Notes 9 and 19) 615,639 579,115 5,161,912 Deferred tax liabilities (Note 16) 13,011 9,968 88,854 Deferred tax liability related to land revaluation (Notes 7 and 16) 95,795 93,951 837,435 Liability for employees' retirement benefits (Notes 2(T) and 10) 21,351 15,093 134,535 Reserve for repair work 28,440 28,357 252,765 Derivative liabilities (Notes 19 and 20) 23,053 12,195 108,699 Oil field premium liabilities (Note 2(U)) 29,042 38,114 339,732 Asset retirement obligations (Note 11) 79,843 78,132 696,430 Other (Note 9) 21,108 21,793 194,252 Total long-term liabilities 927,286 876,722 7,814,619 Total liabilities 1,864,457 2,021,700 18,020,329

Contingent liabilities (Note 12)

Equity (Note 13): Shareholders’ equity: Common stock: 108,606 108,606 968,062 Authorized, 436,000,000 shares in 2016 and 2017; issued, 160,000,000 shares in 2016 and 2017 Capital surplus 71,131 71,131 634,024 Retained earnings 168,990 249,549 2,224,349 Treasury stock-at cost, 46,956 shares in 2016 and 47,236 shares (130) (131) (1,174) in 2017 Total shareholders' equity 348,597 429,156 3,825,261

Accumulated other comprehensive income (loss): Surplus from land revaluation (Note 7) 154,263 155,541 1,386,412 Deferred gains (losses) on hedging activities, net (Note 20) (12,854) (7,713) (68,756) Unrealized gains (losses) on available-for-sale securities 4,527 7,617 67,898 Foreign currency translation adjustments 10,764 318 2,839 Defined retirement benefit plans (4,656) (1,119) (9,977) Total accumulated other comprehensive income 152,045 154,644 1,378,416 Noncontrolling interests in consolidated subsidiaries 37,018 36,132 322,062 Total equity 537,660 619,932 5,525,740 Total liabilities and equity ¥2,402,118 ¥2,641,633 $23,546,069

See notes to consolidated financial statements. ANNUAL REPORT 2017 53 CONSOLIDATED STATEMENTS OF OPERATIONS Idemitsu Kosan Co.,Ltd. and Consolidated Subsidiaries Years Ended March 31, 2016 and 2017 Thousands of U.S. dollars Millions of yen (Note 1) 2016 2017 2017

Net sales ¥3,570,202 ¥3,190,347 $28,437,002 Cost of sales (Note 5) 3,309,167 2,770,857 24,697,904 Gross profit 261,034 419,489 3,739,097 Selling, general and administrative expenses (Note 14) 280,678 284,254 2,533,690 Operating income (loss) (19,643) 135,234 1,205,406

Non-operating income (expenses): Interest income 1,331 2,555 22,776 Gain (loss) on foreign exchange, net (7,930) (1,047) (9,335) Dividend income 5,540 5,338 47,580 Interest expense (11,361) (9,258) (82,520) Subsidy income 2,350 870 7,757 Gain on sales of fixed assets, net 5,081 1,292 11,519 Gain on sales of investments in securities 39 1,320 11,774 Gain on sale of affiliate stock 3,628 39 355 Gain on transfer of business 474 － － Equity in earnings of nonconsolidated subsidiaries and 9,790 7,976 71,099 affiliates, net Impairment loss on fixed assets (Note 8) (35,589) (10,897) (97,132) Loss on disposals of fixed assets (2,797) (6,178) (55,076) Other, net (5,876) (4,237) (37,771) (35,318) (12,225) (108,972) Income (loss) before income taxes (54,961) 123,008 1,096,433

Income taxes – Current (Note 16) 9,053 27,393 244,166 – Deferred (Note 16) (27,637) 5,091 45,383 Total income taxes (18,584) 32,484 289,550 Net income (loss) (36,377) 90,524 806,883 Net income (loss) attributable to noncontrolling interests (383) 2,359 21,029 Net income (loss) attributable to owners of the parent (¥35,993) ¥88,164 $785,854 Basic net income (loss) per share (in yen and dollars) (Notes 2(W) and 21) (¥225.03) ¥551.19 $4.91

Diluted net income per share (in yen and dollars) (Notes 2(W) and 21) － － －

See notes to consolidated financial statements.

54 ANNUAL REPORT 2017 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Idemitsu Kosan Co.,Ltd. and Consolidated Subsidiaries Years Ended March 31, 2016 and 2017 Thousands of U.S. dollars Millions of yen (Note 1) 2016 2017 2017 Net income (loss) (¥36,377) ¥90,524 $806,883 Other comprehensive income (loss) (Note 17) Unrealized gains (losses) on available-for-sale securities (5,098) 3,097 27,607 Deferred gains (losses) on hedging activities, net (5,171) 3,659 32,618 Foreign currency translation adjustments (29,019) (7,603) (67,772) Defined retirement benefit plans (5,893) 3,557 31,709 Surplus from land revaluation (3,257) 1,670 14,887 Share of other comprehensive income (loss) in associates (1,744) (2,088) (18,614) Total other comprehensive income (loss) (50,184) 2,292 20,436

Comprehensive income (loss) (Note 17) (¥86,561) ¥92,816 $827,319

Total comprehensive income (loss) attributable to (Note 17): Owners of the parent (¥80,268) ¥91,156 $812,520 Noncontrolling interests (6,293) 1,660 14,799

See notes to consolidated financial statements.

ANNUAL REPORT 2017 55 CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY Idemitsu Kosan Co.,Ltd. and Consolidated Subsidiaries Years Ended March 31, 2016 and 2017 Thousands Millions of yen Shareholders’ equity

Number of shares of Total common stock Common Capital Retained Treasury shareholders’ outstanding stock surplus earnings stock equity Balance at April 1, 2015 159,953 ¥108,606 ¥71,131 ¥212,119 (¥130) ¥391,727 Cash dividends,㻌\50.0 per share (7,997) (7,997) Net income (loss) attributable to owners of the parent (35,993) (35,993) Net adjustment to retained earnings due to 922 922 change in scope of consolidation Acquisitions of treasury stock (0) (0) (0) Adjustment due to sales and revaluation of (60) (60) land (Note 7) Items other than changes in shareholders' equity Balance at March 31, 2016 159,953 ¥108,606 ¥71,131 ¥168,990 (¥130) ¥348,597 Cash dividends,㻌\50.0 per share (7,997) (7,997) Net income (loss) attributable to owners of the parent 88,164 88,164 Net adjustment to retained earnings due to － change in scope of consolidation Acquisitions of treasury stock (0) (0) (0) Adjustment due to sales and revaluation of 392 392 land (Note 7) Items other than changes in shareholders' equity

Balance at March 31, 2017 159,952 ¥108,606 ¥71,131 ¥249,549 (¥131) ¥429,156

Thousands of U.S. dollars (Note 1) Shareholders’ equity

Total Common Capital Retained Treasury shareholders’ stock surplus earnings stock equity Balance at March 31, 2016 $968,062 $634,024 $1,506,285 ($1,166) $3,107,204

Cash dividends, $0.44 per share (71,286) (71,286)

Net income (loss) attributable to owners of the parent 785,854 785,854 Net adjustment to retained earnings due to － change in scope of consolidation Acquisitions of treasury stock (7) (7) Adjustment due to sales and revaluation of 3,496 3,496 land (Note 7) Items other than changes in shareholders' equity

Balance at March 31, 2017 $968,062 $634,024 $2,224,349 ($1,174) $3,825,261

(Continued)

56 ANNUAL REPORT 2017 Millions of yen Accumulated other comprehensive income Unrealized gains Total Deferred gains (losses) on Foreign Defined accumulated Noncontrolling Surplus (losses) on available- currency retirement other interests in from land hedging for-sale translation benefit comprehensive consolidated Total revaluation activities, net securities adjustments plans income subsidiaries equity Balance at April 1, 2015 ¥157,460 (¥7,896) ¥9,920 ¥34,795 ¥1,243 ¥195,522 ¥43,134 ¥630,384 Cash dividends,㻌\50.0 per share (7,997) Net income (loss) attributable to owners of the (35,993) parent Net adjustment to retained earnings due to 922 change in scope of consolidation Acquisitions of treasury stock (0) Adjustment due to sales and revaluation of 60 60 － land (Note 7) Items other than changes in shareholders' (3,257) (4,957) (5,392) (24,030) (5,899) (43,538) (6,116) (49,655) equity Balance at March 31, 2016 ¥154,263 (¥12,854) ¥4,527 ¥10,764 (¥4,656) ¥152,045 ¥37,018 ¥537,660 Cash dividends,㻌\50.0 per share (7,997) Net income (loss) attributable to owners of the 88,164 parent Net adjustment to retained earnings due to － change in scope of consolidation Acquisitions of treasury stock (0) Adjustment due to sales and revaluation of (392) (392) － land (Note 7) Items other than changes in shareholders' 1,670 5,140 3,089 (10,446) 3,537 2,991 (885) 2,105 equity

Balance at March 31, 2017 ¥155,541 (¥7,713) ¥7,617 ¥318 (¥1,119) ¥154,644 ¥36,132 ¥619,932

Thousands of U.S. dollars (Note 1) Accumulated other comprehensive income Unrealized gains Total Deferred gains (losses) on Foreign Defined accumulated Noncontrolling Surplus (losses) on available- currency retirement other interests in from land hedging for-sale translation benefit comprehensive consolidated Total revaluation activities, net securities adjustments plans income subsidiaries equity Balance at March 31, 2016 $1,375,020 ($114,574) $40,356 $95,953 ($41,508) $1,355,246 $329,959 $4,792,411

Cash dividends, $0.44 per share (71,286) Net income (loss) attributable to owners of the 785,854 parent Net adjustment to retained earnings due to － change in scope of consolidation Acquisitions of treasury stock (7) Adjustment due to sales and revaluation of (3,496) (3,496) － land (Note 7) Items other than changes in shareholders' 14,887 45,818 27,541 (93,113) 31,531 26,665 (7,897) 18,768 equity

Balance at March 31, 2017 $1,386,412 ($68,756) $67,898 $2,839 ($9,977) $1,378,416 $322,062 $5,525,740

See notes to consolidated financial statements.

ANNUAL REPORT 2017 57 CONSOLIDATED STATEMENTS OF CASH FLOWS Idemitsu Kosan Co.,Ltd. and Consolidated Subsidiaries Years Ended March 31, 2016 and 2017 Thousands of U.S. dollars Millions of yen (Note 1) 2016 2017 2017 Operating activities: Income (loss) before income taxes (¥54,961) ¥123,008 $1,096,433 Adjustments for: Depreciation and amortization 80,282 70,200 625,730 Impairment loss on fixed assets (Note 8) 35,589 10,897 97,132 (Gain) loss on sales of tangible fixed assets, net (5,081) (1,292) (11,519) (Increase) decrease in notes and accounts receivable, trade 61,291 (70,211) (625,830) (Increase) decrease in inventories 149,734 (70,623) (629,496) Increase (decrease) in notes and accounts payable, trade (72,883) 42,412 378,037 (Increase) decrease in accounts receivable, other 8,543 (9,842) (87,733) Increase (decrease) in accounts payable, other 28,858 (25,212) (224,734) Increase (decrease) in liability for employees' retirement benefits (198) (2,715) (24,207) Payment of income taxes (13,290) (14,231) (126,847) Other, net (1,516) 1,151 10,260 Net cash provided by (used in) operating activities 216,368 53,539 477,225

Investing activities: Purchases of investment securities (25,008) (162,009) (1,444,067) Proceeds from sales and redemption of securities 405 3,925 34,988 Proceeds from sale of affiliate stock 5,991 49 437 Purchases of tangible fixed assets (60,149) (41,454) (369,502) Proceeds from sales of tangible fixed assets 11,879 3,128 27,882 Purchases of intangible fixed assets (575) (1,968) (17,544) Disbursements for long-term loans (17,970) (17,329) (154,469) Proceeds from collection of long-term loans receivable 1,334 1,887 16,822 (Increase) decrease in short-term loans receivable, net (1,649) 2,293 20,438 Payments for investments in capital of affiliates (914) (1,655) (14,758) Other, net (11,393) (1,682) (14,992) Net cash provided by (used in) investing activities (98,052) (214,817) (1,914,765)

Financing activities: Increase (decrease) in short-term borrowings, net (20,549) 104,408 930,635 Increase (decrease) in commercial paper, net (26,997) 104,005 927,046 Proceeds from long-term debt 163,997 45,745 407,750 Repayments of long-term debt (213,820) (107,554) (958,680) Purchases of treasury stock (0) (0) (7) Cash dividends paid (7,997) (7,997) (71,286) Cash dividends paid to noncontrolling shareholders (419) (2,546) (22,696) Other, net 205 84 749 Net cash provided by (used in) financing activities (105,581) 136,143 1,213,509 Effect of exchange rate changes on cash and cash equivalents (6,183) (3,559) (31,730) Net increase (decrease) in cash and cash equivalents 6,551 (28,693) (255,760) Cash and cash equivalents at beginning of year 111,195 118,787 1,058,803 Net increase (decrease) in cash and cash equivalents resulting 1,040 － － from change in scope of consolidation Cash and cash equivalents at end of year ¥118,787 ¥90,093 $803,042

See notes to consolidated financial statements.

58 ANNUAL REPORT 2017 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Idemitsu Kosan Co.,Ltd. and Consolidated Subsidiaries Years ended March 31, 2016 and 2017

1． Basis of Presentation of Consolidated Financial Statements

The accompanying consolidated financial statements have been prepared in accordance with the provisions set forth in the Japanese Financial Instruments and Exchange Act and its related accounting regulations and in accordance with accounting principles generally accepted in Japan ("Japanese GAAP"), which are different in certain respects as to the application and disclosure requirements of International Financial Reporting Standards.

In preparing these consolidated financial statements, certain reclassifications and rearrangements have been made to the consolidated financial statements issued domestically in order to present them in a form which is more familiar to readers outside Japan. In addition, certain reclassifications have been made in the 2016 consolidated financial statements to conform to the classifications used in 2017.

The consolidated financial statements are stated in Japanese yen, the currency of the country in which Idemitsu Kosan Co.,Ltd. (the "Company") is incorporated and operates. Japanese yen figures less than a million yen are rounded down to the nearest million yen, except for per share data. The translations of Japanese yen amounts into U.S. dollar amounts are included solely for the convenience of readers outside Japan and have been made at the rate of ¥112.19 to $1, the approximate rate of exchange at March 31, 2017. Such translations should not be construed as representations that the Japanese yen amounts could be converted into U.S. dollars at that or any other rate.

2．Summary of Significant Accounting Policies (A) Principles of Consolidation The consolidated financial statements as of and for the years ended March 31, 2016 and 2017, include the accounts of the Company and its significant subsidiaries (together, the "Group"). Under the control and influence concepts, those companies in which the Company, directly or indirectly, is able to exercise control over operations are fully consolidated, and those companies over which the Group has the ability to exercise significant influence are accounted for by the equity method (see (C) below).

All significant intercompany balances and transactions have been eliminated in consolidation. All material unrealized profit included in assets resulting from transactions within the Group is also eliminated. The excess of the cost of acquisition over the fair value of the net assets of an acquired subsidiary at the date of acquisition is amortized over periods ranging from 5 years to 20 years. The account balance of investment costs over the net equity of subsidiaries acquired is included in goodwill in the accompanying consolidated balance sheets.

The number of consolidated subsidiaries as of March 31, 2016 and 2017, is as follows: Consolidated subsidiaries 2016 2017 Domestic 18 18 Overseas 49 49 Total 67 67

Consolidation of the remaining subsidiaries would not have a material effect on the accompanying consolidated financial statements.

Certain subsidiaries, such as Idemitsu Cuu Long Petroleum Co., Ltd. and 46 overseas subsidiaries and certain affiliates, employ December 31 as their balance sheet date. For consolidating the accounts of these subsidiaries and applying the equity method to the investments in these affiliates, the Company uses their financial statements as of their respective financial year-end, and necessary adjustments have been made where significant intercompany transactions took place between such different year-end dates.

(B) Unification of Accounting Policies Applied to Foreign Subsidiaries for the Consolidated Financial Statements Under Accounting Standards Board of Japan ("ASBJ") Practical Issues Task Force ("PITF") No. 18, "Practical Solution on Unification of Accounting Policies Applied to Foreign Subsidiaries for the Consolidated Financial Statements," the accounting

ANNUAL REPORT 2017 59 policies and procedures applied to a parent company and its subsidiaries for similar transactions and events under similar circumstances should in principle be unified for the preparation of the consolidated financial statements. However, financial statements prepared by foreign subsidiaries in accordance with either International Financial Reporting Standards or generally accepted accounting principles in the United States of America (Financial Accounting Standards Board Accounting Standards Codification—"FASB ASC") tentatively may be used for the consolidation process, except for the following items that should be adjusted in the consolidation process so that net income is accounted for in accordance with Japanese GAAP, unless they are not material: (a) amortization of goodwill; (b) scheduled amortization of actuarial gain or loss of pensions that has been directly recorded in the equity through other comprehensive income; (c) expensing capitalized development costs of R&D; and (d) cancellation of the fair value model of accounting for property, plant, and equipment and investment properties and incorporation of the cost model accounting.

(C) Investments in Nonconsolidated Subsidiaries and Affiliates Investments in nonconsolidated subsidiaries and affiliates are, in principle, accounted for by the equity method. The number of nonconsolidated subsidiaries and affiliates to which the equity method is applied as of March 31, 2016 and 2017, is as follows: Equity method entities 2016 2017 Nonconsolidated subsidiaries 4 4 Affiliates 24 25 Total 28 29

Investments in the remaining unconsolidated subsidiaries and affiliates are stated at cost. If the equity method of accounting had been applied to the investments in these companies, the effect on the accompanying consolidated financial statements would not be material.

(D) Unification of Accounting Policies Applied to Foreign Associated Companies for the Equity Method ASBJ Statement No. 16, "Accounting Standard for Equity Method of Accounting for Investments," requires adjustments to be made to conform the associate's accounting policies for similar transactions and events under similar circumstances to those of the parent company when the associate's financial statements are used in applying the equity method unless it is impracticable to determine such adjustments. In addition, financial statements prepared by foreign associated companies in accordance with either International Financial Reporting Standards or generally accepted accounting principles in the United States of America tentatively may be used in applying the equity method if the following items are adjusted so that net income is accounted for in accordance with Japanese GAAP, unless they are not material: (a) amortization of goodwill; (b) scheduled amortization of actuarial gain or loss of pensions that has been recorded in equity through other comprehensive income; (c) expensing capitalized development costs of R&D; and (d) cancellation of the fair value model of accounting for property, plant and equipment and investment properties and incorporation of the cost model of accounting.

(E) Foreign Currency Translation All monetary assets and liabilities in foreign currencies are translated into yen at the exchange rates prevailing at the respective balance sheet dates. With respect to translation of the foreign currency-denominated financial statements of overseas consolidated subsidiaries, all profits and losses of foreign subsidiaries are translated into yen using the average rate for the period. Also, all balance sheet items, except for equity, are translated at the current rates of foreign exchange prevailing at the balance sheet date, whereas equity items are translated at the historical rates. Differences arising from translation of foreign currency financial statements are recorded in the consolidated balance sheets in equity as foreign currency translation adjustments.

(F) Cash Equivalents Cash equivalents are short-term investments that are readily convertible into cash and exposed to insignificant risk of changes in value. Cash equivalents include time deposits, certificates of deposit and commercial paper, all of which mature or become due within three months of the date of acquisition.

(G) Allowance for Doubtful Accounts The Group provides an allowance for doubtful accounts based on the percentage of bad debt losses written off against the balance of total receivables in addition to the amount deemed necessary to cover estimated future losses by reviewing individual accounts.

(H) Inventories Inventories are principally stated at the lower of cost, determined by the average cost method, or net selling value. Losses

60 ANNUAL REPORT 2017 resulting from application of the lower of cost or net selling value method are included in cost of sales in the accompanying consolidated statements of operations.

(I) Securities Securities are classified into three categories: “Held-to-maturity securities,” “Equity securities issued by nonconsolidated subsidiaries and affiliates,” and “Available-for-sale securities.”

Held-to-maturity securities: Shown as current assets if the maturity period is within one year, or as investments in securities if the maturity period is over one year and stated at amortized cost, which is determined using the straight-line method. Equity securities issued by nonconsolidated subsidiaries and affiliates: Carried at cost determined by the moving-average method, unless they are deemed impaired in value, but accounted for by the equity method for consolidation purposes. Available-for-sale securities: Shown as current assets if the maturity period is within one year or as investments in securities if the maturity period is over one year or undefined. Those with readily determinable market values are stated at fair market value and those without readily determinable market values are carried at cost determined by the moving-average method. The resulting unrealized gains/losses are recorded as “Unrealized gains (losses) on available-for-sale securities” in a separate component of equity, net of tax effects thereon. Where the values are considered impaired, such impairments are charged to income.

(J) Derivatives and Hedging Activities Derivatives The Group utilizes forward currency exchange contracts, foreign currency options, interest rate swaps and options, interest rate currency swaps and crude oil and petroleum product swaps and forward contracts to hedge the risks of exchange rate fluctuations, interest rate fluctuations, and price fluctuations of crude oil and petroleum products, respectively. The Company borrows foreign currency-denominated loans to hedge the risks of exchange rate fluctuations of overseas investments in securities and foreign subsidiaries’ equity. Purchases of derivative financial instruments are limited to the amounts of the hedged items and are not used for speculation or dealing purposes. Internal rules have been established with respect to the purposes, policies, procedures, approvals and reporting for derivatives. Hedge effectiveness with respect to the hedged items is constantly monitored.

Hedge Accounting Where the transactions do not satisfy the conditions for hedge accounting stipulated in the accounting standard for financial instruments, such derivative arrangements and financial instruments are valued at fair value and the resulting gains or losses are included in the consolidated statements of operations, whereas the deferral method of accounting is applied to transactions which qualify for hedge accounting. Under hedge accounting, unrealized gains or losses on the hedge instruments are carried as a component of equity in the consolidated balance sheets, until the profits or losses on the corresponding hedged items are realized.

(K) Property, Plant and Equipment Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation of property, plant and equipment of the Company and its subsidiaries is mainly computed by the straight-line method.

(L) Intangible Fixed Assets Software for internal use is amortized using the straight-line method over the estimated useful life of the software, generally 5 years. Other intangible fixed assets are amortized using the straight-line method over the respective estimated useful life.

(M) Bond Issue Costs Bond issue costs are charged to income as incurred.

(N) Asset Retirement Obligations An asset retirement obligation is recorded for a legal obligation imposed either by law or contract that results from the acquisition, construction, development and normal operation of a tangible fixed asset and is associated with the retirement of such tangible

ANNUAL REPORT 2017 61 fixed asset. The asset retirement obligation is recognized as the sum of the discounted cash flows required for the future asset retirement and is recorded in the period in which the obligation is incurred if a reasonable estimate can be made. If a reasonable estimate of the asset retirement obligation cannot be made in the period the asset retirement obligation is incurred, the liability should be recognized when a reasonable estimate of the asset retirement obligation can be made. Upon initial recognition of a liability for an asset retirement obligation, an asset retirement cost is capitalized by increasing the carrying amount of the related fixed asset by the amount of the liability. The asset retirement cost is subsequently allocated to expense through depreciation over the remaining useful life of the asset. Over time, the liability is accreted to its present value each period. Any subsequent revisions to the timing or the amount of the original estimate of undiscounted cash flows are reflected as an adjustment to the carrying amount of the liability and the capitalized amount of the related asset retirement cost.

(O) Research and Development Costs Research and development costs are charged to income as incurred.

(P) Leases   Finance lease transactions are capitalized to recognize lease assets and lease obligations in the balance sheet.  In March 2007, the ASBJ issued ASBJ Statement No. 13, "Accounting Standard for Lease Transactions," which revised the previous accounting standard for lease transactions. Under the previous accounting standard, finance leases that were deemed to transfer ownership of the leased property to the lessee were capitalized. However, other finance leases were permitted to be accounted for as operating lease transactions if certain "as if capitalized" information was disclosed in the notes to the lessee's financial statements. The revised accounting standard permits leases that existed at the transition date and do not transfer ownership of the leased property to the lessee to continue to be accounted for as operating lease transactions.

The Company applied the revised accounting standard effective April 1, 2008. In addition, the Company continues to account for leases that existed at the transition date and that do not transfer ownership of the leased property to the lessee as operating lease transactions.

All other leases are accounted for as operating leases.

(Q) Income Taxes The provision for income taxes is computed based on the pretax income included in the consolidated statements of operations. The asset and liability approach is used to recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Deferred taxes are measured by applying currently enacted income tax rates to the temporary differences.

The Company applied ASBJ Guidance No. 26, "Guidance on Recoverability of Deferred Tax Assets," effective April 1, 2016. There was no impact from this for the year ended March 31, 2017.

(R) Reserve for Repair Work The Company and its consolidated subsidiaries are required periodically to repair oil tanks, machinery and equipment and vessels. A reserve for the repair work on oil tanks, machinery and equipment and vessels is provided for the current portion of the estimated total cost of such work.

(S) Accrued Bonuses to Employees Accrued bonuses to employees are provided for based on the estimated amount to be paid to employees after the consolidated balance sheet date for their services rendered during the current period.

(T) Liability for Employees’ Retirement Benefits The employees of the Company and its subsidiaries are generally covered by point-based retirement benefit plans under which the retiring employees are entitled to lump-sum payments and/or pension payments. Also, certain subsidiaries have defined contribution plans.

62 ANNUAL REPORT 2017 The Company accounts for the liability for retirement benefits based on the projected benefit obligations and plan assets at the balance sheet date. The projected benefit obligations are attributed to periods on a benefit formula basis. Actuarial gains and losses that are yet to be recognized in profit or loss are recognized within equity (accumulated other comprehensive income), after adjusting for tax effects and are recognized in profit or loss over 10 years no longer than the expected average remaining service period of the employees. Past service costs are recognized in profit or loss in the period in which they are incurred.

(U) Oil field premium assets/liabilities With respect to the premium to be paid to the assignor of the Snorre Field based on the agreement made at the time of acquisition of the Snorre Field, the amount of oil field premium liabilities was posted in liabilities and the same amount was recorded in assets as oil field premium assets. The amount of oil field liabilities, which was calculated by estimating the amount of future expenditures based on reserves of crude oil and future prices of crude oil, was discounted at relevant discount rates. The oil field premium assets are amortized in proportion to crude oil production, and the oil field premium liabilities are deducted upon payments.

(V) Appropriation of Retained Earnings The Company may make dividend payments as an appropriation of retained earnings by resolution of the Board of Directors pursuant to the provisions of Article 459, paragraph 1 of the Companies Act of Japan (the “Companies Act”).

(W) Net Income Per Share Basic net income per share is computed by dividing net income attributable to common shareholders by the weighted-average number of common shares outstanding for the period, retroactively adjusted for stock splits.

Diluted net income per share reflects the potential dilution that could occur if securities were exercised or converted into common stock. Diluted net income per share of common stock assumes full conversion of the outstanding convertible notes and bonds at the beginning of the year (or at the time of issuance) with an applicable adjustment for related interest expense, net of tax, and full exercise of outstanding warrants.

(X) Consumption Tax Consumption tax is generally imposed at a flat rate of 8% in Japan on all domestic consumption of goods and services, with certain exceptions. Items in the consolidated statements of operations are presented on a net basis of consumption tax. Net amounts of consumption tax to be recouped or paid are recorded as “Other” in current assets or current liabilities as the case may be in the consolidated balance sheets.

(Y) Impairment of Fixed Assets Fixed assets are required to be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss shall be recognized in the consolidated statements of operations by reducing the carrying amount of impaired assets or a group of assets to the recoverable amount to be measured as the higher of net selling price or value in use.

3．Additional Information (Agreement to Purchase Showa Shell Sekiyu K.K. Share and Discussions toward Business Integration) In its meeting held on July 30, 2015, the Company’s board of directors approved a resolution to purchase Showa Shell Sekiyu K.K. (“Showa Shell”) shares with 33.3% voting rights from subsidiary companies of Royal Dutch Shell plc, and a share purchase agreement was entered into by between the Company and such subsidiary companies on the same day. In addition, in its meeting held on December 19, 2016, the Company’s board of directors approved a resolution to conclude an agreement on amendment of the above share purchase agreement, and on the same day this agreement on amendment was concluded with the subsidiary companies of Royal Dutch Shell plc and the acquisition of Showa Shell shares with 31.3% voting rights was completed.

Discussions toward business integration of the Company and Showa Shell were undertaken based on a Memorandum of Understanding for the Business Integration of the Company and Showa Shell (“MoU”) concluded on November 12, 2015. Companies will continue discussions toward business integration respecting the spirits of the MoU, with the goal of creating an industry-leading player with an unparalleled competitive position. Through these discussions, the Company and Showa Shell have signed an agreement on May 9, 2017 to enhance and promote business collaboration prior to the business integration of both

ANNUAL REPORT 2017 63 companies.

(a) Names of sellers The Shell Petroleum Company Limited The Anglo-Saxon Petroleum Company Limited

(b) Overview of Showa Shell i. Company name: Showa Shell Sekiyu K.K. ii. Main business: Oil business and energy solutions business iii. Scale: Capital: ¥34,197 million ($304,813 thousand) Consolidated sales: ¥ 1,726,075 million ($15,385,283 thousand) (fiscal year ended December 31, 2016)

(c) Schedule for share transfer The acquisition of the shares was completed on December 19, 2016.

(d) Number of shares to be purchased, purchase price, and shareholding after purchase as of March 31, 2017, are summarized as follows: Before the Amendment After the Amendment Number of Shares to be purchased 125,261,200 117,761,200 Ownership % after the purchase 33.3% of the voting rights 31.3% of the voting rights

Before the Amendment After the Amendment Thousands of U.S. Thousands of U.S. Millions of yen Millions of yen dollars dollars ¥169,103 $1,507,291 ¥158,978 $1,417,042 Purchase price (¥1,350 per Share) ($12.03 per Share) (¥1,350 per Share) ($12.03 per Share)

(e) Method of funding share purchase The funds were raised through a bridge loan.

4．Securities Year ended March 31, 2016 (A) Available-for-sale securities with carrying value and acquisition cost as of March 31, 2016, are summarized as follows: Millions of yen Acquisition Unrealized Carrying value cost gains (losses) (1) Securities with carrying value exceeding acquisition cost: Equity securities ¥23,584 ¥16,332 ¥7,252 (2) Securities with carrying value not exceeding acquisition

cost: Equity securities 7,176 8,789 (1,612) Total ¥30,761 ¥25,121 ¥5,639

Year ended March 31, 2017 (A) Available-for-sale securities with carrying value and acquisition cost as of March 31, 2017, are summarized as follows: Millions of yen Carrying Acquisition Unrealized value cost gains (losses) (1) Securities with carrying value exceeding acquisition cost: Equity securities ¥31,433 ¥20,901 ¥10,532 (2) Securities with carrying value not exceeding acquisition

cost: Equity securities 1,286 1,581 (294)

64 ANNUAL REPORT 2017 Total ¥32,720 ¥22,482 ¥10,237

Thousands of U.S. dollars Carrying Acquisition Unrealized value cost gains (losses) (1) Securities with carrying value exceeding acquisition cost: Equity securities $280,181 $186,304 $93,876 (2) Securities with carrying value not exceeding acquisition

cost: Equity securities 11,468 14,093 (2,624) Total $291,649 $200,397 $91,252  Available-for-sale securities sold during the fiscal years ended March 31, 2016 and 2017, are as follows: Thousands of Millions of yen U.S. dollars 2016 2017 2017 Proceeds from sales ¥404 ¥3,876 $34,551 Total gains ¥39 ¥1,320 $11,774 Total losses － ¥88 $791

5．Inventories Inventories as of March 31, 2016 and 2017, consist of the following: Thousands of Millions of yen U.S. dollars 2016 2017 2017 Merchandise and finished products ¥220,876 ¥241,877 $2,155,964 Work in process 666 1,116 9,950 Raw materials and supplies 141,203 187,867 1,674,548 Total ¥362,746 ¥430,861 $3,840,463 Write-downs, net of reversal of write-downs recognized during the prior fiscal year, of ¥2,970 million and (¥19,946) million (($177,788) thousand) are included in the cost of sales for the fiscal years ended March 31, 2016 and 2017, respectively.

6．Property, Plant and Equipment Accumulated depreciation of property, plant and equipment is ¥2,171,787 million and ¥2,204,925 million ($19,653,492 thousand) as of March 31, 2016 and 2017, respectively.

(Investment Property) The Company and certain subsidiaries own office buildings, crude oil storage tanks and commercial facilities including land for rental and unused assets, in areas such as Tokyo, Osaka and overseas. The net of rental income and related expenses for those properties is ¥558 million and ¥659 million ($5,879 thousand) for the fiscal years ended March 31, 2016 and 2017, respectively. The rental income is included in net sales and the expenses are included in selling, general and administrative expenses in the consolidated statements of operations. The amounts in the consolidated balance sheets of relevant investment properties as of March 31, 2016 and 2017, changes during the fiscal years then ended, and their fair values are as follows:

Millions of yen Carrying amount Fair value April 1, 2015 Changes during the fiscal year March 31, 2016 March 31, 2016 ¥112,244 (¥3,196) ¥109,048 ¥90,027

Millions of yen Carrying amount Fair value April 1, 2016 Changes during the fiscal year March 31, 2017 March 31, 2017 ¥109,048 (¥1,801) ¥107,246 ¥89,343

ANNUAL REPORT 2017 65

Thousands of U.S. dollars Carrying amount Fair value April 1, 2016 Changes during the fiscal year March 31, 2017 March 31, 2017 $971,994 ($16,056) $955,938 $796,357

1. Carrying amount recognized in the consolidated balance sheets is net of accumulated depreciation and accumulated impairment losses, if any. 2. Increase during the fiscal years ended March 31, 2016 and 2017, primarily represents the increase of certain properties such as idle assets of ¥361 million and ¥1,186 million ($10,574 thousand), and decrease primarily represents sales and disposals of assets of ¥710 million and ¥2,396 million ($21,357 thousand), respectively. 3. Fair value of properties as of March 31, 2016 and 2017, is measured by the Group in accordance with its Real-Estate appraisal standard.

7．Land Revaluation The Company revaluated its land used for business activities in accordance with the “Law of Land Revaluation” on March 31, 2002. The difference between the revalued amount and the book value is stated as “Surplus from land revaluation” in equity after deducting the related deferred tax liability. “Surplus from land revaluation” is not available for dividend payments. The fair value as of March 31, 2016 and 2017, declined by ¥149,552 million and ¥147,016 million ($1,310,427 thousand), respectively, compared to the book value after the revaluation.

8．Impairment Loss on Fixed Assets For purposes of applying the accounting standard for impairment of fixed assets, the Group categorizes operating assets by business segment, whereas idle assets are assessed on an individual basis. The Group writes down the carrying amount of assets or asset groups where there has been a significant decline in profitability and value compared to the recoverable amount, and records the impairment losses as non-operating expenses.

The recoverable amounts of idle assets are determined by their net selling price at disposition. The net selling price of idle assets with certain significance is based on appraisal determined in accordance with real estate appraisal standards. In the oil exploration and production business and the coal mining business, the recoverable amount of the respective asset group is estimated with value in use, which is estimated by discounting future cash flows projected by the qualified professionals based on the remaining reserve at a discount rate of 12.0% (pre-tax) or 7.0% (post-tax) as of March 31, 2016 and 6.5%-7.0% (post-tax) as of March 31, 2017.

(A) Loss on impairment of fixed assets for the fiscal year ended March 31, 2016, consists of the following: Impairment loss

Use Location Type of asset Millions of yen (Idle assets) Service stations Yakeyamachuo service station Land ¥440 (Kure, Hiroshima) and 13 other service 253 stations Buildings and others 693 Oil depot and others The former site of the Hyogo refinery Land 322 (Himeji, Hyogo) and others Buildings and others 327 650 (Business assets) Oil exploration Licensed blocks located in Norway and Machinery and 34,245 and production UK Continental Shelf and other equipment and others Total ¥35,589

66 ANNUAL REPORT 2017 (B) Loss on impairment of fixed assets for the fiscal year ended March 31, 2017, consists of the following: Impairment loss Thousands of Use Location Type of asset Millions of yen U.S. dollars (Idle assets) Factory Chiba factory and other (Ichihara, Chiba) and other Land ¥4 $41 Buildings and others 838 7,475 843 7,516 Service stations Hiroshima Station Square service station (Hiroshima, Hiroshima) and 28 other Land 875 7,804 service stations Buildings and others 496 4,423 1,371 12,227 Oil depot and others Data Center (Ichihara, Chiba) and other Land 23 210 Buildings and others 1,382 12,324 1,406 12,535 (Business assets) Oil exploration Licensed blocks located in Norway Machinery and 3,082 27,472 and production Continental Shelf equipment Machinery and 3,417 30,462 Coal mining Licensed blocks located in Australia equipment and others Others Republic of India Goodwill 776 6,919 Total ¥10,897 $ 97,132

9．Short-Term Borrowings and Long-Term Debt (A) Short-term borrowings Short-term borrowings are principally unsecured bank borrowings and notes maturing within one year. It is customary in Japan for such borrowings to be rolled over each year. The weighted average interest rates for the fiscal years ended March 31, 2016 and 2017, are approximately 0.44% and 0.42%, respectively.

(B) Short-term borrowings, commercial paper and the current portion of long-term debt as of March 31, 2016 and 2017, are as follows: Thousands of Millions of yen U.S. dollars 2016 2017 2017 Loans from banks, insurance companies and government agencies: Unsecured ¥184,983 ¥287,054 $2,558,646 Commercial paper － 104,005 927,046 Current portion of long-term debt 108,964 80,512 717,640 Current portion of lease obligations * － 93 830 Total ¥293,947 ¥471,665 $4,204,163  * Current portion of lease obligations is included in “Other” current liabilities.

To raise working capital efficiently, the Company entered into commitment line contracts with six banks. Total credit lines as of March 31, 2016 and 2017, are ¥100,000 million and ¥100,000 million ($891,345 thousand), respectively. This facility had not been utilized in either of the two fiscal years.

ANNUAL REPORT 2017 67 (C) Long-term debt as of March 31, 2016 and 2017, is as follows:

Thousands of

Millions of yen U.S. dollars 2016 2017 2017 Loans from banks, insurance companies and government agencies: Unsecured ¥659,603 ¥594,627 $5,300,178 Unsecured straight bonds 65,000 65,000 579,374 Lease obligations* － 1,650 14,712 724,603 661,277 5,894,265 Less: Current portion of long-term debt (108,964) (80,512) (717,640) Less: Current portion of lease obligations － (93) (830) Net ¥615,639 ¥580,672 $5,175,794 * Lease obligations (excluding current portion) are included in “Other” long-term liabilities.

The weighted average interest rates applicable to short-term borrowings, commercial paper and long-term debt as of March 31, 2016 and 2017, are as follows: 2016 2017 Short-term borrowings 0.44% 0.42% Commercial paper － (0.02%) Current portion of long-term debt (excluding lease obligations) 0.72% 0.95% Long-term debt (excluding current portion) 0.71% 0.74%

Annual maturities of loans within long-term debt outstanding as of March 31, 2017, are as follows: Long-term loans

Thousands of Year ending March 31 Millions of yen U.S. dollars 2018 ¥70,512 $628,505 2019 47,360 422,149 2020 42,221 376,339 2021 95,902 854,820 2022 47,909 427,043 2023 and thereafter 290,720 2,591,320 Total ¥594,627 $5,300,178

Straight bonds

Thousands of Year ending March 31 Millions of yen U.S. dollars 2018 ¥10,000 $89,134 2019 25,000 222,836 2020 10,000 89,134 2022 20,000 178,269 Total ¥65,000 $579,374

68 ANNUAL REPORT 2017 Lease obligations

Thousands of Year ending March 31 Millions of yen U.S. dollars 2018 ¥93 $830 2019 95 850 2020 97 870 2021 100 891 2022 102 913 2023 and thereafter 1,161 10,354 Total ¥1,650 $14,712

The net book value of assets pledged as collateral as of March 31, 2016 and 2017, is as follows: Thousands of Millions of yen U.S. dollars 2016 2017 2017 Land * ¥337,963 ¥337,963 $3,012,419 Investments in securities 6,382 7,355 65,566 Total ¥344,346 ¥345,319 $3,077,985

As of March 31, 2016 and 2017, the land in the above table is pledged to a bank as collateral for revolving mortgage. No borrowing secured by the collateral is outstanding at March 31, 2016 and 2017. * Accounts payable, other for which the land is pledged as collateral is ¥- million and ¥ 27,632 million ($246,302 thousand) as of March 31, 2016 and 2017, respectively.

In addition, the Company pledged investments in securities of Nghi Son Refinery and Petrochemical LLC (“NSRP”), the Company’s equity method affiliate, amounting to ¥95,572 and ¥88,798 million ($791,498) as of March 31, 2016 and 2017, respectively, and long-term loans receivable from NSRP amounting to ¥14,973 million and ¥31,892 million ($284,273) as of March 31, 2016 and 2017, respectively, as collateral for NSRP’s borrowings from financial institutions.

10．Retirement Benefits to Employees The Company and its subsidiaries maintain a corporate pension fund system and lump-sum retirement payment plans, which are defined benefit retirement plans covering substantially all employees. The benefit amounts are primarily calculated based on a point system. Certain subsidiaries maintain a defined contribution pension plan. Retirement benefits trust is set up for certain defined benefit corporate pension plans. The simplified method is used to calculate defined benefit obligation for the defined benefit plans of certain subsidiaries in accordance with applicable accounting standards.

(A) Defined benefit plans (1) The changes in defined benefit obligation for the years ended March 31, 2016 and 2017, are as follows (*):

Thousands of Millions of yen U.S. dollars 2016 2017 2017 Balance at beginning of year ¥110,345 ¥110,552 $985,407 Current service cost 3,244 3,142 28,014 Interest cost 945 521 4,644 Actuarial (gains) losses 3,456 (1,289) (11,496) Benefits paid (7,142) (9,502) (84,696) Others (296) (159) (1,419) Balance at end of year ¥110,552 ¥103,265 $920,453 (*) The defined benefit obligation of the plans for which the Group uses the simplified method is not included in this table (see (3) below).

ANNUAL REPORT 2017 69

(2) The changes in plan assets for the years ended March 31, 2016 and 2017, are as follows (*):

Thousands of Millions of yen U.S. dollars 2016 2017 2017 Balance at beginning of year ¥95,071 ¥89,583 $798,500  Expected return on plan assets 2,098 1,931 17,215  Actuarial gains (losses) (5,105) 1,920 17,120  Contributions from the employer 2,497 2,274 20,276  Benefits paid (4,979) (7,030) (62,665)  Others 0 0 0 Balance at end of year ¥89,583 ¥88,680 $790,447 (*) The plan assets of the plans for which the Group uses the simplified method are not included in this table (see (3) below).

(3) The changes in the liability for employees’ retirement benefits of the plans for which the Group uses the simplified method for the years ended March 31, 2016 and 2017, are as follows:

Thousands of Millions of yen U.S. dollars 2016 2017 2017 Balance at beginning of year ¥100 ¥42 $376  Net periodic benefit costs 231 358 3,191  Benefits paid (155) (124) (1,105)  Contributions from the employer (133) (130) (1,164) Balance at end of year ¥42 ¥145 $1,298

(4) Reconciliation between the liability recorded in the consolidated balance sheets and the balances of defined benefit obligation and plan assets are as follows(*):

Thousands of Millions of yen U.S. dollars 2016 2017 2017 Defined benefit obligation ¥111,149 ¥103,805 $925,269 Plan assets (91,808) (90,888) (810,125) 19,340 12,917 115,143 Unfunded defined benefit obligation 1,670 1,813 16,160 Net liability (asset) arising from

defined benefit obligation ¥21,011 ¥14,731 $131,304

Thousands of Millions of yen U.S. dollars 2016 2017 2017 Liability for employees’ retirement

benefits ¥21,351 ¥15,093 $134,535 Asset for employees’ retirement benefits (340) (362) (3,230) Net liability (asset) arising from

defined benefit obligation ¥21,011 ¥14,731 $131,304 (*) The amounts in the above tables include the balances of the plans for which the Group uses the simplified method.

70 ANNUAL REPORT 2017

(5) The components of net periodic benefit costs for the years ended March 31, 2016 and 2017, are as follows:

Thousands of Millions of yen U.S. dollars 2016 2017 2017 Service cost ¥3,244 ¥3,142 $28,014 Interest cost 945 521 4,644 Expected return on plan assets (2,098) (1,931) (17,215) Recognized actuarial (gains) losses 131 2,047 18,247 Net periodic benefit costs calculated using 358 3,191 simplified method 231 Net periodic benefit costs ¥2,453 ¥4,137 $36,882

(6) Amounts recognized in other comprehensive income (before income tax effect) in respect of defined retirement benefit plans for the years ended March 31, 2016 and 2017, were as follows:

Thousands of Millions of yen U.S. dollars 2016 2017 2017 Actuarial (gains) losses ¥8,430 (¥5,261) ($46,899)

(7) Amounts recognized in accumulated other comprehensive income (before income tax effect) in respect of defined retirement benefit plans as of March 31, 2016 and 2017, were as follows:

Thousands of Millions of yen U.S. dollars 2016 2017 2017 Unrecognized actuarial (gains) losses ¥6,781 ¥1,520 $13,549

(8) Plan assets (i) Components of plan assets Plan assets as of March 31, 2016 and 2017, consist of the following (**): 2016 2017 Debt investments 47% 41% Equity investments 26 30 Alternative investments 20 22 Others 7 7 Total 100% 100% (*) The total plan assets include 11% and 12% of retirement benefit trust assets for certain corporate pension plans as of March 31, 2016 and 2017, respectively. (**) The plan assets for which the Group uses the simplified method are not included in this table.

(ii) Method of determining the expected rate of return on plan assets The expected rate of return on plan assets is determined considering the long-term rates of return which are expected currently and in the future from the various components of the plan assets.

(9) Assumptions used for the years ended March 31, 2016 and 2017, are set forth as follows (*): 2016 2017 Discount rate 0.5% 0.6% Expected rate of return on plan assets 2.6% 2.5% (*)The discount rate and expected rate of return on plan assets for the years ended March 31, 2016 and 2017, are shown as a weighted average.

ANNUAL REPORT 2017 71 In calculating benefit obligation, the Group primarily uses the salary increase index by age based on the point system.

(B) Defined contribution retirement benefit plans Required contribution amounts to the defined contribution plans for the years ended March 31, 2016 and 2017, are ¥55 million and ¥75 million ($673 thousand), respectively.

11．Asset Retirement Obligations Asset retirement obligations recognized in the consolidated balance sheets are as follows:

(A) Outline of the relevant asset retirement obligations The Group has recognized the costs of restoration to the original state resulting from real estate leasing agreements on land for service stations facilities and the removal costs for petroleum and coal production facilities on the expiry of production or period of mining rights as asset retirement obligations, based on a reasonable estimation.

(B) Calculation method for the relevant asset retirement obligations The estimated periods for the actual expenditure of costs are based on the useful life of the principal facilities for service stations facilities and the estimated effective mining period from the startup of operations for oil exploration and production and coal mining. The discount rates to be applied for the fiscal years ended March 31, 2016 and 2017, vary from 1.5% to 5.0% and 1.5% to 5.0%, respectively.

(C) The changes in asset retirement obligations for the fiscal years ended March 31, 2016 and 2017, are as follows: Thousands of

Millions of yen U.S. dollars 2016 2017 2017 Balance at beginning of year ¥94,223 ¥80,278 $715,561 Additional provisions associated with the acquisition of property, plant and equipment 79 378 3,374 Reconciliation associated with passage of time 3,066 2,528 22,534 Reduction associated with settlement of asset retirement obligations (778) (492) (4,394) Changes in estimates (decreases) *1 (7,439) 3,876 34,550 Other increases (decreases) *2 (8,873) (7,576) (67,531) Balance at end of year ¥80,278 ¥78,992 $704,094 Note: *1 The Company changed the estimates of the asset retirement costs during the fiscal year ended March 31, 2016 because it became clear that the estimated costs at certain overseas subsidiaries will decrease when the production ceases or the exploration rights terminate. The Company also changed the estimates of the asset retirement costs during the fiscal year ended March 31, 2017 because it became clear that the estimated costs at certain overseas subsidiaries will increase when the production ceases or the exploration rights terminate. The breakdown of changes in estimates for the year ended March 31, 2017, are: increase of ¥5,983 million ($53,334 thousand) and decrease of ¥2,107 million ($18,784 thousand). *2 Other increases (decreases) primarily relate to changes in foreign currency exchange rates for the fiscal years ended March 31, 2016 and 2017.

12．Contingent Liabilities (A) Debt guarantees The Group provides guarantees and items of a similar nature to financial institutions for indebtedness of the following parties as of March 31, 2016 and 2017: Thousands of Millions of yen U.S. dollars 2016   2017   2017 Employees ¥310 ¥211 $1,882 Nonconsolidated subsidiaries and affiliates 2,848 3,337 29,749 Other 3,591 5,238 46,696 Total ¥6,750 ¥8,787 $78,328

72 ANNUAL REPORT 2017

(B) Construction completion guarantee The Company provides a construction completion guarantee related to the project financing for the Nghi Son Refinery and Petrochemical Complex Project in Vietnam by Nghi Son Refinery and Petrochemical Limited Liability Company, whose construction commenced in the previous fiscal year. The Company’s portion of construction completion guarantee outstanding as of March 31, 2016 and 2017, was ¥132,004 million and ¥148,961 million ($1,327,763 thousand), respectively.

13．Equity Japanese companies are subject to the Companies Act. The significant provisions in the Companies Act that affect financial and accounting matters are summarized below:

(A) Dividends Under the Companies Act, companies can pay dividends at any time during the fiscal year in addition to the year-end dividend upon resolution at the shareholders’ meeting. Additionally, for companies that meet certain criteria including (1) having a Board of Directors, (2) having independent auditors, (3) having the Board of Statutory Auditors, and (4) the term of service of the directors being prescribed as one year rather than the normal two-year term by its articles of incorporation, the Board of Directors may declare dividends (except for dividends-in-kind) at any time during the fiscal year if the company has prescribed so in its articles of incorporation. The Company meets all the above criteria and, accordingly, the Board of Directors may declare dividends (except for dividends-in-kind) at any time during the fiscal year.

Semiannual interim dividends may also be paid once a year upon resolution by the Board of Directors if the articles of incorporation of the company so stipulate. The Companies Act provides certain limitations on the amounts available for dividends or the purchase of treasury stock. The limitation is defined as the amount available for distribution to the shareholders, but the amount of net assets after dividends must be maintained at no less than ¥ 3 million.

(B) Increases / decreases and transfer of common stock, reserve and surplus The Companies Act requires that an amount equal to 10% of dividends must be appropriated as a legal reserve (a component of retained earnings) or as additional paid-in capital (a component of capital surplus), depending on the equity account charged upon the payment of such dividends, until the aggregate amount of legal reserve and additional paid-in capital equals 25% of the common stock. Under the Companies Act, the total amount of additional paid-in capital and legal reserve may be reversed without limitation. The Companies Act also provides that common stock, legal reserve, additional paid-in capital, other capital surplus and retained earnings can be transferred among the accounts within equity under certain conditions upon resolution of the shareholders.

(C) Treasury Stock The Companies Act also provides for companies to purchase treasury stock and dispose of such treasury stock by resolution of the Board of Directors. The amount of treasury stock purchased cannot exceed the amount available for distribution to the shareholders which is determined by a specific formula.

14．Research and Development Expenses Research and development expenses charged to income for the fiscal years ended March 31, 2016 and 2017, are ¥12,553 million and ¥13,130 million ($117,040 thousand), respectively.

15．Related Party Transactions Significant transactions of the Company and its subsidiaries with related parties for the years ended March 31, 2016 and 2017, are as follows: (A) The transactions of the Company with related parties Thousands of Millions of yen U.S. dollars 2016   2017   2017 Collection of accounts receivable during the year (*1) ¥953,388 ¥898,069 $8,004,895

ANNUAL REPORT 2017 73

Thousands of Millions of yen U.S. dollars 2016   2017   2017 Undertaking of capital increase of affiliates: Nghi Son Refinery and Petrochemical LLC (*2) ¥21,915 ¥6 $61

Thousands of Millions of yen U.S. dollars 2016   2017   2017 Undertaking of project completion guarantee: Nghi Son Refinery and Petrochemical LLC on Nghi Son

Refinery and Petrochemical Complex in Vietnam (*2) ¥132,004 ¥148,961 $1,327,763

The balances due to or from a related party at March 31, 2016 and 2017, are as follows:

Thousands of Millions of yen U.S. dollars 2016   2017   2017 Accounts receivable, other (*1) ¥34,164 ¥41,985 $374,236

(B) The transactions of the subsidiaries with related parties: Thousands of Millions of yen U.S. dollars 2016   2017   2017 Long-term loans : ¥15,028 ¥16,499 $147,071 Nghi Son Refinery and Petrochemical LLC(*2)

The balances due to or from a related party at March 31, 2016 and 2017, are as follows: Thousands of Millions of yen U.S. dollars 2016   2017   2017 Long-term loans : ¥14,973 ¥31,892 $284,273 Nghi Son Refinery and Petrochemical LLC(*2)

(*1) The collection of accounts receivable represents transactions with Idemitsu Credit Co., Ltd. (“Idemitsu Credit”). When customers make payment at service stations operated by the Company’s contracted retailers using credit card services provided by Idemitsu Credit, Idemitsu Credit collects credit service receivables from the customers at respective payment due dates. The collected cash is then paid to the Company after deducting the amount to be paid to the contracted retailers. The balance of accounts receivable represents outstanding receivables from Idemitsu Credit at year-end. (*2) As of March 31, 2017, the Company holds a 35.1% equity interest in Nghi Shon Refinery and Petrochemical LLC (“NSRP”). In addition to the above, the Company pledged investments in securities of NSRP amounting to ¥95,572 and ¥88,798 million ($791,498) as of March 31, 2016 and 2017, respectively, and long-term loans receivable from NSRP amounting to ¥14,973 and ¥31,892 million ($284,273) as of March 31, 2016 and 2017, respectively, as collateral for NSRP’s borrowings from financial institutions.

74 ANNUAL REPORT 2017

16．Income Taxes The Company and its domestic subsidiaries are subject to Japanese national and local income taxes which, in the aggregate, resulted in normal effective statutory tax rates of approximately 33% and 30% for the fiscal years ended March 31, 2016 and 2017, respectively.

(A) The tax effects of significant temporary differences and tax loss carryforwards which resulted in deferred tax assets and liabilities at March 31, 2016 and 2017, are as follows: Thousands of Millions of yen U.S. dollars 2016 2017 2017 Tax loss carryforwards ¥66,828 ¥54,465 $485,474 Asset retirement obligation 44,361 38,967 347,331 Impairment loss on fixed assets 10,001 9,645 85,973 Reserve for repair work 8,728 8,622 77,214 Liability for employees’ retirement benefits 9,411 7,422 66,156 Non-deductible impairment in values of investment securities 4,629 5,097 45,435 Amortization of software 4,770 4,660 41,538 Estimated sales discounts for the year 5,479 3,481 31,034 Accrued bonuses to employees 1,905 2,445 21,800 Business tax for previous years 311 1,117 9,957 Allowance for doubtful accounts 1,035 1,095 9,762 Deferred losses on hedging activities 2,620 1,022 9,111 Unrealized losses on available-for-sale securities 468 90 803 Other 12,749 15,645 139,456 Subtotal deferred tax assets 173,302 153,818 1,371,052 Less: valuation allowance (26,627) (26,430) (235,583) Total deferred tax assets 146,674 127,388 1,135,468

Special amortization of overseas development costs, etc. (44,842) (32,765) (292,050) Special tax reserve on property, plant and equipment (15,709) (14,968) (133,424) Unrealized gains on available-for-sale securities (1,994) (2,969) (26,470) Adjustment amount of change in the valuation method for (1,562) (1,152) (10,276) inventories Deferred gains on hedging activities (549) (305) (2,720) Reserve for loss on overseas investments (198) (187) (1,669) Other (8,760) (11,384) (101,471) Total deferred tax liabilities (73,617) (63,733) (568,082) Net deferred tax assets (liabilities) (*1) ¥73,057 ¥63,655 $567,385

*1 Net deferred tax assets (liabilities) are included in the consolidated balance sheets as follows: Thousands of Millions of yen U.S. dollars 2016 2017 2017 Current assets ─── deferred tax assets ¥24,557 ¥16,763 $149,416 Investments and other assets ─── deferred tax assets 61,704 57,188 509,742 Current liabilities ─── deferred tax liabilities (193) (328) (2,923) Long-term liabilities ─── deferred tax liabilities (13,011) (9,968) (88,849) Net deferred tax assets (liabilities) ¥73,057 ¥63,655 $567,385

In addition to the above, deferred tax liabilities related to land revaluation are ¥95,795 million and ¥93,951million ($837,427 thousand) as of March 31, 2016 and 2017, respectively.

ANNUAL REPORT 2017 75 (B) A reconciliation between the normal effective statutory tax rates and the actual effective tax rates reflected in the accompanying consolidated statements of operations for the fiscal years ended March 31, 2016 and 2017, are as follows:

2016 2017 Statutory tax rate 33.06% 30.86% Increase (decrease) in taxes resulting from: Tax credits 0.91 (3.24) Equity in earnings and losses of nonconsolidated subsidiaries and affiliates, net 7.02 (2.14) Valuation allowance (23.25) 0.59 Non-deductible expenses for tax purposes (1.23) 0.56 Differences in tax rates applied to foreign subsidiaries 27.47 0.39 Amortization of goodwill (0.74) 0.28 Decrease in deferred tax assets caused by statutory tax rate change (8.14) － Other (1.27) (0.88) Effective income tax rate 33.81% 26.41%

17．Other Comprehensive Income The components of other comprehensive income for the fiscal years ended March 31, 2016 and 2017, are as follows: Thousands of Millions of yen U.S. dollars 2016 2017 2017 Unrealized gains (losses) on available-for-sale securities: Gains (losses) arising during the year (¥7,498) ¥5,683 $50,657 Reclassification adjustments to profit or loss (39) (1,232) (10,983) Amount before income tax effect (7,537) 4,451 39,673 Income tax effect 2,439 (1,353) (12,066) Total (¥5,098) ¥3,097 $27,607 Deferred gains (losses) on hedging activities, net: Gains (losses) arising during the year (¥6,654) ¥2,604 $23,214 Reclassification adjustments to profit or loss (664) 2,628 23,424 Amount before income tax effect (7,319) 5,232 46,639 Income tax effect 2,147 (1,572) (14,020) Total (¥5,171) ¥3,659 $32,618 Surplus from land revaluation: Income tax effect (¥3,257) ¥1,670 $14,887 Total (¥3,257) ¥1,670 $14,887 Foreign currency translation adjustments: Adjustments arising during the year (¥28,988) (¥7,603) ($67,772) Reclassification adjustments to profit or loss (51) － － Amount before income tax effect (29,040) (7,603) (67,772) Income tax effect 20 － － Total (¥29,019) (¥7,603) ($67,772) Defined retirement benefit plans: Adjustments arising during the year (¥8,561) ¥3,222 $28,722 Reclassification adjustments to profit or loss 131 2,039 18,176 Amount before income tax effect (8,430) 5,261 46,899 Income tax effect 2,537 (1,704) (15,189) Total (¥5,893) ¥3,557 $31,709 Share of other comprehensive income (loss) in affiliates: Gains (losses) arising during the year (¥1,740) (¥2,497) ($22,258) Reclassification adjustments to profit or loss (3) 408 3,644 Total (¥1,744) (¥2,088) ($18,614)

Total other comprehensive income (¥50,184) ¥2,292 $20,436

76 ANNUAL REPORT 2017 18．Lease Transactions (A) Lessee (1) Finance leases Finance lease transactions which commenced on or before March 31, 2008, and do not transfer the ownership of the leased property to the lessee are accounted for as operating leases. Pro forma information regarding the leased property, such as acquisition cost and accumulated depreciation, has not been presented because it is not material.

(2) Operating leases The minimum rental commitments under noncancelable operating leases at March 31, 2016 and 2017, were as follows: Thousands of Millions of yen U.S. dollars 2016 2017 2017 Scheduled maturities of future lease payments: Due within one year ¥9,952 ¥9,303 $82,928 Due over one year 42,047 33,885 302,035 ¥51,999 ¥43,189 $384,964

(B) Lessor The Group operates a finance sublease business. Future lease income under finance leases that do not transfer the ownership of the leased assets to the sublessee has not been presented because it is not material.

19．Financial Instruments and Related Disclosures (A) Policy for financial instruments The Group raises funds for capital investment through bank borrowings and issuance of bonds. Cash surpluses, if any, are invested in low-risk and short-term instruments. Short-term working capital is generated through bank borrowings and issuance of commercial paper. Derivatives are used not for speculative purposes, but to manage exposure to financial risks as described in (B) below. The Company and certain consolidated subsidiaries have applied hedge accounting.

(B) Nature and extent of risks arising from financial instruments Notes and accounts receivable, trade are exposed to credit risk in relation to customers. Short-term investments and investments in securities are exposed to market risk. The Group also has long-term loans receivable from group companies, etc.

Substantially all notes and accounts payable, trade have payment due dates within six months. Although the Group is exposed to foreign currency exchange risk arising from import payables denominated in foreign currencies, forward foreign currency exchange contracts are arranged to reduce the risk, after netting receivables in the same currencies.

Short-term borrowings are used mainly in connection with operating activities such as purchases of raw materials, and long-term debt is used principally for the purpose of making capital investments. Long-term debt with variable interest rates is exposed to interest rate fluctuation risk, and long-term debt denominated in foreign currencies is exposed to foreign currency exchange risk, but the Group utilizes interest rate swap transactions or interest rate currency swap transactions as a hedging instrument to reduce such risk.

Regarding derivatives, the Group enters into foreign exchange forward contracts and foreign currency option transactions to reduce the foreign currency exchange risk arising from the receivables and payables denominated in foreign currencies, and enters into interest rate swap transactions to reduce fluctuation risk arising from interest payable on long-term debt bearing interest at variable rates. The Group also enters into interest rate currency swap transactions to reduce fluctuation risk arising from interest payable and foreign currency exchange risk on long-term debt denominated in foreign currencies. The Group also enters into crude oil and petroleum product swaps and forward contracts to hedge the risk of price fluctuations of crude oil and petroleum products. Information regarding the method of hedge accounting, hedging instruments and hedged items, hedging policy, and the assessment of the effectiveness of hedging activities is found in Note 2(J).

ANNUAL REPORT 2017 77 (C) Risk management for financial instruments (1) Monitoring of credit risk (the risk that customers or counterparties may default) In accordance with the internal policies of the Group for managing credit risk arising from receivables, each related division of the Group monitors the creditworthiness of its customers and manages the terms and conditions of payment, price, and collateral and identifies the default risk of customers at an early stage. The Group believes that the credit risk of derivatives is insignificant as it enters into derivative transactions only with financial institutions, etc., which have a sound credit profile.

(2) Monitoring of market risks (the risks arising from fluctuations in foreign currency exchange rates, interest rates, prices of crude oil and petroleum products, and others) For trade receivables and payables denominated in foreign currencies, the Company and certain consolidated subsidiaries identify the foreign currency exchange risk for each currency on a monthly basis and enter into foreign exchange forward contracts and currency option transactions to hedge such risk. In order to mitigate the interest rate risk for loans payable bearing interest at variable rates, the Group enters into interest rate swap transactions (pay-fixed, received-variable), and in order to mitigate foreign currency exchange risk and fluctuation risk arising from interest payable on long-term debt denominated in foreign currencies, the Group enters into currency and interest rate swap transactions. The Company and certain consolidated subsidiaries also enter into crude oil and petroleum product swaps and forward contracts in order to mitigate the risk of price fluctuations of crude oil and petroleum products.

For short-term investments and investments in securities, the Group holds a minimum number of shares of the companies with which the Group has business relationships. The Group reviews the market prices of listed shares quarterly and the financial position of the issuers of unlisted shares annually. The Board of Directors of the Company annually approves the plan for derivative transactions under internal rules established with respect to the purposes, policies, procedures, approvals and reporting for derivatives. In conducting derivative transactions, the division in charge of each derivative transaction follows the internal rules. Reports including actual transaction data are submitted monthly to the derivative committee and at the time of finalizing the annual plan to the management committee. Consolidated subsidiaries have established similar internal rules and follow them in conducting derivative transactions in principle.

(3) Monitoring of liquidity risk (the risk that the Group may not be able to meet its obligations on scheduled due dates) The Group manages its liquidity risk by holding adequate volumes of liquid assets, along with adequate financial planning by the Treasury department. Consolidated subsidiaries raise funds by using loans from the Company, based on their financing plan.

(D) Supplementary explanation of the estimated fair value of financial instruments The fair value of financial instruments is based on their quoted market price, if available. When there is no quoted market price available, fair value is reasonably estimated. Since various assumptions and factors are reflected in estimating the fair value, different assumptions and factors could result in different fair values. In addition, the notional amounts of derivatives in Note 20 are not necessarily indicative of the actual market risk involved in derivative transactions.

(Fair Value of Financial Instruments) The carrying value of financial instruments recorded in the consolidated balance sheets as of March 31, 2016 and 2017, their fair values and unrealized gains (losses) are as follows. In addition, financial instruments of which market values are not available or fair values are extremely difficult to determine are not included in the table below.

78 ANNUAL REPORT 2017 March 31, 2016 Millions of yen Carrying Unrealized amount Fair value gains (losses) Cash and cash equivalents ¥118,787 ¥118,787 － Notes and accounts receivable, trade 259,817 259,817 － Investments in securities 30,761 30,761 － Long-term loans 20,904 21,047 ¥142 Total assets ¥430,271 ¥430,413 ¥142 Notes and accounts payable, trade 291,676 291,676 － Short-term borrowings 184,983 184,983 － Commercial paper － － － Current portion of long-term debt 108,964 108,964 － Long-term debt 615,639 621,366 ¥5,726 Total liabilities ¥1,201,263 ¥1,206,990 ¥5,726 Derivative transactions * (¥22,858) (¥22,858) － * Net debits and credits arising from derivative transactions are presented in each net value, and the value of a net debit after totaling of credit and debit is shown in parentheses.

March 31, 2017 Millions of yen Unrealized Carrying amount Fair value gains (losses) Cash and cash equivalents ¥90,093 ¥90,093 － Notes and accounts receivable, trade 327,402 327,402 － Investments in securities 197,659 171,917 (¥25,742) Long-term loans 36,666 36,708 42 Total assets ¥651,821 ¥626,121 (¥25,699) Notes and accounts payable, trade 331,602 331,602 － Short-term borrowings 287,054 287,054 － Commercial paper 104,005 104,005 － Current portion of long-term debt 80,512 80,512 － Long-term debt 579,115 583,446 ¥4,330 Total liabilities ¥1,382,289 ¥1,386,620 ¥4,330 Derivative transactions * (¥14,014) (¥14,014) －

Thousands of U.S. dollars Unrealized gains Carrying amount Fair value (losses) Cash and cash equivalents $803,042 $803,042 － Notes and accounts receivable, trade 2,918,285 2,918,285 － Investments in securities 1,761,828 1,532,378 ($229,450) Long-term loans 326,823 327,200 376 Total assets $5,809,980 $5,580,906 ($229,073) Notes and accounts payable, trade 2,955,720 2,955,720 － Short-term borrowings 2,558,646 2,558,646 － Commercial paper 927,046 927,046 － Current portion of long-term debt 717,640 717,640 － Long-term debt 5,161,912 5,200,516 $38,604 Total liabilities $12,320,966 $12,359,570 $38,604 Derivative transactions * ($124,921) ($124,921) － * Net debts and credits arising from derivative transactions are presented in each net value, and the value of a net debit after totaling of credit and debit is shown in parentheses.

ANNUAL REPORT 2017 79 Note: 1. Calculation method of fair values of financial instruments and securities and derivatives transactions

Cash and cash equivalents Cash and cash equivalents are based on their book values since all deposits are short-term, thus fair values approximate book value.

Notes and accounts receivable, trade Notes and accounts receivable, trade approximate book value since they are settled in the short term.

Investments in securities With respect to fair values of investments in securities, fair values of stocks are based on quotations from the stock exchange, and those bonds are based on quotations from the stock exchange or quotations presented by a financial institution.

Long-term loans The fair value of long-term loans is based on the present value, which is estimated by discounting future cash flows at a discount rate that would be applied to a similar new loan.

Notes and accounts payable, trade, short-term borrowings, commercial paper and the current portion of long-term debt Notes and accounts payable, trade, short-term borrowings, commercial paper and the current portion of long-term debt approximate book value since they are settled in the short term.

Long-term debt The fair value of loans is determined by discounting the cash flows related to the loan at an estimated interest rate to be applied to a similar new borrowing. The fair value of bonds payable is based on the quoted market price.

Note: 2. Carrying amount of financial instruments whose fair value cannot be reliably determined Thousands of

Millions of yen U.S. dollars 2016 2017 2017 Investments in securities that do not have a quoted market price in an active market ¥224,259 ¥216,796 $1,932,403

Note: 3. Redemption schedule for receivables and short-term investments with maturities at March 31, 2016 and 2017

March 31, 2016 Millions of yen Over 1 year Over 5 years

Within 1 year within 5 years within 10 years Over 10 years Cash and cash equivalents ¥118,787 － － － Notes and accounts receivable, trade 259,817 － － － Long-term loans － ¥19,567 ¥1,061 ¥275 Total ¥378,605 ¥19,567 ¥1,061 ¥275

March 31, 2017 Millions of yen Over 1 year Over 5 years

Within 1 year within 5 years within 10 years Over 10 years Cash and cash equivalents ¥90,093 － － － Notes and accounts receivable, trade 327,402 － － － Long-term loans － ¥26,546 ¥9,542 ¥577 Total ¥417,495 ¥26,546 ¥9,542 ¥577

80 ANNUAL REPORT 2017 Thousands of U.S. dollars Over 1 year Over 5 years Within 1 year within 5 years within 10 years Over 10 years Cash and cash equivalents $803,042 － － － Notes and accounts receivable, trade 2,918,285 － － － Long-term loans － $236,621 $85,059 $5,143 Total $3,721,327 $236,621 $85,059 $5,143

Note: 4. The redemption schedule for long-term debt is presented in Note 9.

20．Derivatives and Hedging Activities March 31, 2016 (A) Derivative transactions to which hedge accounting is not applied (1) Currency related Millions of yen Unrealized March 31, 2016 Notional amount Fair value gains (losses) Contract Maturing after amount one year Forward foreign currency exchange contracts, etc.: Selling U.S. dollars, etc. ¥39,768  － ¥156 ¥156 Buying U.S. dollars, etc. 51,520 － (283) (283) Total ¥91,288 － (¥127) (¥127)

(2) Commodity related Millions of yen Unrealized March 31, 2016 Notional amount Fair value gains (losses) Maturing after Contract amount one year Commodity swap contracts: Selling petroleum products ¥38,360 － ¥2,866 ¥2,866 Buying petroleum products 56,318 ¥31,935 (15,161) (15,161) Total ¥94,679 ¥31,935 (¥12,294) (¥12,294)

(B) Derivative transactions to which hedge accounting is applied (1) Currency related Millions of yen March 31, 2016 Hedged item Notional amount Fair value Contract amount Maturing after one year Forward foreign currency exchange contracts: Notes and accounts Selling U.S. dollars, etc. receivable, trade ¥14,934 － ¥24 Short-term Buying U.S. dollars, etc. 318 － 1 borrowings Total ¥15,253 － ¥25

ANNUAL REPORT 2017 81 (2) Interest rate related Millions of yen March 31, 2016 Hedged item Notional amount Fair value

Maturing after Contract amount one year Interest rate swap contracts: Pay-fixed, receive-variable Long-term debt ¥343,337 ¥283,277 (¥10,146) Total ¥343,337 ¥283,277 (¥10,146)

(3) Commodity related Millions of yen March 31, 2016 Hedged item Notional amount Fair value

Maturing after Contract amount one year Commodity swap contracts: Selling petroleum products Crude oil and － － － Buying petroleum products petroleum products ¥112 ¥82 ¥20 Total ¥112 ¥82 ¥20

Notes: 1. Fair value is computed based on exchange rates and prices obtained from correspondent financial institutions. 2. Unrealized gains and losses in the table above are debited (credited) in the accompanying consolidated statements of operations.

March 31, 2017 (A) Derivative transactions to which hedge accounting is not applied (1) Currency related Millions of yen Unrealized March 31, 2017 Notional amount Fair value gains (losses) Contract Maturing amount after one year Forward foreign currency exchange contracts, etc.: Selling U.S. dollars, etc. ¥20,080  － ¥318 ¥318 Buying U.S. dollars, etc. 77,910 － (168) (168) Interest rate currency swap contracts: 2,692 － (108) (108) USD receive-variable, pay-fixed Total ¥100,684 － ¥40 ¥40

Thousands of U.S. dollars Unrealized March 31, 2017 Notional amount Fair value gains (losses) Contract Maturing amount after one year Forward foreign currency exchange contracts, etc.: Selling U.S. dollars, etc. $178,988 － $2,836 $2,836 Buying U.S. dollars, etc. 694,455 － (1,501) (1,501) Interest rate currency swap contracts: 24,000 － (969) (969) USD receive-variable, pay-fixed Total $897,443 － $365 $365

82 ANNUAL REPORT 2017

(2) Commodity related Millions of yen Unrealized March 31, 2017 Notional amount Fair value gains (losses) Contract Maturing amount after one year Commodity swap contracts: Selling petroleum products ¥58,094 － (¥4,253) (¥4,253) Buying petroleum products 72,668 ¥22,284 (4,302) (4,302) Total ¥130,762 ¥22,284 (¥8,555) (¥8,555)

Thousands of U.S. dollars Unrealized March 31, 2017 Notional amount Fair value gains (losses) Contract Maturing after amount one year Commodity swap contracts: Selling petroleum products $517,818 － ($37,910) ($37,910) Buying petroleum products 647,724 $198,633 (38,351) (38,351) Total $1,165,542 $198,633 ($76,261) ($76,261)

(B) Derivative transactions to which hedge accounting is applied (1) Currency related Millions of yen March 31, 2017 Hedged item Notional amount Fair value Contract Maturing after amount one year Forward foreign currency exchange contracts: Selling U.S. dollars, etc. Notes and accounts － receivable, trade ¥10,547 (¥412) Buying U.S. dollars, etc. Short-term borrowings － － － Total ¥10,547 － (¥412)

Thousands of U.S. dollars March 31, 2017 Hedged item Notional amount Fair value Contract Maturing after amount one year Forward foreign currency exchange contracts: Selling U.S. dollars, etc. Notes and accounts － receivable, trade $94,018 ($3,672) Buying U.S. dollars, etc. Short-term borrowings － － － Total $94,018 － ($3,672)

(2) Interest rate related Millions of yen March 31, 2017 Hedged item Notional amount Fair value Contract Maturing after amount one year Interest rate swap contracts: Pay-fixed, receive-variable ¥286,705 ¥261,575 (¥5,280) Long-term debt Interest rate currency swap contracts USD receive-variable, pay-fixed ¥2,692 － (¥13)

ANNUAL REPORT 2017 83 Total ¥289,398 ¥261,575 (¥5,293)

Thousands of U.S. dollars March 31, 2017 Hedged item Notional amount Fair value Contract Maturing after amount one year Interest rate swap contracts: Pay-fixed, receive-variable $2,555,535 $2,331,540 ($47,063) Long-term debt Interest rate currency swap contracts USD receive-variable, pay-fixed $24,000 － ($123) Total $2,579,535 $2,331,540 ($47,187)

(3) Commodity related Millions of yen March 31, 2017 Hedged item Notional amount Fair value Contract Maturing after amount one year Commodity swap contracts: Selling petroleum products Crude oil and － － － Buying petroleum products petroleum products － － － Total － － －

Thousands of U.S. dollars March 31, 2017 Hedged item Notional amount Fair value Contract Maturing after amount one year Commodity swap contracts: Selling petroleum products Crude oil and － － － Buying petroleum products petroleum products － － － Total － － －

Notes: 1. Fair value is computed based on exchange rates and prices obtained from correspondent financial institutions. 2. Unrealized gains and losses in the table above are debited (credited) in the accompanying consolidated statements of operations.

84 ANNUAL REPORT 2017

21. Net Income Per Share Reconciliation of the differences between basic and diluted net income(loss) per share ("EPS") Reconciliation of the differences between basic and diluted EPS for the years ended March 31, 2016 and 2017, is as follows:

U.S. Millions of yen Thousands of shares Yen Dollars

Net income (loss) attributable to owners of Weighted average the parent shares EPS Year ended March 31, 2016: Basic EPS: Net income (loss) attributable to common shareholders (¥35,993) 159,953 (¥225.03) Effect of dilutive securities: Dilution of subsidiary stock － Diluted EPS: Net income (loss) for computation (¥35,993) 159,953 －* Year ended March 31, 2017: Basic EPS: Net income ( loss) attributable to common shareholders ¥88,164 159,952 ¥551.19 $ 4.91 Effect of dilutive securities: Dilution of subsidiary stock － Diluted EPS: Net income (loss) for computation ¥88,164 159,952 －* －* * Diluted net income per share for the fiscal year ended March 31, 2017 is not calculated because dilutive shares do not exist. Also, diluted net income per share for the fiscal year ended March 31, 2016 is not calculated because of the net loss for the fiscal year although dilutive shares exist.

22．Subsequent Events The following appropriation of retained earnings at March 31, 2017, was approved at the Board of Director’s meeting held on May 15, 2017: Thousands of

Millions of yen U.S. dollars Year-end cash dividends, ¥25 (U.S. $0.22) per share ¥3,998 $35,643

23．Segment Information

Years ended March 31, 2016 and 2017 Under ASBJ Statement No. 17, "Accounting Standard for Segment Information Disclosures," and ASBJ Guidance No. 20, "Guidance on Accounting Standard for Segment Information Disclosures," an entity is required to report financial and descriptive information about its reportable segments. Reportable segments are operating segments or aggregations of operating segments that meet specified criteria. Operating segments are components of an entity about which separate financial information is available and such information is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Generally, segment information is required to be reported on the same basis as is used internally for evaluating operating segment performance and deciding how to allocate resources to operating segments.

ANNUAL REPORT 2017 85 (A) Description of reportable segments The Company’s business segments cover the Group’s business units for which separate financial information is available on the business units for the whole Group and for which the Company’s Board of Directors carries out a periodic review in order to determine the allocation of management resources and to evaluate their operating performance.

Taking into consideration the nature of the products and the business standing in the Group, the Company recognizes three reportable segments, Petroleum products, Petrochemical products and Resources. In addition, other business segments are summarized under Others.

The Petroleum products segment is engaged in the manufacturing and sales of fuel oils and lubricant oils. The Petrochemical products segment is involved in the manufacturing and sales of basic chemicals as raw materials for various petrochemical products, as well as solvents and various functional materials. The Resources segment carries out exploration, development, production and sales of energy resources, including crude oil and coal, etc.

(B) Methods of measurement for the amounts of sales, income (loss), assets and other items for each reportable segment The accounting policies of each reportable segment are consistent with those disclosed in Note 2, “Summary of Significant Accounting Policies.”

(C) Information about sales, income (loss), assets and other items : Year ended March 31, 2016 Millions of yen Reportable segment Petroleum Petrochemical Recon- products products Resources Total Others Total ciliation Consolidated Net sales: Customers ¥2,750,970 ¥520,790 ¥228,838 ¥3,500,599 ¥69,603 ¥3,570,202 － ¥3,570,202 Inter-segment 7,484 5,681 0 13,166 684 13,850 (¥13,850) － Total ¥2,758,454 ¥526,472 ¥228,838 ¥3,513,765 ¥70,288 ¥3,584,053 (¥13,850) ¥3,570,202 Segment profit (loss) (¥67,350) ¥42,276 (¥626) (¥25,699) ¥8,760 (¥16,939) (¥2,703) (¥19,643) Segment assets 1,496,316 367,622 404,248 2,268,186 139,742 2,407,928 (5,810) 2,402,118 Other items: Depreciation and 28,436 8,563 41,513 78,513 1,134 79,648 634 80,282 amortization Amortization of 706 34 － 741 491 1,232 － 1,232 goodwill Equity in earnings (2,099) 10,092 986 8,978 781 9,759 30 9,790 (losses) of nonconsolidated subsidiaries and affiliates, net Impairment loss on 1,016 327 34,245 35,589 － 35,589 － 35,589 fixed assets Investment in equity 105,681 44,041 5,148 154,871 60,763 215,635 － 215,635 method affiliates Unamortized balance 7,020 251 － 7,272 2,427 9,699 － 9,699 of goodwill Capital expenditures ¥28,297 ¥5,478 ¥21,402 ¥55,178 ¥1,675 ¥56,853 ¥777 ¥57,630

86 ANNUAL REPORT 2017 Year ended March 31, 2017 Millions of yen Reportable segment Petroleum Petrochemical Recon- products products Resources Total Others Total ciliation Consolidated Net sales: Customers ¥2,438,225 ¥461,212 ¥227,303 ¥3,126,741 ¥63,605 ¥3,190,347 － ¥3,190,347 Inter-segment 5,587 3,656 112 9,356 538 9,895 (¥9,895) － Total ¥2,443,813 ¥464,869 ¥227,415 ¥3,136,098 ¥64,144 ¥3,200,243 (¥9,895) ¥3,190,347 Segment profit ¥76,999 ¥39,956 ¥16,608 ¥133,564 ¥5,058 ¥138,623 (¥3,388) ¥135,234 Segment assets 1,559,783 422,268 399,144 2,381,197 296,481 2,677,678 (36,045) 2,641,633 Other items: Depreciation and 26,746 8,561 33,266 68,574 1,031 69,606 594 70,200 amortization Amortization of 661 34 － 695 419 1,115 － 1,115 goodwill Equity in earnings (2,468) 8,947 637 7,115 904 8,019 (43) 7,976 (losses) of nonconsolidated subsidiaries and affiliates, net Impairment loss on 2,778 843 6,499 10,120 776 10,897 － 10,897 fixed assets Investment in equity 98,785 47,400 5,328 151,513 220,698 372,212 － 372,212 method affiliates Unamortized balance 6,174 217 － 6,391 1,231 7,623 － 7,623 of goodwill ¥22,184 ¥9,152 ¥12,945 ¥44,283 ¥1,296 ¥45,579 ¥523 ¥46,102 Capital expenditures

Year ended March 31, 2017 Thousands of U.S. dollars Reportable segment Petroleum Petrochemical Recon- products products Resources Total Others Total ciliation Consolidated Net sales: $21,733,004 $4,110,998 $2,026,056 $27,870,058 $566,943 $28,437,002 － $28,437,002 Customers Inter-segment 49,803 32,594 1,004 83,401 4,803 88,205 ($88,205) － Total $21,782,807 $4,143,592 $2,027,060 $27,953,460 $571,747 $28,525,207 ($88,205) $28,437,002 Segment profit $686,334 $356,147 $148,035 $1,190,517 $45,092 $1,235,610 ($30,203) $1,205,406 Segment assets 13,903,054 3,763,871 3,557,758 21,224,684 2,642,672 23,867,356 (321,286) 23,546,069 Other items: Depreciation and 238,406 76,313 296,518 611,238 9,192 620,430 5,300 625,730 amortization Amortization of 5,894 306 － 6,201 3,737 9,939 － 9,939 goodwill (22,005) 79,751 5,679 63,425 8,058 71,483 (384) 71,099 Equity in earnings (losses) of nonconsolidated subsidiaries and affiliates, net Impairment loss on 24,762 7,516 57,934 90,212 6,919 97,132 － 97,132 fixed assets Investment in equity 880,516 422,500 47,495 1,350,512 1,967,181 3,317,693 － 3,317,693 method affiliates Unamortized balance 55,036 1,935 － 56,971 10,975 67,947 － 67,947 of goodwill Capital expenditures $197,739 $81,584 $115,392 $394,715 $11,553 $406,269 $4,661 $410,931

ANNUAL REPORT 2017 87 Notes: 1. The segment “Others” refers to the total of other business segments that are not included in the reportable segments, including Showa Shell, engineering businesses, insurance businesses, electronic materials businesses, agricultural biotechnology businesses and renewable energy businesses. 2. The amount of reconciliation for the segment profit mainly represents research and development costs, which do not belong to reportable segments. 3. The segment profit of the reportable segments is reconciled to the amount of operating income in the consolidated statements of operations. 4. The amount of reconciliation for the segment assets represents elimination among the reportable segments and the amount of Company assets that are not allocated to the reportable segments. 5. The amounts of reconciliations for depreciation and amortization and capital expenditures mainly represent depreciation and increases in fixed assets for research and development that do not belong to the reportable segments. 6. The amounts of reconciliation for equity in earnings (losses) of nonconsolidated subsidiaries and affiliates, net are due to elimination of inter-segment transactions.

(D) Related Information Year ended March 31, 2016 1. Information for each product and service Since the consolidated business segment information includes similar information, descriptions have been omitted.

2. Geographic segment information (1) Sales Millions of yen Asia and North Japan Oceania America Europe Other Total ¥2,677,913 ¥576,857 ¥222,394 ¥86,698 ¥6,339 ¥3,570,202

Note: 1. Areas are segmented based on their geographical proximity. 2. The principal countries or regions included in each geographic segment is as follows: Asia and Oceania : China, Australia, South Korea, Singapore, etc. North America : USA and Canada Europe : UK , Norway , etc. Others : South America, etc.

(2) Property, plant and equipment

Millions of yen Asia and Japan Oceania Europe Other Total ¥826,652 ¥120,776 ¥89,367 ¥29,786 ¥1,066,583

Note: 1. Areas are segmented based on their geographical proximity. 2. The principal countries or regions included in each geographic segment is as follows: Asia and Oceania : Australia, Malaysia, South Korea, Indonesia, etc. Europe : UK and Norway Others : USA, Canada, etc.

3. Principal customer information Of the net sales to outside customers, no customer accounted for 10% or more of net sales in the consolidated statements of operations. Thus, this information has been omitted.

88 ANNUAL REPORT 2017 Year ended March 31, 2017 1. Information for each product and service Since the consolidated business segment information includes similar information, descriptions have been omitted.

2. Geographic segment information (1) Sales Millions of yen Asia and North Japan Oceania America Europe Other Total ¥2,403,764 ¥499,497 ¥168,910 ¥92,891 ¥25,283 ¥3,190,347

Thousands of U.S. dollars Asia and North Japan Oceania America Europe Other Total $21,425,832 $4,452,242 $1,505,579 $827,987 $225,360 $28,437,002

Note: 1. Areas are segmented based on their geographical proximity. 2. The principal countries or regions included in each geographic segment is as follows: Asia and Oceania : China, Australia, South Korea, Singapore, etc. North America : USA and Canada Europe : UK , Norway, etc. Others : South America, etc.

(2) Property, plant and equipment

Millions of yen Asia and Japan Oceania Europe Other Total ¥819,321 ¥114,854 ¥60,075 ¥27,835 ¥1,022,086

Thousands of U.S. dollars Asia and Japan Oceania Europe Other Total $7,302,979 $1,023,750 $535,477 $248,107 $9,110,314

Note: 1. Areas are segmented based on their geographical proximity. 2. The principal countries or regions included in each geographic segment is as follows: Asia and Oceania : Australia, Malaysia, South Korea, Indonesia, etc. Europe : UK and Norway, etc. Others : USA, Canada, etc.

3. Principal customer information Of the net sales to outside customers, no customer accounted for 10% or more of net sales in the consolidated statements of operations. Thus, this information has been omitted.

ANNUAL REPORT 2017 89 90 ANNUAL REPORT 2017 Investor Information

(As of March 31, 2017)

COMPANY NAME REGULAR GENERAL SHAREHOLDERS’ MEETING Idemitsu Kosan Co.,Ltd. June of each year

HEAD OFFICE NUMBER OF SHARES ISSUED 1-1, Marunouchi 3-chome, Chiyoda-ku, Tokyo, Japan 160,000,000 shares (208,000,000 shares as of July 2017 due to the capital increase INCORPORATED of 48,000,000 shares) March 30, 1940 (Founded June 20, 1911) NUMBER OF SHAREHOLDERS REFINERIES 10,566 Hokkaido, Chiba and Aichi TRANSFER AGENT PETROCHEMICAL PLANTS Sumitomo Mitsui Trust Bank, Limited Chiba and Tokuyama 1-4-1, Marunouchi, Chiyoda-ku, Tokyo NUMBER OF EMPLOYEES 100-8233, Japan 9,139 (consolidated) INDEPENDENT AUDITORS FISCAL YEAR Deloitte Touche Tohmatsu LLC April 1 to March 31

MAJOR SHAREHOLDERS Number of Percentage of Name shares total shares (Thousands) (%) Nissho Kosan K.K. 27,120 16.96 Idemitsu Culture and Welfare Foundation 12,392 7.75 Idemitsu Museum of Arts Foundation 8,000 5.00 Idemitsu Employee Stockholders Committee 5,531 3.46 The Bank of Tokyo-Mitsubishi UFJ, Ltd. 5,142 3.22 Sumitomo Mitsui Banking Corporation 5,142 3.22 IR CONTACT Sumitomo Mitsui Trust Bank, Limited 5,142 3.22 Investor Relations Office, Treasury Department, Japan Trustee Services Bank, Ltd. (Trust account) 3,850 2.41 Idemitsu Kosan Co.,Ltd. The Master Trust Bank of Japan, Ltd. (Trust account) 3,161 1.98 1-1, Marunouchi 3-chome, Chiyoda-ku, Tokyo, Masakazu Idemitsu 2,416 1.51 100-8321, Japan Masamichi Idemitsu 2,416 1.51 Phone: +81-3-3213-9307 (Note) Fax: +81-3-3213-3158 The shareholding ratios are calculated by excluding the shares of treasury stock of the Company (47,236 shares).

ANNUAL REPORT 2017 91 www.idemitsu.co.jp