Chiyoda Corporation Annual Report 2016

Plain-text annual report

“MIRAI ENGINEERING” —A GRAND OPPORTUNITY FOR THE FUTURE— ANNUAL REPORT FY2016 For the year ended March 31, 2017 CHIYODA CORPORATION PROFILE ANNUAL REPORT FY2016 Chiyoda Corporation is a leading integrated engineering and construction company with a signiﬁ cant INDEX INDEX presence in the global oil and gas market, and customers in more than 60 countries. Especially in the ﬁ eld of LNG plant engineering and construction, we are a global leader, with a track record of undertaking projects that account for around 40% of the world’s total LNG plant capacity. Established in 1948, Chiyoda started with domestic projects in petroleum refining, petrochemicals and gas processing. Since the 1970s, Chiyoda has developed a powerful global footprint, taking advantage of the many opportunities in the engineering, procurement and construction of energy- related plants, while building a first-class reputation for technological capability, safety and reliability. During its 70-year history, the Chiyoda Group has been growing steadily under the corporate philosophy of enhancing business by aiming for harmony between energy and the environment, while contributing to the sustainable development of society. In addition, Chiyoda has expanded business into the offshore and upstream sectors, new energy and renewable energies. 02 Profile 03 At a Glance To Our Shareholders To Our Shareholders 05 To Our Shareholders Financial Highlights Financial Highlights 11 Financial Highlights Business Overview Business Overview 13 Business Overview 19 Topics 21 Chiyoda’s ESG Initiatives 31 Corporate Governance 35 Directors & Officers Corporate Governance Dialogue Corporate Governance Dialogue 37 Corporate Governance Dialogue 39 Risk Management 41 Corporate Information 43 Stock Information 2017 Order awarded for the pilot plant for production of renewable jet and diesel fuels for euglena Co., Ltd. in Japan 2003 Order awarded for Sakhalin ll LNG Project by Sakhalin Energy in Russia, the first LNG Plant in Russia 1960 Order awarded for Mitsubishi Oil Mizushima Refinery Project 1971 Order awarded for LNG Project on Das island, Abu Dhabi, the first LNG Project for us 1948 Foundation of the Company 1961 Moved up to the First Section of the Tokyo Stock Exchange 1949 1957 Won the first order for Listed on the Second a cracking plant of Koa Oil Company Section of the Tokyo Stock Exchange 1965 Order awarded for Petromin Jeddah Refinery Project in Saudi Arabia 1980 Order awarded for Petromin Mobil Yanbu Export Refinery Project in Saudi Arabia 2001 Gained ISO14001 2004 Order awarded for Qatargas II LNG Project in Qatar, the largest LNG plant (Production Capacity per Train: 7.8 million ton/year) 1993 Order awarded for Qatargas LNG Project in Qatar 2009 Order awarded for Papua New Guinea LNG Project 2014 Order awarded for Cameron LNG Project in the US and Yamal LNG Project in Russia 2013 Confirmed proof of concept for SPERA Hydrogen, a system and technology for massive H2 storage and transportation 1948 1958 1968 1978 1987 1988 1998 2008 2018 1st decade 2nd decade 3rd decade 4th decade 5th decade 6th decade 7th decade 01 02 CHIYODA CORPORATION AT A GLANCE Chiyoda Corporation is a world-leading, integrated engineering and construction company. The Chiyoda Group has developed its cutting-edge technology in this highly challenging industry and a wealth of experience throughout the last seven decades. The Chiyoda Group provides excellent services backed by ample experience and technical knowledge, while striving for vital business with “Energy and Environment in Harmony.” Existing major projects and key data are reflected on this page. MAJOR PROJECTS IN PROGRESS (As of March 2017) ~40% of the world’s total LNG plant capacity Yamal LNG 65.51 mil. Safe man-hours without LTI* in PNG LNG Project New Ulaanbaatar International Airport Titanium Sponge Plant RasGas Helium 3 New Bohol Airport RAPID Tank Terminal Copper Smelter Jangkrik FPU Tangguh Tr. 3 Mozambique Area 1 Ichthys More than 60 countries (Plant design & construction) More than 20 locations (including major overseas subsidiaries & afﬁ liated companies) ANNUAL REPORT FY2016 FY2016 Revenues 603.7 billions of yen FY2016 New Orders 351.8 billions of yen FY2016 Backlog of Contracts 876.8 billions of yen Japan Overseas Business Field LNG/Gas Petrochemical/Refi nery Metal Offshore Infrastructure EPC: Engineering, Procurement and Construction FEED: Front-end Engineering and Design *LTI: Lost time incident More than 5,300 employees Reﬁ nery More than 800 Freeport LNG Cameron LNG Non-hydrocarbon More than 1,800 More than 3,000 projects Domestic receiving LNG terminals 75 Petrochemicals More than 500 03 04 CHIYODA CORPORATION TO OUR SHAREHOLDERS Masaji Santo President & CEO 05 The world is facing major challenges today, including climate change, the digital revolution and changes in the structure of energy supply and demand. Many of these issues affect us deeply here at Chiyoda Corporation but my personal philosophy is that change offers unique, often ideal, opportunities for organizations to adapt and to embrace the chance to reorient the Company for future success. I am confident in these prospects and would like to share my clear vision of what should be expected by our customers, our shareholders and our employees. I am Masaji Santo. It is my great honor and privilege • Consolidation of Resources—enhancing competi- to have become CEO of Chiyoda Corporation. tiveness and reinforcing the profitability of the entire We just published Chiyoda’s new Medium-Term Chiyoda Group as keys to the Group’s future Management Plan, “Mirai Engineering—A Grand development. To achieve this, we will fully develop Opportunity for the Future,” a four-year strategy the human resources of all the Group companies. blueprint for our business development based on a thorough analysis of macrotrends and assessment of This will be challenging, but when I consider the previous management plan. Chiyoda’s major assets—reputation, experience, For the initial two years we will prioritize structural financial stability and, above all, employees’ exper- reforms to create a solid management base and tise—I am confident that we will succeed. Critical to simultaneously pursue a growth strategy. Specific our success is the concept of “Chiyoda—One Team,” plans for growth are (1) building an energy value with management and all employees striving together chain business, (2) expanding the global environmen- to enrich the sustainable corporate value of the entire tal business and (3) developing a new business Chiyoda Group and respond to the needs and model for the digital society. expectations of all clients, shareholders and other In preparing for my role as CEO of Chiyoda I have stakeholders. decided on three major themes to serve as the I believe valuing that relationship and strengthen- foundation for a turnaround: ing the connection to our shareholders through continuous interactions and consultations will be • Challenges Bring Opportunities—using the cycles major ways to create an open dialogue with all in global energy markets and recent financial stakeholders. I look forward to the challenges to challenges at Chiyoda to restructure our business come and to your continued support. in a strong, risk-resilient manner; • How to Change Our Company—putting greater Respectfully yours, focus on allocation of resources, including during the post-EPC phase of our projects, more empha- sis on environment-friendly facilities and methodol- ogies and the use of artificial intelligence (AI) to increase efficiency and effectiveness; August 2017 06 ANNUAL REPORT FY2016CHIYODA CORPORATION ANNUAL REPORT FY2016 Key Management Issues over the Medium Term “MIRAI ENGINEERING” —A GRAND OPPORTUNITY FOR THE FUTURE— Chiyoda Group has released a new medium-term management plan, STRUCTURAL REFORM “MIRAI ENGINEERING—A GRAND OPPORTUNITY FOR THE FUTURE” for the period starting from fiscal year 2017 to 2020 (the MTMP). The aim of the MTMP is for Chiyoda Group to be a global top-tier “Integrated Engineering and Service Provider” in the fields of energy and environment. 1 Assessment of the previous medium-term management plan “SEIZE THE MOMENT, OPEN UP NEW FRONTIERS” (the previous MTMP) 2 New medium-term management plan “MIRAI ENGINEERING — A GRAND OPPORTUNITY FOR THE FUTURE” The previous MTMP during the period Given macrotrends such as changes in from ﬁ scal year 2013 to 2016 was the supply and demand structure for executed and, as a result, the Chiyoda energy, heightened awareness of the Group maintained its No. 1 position in global environment and digital (1) Further strengthen risk management fi xed costs with the aim of balancing basic earnings capabilities and costs, and redefi ne the domestic and global We will strengthen the structure for execution and operational structure. profi tability management of EPC projects on a consolidated basis. We will also establish a structure (3) Further expand human resource base for expansion of business fi elds and the transforma- To reinforce our technical strength and project tion of the business model. execution capabilities, we will realign the human resource development system with a medium- to (2) Increase basic earnings strength and long-term outlook and implement optimal assignment enhance resilience to downturns of human resources for continuous earnings growth. We will seek to expand basic earnings by reinforcing Through these efforts, we will foster a stronger corpo- technological strength and project execution capabili- rate culture and foundation with high loyalty and a ties and cost competitiveness, reduce consolidated willingness to pursue new challenges. GROWTH STRATEGY LNG and steadily progressed in new innovation driving changes in industrial (1) Expansion of business ﬁ elds and transfor- two key business fi elds of “energy” and the “environ- business areas including life science structure, Chiyoda Group will and new energy. However, the Chiyoda Group now faces challenges such as redeﬁ ning the business portfolio, including offshore and upstream, and further strengthening risk management capabilities. 1) provide technological strength and project execution capabilities, as the core value, that achieve harmony between energy and the environment; 2) contribute to the development of a sustainable society; 3) and create a corporate management structure that resonates with all stakeholders and earns their recognition and trust. In the MTMP, we will seek to simultaneously pursue (i) creating a solid management base for future growth (Structural Reform) and (ii) expanding business ﬁ elds and transforming the business model looking ahead 10 years (Growth Strategy). mation of the business model ment.” And we aim to innovate EPC execution and The fi elds of EPC, LNG, gas, petroleum, chemicals diversify our business into investment and service and metal resources will remain the Chiyoda Group’s areas by utilizing innovative digital technologies. core businesses. In addition, we plan to expand the Energy Present LNG, gas, petroleum, chemicals, metal resources New energy, industrial facilities, life sciences Asset holding *1 Asset management *2 Gas to Power *3 Investment & Service Electric power solution New energy -related Hydrogen supply chain Life science *1. Asset holding: Businesses that gain earnings from holding and managing assets like floater (floating facilities) and onshore plants *2. Asset management: Businesses that gain earnings by providing various technological services to holders of assets *3. Gas to Power: An integrated business of LNG liquefaction, LNG regasification, and power generation Environment Maintain core businesses led by LNG, as well as gas, petroleum, chemicals, and metal resources Innovation of EPC execution EPC Dispersion in energy & energy storage New materials Advance pharmaceutical & medical fields 07 08 CHIYODA CORPORATION ANNUAL REPORT FY2016 Key Management Issues over the Medium Term “MIRAI ENGINEERING”—A GRAND OPPORTUNITY FOR THE FUTURE— (2) Build energy value chain business energy), the environment, energy conservation and We plan to enhance the upstream segment (enter industrial facilities (technologies that reduce QUANTITATIVE TARGETS and strengthen ﬂ oater business), midstream environmental impact and conserve energy for We regard fi scal year 2020 as a milestone for the businesses. For the 10 years from fiscal year (comprehensively strengthen and expand LNG industrial facilities and metal resources fi elds) and next 10-year growth strategy, achieving consolidated 2017 (toward fiscal year 2026) and beyond, we lineup) and downstream (build up orders in petro- life science (pursue business opportunities and net profi t of ¥20.0 billion with double-digit ROE look to continue expansion of earnings through the leum, chemicals and metal resources responding to models in cellular, tissue and gene therapies). based on increased earnings strength through growth strategy. shale and increasing demand from newly developing structural reform and the strengthening of existing countries. Also, enter the Gas to Power business). In (4) Develop new business model for addition, we aim to move into the asset holding a digital society business and asset management business. For promotion of the use of digital technologies Companywide, innovative EPC execution and (3) Expand global environmental encouraging its application in the asset management engineering business business, we will work on cultivating capable human We will increase the contribution to profi t with new resources, partnering with cutting-edge digital energy (integration of renewable energy with energy technology companies and innovating project IT with storage, electricity storage as well as dispersion artifi cial intelligence (AI) and others. Consolidated net profit FY2020 ¥20 billion Earnings increase from the Growth Strategy Increased earnings strength from Structural Reform and strengthening of existing businesses Present FY2020 In 10 years (FY2026) Energy solutions Energy solutions Environmental solutions Environmental solutions -- Build energy value chain business Build energy value chain business -- -- Expand global environmental engineering business Expand global environmental engineering business -- INVESTMENT STRATEGY “Mirai Engineering” “Mirai Engineering” Integrated Engineering & Service to contribute to a sustainable Integrated Engineering & Service to contribute to a sustainable society creating harmony between Energy and Environment society creating harmony between Energy and Environment through combination of CHIYODA’s comprehensive strengths and through combination of CHIYODA’s comprehensive strengths and innovative digital technologies innovative digital technologies Technology and Technology and innovation business model innovation business model -- Develop new business model for a digital society -- Develop new business model for a digital society Our profi t distribution policy is to allocate 50% of business fi elds and realize the three growth strategies. consolidated net profi t each fi scal year to investment With respect to the investment size, we will set an for business growth, while maintaining proper aggregate of roughly ¥30.0 billion to ¥50.0 billion over fi nancial health. four years, using cash on hand in addition to invest- In terms of investment areas, we will carefully select ment funds under the profi t distribution policy, on the projects that will contribute to reinforcing core premise of thorough investment discipline. POLICY ON RETURNS TO SHAREHOLDERS We will strive to achieve a consolidated dividend growth strategy and the investment strategy together payout ratio of at least 30% during the MTMP period. with the operating environment. A minimum full-year The actual dividend amount each fi scal year will be dividend of ¥6 per share is set. determined in consideration of progress under the 09 10 CHIYODA CORPORATION FINANCIAL HIGHLIGHTS Chiyoda is facing major global challenges due to a shift in the supply and demand structure for energy and increasing consciousness of the environment. These conditions represent an excellent opportunity to transform the company, aiming to build a business foundation for future growth and combining expansion plans with a business model supporting growth strategies for the next decade. Revenues and Backlog Billions of yen 1,416.9 611.5 603.7 1,072.2 446.1 900.6 398.9 1,165.0 481.0 430.0 876.8 800 600 400 200 0 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 (forecast) Revenues (left scale) Backlog (right scale) Billions of yen 1,600 • Revenues remained close to record levels in FY2015 and FY2016 due to successful projects. • Lower forecast for FY2017 revenues assumes limited new contracts but continued contributions from major ongoing projects. • The backlog remains robust, about twice the forecast for revenues. 1,200 800 400 0 Proﬁ t (Loss) Attributable to Owners of Parent Billions of yen • A loss attributable to owners of parent of ¥41.1 billion for FY2016 was largely due to the ECS-related extraordinary loss in the third quarter. • In FY2017, Chiyoda launched the new Medium Term Management Plan, “MIRAI ENGINEERING —A GRAND OPPORTUNITY FOR THE FUTURE,” a business portfolio in alignment with the Compa- ny’s structural reforms and strategies ensuring further growth. • Chiyoda forecasts profi t attributable to owners of parent of ¥5 billion for FY2017, getting back on a profi table path. • In FY2016, Chiyoda paid an annual dividend of ¥6 per share. 16.1 13.4 11.0 20 10 0 5.0 3.4 −41.1 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 (forecast) Dividends Yen 19 16 13 10 6 6 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 (forecast) 20 15 10 5 0 11 ANNUAL REPORT FY2016 A MESSAGE FROM THE CFO—CHIYODA’S FINANCIAL STRATEGIES I was appointed the CFO at Chiyoda Corporation in June 2017, a challenging time for the Company. After a net loss of ¥41.1 billion in FY2016, mainly due to the ECS investment, revenues and backlog are expected to decline in FY2017. To deal with these challenges I have identiﬁ ed four key missions to carry out. By realizing these, the Chiyoda Group will reverse downward trends and enhance shareholder value. As the CFO, I will undertake the following: 1 Provide ﬁ nancial support to implement the new Medium-Term Management Plan 2 3 Improve the Group’s capital efﬁ ciency and proﬁ tability Ensure the Company’s ﬁ nancial stability to support sustainable growth 4 Enhance communication with stakeholders Hirotsugu Hayashi Senior Executive Vice President & CFO Speciﬁ cs of those initiatives include: 1. Financial support for the new Medium-Term Management Plan • The new Medium-Term Management Plan develops a business strategy that focuses on areas where Chiyoda has a distinct competitive advantage and prioritizes areas with the highest potential. • Providing adequate financial support to implement this business strategy is a key to the plan’s success. • Using enhanced risk management techniques is essential for creating optimum opportunities. 2. Capital efﬁ ciency and proﬁ tability • Emphasize capital efficiency as a strong lever for future success. • Create a lean operating structure capable of dealing with challenging market conditions while delivering profitability. • Evaluate returns to ensure management resources are being used to best advantage. • Prioritize investment in opportunities with the highest potential. • Focus on managing business on a Groupwide basis to maximize the soundness and profitability of Chiyoda as an integrated group. 3. Financial position • With a core business of LNG and other plant construction, it is important to have abundant liquidity and a solid financial position. • Recognize that the Company’s strong financial position supports high-level operating capabilities. • Maintain an optimum capital policy and fi nancial strategy that provide a pathway to sustainable future growth. • Chiyoda will maintain a payout ratio of at least 30% 4. Communication with stakeholders for the next four years (MTMP period) and a minimum full-year dividend of ¥6 per share. • Chiyoda determines the dividend amount each fi scal year in consideration of progress under growth and investment strategies and the operating environment. • Strengthen our communication with stakeholders both inside and outside the Company. • Listen and respond to shareholder concerns, both at the executive level and through our IR team. • Communication with stakeholders inside the company is a key to implementing the business and fi nancial strategy. • Improve the transparency of corporate governance. Together, these policies can enhance our corporate values, especially when leveraging the Group’s natural synergies on a global basis. 12 CHIYODA CORPORATION BUSINESS OVERVIEW The Company has developed a wealth of skills and experiences over the last decades in this highly challenging industry. The world-class services offered by Chiyoda are supported by extensive technological expertise in pursuit of “Energy and the Environment in Harmony.” The industry is highly complex, requiring a long-term commitment of capital, human resources, know-how and experience, and the ability to develop technological superiority at all levels of the business. Chiyoda Corporation meets those goals. OUR CONSOLIDATED BUSINESS ANNUAL REPORT FY2016 During the fi scal year ended March 31, 2017, global advantage for future projects, taking strategic steps through its U.K. subsidiary, Xodus Group Ltd., to confi dence remained under pressure, adversely that included participation in the design of highly clients in Japan and worldwide. affected by the protracted civil war in Syria and feasible expansion projects. On a consolidated basis, new contracts totaled repeated terrorist attacks in several parts of the Meanwhile, the Chiyoda Group posted unanticipat- ¥351.8 billion in the latest fi scal year (down 12.8% world. The global economy also underperformed, due ed non-operating expenses and an extraordinary loss from the previous fi scal year). The contract backlog to the impact on macroeconomics. Chiyoda’s in the fi rst nine months of the fi scal year, due to totaled ¥876.8 billion (down 24.7% year on year); net operating conditions remained challenging in a time operating diffi culties at EMAS CHIYODA Subsea Ltd. sales of completed construction contracts reached of a changing global business landscape. (ECS). ECS is a provider of engineering, procurement, ¥603.7 billion (down 1.2% year on year); and operating For example, OPEC members cut production construction and installation (EPCI) services for income amounted to ¥15.7 billion (down 2.1% year on during 2016 but oil prices have yet to make a defi ned, subsea projects that received investment capital from year). In comparison with consolidated ordinary consistent recovery. Also, market observers believe Chiyoda Corporation in March 2016. Market condi- income of ¥16.2 billion recorded in the previous fi scal that liquefi ed natural gas (LNG) remains in oversupply. tions, as previously discussed, were diffi cult and grew year, the Group suffered a consolidated ordinary loss Combined, these two factors are acting as a brake on signifi cantly worse during the course of the fi scal year. of ¥3.1 billion, mainly attributable to the extraordinary fi nal investment decisions in large new projects In consequence, ECS and its subsidiaries fi led for loss at ECS described previously. The Group also around the world, a key element for Chiyoda’s protection under Chapter 11 of the U.S. Bankruptcy posted ¥41.1 billion in consolidated loss attributable to short-term outlook. In Japan, however, there are Code in February 2017 and later obtained confi rma- owners of parent, compared with ¥3.4 billion in increasing expectations about the government’s tion of the proposed reorganization plan from the U.S. consolidated profi t attributable to owners of parent recent economic measures, and it is hoped that Bankruptcy Court, Southern District of Texas. Under achieved in the previous fi scal year. capital investment plans will begin to accelerate. the reorganization plan, ECS is now wholly owned by The Chiyoda Group deeply regrets reporting these Despite the sluggish environment, activity in Subsea 7 S.A. Going forward, Chiyoda will hold results, which are substantially lower than the forecasts existing construction projects for LNG, a core discussions with partners, including Subsea 7, about announced at the beginning of the fi scal year. The Group operating area for the Group, progressed smoothly, the development of its offshore and upstream is determined to improve its assessment of investment notably in the U.S., Australia and Russia. In addition, business, using the knowledge gained from the ECS projects and regain the trust of shareholders through the the Chiyoda Group received a new order from experience. In addition, Chiyoda will continue to successful management of its businesses. Indonesia. The Group also maintained its competitive provide offshore and upstream consulting services Outlook for the next ﬁ scal year The consolidated backlog of contracts currently stands at approximately ¥900 billion. The Group will continue to make steady progress on current contracts including LNG projects in Australia, the U.S., Indonesia and Russia while considering slight delays of new investment in large-scale LNG projects. The Chiyoda Group will also focus on new business in pharmaceuticals, the environment and alternative forms of energy. Under these operating conditions and on a consolidated basis, the Company forecasts new contracts of ¥350.0 billion, operating income of ¥8.5 billion, ordinary income of ¥10.0 billion and profi t attributable to owners of parent of ¥5.0 billion in the fi scal year ending March 31, 2018, assuming an exchange rate of ¥110 to the U.S. dollar. Yamal Tianjin Office, Tianjin 13 Courtesy of ExxonMobil PNG Limited CIMIC CMO Co., Ltd. 14 CHIYODA CORPORATION ANNUAL REPORT FY2016 LNG PLANTS & OTHER GAS-RELATED WORK REFINERIES/PETROCHEMICALS/METALS Natural gas consumption has increased rapidly in recent years due to its abundance, relatively low Beyond basic refining, the petrochemical industry produces a wide variety of chemical products from cost and environmentally friendly nature. Transportation of natural gas presents major technological the raw materials of petroleum, natural gas, LPG and other hydrocarbons. Chiyoda Corporation has been challenges and a critical infrastructure has been developed to accommodate the needs of liquefaction engaged in the design and construction of ethylene plants and many other downstream petrochemical and regasification. Chiyoda Corporation is one of the world’s leading companies in the design, and chemical plants for several decades. Originally focused on the Japanese market, the Company’s planning and procurement, construction, installation and management of these vital LNG facilities. achievements now include one of the world’s largest ethylene plants, built in the Middle East. Overseas — The Chiyoda Group completed Strategy for future LNG projects — As the global Overseas — The Group completed an oil refi nery Japan — The Group continues to focus on working front-end engineering and design (FEED) work for leader in LNG plant construction, the Group is project in Qatar in December 2016, and fi nished EPC with petroleum companies, modifying existing LNG plants in the U.S. and Russia. Currently, the determined to stay ahead of the competition, work for an oil refi nery and petrochemical complex in facilities in accordance with directives that emphasize Group is undertaking engineering, procurement and regardless of short-term market conditions. Consid- Vietnam. Projects currently under way include the safety, resilience and quality of life of the Japa- construction (EPC) work in Australia, the U.S., Russia ering new opportunities, the Chiyoda Group will engineering, procurement, construction and commis- nese people by enhancing the energy effi ciency of and Indonesia and is continuing pre-contract work in compete strongly for new projects in the U.S., sioning (EPCC) work for a residue ﬂ uid catalytic these facilities and preventing the deterioration of the Mozambique, where it was selected as an EPC Canada, Russia and East Africa through its early cracking project and EPC work for petrochemical country’s petrochemical plants. contractor. Group companies are also performing planning capabilities, placing the Group in a strong tank terminal facilities, both in Malaysia. In addition, the Group is engaged in project management for refi neries, chemical production and other down- stream projects in Asia, operating under long-term contracts, and is conducting EPC work for a titanium sponge plant in Saudi Arabia. Outlook • Focus on expanding downstream projects in the U.S. and copper smelter projects in Indonesia • Receive modifi cation/expansion projects for existing refi neries and petrochemical complexes (domestic businesses) engineering, procurement and construction manage- position once the projects are offi cially launched. ment (EPCM) work to modify and revamp existing LNG and gas processing plants that were previously built by the Company, in addition to EPC work at helium production facilities in Qatar. Japan — The Group is performing EPC work to modify and revamp the LNG receiving terminals built by the Company. Recent achievements — Despite the limited number of new projects launched in 2016, Chiyoda was awarded an EPC contract for the Tangguh Outlook Given the currently stagnant energy prices and imbalances in supply and demand, Chiyoda Corporation’s clients remain cautious about fi nal investment decisions in large new projects. Nevertheless, in the medium to long term, it is quite clear that LNG usage, and therefore demand, will continue to increase, driven by a society dedicated to lowering carbon emissions and accelerating the recent shift from coal to Expansion Project (Tangguh LNG Train 3) in Indonesia, gas consumption. amid strong competition. Construction of large LNG projects in Russia (Yamal), Australia (Ichthys) and the U.S. (Cameron and Freeport) progressed smoothly. LNG Demand Supply (mmtpa) 600 400 200 Under Construction Operational Demand as of 2017 1Q Demand as of 2016 3Q Under Construction as of 2016 3Q Operational as of 2016 3Q 0 2008 2010 2015 2020 2025 2030 2035 (Source: Wood Mackenzie) Courtesy of Qatargas Operating Company Limited 15 16 CHIYODA CORPORATION ANNUAL REPORT FY2016 PHARMACEUTICALS/BIOCHEMISTRY/GENERAL CHEMISTRY/ENVIRONMENT/INFRASTRUCTURE NEW BUSINESS FIELDS Pharmaceutical and food manufacturing centers require impeccable standards of hygiene and safety The utilization of renewable energy is essential for the sustainable growth of human society. Hydrogen and depend on highly skilled design and construction experts to provide the proper facilities. Chiyoda is expected to play a key role in building a low-carbon society for the future. Chiyoda has developed Corporation’s expertise stretches across boundaries from its core businesses of LNG, petrochemicals the necessary technology for storing and transporting hydrogen in large volumes, enabling it to be and pharmaceuticals to a multitude of complex engineering and construction projects, in the liquefied and transported at ambient temperatures and pressure. This world-first technology will environmental and infrastructure fields. overturn conventional wisdom regarding the use and functionality of hydrogen. Overseas — The Chiyoda Group is performing EPC Other current projects include EPC work for food Offshore and upstream — ECS and its subsidiaries Artiﬁ cial intelligence (AI) technologies — In a fi eld work for a new international airport in Mongolia and factories that adhere to the latest safety and hygiene fi led for protection under Chapter 11 of the U.S. related to digital innovation, the Company established the New Bohol Airport in the Philippines. In the standards; research institutes; and facilities capable Bankruptcy Code earlier in 2017 and have com- a business alliance agreement with GRID, Inc., one of environment fi eld, the Group is providing the Chiyoda of handling high-potency pharmacologically active menced restructuring activities as stated previously. the leaders in AI technologies in Japan, and started Thoroughbred 121 (CT-121) Process, a ﬂ ue gas agents and therapeutic antibodies, including Meanwhile, Xodus Group (Holdings) Ltd., the studies for enhancing the productivity of plants by desulfurization technology, at coal-fi red power plants cutting-edge production facilities, drug substance Group’s strategic alliance partner in Britain, continues using AI technologies. The Company has started in high-growth India. The Chiyoda Group is also plants and biomedicine production facilities. to provide offshore and upstream expertise to natural demonstration projects of AI technology application executing a project to demonstrate artifi cial light equipment for plants in Dubai, UAE and intends to promote this technology in markets centered on Russia and the Middle East. Japan — The Group is performing EPC work for large-scale photovoltaic power plants (“mega solar plants”) in various parts of the country. In another example of Chiyoda’s environmental expertise, the Group is performing EPC work on a demonstration plant for bio-jet and diesel fuel production. Outlook • Follow up in the pharmaceutical fi eld including investigational activities in new and synthetic drugs, and projects for mega solar plants where continued investments are expected • Continue business development activities in various fi elds including environmental protection for coal-fi red power stations, food factories, etc. Purification Cell Processing resource companies and other clients, including for several clients. design, consulting and other services associated with both the construction of offshore development facilities and the safe removal of deteriorated structures. The Chiyoda Group takes the view that these fi elds will continue to develop in the long term, due to the overwhelming need for stable supplies of energy. The Group will continue to focus on these business fi elds based on Chiyoda’s philosophy of harmony between energy and the environment. Hydrogen — In another fi eld related to alternative forms of energy, the Group is planning a major demonstration project, scheduled for implementation in 2020, that uses hydrogen gas procured in Asia as fuel in Japan. The project is aimed at commercializing a hydrogen supply chain that uses technologies for massive hydrogen storage and transportation developed by the Company with the long-term goal of building a society based on hydrogen energy. Outlook • Refocus business strategy for offshore and upstream fi elds including Xodus, and restruc- ture ECS • Continue business development activities for demonstration project targeting commercializa- tion of hydrogen supply chain • Provide new service for enhancing productivity of plants by utilizing AI and big data technologies I’ROM Group Co., Ltd./ID Pharma Co., Ltd. GMP Vector Manufacturing Plant for Tissue Engineering Demonstration Plant, Koyasu Office & Research Park 17 18 CHIYODA CORPORATION TOPICS Chiyoda Corporation constantly searches for ways to leverage its expertise in the adoption of new businesses and technological applications. Examples of projects currently under way include: Artiﬁ cial Intelligence Looking to optimize technological breakthroughs in big data analysis and artifi cial intelligence while delivering solutions to customers, Chiyoda has established a business alliance with GRID, Inc., a leader in the fi eld of AI. Through this agreement, made in December 2016, Chiyoda’s engineering technologies will be merged with GRID’s state-of- the-art AI technology, allowing Chiyoda to offer advanced services such as plant operation optimization and enhanced maintenance support. Renewable Jet and Diesel Fuels In February 2016, Chiyoda signed a construc- tion contract with euglena Co., Ltd. for Japan’s fi rst pilot plant for bio-jet and diesel fuel production. Through construction of this plant (scheduled completion: October 2018) the Company continues its commitment to the broad use of bio-jet and diesel fuels in Japan and the associated reduction in greenhouse gas emissions. Oil Reﬁ nery Projects The oil refi nery in Qatar was completed in November 2016 and handed over to the client. This project was a major feat of civil engineering, with 1.2 million cubic meters of soil moved and replaced at the installation site. Construction continued throughout high summer, when workers experienced temperatures exceeding 40 degrees Celsius, causing a host of diffi cul- ties. However, a concerted effort involving the customer, partners and construction contractors ensured that the project was brought to conclusion without incident. ANNUAL REPORT FY2016 Environmental Technology—SPERA Hydrogen and Flue Gas Desulfurization Technology Chiyoda attended the Kawasaki International Eco-Tech Fair 2017, where it showcased Chiyoda’s SPERA Hydrogen, winner of the Grand Prize at the Nikkei Global Environmental Technology Awards in 2016. Participation in such exhibitions allows Chiyoda to provide stakeholders with detailed insights into its activities in the hydrogen fi eld. Chiyoda is also active in India, a country that suffers from severe pollution due to rapid economic growth. Chiyoda provides ﬂ ue gas desulfurization technology for coal-fi red power plants to Larsen & Toubro, one of India’s largest heavy industry manufacturers. Chiyoda’s CT-121 process already enjoys more than a 20% market share in the Japanese and American coal-fi red power plant markets, countries that operate under strict environmental regulations. Similar activities in India should have a signifi cant impact on air pollution abatement in this rapidly emerging market. Hydrogen Storage Tank Dealing with Challenges in the Field of LNG The Yamal LNG project currently under way in Russia faces special challenges. The plant is situated in the Arctic Circle at a latitude of 72 degrees north, experiences lengthy periods without sun during winter and sees tempera- tures falling to minus 50 degrees Celsius. Despite these conditions, construction continues, including installation of construc- tion modules, some weighing over 6,000 tons, which have been delivered by boat from fabrication yards across Asia. On the other side of the world, steady progress is being made on the Freeport LNG and Cameron LNG projects under way in the U.S. Combined, these two projects employ more than 10,000 people. In March, the Cameron project reached a record of 20 million man-hours without an accident, illustrating the commitment of all staff to the Company’s safety-fi rst policy. Courtesy of Cameron LNG, LLC Courtesy of Freeport LNG Development, L.P. Yamal LNG, Yamal, Russia Courtesy of Qatargas Operating Company Limited 19 20 CHIYODA CORPORATION CHIYODA’S ESG INITIATIVES The Chiyoda Group has embraced “Energy and Environment in Harmony” since its foundation, understanding the contribution of such collaboration to the sustainable development of society. We recognize the unique responsibilities of major corporations in the energy engineering sector, and the obligation to search for business strategies that beneﬁ t all members of society. In that regard, we promote open, transparent communication with all our stakeholders about the operations of the Chiyoda Group including its ESG initiatives. Environment • Climate Change • Water Consumption • Biological Diversity • Pollution & Resources • Supply Chain/Environment-oriented Proposals in Project Work Social • Safety, Quality, Environment and Information Security (SQEI) Management • Labor Standards • Human Rights • Reliability • Supply Chain/Knowledge Sharing • Long-term Contribution to Local Communities Environment Social Governance Governance • Enhanced Corporate Governance Policy • Risk Management • Tax Transparency • Anti-corruption Practices • Enhanced Compliance Program Creating Shared Values An important outcome of a vigorous approach to ESG issues is Creating Shared Value for the Company and its stakeholders. Creating Shared Value can be deﬁ ned as the product of Sustainable Growth using Sustainable Means: the creation of long-term growth for the Company by methods that address important environmental and social challenges with corporate governance duly practiced. At the Chiyoda Group, our Shared Value approach is built on a social responsibility-oriented culture that recognizes the risks inherent in the energy engineering business, and aims to realize “Energy and Environment in Harmony” using all the resources available. Our Sustainable Development Goals The Group believes that providing ﬁ nancial disclosure and emphasizing compliance are not enough to fulﬁ ll social responsibilities under this code, and has decided to integrate the principles of the SDGs into the Company’s pursuit of long-term, sustainable growth for society. The Group realizes that achievement of these goals requires collaboration with the government, the private sector and civil society. Chiyoda supports the SDGs • Plant Construction & Providing Infrastructure • Cultural Advancement & Support of Communities • Sharing Technical Knowledge & Job Creation • Working in Partnership with Local Communities • Technical Development for a Low-carbon and Carbon-free Society • Environmental Protection & Climate Change Aversion • Stable, Safe, Affordable Energy Production • Effective Use of Natural Resources ANNUAL REPORT FY2016 A MESSAGE FROM MR. SHUICHI WADA, HEAD OF CORPORATE PLANNING & MANAGEMENT DIVISION Q Q How can Chiyoda Corporation continue to add value for all its stakeholders? • Maintaining the highest level of customer satisfaction is a key metric at Chiyoda. I believe that we can develop our relationships with stakeholders through continuous, open and direct dialogues that recognize their different interests. • Other key Company objectives include profi table, sustainable growth and enhancement of the Group’s corporate values. To achieve these, in 2015, we established the “Chiyoda Corporation Corporate Governance Policy,” designed to enhance the strength and transparency of management. Further, it acts as a constant reminder of the need for a sound corporate governance culture. Chiyoda celebrates its 70th anniversary in 2018. As we reﬂ ect on Chiyoda’s past, what message would you send to the Company’s stakeholders regarding future development of corporate value? • We want to be seen as a fi rst-class, highly reputable and universally admired, reliable company. By • We want to be seen as a fi rst-class, highly reputable and universally admired, reliable company. By recognizing diversity and being open to everyone, including employees, customers and all other stakehold- recognizing diversity and being open to everyone, including employees, customers and all other stakehold- ers, we set the highest corporate standards. • Backed by our cutting-edge technologies and engineering expertise in various • Backed by our cutting-edge technologies and engineering expertise in various businesses, we are dedicated to maintaining our strong presence in the LNG sector businesses, we are dedicated to maintaining our strong presence in the LNG sector and expanding our contribution to the market. • We believe that Chiyoda is identifi ed as a company with high accountability, • We believe that Chiyoda is identifi ed as a company with high accountability, sustainability and timely project execution. We are eager to further develop our sustainability and timely project execution. We are eager to further develop our worldwide reputation for excellence in the years ahead. • As a market leader in the LNG business and with involvement in “new energy” businesses, including SPERA Hydrogen®, Chiyoda as a leading integrated engineer- , Chiyoda as a leading integrated engineer- ing company is ready to adapt itself to dynamic changes in the energy market. Q Communication of the Company’s economic and social values to stakeholders is important. What are your thoughts about disclosure of information in the form of an integrated report? • Our Investor Relations Team regularly engages with the market, giving and gathering information on our corporate performance. In addition, we value opportunities to provide more detailed information, to talk about our longer-term business strategy and the Company’s future development. • Along with recent changes in senior management, we intend to increase the number of opportunities to talk to investors, to introduce the Company’s new leadership and to thoroughly explain the philosophy and current and future strategies. • Reﬂ ecting the above thoughts, we are planning to report in an integrated approach that gives us the opportunity to present a holistic look at our organization including aspects of both a fi nancial and non-fi nancial nature within the context of the markets we serve: our customers, communities, employees and shareholders. Shuichi Wada Division Director Corporate Planning & Management Division 21 22 CHIYODA CORPORATION ANNUAL REPORT FY2016 OUR INITIATIVES WITH THE ENVIRONMENT TECHNOLOGY “Serving Society with Technology” is the philosophy of Chiyoda’s foundation. Bearing this in mind, we have undertaken research and development, demonstration projects and commercialization of energy and advanced environment-related technologies. Making the most of our strengths as an engineering firm, we are able to take such a comprehensive approach to research and development as it is integrated with process development, design and system analysis. With this approach, we have carried out technology development both on our own and in cooperation with our clients and technology owners, aiming for commercialization and problem-solving based on society’s ever-changing demands. We will continue our efforts to contribute to solving new issues including materializing a low- carbon and carbon-free society. We will continue this domestic demonstration of the Environment’s Green Purchasing Law so that project, aiming to improve the produced-water we utilize construction materials and construction fi ltering technology that supplies oil more economical- methods with less of an environmental impact. ly, increases oil fi eld longevity and decreases the environmental burden. *Produced-water: Formation water produced alongside crude oil and natural gas THE DISSEMINATION OF TECHNOLOGY TO PREVENT AIR POLLUTION CT-121 licensing of technology to one of India’s major heavy industry manufacturers In November 2016, Chiyoda concluded a technology ENVIRONMENT-ORIENTED PROPOSALS IN 2016 Site preparation plans that minimize surplus 1 soil generated after construction Adoption of energy-conserving, low-noise 2 equipment Pier design optimization plans to reduce jungle 3 deforestation GREEN PROCUREMENT Use of portland blast furnace cement (material 1 designated under the Green Purchasing Law) Use of base coat paint (anticorrosive) (material 2 designated under the Green Purchasing Law) Use of EM electric wires and cables 3 (eco-friendly material) NEXT-GENERATION CLEAN ENERGY A demonstration plant for renewable jet and diesel fuels With know-how accumulated through engineering license agreement with India’s major heavy industry and the construction of oil refi neries, we continue to manufacturer Larsen & Toubro (L&T) to provide its collaborate in the commercialization of this technology proprietary “Chiyoda Thoroughbred 121 (the CT-121)” As a business partner in the “Domestic Biofuel and further contribute to reducing CO2 emissions. ﬂ ue gas desulfurization process (FGD) technology for Project,” led by euglena Co. Ltd. (Euglena), we are currently participating in the construction of Japan’s fi rst renewable jet and diesel fuel demonstration plant (to be completed in October 2018). EFFECTIVE UTILIZATION OF OIL FIELDS Yabase oil ﬁ eld produced-water treatment demonstration plant promotion in the Indian market. Coal accounts for 75% of the power supply in India, which, with its robust and rapid economic growth, is in need of power plants to sustain develop- Using technology that was introduced by our Global energy needs are growing, for one reason, ment. The demand for FGD plants is increasing technology owner in the United States, Chevron Lummus because water production from oil fi elds increases as signifi cantly, as the demand for coal is fi rmly rooted in Global, Euglena is executing the design, procurement oil fi elds age. To maintain high levels of productivity in its cheap and stable price. While coal-fi red thermal and construction according to Japanese standards. oil and gas production while concurrently abiding by power provides 42% of the world’s energy, that fi gure Led by METI (the Ministry of Economy, Trade and environmental regulations, more advanced pro- is expected to reach 44.5% by 2030. TECHNOLOGY DEVELOPMENT OF HYDROGEN ENERGY SPERA Hydrogen® system receives the top prize of the Nikkei Global Environmental Technology Awards Industry) and MLIT (the Ministry of Land, Infrastructure, duced-water* treatment technology is needed. Under these conditions, CT-121, the environmen- Hydrogen is considered a clean next-generation Transport and Tourism), the project aims to switch to To resolve the problem of produced-water tal technology highly evaluated by L&T, will continue energy, and the dissemination of hydrogen fuel cell biofuel by 2020 to reduce the extent of CO2 emissions. treatment, the Japan Oil, Gas and Metals National to meet the demands of India’s economic growth vehicles and ENE-FARM (home-use fuel cells) as well The international framework of the ICAO (International Corporation’s project known as “Small-Scale while helping to resolve its environmental issues. as practical realization of hydrogen electricity Civil Aviation Organization) to prevent CO2 emissions Demonstration of Produced-Water Treatment from exceeding the 2020 standard means that the need Technology” is being jointly conducted by four for jet biofuel is becoming greater than ever. companies: the Japan Oil, Gas and Metals National Corporation, INPEX, METAWATER and Chiyoda. ENVIRONMENT-CONSCIOUS ACTIVITIES IN PROJECT EXECUTION Environmental Proposals/Green Procurement generation are being promoted by the government. In this respect, it is essential to develop a technology for hydrogen to be “stored” and “transported” in a stable state and in large quantities like natural gas and oil. For the project, a demonstration plant was constructed Chiyoda approaches the design, procurement and Such technology has never been available until now. at the Yabase oil fi eld in Akita Prefecture, with operations construction stages of every project with consider- In 2014, we became the fi rst in the world to begun in March 2017 and planned for seven months. ation for the environment. Improving on the plans complete technological development to resolve this Because the ceramic membrane fi lter requires no provided by our clients and proactively engaging in issue. This system has been named “SPERA,” pretreatment such as that for coagulation, the use of environmental proposals, we aim to construct plants meaning “hope” in Latin. There are high expectations chemicals can be greatly reduced. Further, as the with a lower environmental impact. for this technology, which has been highly evaluated membrane can be washed and used repeatedly, no Over the past fi ve years we have submitted an both domestically and internationally, and has received disposable waste will be generated, reducing the average of 319 proposals annually. In 2016, 221 numerous technology awards such as the top prize in environmental burden. It is expected that the fi ltered proposals were accepted by our clients. Our project the Nikkei Global Environmental Technology Awards. water will be reused as injection water for reservoir procurement operations are implemented on our We will continue to meet these high expectations and Yabase oil field produced-water treatment verification plant pressure maintenance in oil fi elds. green procurement guidelines based on the Ministry to contribute to the global environment. 23 24 CHIYODA CORPORATION ANNUAL REPORT FY2016 CONTRIBUTING TO SOCIETY THROUGH BUSINESS WHY HOW The social responsibility of engineering ﬁ rms is to address issues surrounding society and provide solutions for those issues. In this respect, we are assigned the mission of providing superlative services and products in partnership with our clients, using skills and expertise accumulated from experience in engineering and constructing plants and consistently offering services with the full use of cutting-edge technologies. • Adding value by integrating cutting-edge technologies • Forming and promoting a culture of safety • Human resource development and technology transfer in countries where we have projects participants in these programs last year was 73. The fi ve consecutive years, the Chiyoda Group has hosted training provided in Japan also includes the opportu- a total of eight graduate students in internships nity to experience Japanese culture. involving classroom lectures and on-site inspections Thus, through engineering training and cultural for a month and a half. The Japanese government exchange, we collaborate with countries where plants also works in close cooperation, fostering engineering are constructed to help create a basis for the skills and human resource development. innovation of their industries and technologies as well as develop their human resources. DEVELOPING HUMAN RESOURCES WITH THE GOAL OF ESTABLISHING INDUSTRIAL INFRASTRUCTURE Opening up internships for the Masdar Institute of Science and Technology (MIST) Diverse human resource development at Chiyoda Almana in accordance with the Qatar National Vision 2030 Our overseas Group companies contribute to developing various human resources. Chiyoda Almana Engineering LLC supports the development of human resources, an important aspect of the SAFETY FIRST Best international safety practices to beneﬁ t project execution Chiyoda applies the “Safety First” concept to all our clients. Through the “Design Safety” course, we Through subsidiary aid granted by the Agency for Qatar National Vision 2030. Chiyoda Almana plan to apply the best international safety practices Natural Resources and Energy in the Ministry of supports Qatar by nurturing diverse human resources The Chiyoda Group conducts all activities with domestically. By promoting such a culture of safety Economy, Trade and Industry, internships have been and career development. “Safety First” as a core value. Furthermore, for our awareness, Chiyoda will continue to provide safe provided to the United Arab Emirates’ Masdar Institute In 2016, the company sponsored many educa- clients, a safe plant is usually their highest priority. and highly reliable plants to our clients. This will of Science and Technology (MIST), with the Japan tional opportunities in the fi eld of hydrocarbon While some industries apply “destructive testing” of enable all our employees to be proud of the International Cooperation Center (JICE) as the point of processing technology. With the goal of enriching the their products (think of crash tests for cars), this achievements we deliver. contact. The project was founded with the goal of technical experience of those in the fi eld, Chiyoda approach would be obviously unacceptable in the design of hydrocarbon plants. We verify the safety of our plant design by incorporating international, industry and client-based safety standards. However, safety standards vary for each country and are DEVELOPING EXCELLENT HUMAN RESOURCES THROUGH TECHNOLOGY TRANSFER Deployment of international client training promoting fellowship and strengthening cooperation Almana and Chiyoda Global Headquarters facilitated between Japan and the United Arab Emirates. Within training programs geared toward RasGas and the fi elds of renewable energy, smart communities Qatargas engineers. and green technology, Japanese companies annually On November 2 and 3, 2016, we presented an accept MIST students of UAE nationality, with 2016 important overview of the basic operation of LNG continually being updated. In addition, each plant’s In addition to carrying out many international projects, marking the fi fth year so far. After arriving in Japan, plants to young engineers of Qatargas. We are also confi guration and specifi cations are unique. There- the Chiyoda Group also concentrates on developing MIST interns receive a basic introduction to life in proactively involved with developing human resources fore, a complete understanding of the relevant codes human resources in those countries. Japan. Training is provided for each enterprise. Over in regional communities. and standards and the skills to undertake thorough Starting with the acceptance of trainees from the safety studies are required when we design a plant. Kingdom of Saudi Arabia in 1976, followed by training To deal with the various safety requirements, our including on-site technical education in the Federal company offers a “Design Safety Induction Course” Republic of Nigeria in 1978, collaborative training with that targets all engineers involved in project execu- external organizations has been in practice since tion. To date, over 400 engineers have participated in 1982. The training offered to foreign clients is highly the course, which begins with consideration of the esteemed both domestically and overseas. The concept of plant safety. By the end of the course, we United Arab Emirates joined in 2010, and the State of plan to have taught participants how to achieve safe Qatar joined in 2012, while the number of countries plant design. The participants review relevant case participating in training continues to grow, including studies, study the work ﬂ ow and relationships the Kingdom of Saudi Arabia, the Republic of Korea, between the various required safety studies, look at the Republic of Mozambique and the Islamic how interdisciplinary safety matters are addressed Republic of Iran. The training provided to foreign and learn the effects on costs and schedules when clients can be conducted both in Japan and by safety studies/activities affect the design of a plant. dispatching lecturers abroad. The number of University students of United Arab Emirates' Masdar Institute of Qatargas professionals at Chiyoda Almana Brownfield Management Masterclass 2016 Science and Technology (MIST) 25 26 CHIYODA CORPORATION RESPECT FOR HUMAN RIGHTS At the Chiyoda Group, human resources are valuable assets. We aim to maintain a corporate culture of which all employees and their families are proud. The Group operates worldwide and, under an initiative promoted by the Japanese government, recognizes the need for changes in work style that reﬂ ects the development of global human resources and respects diversity. INITIATIVES FOR CHANGES IN WORK STYLE IN FY2016 We have been encouraging reform through changes in our employees’ mindsets and organizational operations as well as improvements in the operating bases where Chiyoda is 1) a company whose employ- ees are motivated to continue working on a long-term basis and 2) a company that is continually able to develop its competitiveness and strength. We have developed systems for reduced working hours and for leaves of absence for employees constrained by child care or nursing care. Among our achievements in FY2016, we embraced diversity, made the child care and nursing care systems more ﬂ exible and introduced a system to afford retired employees new re-employment opportunities. Additional steps include: 1) Leaves of absence for employees working in Japan or overseas to be off with their spouses 2) Re-employment opportunities for people who have left the company for child care, nursing care or to accompany spouses who have been transferred 3) Work-at-home (teleworking) opportunities on a trial basis (Note: Full-scale introduction was launched in May 2017.) These steps were taken to secure human resources willing and able to work and to help retired employ- ees be re-employed when their circumstances change, all enabling us to increase our workforce in an effective manner. We will continue to take steps to increase our productivity and competitiveness by promoting such changes in work style. In FY2016, Chiyoda Corporation received “Kurumin,” a certifi cation for companies recognized for their enthusiastic efforts to cultivate the next generation, granted by the Kanagawa Labor Bureau of the Ministry ANNUAL REPORT FY2016 SAFETY FIRST CRISIS MANAGEMENT SUPPORT TO PREPARE FOR ALL EMERGENCIES Business Continuity Plan/Disaster prevention Crisis management activity at the ﬁ eld ofﬁ ce in Yanbu, Kingdom of Saudi Arabia At the construction site of a sponge titanium plant that was mechanically completed in May 2017 with In 2015, the Chiyoda Group formulated a Business Non LTI for Advanced Metal Industries Cluster and Continuity Plan (BCP). Covering all kinds of disasters, Toho Titanium Metal Company Limited, we worked including fi res and large earthquakes, disaster with the client to implement various crisis manage- prevention practice and BCP training are conducted ment measures in terms of both hardware and with the basic principle of “life comes fi rst.” software to ensure the safety of the client and fi eld In 2016, we practiced fi re drills from buildings and offi ce staff from around the world. dealing with disrupted transportation networks to As part of this activity, we conducted evacuation help people return home safely in the event of a large drills several times to ensure prompt evacuation and earthquake. While Chiyoda Global Headquarters confi rm the effectiveness of the Emergency Plan and continued its BCP training from last year, training has Emergency Response System. expanded on a larger scale to the Koyasu Offi ce & Practical training was carried out while the Research Park and the corporate Group this year. In diffi culty level was continuously raised according to addition, the “Nighttime/Holiday Initial Response the progress of construction and the number of fi eld Training” outlines the procedures necessary for the offi ce staff. smooth resumption and execution of business after a major crisis. In addition to verifying the safety of employees, we also strive to ensure the safety of their families. In the event of a disaster, employees’ family members will receive e-mails to confi rm their safety if they are registered on the relevant system. Further, our Group company Arrowhead Interna- tional makes all the arrangements for our employees’ business trips. Providing adequate support that puts safety fi rst for the various risks that may occur between departure and return, the Arrowhead Travel Risk Management System (A-TRIMS) provides safer and more reliable crisis management. This system of Health, Labour and Welfare. Companies can gain this certifi cation by achieving the goals specifi ed in their verifi es the itineraries of those traveling overseas and BCP Training action plans and by satisfying the criteria set by the bureau. Chiyoda Corporation obtained the certifi cation after achieving the targets set for the period from April 1, 2010 to March 31, 2015 and for being highly appreciated for the following new initiatives to take from now: 1) Extending application of a program of shorter working hours to employees with elementary school children up through the sixth academic year, fostering a better balance between work and child care 2) Consideration of ﬂ exible work styles 3) Reduction of total working hours by enforcing stoppage of work after 20:00 and on holidays We will continue our efforts to create an environment where employees can perform to the best of their potential. ensures their safety by thoroughly checking through e-mail and mobile phone. The Group as a whole supports stronger crisis management and puts the safety of employees fi rst. 27 28 CHIYODA CORPORATION ANNUAL REPORT FY2016 CHIYODA’S DIVERSITY Chiyoda Corporation believes in the philosophy and integrity of diversity in the workplace and actively encourages employees to think and act accordingly. Ms. Kaoru Nakamura, a Chiyoda employee for 31 years, has been assigned to the position of General Manager in the Project Logistics & Construction Planning & Administration Unit. We posed these questions to her: Q Q What does the issue of “diversity” mean to you? Particularly in Japan, most people have the impression that diversity is an issue only about women. That is not correct. To consider diversity in a large corporation properly is to include, along with gender, nationality, age, the challenged, family care and other issues. The subject of diversity involves everybody, and all of us should consider discussing this subject. Why should Chiyoda embrace diversity? Chiyoda has already accepted the philosophy of diversity. Project teams and construction sites are fi lled with multinationals working for the common goal of a successful project. At CGH, we respect and value each other, regardless of background or nationality, focusing on the contribution each person makes to Chiyoda’s success. We enjoy an excellent working environment that enables us to grow individually while improving the quality and effi ciency of our business. At the same time, we realize that when we lose people for personal reasons, it is a loss of talent and potential for Chiyoda. We need to extend the idea of “Diversity & Inclusion” and focus on people within the Company who may be struggling to care for someone at home or people who feel disadvantaged in their careers because of their gender or other unfair reason. The fi rst step to the goal of true diversity is not just to provide a framework but to change our mindset. Q What can the Change Mindset Task Team achieve? I have been part of the Change Mindset Task Team for four years now. Through activities including lectures by visiting experts and internal discussions, we have offered learning opportunities about “Diversity for Chiyoda” to all personnel. We believe one way to improve our diversity might be to change our working style, by “reforming the way of working (hataraki-kata kaikaku)” to improve our Work/Life Balance. We hope that with such reforms all employees will achieve a good work/life balance of their own regardless of gender, nationality and so on, and enhance each individual performance, thereby helping us to realize our corporate goals. This is something we will be very proud to achieve. Kaoru Nakamura General Manager Project Logistics & Construction Planning & Administration Unit CHIYODA’S CSR ACTIVITIES Educational support/ Human resource development • Internships Operating in 7 companies • Student visits to the company 38 students • University lectures Held at 2 universities • Grade school campaign drive 270 people Contributions to health and welfare • Table for Two (meal program) (facilitated domestically by the Chiyoda Group) 37,200 yen (1,860 meals provided) • Eco-cap collection 196,166 caps recycled (providing 228 vaccinations) • Blood donation 503 donors Support for people with special needs Assistance to areas hit by disasters • In-house sale of products made by • Remittance of donations for people with special needs (CGH, Koyasu Ofﬁ ce) earthquakes in Italy, Ecuador and Kumamoto • Employee volunteer dispatching to areas hit by disasters 7 visits 70 participants • Providing food to the victims of large-scale disasters 500 people • Sale of products from areas hit by disasters (held at CGH, Koyasu Ofﬁ ce) 10 gatherings 15 gatherings • Japan Philharmonic performance of Beethoven’s “9th Symphony” concert invitations provided to those with visual impairments 25 sets 50 people invited Environmental Conservation • Tree planting 43 participants 200 trees planted • Cleaning operations Over 350 participants 29 30 CHIYODA CORPORATION CORPORATE GOVERNANCE CHAIRMAN’S MESSAGE ANNUAL REPORT FY2016 The Company pledges to constantly strive for sustainable growth and to enhance the corporate values of the Chiyoda Group on a mid- to long-term basis. To achieve this goal, the Group established in October 2015 the “Chiyoda Corporation Corporate Governance Policy,” which developed the Group’s basic views and guidelines on corporate governance. The Group will continue to actively secure the CORNERSTONE OF OUR COMMITMENT We believe a broader range of outside views will soundness and transparency of its corporate management through the policy. Along with our corporate philosophy, “Energy enrich the quality of our decision-making and Environment in Harmony,” the Chiyoda process. One of Chiyoda’s management Group, while recognizing its responsibility as an priorities is having Board Members with CORPORATE GOVERNANCE SYSTEM Audit and Supervisory Committee integrated engineering company, reaffi rms its independent views, a policy that we encourage To further reinforce its corporate governance The newly established Audit and Supervisory commitment to the sustainable development of throughout our corporate governance in pursuit structure, the Company has shifted to a “Company Committee is composed of three directors (includ- the global society. of profi table, sustainable growth. with an Audit and Supervisory Committee.” The ing two independent officers) as Audit and Supervi- It is of the highest priority to ensure the Company has established the Corporate Risk sory Committee members who closely monitor the health and safety of everyone concerned with KEEP MOVING FORWARD Management Division, which presides over the execution of duties of directors and executive Chiyoda’s activities and to mitigate the environ- The longest journey begins with a single step. Compliance Unit, the SQEI (Safety, Quality, Environ- officers. The Audit and Supervisory Committee mental impact of our global operations. To This management team is characterized by its ment and Information Security) Management Unit, the members attend meetings of the Executive maintain the highest standards in our business potential for development, providing investors Crisis Management Unit and the Internal Audit Unit. Committee and express their opinion when practices, we have clearly defi ned policies and with a long-term opportunity for sustainable The Corporate Risk Management Division and the necessary. In addition, their responsibilities include processes that thoroughly apply to all employ- returns and continued engagement with all of Internal Audit Unit report directly to management to deciding the content of resolutions submitted to the ees, including management. our stakeholders. I intend to deepen the trust we our stakeholders. I intend to deepen the trust we raise the quality and transparency of management, General Meeting of Shareholders, such as the STRONG CORPORATE GOVERNANCE FOR SUSTAINABLE GROWTH Recently we have seen major changes in the Recently we have seen major changes in the global energy landscape. The energy mix is shifting, driven by changes in supply and demand, technological developments and growing environmental concerns. As an integrated contractor mainly in the hydrocarbon integrated contractor mainly in the hydrocarbon and chemical industries, Chiyoda needs to be and chemical industries, Chiyoda needs to be ﬂ exible in adapting to changes in the business ﬂ exible in adapting to changes in the business climate. To enable swift responses to the changing environment, the new corporate management is committed to a foundation of management is committed to a foundation of effective leadership, fi rm governance and strong stewardship. In the 2016 fi scal year, we increased the number of external Directors to four, out of 12, number of external Directors to four, out of 12, to provide more diversifi ed, transparent and effi - to provide more diversifi ed, transparent and effi - cient oversight of the Company’s management. cient oversight of the Company’s management. Katsuo Nagasaka Katsuo Nagasaka Chairman of the Board Chairman of the Board have cultivated with our stakeholders, and I ask have cultivated with our stakeholders, and I ask for your continued support in our many endeav- for your continued support in our many endeav- ors ahead. ors ahead. enable timely responses to stakeholders and reinforce appointment or dismissal of accounting auditors, the risk management and the compliance system. auditing consolidated financial documents in close To ensure speedy and accurate decision-making to cooperation with the accounting auditors and deal with rapidly changing social and economic preparing audit reports. environments, the Company has adopted the executive offi cer system, which separates the Executive Ofﬁ cer System functions of directors, who are responsible for Where necessary, executive offi cers cooperate with management supervision, from those of executive outside specialists such as corporate lawyers in offi cers, who are responsible for business operations. carrying out duties assigned to them at meetings of By becoming a Company with an Audit and Supervi- the Board of Directors and the Executive Committee. sory Committee, with new functions, the Company will Executive offi cers provide regular progress reports at improve and implement the soundness and transpar- executive offi cer and Executive Committee meetings ency of management and prompt decision- attended by directors and corporate auditors. making, and further enhance its corporate value. The Board of Directors and Meetings of the Board of Directors REINFORCING INTERNAL CONTROLS The Chiyoda Group constantly conducts self- assessments of existing internal control functions and The Board of Directors is composed of 13 directors. reinforces internal control systems. In addition, its Important matters concerning the Company are Internal Audit Unit, as an autonomous unit, performs reported and resolved at meetings of the Board of evaluations, including auditing the development and Directors. The Executive Committee, made up of the operation of a suitable overall internal control four representative directors, examines matters framework and constituent components, and submits before they are submitted for resolution at meetings reports to the Executive Committee. The unit aims to of the Board of Directors. It makes decisions about ensure the establishment of an integrated framework business execution matters by unanimous resolution. of internal controls and a real-time monitoring system for management. 31 32 CHIYODA CORPORATION ANNUAL REPORT FY2016 CORPORATE GOVERNANCE AND INTERNAL CONTROLS General Shareholders’ Meeting 3) Mikio Kobayashi sound management through audits conducted Mr. Kobayashi has gained experience as President from an objective and independent perspective. and Representative Director of Ryoshin Credit Election Report Election Service Co., Ltd. and Deputy President and 4) Yukihiro Imadegawa Accounting Auditor Representative Director of Japan Property The Company expects that as a lawyer and Solutions Co., Ltd., after working for Mitsubishi specialist in corporate legal matters, UFG Trust and Banking Corporation as an Mr. Imadegawa will contribute to its sound Executive Offi cer. The Company expects that he management through audits conducted from a will build on such experience and contribute to its professional and objective perspective. Report REMUNERATION FOR DIRECTORS AND AUDIT & SUPERVISORY BOARD MEMBERS Total amount of remuneration for Directors and Audit & Supervisory Board Members of the term under review Election Submit/Report Board of Directors Directors (excluding Audit and Supervisory Committee Members) Audit/ Supervision Audit and Supervisory Committee Report Directors (Audit and Supervisory Committee Members) Election Supervision Election Submit/ Report Survey, Report Request Survey, Report Request Supervision Report Supervision Audit Referral (advice) Submit/Report Executive Ofﬁ cer Meeting Executive Ofﬁ cers Executive Committee 4 Representative Directors Submit/ Report Compliance Committee Internal Controls Management Committee Scheduled Reports (deliverables, etc.) Organization Staffing Submit/ Report Report Department Internal Controls Group Companies Business Execution Departments (Risk Manager) Group Operation Unit Corporate Planning Unit Corporate Services Unit, HR* Unit Finance & Accounting Unit Legal & Project Audit Unit Self-Assessment *HR: Human Relations Internal Audit Unit Corporate Risk Management Division SQEI Management Unit Compliance Unit Crisis Management Unit (Crisis Manager) : Important units and arms of the Company : Departments with internal control functions Financial Audit OUTSIDE DIRECTORS 1) Nobuo Tanaka of Mitsubishi Corporation and others, and is very well versed in a wide range of business fi elds such The Company expects that, as an outside director, as infrastructure including that of oil and gas, Mr. Tanaka will properly fulfi ll his duties by drawing power generation and new energy. He has also on his abundant knowledge and experience been involved in the management of investee acquired from international organizations such as companies and business groups in Japan and those specializing in international energy. overseas. The Company expects that by leverag- 2) Hiroshi Sakuma Mr. Sakuma has served as President of Diamond Generating Corporation, Executive Vice President ing his experience and knowledge, he is capable of carrying out his duties as an outside director. No. of persons Base remuneration (millions of yen) Performance-based remuneration (millions of yen) Remuneration for purchase of treasury stock (millions of yen) Directors (excluding Audit and Supervisory Committee members) Directors (Audit and Supervisory Committee members) Audit & Supervisory Board Members 9 3 3 219 43 13 — (N/A) (N/A) 43 (N/A) (N/A) Following are details of the policy on the decision of content of remuneration for directors and the calculation method thereof as well as the process for deciding such a policy: The Company’s system of remuneration for directors was established based mainly on performance, sharing values with shareholders and increasing offi cers’ motivation and morale toward improving performance. The system was approved by resolution at the FY2015 Ordinary General Meeting of Shareholders, held on June 23, 2016. Category Concept of Remuneration Outline of System of Remuneration Base Remuneration Corresponds to roles and responsibilities Remuneration for Directors is 300 million yen or less per annum. Directors Performance-based Remuneration Corresponds to the achievements for each term Remuneration for Purchase of Treasury Stock Linked to long-term achievement improvement Taking into account the levels of net income and dividend for the consolidated fi scal year under review and qualitative elements such as the degree of achievement of management objectives, the amount is kept within 200 million yen or 1% of the amount of profi t attributable to owners of parent. Directors (excluding Outside Directors) acquire treasury shares of 90 million yen or less per annum through the Directors Holding Association for continuous holding until retirement from positions. Audit & Supervisory Board Members Base Remuneration Corresponds to roles and responsibilities Remuneration for Audit & Supervisory Board Members is 84 million yen or less per year. 33 34 CHIYODA CORPORATION DIRECTORS & OFFICERS (As of June 26, 2017) 10 5 11 7 12 6 8 MEMBERS OF THE BOARD REPRESENTATIVE DIRECTORS 9 3 1 2 4 Katsuo Nagasaka 1 Masaji Santo 2 Arata Sahara 3 Hirotsugu Hayashi 4 DIRECTORS Masahiko Kojima 5 Ryosuke Shimizu 6 Nobuyuki Uchida 7 Nobuo Tanaka* 8 Hiroshi Sakuma* 9 *External director as provided for in Article 2-15 of the Companies Act. DIRECTOR, AUDIT & SUPERVISORY COMMITTEE MEMBERS MEMBERS OF THE AUDIT & SUPERVISORY COMMITTEE Mikio Kobayashi* 10 Hideaki Takaishi 11 Yukihiro Imadegawa* 12 *External director as provided for in Article 2-15 of the Companies Act. ANNUAL REPORT FY2016 VICE PRESIDENTS Eisuke Oki Deputy Operations Director, ChAS & Life Science Project Operations Toshiyuki Kariya Deputy Operations Director, Offshore & Upstream Project Operations GM, Offshore & Upstream Project Unit Hideaki Tomiku Technology Development, Investment and Project Operations Terunobu Iio Deputy Operations Director, Downstream & Non Hydrocarbon Project Operations GM, Downstream & Chemical Project Unit Jinei Yamaguchi Deputy Division Director, Corporate Planning & Management Division GM, Group Operation Unit Hiroyuki Shimizu Deputy Operations Director, Gas & LNG Project Operations No. 1 Toshiaki Furugori Deputy Division Director, Technology & Engineering Division Hideo Matsui Division Director, Business Development Division GM, Business Development Unit 2 Masaki Kadono Deputy Division Director, Global Project Management Division GM, Project Management Unit Masakazu Fujiwara Project Director Munetaka Horiguchi Business Development Division EXECUTIVE OFFICERS PRESIDENT & CEO Masaji Santo SENIOR EXECUTIVE VICE PRESIDENTS Arata Sahara Operations Director, Downstream & Non Hydrocarbon Project Operations Hirotsugu Hayashi CFO Risk Management Hiroshi Ogawa Project Operations EXECUTIVE VICE PRESIDENTS Masahiko Kojima Corporate Planning & Management Operations Director, Offshore & Upstream Project Operations Mamoru Nakano Operations Director, Gas & LNG Project Operations No.1 GM, Gas & LNG Project Unit No.1 SENIOR VICE PRESIDENTS Ryosuke Shimizu Operations Director, Technology Development, Investment and Project Operations Nobuyuki Uchida Project Operations - US Projects Gas & LNG Project Operations No. 2 Hiromi Koshizuka Operations Director, ChAS & Life Science Project Operations GM, ChAS Marketing Unit Akira Fujisawa Operations Director, Gas & LNG Project Operations No. 2 GM, Gas & LNG Project Unit No. 2 Masao Ishikawa Division Director, Technology & Engineering Division Toshihiro Shimazaki Deputy Operations Director, Technology Development, Investment and Project Operations Yasumitsu Abe Division Director, Project Logistics & Construction Division Shuichi Wada Division Director, Corporate Planning & Management Division GM, Corporate Planning Unit Masao Fujiwara Division Director, Global Project Management Division GM, Project Administration Unit 35 36 CHIYODA CORPORATION ANNUAL REPORT FY2016 CORPORATE GOVERNANCE DIALOGUE Chiyoda’s IR Team brought together Mr. Toshikazu Suzuki, Senior Analyst at Asset Management One, and Mr. Nobuo Tanaka, External Director at Chiyoda, for an open dialogue on ESG topics, including Chiyoda’s ESG activities, the potential for SPERA Hydrogen as a future form of energy, carbon taxes, Chiyoda’s progress on diversiﬁ cation and the composition of the Board of Directors. Some extracts follow. Mr. Toshikazu Suzuki Mr. Toshikazu Suzuki is a Senior Analyst at Asset Management One. AM One is an asset management company that was established as a result of integrating DIAM Co., Ltd., Asset Management Division of Mizuho Trust & Banking Co., Ltd., Mizuho Asset Management Co., Ltd. and Shinko Asset Management Co., Ltd. on October 1, 2016. Mr. Nobuo Tanaka Mr. Nobuo Tanaka graduated from the University of Tokyo in the fi eld of economics in 1972, then began his career with the Ministry of Economy, Trade and Industry (METI). Later, he also became the Director for Science, Technology and Industry at the Organization for Economic Co-operation and Development (OECD). Before becoming External Director at Chiyoda in June 2016, he was a Japanese offi cial and the former Executive Director of the International Energy Agency (IEA). ment, Chiyoda increased the number of external with shareholders and investors, for example, on Mr. Tanaka: directors to four in the past year. ESG topics. A high criterion especially for an An important business approach is the creation of Mr. Suzuki: How do you evaluate the responsibility of an external director and what do you think of the role of external directors at Board meetings in Mr. Suzuki: terms of Chiyoda’s corporate governance? Various factors link corporate ESG initiatives Mr. Tanaka: The Corporate Governance Code for listed Japanese companies was facing a major turning point. There is a clear trend toward appointing and investor demand for information on ESG. What do you think are the key metrics, achievements and/or future challenges on ESG for Chiyoda? external director, but also for an internal director, so-called “shared value” for the Company as well is whether our action leads to shareholders’ as for all its stakeholders. Creating shared value profi ts. As an external director, I cannot evaluate can be defi ned as the product of sustainable the business content itself, though I can give an growth that aims to create long-term growth for the independent view about the importance of the Company through actions that are environmentally Board of Directors’ involvement in terms of friendly and socially responsible. Chiyoda’s integrating environmental and social sustainability corporate philosophy to enhance our business in into corporate practices, increasing regulatory aiming for harmony between energy and the requirements to disclose ESG risks and strategy, environment saw the development of SPERA external directors, though there are different Mr. Tanaka: the trend toward integrated reporting and the aim Hydrogen®, the world’s fi rst use of technology that interpretations about their roles. From my point of Chiyoda’s management clearly defi ned ESG of achieving sustainable development goals. enables the storage and transportation of large view, the main responsibility of external directors criteria for transparent progress and achievement is to provide oversight on management relative to while consistently incorporating ESG factors into business decisions. Examining management’s the business. To demonstrate their effectiveness, performance in terms of business plans and corporate boards should increase transparency developing strategies are essential roles. To and take charge of relations with shareholders. enhance external directors’ oversight on manage- Chiyoda’s top management has regular dialogues “It is essential that Directors keep open a clear line of communication with shareholders.” Mr. Suzuki: External directors should ensure the effective- ness of the corporate governance function as they openly exchange views and experiences at Board of Directors’ meetings. Recently CSV (creating shared value) has become a new topic at Japanese companies. What are your thoughts on Chiyoda’s management objec- tives toward investors on this topic? volumes of hydrogen gas. Hydrogen is expected to play a major role in the future development of the low-carbon society, and the Chiyoda Group is at the forefront of this exciting opportunity. Investor Relations Engagement Shareholder and Investor Stewardship 37 38 CHIYODA CORPORATION RISK MANAGEMENT ANNUAL REPORT FY2016 Risk management is the identification of different types of risk within a company (financial, operational, etc.) and measures taken to mitigate those risks to an acceptable level. CORPORATE RISK MANAGEMENT AT CHIYODA BUSINESS RISKS Business risks may signifi cantly impact the Chiyoda Group’s business operations and fi nances. These risks have the potential to impact investor decision-making. Recognizing these risks, the Group has implemented risk mitigation plans to minimize consequences when such events occur. The risks below are those we recognize as of the date of the fi scal year ended. (a) Changes in the business environment; economic, social and political factors Various factors may require that modifi cations be made to clients’ investment plans, project suspension, delay or review. These factors include changes in global economic, social and political environments, economic sanctions, changes in home country energy policies and commodity prices such as oil, LNG and metal resources prices: All the factors may affect the Group earnings. Changes in economic, social and political environments for clients, joint venture partners, subcontractors, suppliers and service providers could affect the Group’s project execution plans, profi tability and, ultimately, its fi nancial strength.The Group monitors global economic and social trends for a potential impact on business and strives to reduce such risk through rigorous contract negotiations. Due diligence is executed for subcontractors, vendors and service providers and remedial action in the supply chain is taken if necessary. (b) Earthquakes and natural disasters, terrorism, wars and other force majeure events Force Majeure events such as earthquakes, natural disasters, terrorism and wars have the potential to materially impact project sites or business locations. Disruption issues may include personnel life crisis, delays in equipment and materials delivery and/or suspension of fi eld work. The Group puts life and safety fi rst and has the Crisis Management Unit, to compile and analyze information to prevent human suffering or harm. The Group has established, and is reinforcing, the crisis management system, which advocates the employment of professional security advisors in the regions requiring particular attention. Additionally, the Group maintains the risk management system to rapidly react to various situations and to respond to an emergency immediately, including consulting with the clients and/or the parties concerned to minimize force majeure risk. The Group has formulated a Business Continuity Plan (BCP) for unexpected events including as a massive earthquake to act smoothly in the initial stage and execute priority tasks. In that way, the Group has been prepared to ensure business continuity by conducting emergency response training. (c) Fluctuations in equipment and material costs Under certain contracts, the Group is exposed to material/equipment cost ﬂ uctuation risk due to the time difference between plant or material quotation and purchase. Specifi cally the price of steel, which constitutes a major part of plant construction, could be severely impacted by a rise in commodity prices such as coal and iron ore. Future market prices of copper, nickel, aluminum and zinc are similarly unpredictable. The Group avoids such risks (or minimizes the impact) by diversifying supply sources, placing early orders, maintaining alliances with major vendors/suppliers and identifying market trends. (d) Possible shortages of construction workers/equipment and materials A project may experience a delay and a cost impact if suffi cient construction labor, equipment and materials or other resources required for a project cannot be suffi ciently procured. The Group avoids such risk (or minimizes the impact) by applying diverse construction methods including modular construction, in the areas where materials and/or adequately qualifi ed labor are scarce and by establishing communication and collaboration with reliable subcontractors, vendors and suppliers. If a plant’s construction is suspended due to labor disputes and the like, the Group minimizes risk by taking appropriate action in cooperation with clients and the local authorities. (e) Plant accidents Safety risk, the consequences of which could be serious for the Group’s operating capability, is inherent in the construction industry. Safety is of paramount importance to the Group, reinforced by the maxim “Safety is the Core Value”. Through comprehensive Risk Identifi cation and Management procedures, reinforced by close collaboration with clients, designers, subcontractors and vendors, all the risks are identifi ed at every stage of project delivery, from feasibility through design and construction, and measures to negate or mitigate the identifi ed risks are implemented. (f) Exchange rate ﬂ uctuations Some construction projects may involve payment settlements (subcontractors, vendors and suppliers) in a currency that does not correspond with the currency received from the client for the work. In such cases, exchange rate ﬂ uctuations can have an impact on earnings. The Group avoids/minimizes exchange rate risk by reserving construction payments against such risk in multiple foreign currencies and by entering into exchange rate forward contracts. (g) Compliance-related risk The Group’s global operations are required to comply with local laws, acts and regulations in the respective countries and regions where its head offi ce, subsidiaries, business offi ces and construction execution sites are located, both at home and abroad. Penalties or suspicious action resulting from non-compliance could have a serious impact on a project’s execution or the business operation of the Group. To prevent and/or minimize such compliance-related risk, the Group runs training courses for employees including assembled induction and e-learning. Those are intended for them to understand and strictly observe the updated laws, acts, regulations or rules related to its business operations including those for human rights and anti-bribery. The Group also makes every effort to comprehend the present trend of stakeholders including the authorities concerned and clients, both at home and abroad. Additionally, the Group has incorporated compliance response in its operating processes based on its Code of Conduct by establishing a Compliance Committee under the direct control of the Executive Committee and the Compliance Committee of the Chiyoda Group under its wing, consisting of Group company representatives. (h) Information security risk The Group takes great care in managing information obtained from clients, subcontractors, equipment and materials suppliers and other service providers. The information is necessary in the performance of its business. The Group also possesses confi dential information related to technologies, sales, and other businesses. Many core corporate operations and business transactions are conducted by making full use of the IT systems at global subsidiaries. The Group operations are subject to system failure, information leakage and loss of important business information due to infection by computer viruses, external unauthorized access and cyber-attacks. The Group, including the main subsidiaries and global headquarters, holds an ISMS (Information Security Management System) certifi cate and performs competent information security management which includes training, auditing, and defensive and minimizing measures under its business continuity plan. (i) Business investment risk The Group makes business investment to pursue the growth strategy such as the establishment of a new company or the purchase of the existing company to construct a new business model. The Group is exposed to several risks, such as changes in the business environment, lower earnings obtained than planned, a downturn in business and incurring extra costs. Prior to deciding on business investment, the Group does assess the feasibility through our standards and rules. After making an investment, the Group regularly monitors the progress in the business and provide various types of support as necessary, to avoid or minimize any loss. Yasuyuki Maeda Division Director Corporate Risk Management Division With reference to the rather fresh concept of “Strategic Risk Management,” I should say that, at Chiyoda, we ensure that corporate management leaders are able to manage risks and seize opportunities and to make strategic decisions in business ﬁ elds of volatility, uncertainty, complexity and ambiguity, based on the well-run “Business Risk Management” by all organizations as described below. Through this one-team approach, Chiyoda strives to create additional shareholder value in our continuing challenges. I have been studying the various methodologies a That concept is illustrated by ISO 31000, an company can employ to manage business risk, International standard initiated in Japan. Using this including fi nancial, operational, legal, reputational, approach, we have created a corporate-wide risk environmental and social, some identifi ed as shared map of 97 items, measured by probability, repeatabili- risks and some more specifi c. In my opinion, one of ty and magnitude of impact, further ranked by priority, the most effective ways to approach corporate risk for which individual countermeasures have been management could be to align the different types of identifi ed, subject to regular reviews and updates. risk with the company’s organizations and functions. A project manager assesses risks to avoid or to Chiyoda has taken the unique approach of mitigate potential negative impact in the execution dividing business risk into two major categories: of a project. Exposure to such risks often ends at Project Risk and Non-Project Risk. This aligns with the completion of the project contract, thus our matrix organization, which is divided into two confi ning the nature of Project Risk to a specifi c axes: Project Operations and Shared Services, each period of time. On the other hand, Non-Project Risk with six separate divisions. All the divisions within can be lifetime in its nature and is more closely these two groups implement an independent risk related to the sustainability of the Company. The management approach that directly identifi es and sharing of supply services, appointment of creates responses to their own specifi c risks daily. top-quality engineers and determination to remain In reality, Project Risk is the larger contributor to at the cutting edge of technology for each project corporate risk at Chiyoda. But by considering Project and service we provide should always be effi cient Risk and Non-Project Risk together, the Corporate and add value. A joint management approach Risk Management team looks to achieve a balance across Project Risk and Non-Project Risk is the key between risks and opportunities for the Company. to our success. 39 40 CORPORATE INFORMATION (As of March 31, 2017) CORPORATE DATA GLOBAL NETWORK Chiyoda Global Headquarters Minato Mirai Grand Central Tower 4-6-2, Minatomirai, Nishi-ku, Yokohama 220-8765, Japan Tel: (81) 45-225-7777 (voice guidance) Established Paid-in Capital January 20, 1948 ¥43,396 million Number of Employees 1,505 (Non-consolidated), 5,367 (Consolidated) Annual Fiscal Close March 31 Shareholders’ Meeting June Organization Chart (As of April 1, 2017) Board of Directors Audit & Supervisory Committee Executive Committee President Secretarial Office Internal Audit Unit Corporate Risk Management Division Global Project Management Division Offshore & Upstream Project Operations SQEI Management Unit Compliance Unit Crisis Management Unit Project Administration Unit Project Management Unit IT Management Unit Global Human Resource Planning Unit Work Process Innovation Task Team Chiyoda Global Taskforce Team Change the Mindset Corporate Planning & Management Division Technology & Engineering Division Corporate Planning Unit IR, PR & CSR Sec. Corporate Services Unit Human Relations Unit Finance & Accounting Unit Legal & Project Audit Unit Group Operation Unit Engineering Operation Unit Gas & LNG Process Engineering Unit Refinery, Petrochemical & New Energy Process Engineering Unit Integrity Management Unit Mechanical Engineering Unit Control System Engineering Unit Electrical System & Smart Grid Engineering Unit Piping Engineering Unit Civil Engineering Unit Business Development Division Project Logistics & Construction Division Strategic Business Planning & Administration Unit Corporate Relations Sec. Business Development Unit 1 Business Development Unit 2 PLC* Planning & Administration Unit Procurement Unit Construction Unit Commissioning Unit * PLC: Project Logistics & Construction ** TIP: Technology Development, Investment and Project 41 Offshore & Upstream Business Development Unit Offshore & Upstream Strategic Project Development Unit Offshore & Upstream Project Unit Gas & LNG Project Operations No. 1 Gas & LNG Project Unit No. 1 Strategic Project Development Unit Gas & LNG Project Operations No. 2 Gas & LNG Project Unit No. 2 Downstream & Non Hydrocarbon Project Operations Downstream & Chemical Project Unit International Downstream and Transport Infrastructure Project Unit Metals & Mining Project Unit Global Collaboration Unit Technology Development, Investment and Project Operations TIP** Planning & Administration Unit Strategic Business & Investment Management Unit Hydrogen Supply Chain Development Unit Green Infrastructure Project Unit Environmental Project Unit Technology Development Unit Research & Development Center ChAS & Life Science Project Operations ChAS/Life Science Business Planning & Administration Unit ChAS Marketing Unit Advanced Process Engineering Unit Plant Diagnosis Unit AI Solution Unit Consulting Unit Pharmaceutical Industries Project Unit Space & Bio Engineering Unit Chiyoda’s global network enables project life cycle construction through to operation and maintenance. engineering to be offered all over the world. Chiyoda With a view toward meeting the ever-changing needs has expanded its network to provide prompt support of our customers, we offer services by utilizing local for customers’ business activities on a global scale. offices and group companies with thorough knowl- Our services cover the entire life cycles of projects— edge of the latest local and global circumstances in from planning, engineering, procurement and countries around the world. Xodus Group (Holdings) Ltd. Milan Representative Office Chiyoda Corporation Netherlands B.V. Sales Base Engineering Center Procurement Center Project Execution Base Operation Support Chiyoda International Corporation UK The Netherlands Italy Chiyoda Tehran Office Beijing Office Chiyoda Corporation (Shanghai) Korea Representative Office Iran Saudi Arabia Qatar UAE India China Korea Japan Chiyoda Global Headquarters USA Myanmar Thailand Malaysia The Philippines Chiyoda Philippines Corporation Singapore Indonesia Mozambique Australia Chiyoda Oceania Pty. Limited Brazil Chiyoda Mozambique Limitada PT. Chiyoda International Indonesia L&T-Chiyoda Limited Chiyoda Human Resources International (Pte.) Limited Chiyoda Singapore (Pte.) Limited Abu Dhabi Office Chiyoda-CCC Engineering (Pte.) Limited Middle East Headquarters Doha Office Chiyoda Almana Engineering LLC Chiyoda Malaysia Sdn. Bhd. Chiyoda Sarawak Sdn. Bhd. Chiyoda (Thailand) Limited Chiyoda Petrostar Ltd. Chiyoda & Public Works Co., Ltd. Chiyoda do Brasil Representações Ltda. 42 CHIYODA CORPORATIONANNUAL REPORT FY2016Minato Mirai Grand Central Tower 4-6-2, Minatomirai, Nishi-ku, Yokohama 220-8765, Japan Tel: (81)45-225-7777 (voice guidance) http://www.chiyoda-corp.com/en/ MEMO STOCK INFORMATION (As of March 31, 2017) Authorized Shares Capital Stock Issued 570,000,000 260,324,529 Number of Shareholders Number of Shares per Unit 20,380 1,000 Stock Code ISIN: JP3528600004 SEDOL1: 6191704 JP TSE: 6366 Major Shareholders Mitsubishi Corporation The Master Trust Bank of Japan, Ltd. (Trust account) Japan Trustee Services Bank, Ltd. (Trust account) The Bank of Tokyo-Mitsubishi UFJ, Ltd. Trust & Custody Services Bank, Ltd. Mitsubishi UFJ Trust and Banking Corporation STATE STREET BANK AND TRUST COMPANY Japan Trustee Services Bank, Ltd. (Trust account 9) Japan Trustee Services Bank, Ltd. (Trust account 5) Meiji Yasuda Life Insurance Company Note: Ratio of Shares Owned excludes treasury shares of 1,351,100. Number of Shares Owned (Thousands of Shares) Ratio of Shares Owned (%) Breakdown by Shareholder 86,931 20,652 11,593 9,033 6,631 4,274 3,707 3,568 2,970 2,265 33.57 7.97 4.48 3.49 2.56 1.65 1.43 1.38 1.15 0.87 Total Number of Shares Issued: 260,325 thousand Financial Institutions Securities Companies Other Corporations Foreign Investors and Others Individuals and Others 27.81% 3.62% 36.05% 14.29% 18.23% Monthly Share Price (April 2013 – March 2017) on the Tokyo Stock Exchange Share Price (left)　 Volume (right) (Thousands of shares) 150,000 100,000 50,000 0 2013 2014 2015 2016 2017 (Yen) 2,000 1.500 1,000 500 0 43 CHIYODA CORPORATIONANNUAL REPORT FY2016CORPORATE PHILOSOPHY Enhance our business in aiming for harmony between energy and the environment, and contribute to the sustainable development of society as an integrated engineering company through the use of our collective wisdom and painstakingly developed technology. CONSOLIDATED FINANCIAL STATEMENTS FY2016 For the year ended March 31, 2017, and Independent Auditor’s Report Chiyoda Corporation and Consolidated Subsidiaries CONSOLIDATED BALANCE SHEETS (March 31, 2017) Consolidated Balance Sheet March 31, 2017 ASSETS CURRENT ASSETS: Cash and cash equivalents (Note 14) Short-term investments (Note 14) Notes and accounts receivable—trade (Note 14) Costs and estimated earnings on long-term construction contracts (Notes 4 and 14) Costs of construction contracts in process Accounts receivable—other Jointly controlled assets of joint venture (Note 14) Deferred tax assets (Note 11) Prepaid expenses and other (Note 21) Allowance for doubtful accounts Millions of Yen 2017 2016 Thousands of U.S. Dollars (Note 1) 2017 ¥ 138,889 4,483 40,377 ¥ 136,919 7,795 35,651 $ 1,240,081 40,034 360,509 19,487 24,220 7,761 164,283 9,586 17,696 (1,541) 33,644 35,053 7,112 179,360 12,889 8,888 (2,285) 173,999 216,257 69,295 1,466,813 85,593 158,006 (13,762) LIABILITIES AND EQUITY CURRENT LIABILITIES: Short-term borrowings (Notes 8 and 14) Current portion of long-term debt (Notes 8 and 14) Notes and accounts payable—trade (Note 14) Advance receipts on construction contracts Income taxes payable (Note 14) Deposits received Allowance for warranty costs for completed works Allowance for losses on construction contracts Provision for loss on business of subsidiaries and associated companies Accrued expenses and other Millions of Yen 2017 2016 ¥ 203 10,023 160,096 85,187 668 1,087 319 3,315 22,919 17,360 ¥ 333 45 150,078 135,667 2,841 1,209 337 3,160 17,432 Thousands of U.S. Dollars (Note 1) 2017 $ 1,819 89,491 1,429,436 760,599 5,972 9,708 2,855 29,599 204,638 155,008 Total current assets 425,244 455,030 3,796,828 Total current liabilities 301,182 311,106 2,689,131 PROPERTY, PLANT AND EQUIPMENT: Land Buildings and structures Machinery and equipment Tools, furniture and fixtures Construction in progress Total Accumulated depreciation 5,266 13,892 547 7,236 22 26,965 (13,806) 5,266 13,887 635 7,439 22 27,251 (13,309) 47,018 124,044 4,888 64,607 203 240,763 (123,276) LONG-TERM LIABILITIES: Long-term debt (Notes 8 and 14) Liability for retirement benefits (Note 9) Provision for treatment of PCB waste Asset retirement obligations Other Total long-term liabilities Net property, plant and equipment 13,158 13,942 117,487 COMMITMENTS AND CONTINGENT LIABILITIES INVESTMENTS AND OTHER ASSETS: Investment securities (Notes 5 and 14) Investments in and advances to unconsolidated subsidiaries and associated companies (Note 7) Goodwill (Note 6) Software Asset for retirement benefits (Note 9) Deferred tax assets (Note 11) Other assets Allowance for doubtful accounts 2,748 5,616 2,051 5,989 84 4,967 1,806 (336) 14,113 29,650 3,931 7,079 94 2,894 1,861 (379) 24,540 50,143 18,317 53,481 758 44,353 16,126 (3,002) Total investments and other assets 22,928 59,247 204,718 (Notes 8, 13, 15, 16 and 21) EQUITY (Notes 10 and 19): Common stock—authorized, 570,000 thousand shares; issued, 260,324 thousand shares in 2017 and 2016 Capital surplus Retained earnings Treasury stock—at cost, 1,351 thousand shares in 2017 and 1,340 thousand shares in 2016 Accumulated other comprehensive income (loss): Unrealized gain on available-for-sale securities Deferred gain (loss) on derivatives under hedge accounting Foreign currency translation adjustments Defined retirement benefit plans Total Noncontrolling interests Total equity 30 1,522 338 1,010 121 3,023 10,036 2,134 340 996 1,477 14,985 275 13,593 3,025 9,018 1,085 26,998 43,396 37,112 72,132 43,396 37,112 115,839 387,467 331,362 644,043 (1,431) (1,422) (12,777) 379 499 2,656 592 155,339 1,785 2,386 (1,618) 4,171 300 200,166 1,961 3,392 4,460 23,722 5,290 1,386,963 15,940 157,125 202,128 1,402,903 TOTAL ¥ 461,331 ¥ 528,219 $ 4,119,033 TOTAL ¥ 461,331 ¥ 528,219 $ 4,119,033 See notes to consolidated financial statements. - 2 - 01 02 CHIYODA CORPORATIONCONSOLIDATED FINANCIAL STATEMENTS FY2016Chiyoda Corporation and Consolidated Subsidiaries CONSOLIDATED STATEMENTS OF INCOME Consolidated Statement of Operations (Years Ended March 31, 2017 and 2016) Year Ended March 31, 2017 Chiyoda Corporation and Consolidated Subsidiaries CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Consolidated Statement of Comprehensive Income (Years Ended March 31, 2017 and 2016) Year Ended March 31, 2017 Millions of Yen 2017 2016 Thousands of U.S. Dollars (Note 1) 2017 Millions of Yen 2017 2016 Thousands of U.S. Dollars (Note 1) 2017 ¥ 603,745 ¥ 611,548 $ 5,390,587 NET (LOSS) INCOME ¥ (41,251) ¥ 3,496 $ (368,321) REVENUE COST OF REVENUE Gross profit 38,223 41,520 341,284 SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES (Note 12) 22,543 25,505 201,284 565,521 570,028 5,049,303 OTHER COMPREHENSIVE LOSS (Note 17): Unrealized loss on available-for-sale securities Deferred gain on derivatives under hedge accounting Foreign currency translation adjustments Defined retirement benefit plans Share of other comprehensive loss of associates (2,006) 2,129 (1,102) 291 (451) (4,831) 441 (1,135) (775) (83) (17,917) 19,017 (9,843) 2,603 (4,030) Operating income 15,680 16,015 140,000 Total other comprehensive loss (1,139) (6,385) (10,170) COMPREHENSIVE LOSS ¥ (42,391) ¥ (2,888) $ (378,491) TOTAL COMPREHENSIVE LOSS ATTRIBUTABLE TO: Owners of the parent Noncontrolling interests ¥ (42,228) (162) ¥ (2,844) (44) $ (377,039) (1,452) See notes to consolidated financial statements. OTHER (EXPENSES) INCOME: Interest and dividend income Gain on sales of investment securities Interest expense Equity in losses of associated companies (Note 7) Foreign exchange loss Loss on valuation of investment securities Impairment loss (Note 6) Provision for loss on business of subsidiaries and associated companies (Note 7) Loss on sales of shares of subsidiaries and associated companies Other—net 2,487 1,937 (209) (17,106) (3,455) (393) (766) (22,919) (1,146) (477) 2,484 2,686 (216) (1,318) (665) (4,431) (93) 22,207 17,296 (1,868) (152,733) (30,848) (3,513) (6,839) (204,638) (10,234) (4,262) Other expenses—net (42,048) (1,554) (375,435) (LOSS) INCOME BEFORE INCOME TAXES (26,368) 14,460 (235,435) INCOME TAXES (Note 11): Current Deferred 15,026 (143) 8,708 2,255 134,164 (1,278) Total income taxes 14,883 10,963 132,885 NET (LOSS) INCOME (41,251) 3,496 (368,321) NET (LOSS) INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS (135) 121 (1,207) NET (LOSS) INCOME ATTRIBUTABLE TO Chiyoda Corporation and Consolidated Subsidiaries OWNERS OF THE PARENT ¥ (41,116) ¥ 3,375 $ (367,113) Consolidated Statement of Operations Year Ended March 31, 2017 - 3 - Yen 2017 2016 U.S. Dollars 2017 (Continued) - 5 - PER SHARE OF COMMON STOCK (Notes 2.z and 18): Basic net (loss) income Cash dividends applicable to the year ¥ (158.76 ) 6.00 ¥ 13.03 10.00 $ (1.42 ) 0.05 See notes to consolidated financial statements. 03 04 - 4 - (Concluded) CHIYODA CORPORATIONCONSOLIDATED FINANCIAL STATEMENTS FY2016Chiyoda Corporation and Consolidated Subsidiaries CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY Consolidated Statement of Changes in Equity (Years Ended March 31, 2017 and 2016) Year Ended March 31, 2017 Thousands Outstanding Number of Shares of Common Stock Common Stock Capital Surplus Retained Earnings Treasury Stock Millions of Yen Accumulated Other Comprehensive Income (Loss) Unrealized Gain on Available- for-Sale Securities Deferred Gain (Loss) on Derivatives under Hedge Accounting Foreign Currency Translation Adjustments Defined Retirement Benefit Plans Total Noncontrolling Interests Total Equity BALANCE, APRIL 1, 2015 259,001 ¥ 43,396 ¥ 37,112 ¥ 115,831 ¥ (1,405) ¥ 7,218 ¥ (2,064) ¥ 5,229 ¥ 1,076 ¥ 206,395 ¥ 2,010 ¥ 208,405 Net income attributable to owners of the parent Cash dividends, ¥13.00 per share Purchase of treasury stock Net change in the year (16) 3,375 (3,367) (16) (4,831) 445 (1,057) BALANCE, MARCH 31, 2016 258,984 43,396 37,112 115,839 (1,422) 2,386 (1,618) 4,171 3,375 (3,367) (16) (6,219) 3,375 (3,367) (16) (6,269) (49) 200,166 1,961 202,128 (775) 300 Net loss attributable to owners of the parent Cash dividends, ¥10.00 per share Purchase of treasury stock Net change in the year (11) (41,116) (2,589) (8) (2,006) 2,118 (1,514) 291 (41,116) (2,589) (8) (1,111) (41,116) (2,589) (8) (1,287) (175) BALANCE, MARCH 31, 2017 258,973 ¥ 43,396 ¥ 37,112 ¥ 72,132 ¥ (1,431) ¥ 379 ¥ 499 ¥ 2,656 ¥ 592 ¥ 155,339 ¥ 1,785 ¥ 157,125 Common Stock Capital Surplus Retained Earnings Treasury Stock Thousands of U.S. Dollars (Note 1) Accumulated Other Comprehensive Income (Loss) Unrealized Gain on Available- for-Sale Securities Deferred Gain (Loss) on Derivatives under Hedge Accounting Foreign Currency Translation Adjustments Defined Retirement Benefit Plans Total Noncontrolling Interests Total Equity BALANCE, MARCH 31, 2016 $ 387,467 $ 331,362 $ 1,034,280 $ (12,697) $ 21,309 $ (14,452) $ 37,247 $ 2,686 $ 1,787,205 $ 17,509 $ 1,804,714 Net loss attributable to owners of the parent Cash dividends, $0.09 per share Purchase of treasury stock Net change in the year (367,113) (23,123) (79) (17,917) 18,912 (13,524) 2,603 (367,113) (23,123) (79) (9,926) (1,568) (367,113) (23,123) (79) (11,494) BALANCE, MARCH 31, 2017 $ 387,467 $ 331,362 $ 644,043 $ (12,777) $ 3,392 $ 4,460 $ 23,722 $ 5,290 $ 1,386,963 $ 15,940 $ 1,402,903 See notes to consolidated financial statements. - 6 - 05 06 CHIYODA CORPORATIONCONSOLIDATED FINANCIAL STATEMENTS FY2016Chiyoda Corporation and Consolidated Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS Consolidated Statement of Cash Flows (Years Ended March 31, 2017 and 2016) Year Ended March 31, 2017 Chiyoda Corporation and Consolidated Subsidiaries Consolidated Statement of Cash Flows Year Ended March 31, 2017 OPERATING ACTIVITIES: (Loss) income before income taxes Adjustments for: Income taxes paid Depreciation Impairment loss Amortization of goodwill (Decrease) increase in allowance for doubtful accounts Decrease in allowance for warranty costs for completed works Increase (decrease) in allowance for losses on construction contracts Decrease in liability for retirement benefits Foreign exchange (gain) loss—net Increase in provision for loss on business of subsidiaries and associated companies Loss on sales of shares of subsidiaries and associated companies Equity in losses of associated companies Gain on sales of investment securities Loss on valuation of investment securities Changes in operating assets and liabilities: Decrease (increase) in trade notes and accounts receivable, and costs and estimated earnings on long-term construction contracts Decrease in costs of construction contracts in process Increase in trade notes and accounts payable (Decrease) increase in advance receipts on construction contracts (Increase) decrease in accounts receivable—other Decrease in jointly controlled assets of joint venture Increase in interest and dividend receivable Other—net Total adjustments Millions of Yen 2017 2016 Thousands of U.S. Dollars (Note 1) 2017 Millions of Yen 2017 2016 Thousands of U.S. Dollars (Note 1) 2017 ¥ (26,368) ¥ 14,460 $ (235,435) (Forward) ¥ (4,375) ¥ 55,526 $ (39,066) Net cash (used in) provided by operating activities— (13,821) 3,643 766 547 (701) (15) 154 (428) (186) 22,919 1,146 17,106 (1,937) 393 8,141 10,786 11,401 (48,668) (1,901) 13,666 (1,029) 11 21,993 (1,673) 3,589 4,431 1,256 2,387 (21) (826) (117) 813 1,318 (2,686) (16,491) 24,543 13,293 12,184 5,158 3,501 (812) (8,781) 41,065 (123,409) 32,529 6,839 4,886 (6,262) (139) 1,380 (3,822) (1,665) 204,638 10,234 152,733 (17,296) 3,513 72,695 96,305 101,798 (434,543) (16,978) 122,019 (9,189) 98 196,369 INVESTING ACTIVITIES: Net decrease (increase) in time deposits Purchases of property, plant and equipment Purchases of intangible assets Payments for purchases of investment securities Proceeds from sales of investment securities Payments of loans receivable Proceeds from collections of loans Other—net 3,043 (649) (1,451) (351) 15,554 (12,188) 6,382 95 (7,739) (806) (1,801) (21,998) 5,463 (382) 489 25 27,170 (5,803) (12,963) (3,134) 138,879 (108,825) 56,982 853 Net cash provided by (used in) investing activities 10,433 (26,750) 93,159 FINANCING ACTIVITIES: Net decrease in short-term borrowings Repayments of long-term debt Payments of cash dividends Other—net (50) (3) (2,586) (52) (498) (4) (3,362) (76) (450) (33) (23,096) (464) Net cash used in financing activities (2,693) (3,942) (24,045) FOREIGN CURRENCY TRANSLATION ADJUSTMENTS ON CASH AND CASH EQUIVALENTS (1,395) (1,159) (12,462) NET INCREASE IN CASH AND CASH EQUIVALENTS 1,969 23,673 17,584 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 136,919 113,246 1,222,496 CASH AND CASH EQUIVALENTS, END OF YEAR ¥ 138,889 ¥ 136,919 $ 1,240,081 Net cash (used in) provided by operating activities—(Forward) ¥ (4,375) ¥ 55,526 $ (39,066) See notes to consolidated financial statements. - 7 - (Continued) - 8 - (Concluded) 07 08 CHIYODA CORPORATIONCONSOLIDATED FINANCIAL STATEMENTS FY2016Chiyoda Corporation and Consolidated Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Notes to Consolidated Financial Statements Year Ended March 31, 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 Chiyoda Corporation (the "Company") is incorporated and principally operates. 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 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. Japanese yen figures less than a million yen are rounded down to the nearest million, except for per share data. U.S. dollar figures less than a thousand U.S. dollars are rounded down to the nearest thousand, except for per share data. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a. Consolidation—The consolidated financial statements as of March 31, 2017, include the accounts of the Company and its 30 (30 in 2016) 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. Investments in seven (seven in 2016) associated companies are accounted for by the equity method. Investments in the remaining unconsolidated subsidiaries and associated companies 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. Most of the foreign consolidated subsidiaries have a December 31 year-end, which is different from that of the Company. As a result, adjustments have been made for any significant transactions which took place during the period between the year-end of these subsidiaries and the year-end of the Company. 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 a period of 5 to 20 years. 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. 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) 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 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. c. 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. d. Construction Contracts—Under Japanese GAAP, construction revenue and construction costs are recognized by the percentage-of-completion method if the outcome of a construction contract can be estimated reliably. When total construction revenue, total construction costs and the stage of completion of the contract at the balance sheet date can be reliably measured, the outcome of a construction contract is deemed to be estimated reliably. If the outcome of a construction contract cannot be reliably estimated, the completed-contract method should be applied. When it is probable that the total construction costs will exceed total construction revenue, an estimated loss on the contract should be immediately recognized by providing for a loss on such construction contracts. - 9 - - 10 - 09 10 CHIYODA CORPORATIONCONSOLIDATED FINANCIAL STATEMENTS FY2016Concerning the construction contracts, the Group applies the following accounting methods: Unbilled costs on contracts, which are accounted for by the completed-contract method, are stated as costs of construction contracts in process. Payments received in excess of costs and estimated earnings on contracts, which are accounted for by the percentage-of-completion method, and payments received on the other contracts, are presented as current liabilities. Costs of preparation work for unsuccessful proposals and other projects that are not realized are charged to income, as incurred, and are included in cost of revenue. e. 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. f. g. Short-Term Investments—Short-term investments are time deposits, which will mature three months after the date of acquisition. Short-term investments are exposed to insignificant risk of changes in value. Investment Securities—All marketable securities are classified as available-for-sale securities and are reported at fair value, with unrealized gains and losses, net of applicable taxes, reported in a separate component of equity. The cost of securities sold is determined based on the moving-average method. Nonmarketable available-for-sale securities are stated at cost determined by the moving-average method or at amortized cost. For other-than-temporary declines in fair value, investment securities are reduced to net realizable value by a charge to income. h. Jointly Controlled Assets of Joint Venture—The jointly controlled assets of the joint venture consist of jointly controlled cash recognized based on the Company's share of the venture. i. j. Allowance for Doubtful Accounts—The allowance for doubtful accounts is stated in amounts considered to be appropriate based on the Group's past credit loss experience and an evaluation of potential losses in the receivables outstanding. Property, Plant and Equipment—Property, plant and equipment are stated at cost. Depreciation is computed by the declining-balance method, except for buildings owned by the Company and structures acquired on or after April 1, 2016, that are depreciated using the straight-line method, at rates based on the estimated useful lives of the assets. The range of useful lives is from 8 to 57 years for buildings and structures, from 4 to 17 years for machinery and equipment, and from 4 to 15 years for tools, furniture, and fixtures. Equipment held for lease is depreciated by the straight-line method over the respective lease periods. Pursuant to an amendment to the Corporate Tax Act, the Company adopted ASBJ PITF No. 32, "Practical Solution on a change in depreciation method due to Tax Reform 2016," and changed its depreciation method for structures acquired on or after April 1, 2016, from the declining-balance method to the straight-line method. The effect of this change on profit and loss is immaterial. k. Long-Lived Assets—The Group reviews its long-lived assets for impairment whenever events or changes in circumstance indicate the carrying amount of an asset or asset group may not be recoverable. An impairment loss is recognized if the carrying amount of an asset or asset group exceeds the sum of the undiscounted future cash flows expected to result from the continued use and eventual disposition of the asset or asset group. The impairment loss would be measured as the amount by which the carrying amount of the asset exceeds its recoverable amount, which is the higher of the discounted cash flows from the continued use and eventual disposition of the asset or the net selling price at disposition. l. Software—Software for internal use is amortized on a straight-line basis over its estimated useful life (five years at the maximum). m. Other Assets—Intangible assets are carried at cost less accumulated amortization, which is calculated by the straight-line method over their estimated useful lives. n. Allowance for Warranty Costs for Completed Work—The allowance for warranty costs for completed work is provided based on past rate experience. o. Allowance for Losses on Construction Contracts—The allowance for losses on construction contracts is provided for an estimated amount of probable losses to be incurred in future years in respect of construction projects in progress. When there are losses on completed-contract method applied contracts, the allowance for losses on construction contracts is offset against the costs of construction contracts in process in the balance sheet. p. q. r. Provision for Loss on Business of Subsidiaries and Associated Companies—The provision for loss on business of subsidiaries and associated companies is provided for an estimated amount of probable losses at the end of the fiscal year based on consideration of the financial conditions and business results, etc., of the subsidiaries and associated companies. Provision for Treatment of PCB Waste—Provision for treatment of PCB (Poly Chlorinated Biphenyl) waste is provided based on estimated costs of the treatment for PCB products and equipment as well as their collection and transportation fees. Retirement and Pension Plans—The Company and consolidated subsidiaries have funded or unfunded defined benefit pension plans and defined contribution pension plans for employees. Certain consolidated subsidiaries have defined benefit corporate pension plans or severance lump-sum payment plans, and calculate retirement benefit expenses by using the simplified method. The Company and its domestic consolidated subsidiaries account 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 are amortized on a straight-line basis over 10 years within the average remaining service period. 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, are recognized in profit or loss over a certain period no longer than the expected average remaining service period of the employees. - 11 - - 12 - 11 12 CHIYODA CORPORATIONCONSOLIDATED FINANCIAL STATEMENTS FY2016s. Asset Retirement Obligations—Under Japanese GAAP, an asset retirement obligation is defined as 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. t. Research and Development Costs—Research and development costs are charged to income as incurred. u. Leases—Japanese GAAP require that all finance lease transactions be capitalized by recognizing lease assets and lease obligations in the balance sheet. All other leases are accounted for as operating leases. v. Income Taxes—The provision for income taxes is computed based on the pretax income included in the consolidated statement 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 and its wholly-owned domestic subsidiaries file a tax return under the consolidated corporate-tax system, which allows companies to base tax payments on the combined profits or losses of the parent company and its wholly-owned domestic subsidiaries. w. Foreign Currency Transactions—All short-term and long-term monetary receivables and payables denominated in foreign currencies are translated into Japanese yen at the exchange rates at the balance sheet date. Foreign exchange gains and losses from translation are recognized in the consolidated statement of operations to the extent that they are not hedged by foreign currency forward contracts. Derivative financial instruments are classified and accounted for as follows: (1) All derivatives are recognized as either assets or liabilities and measured at fair value, with gains or losses recognized in the consolidated statement of operations. (2) For derivatives used for hedging purposes, if such derivatives qualify for hedge accounting because of high correlation and effectiveness between the hedging instruments and the hedged items, gains or losses on derivatives are deferred until maturity of the hedged transactions. Foreign currency forward contracts are utilized to hedge foreign exchange risks. Certain assets and liabilities on construction contracts denominated in foreign currencies are translated at the contracted rates if the forward contracts qualify for hedge accounting. Foreign currency deposits are held to hedge foreign exchange risks derived from forecasted purchases of fixed assets denominated in foreign currency. Interest rate swaps which qualify for hedge accounting and meet specific matching criteria are not remeasured at market value but the differential paid or received under the swap agreements is recognized and included in interest expense. z. Per Share Information—Basic net income per share is computed by dividing net income available 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. Diluted net income per share is not disclosed because there was no potential stock having a dilutive effect for the fiscal years ended March 31, 2017 and 2016. Cash dividends per share presented in the accompanying consolidated statement of operations are dividends applicable to the respective fiscal years, including dividends to be paid after the end of the year. 3. CHANGES IN PRESENTATION x. Foreign Currency Financial Statements—Balance sheet accounts of consolidated foreign subsidiaries are (Consolidated Balance Sheet) translated into Japanese yen at the current exchange rate as of the balance sheet date except for equity, which is translated at the historical rate. Differences arising from such translation are shown as "Foreign currency translation adjustments" under accumulated other comprehensive income in a separate component of equity. Revenue and expense accounts of consolidated foreign subsidiaries are translated into Japanese yen at the current exchange rate as of the balance sheet date. y. Derivatives and Hedging Activities—The Group uses derivative financial instruments, including foreign currency forward contracts and interest swap contracts, as a means of hedging exposure to foreign currency risks and interest rate risks. The Group does not enter into derivatives for trading or speculative purposes. "Deferred tax assets," included within "Other assets" of the investments and other assets section until the previous consolidated fiscal year, is separately stated from the fiscal year ended March 31, 2017, as it has exceeded 1% of the total assets. The prior period consolidated financial statements have been reclassified in accordance with the new presentation. (Consolidated Statement of Cash Flows) "Increase (decrease) in deposits received" included within operating activities, which had previously been separately presented, is included in "Other" from the fiscal year ended March 31, 2017, as its materiality has decreased. The prior period consolidated financial statements have been reclassified in accordance with the new presentation. - 13 - - 14 - 13 14 CHIYODA CORPORATIONCONSOLIDATED FINANCIAL STATEMENTS FY20164. CONSTRUCTION CONTRACTS The information for the available-for-sale securities which were sold during the years ended March 31, 2017 and 2016, was as follows: Costs and estimated earnings recognized with respect to construction contracts which are accounted for by the percentage-of-completion method at March 31, 2017 and 2016, were as follows: March 31, 2017 Millions of Yen 2017 2016 Thousands of U.S. Dollars 2017 Millions of Yen Realized Gains Realized Losses Proceeds Costs and estimated earnings Amounts billed ¥ 539,987 (520,499) ¥ 550,114 (516,469) $ 4,821,314 (4,647,314) Securities classified as— Available-for-sale—equity securities ¥ 9,962 ¥ 1,937 Net ¥ 19,487 ¥ 33,644 $ 173,999 March 31, 2016 5. INVESTMENT SECURITIES Investment securities at March 31, 2017 and 2016, consisted of the following: Millions of Yen 2017 2016 Thousands of U.S. Dollars 2017 Securities classified as— Available-for-sale—equity securities March 31, 2017 Millions of Yen Realized Gains Realized Losses Proceeds ¥ 5,467 ¥ 2,686 Non-current—Equity securities ¥ 2,748 ¥ 14,113 $ 24,540 The costs and aggregate fair values of investment securities at March 31, 2017 and 2016, were as follows: March 31, 2017 Millions of Yen Cost Unrealized Gains Unrealized Losses Fair Value Securities classified as— Available-for-sale—equity securities ¥ 680 ¥ 421 ¥ 1,100 March 31, 2016 Millions of Yen Cost Unrealized Gains Unrealized Losses Fair Value Securities classified as— Available-for-sale—equity securities ¥ 8,697 ¥ 3,382 ¥ 12,080 March 31, 2017 Thousands of U.S. Dollars Unrealized Gains Unrealized Losses Fair Value Cost Securities classified as— Available-for-sale—equity securities $ 6,072 $ 3,759 $ 5 $ 9,826 Thousands of U.S. Dollars Realized Gains Realized Losses Proceeds Securities classified as— Available-for-sale—equity securities $ 88,947 $ 17,296 6. IMPAIRMENT LOSS OF LONG-LIVED ASSETS Impairment loss on long-lived assets for the fiscal year ended March 31, 2017, was as follows: March 31, 2017 Location Used Status The United Kingdom Indonesia — — Category of Assets Goodwill Goodwill Impairment Loss Millions of Yen Thousands of U.S. Dollars ¥ 469 296 $ 4,191 2,647 Regarding the goodwill recorded in the acquisition of the shares of subsidiaries in UK and Indonesia, the Group concluded that excess earning power have been damaged, as the business plan considered at the time of recognition of the goodwill is lower than the performance of each business carried out by the Group subsidiaries in UK and Indonesia. - 15 - - 16 - 15 16 CHIYODA CORPORATIONCONSOLIDATED FINANCIAL STATEMENTS FY2016Impairment loss on long-lived assets for the fiscal year ended March 31, 2016, was as follows: Long-term debt at March 31, 2017 and 2016, consisted of the following: March 31, 2016 Location Used Status Category of Assets Millions of Yen Thousands of U.S. Dollars Impairment Loss — — Goodwill ¥ 4,431 $ 39,217 During the year ended March 31, 2016, the goodwill in relation to the Group subsidiary in UK was impaired in the amount of ¥4,431 million as other expense following a fall in the long term cash flow forecasts resulting from the decline in the price of oil. The carrying amount of goodwill was written down to its recoverable amount. The recoverable amount was measured at its value in use and the discount rate used for computation of the present value of future cash flows was 16.9%. 7. INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED SUBSIDIARIES AND ASSOCIATED COMPANIES Investments in and advances to unconsolidated subsidiaries and associated companies at March 31, 2017 and 2016, were as follows: Investments Long-term receivables Total Millions of Yen 2017 2016 Thousands of U.S. Dollars 2017 ¥ 4,959 656 ¥ 28,957 693 $ 44,280 5,862 ¥ 5,616 ¥ 29,650 $ 50,143 EMAS CHIYODA Subsea Limited ("ECS"), an associated company of Chiyoda Corporation accounted for by the equity method, experienced financial hardship, brought about by a greater than anticipated slowdown of the subsea market, and filed for bankruptcy protection under Chapter 11 of the U.S Bankruptcy Code in February 2017. The Company recorded its share of ECS's net loss in "equity in losses of associated companies" of ¥15,005 million during the year ended March 31, 2017. In addition, given the current financial state of ECS and its imminent bankruptcy filing, the Company recognized a "provision for loss on business of subsidiaries and associated companies" of ¥22,919 million during the year ended March 31, 2017, related to loans and guarantee obligation. 8. SHORT-TERM BORROWINGS AND LONG-TERM DEBT Short-term borrowings as of March 31, 2017 and 2016, mainly consisted of notes to banks. The weighted average interest rates of short-term borrowings as of March 31, 2017 and 2016, were 2.0% and 1.9%, respectively. Long-term loans principally from banks, due serially through 2024, with interest rates ranging from 1.3% to 2.0% at 2017 and 2016—Unsecured Obligations under finance leases Total Less current portion Millions of Yen 2017 2016 Thousands of U.S. Dollars 2017 ¥ 10,008 45 10,053 (10,023) ¥ 10,014 67 10,081 (45) $ 89,357 409 89,767 (89,491) Long-term debt, less current portion ¥ 30 ¥ 10,036 $ 275 Annual maturities of long-term debt, excluding finance leases, at March 31, 2017, were as follows: Year Ending March 31 2018 2019 2020 2021 2022 2023 and thereafter Total Commitment-line contracts at March 31, 2017, were as follows: Commitment-line contracts Unused commitments 9. RETIREMENT AND PENSION PLANS Millions of Yen ¥ 10,004 2 Thousands of U.S. Dollars $ 89,321 22 1 13 ¥ 10,008 $ 89,357 Millions of Yen ¥ 15,000 ¥ 15,000 Thousands of U.S. Dollars $ 133,928 $ 133,928 The Company and consolidated subsidiaries have funded or unfunded defined benefit pension plans and defined contribution pension plans for employees. Under defined benefit corporate pension plans, all of which are funded, employees are entitled to certain lump-sum payments or pension payments based on cumulated points which are granted in accordance with years of continuous employment, occupational classification and performance evaluation. Under severance lump-sum payment plans, employees are entitled to certain lump-sum payments based on salary and service period. Certain consolidated subsidiaries have defined benefit corporate pension plans or severance lump-sum payment plans, and calculate retirement benefit expenses by using the simplified method. - 17 - - 18 - 17 18 CHIYODA CORPORATIONCONSOLIDATED FINANCIAL STATEMENTS FY2016(1) The changes in defined benefit obligation for the years ended March 31, 2017 and 2016, were as follows: (4) Reconciliation between the liability recorded in the consolidated balance sheet and the balances of defined benefit obligation and plan assets: Balance at beginning of year Current service cost Interest cost Actuarial (gains) losses Benefits paid Prior service cost Others Millions of Yen 2017 2016 ¥ 21,732 1,048 179 (46) (1,630) (25) ¥ 22,151 966 228 229 (1,999) 32 122 Thousands of U.S. Dollars 2017 $ 194,039 9,359 1,598 (415) (14,553) (231) Balance at end of year ¥ 21,257 ¥ 21,732 $ 189,796 (2) The changes in plan assets for the years ended March 31, 2017 and 2016, were as follows: Balance at beginning of year Expected return on plan assets Actuarial losses (gains) Contributions from the employer Benefits paid Others Millions of Yen 2017 2016 ¥ 20,314 336 126 1,007 (1,614) (41) ¥ 21,815 418 (852) 947 (1,990) (24) Thousands of U.S. Dollars 2017 $ 181,377 3,007 1,132 8,992 (14,419) (371) Balance at end of year ¥ 20,128 ¥ 20,314 $ 179,719 (3) The changes in the liability recorded in the consolidated balance sheet by using the simplified method for the years ended March 31, 2017 and 2016, were as follows: Balance at beginning of year Benefit costs Benefits paid Contribution to the plans Others Millions of Yen 2017 2016 Thousands of U.S. Dollars 2017 ¥ 621 205 (435) (79) (2) ¥ 700 288 (97) (91) (179) $ 5,547 1,830 (3,889) (706) (25) Balance at end of year ¥ 308 ¥ 621 $ 2,757 Funded defined benefit obligation Plan assets Total Unfunded defined benefit obligation Net liability arising from defined benefit obligation Liability for retirement benefits Asset for retirement benefits Net liability arising from defined benefit obligation Millions of Yen 2017 2016 Thousands of U.S. Dollars 2017 ¥ 22,151 (21,245) 905 531 ¥ 22,892 (21,429) 1,463 576 $ 197,782 (189,694) 8,087 4,746 ¥ 1,437 ¥ 2,039 $ 12,834 Millions of Yen 2017 2016 Thousands of U.S. Dollars 2017 ¥ 1,522 (84) ¥ 2,134 (94) $ 13,593 (758) ¥ 1,437 ¥ 2,039 $ 12,834 (5) The components of net periodic benefit costs for the years ended March 31, 2017 and 2016, were as follows: Service cost Interest cost Expected return on plan assets Recognized actuarial losses Amortization of prior service cost Benefit costs in simplified method Millions of Yen 2016 2017 ¥ 1,048 179 (336) 243 205 ¥ 966 228 (418) 11 (114) 288 Thousands of U.S. Dollars 2017 $ 9,359 1,598 (3,007) 2,171 1,830 Net periodic benefit costs ¥ 1,338 ¥ 963 $ 11,952 (6) Amounts recognized in other comprehensive income (before income tax effect) in respect of defined retirement benefit plans for the years ended March 31, 2017 and 2016, were as follows: Prior service cost Actuarial losses (gains) Total Millions of Yen 2017 2016 Thousands of U.S. Dollars 2017 ¥ 412 ¥ (146) (1,070) $ 3,683 ¥ 412 ¥ (1,217) $ 3,683 - 19 - - 20 - 19 20 CHIYODA CORPORATIONCONSOLIDATED FINANCIAL STATEMENTS FY2016(7) Amounts recognized in accumulated other comprehensive income (before income tax effect) in respect of a. Dividends defined retirement benefit plans as of March 31, 2017 and 2016, were as follows: Unrecognized actuarial gains ¥ (805) ¥ (393) $ (7,195) Millions of Yen 2017 2016 Thousands of U.S. Dollars 2017 Total (8) Plan assets a. Components of plan assets ¥ (805) ¥ (393) $ (7,195) Plan assets as of March 31, 2017 and 2016, consisted of the following: Debt investments Equity investments General accounts Others Total 2017 2016 29 % 34 25 12 26 % 35 25 13 100 % 100 % b. 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, 2017 and 2016, were set forth as follows: 2017 2016 Discount rate Expected rate of return on plan assets Mainly 0.7% Mainly 1.6% Mainly 0.7% Mainly 1.9% (10) Payables to defined contribution plans of the Company and consolidated subsidiaries for the years ended March 31, 2017 and 2016, were ¥604 million ($5,399 thousand) and ¥653 million, respectively. 10. EQUITY Japanese companies are subject to the Companies Act of Japan (the "Companies Act"). The significant provisions in the Companies Act that affect financial and accounting matters are summarized below: 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, an Audit & Supervisory Board 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 Board of Directors of a company with an audit and supervisory committee (as implemented under the Companies Act effective May 1, 2015) may also declare dividends at any time because such company, by its nature, meets the criteria under the Companies Act. The Company is organized as a company with an audit and supervisory committee, effective June 23, 2016. However, the Company does not meet all the above criteria. The Companies Act permits companies to distribute dividends in kind (noncash assets) to shareholders subject to a certain limitation and additional requirements. 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 and Treasury Stock Acquisition Rights 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. Under the Companies Act, stock acquisition rights are presented as a separate component of equity. The Companies Act also provides that companies can purchase both treasury stock acquisition rights and treasury stock. Such treasury stock acquisition rights are presented as a separate component of equity or deducted directly from stock acquisition rights. - 21 - - 22 - 21 22 CHIYODA CORPORATIONCONSOLIDATED FINANCIAL STATEMENTS FY201611. 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 31% and 33% for the years ended March 31, 2017 and 2016, respectively. The tax effects of significant temporary differences and tax loss carryforwards which resulted in deferred tax assets and liabilities at March 31, 2017 and 2016, were as follows: Deferred tax assets: Provision for loss on business of subsidiaries and associated companies Tax loss carryforwards Cost of revenue Adjustment of percentage of completion for foreign construction Allowance for employees' bonus Allowance for losses on construction contracts Costs of construction contracts in process Future deductible depreciation Allowance for doubtful accounts Deferred loss on derivatives under hedge accounting Other Less valuation allowance Millions of Yen 2017 2016 Thousands of U.S. Dollars 2017 ¥ 7,008 6,140 5,834 5,427 950 925 767 550 391 3,055 (15,675) $ ¥ 4,589 4,737 1,067 970 600 674 610 671 3,428 (1,694) 62,578 54,825 52,092 48,459 8,487 8,265 6,849 4,918 3,493 27,285 (139,951) 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 years ended March 31, 2017 and 2016, is as follows: Normal effective statutory tax rate Expenses not deductible for income tax purposes Nontaxable dividend income Jointly controlled assets of joint venture Difference in tax base between corporate income tax and enterprise tax Change in valuation allowance Higher income tax rates applicable to subsidiaries Effect of reduction of income tax rates on deferred tax assets Equity in losses of associated companies Other—net Actual effective tax rate * As loss before income taxes is provided, the amount is abbreviated. 2017 2016 * 33 % 1 (3) 4 4 16 15 5 2 (1) 76 % New tax reform laws enacted in 2016 in Japan do not impact on effective rates which are used for calculating deferred tax assets and liabilities, however, there are reclassifications between national tax and local tax. The effect of this change on the consolidated financial statements is immaterial. 12. RESEARCH AND DEVELOPMENT COSTS Research and development costs charged to income were ¥2,075 million ($18,534 thousand) and ¥1,908 million for the years ended March 31, 2017 and 2016, respectively. Total 15,378 15,655 137,304 13. LEASES Deferred tax liabilities: Deferred gain on derivatives under hedge accounting Unrealized gain on available-for-sale securities Other Total 226 40 557 824 987 171 1,159 2,023 358 4,974 7,357 Net deferred tax assets ¥ 14,554 ¥ 14,495 $ 129,946 Net deferred tax assets as of March 31, 2017 and 2016, were recorded in the accompanying consolidated balance sheet as follows: Current assets—Deferred tax assets Investments and other assets—Deferred tax assets Long-term liabilities—Other Millions of Yen 2017 2016 ¥ 9,586 4,967 ¥ 12,889 2,894 1,287 Thousands of U.S. Dollars 2017 $ 85,593 44,353 The Group leases certain machinery, computer equipment, and other assets. Future minimum payments under noncancelable operating leases were as follows: Due within one year Due after one year Total Millions of Yen 2017 2016 Thousands of U.S. Dollars 2017 ¥ 763 1,730 ¥ 731 1,691 $ 6,814 15,451 ¥ 2,493 ¥ 2,423 $ 22,265 14. FINANCIAL INSTRUMENTS AND RELATED DISCLOSURES (1) Group Policy for Financial Instruments The Group uses financial instruments for cash surpluses, if any, invested in low-risk financial assets, such as commercial paper. For operating capital, the Group uses bank loans. Derivatives are used, not for speculative purposes, but to manage exposure to the market risk of fluctuation in foreign currency exchange rates and interest rates. - 23 - - 24 - 23 24 CHIYODA CORPORATIONCONSOLIDATED FINANCIAL STATEMENTS FY2016(2) Nature and Extent of Risks Arising from Financial Instruments Receivables, such as trade notes and trade accounts, are exposed to customer credit risk. Although receivables in foreign currencies are exposed to the market risk of fluctuation in foreign currency exchange rates, the position, net of payables in foreign currencies, is hedged by using foreign currency forward contracts. Cash equivalents include commercial paper, which have short maturities and are used for cash surpluses. Foreign currency forward contracts are controlled under internal guidelines. The position related to particular construction contracts is identified and is reviewed monthly. Reconciliation of the transaction and balances with customers' confirmation replies is made, and the transactions related to foreign currency forward contracts are executed and accounted for under internal guidelines. Marketable and investment securities are managed by monitoring the market values and financial position of issuers on a regular basis. The Group assesses the stock price risk quantitatively so as to account for significant declines in market value as impairment losses. Short-term investments include time deposits, which will mature three months after the date of acquisition. Both commercial paper and time deposits are exposed to default risk of the issuing company. Liquidity risk management Investment securities are equity securities related to the business, which the Group operates. Marketable securities are exposed to the risk of fluctuations in stock prices. Payment terms of payables, such as trade notes and trade accounts, are generally less than one year. Although payables in foreign currencies are exposed to the market risk of fluctuation in foreign currency exchange rates, those risks are netted against the balance of receivables denominated in the same foreign currency as noted above. Bank loans are used for operating capital. Although they are exposed to the market risks from changes in interest rates, the risk is hedged by using interest rate swap contracts. Derivatives are foreign currency forward contracts and interest rate swap contracts, which are used to manage exposure to market risks from changes in foreign currency exchange rates of receivables and payables, and from changes in interest rates, respectively. Please see Notes 2.y and 15 for more details about derivatives. (3) Risk Management for Financial Instruments Credit risk management Credit risk is the risk of economic loss arising from a counterparty's failure to repay or service debt according to the contractual terms. The Group manages its credit risk from receivables on the basis of internal guidelines, which include monitoring of payment terms and balances of major customers to identify the default risk of customers at an early stage. Commercial paper and time deposits are exposed to insignificant default risk because transactions are limited to companies with high credit ratings. With respect to foreign currency forward contracts, the Group limits the counterparties to those derivatives to major financial institutions that can bear losses arising from credit risk. Market risk management (risk of foreign exchange and interest rates) Foreign currency trade receivables and payables are exposed to market risk resulting from fluctuations in foreign currency exchange rates. Such foreign exchange risk is hedged principally with foreign currency forward contracts. Interest expense associated with long-term debts is exposed to market risk resulting from changes in interest rates. Such risk is hedged by interest rate swap contracts. Liquidity risk comprises the risk that the Group cannot meet its contractual obligations in full on their maturity dates. The Group manages its liquidity risk by holding adequate volumes of liquid assets along with timely adequate financial planning. (4) Fair Values of Financial Instruments Fair values of financial instruments are based on quoted prices in active markets. If a quoted price is not available, another rational valuation technique is used instead. Also, please see Note 15 for the details of fair value for derivatives. (a) Fair values of financial instruments March 31, 2017 Cash and cash equivalents Short-term investments Notes and accounts receivable—trade Allowance for doubtful accounts* Costs and estimated earnings on long-term construction contracts Jointly controlled assets of joint venture Investment securities Total Short-term borrowings Current portion of long-term debt Notes and accounts payable—trade Income taxes payable Long-term debt Carrying Amount ¥ 138,889 4,483 40,377 (1,517) 19,487 164,283 1,100 Millions of Yen Fair Value ¥ 138,889 4,483 40,377 (1,517) 19,487 164,283 1,100 ¥ 367,104 ¥ 367,104 ¥ 203 10,004 160,096 668 4 ¥ 203 10,028 160,096 668 4 Unrealized Gain (Loss) ¥ 24 Total ¥ 170,977 ¥ 171,002 ¥ 24 - 25 - - 26 - 25 26 CHIYODA CORPORATIONCONSOLIDATED FINANCIAL STATEMENTS FY2016March 31, 2016 Cash and cash equivalents Short-term investments Notes and accounts receivable—trade Allowance for doubtful accounts* Costs and estimated earnings on long-term construction contracts Jointly controlled assets of joint venture Investment securities Total Short-term borrowings Current portion of long-term debt Notes and accounts payable—trade Income taxes payable Long-term debt Total March 31, 2017 Cash and cash equivalents Short-term investments Notes and accounts receivable—trade Allowance for doubtful accounts* Costs and estimated earnings on long-term construction contracts Jointly controlled assets of joint venture Investment securities Total Short-term borrowings Current portion of long-term debt Notes and accounts payable—trade Income taxes payable Long-term debt Carrying Amount ¥ 136,919 7,795 35,651 (2,283) 33,644 179,360 12,080 Millions of Yen Fair Value ¥ 136,919 7,795 35,651 (2,283) 33,644 179,360 12,080 ¥ 403,169 ¥ 403,169 ¥ 333 5 150,078 2,841 10,009 ¥ 333 5 150,078 2,841 10,062 ¥ 163,268 ¥ 163,320 ¥ 52 ¥ 52 Thousands of U.S. Dollars Carrying Amount Fair Value Unrealized Gain (Loss) $ 1,240,081 40,034 360,509 (13,548) $ 1,240,081 40,034 360,509 (13,548) 173,999 1,466,813 9,826 173,999 1,466,813 9,826 $ 3,277,716 $ 3,277,716 $ 1,819 89,321 1,429,436 5,972 36 $ 1,819 89,538 1,429,436 5,972 36 $ 217 Total $ 1,526,586 $ 1,526,803 $ 217 * Allowance for doubtful accounts corresponding to trade receivable is deducted. Unrealized Gain (Loss) The carrying values of the accounts mentioned above approximate fair value because of their short maturities. Cash and Cash Equivalents, Short-Term Investments, Notes and Accounts Receivable—Trade, and Costs and Estimated Earnings on Long-Term Construction Contracts Jointly Controlled Assets of Joint Venture The jointly controlled assets of the joint venture consists of cash recognized based on the Company's share of the venture. The carrying values of jointly controlled assets of the joint venture approximate fair value because of their short maturities. Investment Securities The fair values of investment securities are measured at the quoted market price of the stock exchange for the equity instruments. Fair value information for investment securities by classification is included in Note 5. The above schedules do not include investment securities whose fair value cannot be reliably determined. Short-Term Borrowings, Notes and Accounts Payable—Trade and Income Taxes Payable The carrying values of the accounts mentioned above approximate fair value because of their short maturities. Current Portion of Long-Term Debt (Bank Loans) and Long-Term Debt (Bank Loans) The fair value of fixed rate loans is calculated by discounting total principal and interest payments to present value using a discount rate equal to the rate that would be charged if the loan was newly borrowed. The fair value of floating rate loans, which are subject to a specific method for interest rate swaps, is calculated by discounting total principal and interest payments, which are handled together with interest rate swaps, to present value using a discount rate equal to the rate that would be charged if the loan was newly borrowed. Derivatives Fair value information for derivatives is included in Note 15. (b) Carrying amount of financial instruments whose fair values cannot be reliably determined Investment securities that do not have a quoted market price in an active market Investments in equity instruments that do not have a quoted market price in an active market Investments in unconsolidated subsidiaries and associated companies that do not have a quoted market price in an active market Millions of Yen 2017 2016 Thousands of U.S. Dollars 2017 ¥ 1,645 ¥ 2,030 $ 14,690 2 2 23 4,959 28,957 44,280 The impairment losses on investment securities for the year ended March 31, 2017, were ¥393 million ($3,513 thousand). - 27 - - 28 - 27 28 CHIYODA CORPORATIONCONSOLIDATED FINANCIAL STATEMENTS FY2016(5) Maturity Analysis for Financial Assets and Securities with Contractual Maturities 15. DERIVATIVES March 31, 2017 Derivative Transactions to Which Hedge Accounting Is Not Applied Millions of Yen Due after 1 Year through 5 Years Due after 5 Years through 10 Years ¥ 8 ¥ 8 Millions of Yen Due after 1 Year through 5 Years Due after 5 Years through 10 Years ¥ 3 ¥ 3 Due in 1 Year or Less ¥ 138,847 4,483 58,338 164,283 ¥ 365,953 Due in 1 Year or Less ¥ 136,625 7,795 67,010 179,360 ¥ 390,791 Thousands of U.S. Dollars Due after 1 Year through 5 Years Due after 5 Years through 10 Years Due in 1 Year or Less $ 1,239,712 40,034 520,881 1,466,813 $ 79 $ 3,267,441 $ 79 Cash and cash equivalents Short-term investments Notes and accounts receivable, and costs and estimated earnings on long-term construction contracts* Jointly controlled assets of joint venture Total March 31, 2016 Cash and cash equivalents Short-term investments Notes and accounts receivable, and costs and estimated earnings on long-term construction contracts Jointly controlled assets of joint venture Total March 31, 2017 Cash and cash equivalents Short-term investments Notes and accounts receivable, and costs and estimated earnings on long-term construction contracts* Jointly controlled assets of joint venture Total * Allowance for doubtful accounts is deducted. Please see Note 8 for annual maturities of long-term debt. March 31, 2017 Foreign currency forward contracts: Selling U.S.$/buying yen Selling Euro/buying yen Selling GBP/buying yen Selling AUD/buying yen Buying U.S.$/selling yen Selling U.S.$/buying Euro Selling U.S.$/buying KRW Total March 31, 2016 Foreign currency forward contracts: Selling U.S.$/buying yen Selling Euro/buying yen Selling GBP/buying yen Selling AUD/buying yen Selling MYR/buying yen Buying Euro/selling U.S.$ Buying AUD/selling Euro Buying U.S.$/selling Euro Buying AUD/selling GBP Buying U.S.$/selling GBP Millions of Yen Contract Amount Due after One Year ¥ 328 30 Contract Amount ¥ 42,679 7,071 1,471 6,199 30 166 637 Fair Value (Loss) ¥ (62) (5) (1) 6 (1) (14) (25) Unrealized Gain (Loss) ¥ (62) (5) (1) 6 (1) (14) (25) ¥ 58,256 ¥ 358 ¥ (103) ¥ (103) Millions of Yen Contract Amount Due after One Year Fair Value (Loss) Unrealized Gain (Loss) ¥ 207 ¥ (87) (1) ¥ (87) (1) 13 23 (55) (21) (3) (1) 6 23 (55) (21) (3) (1) 6 Contract Amount ¥ 42,188 6,438 5,088 8,665 1,392 98 575 191 1,029 195 Total ¥ 65,863 ¥ 221 ¥ (141) ¥ (141) - 29 - - 30 - 29 30 CHIYODA CORPORATIONCONSOLIDATED FINANCIAL STATEMENTS FY2016March 31, 2017 March 31, 2016 Foreign currency forward contracts— Accounted for under deferred hedge accounting method: Selling U.S.$/buying yen Buying U.S.$/selling yen Buying Euro/selling yen Buying Euro/selling U.S.$ Buying KRW/selling U.S.$ Total Other*1: Selling U.S.$/buying yen Buying U.S.$/selling yen Buying Euro/selling yen Total Hedged Item Contract Amount Millions of Yen Contract Amount Due after One Year Fair Value (Loss) Foreign currency forecasted transaction ¥ 6,491 473 302 1,292 1,293 ¥ 1,465 226 100 ¥ (266) (23) (12) (106) 33 ¥ 9,852 ¥ 1,792 ¥ (376) Receivables Payables ¥ 415 64 22 ¥ 502 ¥ ¥ 22 22 Interest rate swaps*2 (fixed rate payment, Long-term debt ¥ 10,000 ¥ 10,000 floating rate receipt) Total ¥ 10,000 ¥ 10,000 Foreign currency forward contracts: Selling U.S.$/buying yen Selling Euro/buying yen Selling GBP/buying yen Selling AUD/buying yen Buying U.S.$/selling yen Selling U.S.$/buying Euro Selling U.S.$/buying KRW Thousands of U.S. Dollars Contract Amount Due after One Year $ 2,931 271 Fair Value (Loss) $ (558) (45) (9) 60 (10) (128) (231) Unrealized Gain (Loss) $ (558) (45) (9) 60 (10) (128) (231) Contract Amount $ 381,069 63,135 13,136 55,351 271 1,490 5,695 Total $ 520,151 $ 3,203 $ (923) $ (923) Derivative Transactions to Which Hedge Accounting Is Applied March 31, 2017 Foreign currency forward contracts— Accounted for under deferred hedge accounting method: Selling U.S.$/buying yen Buying U.S.$/selling yen Buying Euro/selling yen Buying SEK/selling yen Total Other*1: Selling U.S.$/buying yen Buying Euro/selling yen Total Hedged Item Foreign currency forecasted transaction Millions of Yen Contract Amount Due after One Year Contract Amount Fair Value (Loss) ¥ 657 141 ¥ 3,554 237 4 30 ¥ (28) (6) (1) ¥ 3,825 ¥ 799 ¥ (37) Receivables ¥ ¥ 519 11 531 Interest rate swaps*2 (fixed rate payment, Long-term debt ¥ 10,000 floating rate receipt) Total ¥ 10,000 - 31 - - 32 - 31 32 CHIYODA CORPORATIONCONSOLIDATED FINANCIAL STATEMENTS FY2016March 31, 2017 17. OTHER COMPREHENSIVE LOSS Thousands of U.S. Dollars The components of other comprehensive loss for the years ended March 31, 2017 and 2016, were as follows: Foreign currency forward contracts— Accounted for under deferred hedge accounting method: Selling U.S.$/buying yen Buying U.S.$/selling yen Buying Euro/selling yen Buying SEK/selling yen Total Other*1: Selling U.S.$/buying yen Buying Euro/selling yen Total Hedged Item Contract Amount Contract Amount Due after One Year Fair Value (Loss) Foreign currency forecasted transaction $ 31,736 2,117 36 269 $ 5,874 1,260 $ (251) (61) (5) (14) $ 34,160 $ 7,135 $ (332) Receivables $ 4,638 101 $ 4,746 Unrealized loss on available-for-sale securities: Losses arising during the year Reclassification adjustments to profit or loss Amount before income tax effect Income tax effect Total Deferred gain on derivatives under hedge accounting: Gains arising during the year Reclassification adjustments to profit or loss Adjustment to acquisition cost of assets Amount before income tax effect Income tax effect Interest rate swaps*2 (fixed rate payment, Long-term debt $ 89,285 Total floating rate receipt) Total $ 89,285 Foreign currency translation adjustments— Adjustments arising during the year *1 Foreign currency forward contracts, which are applied to the foreign currency translation at the contract rate of Total the assets and liabilities on construction contracts denominated in foreign currencies. Millions of Yen 2017 2016 Thousands of U.S. Dollars 2017 ¥ (1,410) (1,543) (2,954) 947 ¥ (4,365) (2,686) (7,052) 2,220 $ (12,593) (13,782) (26,375) 8,458 ¥ (2,006) ¥ (4,831) $ (17,917) ¥ 895 351 1,780 3,027 (897) ¥ 534 202 (80) 656 (214) $ 7,998 3,138 15,898 27,034 (8,017) ¥ 2,129 ¥ 441 $ 19,017 ¥ (1,102) ¥ (1,135) ¥ (1,102) ¥ (1,135) ¥ 169 243 412 (120) ¥ (1,082) (135) (1,217) 441 $ $ $ (9,843) (9,843) 1,512 2,171 3,683 (1,080) *2 Interest rate swap contracts accounted for under a specific method, are treated as part of the hedged long-term debt and thus their fair values are integrally computed with those of the hedged long-term debt. See Note 14 for the fair value of long-term debt. 16. CONTINGENT LIABILITIES At March 31, 2017, the Group had the following contingent liabilities: Guarantees on employees' housing loans and others Performance bond for unconsolidated subsidiaries and associated companies Millions of Yen ¥ 43 1,300 Thousands of U.S. Dollars $ 384 11,608 Defined retirement benefit plans: Adjustments arising during the year Reclassification adjustments to profit or loss Amount before income tax effect Income tax effect Total ¥ 291 ¥ (775) $ 2,603 Share of other comprehensive loss of associates: Loss arising during the year Reclassification adjustments to profit or loss Total ¥ (1,380) 928 ¥ (451) ¥ ¥ (83) $ (12,323) 8,292 (83) $ (4,030) Total other comprehensive loss ¥ (1,139) ¥ (6,385) $ (10,170) - 33 - - 34 - 33 34 CHIYODA CORPORATIONCONSOLIDATED FINANCIAL STATEMENTS FY201618. NET (LOSS) INCOME PER SHARE 20. SEGMENT INFORMATION A reconciliation of the differences between basic and diluted net (loss) income per share ("EPS") for the years ended March 31, 2017 and 2016, was as follows: Year Ended March 31, 2017 Millions of Yen Net Loss Attributable to Owners of the Parent Thousands of Shares Weighted- Average Shares Yen U.S. Dollars EPS Basic EPS—Net loss available to common shareholders ¥ (41,116) 258,979 ¥ (158.76 ) $ (1.42 ) There is no dilutive effect for the year ended March 31, 2017. Year Ended March 31, 2016 Millions of Yen Net Income Attributable to Owners of the Parent Thousands of Shares Weighted- Average Shares Yen EPS Under Japanese accounting standards, 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. (1) Description of Reportable Segments The Group's reportable segments are those for which separate financial information is available and regular evaluation by the Company's management is being performed in order to decide how resources are allocated within the Group. The Group globally provides "Engineering" services, including planning, engineering, construction, procurement, commissioning, and maintenance, adapting the most appropriate functions of each related company. (2) Methods of Measurement for the Amounts of Sales, Profit (Loss), Assets, Liabilities, 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." The profit in reporting segments is based on the operating income. Intersegment income and transfers are measured at the quoted market price. (3) Information about Sales, Profit, Assets, Liabilities, and Other Items Basic EPS—Net income available to common shareholders ¥ 3,375 258,990 ¥ 13.03 Year Ended March 31, 2017 There is no dilutive effect for the year ended March 31, 2016. 19. SUBSEQUENT EVENT The following appropriation of retained earnings at March 31, 2017, was approved at the Company's shareholders' meeting held on June 26, 2017: Year-end cash dividends, ¥6.00 ($0.05) per share ¥ 1,553 $ 13,873 Millions of Yen Thousands of U.S. Dollars Millions of Yen Reportable Segment Engineering Other*1 Total Reconcili- ations*2 Consoli- dated*3 Sales: Sales to external customers Intersegment sales or transfers ¥ 600,244 21 ¥ 3,501 5,380 ¥ 603,745 5,401 ¥ (5,401) ¥ 603,745 Total ¥ 600,265 ¥ 8,881 ¥ 609,147 ¥ (5,401) ¥ 603,745 Segment profit Segment assets Segment liabilities Other: Depreciation Amortization of goodwill Investment in associated companies Increase in property, plant and equipment and intangible assets ¥ 15,416 455,596 294,553 ¥ 265 4,893 1,549 ¥ 15,682 460,489 296,102 ¥ (2) 841 8,103 ¥ 15,680 461,331 304,206 3,620 517 2,868 22 29 3,643 547 2,868 2,109 21 2,131 3,643 547 2,868 2,131 - 35 - - 36 - 35 36 CHIYODA CORPORATIONCONSOLIDATED FINANCIAL STATEMENTS FY2016Year Ended March 31, 2016 Notes for the year ended March 31, 2017: Millions of Yen Reportable Segment Engineering Other*1 Total Reconcili- ations*2 Consoli- dated*3 Sales: Sales to external customers Intersegment sales or transfers ¥ 607,693 21 ¥ 3,855 6,229 ¥ 611,548 6,250 ¥ (6,250) ¥ 611,548 Total ¥ 607,715 ¥ 10,084 ¥ 617,799 ¥ (6,250) ¥ 611,548 Segment profit Segment assets Segment liabilities Other: Depreciation Amortization of goodwill Investment in associated companies Increase in property, plant and equipment and intangible assets Year Ended March 31, 2017 ¥ 15,662 522,693 316,597 ¥ 328 4,771 1,476 ¥ 15,990 527,464 318,074 ¥ 24 755 8,016 ¥ 16,015 528,219 326,091 3,568 1,226 26,929 21 29 3,589 1,256 26,929 2,677 20 2,698 3,589 1,256 26,929 2,698 Thousands of U.S. Dollars Reportable Segment Engineering Other*1 Total Reconcili- ations*2 Consoli- dated*3 Sales: Sales to external customers Intersegment sales or transfers $ 5,359,327 189 $ 31,260 48,037 $ 5,390,587 48,227 $ (48,227) $ 5,390,587 Total $ 5,359,517 $ 79,297 $ 5,438,815 $ (48,227) $ 5,390,587 *1 "Other" represents industry segments, which are not included in the reportable segment, consisting of temporary staffing services and travel services. *2 The details of the reconciliations are as follows: (1) The reconciliation in segment profit of ¥(2) million ($(21) thousand) is the elimination of intersegment trades. (2) The reconciliation in segment assets of ¥841 million ($7,516 thousand) is the result of the elimination of intersegment trades of ¥(1,909) million ($(17,050) thousand) and the Group's assets of ¥2,751 million ($24,566 thousand), which are not included in the reportable segment. (3) The reconciliation in segment liabilities of ¥8,103 million ($72,354 thousand) is the result of the elimination of intersegment trades of ¥(1,896) million ($(16,931) thousand) and the Group's liabilities of ¥10,000 million ($89,285 thousand), which are not included in the reportable segment. *3 The calculation of the segment profit is based on the operating income in the consolidated statement of operations. Notes for the year ended March 31, 2016: *1 "Other" represents industry segments, which are not included in the reportable segment, consisting of temporary staffing services and travel services. *2 The details of the reconciliations are as follows: (1) The reconciliation in segment profit of ¥24 million is the elimination of intersegment trades. (2) The reconciliation in segment assets of ¥755 million is the result of the elimination of intersegment trades of ¥(1,994) million and the Group's assets of ¥2,749 million, which are not included in the reportable segment. (3) The reconciliation in segment liabilities of ¥8,016 million is the result of the elimination of intersegment trades of ¥(1,983) million and the Group's liabilities of ¥10,000 million, which are not included in the reportable segment. *3 The calculation of the segment profit is based on the operating income in the consolidated statement of Segment profit Segment assets Segment liabilities Other: Depreciation Amortization of goodwill Investment in associated companies Increase in property, plant and equipment and intangible assets $ 137,648 4,067,824 2,629,945 $ 2,373 43,692 13,830 $ 140,021 4,111,517 2,643,776 $ (21) $ 7,516 72,353 140,000 4,119,033 2,716,130 operations. Related Information 202 267 32,326 4,618 25,615 32,529 4,886 25,615 18,836 194 19,030 32,529 4,886 25,615 19,030 (1) Information about Products and Services The engineering business represents more than 90% of the total sales of the Group. Accordingly, the presentation of the information about each service is not required under Japanese GAAP. - 37 - - 38 - 37 38 CHIYODA CORPORATIONCONSOLIDATED FINANCIAL STATEMENTS FY2016(2) Information about Geographical Areas (a) Revenue Year Ended March 31, 2017 Japan Australia Russia U.S.A. Others Total Year Ended March 31, 2016 Japan Australia Russia U.S.A. Vietnam Others Total Millions of Yen ¥ 102,434 96,046 147,418 155,142 102,703 Thousands of U.S. Dollars $ 914,595 857,556 1,316,239 1,385,203 916,992 ¥ 603,745 $ 5,390,587 Millions of Yen ¥ 111,464 143,980 117,274 79,750 71,885 87,193 ¥ 611,548 Note: Revenue is classified by country or region based on the location of construction sites. (b) Property, plant and equipment Year Ended March 31, 2017 Japan Asia Others Total Year Ended March 31, 2016 Japan Asia Others Total Millions of Yen ¥ 11,338 1,493 326 Thousands of U.S. Dollars $ 101,235 13,338 2,912 ¥ 13,158 $ 117,487 Millions of Yen ¥ 11,732 1,704 504 ¥ 13,942 (3) Information about Major Customers Year Ended March 31, 2017 Name OJSC Yamal LNG Cameron LNG LLC Ichthys Lng Pty Ltd. Year Ended March 31, 2016 Name Ichthys Lng Pty Ltd. OJSC Yamal LNG Nghi Son Refinery and Petrochemical LLC Cameron LNG LLC Related Segment Millions of Yen Revenue Engineering Engineering Engineering ¥ 145,868 130,509 88,950 Thousands of U.S. Dollars Revenue $ 1,302,392 1,165,258 794,196 Related Segment Millions of Yen Revenue Engineering Engineering Engineering Engineering ¥ 134,100 116,803 71,867 63,619 (4) Information about Impairment Loss on Fixed Assets by Reportable Segment Impairment loss of goodwill as of March 31, 2017 and 2016, was as follows: Millions of Yen Engineering Total 2017 ¥ 766 ¥ 766 Thousands of U.S. Dollars 2017 2016 ¥ 4,431 $ 6,839 ¥ 4,431 $ 6,839 (5) Information about Goodwill by Reportable Segment The ending balance of goodwill as of March 31, 2017 and 2016, was as follows: Engineering Other* Total * Other involves temporary staffing services. Millions of Yen 2017 2016 Thousands of U.S. Dollars 2017 ¥ 1,676 374 ¥ 3,527 404 $ 14,969 3,347 ¥ 2,051 ¥ 3,931 $ 18,317 - 39 - - 40 - 39 40 CHIYODA CORPORATIONCONSOLIDATED FINANCIAL STATEMENTS FY2016INDEPENDENT AUDITOR’S REPORT 21. RELATED PARTY DISCLOSURES The material transactions of the Group with unconsolidated subsidiaries and associated companies for the year ended March 31, 2017, were as follows: Loan of funds*2 Guarantee obligation*1,*3 Millions of Yen ¥ 12,101 13,632 Thousands of U.S. Dollars $ 108,045 121,720 The material balances due to or from these unconsolidated subsidiaries and associated companies at March 31, 2017, were as follows: Prepaid expenses and other*3 Millions of Yen Thousands of U.S. Dollars ¥ 6,396 $ 57,113 *1 This is a guarantee for bonds, etc. related to constructions of associated company guaranteed by the Company. *2 Regarding loan of funds applicable interest rates are rationally determined upon taking into account the market rate of interest. *3 ¥18,907 million ($168,816 thousand) of the provision for loss on business of subsidiaries and associated companies is provided for loans and guarantee obligation. * * * * * * 41 42 CHIYODA CORPORATIONCONSOLIDATED FINANCIAL STATEMENTS FY2016Minato Mirai Grand Central Tower 4-6-2, Minatomirai, Nishi-ku, Yokohama 220-8765, Japan Tel: (81)45-225-7777 (voice guidance) http://www.chiyoda-corp.com/en/ CORPORATE PHILOSOPHY Enhance our business in aiming for harmony between energy and the environment, and contribute to the sustainable development of society as an integrated engineering company through the use of our collective wisdom and painstakingly developed technology.

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