To Our Shareholders

Second Quarter YTD 2016 Business Overview

Consolidated operating income for the second quarter year-to-date amounted to 16.9 billion yen, a decrease of 23.8 billion yen versus the same period the previous year, due mainly to losses from lower oil product margins, despite gains due in particular to a decrease in inventory valuation losses and favorable chemical product margins. Profit attributable to owners of parent which incorporates extraordinary items and income taxes was 15.9 billion yen, a decrease of 7.4billion yen versus the same period of the previous year.

Jun Mutoh, Representative Director and President

Progress of medium-term management plan

As the business environment surrounding oil and chemical sectors was expected to remain tough, we announced the medium term management plan in February 2013. The plan identified two major pillars, “strengthening core business” and “expanding growth options.” We carried them out steadfastly and delivered significant results.

Strengthening our core business

Concerning collaboration with others under core business, construction of pipeline connecting our company’s Chiba refinery and Cosmo Oil’s Chiba refinery is under way smoothly. With respect to continuous improvement, cross-functional and effective efforts in search for optimization of entire supply chain by IBT (Integrated Business Team), Service Station network expansion such as steady increase of Seven-Eleven alliance sites, and energy efficiency improvement activities are progressing successfully.
We invested and completed construction of a new mixed xylene recovery unit in Chiba Refinery. Going forward, we plan to expand the production capacity of high-voltage electric wire and cable insulation products at NUC (formerly Nippon Unicar Company Ltd.). We expect sales channel expansion not only in China but also in other parts of Asia.
Since 2012, we have carried out Nippon Unicar Company, Mitsui Oil and Kyokuto Petroleum Industries acquisition and integration. These activities combined organically with the efforts at Chiba refinery and NUC that I mentioned earlier have strengthened our core businesses.

Development of growth options

With regard to electricity business under the pillar of Growth Options, environmental assessments are under way for construction plans of two power plants at Shimizu and Ichihara. We started retail electricity sales services in April and have expanded service areas to acquire about 30,000 sales contracts as of the end of June.
In terms of overseas activities, FEED (front end engineering design) is under way for a terminal construction project in Australia and product sales volume is growing steadily.

Progress on Medium Term Management Plan – Steps to strengthen the Core

[M&A]2013: NUC*1 acquisition, 2014~2015: MOCM*2 acquisition, MOCM/KPI*3 consolidation, Gyxis establishment, 2016~2017: Business integration with JXHD (planned for April 2017) [Core Business (Collaboration with Others)] 2013~2017: Industrial complex collaboration (Toa Oil / Kawasaki, Cosmo / Chiba), 2014~2017: Lubricant oil consignment from Cosmo [Core Business (Continuous Improvement)] 2013~2017: Integrated Business Team (IBT), SS network expansion (Seven-Eleven alliance sites: 130SS, Express: 1,120SS as of June 2016), Energy efficiency improvement (recognized for achievement of Energy Benchmarks; 5 consecutive year since 2012), 2013~2014: H-Oil creep-up / 2 toppers decommission, 2014~2016: New MX Unit (Chiba), 2016~2017: NUC production capacity expansion [Growth Options] 2014~2017: Electricity Business (LNG/coal power plant project, electric power sales), 2015~2017: Oil downstream business in Australia
  • *1 Formerly Nippon Unicar Company Ltd.
  • *2 Formerly Mitsui Oil Co., Ltd.
  • *3 Formerly Kyokuto Petroleum Industries, Ltd.

Business integration with JX Holdings, Inc.

Since the inauguration of restructured TonenGeneral Group in 2012, we have given a deep thought to medium and long-term direction and strategy of our company. As our group’s stand-alone efforts, as written above, we have engaged in efforts to implement the strategy under Medium Term Management Plan and delivered significant results.
On the other hand, we have also examined pros and cons of business integration beyond our group as an option to enhance corporate value and shareholders’ value. Our company and JX Holdings have come to agree that business integration between the two is the only opportunity to significantly improve shareholders’ value, which can’t otherwise be attained. We reached a final agreement regarding Business Integration Agreement on August 31, following the Memorundum of Understanding announced in December last year. In December, we set the target of achieving 100 billion yen of synergy effects within five years. This time, after scrutinizing the synergy capturing plans more closely, we newly set to achieve the 100 billion yen target within three years. Both of us share the recognition that this target cannot be attained by simply putting the two together, but that it takes bold and substantial changes on both sides. Given this, Business Integration Agreement clearly states concrete strategies and guidelines to achieve the synergy effects. The schedule is that assuming clearance from all authorities concerned, including Japan Fair Trade Commission, is obtained, we will hold extraordinary meetings of shareholders on December 21 for their approval. We aim at launching a new company group in April 2017.

Business integration with JX Holdings

[Purpose of business integration] Establish a strong company group that: Is among Asia's most prominent and internationally competitive total energy, natural resource and material companies / Contributes to the development of a sustainable and vigorous economy and society. [Schedule] August 31, 2016: Determination of the integration ratio and execution of business integration agreement. December 21, 2016: Shareholders' meetings, required for the approval of the business integraiton. April 2017: New company group launch*. *: Based on premise of clearance from all authorities concerned. [Future Earnings Perspective] Core business (base), Steps to strengthen the core, Growth options, Synergy of integration with JXHD.

To our shareholders

We continue to mobilize the efforts of the entire TonenGeneral Group to strengthen our core business and promote the steady development of projects in growth areas where we can utilize our group’s strengths while at the same time pursuing further discussions for the business integration with JX Holdings, Inc.. Our company places a high priority on timely updates to investors of our progress and will release important developments as they occur.

We will endeavor to maintain a healthy financial condition, and taking into account factors such as mid- to long-term cash flow, changes in business results, and capital investment plans. We would like to express our sincere appreciation to our shareholders for your continued understanding and support.

Jun Mutoh,
Representative Director and President
September 2016

Jun Mutoh