Annual Report 2013
95/182

Basic Policy Regarding Earnings AppropriationThe Company places particular emphasis on shareholder returns. Its basic policy is tomaintain stable dividend payments by taking fi nancial structural enhancement, futurebusiness development, business results and balanced fund positions into dueconsideration. However, considering the fi nancial situation, among other factors, theCompany has regrettably decided not to pay dividends for the term under review.Turning to the payment of dividends for fi scal 2013, Cosmo Oil’s policy concernstake into consideration the need to improve its earnings foundation. This in turn drawson the Company’s ability to secure safe operations at its refi neries when ensuringstable supply. With this as its base, the payment of future dividends will then dependon operating results and the Company’s fi nancial condition.Business and Other RisksThe Cosmo Oil Group’s business performance and fi nancial condition are subject to anumber of factors that in the future could have a signifi cant impact. The following isa summary of major risk factors that the Group incurs in the course of its businessdevelopment. The Group proactively discloses all risks that it considers important tothose investing in Cosmo Oil stock, including external factors over which the Grouphas no control and which have little probability of occurring. Moreover, the followingrisks are not all-inclusive of the risks associated with investment in Cosmo Oil stock.(1) Supply and Demand TrendsSales of gasoline, kerosene and diesel fuel comprise a major portion of the Group’stotal sales and are strongly affected by general trends in personal consumption. Inaddition, the demand for naphtha is strongly affected by demand trends in thepetrochemical industry, while the demand for diesel fuel is strongly affected by thetransportation industry, and the demand for heavy fuel oil, by the electric power andshipping industries. As a result, changes in economic as well as weather conditionscan cause fl uctuations in demand, which, in turn, can have a material impact on thescale of the Group’s sales.(2) Crude Oil Prices and ProcurementCrude oil prices are signifi cantly affected by demand and production trends. In termsof demand trends, the impact of large consuming nations, such as the United States,and of Asian nations showing rapid economic growth (particularly China) is highlysignifi cant. Increases and decreases in the crude oil production by Middle Eastoil-producing nations primarily have a large impact on production trends. In additionto political instability, such as the outbreak of war around oil-producing nations, andterrorism and other uncertainties that could signifi cantly affect crude oil prices andcrude oil procurement by the Group, production stoppages at the Group’s productionbases could also have a material impact on the Group’s business performance andfi nancial condition.The Group uses the weighted average method to value crude oil inventories.Therefore, lower crude oil prices can have a material impact on the Group’s operatingperformance and fi nancial condition, such as a heavier cost burden the Group mighthave to bear for actual market conditions.(3) Foreign Exchange Rate FluctuationsThe Group imports crude oil and oil products from overseas, and usually pays forthese imports in U.S. dollars, which means that fl uctuations in foreign exchange ratescan cause currency losses or gains. In order to minimize the impact of foreignexchange rates, the Group engages in currency hedge transactions. However, as aweaker yen results in higher procurement costs, exchange rate fl uctuations can havea material impact on the Group’s business performance and fi nancial condition.Foreign exchange rate fl uctuations can also have a material impact when thefi nancial statements of consolidated subsidiaries outside Japan and associatedcompanies accounted for in the equity method are restated in Japanese yen.(4) Market ImpactAs mentioned above, the cost of the Group’s major oil products is determined byinternational market prices of crude oil and foreign exchange rates. On the otherhand, the Group’s marketing activities are mainly conducted within Japan, and sellingprices are determined by domestic market conditions. Consequently, gaps and/or time

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