Net sales Operating income Ordinary income Net income. Earnings per share to sales. Cash flow from investing activities

Transcription

1 (English Translation) Summary of Consolidated Full Year Results for 2013 February 14, 2014 Listed Company Name: Showa Shell Sekiyu K.K. Listed Stock Exchange: Tokyo Stock Exchange 1st Section Code number: 5002 (URL Delegate: Title: COO, Representative Director Name: Jun Arai Contact: Title: Controller, Executive Officer Name: Tsutomu Yoshioka Phone: (03) Date of annual shareholders meeting : March 27, 2014 Expected date of dividend payment: March 28, 2014 Expected date of security report submission: March 28, 2014 Supporting material for full year results: Applicable The briefing session of full year results: Applicable (For analysts and institutional investors) (Amount unit: Millions of yen, unless otherwise stated) (Fractions less than one million yen are rounded off.) 1. Consolidated financial results for full year 2013 (January 1 thorough December 31, 2013) (1) Consolidated financial results (Note) Percentages represent changes from previous year. Net sales Operating income Ordinary income Net income % % % % Full year ,953, , , ,295 - Full year ,629,261 (5.1) 14,697 (75.6) 12,674 (79.5) 1,013 (95.6) (Note Comprehensive income for: FY ,251 million yen ( -%) FY ,366 million yen ((90.0)%) Earnings per share Diluted earnings per Net income to net assets Ordinary income to Operating income share (excl. minority interests) total assets to sales Yen Yen % % % Full year Full year (Note Equity in net earnings of affiliates for: FY ,496 million yen FY 2012 (924) million yen (2) Consolidated financial position Total assets Net assets Net assets (excl. minority Net assets (excl. minority interests) to total assets interests interests) per share % Yen Full year ,295, , Full year ,233, , (Note Net assets (excluding minority interests): As of December 31, ,618 million yen As of December 31, ,826 million yen (3) Consolidated cash flow position Cash flow from operating activities Cash flow from investing activities Cash flow from financing activities Cash and cash equivalents at end of period Full year ,133 (27,534) (57,193) 27,428 Full year ,922 (17,747) (21,391) 16, Dividends End of 1st Quarter End of 2nd Quarter Cash dividend per share End of 3rd Quarter End of fiscal year Total Total dividends paid Dividends payout ratio (Consolidated) Dividends on net assets (Consolidated) Yen Yen Yen Yen Yen % % Full year , Full year , Full year 2014 (Forecast) Forecast of consolidated financial results for full year 2014 (January 1 through December 31, 2014) (Note) Percentages represent changes from previous year. Net sales Operating income Ordinary income Net income Earnings per share % % % % Yen Interim ,560, ,000 (53.8) 20,000 (54.5) 15,000 (50.1) Full year ,150, ,000 (29.7) 53,000 (30.4) 37,000 (38.6) 98.24

2 4. Others (1) Important changes in scope of significant consolidated subsidiaries during the period : None (2) Changes in accounting principles, accounting estimates and restatement a) Changes in accounting principles due to amendment of accounting standards : None b) Changes in accounting principles due to the reason except a) : None c) Changes in accounting estimates : None d) Restatement : None (3) Number of shares issued (Common shares) (I) Number of shares issued (Including treasury shares) As of December 31, 2013 : 376,850,400 As of December 31, 2012 : 376,850,400 (II) Number of treasury shares As of December 31, 2013 : 213,372 As of December 31, 2012 : 227,342 (III) Average number of shares As of December 31, 2013 : 376,623,693 As of December 31, 2012 : 376,623,640 Reference Summary of Non-consolidated Financial Results 1. Non-consolidated financial results for full year 2013 (January 1 through December 31, 2013) (1) Non-consolidated financial results (Note) Percentages represent changes from previous year. Net sales Operating income Ordinary income Net income % % % % Full Year ,708, , , ,426 - Full Year ,457,814 (5.9) 21,942 (72.4) 22,320 (73.2) 3, Earnings per share Diluted earnings per share Yen Yen Full Year Full Year (2) Non-consolidated financial position Total assets Net assets Net assets(excl. minority interests) to total assets Net assets (excl. minority interests) per share % Yen Full Year ,145, , Full Year ,107, , (Note Net assets : As of December 31, ,870 million yen As of December 31, ,307 million yen 2. Forecast of non-consolidated financial results for full year 2014(January 1 through December 31, 2014) (Note) Percentages represent changes from previous year. Net sales Ordinary income Net income Earnings per Share % % % Yen Interim ,410, ,000 (81.4) 5,000 (79.4) Full Year ,880, ,000 (50.0) 16,000 (54.8) Indication of audit procedure implementation status This report is exempt from audit procedure based upon the Financial Instruments and Exchange Act. It is under the audit procedure process at the time of disclosure of this report. * Explanation regarding appropriate use of the forecast, other special instructions Figures in the above forecast are based on currently available information, and includes various risks and uncertainty. Actual results could differ from this forecast due to changes in economic conditions, market trends, exchange rate and other factors. Please refer to Outlook for 2014 on page 5 for the details of this forecast of business performance.

3 Supporting Material Contents 1.Business Results P.2 (1) Analysis of Business Results P.2 (2) Analysis of Financial Conditions P.6 (3) Basic Policy for Distributions of Profits and Dividend Payments P.7 2. Scope of Consolidation and Equity Associates P.8 3. Management Policy P Consolidated Financial Statements P.12 (1) Consolidated Balance Sheet P.12 (2) Consolidated Statement of Income and Consolidated Statement of Comprehensive P.14 Income (3) Consolidated Statement of Changes in Shareholder s Equity P.17 (4) Consolidated Statement of Cash Flows P.19 (5) Notes for Premises of Going Concern P.21 (6) Basis of Presenting Consolidated Financial Statements P.21 (7) Notes to Consolidated Financial Statements P.25 Consolidated Balance Sheet P.25 Consolidated Statement of Changes in Shareholder s Equity P.26 Consolidated Statement of Cash Flows P.27 Segment Information P.28 Information on Per Share Data P.30 Significant Subsequent Event P Non-consolidated Financial Statements P.31 (1) Non-consolidated Balance Sheet P.31 (2) Non-consolidated Statement of Income P.34 (3) Non-consolidated Statement of Changes in Shareholder s Equity P.36 (4) Notes for Premises of Going Concern P.38 1

4 1.Business Results (1) Analysis of Business Results A. Business Results for the Current Period [Analysis of Consolidated Business Results] During the fiscal period under review, the Japanese economy continued to recover amid an upturn in consumer spending and corporate earnings, which was supported by the weaker yen and rising share prices. However, the weak yen also led to higher prices for consumers and a wider trade deficit. In 2013, the price of Dubai crude oil started the year at roughly 107 dollars-per-barrel, rising to around 113 dollars-perbarrel in February before falling back to the 96 dollars-per-barrel level in April. The price then gradually turned up, returning to nearly 113 dollars-per-barrel at the end of August. From September onward, the price of Dubai crude oil traded in a range of dollars-per-barrel, ending the fiscal year at roughly 108 dollars-per-barrel. In the foreign exchange markets, the USD/JPY rate started the year at around 86 yen, before weakening to roughly 103 yen in May. The yen then appreciated again, strengthening to the 93 yen level in mid-june. The yen remained firm from July through to November, when dollar buying increased, but subsequently ended the fiscal year at around 105 yen against the US dollar. (Crude oil prices and foreign exchange rate) The Dubai crude oil price (USD/Barrel) Exchange rate (JPY/USD) Exchange rate (JPY/EUR) Full year Full year Difference (3.5) (Note) These are the average figures during the period. Against this backdrop, the Showa Shell Group reported consolidated net sales of 2,953.8 billion yen, up 12.3% year on year, mainly reflecting an increase in prices for oil products. The Group reported operating income of 75.4 billion yen, up 60.7 billion yen from the previous fiscal year, and ordinary income of 76.2 billion yen, up 63.5 billion yen year on year. This growth in profits mainly reflected inventory valuation gains in the oil business, due to rising crude oil prices, and an increase in domestic sales of solar cells in the energy solution business. CCS ordinary income (current cost of supply basis, excluding the impact of inventory valuation) totaled 41.8 billion yen, up 30.6 billion yen from the previous fiscal year. The Group reported net extraordinary income of 0.6 billion yen, with extraordinary income such as gains on the sale of fixed assets and subsidy income exceeding extraordinary losses such as losses on the disposal of fixed assets and impairment losses, resulting in net income before taxes of 76.8 billion yen, up 64.4 billion yen year on year. While income taxes-current totaling 21.4 billion yen were incurred, with the reassessment of recoverability of deferred tax assets of Solar Frontier K.K., a consolidated subsidiary, the Company recorded income taxes-deferred benefits totaling 6.2 billion yen. As a result, the net income was 60.2 billion yen, an increase of 59.2 billion yen compared with the previous fiscal year. The business results by segment are as follows. [Oil Business] In crude oil procurement, we carried out flexible procurement activities in response to fluctuations in the market to ensure access to optimal supply sources for the Group s refineries. Specifically, we maintained our primary crude oil supply relationship with Saudi Aramco and worked closely with other Middle East oil producers and the Shell Group. In production and supply, we worked to ensure safe and stable operations at our refineries while also rapidly adjusting 2

5 production in response to fluctuating demand and market conditions in Japan and overseas. In addition to sales to the domestic market, we used the Shell Group s network to actively export oil products, mainly middle distillates such as gas oil and jet fuel, which continue to see strong demand. This supported a high capacity utilization rate at our refineries throughout the fiscal year. Also, under a basic agreement with Tonen General Sekiyu K.K. concluded in March 2013, we studied how to build alliances in areas of refining, supply and distribution in order to build a more efficient distribution network, and realized sharing of feedstocks and oil tankers. In domestic fuel sales, demand for oil products continued to decline due to structural factors in the Japanese market, such as wider uptake of fuel-efficient vehicles and falling consumption of industrial fuels. Despite this trend, total sales of the main fuels supplied by Showa Shell in Japan (gasoline, kerosene, gas oil and heavy fuel oil) were largely steady year on year. In retail initiatives, the Ponta joint point card, which is used in various retail sectors, had attracted a total of 70 affiliated companies and a membership base of over 59 million, as of December 31, This means that around half of the Japanese population now has a Ponta card, which is likely to spur affiliated companies to offer further incentives to attract customers. More of our customers are also now using our convenient payment system Shell Easy Pay, a contactless IC key fob system that allows customers to automatically select and pay for their fuel. Over 770,000 key fobs had been issued by the end of December 2013, an increase of roughly 350,000 compared with the end of the previous fiscal year. In value-added products other than fuel, we continued to develop automotive and industrial lubricants and grease to address customer needs for long-life products and fuel-efficiency, as well as environmentally friendly and aesthetically pleasing asphalt products. We also developed a range of new products to create a more distinctive product line-up. These included Shell Heat Transfer Oil S4X and Shell Vacuum Pump Oil S4 RX, both based on the Shell Group s unique synthetic oils, and we promoted the sale of value-added products such as CARIMEX ART, a mid-temperature asphalt that lowers the amount of heat produced during the mixing stage to below 30 C, helping to reduce CO2 emissions. In the petrochemical business, shale gas has increasingly been used as a feedstock, particularly in the US, leading to relatively decreased production of benzene to the global market. Also, demand for blended xylene, a polyester feedstock, is substantially growing in Asia supported by a strong demand for polyester. As a result, prices for those materials remained firm throughout the year, so we maximized profits and expanded output and sales by 1% compared with the previous fiscal year. In the liquefied petroleum gas (LPG) business, we entered into an agreement with Cosmo Oil Co., Ltd., Sumitomo Corporation and Tonen General Sekiyu K.K. in December 2013 to start discussions on integrating our LPG business operations. The integrated business structure would merge all operations in these businesses, ranging from import and procurement to logistics, shipment terminal operation, domestic wholesaling and overseas trading. Separately, we also reached agreement with Cosmo Oil Co., Ltd. and Sumitomo Corporation to start discussions on merging our domestic LPG retail sales business. In addition to the above initiatives, we launched a company-wide reform project called Dantotsu Project in April Through this project, which runs for three years until the fiscal year ending December 31, 2015, we plan to roll out a range of initiatives to ensure the Group remains competitive by building a business structure that is efficient and costcompetitive under any business conditions. The project will mainly focus on reducing structural costs and reforming business processes from the bottom up. Guided by these objectives, we started making changes to each supply chain area by implementing new measures to reduce costs, lower our overheads and shift to the manufacture of value-added products. As a result, the oil business reported net sales of 2,803.0 billion yen, up 10.4% year on year, and operating income of 56.1 billion yen, up 27.9 billion yen, reflecting factors such as an increase in the price of oil products due to higher crude oil prices and inventory valuation gains. Despite our efforts described above, CCS ordinary income (current cost of supply basis, excluding the impact of inventory valuation) totaled 21.7 billion yen, down 4.9 billion yen compared with the previous fiscal year due to lower fuel oil margin under the competitive domestic environment.. 3

6 [Energy Solution Business] In the solar cell business, we stepped up sales in the domestic market, where demand continues to expand at a rapid pace, supported by the renewable energy feed-in tariff scheme, and actively supplied solar panels to residential and commercial users and to mega solar projects. We also worked to strengthen sales in the residential solar panel market. This included launching an advertising campaign asking viewers to make sure they compare solar panel products. The adverts focused on three areas: actual power output, guarantee periods and quality. In addition to solar panel sales, our integrated business model, which covers all areas from project development and design through to fund procurement, system construction, operation and power wholesaling, has gained a strong reputation in the market, enabling us to attract leading corporate partners from Japan and overseas to jointly develop our solar power generation business. Backed by these marketing efforts, our main Kunitomi Plant (Miyazaki Prefecture, annual production capacity: 900MW) operated at full capacity from the start of 2013 and our Second Plant (Miyazaki Prefecture, annual production capacity: 60MW) resumed production in July Also in July, we launched our most powerful CIS thin-film solar module(*1) to date, the SF170-S, which has an output of 170W. This was followed in November by the launch of Solacis Neo, a new slim lightweight module built on the strengths of our CIS technology. We also began introducing the new Cross One mounting system for residential use, which substantially reduces the time needed to install CIS systems on roofs. These new products helped us to step up sales in the domestic residential market. In the fiscal year under review, we achieved significant growth in sales volume, but the above initiatives also boosted the added value of our products. In addition to the above sales initiatives, we continued to work on reducing costs. This led to an improvement in the profitability of our operations, with the solar panel business reporting its first ever full-year profit. In research and development, in January 2013 we achieved a world record energy conversion efficiency of 19.7% for cadmium-free, thin-film solar cells, verified by the National Institute of Advanced Industrial Science and Technology (AIST). Also, in December, we set a new conversion efficiency record of 12.6% for CZTS thin film solar cells(*2), which are attracting attention as a next-generation solar panel technology. This latest record, which was achieved in joint research, and verified by US-based Newport Corporation, eclipses our last world record achieved in We believe these new world records are a positive step on the road to further technological innovation that boosts conversion efficiency and improves prospects for commercialization. In December 2013, we took the decision to construct a new solar module manufacturing plant in Ohira Village in Kurokawa County, Miyagi Prefecture, Tohoku Region. This Tohoku Plant will have a nominal annual production capacity of 150MW and will employ the latest technologies to significantly reduce production costs. The facility is scheduled for completion in March In the electric power business, the first and second units at Ohgishima Power Station, a large, highly efficient natural gasfired thermal power plant in which Showa Shell has a stake, continued to operate smoothly. Amid fluctuations in electricity supply and demand since the Great East Japan Earthquake, this power station continues to contribute to stable power supplies. Profits from the power station also increased year on year. We are also making good progress on the construction of a third unit at the plant, which is scheduled to come on line in March As part of efforts to expand our power generation portfolio, we began operating solar power facilities at some of our former oil product manufacturing sites using CIS thin-film solar modules made by Solar Frontier K.K. We also decided to invest in a new biomass power plant (49MW output) fueled by wood pellets on the site of our former Ohgimachi Plant at the Keihin refinery complex. Preparations are underway to begin construction of the plant, which is scheduled to come on line at the end of In this way, we continue to make steady progress on developing environmentally friendly energy sources. As a result, the energy solutions business reported net sales of billion yen, up 80.4% from the previous fiscal year, and an operating income of 17.5 billion yen, up 32.9 billion yen compared with the previous fiscal year. 4

7 *1. CIS thin-film solar cells: Next-generation solar cells containing the key materials of copper, indium and selenium, made using the Group s unique manufacturing technology. Our CIS solar cells generate high output under real-world conditions, have an attractive design and are kind on the environment, as they do not contain cadmium. *2. CZTS thin-film solar cells: Solar cells made from the key materials of copper, zinc, tin, sulfur and selenium. A promising cost-competitive massproduction technology, because it does not require rare metals. [Other Business] The other business covers construction work, the sale of automobile accessories, leasing of Company-owned office building and other businesses. In the fiscal year under review, the segment reported net sales of 9.5 billion yen, down 15.0% year on year, and operating income of 1.7 billion yen, down 0.2 billion yen. B. Outlook for 2014 As for the outlook for 2014, we estimate profit and loss as follows; In oil business, we will conduct appropriate production and supply control adapting quickly to supply/demand situations, based on the security of stable supply. We expand our customer base in retail marketing and will continue and expand sales activities that thoroughly satisfy customer needs in commercial sales, with promoting improvement of structural cost competitiveness. In energy solution business, we will expand the system sales with continuously focusing on Japan sales and will improve the effectiveness of plant operation in solar business, in addition to the stable sales of electric power business with stabile operation of our power plant. In consideration of the above, we estimate that consolidated net sales will be 3,150.0 billion yen (2,880.0 billion yen on a nonconsolidated basis), consolidated ordinary income for the period will be 53.0 billion yen (27.0 billion yen on a nonconsolidated basis) and consolidated net income for the period will be 37.0 billion yen (16.0 billion yen on a nonconsolidated basis). The above forecast is calculated on the assumption that crude oil price will be 103 dollars per barrel and that the exchange rate will be 105 yen per dollar, and we estimate no effect of inventory valuation. 5

8 (2) Analysis of Financial Conditions A. Balance Sheet Analysis Consolidated total assets as of the end of the year were 1,295.8 billion yen, an increase of 62.6 billion yen compared with the end of the previous year. This was mainly attributable to the increase in accounts receivables and inventories, which were caused by the hike in sales prices of oil products and crude oil prices due to the depreciation of yen. Consolidated net assets as of the end of the year were billion yen, an increase of 51.5 billion yen compared with the end of the previous year. This was mainly attributable to positive factors, such as net income for the current year exceeding offsetting factors like the final and interim dividend payment. Consolidated total liabilities were billion yen, an increase of 11.0 billion yen compared with the end of the previous year. This was chiefly due to increases in accounts payable, caused by the hike in crude oil prices on a yen basis. Short and long-term interest-bearing liabilities (borrowings, CP, and bonds) were billion yen, a decrease of 44.7 billion yen from the end of the previous year. As a result, equity ratio at the end of the year was 23.2%. The net assets (excluding minority interests) per share based on the total number of shares issued as of the end of the year were yen, up from yen for the previous year. B. Cash Flow Analysis The cash and cash equivalents (hereinafter referred to as funds) as of the end of the year was 27.4 billion yen, an increase of 10.4 billion yen from the end of the previous year. The details are as follows: a) Cash flows from operating activities Operating activities provided net cash of 95.1 billion yen. This mainly reflected net income before taxes of 76.8 billion yen and depreciation and amortization of 40.6 billion yen, a non-cash operating item. b) Cash flows from investing activities Investing activities used net cash of 27.5 billion yen. This chiefly reflected investment to maintain operations at service stations and to increase added value at the Group s refineries, as well as investment related to the construction of new power generation facilities to supply electricity for sale to utilities. Free cash flow, which is the total of cash flows from operating activities and cash flows from investing activities, was positive 67.5 billion yen. c) Cash flows from financing activities Financing activities used net cash of 57.1 billion yen, mainly reflecting a decline in interest-bearing debt and cash dividends paid. The Group s cash flow indicators are summarised as follows Year end 2010 Year end 2011 Year end 2012 Year end 2013 Year end Equity ratio (%) Market value equity ratio (%) Interest-bearing debts /Cash flow from operating activities (Times) Interest coverage ratio (Note) Equity ratio: (Net assets Minority interest) / Total assets Market value equity ratio: Gross market capitalisation (*1) / Total assets Interest-bearing debts / Cash flow from operating activities: (*2) / (*3) Interest coverage ratio: Cash flow from operating activities / Interest payment (*3) Each indicator is calculated by the numbers in the consolidated financial statements. (*1) Gross market capitalisation is calculated by multiplying the closing price of the Company's shares at the yearend by the number of shares issued and outstanding (excluding treasury shares) at the year-end. 6

9 (*2) Debts include all the interest-bearing liabilities in the consolidated balance sheets. (*3) Cash flow from operating activities is the "cash flow from operating activities" in the consolidated cash flow statement. Interest payments equate with the amount of interest paid in the consolidated cash flow statements. C. Commitment-Line Contract In order to finance working capital efficiently, we have concluded commitment-line contracts (credit line amount: 150 billion yen) with a banking syndicate group and a commitment-line contract (overdraft agreement for the current account/credit line amount: 10 billion yen) with Mizuho Corporate Bank, Ltd. As of the end of this year, there is no outstanding loan balance for the contracts above mentioned. (3) Basic Policy for Distribution of Profits and Dividend Payments In consideration of our business performance and financial position, as well as of the financial market conditions, we make it a basic policy to realize distribution of profits that are lucrative and stable enough to satisfy shareholders. At the same time, we strive to attain sufficient retained earnings in order to accomplish our mid-and-long-term growth strategy for the purpose of maximising corporate value. In order to do this, our policy is to distribute profits twice a year, a yearend dividend (base date: 31 December) based on resolutions approved at meetings of the general shareholders and an interim dividend (base date: 30 June) based on resolutions approved by the board in accordance with the provisions of Article of the Corporate Law. 7

10 2. Scope of Consolidation and Equity Associates Consolidated subsidiaries of Showa Shell Sekiyu (SSSKK) are 31, and equity associates are 12. Our core business is oil business. In addition we also run energy solution (solar cell and electricity), and other businesses such as property letting, construction, sales of motorcar parts and distributed power supply. The following shows the subsidiaries' segment and positioning. Kinds of Business Detail of Business Consolidated Subsidiaries Equity Associates Oil Business Oil refining, manufacturing of oil products (SSSKK) Nippon Grease Seibu Oil Toa Oil Shoseki Kako Showa Yokkaichi Sekiyu (SYS) Crude & oil products transportation, (SSSKK) Heiwa Kisen Niigata Joint Oil Stockpiling Stockpiling & Loading Showa Shell Sempaku Japan Oil Network (JONET) Sale of oil products (SSSKK) Tokyo Shell Pack Marubeni Energy (gasoline, LPG, kerosene, gas oil, fuel oil, Nippon Grease Sun Road Central Sekiyu Gas asphalt, lubricants, chemical products etc.) Shoseki Kako Hayashi Bussan Shell Sekiyu Osaka Hatsubaisho Petro Star Kansai Wakamatsu Gas Dia Shoseki Chuo Shell Sekiyu Hanbai Nissho Koyu Toyotsu Sekiyu Hanbai Leef Energy Nagase Sekiyu Jyoyo Shell Sekiyu Hanbai Nakagawa Sekiyu Jonen Mie-seki Shoji Enessance Holdings Enessance Hokkaido Shell Tokuhatsu Enessance Touhoku Enessance Niigata Enessance Kanto Enessance Kyushu Enessance Service Enessance Chubu Enessance Hokkaido Butsuryu Sales of Petrochemicals (SSSKK) Energy Solution Solar cell and electricity (SSSKK) Genex Ogishima Power Business Solar Frontier Other Business Property letting, Construction, sales of motor car parts and distributed power supply, etc. (SSSKK) Shoseki Engineering Rising Sun On-Site Power 8

11 Oil Business <Oil refinery, Manufacturing of oil products> Showa Yokkaichi Sekiyu (SYS) Toa Oil *1 Seibu Oil Nippon Grease Shoseki Kako <Crude & oil products transportation, Stockpiling & Loading> Showa Shell Sempaku Heiwa Kisen Niigata Joint Oil Stockpiling Japan Oil Network (JONET) <Sale of oil products> Shoseki Kako Leef Energy Sun Road Nakagawa Sekiyu Wakamatsu Gas Tokyo Shell Pack Nagase Sekiyu Enessance Hokkaido Enessance Touhoku Enessance Kanto Enessance Hokkaido Butsuryu Dia Shoseki Central Sekiyu Gas Jyoyo Shell Sekiyu Hanbai Marubeni Energy Nippon Grease Petro Star Kansai Chuo Shell Sekiyu Hanbai Hayashi Bussan Nissho Koyu Jonen Enessance Holdings Enessance Niigata Enessance Chubu Enessance Kyushu Enessance Service Shell Sekiyu Osaka Hatsubaisho Shell Tokuhatsu Mie-seki Shoji Toyotsu Sekiyu Hanbai <Sale of petrochemical products, sales and purchase of oil products > Shell Chemicals Japan S S S K K Energy Solution Businesses Solar Frontier Genex *2 Ogishima Power Crude & oil products supply Other Business Rising Sun Shoseki Engineering Onsite Power Shell Eastern Trading (PTE) Limited Saudi Arabian Oil Company *1 Listed on Tokyo Stock Exchange (second section) *2 Consolidated subsidiary of Toa means other related companies and corporate shareholders, in the related parties. 9

12 3. Management Policy (1) Fundamental policy of management Showa Shell Sekiyu K.K. can only achieve a further leap and perpetual growth by constantly making its contribution to society, while securing reasonable profits and constructing a strong management base and sound corporate constitution. With this in mind, we set our corporate creed as follows. 1. We will always endeavor for a break-through or technological innovation with a spirit of customer first, and for continual growth of the company, discharging our social responsibilities, including environmental preservation, a stable supply of energy, and operational safety. 2. We will implement Japanese-style management adaptable to changes at our own discretion and on our own responsibility, while maintaining close relationships with Shell Group companies and cultivating our international business sense. 3. We will aim to achieve our corporate goals and form a group of positive people full of vitality associated with each other through a noble ideal and trust. 4. We will endeavor to improve productivity through an effort calling for everybody s participation for thinking and sweating together and construct an affluent future on the base of the company s unshakable footing. (2) Management goal A management indicator as our target is consolidated ordinary income calculated on a current cost of supply basis (excluding the effects of valuation of inventory assets). (3) Medium-and long-term strategies Showa Shell Sekiyu K.K. (hereafter Showa Shell ) here created the Medium Term Business Action Plan in order to become the highly competitive and sustainable Energy Solution Provider meeting the needs of customers and society as a follow-up to our Mid Term Business Vision "EPOCH 2010 set out in Key strategic pillars under Medium Term Business Action Plan ~ Global business expansion on the strong domestic business base ~ Enhancing profitability of the Oil Business Become the most profitable refiner in Japan Enhancing competitiveness of the Solar Business Become a global leader Fostering seeds for future growth Develop new products or business models for future growth Expanding the Power Business Expand business scale and the source of power generation Key management targets in Medium Term Business Action Plan Delivering a profitable growth strategy that provides stable and attractive dividends Comply fully with laws and our Code of Conduct Operate our businesses in a safe and environmentally-friendly manner, promoting our Goal Zero initiative of having no occupational accidents or product quality incidents You can see the detail of Medium Term Business Action Plan if you click the following URL. 10

13 (4) Issues to be addressed In the oil business, we will need to respond flexibly to changes in our operating environment, which continues to face an uncertain outlook. This will mean addressing the decline in oil product demand due to the growing shift to energy conservation, improvements in fuel efficiency, and Japan s aging society, as well the impact on the oil industry s supply framework from the law entitled Sophisticated Methods of Energy Supply Structures. The Showa Shell Group has led the sector in reducing structural costs by cutting back excess refining capacity. We have also created a production and distribution framework with high rates of capacity utilization and high added value by maximizing the use of our refineries through exports in response to conditions in domestic and overseas markets. Also, in order to address the tight refining margins faced by the entire sector, we will continue to ensure stable supplies, while also adjusting our production portfolio further, including boosting output of petrochemicals, to ensure our production framework retains its competitive advantage in Japan and overseas market. We will also work to supply products and services that dynamically address customers changing needs in order to add more value to our operations. In the LPG business, we will examine the possibility of integrating our operations with those of other companies in order to create a more efficient retail and distribution network and target new opportunities for business expansion. In the energy solutions business, we forecast continued strong sales of solar panels on the back of firm growth in demand in the domestic market. We also intend to step up sales to the residential market and target demand for smaller industrial systems amid prospects of a reduction to the electricity purchase price under the feed-in tariff scheme. Aiming to achieve grid parity, which means renewable energy sources being the same cost as the ordinary electricity grid, we will work relentlessly to reduce system costs and strengthen our research and development activities in order to build a competitive position in the power generation field. In addition, we plan to strengthen our business model in the mega solar power generation field. The domestic solar cell market is likely to become more mature, but our solar cell business will remain focused on Japan for the time being. However, we are now making preparations to expand sales worldwide, with our new Tohoku Plant, announced in December 2013, serving as a blueprint for the Group s future manufacturing facilities outside Japan. The electric power business is likely to face major changes in its operating environment due to trends in energy policy. Against this backdrop, we will continue to focus on ensuring stable and efficient operations at our existing power stations, while also working to further diversify our sources of energy. This will include expanding the Ohgishima Power Station, constructing the new biomass power plant and steadily optimizing our retail portfolio. 11

14 4. Consolidated Financial Statements (1) Consolidated Balance Sheet Previous year end As of December 31, 2012 Current year end As of December 31, 2013 Assets Current assets Cash and deposits 18,175 28,635 Notes and accounts receivable-trade 377, ,257 Merchandise and finished goods 152, ,640 Work in process 1,985 1,622 Raw materials and supplies 123, ,347 Deferred tax assets 6,642 13,540 Other 32,057 30,683 Allowance for doubtful accounts (591) (452) Total current assets 711, ,274 Noncurrent assets Property, plant and equipment Buildings and structures 313, ,264 Accumulated depreciation and impairment loss (210,007) (211,496) Buildings and structures, net 103,422 99,767 Oil tanks 84,564 85,751 Accumulated depreciation and impairment loss (74,249) (74,917) Oil tanks, net 10,314 10,833 Machinery, equipment and vehicles 575, ,152 Accumulated depreciation and impairment loss (427,637) (451,393) Machinery, equipment and vehicles, net 147, ,758 Land 157, ,911 Construction in progress 5,478 3,847 Other 26,655 26,538 Accumulated depreciation and impairment loss (20,351) (19,565) Other, net 6,303 6,973 Total property, plant and equipment 430, ,092 Intangible assets Goodwill 1,409 1,448 Leasehold right 4,025 3,987 Software 4,857 5,485 Other Total intangible assets 10,532 11,160 Investments and other assets Investment securities 37,684 40,139 Long-term loans receivable 5,740 7,255 Deferred tax assets 21,614 20,411 Other 16,306 19,137 Allowance for doubtful accounts (672) (640) Total investments and other assets 80,672 86,303 Total noncurrent assets 521, ,556 Total assets 1,233,193 1,295,831 12

15 Previous year end As of December 31, 2012 Current year end As of December 31, 2013 Liabilities Current liabilities Notes and accounts payable-trade 336, ,965 Short-term loans payable 65,933 89,298 Current portion of bonds 15,000 10,000 Accounts payable-other 172, ,149 Income taxes payable 6,604 18,153 Accrued expenses 9,840 10,060 Provision for bonuses 2,359 2,146 Provision for directors' bonuses 4 60 Commercial papers 26,000 Other 47,148 47,746 Total current liabilities 682, ,580 Noncurrent liabilities Bonds payable 20,000 10,000 Long-term loans payable 138, ,696 Deferred tax liabilities 3,539 3,055 Provision for retirement benefits 74,493 73,005 Provision for special repairs 15,890 15,033 Other 24,394 22,107 Total noncurrent liabilities 277, ,897 Total liabilities 959, ,478 Net assets Shareholders' equity Capital stock 34,197 34,197 Capital surplus 22,113 22,123 Retained earnings 193, ,374 Treasury stock (184) (180) Total shareholders' equity 249, ,515 Valuation and translation adjustments Valuation difference on available-for-sale securities 325 1,613 Deferred gains or losses on hedges 125 (510) Total valuation and translation adjustments 450 1,102 Minority interests 23,957 24,733 Total net assets 273, ,352 Total liabilities and net assets 1,233,193 1,295,831 13

16 (2) Consolidated Statement of Income and Consolidated Statement of Comprehensive Income Consolidated Statement of Income Previous year From January 1, 2012 To December 31, 2012 Current year From January 1, 2013 To December 31, 2013 Net sales 2,629,261 2,953,808 Cost of sales 2,481,144 2,744,530 Gross profit 148, ,278 Selling, general and administrative expenses Freightage related expenses 38,787 40,373 Personal expenses 35,536 34,972 Rent expenses 6,225 6,847 Depreciation 7,294 5,286 Other 45,576 46,367 Total selling, general and administrative expenses 133, ,847 Operating income 14,697 75,430 Non-operating income Interest income Dividends income 1, Foreign exchange gains 700 Reversal of allowance for doubtful accounts Equity in earnings of affiliates 1,496 Gain on investments in silent partnership 1,421 1,616 Other 1,673 1,314 Total non-operating income 5,161 5,909 Non-operating expenses Interest expenses 2,365 1,931 Sales discounts 1,936 2,065 Foreign exchange losses 175 Equity in losses of affiliates 924 Other 1,781 1,138 Total non-operating expenses 7,183 5,136 Ordinary income 12,674 76,204 Extraordinary income Gain on sales of noncurrent assets 1,733 1,231 Gain on sales of investment securities 1 47 Subsidy 1,871 4,301 Other Total extraordinary income 3,998 6,462 14

17 Previous year From January 1, 2012 To December 31, 2012 Current year From January 1, 2013 To December 31, 2013 Extraordinary loss Loss on disposal of noncurrent assets 1,943 2,623 Loss on valuation of investment securities Impairment loss 978 1,780 Expenses related to upgrading of equipment 517 Other Total extraordinary losses 4,293 5,861 Income before income taxes and minority interests 12,379 76,805 Income taxes-current 8,163 21,483 Income taxes-deferred 1,744 (6,233) Total income taxes 9,908 15,250 Income before minority interests 2,470 61,555 Minority interests in income 1,457 1,260 Net income 1,013 60,295 15

18 Consolidated Statement of Comprehensive Income Previous year From January 1, 2012 To December 31, 2012 Current year From January 1, 2013 To December 31, 2013 Income before minority interests 2,470 61,555 Other comprehensive income Valuation difference on available-for-sale securities (214) 1,127 Deferred gains or losses on hedges 125 (635) Share of other comprehensive income of associates accounted for using equity method (14) 204 Total other comprehensive income (104) 696 Comprehensive income 2,366 62,251 Comprehensive income attributable to Comprehensive income attributable to owners of the parent ,947 Comprehensive income attributable to minority interests 1,460 1,303 16

19 (3) Consolidated Statement of Changes in Shareholders Equity Previous year (January 1 through December 31, 2012) Shareholder s equity Capital stock Capital surplus Retained earnings Treasury stock Total shareholders equity Balance at the end of previous year Changes of items during the period 34,197 22, ,182 (184) 225,308 Dividends from surplus (6,780) (6,780) Net income 1,013 1,013 Purchase of treasury stock (0) (0) Change of scope of consolidation Purchase of shares of consolidated subsidiaries Net changes of items other than shareholders' equity Total changes of items during the period Balance at the end of current period (164) (164) (5,932) (0) (5,932) 34,197 22, ,250 (184) 249,375 Balance at the end of previous year Changes of items during the period Difference on valuation of other securities Valuation & translation gains/losses Deferred gains or losses on hedges Total accumulated other comprehensive income Minority interests Total net assets , ,152 Dividends from surplus (6,780) Net income 1,013 Purchase of treasury stock (0) Change of scope of consolidation Purchase of shares of consolidated subsidiaries Net changes of items other than shareholders' equity Total changes of items during the period Balance at the end of current period (164) (214) (214) (231) 125 (106) (231) 125 (106) 670 (5,368) , ,783 17

20 Current year (January 1 through December 31, 2013) Balance at the end of previous year Changes of items during the period Shareholder s equity Capital stock Capital surplus Retained earnings Treasury stock Total shareholders equity 34,197 22, ,250 (184) 249,375 Dividends from surplus (10,170) (10,170) Net income 60,295 60,295 Purchase of treasury stock (1) (1) Disposal of treasury stock Purchase of shares of consolidated subsidiaries Net changes of items other than shareholders' equity Total changes of items during the period Balance at the end of current period 10 50, ,139 34,197 22, ,374 (180) 299,515 Balance at the end of previous year Changes of items during the period Difference on valuation of other securities Valuation & translation gains/losses Deferred gains or losses on hedges Total accumulated other comprehensive income Minority interests Total net assets , ,783 Dividends from surplus (10,170) Net income 60,295 Purchase of treasury stock (1) Disposal of treasury stock 17 Purchase of shares of consolidated subsidiaries Net changes of items other than shareholders' equity Total changes of items during the period Balance at the end of current period ,288 (635) ,363 1,288 (635) ,568 1,613 (510) 1,102 24, ,352 18

21 (4) Consolidated Statement of Cash Flows Previous year From January 1, 2012 To December 31, 2012 Current year From January 1, 2013 To December 31, 2013 Net cash provided by (used in) operating activities Income before income taxes and minority interests 12,379 76,805 Depreciation and amortization 43,620 40,601 Impairment loss 978 1,780 Loss (gain) on disposal of noncurrent assets 1,943 2,623 Loss (gain) on sales of noncurrent assets (1,733) (1,231) Loss (gain) on valuation of investment securities Increase (decrease) in allowance for doubtful accounts (342) (174) Increase (decrease) in provision for retirement benefits (842) (1,491) Increase (decrease) in provision for special repairs (417) (857) Interest and dividends income (1,748) (680) Interest expense and sales discount 4,301 3,997 Decrease (increase) in notes and accounts receivable-trade (51,930) (13,482) Decrease (increase) in inventories (3,542) (46,069) Increase (decrease) in notes and accounts payable-trade 35,216 45,957 Other, net 12, Subtotal 50, ,353 Interest and dividends income received 1, Interest expenses paid (4,304) (3,997) Income taxes (paid) refund (5,996) (10,904) Net cash provided by (used in) operating activities 41,922 95,133 Net cash provided by (used in) investing activities Purchase of property, plant and equipment (20,041) (25,028) Purchase of intangible assets (2,058) (2,842) Proceeds from sales of property, plant and equipment 3,427 2,421 Purchase of investment securities (74) (136) Proceeds from sales of investment securities Net decrease (increase) in short-term loans receivable 2,203 2,809 Payments of long-term loans receivable (942) (2,506) Collection of long-term loans receivable 4 2 Other, net (272) (2,365) Net cash provided by (used in) investing activities (17,747) (27,534) 19

22 Previous year From January 1, 2012 To December 31, 2012 Current year From January 1, 2013 To December 31, 2013 Net cash provided by (used in) financing activities Net increase (decrease) in short-term loans payable 17,561 (2,399) Net increase (decrease) in commercial papers (26,000) (26,000) Proceeds from long-term loans payable 8,500 1,300 Repayment of long-term loans payable (12,696) (2,795) Redemption of bonds (15,000) Purchase of treasury stock (0) (1) Proceeds from sales of treasury stock 17 Repayments of lease obligations (1,400) (1,551) Cash dividends paid (6,780) (10,170) Cash dividends paid to minority shareholders (575) (592) Net cash provided by (used in) financing activities (21,391) (57,193) Net increase (decrease) in cash and cash equivalents 2,783 10,405 Cash and cash equivalents at beginning of period 14,466 16,979 Decrease in cash and cash equivalents resulting from exclusion of subsidiaries from consolidation (270) Increase (decrease) in cash and cash equivalents resulting from merger of subsidiaries 43 Cash and cash equivalents at end of period 16,979 27,428 20

23 (5) Notes for Premises of Going Concern Not applicable (6) Basis of Presenting Consolidated Financial Statements 1. Scope of consolidation (1) Consolidated Subsidiaries 31 Showa Yokkaichi Sekiyu, Toa Sekiyu, Showa Shell Sempaku, Heiwa Kisen, Shoseki Engineering, Nippon Grease, Shoseki Kako, Rising Sun, Sun Road, Chuo Shell Sekiyu Hanbai, Leef Energy, Hayashi Bussan, Tokyo Shell Pack, Nakagawa Sekiyu, Petro Star Kansai, Wakamatsu Gas, Genex, On-Site Power, Nissho Koyu, Solar Frontier, Nagase Sekiyu, Jonen, Enessance Holdings, Other 8 companies Shinyo Sekiyu, a consolidated subsidiary of the Company, was excluded from the scope of consolidation because it was merged into a non-consolidated subsidiary, Hayashi Bussan. As a result, Hayashi Bussan was included in the scope of consolidation due to the increase of its significance. (2) Primary Nonconsolidated Subsidiaries Rekisei kagaku (Reasons for removing from the scope) Those companies are excluded from consolidation because their influence is immaterial to the consolidated financial statement such as total assets, sales proceeds, net income after tax, profit surplus and so on. 2. Scope of equity associates (1) Equity-method Affiliates 12 Seibu Oil, Dia Shoseki, Shell Sekiyu Osaka Hatsubaisho, Central Sekiyu Gas, Mie-seki shoji, Niigata Joint Oil Stockpiling, Shell Tokuhatsu, JONET, Jyoyo Shell Sekiyu hanbai, Marubeni Energy, Toyotsu Sekihan, Ogishima Power TS Aromatics, an equity associate is excluded from the scope of equity associates because it has completed the liquidation procedure. (2) Other Main Affiliates Kyoudo Gas Those companies are excluded from the scope of equity associates because their influence on the consolidated financial statements is immaterial. (3) When the account closing dates of the equity-method affiliates are different from SSSKK s account closing date, the financial statements of those companies on their own account closing date are adopted. 21

24 3. Account closing date of consolidated subsidiaries Account closing dates of the consolidated subsidiaries are as follows. September 30 7 subsidiaries October 31 1 subsidiary December subsidiaries The consolidated financial statements incorporated its accounts and the other subsidiaries accounts of their accounts closing dates, with adjustments for significant trades occurring after the accounts closed. 4. Important accounting standards (1) Valuation method for major assets 1 Securities Other Securities Securities with market value Stated at market value as of account closing date (Any valuation differences are directly charged or credited to shareholders equity, and cost of securities sold is calculated primarily by the moving average method.) Securities with no market value Stated at historical cost based on the moving average method 2 Derivatives Stated at market value 3 Inventories Stated at historical cost mainly based on the weighted average method (Values on the balance sheet are subject to the book value reduction method based on decreased profitability.) (2) Depreciation 1 Tangible Fixed Assets (Excluding lease asset) Straight-line method The same standard as stipulated in the Corporate Tax Law is applied to the useful economic lives and the residual values. The main refining facilities at the Yokkaichi Refinery of Showa Yokkaichi Sekiyu are depreciated with an estimated useful economic life of 20 years. 2 Intangible Fixed Assets (Excluding lease asset) Straight-line method Software for own use is amortized based on the straight-line method over an expected useful economic life of 5 years. 3 Leased Assets Finance lease transaction for which ownership of the leased assets is not considered to transfer to leasees (hereinafter ownership non-transfer finance lease ) With regard to the depreciation method of leased assets, the straight-line method is applied where the lease period is taken as useful economic life and the residual value is zero. 22