IDEMITSU KOSAN CO.,LTD. ANNUAL REPORT 2016 Year Ended March 31, 2016 Topics in Fiscal Year 2015 2015 Jun. • Successful appraisal well in the Norwegian Barents Sea Aug. • Completion of Boggabri Coal Mine Expansion Project Oct. • Short-term flow test of exploratory wells for geothermal energy development in Amemasudake area, Hokkaido, Japan • Production capacity increase at the lubricants plant in China Nov. • Idemitsu and Doosan agree to form cooperative partnership in OLED material business • Entered into Memorandum of Understanding with Showa Shell Sekiyu K.K. for the Business Integration 2016 Jan. • Increasing the production capacity for SPS resin XAREC® Feb. • Establishment of Himeji Natural Gas Power Generation Co., Ltd. with Osaka Gas., Ltd. • Opening of first commercial hydrogen station Mar. • Construction begins on one of Japan’s largest geothermal binary power plants • Reached an agreement on financing by subordinated loans Contents 02 Financial Highlights 23 Material Agreements, etc. 04 To Our Stakeholders 24 Corporate Governance 17 Management Philosophy 34 Directors, Audit & Supervisory Board Members and Executive Officers 18 At a Glance 35 Financial Section 20 Research & Development 92 Investor Information Contribute to society with harmony between the economy and the environment by effectively securing and using energy and by developing functional materials. Idemitsu Kosan Co.,Ltd. was founded in Moji, Kita-Kyushu in 1911 under the name Idemitsu Shokai to engage in oil distribution. Since its foundation, Idemitsu has worked hard under the fundamental principle of social contribution through business, always maintaining respect for human beings in carrying out business operations. During its 105-year history, the Company has utilized its expertise globally in a wide range of strategic businesses, such as petroleum products, petrochemical products, oil exploration and production, coal, and other businesses. The Idemitsu Group strives to contribute to the creation of a recycling society of the future by focusing on development of businesses in these elds. Petroleum Products 77.1% • Fuel oil • Lubricants • Transportion of oil Petrochemical Products 14.6% • Basic chemicals • Performance chemicals NET SALES • Engineering plastics • Plastic processed products ¥3.6 trillion Resources 6.3% • Oil exploration and production • Coal • Geothermal resources • Uranium Others 2.0% • Electoronic materials • Agricultural biotechnology Note: FY and fiscal year indicated in this annual report refer to the fiscal year from April 1 to March 31 of the following year. CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS This annual report contains forward-looking statements concerning the future plans, strategies and performance of Idemitsu Kosan Co., Ltd. These forward-looking statements are not historical facts; rather, they represent assumptions and beliefs based on economic and financial data available as of the publication date. Actual operating results may therefore differ substantially from the Company’s expectations due to various factors, including but not limited to the following: (1) global economic conditions; (2) social trends; and (3) changes in the Company’s competitiveness caused by fluctuation of demand for its products and services. ANNUAL REPORT 2016 01 Financial Highlights Idemitsu Kosan Co.,Ltd. and Consolidated Subsidiaries Fiscal years ended March 31 Thousands of Millions of yen U.S. dollars* FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2015 For the year Net sales ¥4,310,348 ¥4,374,696 ¥5,034,995 ¥4,629,732 ¥3,570,202 $31,684,434 Operating income 138,078 110,684 78,197 (104,798) (19,643) (174,326) Net income 64,376 50,167 36,294 (137,958) (35,993) (319,427) Net cash provided by operating activities 159,723 50,780 50,087 172,904 216,368 1,920,199 Net cash provided by investing activities (59,092) (70,891) (179,811) (131,146) (98,052) (870,181) Net cash provided by financing activities (79,462) (45,657) 161,143 (98,253) (105,581) (936,999) Capital expenditures 64,244 71,020 107,472 147,406 57,630 511,448 Depreciation and amortization 61,062 53,988 63,120 66,744 80,282 712,478 At year-end Total assets 2,682,139 2,728,480 2,995,063 2,731,001 2,402,118 21,318,051 Total equity 614,513 687,948 743,786 630,384 537,660 4,771,565 Interest–bearing debt 919,807 896,380 1,081,931 1,006,207 909,586 8,072,293 Per share data** Net income per share 1,609.83 1,254.51 226.90 (862.50) (225.03) (2.00) Net assets per share 14,668.18 16,343.31 4,391.46 3,671.39 3,129.93 27.78 Cash dividends per share 200.0 200.0 125.0 50.0 50.0 0.44 Ratios Return on invested capital (ROIC)*** (%) 9.6 7.7 5.4 (5.6) (0.1) — Return on equity (ROE) (%) 11.7 8.1 5.4 (21.4) (6.6) — Shareholders’ equity ratio (%) 21.9 24.0 23.5 21.5 20.8 — Net debt/equity ratio (times) 1.3 1.2 1.3 1.5 1.6 — Other data Number of shares issued (thousands of shares)** 40,000 40,000 160,000 160,000 160,000 — Number of employees (people) 8,243 8,684 8,749 8,829 9,203 — * Solely for the convenience of the reader, the consolidated financial statements as of and for the year ended March 31, 2015 have been translated into United States dollars at the rate of ¥112.68 = U.S.$1, the approximate rate of exchange prevailing on March 31, 2016. This translation should not be construed as a representation that all the amounts shown could be converted into U.S. dollars. ** The Company conducted a 1:4 stock split on its common shares with the effective date of January 1, 2014. Cash dividends per share of FY2013 are calculated under the assumption that the stock split had been conducted at the beginning of FY2013. *** ROIC = Operating income****/(total equity + interest - bearing debt) **** Operating income used to calculate ROIC includes equity in earnings/losses of affiliated companies and dividend income. 02 ANNUAL REPORT 2016 Net Sales Operating Income Net Income Billions of yen Billions of yen Billions of yen 6,000 150 60 125 5,000 40 100 4,000 20 75 3,000 50 0 25 2,000 -20 0 1,000 -40 -25 0 -100 -140 11 12 13 14 15 FY 11 12 13 14 15 FY 11 12 13 14 15 FY Shareholders’ Equity Interest-Bearing Debt Total Assets Shareholders’ Equity Ratio Net Debt/Equity Ratio Billions of yen Billions of yen % Billions of yen Times 3,000 900 30 1,200 6 2,500 750 25 1,000 5 2,000 600 20 800 4 1,500 450 15 600 3 1,000 300 10 400 2 500 150 5 200 1 0 0 0 0 0 11 12 13 14 15 FY 11 12 13 14 15 FY 11 12 13 14 15 FY Shareholders’ Equity Interest-Bearing Debt Shareholders’ Equity Ratio Net Debt/Equity Ratio Shareholders’ equity = Equity – Minority interests in consolidated subsidiaries Shareholders’ equity ratio = Shareholders’ equity/Total assets ROE = Net income/Average of shareholders' equity at beginning and end of period Net Debt/Equity Ratio = (Interest-bearing debt - cash and cash equivalents and marketable securities)/shareholders' equity ANNUAL REPORT 2016 03 To Our Stakeholders Analyses of Operating Results and Financial Position (1) ANALYSIS OF OPERATING RESULTS 1) GENERAL ECONOMIC CONDITIONS AND ENVIRONMENT SURROUNDING THE IDEMITSU GROUP During the fiscal year ended March 31, 2016, the Japanese economy, including share prices, had shown a steadily growing trend up until the end of 2015 underpinned by the favorable environment for corporate earnings. However, moving into 2016, the economy had been showing a sign of stagnation, amid growing uncertainty over the Chinese economy and the slowdown in emerging-market economies. The domestic overall demand for petroleum products during fiscal 2015 fell short of its year-earlier level. While demand for transportation fuel, such as gasoline, almost unchanged from the prior fiscal year, demand for kerosene and heavy fuel oil for the power industry decreased, hit by the unusually warm winter. Dubai crude oil prices remained on an upward trend around the spring of 2015. However, they started to drop in the summer on account of a cloudy outlook for China’s economy triggered by the devaluation of the yuan and OPEC’s unwillingness to cut its oil production. The pace of the drop accelerated when OPEC decided at a general assembly held in early December 2015 not to make supply and demand adjustment through reduction in oil production, and the prices temporarily plunged below $30/bbl. Consequently, the average price of Dubai crude oil for fiscal 2015 plummeted $37.9/bbl from the preceding year to $45.5/bbl. Demand for petrochemical products during fiscal 2015 remained consistent with the previous fiscal year. Domestic production fared relatively well supported by a decrease in import volume due to the weaker yen. The price for naphtha, a petrochemical raw material, tumbled by $332/ton from a year earlier to $486/ton. The average exchange rate of the Japanese yen to the US dollar for fiscal 2015 decreased by ¥10.2/$ from the last fiscal Takashi Tsukioka year to ¥121.1/$ due to the further weakening yen, mainly Representative Director & Chief Executive Officer attributable to the continued monetary easing policy of the Bank of Japan and expectations for interest rate rises in the US. 04 ANNUAL REPORT 2016 Crude Oil Price 2) OPERATING RESULTS USD/bbl Dubai Under these circumstances, the Idemitsu Group’s net sales for 120 fiscal 2015 were ¥3,570.2 billion, down 22.9% from the prior fiscal year, due mainly to drops in crude oil prices.