annual report 2017 - idemitsu kosan · developing functional materials. ... ** the company...

ANNUAL REPORT 2017Year 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

04 To Our Stakeholders

21 Management Philosophy

22 At a Glance

24 Research & Development

27 Material Agreements, etc.

28 Corporate Governance

39 Directors, Audit & Supervisory Board Members and Executive Officers

41 Financial Section

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.

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 STATEMENTSThis 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.

NET SALES

¥3.2 trillion

Petroleum Products

76.6%• Fuel oil• Lubricants• Transportion of oil

Petrochemical Products

14.6%• Basic chemicals • Performance chemicals • Engineering plastics• Plastic processed products

Resources

7.1%• Oil exploration and production• Coal• Geothermal resources• Uranium

Others

1.7%• Electoronic materials• Agricultural biotechnology

ANNUAL REPORT 2017 01

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

Millions of yenThousands of 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.

Financial Highlights

ANNUAL REPORT 201702

Net Sales

FY161512 13 14 161512 13 14 161512 13 14

161512 13 14 161512 13 14 161512 13 14

Billions of yen

Net Income

FY

Billions of yen

Operating Income

FY

Billions of yen

0

1,000

2,000

3,000

4,000

5,000

6,000

Total Assets

FY

Billions of yen

0

500

1,000

1,500

2,000

2,500

3,000

Shareholders’ EquityShareholders’ Equity Ratio

FY

Billions of yen %

0

150

300

450

600

750

900

Interest-Bearing DebtNet Debt/Equity Ratio

FY

Billions of yen

0

200

400

600

800

1,000

1,200

Interest-Bearing DebtNet Debt/Equity Ratio

Shareholders’ Equity Shareholders’ Equity Ratio

0

5

10

15

20

25

30

Times

0

1

2

3

4

5

6

Shareholders’ equity = Equity – Minority interests in consolidated subsidiariesShareholders’ equity ratio = Shareholders’ equity/Total assetsROE = Net income/Average of shareholders’ equity at beginning and end of periodNet Debt/Equity Ratio = (Interest-bearing debt - cash and cash equivalents and marketable securities)/shareholders’ equity

-100

0

25

-25

50

75

100

125

150

-150

-30

0

30

60

90


Takashi TsukiokaRepresentative Director & Chief Executive Officer

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

increased from the previous fiscal year. Domestic production

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.

To Our Stakeholders


Crude Oil Price

USD/bbl

FY15 161Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Dubai

20

30

40

50

60

70

FY12 13 14 15 16

Consolidated Operating Income

Billions of yen

-100

-30

0

30

60

90

120

150

The exchange rate of the Japanese yen to the US dollar

remained at an underlying trend of a strong yen until the

middle of the year due to the influence of the Brexiters’ victory

in the EU exit vote in the UK. Afterwards the trend turned to

a weak yen due to the expectation of an economic stimulus

package from Donald Trump, the winner of the US presidential

election. The average exchange rate for fiscal 2016 increased

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

2) Operating Results

Under these circumstances, the Idemitsu Group’s net sales

for fiscal 2016 were ¥3,190.3 billion, down 10.6% from the

previous fiscal year, due mainly to drops in crude oil prices on

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

increased profit in the resources business, and the effect of

inventory valuation which turned profitable after a significant

loss in the previous fiscal year. Net non-operating income was

¥4.7 billion due mainly to the decreased currency revaluation

loss, an increase by ¥7.0 billion from net non-operating loss

for the previous fiscal year. Ordinary income improved by

¥161.9 billion from the previous fiscal year to ¥140.0 billion.

Net extraordinary loss was ¥17.0 billion, representing a year-

on-year reduction of ¥16.1 billion, helped chiefly by decreased

impairment loss in the resources business.

In addition, the Company recorded income taxes of ¥32.5

billion and net income attributable to noncontrolling interests

of ¥2.4 billion.

As a result, net income attributable to owners of the parent

was ¥88.2 billion, an improvement of ¥124.2 billion from the

previous fiscal year.


FY12 13 14 15

Volume of Crude Oil Processed Utilization Rate

1,000 kiloliters %

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

0

20

40

60

80

100

Volume of Crude Oil ProcessedUtilization Rate (Calender-Day Basis)

16

Fuel Product Sales Volume(Total volume of domestic sales)

FY12 13 14 15

1,000 kiloliters

0

5,000

10,000

15,000

20,000

25,000

30,000

16

3) Progress and Results of Business

Petroleum Products Segment

In the petroleum products segment, the Company set as its

basic strategy the reinforcement of the competitiveness of the

domestic supply and marketing systems and the expansion of

business in overseas markets, and took the following actions:

Fuel Oil Business

In the supply of petroleum products, the Company carried

out crude oil processing taking supply-demand and sales

conditions into account, and strived to promote reductions in

supply costs while still securing a stable supply of products.

Pursuant to the Second Announcement of Sophisticated

Methods of Energy Supply Structures, the Company cut its

crude distillation unit capacity at the Hokkaido Refinery by

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

construction of a more competitive production structure.

In the marketing and sales of petroleum products, the

Company continuously reinforced its network of service

stations through opening new service stations, and remodeling

and revitalizing the existing ones. It also introduced a POS

system before its competitors and started to handle the

SoftBank Card (prepaid card). In this way, the Company

attempted to increase customer convenience by leveraging

the strength of its nationwide network.

As for business efforts in overseas markets, the

construction of Nghi Son Refinery and Petrochemical Complex

in Vietnam has been completed in April 2017, with a view to

embarking on commercial production in fiscal 2017. Also, in

order to develop the fuel oil wholesale and retail business in

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.


FY

Lubricant Sales Volume

1,000 kiloliters

12 13 14 15

DomesticOverseas

0

300

600

900

1,200

1,500

* Includes sales of overseas licenses

16

To Our Stakeholders

Lubricants Business

In fiscal 2016, the total amount of lubricants sold in Japan and

abroad was close to 1.2 million kiloliters, hitting an all-time

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,

the Company started operations of a new factory in Thailand

and enhanced R&D functions in the US.

Consequently, net sales in the petroleum products segment

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.

Operating income was ¥77.0 billion improving by ¥144.4 billion

in comparison with the previous fiscal year on account of the

improved product margins and the effect of inventory valuation

which turned profitable after a significant loss in the previous

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.


FY

1,000 tons

12 13 14 150

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

Petrochemical Products Sales Volume

16

Performance Materials Business

In the engineering plastics business, the Company had

pressed ahead step by step since 2013 with the consolidation

of the production of polycarbonate resin (Product name:

TARFLON®) into Formosa Chemicals & Fibre Corporation

(“FCFC”) of Taiwan to which the Company had granted a

license. In fiscal 2016, the Company completed consolidation

of the production of special grade polycarbonates into FCFC

and started supply for high value-added applications such as

chassis for information equipment and optical components

for vehicles. In this way, stable supply systems with greater

competitive advantages were established. With regard to

syndiotactic polystyrene resin (Product name: XAREC®),

which has excellent properties such as superior heat

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.


*Based on interest owned by Idemitsu Group

FY

Crude Oil Production*

1,000 barrels per day

12 13 14 15

NorwayUKVietnam

160

10

20

30

40

50

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

With regard to exploration activities, the Company discovered

accumulations of oil and gas in the Cara structure of the

Norwegian North Sea in September 2016. Moreover, the

Company conducted studies related to the future development

of oil and gas fields which were discovered off the coast of

Vietnam in 2014.

In the existing oil fields, the Company carried out operation

improvement activities in addition to stable operation and

production. Therefore, it produced crude oil and natural gas

in an amount of 43 thousand barrels of crude oil-equivalent

per day in the Norwegian North Sea, the UK North Sea, and

Vietnam.

Net sales in the oil exploration and production business for

fiscal 2016 decreased by 1.4% from the prior year to ¥73.6

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

commodity countries offset the lower crude oil prices.

Coal Business and Others

Regarding the coal business, amid a wide swing in coal prices

due mainly to China’s policy trend, the Company made efforts

to enhance competitiveness through improving productivity at

all of its mines including those in Indonesia and cost reduction

through integrated purchasing and others. Consequently,

the Company produced a record-high of approximately 13

million tons of coals in total from its own mines in Australia

and Indonesia. Moreover, three companies, namely the

Company, NYK Trading Corporation, and NYK Line, agreed

to jointly sell “ULTY”, NYK Trading’s optimization system to

control coal boilers, and to jointly develop a new ULTY model

that integrates the existing ULTY with the Company’s highly

efficient combustion technique.

As for the uranium business, the Company sells uranium

concentrates produced at the Cigar Lake Mine in Canada.

To Our Stakeholders

*Based on interest owned by Idemitsu Group

FY

Coal Production*

1,000 tons

12 13 14 15

Muswellbrook mineEnsham mine

Boggabri mineTarrawonga mineMalinau

160

2,000

4,000

6,000

8,000

10,000

12,000

14,000


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.


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.

To Our Stakeholders


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


FY13 14 15 16 17plan

Dividend per Share

Yen

0

50

100

150

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/Dividends for FY2016 and FY2017

The Company considers the return of profits to shareholders

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

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

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

a distribution out of the Company’s surplus to shareholders

pursuant to the provision of Article 459, Paragraph 1 of the

Companies Act. The Company has been paying out dividends

twice in each fiscal year as interim dividends and year-end

dividends since the fiscal year ended March 2008.

To Our Stakeholders


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:


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.


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

Initiatives for Synergies are as follows.

Section Initiatives Expected Effect

Purchase of Crude Oil

1) Joint purchase of crude oil2) Joint allocation of VLCC (Very Large Crude Carrier)/reduction of chartered

VLCC cost

1 Billion Yen

Supply 1) Earnings improvement by integration of production planning model• Maximization of profitability of heavy oil upgrading units to optimize heavy

components• Optimization of crude allocation for each refinery2) 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)

12 Billion Yen

Manufacturing and Procurement

1) Implementation of best practice to improve refinery margin• Reduction in refining cost and others2) Joint procurement• Sub-materials (catalysts/chemicals, etc.)• Construction/construction materials

7 Billion Yen

Logistics and Sales 1) Mutual utilization of oil terminal2) Cooperative distribution (land and marine)

4 Billion Yen

Administrative Sectors

Joint procurement (IT system, corporate-related expenses, etc.) 1 Billion Yen

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.


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.


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.


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)


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

To Our Stakeholders


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 CustomersWe 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 EnvironmentWe 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 ShareholdersWe fulfill our corporate social responsibilities, strive for sound, sustainable growth, and endeavor to generate stable returns for shareholders.

Cooperation with PartnersWe 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-realizationWe 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.

Management Philosophy


Business Segment Business OperationsMajor Subsidiaries

(�◆�Equity method affiliates) (Overseas companies*)

Others

Resources

Petroleum Products

• Import, refining, production and sale of crude oil, petroleum products and lubricants, and transportation and storage relating thereto

• Sale of service station products

● Idemitsu Tanker Co., Ltd.

● Idemitsu Retail Marketing Co., Ltd.

● Apolloretailing Co.,Ltd.

● Idemitsu International (Asia) Pte.Ltd.*

● Idemitsu Apollo Corporation *

◆� Nghi Son Refinery and Petrochemical LLC*

• Production and sale of petrochemical products

● Idemitsu Unitech Co., Ltd.

◆�Prime Polymer Co., Ltd.

◆� PS Japan Corp.

● Idemitsu SM (Malaysia) Sdn.Bhd.*

◆� Formosa Idemitsu Petrochemicals Corporation*

• Investigation, exploration, development and sale of oil resources, coal, uranium and geothermal resources

● Idemitsu Petroleum Norge AS*

● Idemitsu Petroleum UK Ltd.*

● Idemitsu Australia Resources Pty Ltd*

● Idemitsu Canada Resouces Ltd.*

● Idemitsu Oita Geothermal Co.,Ltd.

◆� Astomos Energy Corp.● Idemitsu Engineering Co., Ltd.● Idemitsu Insurance Service, Co.,Ltd.◆� Idemitsu Credit Co., Ltd.● SDS Biotech K.K.● Idemitsu Canada Corporation*◆ AltaGas Idemitsu Joint Venture Limited

Partnership*◆ Showa Shell Sekiyu K.K.

• Import, purchase and sale of liquefied petroleum gas (LPG)

• Production and sale of electronic materials

• Design, construction, maintenance and management of petroleum-related facilities

• Credit card service

• Import and sale of agricultural chemicals

Petrochemical Products

At a Glance


Net Sales Operating Income/Loss

¥461.2 billion

¥520.8 billion

¥227.3 billion

¥63.6 billion

¥2,438.2 billion

¥2,751.0 billion

-¥312.8 billion

-¥59.6 billion

-¥1.5 billion

-¥6.0 billion -¥3.7 billion

+¥17.2 billion

-¥2.3 billion

¥40.0 billion

¥42.3 billion

¥8.8 billion

¥228.8 billion

¥69.6 billion

¥16.6 billion

¥5.1 billion

¥77.0 billion

-¥67.4 billion

+¥144.4 billion

-¥0.6 billion

FY2016

FY2015

FY2016

FY2015

FY2016

FY2015

FY2016

FY2015

FY2016

FY2015 FY2015

FY2016

FY2015

FY2016

FY2015

FY2016


The Idemitsu Group engages in R&D activities

concerning petroleum and petrochemical products

and the natural resources business, as well as for

the purpose of starting new businesses. Currently,

different parts of the Group work closely together to

conduct R&D activities.

In fiscal 2016, the Group’s R&D expenses totaled

¥13.1 billion, up ¥0.6 billion year on year. This amount

includes ¥2.7 billion in common R&D expenditures that

cannot be allocated to individual business segments.

The details, expenses, and results of R&D activities for

each segment in fiscal 2016 are outlined below.

1. Petroleum Products Segment

In the Petroleum Products Segment, the Group

is advancing activities to develop environmentally

conscious petroleum and lubrication products. In

fiscal 2016, R&D expenditures in this segment were

¥3.2 billion.

a. In the petroleum business, Idemitsu focuses its

technological development efforts on goals such as

developing total optimal processing technologies for

refining heavy oil equipment, clarifying the corrosion

mechanism when using poor-quality crude oil and

considering relevant countermeasures, developing

Petroleomics Technology with the aim of adding

more value to petroleum products, using process

technologies to make the petroleum business more

competitive, improving efficiency at refineries,

factories, and offices, energy conservation, and

contributing to an environment-friendly society.

b. In the lubricants business, the Company undertakes

global development of products that conserve fuel

and energy and are environmentally conscious,

aiming to achieve stable supplies to domestic

and overseas markets. Some of our major

accomplishments in fiscal 2016 are described

below.

• We enhanced our lineup of automotive lubricant

products by developing next-generation engine

oils with enhanced quality in conformity with the

API GF-5 standard.

• Our product lineup for industrial lubricants

was enhanced by promoting the development

of environment-friendly high-performance

products, refrigerant oil for freezers with global

warming potential (GWP), energy efficient

lubricants for manufacturing facilities that help

to reduce electric power consumption, as well

as environmentally conscious hydraulic oil that

contributes to improved processing efficiency by

producing less waste water while having a longer

useful life.

2. Petrochemical Products Segment

R&D activities in the Petrochemical Products

Segment are aimed at enhancing our competitiveness

in performance materials and plastic processed

products in the performance materials business. R&D

expenditures in this segment totaled ¥2.7 billion in

fiscal 2016.

a. In the performance materials business, we are

working to develop raw materials that impart new

properties to adhesives and high-value-added

products incorporating the engineering plastics of

polycarbonate and syndiotactic polystyrene (SPS)

resins. Some of our major accomplishments in fiscal

2016 are described below.

• In the field of functional soft polypropylene

(product name: L-MODU® that has a much lower

crystallization point than traditional crystalline

polypropylenes, giving it a special softness, the

Company has developed new applications for

use as an adhesive for sanitary products and as

a modifying material for nonwoven fabrics and for

film, as well as for wood adhesives, resulting in

growth in sales of this material.

• In the field of polycarbonate resin (product

name: TARFLON®), the Company has developed

applications for a new grade of the product with

excellent transparency and liquidity. The product

has since been received well in the market of

various lighting components, including those

Research & Development


for automobiles as well as liquid crystal display

(LCD) components. Idemitsu ceased operation

of the polycarbonate production facility at its

Chiba Plant in December 2015. In fiscal 2016,

the Company consolidated the production of

polycarbonate resin into Formosa Chemicals &

Fibre Corporation (hereinafter, “FCFC”), a core

firm of Taiwan’s Formosa Group, and further

enhanced its competitiveness in the market.

• In the field of syndiotactic polystyrene resin

(product name: XAREC®), we rolled out

applications for a grade that reduces molding

cycle time with lower gas emissions, and we

expanded sales of this material for use in

automotive electrical components and others. In

addition, the strong reputation it has earned for

its excellent radio wave transmitting property and

electrical properties has led to XAREC® seeing

expanded use by manufacturers of components

for use in radar-sensors for determining distance

between running vehicles and by manufacturers

of electric vehicle components.

b. In the sheet film business, the Company is

developing grades for packaging materials and

decorative products for industrial applications.

Some of our major accomplishments in fiscal 2016

include the following.

• The lineup of packaging materials has been

reinforced by promoting the development of

grades based on the requirements of customers,

including the improved sheet grade for prepared

food packages used by suppliers to convenience

stores (product name: MULTILAY®), and the

improved zipper tape grade with its straight line

cut property (product name: PLALOC®).

• In the decorations field, the Company promoted

the enhancement of sheets for use on the

exterior of motorcycles, which have been

adopted more extensively by major motorcycle

makers. We also promoted the development

of applications for the automotive and home

construction fields by introducing newly

developed grades.

3. Resources Segment

In the coal business, we advanced development of

technologies to improve the quality of coal produced

at coal mines and lessen environmental impact

through efficient, clean use of coal. R&D expenditures

in this segment were ¥0.2 billion. Some of our major

accomplishments in fiscal 2016 include the following.

In light of the enforcement of the Paris Agreement in

particular, we enhanced development of clean coal

technologies in harmony with the environment.

• We embarked on market development for woody

biomass that will lead to the reduction of CO2

emissions, and have established the evaluation

technology. By means of this, we have selected

the optimal wood pellet for co-combustion with

coal, and have been engaging in consulting sales

to customers.

• In collaboration with the NYK Group, Idemitsu

started to expand sales of the control

optimization system for coal-fired boilers

(product name: ULTY), which is owned by

NYK Trading Corporation. In addition, we

embarked on the development of a new type

ULTY, whose functions are designed to be

upgraded by merging Idemitsu’s high-efficiency

coal combustion technology, and have been

contributing to customers’ efforts to reduce CO2

emissions from coal-fired boilers.

• Idemitsu’s coal evaluation system has been

adopted by several national projects overseas,

from which we also received orders for

technology consulting services related to power

plant operations to avoid troubles due to poor-

quality coal.

• To encourage use of low-grade coal, we

partnered with Japan Oil, Gas and Metals

National Corporation (JOGMEC) to engage in

research and development by using Indonesian

lignite. The achievements include the restraint

of self-generating heat due to the blending with

bituminous coal and the simultaneous synthesis

of improved coal and synthetic oil as a result of

hydrothermal reaction.


4. Other Segments

In addition to the above segments, we also carry out

R&D activities in the electronics materials and agri-

bio businesses. Fiscal 2016 R&D expenditures in this

segment totaled ¥4.3 billion.

a. In the electronics materials field, R&D activities are

being conducted for new base materials, such as

materials for organic light-emitting diodes (OLED)

and oxide semiconductor materials. Particularly with

regard to OLED materials, the Company is advancing

broad-ranging development activities, ranging from

further improving the performance of products and

materials to developing next-generation technologies,

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.

5. Company-wide Initiatives (Corporate R&D Strategy)

As part of the corporate R&D strategies, company-

wide activities are currently underway, aimed at

providing analytical support for the new products

developed by the respective research laboratories

within the Group by leveraging its highly sophisticated

analytical equipment and techniques. We also stay

focused on taking steps to develop animal vaccines

in the field of livestock and materials for the next

generation storage battery toward achieving the

effective use of electric power represented by electric

vehicles in pursuit of new business opportunities

based on the current trends in society and technology

suitable for the Company.

Research & Development


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 Idemitsu Kosan Co.,Ltd. and Showa

Shell Sekiyu K.K. (“MoU”) concluded 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 business prior to the

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 purchaseBefore the Amendment After the Amendment

Number of Shares to be purchased 125,261,200 117,761,200

Purchase price¥169,103 million

(¥1,350 per Share)¥158,978 million

(¥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.

Material Agreements, etc.


Corporate Governance

Corporate Governance System

Outline of the Corporate Governance System

Basic PolicyEver since its foundation, Idemitsu has consistently

held the utmost respect for people and has worked

diligently to be a socially respected and highly trusted

company.

With this aim in mind, the Company recognizes the

importance of constructing positive relationships with

all stakeholders, including customers, shareholders,

business partners, local communities and employees,

by fulfilling its social responsibility as a good corporate

citizen, improving management transparency and

promoting sound and sustainable growth.

In line with the philosophy expressed above,

Idemitsu has adopted the structure of a “company with

corporate auditors,” established a robust corporate

governance system and continues to engage in

activities aimed at improving its capabilities in this field.

The basic policy stated above is that of the entire

Idemitsu Group. The following details are based on

the status as of the Annual YUHO Report submission

date, unless otherwise indicated.

Reasons for Adoption of the Corporate Governance SystemThe 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

inside personnel can be reflected in the Company’s

management.

Business Execution and Management Supervision MechanismsTo increase efficiency in executive functions, the

Company has adopted the corporate executive

officer system. Executive Officers are appointed by

the Board of Directors and execute the business by

working with the relevant Directors. The Board of

Directors meets once a month in principle (23 times

in fiscal 2016), to deliberate and make decisions on

important management issues and to monitor and

supervise the Executive Officers in the execution of

their responsibilities in accordance with the laws and

ordinances, the Company’s Articles of Incorporation,

and Regulations of the Board of Directors.

Idemitsu has also established two advisory

committees comprising external advisers to the

Company’s Board of Directors to strengthen the

Board’s overall functions. The mechanism to monitor

management encompasses supervision by the Board

of Directors, auditing by statutory auditors, and

accounting audits by accounting auditors. In support

of these, the Company has established an Internal

Audit Office, which remains independent of the

operational divisions and is under the direct control

of the Representative Director and CEO. This office

conducts internal audits based on Internal Audit

Regulations and the evaluation of internal controls

based on the Regulations for Internal Control over

Financial Reporting.



Status of Internal Auditing, Evaluation of Internal Controls, Auditing by Statutory Auditors, and Auditing by Accounting Auditors

Internal Auditing

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. 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.

Status of the Evaluation of Internal Controls over Financial Reporting

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 order to ensure the reliability of financial reporting for the Group as a whole. Each operating division prepares a remediation plan to address any shortcomings discovered during the evaluation and undertakes improvements. 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.

Auditing by Statutory Auditors

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 presidents of subsidiaries. Non-standing statutory auditors carry out audits by visiting major departments 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.

Auditing by the Accounting Auditor

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 accountants and 24 other staff. 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.


Committee Name Committee Chair/Members Meeting Schedule Role

Management Committee

Chair: Representative Director and CEOMembers: Members appointed by committee chair

Twice per month in principle

Discussion and consideration of management issues and strategies for the Group as a whole and each operating division

Risk Management Committee

Chair: Director Members: Managers of related departments

Twice per year in principle Promotion of risk management

Compliance CommitteeChair: Director Members: Managers of related departments

Four times per year in principle

Deliberation and planning of important policies for thorough compliance and the promotion of compliance activities

Committee for the Evaluation of Internal Controls over Financial Reporting

Chair: Director Members: Related Directors and Executive Officers, General Manager of the Internal Audit Office

Twice per year in principle

Consideration and deliberation of items related to internal controls over financial reporting

Outline of the Committees

Advisory CommitteesIn order to maintain the transparency and soundness

of the management, the Company has established the

following two committees consisting of external experts

as advisory organs to the Board of Directors. Both

committees listen closely to frank opinions from the

perspective of third parties and reflect these opinions

in recommendations to the management.

Management Advisory CommitteeThe Management Advisory Committee is an advisory

organ that discusses issues related to overall

management reforms. The committee, which meets

once every half period in principle, engages three

external advisers who express their opinions and

provide advice.

Safety and Security Advisory CommitteeThe Safety and Security Advisory Committee

has provided advice on matters concerning the

strengthening of security, especially on technical

issues, in order to prevent large-scale disasters at

refineries and plants. Due to changes in the current

management environment, there is a pressing need to

ensure the safety regarding business expansion, new

businesses, and overseas expansion. Accordingly,

the committee selects a theme based on the Group’s

businesses and then establishes a working group to

discuss that topic within the Safety & Environmental

Protection Headquarters to obtain the opinions of

external experts.

Nomination and Compensation Advisory CommitteeIn addition to the two committees described above,

The Company has set up the Nomination and

Compensation Advisory Committee, which consists of

independent outside directors and independent outside

auditors. This committee advises on matters related

to the selection of directors and candidate auditors

proposed by Representative Director & Chief Executive

Officer for the submission to a general meeting of

shareholders.

In addition, the Nomination and Compensation

Advisory Committee also advises on matters related to

directors’ compensation in response to a consultation

from the Board of Directors.

Management Committee and Other CommitteesIdemitsu established the Management Committee

to discuss and consider management strategies

and issues for the Group as a whole and for each

operating division. Furthermore, the Risk Management

Committee and the Compliance Committee were

established as subordinate organs to the Management

Committee. Idemitsu has also established a Committee

for the Evaluation of Internal Controls over Financial

Reporting, which considers and deliberates on items


concerning annual preparations and operating policies

and evaluation plans, as well as decisions on the

scope of evaluations. The chair of each committee,

with the exception of the Management Committee, is

in principle a Director other than the Representative

Director and CEO and plays a cross-divisional role

as part of Company-wide internal controls in order

to implement effective operations of committees. An

overview of each committee is shown below.

System for Environmental Issues and SafetyThe Company established a “Global Environmental

Management Basic Plan” for environmental protection

arising from its environmental management and

operations, and a “Safety Basic Plan” for ensuring

safety and security. The Company also established

the Safety & Environmental Protection Headquarters,

which plans basic policies and important matters related

to environmental management, ensures safety and

security arising from environmental protection efforts

in the business operations of Idemitsu and the Idemitsu

Group based on each basic plan above, and promotes

various related activities.

Furthermore, the Company has introduced a Special

Committee on Safety subordinate to the Safety &

Environmental Protection Headquarters to consider and

deliberate on important issues related to security.

System for Quality AssuranceIdemitsu has created a Quality Assurance Basic Plan for

matters related to quality assurance. The Company has

also established the Quality Assurance Headquarters

that plans basic policies and important matters related

to quality assurance for Idemitsu and the Idemitsu

Group, and promotes various activities, based on the

basic plan above.

Furthermore, Idemitsu has established a Special

Committee on Quality Assurance, which is subordinate

to the Quality Assurance Headquarters, to consider and

promote important matters related to quality assurance.

Basic Policy on the Internal Control System and the Status of Internal Controls

Idemitsu’s fundamental policy for its internal control

system is to establish a system that maintains

appropriate business operations throughout the

Company. Based on this policy, the Board of Directors

has determined the systems shown below.

Furthermore, the Board of Directors verifies whether

the internal control system has been established

correctly and is operating appropriately, making any

necessary revisions to ensure its proper functioning.

System to ensure the execution of the duties of Company and subsidiary Directors and employees in compliance with the laws, ordinances and the Company’s Articles of Incorporation

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.

2 The Compliance Committee has been established in the Company to promote compliance activities in the Company and subsidiaries, in accordance with the Compliance Regulations.

3 Compliance is rigorously implemented within the Company by making use of the Compliance Handbook, which sets out Compliance Action Guidelines and specific matters for compliance.

4 The Compliance Consultation Desk, which serves as a contact point for both internal and external communications, is used by employees of the Company and subsidiaries to help resolve questions and problems regarding compliance.

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 preservation and control of information regarding Company Directors’ execution of duties

Information regarding execution of duties is retained and controlled pursuant to the Regulations of the Board of Directors, Regulations on Handling of Documents, Regulations on Handling of Circulars, and other rules.



System for internal regulation for risk management of losses by the Company and subsidiaries

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.

3 The Business Continuity Plan (BCP) has been established for responding to risks such as those of an earthquake with an epicenter directly beneath the greater Tokyo area or novel strains of influenza, and BCP implementation, maintenance, and management take place through group-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.

System for internal control over financial reporting

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 over Financial Reporting has been established to deliberate on and consider matters such as 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.

System for rejecting relationships with antisocial groups

1 Under a resolute stance in opposition to individuals and groups involved in antisocial activities, violence, improper demands, or similar activities, such as organized crime group and racketeers, any and all ties to such groups are refused.

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.

System to ensure efficient execution of duties by Company Directors

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

defined clearly under the Official Authority Regulations and the Business Execution Regulations.3 The Management Committee has been established to discuss and consider management

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.

System to ensure fair execution of duties in the corporate group, consisting of the Company and its parent company and subsidiaries

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 performance and other matters.

2 The Affiliate Management Regulations specify the fundamental policy that in principle transactions with affiliates shall be based on market prices, to prevent conflicts of interest.

3 The Affiliate Management Regulations establish standards for appointment of subsidiary directors and statutory auditors and specify that in principle Idemitsu directors shall not be 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.


System related to employees in the event that Company statutory auditors request that they be allocated as assistants

Statutory auditor staff are allocated as requested by statutory auditors to the Secretariat of Audit & Supervisory Board to assist them in performing their duties.

Ensuring the independence from Directors of employees allocated as assistants to statutory auditors as described above and the performance of instructions to such employees

1 Staff shall be allocated to the Secretariat of Audit & Supervisory Board on a full-time basis. Internal rules in the Human Resources Department stipulate that the consent of the statutory auditor is required regarding final decisions on transfers, evaluation, and other HR matters concerning statutory auditor staff.

2 The Job Assignment Regulations specify the duties of the Secretariat of Audit & Supervisory Board.

System for Company and subsidiary Directors, employees and subsidiary statutory auditors who report to Company statutory auditors or the Audit & Supervisory Board, and other systems for reporting to Company statutory auditors

1 Directors, Executive Officers, and the General Manager of the Safety, Environment & Quality Assurance Department report to the statutory auditors on specified matters pursuant to the Business Execution Regulations.

2 The Internal Audit Office reports to the statutory auditors on the results of audits, pursuant to the Internal Audit Regulations.

3 The Compliance Committee makes periodic reports to the statutory auditors on the status of consultation with and handling by the Compliance Consultation Desk.

System for ensuring that persons who have submitted reports as described above do not suffer disadvantageous treatment as a result of such reports

1 It is prohibited to treat disadvantageously persons who have submitted reports to Company statutory auditors or the Audit & Supervisory Board as described above as a result of such reports.

2 The Compliance Committee has decided that parties who have consulted with the Compliance Consultation Desk shall not suffer disadvantageous treatment as a result of such consultation and ensures that this fact is well understood through means including stating it clearly in the Compliance Handbook and covering it in training.

Policies related to handling of expenses and other costs arising in connection with the execution of statutory auditors’ duties

The Company shall bear all costs necessary to fulfill the roles and responsibilities of statutory auditors, including auditing of the execution of Directors’ duties and appointment and dismissal of accounting auditors.

System to ensure effective audits by Company statutory auditors or the Audit & Supervisory Board

1 The Representative Director meets with the statutory auditors periodically, in principle once every quarter.

2 The Internal Audit Office maintains close cooperation and coordination with the statutory auditors and the accounting auditors concerning matters such as the internal auditing schedule and audit visits.

Overview of content of Contracts for Limitation of Liability

Pursuant to the provisions of Article 427, Paragraph

1 of the Companies Act, Idemitsu has concluded with

each Outside Director and each Outside Statutory

Auditor a Contract for Limitation of Liability limiting

liability for damages as described under Article 423,

Paragraph 1 of the same Act. The limit on amounts of

liability in such contracts is the amount stipulated by

laws and regulations.



Status of Internal Auditing and Auditing by Statutory Auditors

Idemitsu’s organization for internal auditing and

auditing by statutory auditors consists of the Internal

Audit Office (currently staffed by 13 persons), under

the direct supervision of the Representative Director

and CEO, and statutory auditor staff (currently two

persons), under the direct supervision of the statutory

auditors. The status of such audits is as described

under “Status of Internal Auditing, Evaluation of Internal

Controls, Auditing by Statutory Auditors, and Auditing

by Accounting Auditors.”

The Audit & Supervisory Board cooperates

with accounting auditors through means including

coordination of audit schedules and accompanying the

auditors on site visits. It cooperates with the Internal

Audit Office through means including reconciliation

of key topics, coordination of audit schedules,

communication of audit results, and communication

of results of evaluation of internal controls. It receives

reports from other sections related to internal controls

on matters that could have material impacts on

Idemitsu Group businesses or finances and matters

that could cause serious damage to the Group.

The following Idemitsu statutory auditors are highly

knowledgeable on financial and accounting subjects.

Full-time Statutory Auditor Sakae Hirano has practical

accounting experience with the Company’s Treasury

Department, Outside Statutory Auditor Taigi Ito has

experience as a certified public accountant and a

university professor.

Outside Directors and Outside Statutory Auditors

Idemitsu has four Outside Directors and two Outside

Statutory Auditors.

The Outside Directors’ and Outside Statutory

Auditors’ relations with Idemitsu are shown below.

None has any particular vested interests in Idemitsu.

Outside Directors

Name Affiliation Additional Information Reasons for Selection

Eri Yokota University professor No transaction relationship to Idemitsu. Ms. Yokota is a Director of TOLI Corporation.

Appointed based on overall consideration of factors including her experience and specialized 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 services to Mr. Ito’s law office as necessary, the compensation it pays for such services is minor, totaling less than 1 million yen in this fiscal year.

Appointed based on overall consideration of 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.

Takeo Kikkawa University professor While Mr. Kikkawa serves as a member of Idemitsu’s Management Advisory Committee, the compensation he receives for the service is minor, totaling 1 million yen this fiscal year.He is a Director of Mitsubishi Chemical Holdings Corporation.

Appointed based on overall consideration of factors including his experience and specialized knowledge as a university professor, 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

outside directors and outside auditors. our basic policy

is to appoint outside directors and outside auditors

with deep insights as specialists based on their

expertise and career background from persons who

do not meet any of the following conditions.

Criteria for the Independence of Outside Officers

(a) Individuals who currently belong to or belonged in

the past to the Company or its subsidiaries.

(b) Individuals with 10% or higher major share

ownership of the Company according to the

Company’s latest share registry or individuals who

currently belong to a group or organization with

major share ownership of the Company.

(c) Individuals at the Company’s trading partners

or their subsidiaries having annual transactions

with the Company in excess of 2% of its annual

consolidated sales in the most recent three

fiscal years.

(d) Consultants, certified accountants, law experts,

accounting auditors, or other advisory retainers

who receive money or other property from the

Company worth more than an average of 10 million

yen per year, excluding compensation for officers in

the most recent three fiscal years (If organizations

such as corporations and associations receive

the money or other property from the Company,

individuals currently belonging to those

organizations shall fall under this category).

(e) Individuals who currently belong to non-profit

organizations that receive donations or aid worth

more than 2% of the Company’s gross revenue or

recurring profit in the latest three fiscal years.

(f) Individuals with five years of less post-retirement

years who in the past belonged to the organizations

or the Company’s trade partners as set forth in

items (b) through (e) above.

Outside Statutory Auditors

Name Affiliation Additional Information Reasons for Selection

Taigi Ito Certified public accountant

No transaction relationship to Idemitsu. External Audit & Supervisory Board Member of IT Holdings Corporation, Statutory Auditor of Mitsubishi Chemical Holdings Corporation, and Statutory Auditor of Mitsubishi Chemical Corporation.

Appointed based on overall consideration of factors including his experience and specialized knowledge as a certified public accountant and university professor, his character, and his judgment. His independence means there is little likelihood of a conflict of interest arising with ordinary shareholders.

Shoichiro Niwayama

Attorney No transaction relationship to Idemitsu.

Appointed based on overall consideration of 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.


Mackenzie Clugston

Former diplomatUniversity professor

No transaction relationship to Idemitsu. Mr. Clugston is a Director of KAMEDA SEIKA CO., LTD., an Advisor to Sapporo Holdings Limited, and a professor of Kwansei Gakuin University.

Appointed based on overall consideration of factors including his experience and specialized knowledge as a former diplomat and university professor, his character, and his judgment. His independence means there is little likelihood of a conflict of interest arising with ordinary shareholders.


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

Category Number Total amount of 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 those receiving consolidated compensation etc. totaling 100 million yen or more)

Not applicable.

Content and decision methods for amounts of officer’s compensation etc. and policies for deciding on methods of calculation

Under a resolution of the 91st Ordinary General

Meeting of Shareholders held June 27, 2006, officer’s

compensation is limited to no more than 1.2 billion yen

per year for Directors and no more than 120 million

yen per year for Statutory Auditors. Decisions on

compensation for individual Directors are entrusted by

the board meetings in consultation with the Nomination

Compensation Advisory Committee, whose four

members include two Outside Statutory Auditors.

Compensation for Statutory Auditors is decided

through consultation among Statutory Auditors.

Specified Number of Directors

The Articles of Incorporation specify that the Company’s

number of Directors shall not exceed 20 persons.

Requirements of Resolutions on Appointment of Directors

The Articles of Incorporation specify that a resolution

on appointment of Directors must be passed by

a majority of the voting rights represented by the

shareholders present at the meeting who hold one-

third or more of all voting rights able to be exercised.

The Articles of Incorporation also specify that a

(g) Spouses or relatives within three degrees

of kinship of the officers at the Company

or specified trade partners (exclusive of

organizations lacking significance in business

relations with the Company).

The Company has adopted a corporate governance

system aimed at strengthening the supervisory

function of the management with the cooperation of

assigned Outside directors and outside auditors in

order to further improve management efficiency, and

maintain the financial soundness and transparency of

the Company.

Outside auditors attend meetings held once a

month as a general rule to determine audit plans

and discuss the results within the meetings. Outside

auditors attend liaison meetings with internal

auditors, accounting auditors, and internal control

division representatives. Audit and supervisory board

members implement audit functions that cover the

overall management of the Group by liaising with the

supervisory board as described in item (2) above.

Outside directors and outside auditors hold regular

meetings aimed at ensuring appropriate cooperation

with regard to audits by auditors, and internal and

accounting audits.


Details of Audit Fees etc.

Details of fees paid to certified public accountants and others involved in auditing

Category

Previous consolidated fiscal year This consolidated fiscal year

Fees for audit certification services

(million yen)

Fees for non-auditing services

(million yen)

Fees for audit certification services

(million yen)

Fees for non-auditing services

(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.

resolution on appointment of Directors may not be

passed through cumulative voting.

Matters Subject to Resolution in General Meeting of Shareholders that May Be Covered by a Resolution of the Board of Directors

Pursuant to the provisions of Article 426, Paragraph

1 of the Companies Act, the Articles of Incorporation

specify that Directors and Statutory Auditors may, to

the extent permitted under laws and regulations, be

exempted from liability for damages due to neglect of

duties through a resolution of the Board of Directors

rather than obtaining the consent of all shareholders.

This is intended to enable Directors and Statutory

Auditors to fully perform their expected roles.

The Articles of Incorporation also specify that,

expect where specified separately in laws or

regulations, the matters covered under each item of

Article 459, Paragraph 1 of the Companies Act on

dividends of surplus, etc. may be decided through a

resolution of the Board of Directors. This is intended

to enable flexible policies on capital and dividends

through putting dividends of surplus and related

matters under the authority of the Board of Directors.

Requirements of Special Resolutions by General Meeting of Shareholders

The Articles of Incorporation specify that the

resolutions under Article 309, Paragraph 2 of the

Companies Act must be passed by two-thirds or more

of the voting rights represented by the shareholders

present at the meeting who hold one-third or more of

all voting rights able to be exercised. This is intended

to facilitate the operation of General Meeting of

Shareholders by easing the quorum required for special

resolutions by the General Meeting of Shareholders.



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 feesNot applicable.



(As of September 30, 2017)

Kazuo MaruyamaDirector

Kiyoshi HommaDirector

Susumu NibuyaManaging Director

Toshiaki SagishimaDirector

Shunichi KitoExecutive Vice President and Director

Takashi TsukiokaRepresentative Director and Chief Executive Officer

Takashi MatsushitaExecutive Vice President and Director

Daisuke SekiExecutive Vice President and Representative Director

Masashi Yokomura

Hajime Nakamoto

Soichi Kobayashi

Toshiyuki Tanida

Shinji Araki

Hiroshi Maesawa

Atsushi Yamamoto

EXECUTIVE OFFICERS

Takehiko Kawasaki

Yuji Arai

Kazuhisa Harada

Itaru Matsuhiro

Eiji Hagiwara

Shinichi Naruuchi

MANAGING EXECUTIVE OFFICERS

Ryosuke Ito*Director

Mackenzie Clugston*Director

Eri Yokota*Director

Takeo Kikkawa*Director

Takanori Kuniyasu

Sakae Hirano

Taigi Ito**

Shoichiro Niwayama**

AUDIT & SUPERVISORY BOARD MEMBERS

* Outside director** Non-standing Audit &

Supervisory Board members

Directors, Audit & Supervisory Board Members and Executive Officers


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


Analysis of Consolidated Operating Results

Net SalesConsolidated net sales for fiscal 2016 fell 10.6% year

on year to ¥3,190.3 billion, due in part to decreases

in the import prices for crude oil in yen terms. A

breakdown of net sales by business segment is as

follows: The Petroleum Products Segment had net sales

of ¥2,438.2 billion (down 11.4% year on year). The

Petrochemical Products Segment’s net sales amounted

to ¥461.2 billion (down 11.4% year on year), partly

due to a decrease in naphtha prices. The Resources

Segment had net sales ¥227.3 billion (down 0.7% year

on year) due to weakened currencies of commodity

countries.

Cost of sales and selling, general, and administrative expensesThe 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 incomeBased on the above results, the consolidated operating

income for fiscal 2016 was ¥135.2 billion (up ¥154.9

billion year on year). Here follow a breakdown of

operating income by business segment.

The Petroleum Products Segment recorded an

operating income of ¥77.0 billion, an increase of ¥144.4

billion on a year-on-year basis, due largely to improving

margins on petroleum products and the inventory

revaluation that turned into a profit from a substantial

loss in the previous fiscal year. This operating income

figure includes ¥31.0 billion in profits on the valuation of

inventories.

The Petrochemical Products Segment posted an

operating income of ¥40.0 billion (down ¥2.3 billion year

on year), due mainly to exchange impact by the strong

yen. This operating income figure includes ¥2.1 billion in

profits on the valuation of inventories.

FY

Billions of yen

12 13 14 15 16

Net Sales

0

1,000

2,000

3,000

4,000

5,000

* Operating income margin: Operating income / Net sales

Operating Income

Operating Income Margin

FY

Billions of yen

12 13 14 15 16

%

Operating Income and Operating Income Margin

-100

-25

0

25

50

75

100

125

150

-2

-1

0

1

2

3

4

5

6

Management’s Discussion and Analysis


FY

Billions of yen

12 13 14 15 16

Net Income

-150

0

30

60

90

FY2013

Cash flows from operating activities(Billions of yen)

Interest expense paid(Billions of yen)

Interest coverage ratio(Times)

* Interest coverage ratio = Cash flows from operating activities / Interest expense paid

50.1

11.0

4.5

FY2012

50.8

13.0

3.9

FY2014

172.9

12.1

17.2

FY2015

216.4

11.4

19.6

FY2016

53.5

9.3

5.7

Interest Coverage Ratio

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 incomeNon-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).

Extraordinary income (loss), and income before tax provisionsExtraordinary profit/loss, calculated by subtracting

extraordinary expenses of ¥19.8 billion from

extraordinary income of ¥2.9 billion, resulted in an

extraordinary loss of ¥17.0 billion on a net basis,

up ¥16.1 billion year on year. This is attributable to

factors including a decrease in impairment losses in the

resources business.

Based on the above results, the income before tax

provisions was ¥140.0 billion (up ¥178.0 billion year on

year).

Income taxes, and net income attributable to the parent and non-controlling interestsTax expenses consisting of corporate income,

inhabitant, business, and deferred taxes totaled ¥32.5

billion, and the ratio of income taxes to income before

income taxes was 26.4%.

A net income attributable to non-controlling interests

was ¥2.4 billion.

As a result, the consolidated net income attributable

to the parent for fiscal 2016 was ¥88.2 billion (up

¥124.2 billion year on year).


Analysis of Financial Position

AssetsConsolidated total assets as of the end of fiscal 2016

stood at ¥2,641.6 billion (an increase of ¥239.5 billion

compared with the end of the preceding fiscal year),

partly due to acquisition of Showa Shell Sekiyu K.K.

(Showa Shell) shares and increase in inventories and

notes and accounts receivables-trade resulting from

factors including rising crude oil price.

LiabilitiesConsolidated total liabilities as of the end of fiscal 2016

were ¥2,217.0 billion (up ¥157.2 billion compared with

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 assetsConsolidated net assets as of the end of fiscal 2016

totaled ¥619.9 billion (up ¥82.3 billion compared with

the end of the preceding fiscal year), due to factors

including the net income attributable to the parent

company.

As a result, the shareholders equity ratio as of the end

of fiscal 2016 improved 1.3%, from 20.8% at the end of

the previous fiscal year to 22.1%

Analysis of Funds and Liquidity

Consolidated cash flow analysisCash and cash equivalents (“funds”) as of March 31,

2017, stood at ¥90.1 billion, a decrease of ¥28.7 billion

from the end of the preceding year. The major factors

behind this increase are summarized below.

Net cash provided by operating activities amounted to

¥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.

FY

Billions of yen

12 13 14 15 160

500

1,000

1,500

2,000

2,500

3,000

Total Assets

FY

Billions of yen %

12 13 14 15 160

5

10

15

20

25

30

* Shareholders’ equity: Total equity – Minority interests* Shareholders’ equity ratio: Shareholders’ equity / Total assets

Shareholders’ Equity

Shareholders’ Equity Ratio

Shareholders’ Equity and Shareholders’ Equity Ratio

0

100

200

300

400

500

600

700



FY

Billions of yen

12 13 14 15 16

Net Cash Provided by Operating Activities

0

100

200

Net cash used in investment activities was ¥214.8

billion, due mainly to the acquisition of Showa Shell

shares and the increased investments related to

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.

Fund demandMajor 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,

and the payment taxes. The major items of operating

expenses are personal costs, distribution costs,

operational expenses and R&D expenditures.

The demand for capital investment funds includes the

following, in line with the strategy for each segment.

a. Investments to reconstruct sales and supply systems

and enhance competitiveness for businesses,

including fuel oils, basic chemicals, 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.



Financial policyThe Idemitsu Group currently finances its operating

capital and capital expenditures mainly through internal

funds, borrowings, or the issuance of commercial paper

and corporate bonds. As of the end of fiscal 2016, the

outstanding amounts of short-term borrowings, long-

term debt (including the current portion), and corporate

bonds (including those maturing in a year or less) stood

at ¥287.1 billion, ¥594.6 billion, and ¥65.0 billion,

respectively.

The Company finances and loans all the funds required

by domestic subsidiaries for their operating capital

and for capital expenditures from the Group finances.

Outside Japan, individual overseas subsidiaries borrow

the amounts required for operating capital and capital

expenditures locally in their respective local currencies.

In order to procure the funds that will be required for

operating capital and capital expenditures to sustain

medium- to long-term growth, the Idemitsu Group

effectively combines operating cash flows, loans, and

the issuance of commercial paper and corporate bonds

with commitment line agreements as well as capital

reinforcement, while taking into consideration the

balance regarding our financial position.

The Idemitsu Group has established a system that

enables the procurement of funds in a flexible and

stable manner by entering a long-term commitment line

agreement with a syndicate consisting of six lenders

that allows us to receive short-term loans during

the contract period through March 2018, in order

to efficiently procure operating capital, thus secure

sufficient liquidity, and smooth finances in case of

occasion of disaster.

%

FY12 13 14 15 16

* 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)

Return on Invested Capital

-8

-6

-4

-2

0

2

4

6

8

10

FY

Billions of yen Times

12 13 14 15 16

Interest-Bearing Debt

Net Debt/Equity Ratio

0

1

2

3

* Figures for interest-bearing debt use the amounts recorded on the consolidated balance sheets as short-term borrowings, commercial paper, corporate bonds and long-term debt, as well as lease obligations.

* Net D/E ratio: Calculated as (Interest-bearing debt – Cash and cash equivalents and marketable securities) / (Equity – Minority interests in consolidated subsidiaries)

Interest-Bearing Debt and Net Debt/Equity Ratio

0

200

400

600

800

1,000

1,200


Business Risk Factors

Matters describing the Idemitsu Group’s business and

financial situation that may affect investors’ decisions

to invest are discussed below. Information concerning

the future is as of the Annual YUHO Report

submission date.

Risks in Each Business SegmentPetroleum Products Segment(1) Fluctuations in crude oil pricesThe Idemitsu Group imports almost all of the crude oil

required for the production of its petroleum products.

The price of crude oil fluctuated substantially in the

past, and there are concerns that the price of crude oil

will continue to fluctuate in the future due to increasing

demand from Asian countries; the unstable political

situation in oil-producing countries in the Middle East

and Africa; movements to nationalize resources in

South American oil-producing countries; trends with

respect to environmental regulations and tax systems

in the oil-consuming countries, including the US; and

speculative trading in petroleum.

Furthermore, since the Idemitsu Group imports

its entire volume of crude oil in US dollars, the

procurement costs of crude oil are affected by the

currency exchange rate against the US dollar.

The Idemitsu Group strives to link the selling prices

of petroleum products to domestic market prices in

order to secure its margins. However, should market

prices fall due to intensifying competition in the

domestic market or other factors, this could have a

significant impact on the Group’s financial condition

and operating results.

The Idemitsu Group employs the gross average

method for the valuation of inventories. When crude

oil prices are rising, the gross average method is

generally a positive factor for profits because the cost

of sales is pushed down by inventory assets that were

relatively inexpensive at the beginning of the term.

When crude oil prices are falling, however, the gross

average method has a negative impact on profits

because the cost of sales is pushed up by inventory

assets that were relatively expensive at the beginning

of the term.

(2) Market competitionThe Idemitsu Group’s petroleum products business

competes with multiple petroleum companies, some of

which have a scale of business operations and market

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

and service stations. If the Idemitsu Group is unable

to manage its business efficiently under this business

environment, the Idemitsu Group’s financial condition

and operating results may be substantially affected.

(3) Suppliers of crude oil to the GroupSince the Idemitsu Group relies on oil-producing

countries in the Middle East for practically all of its

imports of crude oil, the Group has been making

efforts to diversify risk in the region by concluding

long-term crude oil import agreements with major oil-

producing countries in the Middle East in order to

stably procure crude oil. However, the risk remains

that the Idemitsu Group’s financial condition and

operating results may be substantially affected if

imports of crude oil are restricted for a prolonged

period by unstable political situations, crude oil

production adjustments or accidents at oil-related

facilities in the region.

(4) Demand for petroleum productsThe Japanese petroleum market has matured, and

demand for petroleum products is expected to

gradually decline. Furthermore, there is the possibility

that rising crude oil prices and government measures to

address global warming based on the Paris Agreement

will impact future demand for petroleum products. In

the event that demand for petroleum products declines

due to these factors, the Idemitsu Group’s financial

condition and operating results could be affected.

(5) Nghi Son Refinery and Petrochemical Complex Project

As part of the expansion of its oil and petrochemical

businesses in Asia, the Idemitsu Group jointly

established Nghi Son Refinery and Petrochemical

LLC (hereinafter “NSRP”) with Kuwait Petroleum

International, PetroVietnam, and Mitsui Chemicals, Inc.


(hereinafter collectively referred to as the “Sponsors,”

including Idemitsu). This joint venture has been

constructing the Nghi Son Refinery and Petrochemical

Complex, which is equipped with oil refinery facilities

with a refining capacity of 200,000 barrels/day and

facilities for producing petrochemicals including

paraxylene in the Nghi Son Economic Zone, Thanh

Hoa Province, Socialist Republic of Viet Nam.

Construction for the project was completed at the

end of April 2017 and the complex intends to begin

commercial operations in fiscal 2017.

The total cost of the project is estimated at around

$9.0 billion, of which $5.0 billion will be procured on a

project finance basis from a syndicate of banks including

the Japan Bank for International Cooperation, while the

remaining $4.0 billion or so will be procured through

investment and loans provided by the Sponsors.

Of the amount procured through the project finance

arrangement, the Idemitsu Group has provided a loan

guarantee to the syndicate of banks for 35.1%, which

is equivalent to its stake in the NSRP. Therefore, if

the facilities fail to operate under certain conditions

after construction is completed, the Idemitsu Group’s

financial condition and operating results may be

affected due to execution of the loan guarantee.

Furthermore, the Idemitsu Group will shoulder 35.1%

of the investment and loans provided by the Sponsors,

but if the project does not progress as planned due to

changes in Vietnam’s political and economic conditions,

laws and regulations, and employment environment,

then the Idemitsu Group’s financial condition and

operating results may be affected.

The Idemitsu Group has taken out overseas

investment insurance from the official export credit

agency of Japan, Nippon Export and Investment

Insurance, against the estimated losses from the

project, but this insurance may not necessarily be

sufficient to cover all such losses.

Petrochemical Products Segment(1) Fluctuations in raw material costsThe Idemitsu Group produces naphtha, a raw material

for petrochemical products at its refineries and also

procures it from the market. There is a possibility

that the price of naphtha may be affected by crude oil

prices and increasing demand due to the construction

of new petrochemical production facilities that are

planned in China and other countries. If we are unable

to appropriately transfer fluctuations in the price of

naphtha to the price of petrochemical products due

to fierce market competition or other factors, the

Idemitsu Group’s financial condition and operating

results could be affected.

(2) Fluctuations in demandAsian petrochemicals markets, including the Japanese

market, are currently experiencing intensifying

competition and therefore may be affected by

fluctuations in demand and increases in supply. In the

petrochemicals business, the Idemitsu Group is in

competition with companies whose business scale

is larger, business bases more established, or that

are more competitive than the Idemitsu Group in the

Japanese and Asian markets. Moreover, although

demand for petrochemical products in China and other

Asian countries has increased in recent years, there is

the possibility that demand will decline in the future as

a result of an economic slowdown in these countries

or other factors. The Idemitsu Group’s financial

condition and operating results could be affected by

such intensification of competition and/or decrease in

demand in the market.

Resources Segment(1) Oil exploration and production businessesa. Securing resourcesThe Idemitsu Group strives to acquire interests in

and discover resources that can lead to commercial

production. However, if the Idemitsu Group is unable

to successfully acquire or explore such interests, or is

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

confirmed resources are concentrated in Norway, and

it conducts exploration activities in Norway, the United

Kingdom, and Vietnam. The Idemitsu Group’s financial

condition and operating results could be affected if

these exploration and development activities are shut


down due to factors such as the political or economic

situation in these regions, which would leave it

unable to develop confirmed resources or to discover

additional resources.

b. Crude oil priceIn recent years, the operating income from the oil

exploration and development business has been

supported primarily by high crude oil prices. Crude

oil prices have fluctuated in the past and the Idemitsu

Group’s financial condition and operating results may

be affected if the price of crude oil declines in the future

due to political or economic conditions or other factors.

(2) Coal businessesThe Idemitsu Group produces coal at its mines in

Australia and other facilities and sells mainly to the

Japanese market and other Asian markets. The

Idemitsu Group has bolstered its production capacity

in response to the projected growth in demand for

coal in these regions. However, this demand may not

grow due to factors such as a shift to other types of

energy, environmental regulations or other regulations.

In addition, even if demand grows, the Idemitsu Group

may be in competition with other companies with

a larger scale of business and a more established

business base than the Idemitsu Group. Furthermore,

the Idemitsu Group’s coal mining operations may be

impacted by changes in the weather, accidents, or

other uncertainties. The Idemitsu Group’s financial

condition and operating results could be affected if the

demand for coal does not grow as expected or as a

result of competition with other companies.

Other SegmentsElectronics materials and agricultural biotechnologyThe Idemitsu Group develops products with high

added value in the electronics materials and agri-bio

fields with a view to future growth. However, success

in the development, production and market cultivation

of such products is not guaranteed. If the Group is

unable to sell these products at a scale large enough

to be profitable, it may not be able to recover the

development costs and secure profits.

Other Risks(1) InvestmentThe Idemitsu Group owns large-scale business

assets, and requires a large amount of investment

for its business activities, such as the maintenance

and replacement of existing refineries, plants and

distribution facilities, the acquisition of interests

in oil fields, and oil exploration and development.

In fiscal 2016, the Group required ¥46.1 billion for

such investments. The Group intends to continue

investments in enhancing the competitiveness of

its existing businesses, including petroleum and

petrochemicals, securing earnings in oil exploration

and development and in its coal businesses, and

developing new businesses. However, if the Group

is unable to generate the cash flows necessary for

such investment or obtain financing for the necessary

funds, it may not be able to implement the planned

investment and may lose profit-earning opportunities.

Furthermore, there is a possibility that these

investments will not yield revenues as planned due

to changes in the economic conditions or the market

environment. In such cases, the Group’s financial

condition and operating results could be affected.

(2) Interest-bearing debtThe Idemitsu Group has been making efforts to reduce

interest-bearing debt, but continues to carry a large

amount of liabilities. As of the end of fiscal 2016,

the amount of interest-bearing debt totaled ¥1,052.3

billion, while interest paid during the consolidated fiscal

2016 totaled ¥9.3 billion.

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

its businesses. However, if financing is restricted due

to a change in the financial situation, or if the burden

of interest expenses increases owing to rising interest

rates, the Group’s financial condition and operating

results could be affected. In addition, part of the

interest-bearing debt has general restrictive financial

covenants imposed, and therefore if our financial

position substantially changes in the future, that could

affect the Group’s fund procurement.



(3) Business alliances and business integrationThe Idemitsu Group has promoted business alliances

with other companies as part of its efforts to enhance

competitiveness, and these business alliances have

been playing an important role in the execution of the

Company’s businesses. Moreover, the Group has also

been considering business integration for the purpose

of enhancing the fuel oil business and so on. However,

in the cases of strategic business alliances and the

business integration, the Group may be unable to

properly control the management, business operations

and assets of its business alliance partners. In

addition, business alliances and business integration

may be affected by factors such as certain conditions

of the relevant counterparties and the Group’s

environment, or due to these factors the Group may

be unable to sufficiently gain initially-expected benefits

or synergy effects, etc. In such cases, the Group’s

business, financial condition and operating results may

be materially affected.

(4) Accidents, disasters, and disputesThe Idemitsu Group’s businesses involve risk factors,

such as natural disasters, accidents and operation

stoppages at refineries or plants due to natural

disasters and accidents. Natural disasters include

earthquakes, tsunami, and typhoons, as well as the

risk of fires and explosions at refineries or plants

located in Japan where there are many earthquakes.

The Idemitsu Group’s equipment and facilities may

be affected by accidents caused by human error or

mechanical faults. The Group’s marine transportation

of crude oil and petroleum products, consisting of

very large crude carriers, are exposed to the risks of

piracy and sinking or collisions due to adverse weather

conditions. In addition, the Idemitsu Group faces the

risk of labor disputes. If any of the above risks, such

as accidents, disasters or labor disputes, were to

materialize, the Idemitsu Group’s business activities

may be suspended for a prolonged period of time.

The Group has taken out nonlife insurance against

estimated losses from accidents or disasters, but this

insurance might not be sufficient to cover such losses.

(5) Environmental regulationsThe Idemitsu Group’s businesses are subject to a wide

range of legal restrictions concerning environmental

protection and other matters in Japan and overseas

where it operates its businesses or has rights and

interests. For example, the Idemitsu Group is subject

to regulations on such activities as emissions of

pollutants from oil refineries and factories, as well

as the processing of waste materials, and may be

penalized if it releases environmental pollutants in

excess of mandated standards. Furthermore, the

Idemitsu Group may be forced to bear substantial

expenses if Japan or any other country introduces

new environmental regulations, or when the Group

complies with current or future environmental

regulations. In relation to the efforts to address global

warming, if Japan or any foreign country restricts

emissions of greenhouse gases, or introduces new

carbon taxation, the Idemitsu Group may be required

to pay a substantial amount of expenses or to invest

a large amount of funds. The Idemitsu Group’s

financial condition and operating results may be

significantly affected by liabilities or obligations related

to compliance with such environmental or other

regulations.

(6) Intellectual property rights and licensesThe Idemitsu Group utilizes intellectual property rights

and licenses to execute its business operations, and in

particular patents and corporate secrets play important

roles in the technologies involved in oil refining and

lubricants and in the field of high-value-added products,

including engineering plastics, performance chemicals,

electronics materials and agri-bio products. In addition,

the Group files for registration to trademark its brands.

However, patents, corporate secrets and brands

owned by the Group may not necessarily provide

sufficient protection for the Group’s intellectual

property rights.

In addition, it is possible that the Group’s corporate

secrets will be improperly handled by the Group’s

employees, trading partners, or other related parties.

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


these technologies, as licenses may not be renewed

or complaints from third parties about infringements of

intellectual property rights may be received.

The Idemitsu Group’s businesses and operating

results could be affected if it cannot protect or fully

utilize the intellectual property rights required to

conduct its business.

(7) Fluctuations in foreign exchange ratesThe Idemitsu Group conducts a large amount of

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 pricesThe 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 informationThe 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.

(10) Transactions with shareholdersThe Company engages in real estate lease

transactions with Nissho Kosan Co., Ltd. and the

Idemitsu Foundation of Culture and Welfare. The

terms of these transactions are determined based

on market prices in the vicinity. The Company also

makes donations to the Idemitsu Museum of Arts. The

amount donated is determined based on such factors

as the museum’s management expenses, the scale of

the Company’s business and the publicity impact.



CONSOLIDATED BALANCE SHEETSIdemitsu Kosan Co.,Ltd. and Consolidated SubsidiariesMarch 31, 2016 and 2017

Millions of yen

Thousands of U.S. dollars

(Note 1) 2016 2017 2017

ASSETS Current assets:

Cash and cash equivalents (Note 19) ¥118,787 ¥90,093 $803,042Notes and accounts receivable, trade (Note 19) 259,817 327,402 2,918,285Inventories (Note 5) 362,746 430,861 3,840,463Accounts receivable, other 56,599 61,950 552,195Short-term loans 7,666 5,272 46,996Deferred tax assets (Note 16) 24,557 16,763 149,420Derivative assets (Notes 19 and 20) 1,336 48 433Other 29,479 30,007 267,470Less: 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 1,629,994Machinery and equipment 235,916 203,493 1,813,830Land (Notes 7 and 9) 586,690 584,350 5,208,580Construction in progress 9,379 7,808 69,600Other 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 67,947Other 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 43,334 386,258Investments in nonconsolidated subsidiaries and affiliates (Notes 4 and 19) 235,265 394,302 3,514,593

Long-term loans (Note 19) 20,904 36,666 326,823Guarantee deposits 13,937 14,645 130,542Long-term prepaid expenses 11,479 10,611 94,581Exploration and development expenditures 40,328 46,161 411,457Deferred tax assets (Note 16) 61,704 57,188 509,749Oil field premium assets (Note 2(U)) 23,188 30,617 272,906Other 3,160 4,582 40,845Less: 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


Millions of yen


(Note 1)2016 2017 2017

LIABILITIES AND EQUITY

Current liabilities: Notes and accounts payable, trade (Note 19) ¥291,676 ¥331,602 $2,955,720Short-term borrowings (Notes 9 and 19) 184,983 287,054 2,558,646Commercial paper (Notes 9 and 19) － 104,005 927,046Current portion of long-term debt (Notes 9 and 19) 108,964 80,512 717,640Accounts payable, other (Note 9) 256,661 232,548 2,072,808Accrued expenses 20,860 18,500 164,899Income taxes payable 3,856 14,529 129,506Accrued bonuses to employees 6,157 8,247 73,515Derivative liabilities (Notes 19 and 20) 1,242 2,100 18,718Deferred tax liabilities (Note 16) 193 328 2,930Other (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 5,161,912Deferred tax liabilities (Note 16) 13,011 9,968 88,854Deferred tax liability related to land revaluation (Notes 7 and 16) 95,795 93,951 837,435Liability for employees' retirement benefits (Notes 2(T) and 10) 21,351 15,093 134,535Reserve for repair work 28,440 28,357 252,765Derivative liabilities (Notes 19 and 20) 23,053 12,195 108,699Oil field premium liabilities (Note 2(U)) 29,042 38,114 339,732Asset retirement obligations (Note 11) 79,843 78,132 696,430Other (Note 9) 21,108 21,793 194,252

Total long-term liabilities 927,286 876,722 7,814,619Total 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 in 2017 (130) (131) (1,174)

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 1,378,416Noncontrolling interests in consolidated subsidiaries 37,018 36,132 322,062Total 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 OPERATIONSIdemitsu Kosan Co.,Ltd. and Consolidated SubsidiariesYears Ended March 31, 2016 and 2017


(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 22,776Gain (loss) on foreign exchange, net (7,930) (1,047) (9,335)Dividend income 5,540 5,338 47,580Interest expense (11,361) (9,258) (82,520)Subsidy income 2,350 870 7,757Gain on sales of fixed assets, net 5,081 1,292 11,519Gain on sales of investments in securities 39 1,320 11,774Gain on sale of affiliate stock 3,628 39 355Gain on transfer of business 474 －－Equity in earnings of nonconsolidated subsidiaries and affiliates, net 9,790 7,976 71,099

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

(¥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.

Millions of yen

Basic net income (loss) per share (in yen and dollars) (Notes 2(W)　 and 21)


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOMEIdemitsu Kosan Co.,Ltd. and Consolidated SubsidiariesYears Ended March 31, 2016 and 2017


(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


Millions of yen


CONSOLIDATED STATEMENTS OF CHANGES IN EQUITYIdemitsu Kosan Co.,Ltd. and Consolidated SubsidiariesYears Ended March 31, 2016 and 2017

Thousands

Number ofshares of

common stockoutstanding

Commonstock

Capitalsurplus

Retainedearnings

Treasurystock

Totalshareholders’

equityBalance at April 1, 2015 159,953 ¥108,606 ¥71,131 ¥212,119 (¥130) ¥391,727Cash dividends, \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 change in scope of consolidation 922 922

Acquisitions of treasury stock (0) (0) (0)Adjustment due to sales and revaluation of land (Note 7) (60) (60)

Items other than changes in shareholders' equityBalance at March 31, 2016 159,953 ¥108,606 ¥71,131 ¥168,990 (¥130) ¥348,597

Cash dividends, \50.0 per share (7,997) (7,997)

Net income (loss) attributable to owners of the parent 88,164 88,164Net 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 land (Note 7) 392 392

Items other than changes in shareholders' equity

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

Commonstock

Capitalsurplus

Retainedearnings

Treasurystock

Totalshareholders’

equityBalance 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 land (Note 7) 3,496 3,496

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)

Shareholders’ equity

Shareholders’ equity

Thousands of U.S. dollars (Note 1)

Millions of yen


Surplusfrom land

revaluation

Deferred gains(losses) on

hedgingactivities, net

Unrealizedgains

(losses) onavailable-for-sale

securities

Foreigncurrency

translationadjustments

Definedretirement

benefitplans

Totalaccumulated

othercomprehensive

incomeBalance at April 1, 2015 ¥157,460 (¥7,896) ¥9,920 ¥34,795 ¥1,243 ¥195,522 ¥43,134 ¥630,384Cash dividends, \50.0 per share (7,997)Net income (loss) attributable to owners of theparent (35,993)

Net adjustment to retained earnings due to change in scope of consolidation 922

Acquisitions of treasury stock (0)Adjustment due to sales and revaluation of land (Note 7) 60 60 －

Items other than changes in shareholders' equity (3,257) (4,957) (5,392) (24,030) (5,899) (43,538) (6,116) (49,655)

Balance at March 31, 2016 ¥154,263 (¥12,854) ¥4,527 ¥10,764 (¥4,656) ¥152,045 ¥37,018 ¥537,660

Cash dividends, \50.0 per share (7,997)Net income (loss) attributable to owners of theparent 88,164Net adjustment to retained earnings due to change in scope of consolidation －

Acquisitions of treasury stock (0)Adjustment due to sales and revaluation of land (Note 7) (392) (392) －

Items other than changes in shareholders' equity 1,670 5,140 3,089 (10,446) 3,537 2,991 (885) 2,105

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

Surplusfrom land

revaluation

Deferred gains(losses) on

hedgingactivities, net

Unrealizedgains

(losses) onavailable-for-sale

securities

Foreigncurrency

translationadjustments

Definedretirement

benefitplans

Totalaccumulated

othercomprehensive

incomeBalance 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 theparent 785,854

Net adjustment to retained earnings due to change in scope of consolidation －

Acquisitions of treasury stock (7)Adjustment due to sales and revaluation of land (Note 7) (3,496) (3,496) －

Items other than changes in shareholders' equity 14,887 45,818 27,541 (93,113) 31,531 26,665 (7,897) 18,768

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

Noncontrollinginterests in

consolidatedsubsidiaries


Totalequity

Millions of yen

Accumulated other comprehensive income

Noncontrollinginterests in

consolidatedsubsidiaries

Totalequity

Thousands of U.S. dollars (Note 1)

Accumulated other comprehensive income


CONSOLIDATED STATEMENTS OF CASH FLOWSIdemitsu Kosan Co.,Ltd. and Consolidated SubsidiariesYears Ended March 31, 2016 and 2017


(Note 1)

2016 2017 2017Operating activities:

Income (loss) before income taxes (¥54,961) ¥123,008 $1,096,433Adjustments 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 34,988Proceeds from sale of affiliate stock 5,991 49 437Purchases of tangible fixed assets (60,149) (41,454) (369,502)Proceeds from sales of tangible fixed assets 11,879 3,128 27,882Purchases 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 20,438Payments 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) 104,408 930,635Increase (decrease) in commercial paper, net (26,997) 104,005 927,046Proceeds from long-term debt 163,997 45,745 407,750Repayments 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

1,040 －－

Cash and cash equivalents at end of year ¥118,787 ¥90,093 $803,042

Millions of yen

Net increase (decrease) in cash and cash equivalents resulting from change in scope of consolidation



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


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


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


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.


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


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 Millions of yen Thousands of U.S.

dollars Millions of yen Thousands of U.S. dollars

Purchase price ¥169,103 (¥1,350 per Share)

$1,507,291 ($12.03 per Share)

¥158,978 (¥1,350 per Share)

$1,417,042 ($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

Carrying value Acquisition

cost Unrealized

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

value Acquisition

cost Unrealized

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)


Total ¥32,720 ¥22,482 ¥10,237


Carrying

value Acquisition

cost Unrealized

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:

Millions of yen


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:

Millions of yen Thousands of

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



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 stations Buildings and others 253

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 and production

Licensed blocks located in Norway and UK Continental Shelf and other

Machinery and equipment and others 34,245

Total ¥35,589


(B) Loss on impairment of fixed assets for the fiscal year ended March 31, 2017, consists of the following: Impairment loss

Use Location Type of asset Millions of yen Thousands of 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 and production

Licensed blocks located in Norway Continental Shelf

Machinery and equipment 3,082 27,472

Coal mining Licensed blocks located in Australia Machinery and equipment and others 3,417 30,462

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:


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.


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

Millions of yen

Thousands of

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

Year ending March 31

Millions of yen


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


Millions of yen


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


Lease obligations


Millions of yen


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:

Millions of yen Thousands of 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 (*):


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).


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


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:


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(*):


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


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.


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

Millions of yen


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

simplified method 231 358 3,191

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:


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:


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.


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:


U.S. dollars 2016 2017 2017 Balance at beginning of year ¥94,223 ¥80,278 $715,561 Additional provisions associated with the acquisition

79 378

3,374 of property, plant and equipment Reconciliation associated with passage of time 3,066 2,528 22,534 Reduction associated with settlement of asset

(778) (492)

(4,394) retirement obligations 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:

Millions of yen


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


(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


U.S. dollars 2016 2017 2017 Collection of accounts receivable during the year (*1) ¥953,388 ¥898,069 $8,004,895



U.S. dollars 2016 2017 2017 Undertaking of capital increase of affiliates:

Nghi Son Refinery and Petrochemical LLC (*2) ¥21,915 ¥6 $61

Millions of yen


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:


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:


U.S. dollars 2016 2017 2017 Long-term loans : Nghi Son Refinery and Petrochemical LLC(*2)

¥15,028 ¥16,499 $147,071

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

Millions of yen


2016 2017 2017 Long-term loans : Nghi Son Refinery and Petrochemical LLC(*2)

¥14,973 ¥31,892 $284,273

(*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.


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:

Millions of yen Thousands of U.S. dollars

2016 2017 2017Tax 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

inventories (1,562) (1,152) (10,276)

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:

Millions of yen


2016 2017 2017Current 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.


(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:


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


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:


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).


(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.


March 31, 2016 Millions of yen

Carrying amount Fair value

Unrealized 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

Carrying amount Fair value Unrealized

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) －


Carrying amount Fair value Unrealized gains

(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.


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

Millions of yen


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

Within 1 year Over 1 year

within 5 years Over 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

Within 1 year Over 1 year

within 5 years Over 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



Within 1 year

Over 1 year within 5 years

Over 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

March 31, 2016 Notional amount Fair value Unrealized

gains (losses)

Contract amount

Maturing after one year

¥156 (283)

¥156 (283)

Forward foreign currency exchange contracts, etc.:

Selling U.S. dollars, etc. Buying U.S. dollars, etc.

¥39,768 51,520

－－

Total ¥91,288 － (¥127) (¥127)

(2) Commodity related

Millions of yen


gains (losses)

Contract amount


¥2,866 (15,161)

¥2,866 (15,161)

Commodity swap contracts: Selling petroleum products Buying petroleum products

¥38,360 56,318

－ ¥31,935

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:

Selling U.S. dollars, etc. Notes and accounts receivable, trade ¥14,934 － ¥24

Buying U.S. dollars, etc. Short-term borrowings 318 － 1

Total ¥15,253 － ¥25


(2) Interest rate related Millions of yen

March 31, 2016 Hedged item Notional amount Fair value

Contract amount


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


Contract amount



Crude oil and 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


gains (losses)

Contract amount


¥318 (168)

¥318 (168)



¥20,080 77,910

－－

Interest rate currency swap contracts: USD receive-variable, pay-fixed 2,692 － (108) (108)

Total ¥100,684 － ¥40 ¥40



gains (losses)

Contract amount


$2,836 (1,501)

$2,836 (1,501)



$178,988 694,455

－－

Interest rate currency swap contracts: USD receive-variable, pay-fixed

24,000 － (969) (969)

Total $897,443 － $365 $365



Millions of yen

March 31, 2017 Notional amount Fair value Unrealized gains (losses)

Contract amount


(¥4,253) (4,302)

(¥4,253) (4,302)


¥58,094 72,668

－ ¥22,284

Total ¥130,762 ¥22,284 (¥8,555) (¥8,555)


March 31, 2017 Notional amount Fair value Unrealized gains (losses)

Contract amount


($37,910) (38,351)

($37,910) (38,351)


$517,818 647,724

－ $198,633

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


Contract amount




Notes and accounts receivable, trade Short-term borrowings

¥10,547

－ (¥412)

－－－ Total ¥10,547 － (¥412)



Contract amount




Notes and accounts receivable, trade Short-term borrowings

$94,018 －

($3,672)

－－－ Total $94,018 － ($3,672)

(2) Interest rate related


Contract amount


Interest rate swap contracts: Pay-fixed, receive-variable Long-term debt ¥286,705 ¥261,575 (¥5,280)

Interest rate currency swap contracts USD receive-variable, pay-fixed ¥2,692 － (¥13)


Total ¥289,398 ¥261,575 (¥5,293)

Thousands of U.S. dollars March 31, 2017 Hedged item Notional amount Fair value

Contract amount


Interest rate swap contracts: Pay-fixed, receive-variable Long-term debt $2,555,535 $2,331,540 ($47,063)

Interest rate currency swap contracts USD receive-variable, pay-fixed $24,000 － ($123) Total $2,579,535 $2,331,540 ($47,187)



Contract amount



Crude oil and

petroleum products －－

－－

－－

Total －－－

Thousands of U.S. dollars March 31, 2017 Hedged item Notional amount Fair value

Contract amount



Crude oil and

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.


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:

Millions of yen

Thousands of shares

Yen U.S.

Dollars

Net income (loss) attributable to

owners of the parent

Weighted average 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:

Millions of yen


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.


(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 products

Petrochemical products Resources Total Others Total

Recon- 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 amortization

28,436 8,563 41,513 78,513 1,134 79,648 634 80,282

Amortization of goodwill

706 34 － 741 491 1,232 － 1,232

Equity in earnings (losses) of nonconsolidated subsidiaries and affiliates, net

(2,099) 10,092 986 8,978 781 9,759 30 9,790

Impairment loss on fixed assets

1,016 327 34,245 35,589 － 35,589 － 35,589

Investment in equity method affiliates

105,681 44,041 5,148 154,871 60,763 215,635 － 215,635

Unamortized balance of goodwill

7,020 251 － 7,272 2,427 9,699 － 9,699

Capital expenditures ¥28,297 ¥5,478 ¥21,402 ¥55,178 ¥1,675 ¥56,853 ¥777 ¥57,630


Year ended March 31, 2017 Millions of yen Reportable segment

Petroleum products



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 amortization

26,746

8,561

33,266

68,574

1,031

69,606

594

70,200


661

34 － 695

419

1,115

－ 1,115


(2,468)

8,947

637

7,115

904

8,019

(43)

7,976


2,778

843

6,499

10,120

776

10,897

－ 10,897


98,785

47,400

5,328

151,513

220,698

372,212

－ 372,212


6,174

217

－ 6,391

1,231

7,623

－ 7,623

Capital expenditures ¥22,184

¥9,152

¥12,945

¥44,283

¥1,296

¥45,579

¥523

¥46,102

Year ended March 31, 2017

Thousands of U.S. dollars Reportable segment

Petroleum products



Net sales:

Customers $21,733,004

$4,110,998

$2,026,056

$27,870,058

$566,943

$28,437,002

－ $28,437,002

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 amortization

238,406 76,313 296,518 611,238 9,192 620,430 5,300 625,730


5,894 306 － 6,201 3,737 9,939 － 9,939


(22,005) 79,751 5,679 63,425 8,058 71,483 (384) 71,099


24,762 7,516 57,934 90,212 6,919 97,132 － 97,132


880,516 422,500 47,495 1,350,512 1,967,181 3,317,693 － 3,317,693


55,036 1,935 － 56,971 10,975 67,947 － 67,947

Capital expenditures $197,739 $81,584 $115,392 $394,715 $11,553 $406,269 $4,661 $410,931


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

Japan Asia and Oceania

North 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

Japan Asia and 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.


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



¥2,403,764 ¥499,497 ¥168,910 ¥92,891 ¥25,283 ¥3,190,347 Thousands of U.S. dollars



$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


¥819,321 ¥114,854 ¥60,075 ¥27,835 ¥1,022,086



$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.


COMPANY NAME Idemitsu Kosan Co.,Ltd.

HEAD OFFICE 1-1, Marunouchi 3-chome, Chiyoda-ku, Tokyo, Japan

INCORPORATED March 30, 1940 (Founded June 20, 1911)

REFINERIES Hokkaido, Chiba and Aichi

PETROCHEMICAL PLANTS Chiba and Tokuyama

NUMBER OF EMPLOYEES 9,139 (consolidated)

FISCAL YEAR April 1 to March 31

REGULAR GENERAL SHAREHOLDERS’ MEETING June of each year

NUMBER OF SHARES ISSUED 160,000,000 shares (208,000,000 shares as of July 2017 due to the capital increase of 48,000,000 shares)

NUMBER OF SHAREHOLDERS 10,566

TRANSFER AGENT Sumitomo Mitsui Trust Bank, Limited 1-4-1, Marunouchi, Chiyoda-ku, Tokyo 100-8233, Japan

INDEPENDENT AUDITORS Deloitte Touche Tohmatsu LLC

MAJOR SHAREHOLDERS

NameNumber of

shares(Thousands)

Percentage oftotal shares

(%)

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

Sumitomo Mitsui Trust Bank, Limited 5,142 3.22

Japan Trustee Services Bank, Ltd. (Trust account) 3,850 2.41

The Master Trust Bank of Japan, Ltd. (Trust account) 3,161 1.98

Masakazu Idemitsu 2,416 1.51

Masamichi Idemitsu 2,416 1.51

(Note)The shareholding ratios are calculated by excluding the shares of treasury stock of the Company (47,236 shares).

IR CONTACT

Investor Relations Office, Treasury Department,

Idemitsu Kosan Co.,Ltd.

1-1, Marunouchi 3-chome, Chiyoda-ku, Tokyo,

100-8321, Japan

Phone: +81-3-3213-9307

Fax: +81-3-3213-3158

(As of March 31, 2017)

Investor Information


www.idemitsu.co.jp